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Greg and Jason will review our results along with commentary and Jack and Mahesh will join for Q&A. These materials include GAAP to non-GAAP reconciliations for your reference. These statements are based on current expectations and assumptions that are subject to a variety of risks and uncertainties. Information about factors that could cause such differences can be found in today's earnings news release, in the comments made during this conference call, in the risk factors section of our 2020 Annual Report on Form 10-K and in our other reports and filings with the SEC. I'll start off by sharing a few thoughts about the overall business before Jason takes us through the results and our outlook. First, Q2 was an outstanding quarter. We grew revenue 22%, earnings per share of 49% and operating cash flow 86% versus the prior year. Additionally, we expanded operating margins by 220 basis points and ended the quarter with $11.2 billion of backlog, up 7% versus last year and a record for Q2. Second, we saw strong demand in both segments of our business during the quarter. In Products and Systems Integration, revenue was up 24% and operating margins expanded 270 basis points driven by growth in our LMR and video security technologies. And in Software and Services, revenue was up 19%, and operating margins expanded by 210 basis points on growth in LMR services, video security and command center software. This strong broad-based performance highlights the strength of our business and value of our mission-critical integrated ecosystem. And finally, based on the strong backlog and momentum that we're seeing across our business, we're raising again our full year guidance for both sales and earnings per share. Our Q2 results included revenue of $2 billion, up 22%, including $47 million from acquisitions and $66 million from favorable FX. The GAAP operating earnings were $370 million, and operating margins were 18.8% of sales compared to 13.5% in the year ago quarter. Non-GAAP operating earnings of $482 million, up $123 million or 34% from the year ago quarter and non-GAAP operating margins of 24.4% of sales, up from 22.2% driven by higher sales and improved operating leverage in both segments, inclusive also of higher costs related to employee incentive compensation this year. GAAP earnings per share of $1.69 compared to $0.78 in the year ago quarter. This increase was primarily due to increased sales volume, improved operating leverage, a lower tax rate related to the release of valuation allowance and lower reorganization charges in the current quarter. Non-GAAP earnings per share of $2.07 compared to $1.39 last year, primarily due to higher sales and improved operating leverage in both segments. opex in Q2 was $477 million, up $51 million versus last year, primarily due to higher compensation related incentives and higher expenses related to acquisitions. Turning to cash flow. Q2 operating cash flow was $388 million compared with $209 million in the prior year, and free cash flow was $326 million compared with $155 million in the prior year. These increases in cash flows were primarily due to higher sales and working capital improvements, partially offset by higher cash taxes. Capital allocation for Q2 included $121 million in cash dividends, $102 million in share repurchases at an average price of $206.85 per share and $62 million of CapEx. Additionally, during the quarter, we issued $850 million of new long-term debt and redeemed $324 million of outstanding senior notes due in 2023. Subsequent to quarter end, we acquired Openpath, a leader in cloud-based access control solutions for $297 million, and we invested $50 million in equity securities of Evolve, whose technology powers our concealed weapons detection solution. Moving to our segment results. Q2 Products and Systems Integration sales were $1.2 billion, up 24%, driven by strong growth in LMR and video security. Revenue from acquisitions in the quarter was $38 million. Operating earnings were $194 million or 16.2% of sales, up from 13.5% in the prior year on higher sales and improved operating leverage, inclusive of higher costs related to incentive compensation. Some notable Q2 wins and achievements in this segment include a $37 million P25 order for the Kentucky State Police, a $36 million P25 upgrade for a state in the US, a $30 million P25 order from MARTA in Atlanta, a $29 million P25 devices order for a large US state and local customer, and a $5 million video security order, our largest single fixed video order from a US federal customer to date. Moving to the Software and Services segment. Q2 revenue was $773 million, up 19% from last year, driven by growth in LMR services, video security and command center software. Revenue from acquisitions in the quarter was $9 million. Operating earnings were $288 million or 37.2% of sales, up 210 basis points from last year, driven by higher sales, higher gross margins, improved operating leverage and also inclusive of higher compensation related incentives this year. Some notable Q2 wins in this segment include, an $18 million French MOI body-worn camera frame agreement, a $15 million license plate recognition software extension with US based customer, a $10 million P25 multiyear services extension for Ohio's statewide network, and a $10 million P25 maintenance renewal with the US federal customer. Additionally, we launched Command Central Suite, Public Safety's, first cloud-native 911 case-call to case closure solution. Looking at our regional results, North America Q2 revenue was $1.3 billion, up 20% on growth in LMR, video security and command center software. International Q2 revenue was $659 million, up 25%, also driven by LMR, video security and command center software. We saw strong growth in EMEA during the quarter, while in Asia Pac growth was minimal as the region continues to navigate impacts from COVID-19. Ending backlog was a Q2 record of $11.2 billion, up $741 million compared to last year, driven by $660 million of growth in North America and $81 million of growth internationally. Sequentially, backlog was down $57 million, driven by revenue recognition on Airwave and ESN, partially offset with growth in LMR products. Software and Services backlog was up $257 million compared to last year, primarily driven by North America multiyear service contracts. And sequentially, backlog was down $130 million, driven again primarily by the revenue recognition for Airwave and ESN. Products backlog was up $484 million compared to last year and $73 million sequentially, driven primarily by LMR growth in both regions. Turning to our outlook. We expect Q3 sales to be approximately up 10% with non-GAAP earnings per share between $2.09 and $2.14 per share. This assumes FX at current rates, a weighted average diluted share count of approximately 174 million shares and an effective tax rate of 23% to 24% a year. And for the full year, we now expect sales to be up between 9.5% and 10%, an increase from our prior guide of 8% to 9%, and we now expect full year non-GAAP earnings per share between $8.88 and $8.98 per share, up from our prior guidance of $8.70 to $8.80 per share. This increased outlook incorporates the ongoing supply chain constraints, primarily in LMR and assumes FX at current rates, a weighted average share count of approximately 173 million shares and an effective tax rate of approximately 22%. I thought I'd end with a few thoughts as we conclude the call. First, our results for the quarter were excellent. We achieved Q2 record sales, operating earnings and EPS, expanded operating margins, grew our video security technologies by 66% and achieved strong growth in LMR and command center software technologies as well. Additionally, we finished the quarter with record Q2 ending backlog and a robust pipeline that we expect to drive growth for the remainder of the year, inclusive of the continued supply chain challenges that we're navigating primarily in LMR. Second, in video security, demand remains strong. We've continued investing in this area even during the early days of the pandemic, and these investments have positioned us well to capture the increased demand we're now seeing from our customers. Additionally, we just announced our acquisition of Openpath, a leader in cloud based access control solutions. Openpath is disrupting the access control industry and extends our value proposition in the $15 billion video security market. As a result, we're also renaming the technology within our revenue desegregation from video security and analytics to now video security and access control to reflect these investments and the future of video and access control convergence. And finally, as I look to the second half of the year, I'm encouraged. I'm encouraged by our execution across all of the businesses. In LMR, customers are looking to invest in their networks, including several statewide upgrades and we're gaining traction with our APX NEXT device designed for the highest tier of public safety requirements. In video security and command center software, we're leveraging our large installed base and go-to-market footprint to drive continued strong growth. And with respect to ESG, we've recently released our 2020 corporate responsibility report, which highlights our strategy and performance. Our work in this critically important area has been recognized by Forbes who named us as one of the best employers for diversity and Barron's who named us as one of the most sustainable companies. I'm proud of what our teams are doing and look forward to further progress as we continue to deliver mission-critical solutions that create value for employees, customers, communities and our shareholders. Before we begin taking questions, I'd like to remind callers to limit themselves to one question and one follow-up to accommodate as many participants as possible. Operator, would you please remind our callers on the line how to ask a question?	motorola solutions sees fy revenue up 9.5 to 10 percent. sees q3 non-gaap earnings per share $2.09 to $2.14. sees fy revenue up 9.5 to 10 percent. sees q3 revenue up about 10 percent. company raises full-year revenue and earnings per share guidance again following record q2 revenue and earnings. qtrly gaap earnings per share (eps) of $1.69. qtrly non-gaap earnings per share of $2.07. quarter-end backlog of $11.2 billion, up 7% versus a year ago. motorola solutions - although covid-19 pandemic continued to influence activities in q2, negative impacts on business from covid-19 have begun to ease.
Erik Gershwind, our chief executive officer; and Kristen Actis-Grande, our chief financial officer, are both on the call with me. As on our last call, we are all remote, so bear with us if we encounter any technical difficulties. These risk factors include our comments on the potential impact of COVID-19. I'll begin by wishing each of you a happy, a healthy, and especially a safe new year. I'll then review first-quarter results and take a deeper dive into our growth initiatives. From there, Kristen will review the financials in more detail and provide color on our structural cost program. As we enter the middle of fiscal 2021, momentum on our initiative is building. This is evidenced in part by improving numbers. More importantly, by progress against our key initiatives and by the increasing pace with which we're operating the business. As a reminder, several years ago, we decided to reposition MSC from a spot-buy a supplier to a mission-critical partner. We capture this in our new brand promise built to make you better. And we did so in order to secure the next decade-plus of MSC's success and to deepen the mode around our business. Since that time, we have recreated MSC's value proposition, remodeled our supply chain with an elevated presence on the plant floor, reshaped MSC's sales force, built new platforms for growth such as CCSG, and we've accelerated the pace of innovation with advancements like MSC MillMax. We've built new digital capabilities like e-commerce to improve customer retention and loyalty and a new pricing function to improve price execution and realization. And finally, we've taken steps to create a more agile culture in order to drive change faster. On our last call, we outlined mission critical or our pathway to translate these changes into improved performance. We share two three-year targets: and those were accelerated market share capture, and improving ROIC. We shared five growth levers that will deliver at least 400 basis points of outgrowth above IP by our fiscal 2023. We also shared a structural cost initiative that we yield at least 200 basis points in operating expense to sales ratio improvements by fiscal 2023 powering ROIC back into the high teens during that time. While we're encouraged by progress, we have our sights set high and we're just getting started. We're making inroads on the five growth levers and we're moving aggressively on the structural cost front to achieve our one-year and three-year targets with a robust project pipeline and a steady drumbeat of changes being implemented across the company. Looking outside of our company, all of this is happening against the backdrop that remains challenging but is showing some positive indicators. The good news on the vaccine front and the recently passed stimulus package will likely improve the outlook over the coming quarters. I'll now turn to our fiscal first-quarter financial results which you can see on Slide 4. Overall sales were down 6.3%, and gross margin was down 30 basis points versus the prior-year period. Our operating margin on a GAAP basis was 7% and was significantly influenced by a nonrecurring asset impairment charge which I'll describe in greater detail shortly. As you can see on Slide 5, excluding this impairment charge and adjustments related to severance and cost associated with mission critical, our adjusted operating margin was 11%, down 30 basis points from the prior year despite lower sales and supported by mission critical. All of this resulted in earnings per share of $0.69 for the quarter, or $1.10 on an adjusted basis. We're seeing continued sequential improvement in our sales levels. Most notably, our nonsafety and nonjanitorial product lines improved through the quarter and declined low double digits. Tales of safety and janitorial products anchored by our PPE program continued growing at over 20% for the quarter. The improving trends extended into December with total company sales growth estimated at 2.4%. While aided by some large PPE orders, December is nonetheless encouraging as the rest of the business excluding safety and janitorial was down in the low single digits year over year. Looking at our performance by customer type, government sales continue to grow significantly year over year due to the surge in large safety and janitorial orders. National accounts declined in the low teens while our core customers declined low double digits, and CCSG was down mid-single digits. As you can see on Slide 6, industrial production remained in the negative single digits range but did improve over the prior quarter. Most manufacturing end markets behaved consistent with this trend. Although metalworking-centric end markets did continue to lag the broader IP index. More importantly, we have seen the GAAP between IP in our growth rate begin to compress as expected. We plan to build on that momentum and as a reminder, we target exiting fiscal 2021 with at least the 200-basis-point positive GAAP above IP for our fourth quarter. I'll now turn to our growth initiatives. On the last call, I outlined five levers that will drive our improved growth over the next three years. And those are metalworking, solutions, selling our portfolio, digital, and diversified end markets. Today I'll discuss and focus on a couple of them. We're investing heavily in our core business in order to widen our lead. One way we do so is by capturing new customers from local distributors who are under tremendous pressure in the current environment. We track our funnel of opportunities and win rate by market, and both are progressing according to plan. We expect that price to progress to build as the locals come under more and more pressure with each passing month. MSC MillMax is aiding our efforts to capture market share. Milling is one of the most significant cutting tool applications. Cutting tools represent roughly 30% to 40% of the $12 billion to $15 billion metalworking market. MSC MillMax not only provides opportunities to capture share within cutting tools but it opens up access to our customers broader MRO purchases which are multiple times the size of their cutting tool spent. We're seeing strong early reception to the new technology. Our funnel of opportunities is building quickly and is starting to produce new wins. As we do with vending, we're offering MSC MillMax as a service in exchange for incremental share of wallet. The second initiative I'll feature is government, which is right now our largest diversification play. We've been working hard over the past two years to turn our government business from an underperformer to an outperformer. And while we're benefiting from a PPE tailwind, we are nonetheless pleased with our progress in the fiscal first quarter as the business grew over 35%. Beyond the current momentum, we're investing in this area to build for the future including adding hunter roles dedicated to creating new opportunities for us. Third, I'll highlight our sales force build-out. Growing and reshaping our sales force is an important enabler that powers each of the five initiatives. In recent years, we've taken sales headcount down in order to reshape the sales force consistent with our new strategy. For the first time in several years, we're now poised to expand the sales force. We had a delay due to the pandemic but we've now restarted those efforts. In our fiscal first quarter, we increased our sales headcount by 50, including roles such as business development or hunting, metalworking specialists, and government. This effort has been aided by the redesign and outsourcing of our talent acquisition function which was one of the mission critical projects that Kristen mentioned on the last call. We are hiring faster and at a lower cost. Before turning things over to Kristen, I'll now discuss our PPE program and the related impairment charge for the nitrile gloves. From the outset of the pandemic, we have worked hard to source critical PPE supplies to support our customers in need and to keep the front lines of industry and government workers safe. Despite the widespread scarcity of certain products and well-documented supply chain issues, we've been successful in this effort across a wide range of items. Nitrile gloves have proven to be more challenging. Over the past several months, a number of our large customers approached us in dire need of the scarce product. Our normal channels of supply could not produce sufficient quantities as the nitrile glove global supply chain is under extreme pressure right now. As a result, in September, our team turned to new sources of supply. We used prepayments to secure priority status which has been a standard market practice through the pandemic and has been an effective tool for us in securing scarce products during this time. As of today, we've not yet received the gloves. And in light of the growing uncertainty over our ability to secure deliveries, we recorded an impairment charge for the full amount of the prepayments. We are of course pursuing all possible paths to either secure the gloves or a refund of our prepayments. Pulling back from this specific issue, we're quite pleased with our PPE program which has consisted of hundreds of global supply transactions leading to substantial revenues and most importantly the ability to keep our customers safe. I'll now pass it over to Kristen. Let me start with the review of our fiscal first quarter and then I'll update you on the progress of our mission critical initiatives. Our first-quarter sales were $772 million, or $12.5 million on an average daily sales basis. Both a decline of 6.3% versus the same quarter last year. Moving to gross margins, our first-quarter gross margin was 41.9%, a decline of 30 basis points compared to the first quarter of last year. Sequentially, gross margin improved 30 basis points, compared to the fourth quarter 2020. Despite the headwind from some large PPE sales that we mentioned on our last call, we continue to see solid performance due to the traction of our initiatives. Our execution on both the pricing and purchasing fronts has been strong with solid realization from our annual price increase as well as improvements to our supplier programs. December gross margins continued the trend of solid execution on the price and cost fronts. We could, however, see increased headwinds in gross margins due to PPE-related SKUs over the next couple of quarters. Total operating expenses in the first quarter were $243 million, or 31.4% of sales, versus $257 million, or 31.2% of sales in the prior year. This includes about $4 million of costs related to severance and the review of our operating model both related to mission critical. The severance made up about one-third of that amount. Excluding these costs, operating expenses as a percent of sales were 30.9% in the prior year, excluding $2.6 million of costs related to severance. Operating expenses were also 30.9% of sales. We were able to keep the adjusted opex to sales ratio flat despite the decline in sales as our mission critical initiatives continued to deliver savings. I'll go into more details on the progress of our mission critical initiatives in a minute. Including the asset impairment charge that Erik mentioned earlier, all of this resulted in GAAP operating margin of 7%, compared to 11% in the same period last year. Excluding the impairment charge, severance, and other related costs, our adjusted margin was 11%, versus an adjusted 11.3% in the prior year. GAAP earnings per share were $0.69 adjusted for the impairment charge as well as severance and other related costs. Adjusted earnings per share were $1.10. Turning to the balance sheet and moving ahead to Slide 7. We achieve a free cash flow of $95 million in the first quarter, as compared to $72 million in the prior year. This improvement was driven by our accounts payable management and the deferral of payroll taxes under the CARES Act. As of the end of fiscal Q1, we were carrying $521 million of inventory down $22 million from last quarter. Roughly $60 million of that is related to PPE products and over half of that is specific to disposable masks. This is ample supply should the virus surge continue. During the quarter, we continued to manage our liquidity very closely and we paid down $130 million of our revolving credit facility in Q1. Our total debt as of the end of the first quarter was $490 million, comprised primarily of $120 million balance on our revolving credit facility; $20 million of short-term, fixed-rate borrowings; and $345 million of long-term, fixed-rate borrowings. Cash and cash equivalents were $53 million resulting in net debt of $437 million at the end of the quarter. Since then in December, we paid a special dividend of approximately $195 million which we funded primarily from our revolver. The special dividend reflects our long-standing commitment to returning capital to our shareholders as part of our balanced capital allocation philosophy while maintaining a conservative balance sheet. On Slide 8, you can see our original program goals of $90 million to $100 million of cost takeout through fiscal 2023 and as versus fiscal 2019. On our last call, we shared that we had taken out $20 million of cost in fiscal 2020 and that our goal for fiscal '21 was to take out another $25 million to achieve cumulative savings of $45 million by the end of fiscal '21. I'm pleased to report that we achieved an additional $8 million of savings in the first quarter, bringing our cumulative savings to $28 million against our goal of $45 million by the end of this year. This is growth savings and does not reflect investments of roughly $2 million to $3 million in the first quarter, and $15 million expected in fiscal '21. While one quarter does not make a year, and we did capitalize on some low hanging fruit, I'm encouraged by our fast start to the year and our continued momentum in executing our mission critical productivity programs. In addition to some of the initiatives I mentioned last quarter, which are proceeding as planned, we also have signed an agreement to sell our Melville, New York facility. This 170,000-square-foot facility on 17 acres served as one of our co-headquarters. We will be relocating late this spring to a smaller 26,000-square-foot space nearby, which will accommodate our new hybrid working model. Once the sale of our current location is complete, we will save roughly $3 million annually in operating expenses. We will continue to review our real estate footprint for additional opportunities. Last quarter, we outlined our mission critical initiative that aimed at turning the hard work we've performed over the past several years into improved financial performance. Our company's sights are firmly set on two goals referenced on Slide 12 to be achieved by the end of our fiscal '23: first, growing at least 400 basis points above IP, and second, returning ROIC back into the high teens. We have five growth initiatives powering our market share aspirations and we are executing significant structural cost reductions that we expect to improve operating expenses as a percentage of sales by at least 200 basis points. As we move into the middle of our fiscal year, we're encouraged by the momentum that is building inside the company. This is evidenced by improving numbers and by improving the execution of the projects behind them. Most significantly, there is an energy building inside the four walls of MSC and with each passing quarter, we expect that energy to grow. We will not rest until we've achieved our mission of being the best industrial distributor in the world as measured by all four of our stakeholders.	compname reports q1 adjusted earnings per share $1.10. q1 adjusted earnings per share $1.10. q1 earnings per share $0.69.
Most of us continue to work remotely at MSC, so bear with us if we encounter technical difficulties. These risk factors include our comments on the potential impact of COVID-19. Since the inception of MSC over 80 years ago and through our last 25 years as a public company, our mission has stayed the same: to be the best industrial distributor in the world as measured by our four stakeholders. And we've not wavered from this. Two concepts underpin our pursuit of this mission. The first is reinvention. We believe in the need to continuously reinvent ourselves in order to remain relevant and secure our future. Our history demonstrates this, and it can be captured in chapters, each one of those chapters being defined by a different reinvention, from a storefront to a cataloger, from a regional metalworking distributor to a national broadline MRO distributor, from catalog to digital, from direct marketing to field sales, from generalists to specialists. The second concept that underpins our mission is growth, which is the lifeblood of this company throughout its history. Growth has enabled us to attract and retain great associates, better serve our customers, produce market share capture for our suppliers, and generate returns for our shareholders. Historically and up until the past few years, we produced a revenue CAGR in the double digits with an organic revenue CAGR in the high single digits. And these results were a product of continuous and focused investments. This growth produced strong incremental margins, which allowed for reinvestment back into the business, thus creating a virtuous cycle. Our most recent reinvention has been one we've talked about: the repositioning of MSC from spot-buy supplier to mission-critical partner on the plant floor. Like the other ones that came before it, this pivot was done to deepen the moat around our business and to secure our next phase of growth. This reinvention was complex. The moves took time, and they impacted growth while changes were made. We redesigned our value proposition, and we reshaped our sales force from one-size-fits-all to a more segmented one. We reengineered our supply chain to move from the four walls of our distribution centers onto the customer's plant floor, and we sharpened our culture to move faster and more readily embrace change inside our business. While we did all of this, we reduced growth investments in areas like field sales in order to complete the reshaping into our new model. We are now emerging as a stronger company and are poised to reaccelerate growth. We've strengthened our value proposition with still more to come and further strengthened and extended our leadership in our core business of metalworking. History shows that market leaders capture the largest portions of an industry's profit pool, and we will do so. Five levers will fuel our growth, and we're investing into them in order to produce market share gains. Market share capture will lead to growth, which leads to more reinvestment back into the business to further strengthen our core and to add more adjacencies over time. We've also focused on structural cost takeout, with a portion of the savings being reinvested back into growth even more aggressively. We've captured both of these elements, growth and structural cost improvements, in the two mission-critical goals that we laid out at the start of the fiscal year. And as a reminder, those goals are reaching 400 basis points of market share capture by the end of fiscal 2023 and returning return on invested capital into the high teens by improving our operating expense-to-sales ratio, inclusive of a $90 million to $100 million gross cost takeout target. We're in the early innings of this journey, but the proof points so far are encouraging. You saw our commitment to these goals evidenced with the recent announcement regarding the move to virtual customer care hubs. We are redeploying cost from back office, from management roles, and from rent and putting it into growth. We eliminated 110 positions, and we're adding 135 positions that are customer-facing and that will drive growth. This will represent the largest year-over-year increase in customer-facing sales role that we've seen in years. The recent announcement was also about talent. By moving to a virtual customer care network, we retain our local one-to-one connection with our customers while knocking down geographic boundaries. We're now able to recruit technical talent wherever it resides. The improving economic outlook makes our story even more exciting. With the vaccine rollout picking up steam, we're seeing significant positive signs from our customers such as building backlogs and activity levels. All indications suggest the continued firming of the environment. At the same time, the speed of the recovery coming on the back of significant economic disruption is leading to supply chain shortages and disruptions, and we are well-positioned to help address these for a couple of reasons. First, the local distributors who have been struggling for the past year and from whom we focused on market share capture will struggle even more during a snapback due to working capital constraints, limited product offerings, and limited delivery capabilities. The market share capture opportunity will only accelerate. Second, while we all face supply chain disruptions and shortages, MSC's broad and deep product assortment, our multiple brand choices including exclusive brands, and our next-day delivery capabilities position us very well against the 70% of the market, made up of local and regional distributors. The speed of the recovery, commodity scarcity, and supply shortages are also leading to commodities inflation. We typically benefit in the early stages of an inflation cycle and should see a gross margin tailwind as we capture price earlier than realizing cost. As we look ahead to the latter part of 2021 -- or fiscal 2021 and into our fiscal 2022, assuming the economic recovery continues on its current pace, here's what we expect. We anticipate improving average daily sales levels with strong growth rates in our non-safety and non-janitorial business. This will be fueled by the investments that we're making, and their contribution will grow over time. Keep in mind that we'll see high PPE comparables in our fiscal third quarter, and this will mute our overall growth rate. However, this moderates by our fiscal fourth quarter, and we should see strong overall growth rates. We anticipate a bounce-back in gross margin from the Q2 anomaly, which I'll talk about in a bit. We should return to at least the levels at which gross margins have run over the past year with some potential upside due to the early stages of an inflation cycle. We also expect a continued stream of structural cost work that is moving us toward the higher end of our $90 million to $100 million cost takeout range. All of this should yield healthy growth that translates into expanding operating margins as we look ahead to fiscal 2022. It's an exciting time for our company, and we remain heads down, focused on executing so that we can capitalize on the opportunity in front of us. I'll now turn to our second-quarter performance. Before getting into the details, I'll start by addressing the obvious issue in our second quarter that impacted results, which is the inventory writedown on PPE of roughly $30 million. The writedown is exclusive to PPE inventory and is primarily comprised of disposable masks. It's no secret that we moved aggressively in the early stages of the pandemic to acquire large quantities of PPE and, specifically, disposable masks. At the time, we were selling millions of masks per week, inclusive of some very large-quantity purchases for several of our large customers. Some of these customers were not only buying large quantities at the time but also committing to even more large-quantity buys in the coming weeks and months. As a result, we bought big in order to ensure we could keep these customers safe and keep their operations up and running. As time went on, these customers found that their consumption was not as great as anticipated. When that happened, we decided to play the long game. Even in cases where agreements were in place, we decided not to impose them. We wanted to support our customers through the pandemic, knowing that what's really important is securing long-term loyal customers and keeping them safe. As a result, we took on the extra inventory. Pricing on these items has come down considerably. And at the same time, demand slowed even through the winter months when the virus surged. And so we were left with the exposure that we addressed in our fiscal second quarter. This was an extremely unique set of circumstances. And if you look back, we've not had any meaningful inventory writedowns over the last decade. Putting the PPE inventory aside, our fiscal second quarter reflected solid execution in a choppy but clearly improving environment. You can see our reported numbers on Slide 4 and adjusted numbers on Slide 5. Overall sales were down 1.5% for the quarter. We're seeing continued sequential improvement in our sales levels. And most notably, our nonsafety and nonjanitorial product lines improved throughout the quarter from low double-digit declines in our first quarter to mid-single-digit declines in our second quarter. Sales of safety and janitorial products continued progressing nicely, growing in the low teens for the quarter. Looking at our performance by customer types. Government sales continued to grow significantly year over year due to large safety and janitorial orders. National accounts improved sequentially and declined in the high single digits, while our core customers also improved sequentially and declined in the mid-single digits. CCSG finally improved to declines in the low single digits. As you can see on Slide 6, industrial production through the IPI or industrial production index continued improving, though it did remain negative through our fiscal second quarter. Most manufacturing end markets behaved consistent with this trend, although metalworking-centric end markets did continue to lag the broader IP index. Notably, the gap between IP and our growth rate flipped to positive. Recall that a 200 basis point spread was our target for our fiscal fourth quarter. So while it's still early, we are encouraged by our recent performance. March showed continued improvement. Our nonsafety and nonjanitorial business turned positive growth for the month, as did CCSG, both of which grew in the mid-single digits. Safety and janitorial, on the other hand, were down roughly 20% against last year's PPE surge. We expect strong growth rates in our nonsafety and nonjanitorial product lines for the balance of the fiscal year. Due to the PPE writedown, our GAAP gross margin was 38.1%. But excluding that writedown, adjusted gross margin was 42%, down just 10 basis points versus the prior year and up 10 basis points sequentially from the first quarter. Looking ahead, we took our midyear price increase in early March in response to the early stages of the inflation cycle, which, again, are generally a nice tailwind for gross margins. So we expect the recent trending to continue into the back half of the year. In terms of our Mission Critical growth initiatives, we're particularly pleased with our metalworking market share capture from local and regional distributors. We track new customer market share wins by MSA, or metropolitan statistical area, and have seen strong performance through this downturn. We're just now scratching the surface in terms of the revenue contribution from these wins, primarily because metalworking customer spend has been suppressed to now due to the soft conditions. As things rebound, we should see an outside lift -- an outsized lift, excuse me. I'll now turn things over to Kristen to cover the financials and overall progress on our Mission Critical program. I'll begin with a review of our fiscal second quarter and then update you on the progress of Mission Critical initiatives. Slide 5 reflects the adjusted results. Our second-quarter sales were $774 million, or $12.7 million, on an average daily sales basis, both a decline of 1.5% versus the same quarter last year. Moving to gross margins. Our second-quarter gross margin was 38.1%, a decline of 400 basis points compared to the second quarter of last year. As Erik mentioned, this was primarily the direct result of the roughly $30 million PPE writedown we recorded during the quarter, which was primarily related to masks. Excluding this writedown, our second-quarter gross margin was 42%, a 10 basis point decline from the prior year and a 10 basis point increase sequentially from our first quarter. Our pricing realization has remained strong, and solid execution of our supplier programs has continued. I'll add two points here. One, we don't expect any further impairments going forward. And two, our midyear price increase had no impact on our fiscal second quarter as we implemented it in March, the first month of our fiscal third quarter. Operating expenses in the second quarter were $245.1 million, or 31.7% of sales, versus $251.4 million, or 32% of sales in the prior year. This includes about $700,000 of legal costs associated with the nitrile glove prepayments we impaired in the first quarter. Excluding these costs, operating expenses as a percent of sales was 31.6%, a 40 basis point improvement from the prior year in which there were no operating expense adjustments. With regard to the nitrile glove impairment we announced in our fiscal first quarter, we're pleased to report that an arrest for suspicion of fraud has been made, and we've been notified that bank accounts holding a substantial portion of the impaired value have been frozen. The legal process is going to take some time to resolve this matter, and we will provide you with updates as developments occur. Moving back to our fiscal second-quarter results. We incurred approximately $21.6 million of restructuring costs, primarily related to the move to virtual customer care hubs and a review of our operating model, both related to Mission Critical. Execution of our Mission Critical initiatives continue to deliver savings, and I'll go into more detail on that in a minute. In Q2 of last year, we incurred $1.9 million of restructuring charges, and that was primarily related to consulting costs. All of that led to operating margin on a GAAP basis of 3.6%, but that was significantly influenced by the PPE writedown and the restructuring charges related to the virtual customer care hubs. Excluding this writedown, as well as the restructuring and other related costs, our adjusted operating margin was 10.4%, up 30 basis points from the prior year due to our progress on Mission Critical and despite lower sales. GAAP earnings per share were $0.32. Adjusted for the inventory writedown, as well as restructuring, and other charges, adjusted earnings per share were $1.03. Turning to the balance sheet and moving ahead to Slide 7. Our free cash flow was $4 million for the second quarter as compared to $58 million in the prior year. The largest contributor was our increasing inventory and accounts receivable balance as our sales picked up in January and in February. As of the end of fiscal Q2, we were carrying $533 million of inventory, up $12 million from last quarter. This is net of the $30 million inventory writedown during the quarter. We're actively managing inventory levels to ensure we can support our customers as sales accelerate in the second half. Therefore, inventory will likely continue to be a use of cash. We now expect capex for the fiscal year of approximately $50 million to $60 million. We still expect our cash flow conversion or operating cash flow divided by net income to be above 100% for fiscal '21. As we mentioned on our last call, we increased our debt to fund the $195 million special dividend paid in December. Our total debt as of the end of the second quarter was $684 million, comprised primarily of a $115 million balance on our revolving credit facility, about $200 million on our uncommitted facilities, $20 million of short-term fixed rate borrowings, and $345 million of long-term fixed rate borrowings. Cash and cash equivalents were $20 million, resulting in net debt of $664 million at the end of the quarter. Let me pivot now and provide you on an update on our Mission Critical productivity goals. On Slide 8, you can see our original program goals of $90 million to $100 million of cost takeout through fiscal '23, and that's versus fiscal '19. On our last call, we shared that we had taken out $8 million of gross savings and invested roughly $2 million to $3 million in the first quarter. During our fiscal second quarter, we achieved additional gross savings of $9 million, bringing our cumulative savings for fiscal '21 to $17 million against our goal of $25 million by the end of this year. We also invested roughly $5 million in Q2, bringing our total investments to $7 million to $8 million, which compares to our full-year target of $15 million. We're ahead of plan on savings, and our investment program is also progressing very well. In fact, these results are such that we anticipate making some additional growth investments to capture more of the opportunities that we're seeing. On balance, this means that our net savings target for Mission Critical remains roughly the same or slightly larger for the full year. The most significant initiative during the quarter was, of course, our move to virtual customer care hubs, including the closure of 73 sales branches. The gross savings related to that move are expected to be between $7 million and $9 million in fiscal 2021 and reach an annualized level of approximately $15 million to $18 million starting in fiscal 2022. With respect to revenue growth, as Erik described, we expect to turn nicely positive in our nonsafety and nonjanitorial business this quarter, and assuming these trends continue, should see healthy growth rates for the total business in the fiscal fourth quarter. For the year, while still early, it is likely that we will be flat to positive for total company growth. We expect our gross margins to remain at levels where they've been running, excluding the writedown. In terms of adjusted operating expenses, you can expect to see a step-up sequentially from volume-based expenses, increased incentive compensation, and increased growth investment. Where we fall within that framework will primarily be a function of how quickly revenues accelerate and how much gross margin tailwind we see from price. As we move to the back half of fiscal 2021, momentum is building both inside and outside of the company. On the outside, the environment continues to firm. On the inside, we're accelerating progress with respect to growth investments and structural cost takeout. And while we're ju -- we're just getting started, we are encouraged by the progress that is beginning to evidence itself.	compname posts q2 earnings per share $0.32. q2 adjusted earnings per share $1.03. q2 earnings per share $0.32. q2 sales $774 million versus refinitiv ibes estimate of $779.8 million.
These risk factors include our comments on the potential impact of COVID-19. I hope that everyone remains safe and healthy. As we cross the halfway point of our fiscal 2022, I'm excited by the growing momentum inside of our company to accelerate market share capture and improve profitability. Each passing quarter is another proof point that the extensive repositioning of MSC is now firmly taking hold. As our performance improves, we continue raising the bar on expectations across the organization. And I'm pleased to see how our team is rising to the challenge. With respect to market share capture, we're sustaining growth rates that are at or above our long range target of growth, at least 400 basis points above the industrial production index. Our fiscal second quarter average daily sales growth rate of 7.9%, does not do justice to the momentum that we see developing. This year included two sales days around the holidays that carried minimal sales, whereas last year we were closed due to the timing of those days. Therefore, the absolute sales growth rate of 11.4% is more indicative of underlying performance. January got off to a very slow start, as a result of widespread absenteeism due to the COVID surge throughout the supply chain. In fact, our growth rate in January actually started out negative. We saw an inflection during the last two weeks of the month of January, and we've sustained double-digit growth rates since that point. February was particularly strong at nearly 18%, with a catch up from the soft January. And March has continued our double-digit growth pace. You'll hear from Kristen that we now see double-digit growth for fiscal '22 as a likely outcome. In line with our strategy, growth is being fueled by the five growth levers that we've been describing for you. And those are metalworking, solutions, selling the portfolio, digital investments, and customer diversification with an emphasis on the public sector. Within these five levers, today I'll highlight our implant program, e-commerce, metalworking, and the public sector. Implant continues its strong momentum and now represents approximately 9% of company sales. We're tracking ahead of plan, which targeted 10% of total company sales by the end of fiscal '23. Our recent investments in e-commerce are also starting to pay dividends. E-commerce reached 60.7% of total company sales, up 150 basis points from prior year and 30 basis points from the prior quarter. This is being driven largely by improvements to mscdirect.com. Our technical metalworking expertise, including MSC MillMax, is particularly powerful in the current environment. Our customers are experiencing rapid inflation, labor shortages, extended lead times and more. As a result, the need for productivity on the plant floor is higher now than it's ever been. And MSC is uniquely positioned to address these challenges, as the largest national metalworking distributor offering multiple brands, robust technical expertise, and the ability to document cost savings and productivity improvements on a continuous basis. A recent example demonstrates how our approach is helping customers find the needed productivity. Our technical experts were brought into one of our aerospace customers to analyze their cutting tool consumption. We were able to save the customer over $1.2 million on an annualized basis, by recommending alternate tooling that yielded faster metal removal rates, shorter lead times, and increased productivity with a more cost effective tool. These savings are allowing our customer to bring some of the outsourced production back in-house, adding volume for our customer, and leading to greater opportunities for MSC. Examples like these are happening regularly across our business and they are fueling new customer wins as well as greater wallet share at existing customers. Finally on the growth front is the public sector. Our team is performing well. You may have seen that we were recently awarded a five year contract to service 10 U.S. Marine Corps bases across the continental United States, Hawaii, and Japan. Implementation across the bases is underway, and we expect to see revenue build through the balance of fiscal '22 and into fiscal '23. Turning now to profitability improvements. Our long range goal is to -- restore return on invested capital into the high teens by the end of fiscal '23. And we said we would achieve this by leveraging growth, by executing on gross margin initiatives, and by delivering structural cost takeout of at least $100 million, helping to reduce opex as a percentage of sales by at least 200 basis points from our fiscal 2019 baseline. I'm encouraged by progress on each of these fronts. Let me start out with a few words about gross margin. You'll recall that we were not pleased with our gross margin performance in our fiscal first quarter. We began addressing it aggressively with countermeasures during the latter portion of Q1. As part of those countermeasures and in response to the massive purchase cost inflation coming from our suppliers, we implemented a significant price increase in late January. Price realization thus far has been strong, and as a result, Q2 gross margins came in at 42.5%. This gives us added confidence that we can keep gross margins flat or better for fiscal '22 versus prior year. We also generated strong operating expense leverage and reduced adjusted opex as a percentage of sales by 80 basis points versus prior year. This is largely the result of our Mission Critical initiative. We delivered $6 million of savings in the second quarter and remain on track for $25 million in expected cost savings for the fiscal year. And we remain on pace to achieve our goal of at least $100 million in total cost savings by the end of fiscal '23. All of this is translating into improving adjusted returns on capital, which is well on its way into the high teens. Turning now to the external landscape. The story remains largely unchanged. Strong underlying demand, tight supply chain constraints, even tighter labor constraints, and rapid inflation. All of this is evidenced in public indices such as IP readings, which remain at mid-single digit growth levels. Sentiment surveys like the MBI and feedback from our customers. [Audio gap] with limited exceptions like automotive, the order backlog and outlook for most customer segments remains robust. Relative to last quarter, headwinds from COVID have eased dramatically. They reached a fever pitch during December and the first half of January. But if subsided considerably as the virus has waned. Like everyone will watch the developments with the latest variant, of course. Here at MSC, we reopened our customer support centers in Melville and Davidson, with a hybrid work environment. We've received positive feedback from our associates and our operations are running smoothly. Angst related to COVID has been joined by broad based concerns related to the Russia-Ukraine situation. Our direct exposure to the region with respect to sales and purchasing is insignificant. The indirect impacts, though, will likely play out in the form of further inflation, and more supply chain disruption. While these conditions create some challenges for us here at MSC, they also provide opportunities to take additional market share from the 70% of the distribution market that's made up of local and regional distributors. MSC's brought in deep inventory, a good better best brand assortment, and our logistics capabilities, enable us to service our customers at high levels when many cannot. We've used recent market conditions to accelerate share capture and will continue doing so. Kristen will now take you through the details of our performance, the financials for the quarter and our outlook, which includes a revised annual operating margin framework with a low double-digit sales growth scenario. Kristen, over to you. Our second quarter sales came in at $863 million. As Erik mentioned, given the extra two days this year coming with minimal sales, the total sales growth of 11.4% over the prior year period is more reflective of our real growth. On an average daily sales basis, Q2 growth was 7.9%. Our non-safety and non-janitorial product lines grew just over 10% on an ADS basis, and sales of safety and janitorial products declined roughly 3%. Looking at ADS growth rates for our sales by customer type. Government sales declined roughly 11%, due to the difficult janitorial and safety comps. This is a large improvement from Q1's decline of nearly 30%, and we expect the comps to ease further in the back half of fiscal 2022. National account growth with low double-digit and core customers grew high single-digit. We're continuing to see strong execution and growth initiatives with vending and plant and mscdirect.com, each growing roughly 100 basis points or more, as a percent of total company sales versus the prior year. As Erik mentioned, our fiscal Q2 gross margin was 42.5%, up 90 basis points sequentially from our first quarter, and up 440 basis points from last year's fiscal Q2. As you may recall included in last year's Q2 gross margin was a $30 million PPE related write down. Excluding this write down, our prior year Q2 adjusted gross margin was 42%, 50 basis points below the current year quarter. We're very pleased with this result and we remain on track to hold the annual gross margin for fiscal year 2022 flat or better in fiscal 2021. Reported and adjusted operating expenses in the second quarter were $266 million, or 30.8% of sales. Last year reported operating expenses were $245.1 million, and adjusted operating expenses were $244.4, or 31.6% of sales. This represents an 80 basis point reduction in adjusted opex to sales. It's worth noting that this includes an increase to our incentive compensation accrual this quarter, including a year-to-date catch up that will not repeat. We incurred approximately $3.1 million of restructuring and other costs in the quarter, as compared to $21.6 million in the prior year quarter. Last year's Q2 charges primarily included operating lease impairment, and other related costs associated with our move from physical sales branches to virtual customer care hubs. Our operating margin was 11.3%, compared to 3.6% in the same period last year. Excluding the restructuring and other costs and the PPE related inventory write down in the prior year, our adjusted operating margin was 11.6% versus an adjusted 10.4% in the prior year period, a 120 basis point improvement. On the adjusted incremental margin front for second quarter came in at just over 22% ahead of our initial fiscal 2022 goal. Earnings per share were $1.25 as compared to $0.32 in the same period prior year. Adjusted for restructuring and other costs, as well as the prior year's PPE related inventory write down. Adjusted earnings per share were $1.29 as compared to adjusted earnings per share of a $1.03 in the prior year period, an increase of 25%. This is a result of our execution at all levels, sales performance, gross margin, and opex leverage. Turning to the balance sheet, you can see that as of the end of our fiscal second quarter, we were carrying $658 million of inventory, up $35 million from Q1 balance of $623 million. The inventory build is fairly typical with historical periods of high growth, with the added element of ongoing supply chain disruptions. Accounts receivable are also rising as expected with the current sales growth. As a result of this increased use of working capital, our second quarter cash flow conversion or operating cash flow divided by net income was slightly negative. Our capital expenditures were $16 million in the second quarter. Moving ahead to Slide 7, you can see the uses of working capital also impacts our free cash flow, which came in slightly negative for the second quarter as compared to $4 million in the prior year quarter. We do expect cash conversion to improve in the second half of fiscal 2022, and for the fiscal 2022 full year to come in at approximately 70% to 80%, roughly comparable with historical periods of Southwest. Our current expectation for strong sales growth for the year, continuing supply chain challenges, and the recent government contract win are all increasing our working capital and affecting our cash conversion for this year. Our total debt at the end of the fiscal second quarter was $835 million, which reflects a $72 million increase from our first quarter. As for the composition of our debt, $285 million was on our revolving credit facility, about $200 million was under our uncommitted facilities, approximately $300 million with long-term fixed rate borrowings, and $50 million were short-term fixed rate borrowings. Our cash and cash equivalents were $42 million, resulting in net debt of $794 million at the end of the quarter, up from $700 million at the end of the first quarter. Let me now provide an update on our mission critical productivity goals. You may recall that our updated cost savings goal for fiscal 2023 is a minimum of $100 million versus our fiscal 2019 cost base. As you can see on Slide 8, our cumulative savings for fiscal 2021 were $60 million, and we also invested roughly $22 million over that same period. For the full year fiscal 2022, we expect additional gross savings of $25 million, and additional investments of $15 million. We've made excellent progress toward this goal in the first half, as we've achieved $16 million of gross savings and invested $11 million. We remain on target to hit at least $100 million of cost savings by fiscal 2023. We're encouraged by the momentum building across all three lines of the P&L, revenue growth, gross margins, and operating expense leverage. Our current growth momentum creates the potential for a higher tier on our annual operating margin framework provided to you on Slide 9. You can see that we added a low double-digit scenario in that growth range. We would achieve an annual adjusted operating margin between 12.5% and 13.1%. Should the current trends continue, we would expect to move into that range. At those levels of adjusted operating margin, our incremental margins will be around 25% in the back half of this year and north of the 20%, we originally envisioned for full year fiscal 2022. We've now crossed the halfway point of fiscal '22 and momentum is picking up steam. With each passing quarter, our repositioning is taking hold. We're accelerating market share capture, capitalizing on our ability to add value in a unique pricing environment in order to improve gross margins, and we're generating operating leverage through our mission critical efforts. As we look to the back half of the year, we will continue raising the bar, targeting double-digit sales growth, strong price realization, and incremental margins in the mid-20s. They are the driving force behind our improved performance for all stakeholders. All 6,500 of us will remain restless until we achieve our mission to be the best industrial distributor in the world.	q2 adjusted earnings per share $1.29. q2 earnings per share $1.25.
Erik Gershwind, our chief executive officer; and Kristen Actis-Grande, our chief financial officer, are both on the call with me. We continue to work remotely at MSC. So please bear with us if we encounter any technical difficulties. Like last quarter, when I highlighted our recently created micro site dedicated to corporate social responsibility, I'd like to invite you to visit our completely redesigned investor relations web page. We have made it much easier to find information and add content we think you will find useful. These risk factors include our comments on the potential impact of COVID-19. I hope that everybody remains safe and healthy. As we close the books on fiscal '21 and we kick off our fiscal '22, our transformation story is gaining steam. Several years ago, we began repositioning MSC from strictly a spot-buy supplier to a mission-critical partner on the plant floor of Industrial North America. Along the way, we execute several significant changes. We reimagined our value proposition, reengineered our supply chain, reshaped our sales force, and updated our technology infrastructure. The pandemic came, and we used it as a catalyst to accelerate the path we were already on. We took several bold steps to rethink how we work and to redeploy capital from back office into growth. At the start of fiscal '21, we rolled out Mission Critical, which was our plan to translate these changes into superior financial performance, and we outlined two, three-year goals. First, to accelerate market share gains. Our stated target was to reach at least 400 basis points of growth above the IP index by the end of our fiscal 2023. Our first base camp would be this past quarter, our fiscal '21 fourth quarter, where we expect it to be at least 200 basis points above IP. The second goal was to restore return on invested capital, or ROIC, into the high teens by the end of fiscal 2023. And we would achieve this by leveraging growth, by executing on gross margin initiatives, and by delivering structural cost takeout of 90 to $100 million, helping to reduce opex as a percentage of sales by at least 200 basis points over that time period. We're now one year into our Mission Critical journey, and I am very encouraged by progress. With respect to our first goal market share capture, we're gaining momentum. Our Q4 performance was strong, with ADS growth of roughly 500 basis points above IP. Our growth continues to be powered by the execution of the five growth levers that we outlined at the start of the fiscal '21. And those are metalworking, solutions, selling our portfolio, digital, and diversified end markets. We're also seeing improvement in ROIC. After adjusting out nonrecurring costs, adjusted ROIC was 15.4% at the end of Q4, an improvement of approximately 60 basis points over the past year. And there's two important drivers behind this. We held gross margins flat on higher sales dollars and had strong price realization in a robust inflationary period to offset mix headwinds. Our structural cost takeout also helped drive profitability, and I'll speak more to that in just a minute. The second driver of improved ROIC was our balance sheet, as we brought down average working capital versus prior year. I'd add that our board just approved ROIC as a metric driving long-term incentive compensation. Back to our Mission Critical program. We achieved $40 million of cost savings in fiscal '21, exceeding our original target of 25 million. And we're redeploying a good portion of these savings back into growth investments that will further fuel revenue growth, and hence, improve operating leverage. We've redeployed field sales headcount from back-office into growth drivers, including metalworking, government, and our business development program. We're approaching pre-COVID levels on our vending machine signings and our implant program is gaining traction, finishing fiscal '21 at just over 7% of company sales, as compared to 5% a year ago. We continue to upgrade our web infrastructure, including a new search engine, product information platform, and user experience. These have started, and it will continue to drive improved performance through e-commerce. We've executed all of this in the face of very challenging conditions, including severe supply chain disruptions, substantial cost inflation, and extreme labor shortages. And while we're certainly not immune to these challenges, I've been quite pleased with our team's response to navigating these choppy waters. We've increased inventory significantly and are leveraging our good, better, best product offering to offer our customers alternatives. As a result, while our service level is not yet back to pre-COVID levels, it is well above most of the industry and is fueling market share capture. On the cost side, we are seeing significant inflation in wages, freight, product costs, and more, and our team has worked hard to minimize the impact of these. Our structural cost and productivity efforts are buffering the effects on our P&L. Looking ahead to fiscal '22, our outlook is positive. We intend to build on this momentum despite the near-term challenges with supply chain disruption and inflation. With respect to revenue growth, we're aiming for at least 300 basis points of growth above IP, on our way to 400 basis points or more for fiscal 2023. We'll target holding gross margins roughly flat for the third consecutive year by continuing strong price execution. On the structural cost front, we expect to deliver roughly $25 million in incremental savings on top of the 40 million in fiscal 2021. As Kristen will describe in just a bit, we expect this to yield incremental margins of 20% in the likely scenarios for the year. I'll now turn to the details of the quarter and the latest test to what we see on landscape. The demand environment remained strong during our fiscal fourth quarter. The majority of our manufacturing end markets remain robust, with some isolated but acute pockets of softness like automotive. This is reflected in the IP reading that continues to show growth and in sentiment reading such as the MBI index, which remain at high levels. That said, the supply chain shortages and disruptions that we began to see in our fiscal third quarter have increased. And while hard to quantify, are certainly constraining growth across the industrial economy in the near term. Product scarcity, freight delays and extreme labor shortages are also resulting in significant inflationary pressures. We are well positioned to navigate this environment, particularly when compared to the local and regional distributors who make up 70% of our market. MSC's broad multi-brand product assortment, our high inventory levels, strong supplier relationships, and next-day delivery capabilities are all strengths that allow us to accelerate market share capture. Turning to our performance. You can see our reported numbers on Slide 4 and adjusted numbers on Slide 5. Sales were up 11.1%, or 12.9% on an average daily sales basis. Our non-safety and non-janitorial product lines grew 20%, while sales of safety and janitorial products declined roughly 14%. Looking at our performance by customer type. Government sales declined nearly 30% due to difficult janitorial and safety comps. National Accounts improved their growth rate into the mid-teens, while our core customers maintained their growth rates. DCSG grew in the low double digits. September continued the trend of a low double-digit growth rate with ADS growth of 11.1%. Our non-safety and non-janitorial growth was roughly 15% [Inaudible] 11%. Keep in mind that the difficult safety and janitorial prior-year comparisons continue for the first half of our fiscal '22 and particularly the rest of our fiscal first quarter before easing in the back half of the year. Kristen will speak more about our fiscal '22 assumptions when she discusses our annual operating margin framework in just a bit. With regards to the pricing environment, it remains strong as product inflation continues pretty much across the board. Supplier pricing moves led us to take another increase in August, and solid realization of our June increase allowed us to post the gross margin of 42% for the quarter, down just 30 basis points from our fiscal third quarter, which is less than our typical seasonal drop. Continued price escalations from suppliers and increasing inbound freight costs will be a headwind in the coming quarters, and we'll look to offset this with further pricing actions. I'll now turn things over to Kristen, who will cover our financials, Mission Critical progress, and our fiscal '22 annual operating margin framework. I'll begin with a review of our fiscal fourth quarter and then update you on the progress of our Mission Critical initiative. Our fourth-quarter sales were 831 million, up 11.1% versus the same quarter last year. We had one less selling day this year in our fourth quarter. So on an average daily sales basis, net sales increased 12.9%. Erik gave some details on our sales growth, but I'll just reiterate that the non-safety and non-janitorial ADS sales grew 20% in the quarter, while our safety and janitorial sales declined 14%. Our gross margin for fiscal Q4 was 42%. And as Erik mentioned, was down 30 basis points from our third quarter and up 40 basis points from last year. Operating expenses in the fourth quarter were 253.3 million or 30.5% of sales, versus 227 million or 30.4% of sales in the prior year. It's worth noting that our fourth quarter operating expenses include nearly 8 million of expense add-back from prior year COVID cost containment measures. Opex also increased as inflation challenges began in the fourth quarter. Excluding approximately $1 million of acquisition-related costs, adjusted opex was 252.1 million or 30.3 as a percent of sales. As expected, our adjusted operating expenses came down sequentially from Q3 due to volume-based expenses from sequentially lower sales dollars and lower incentive compensation. We also incurred approximately 4.4 million of restructuring and other related charges in the quarter. Our operating margin was 11%, compared to 9.8% in the same period last year. Excluding the acquisition-related costs, as well as the restructuring and other related costs, our adjusted operating margin was 11.7%, versus an adjusted 11.2% in the prior year. Adjusted incremental margin for our fiscal fourth quarter was 15.3%. GAAP earnings per share were $1.18, as compared to $0.94 in the same prior-year period. Adjusted for the acquisition-related costs, as well as restructuring and other charges, adjusted earnings per share were $1.26 as compared to adjusted earnings per share of $1.09 in the prior-year period, an increase of 15.6%. Turning to the balance sheet and moving ahead to Slide 9. Our free cash flow was 69 million in the fourth quarter, as compared to 171 million in the prior year. The largest contributor to the decline were increasing inventory and accounts receivable balances relating to our year-over-year sales lift. I would also note that we repurchased 20 million of stock during the quarter or about 231,000 shares at an average price of 89.08 per share. As of the end of the fiscal fourth quarter, we were carrying 624 million of inventory, up 26 million from last quarter. We're actively managing inventory levels to support our customers as sales continue accelerating and in light of the ongoing supply chain disruptions. Our capital expenditures were 16 million in the fourth quarter and for the full year, were 54 million, within our expected range of 50 to 60 million. In addition, our fiscal year 2021 annual cash flow conversion or operating cash flow divided by net income was strong at 103%. Our total debt at the end of the fiscal fourth quarter was 786 million, reflecting a 27 million increase from our third quarter. As for the composition of our debt, 234 million was on our revolving credit facility, about 200 million was under our uncommitted facilities, and approximately 350 million was long-term fixed rate borrowings. Cash and cash equivalents were 40 million, resulting in net debt of 746 million at the end of the quarter. As of the end of September, our net debt was down to 728 million. Let me now provide an update on our Mission Critical productivity goals. Our original program goal was to deliver 90 to 100 million of cost takeout through fiscal 2023, and that is versus fiscal 2019. As you can see on Slide 10, our cumulative savings for fiscal year 2021 were 40 million against our original goal of 25 million and our revised goal of 40 million. We also invested roughly 23 million in fiscal 2021, which compares to our revised full-year target of 25 million. As we have already begun our fiscal '22, I'll give you our expectations for this year. We expect additional gross savings in fiscal '22 of 25 million and additional investments of 15 million. These investments will continue to fuel share gains by building out our digital platform and expanding our sales force. That will result in additional net savings for Mission Critical initiatives of roughly 10 million. As a result of our strong progress on Mission Critical savings, we are increasing our total savings target to a minimum of 100 million through the end of fiscal '23, as compared to our fiscal '19 baseline. Now let's turn to the fiscal year 2022 adjusted operating margin framework, which is shown on Slide 11. Operating margins will naturally vary based on our sales levels. The punchline is that, on an average daily sales basis, sales are up high single digits. We would expect adjusted operating margin to be in the range of 12.3%, plus or minus 30 basis points. And if sales are up mid-single digits, we would expect adjusted operating margin to be in the range of 12%, also plus or minus 30 basis points. This means we expect to achieve 20% adjusted incremental margins at our likely revenue growth range of mid to high single-digit growth. Let me cover some of our assumptions behind the framework. With regard to sales levels, we are assuming an IP index somewhere between low to mid-single-digit growth, and we are targeting market outgrowth of roughly 300 basis points. That yields company growth on an ADS basis in the mid to high single digits. We're optimistic about our growth runway as most of our end markets are still in the early stages of recovery. We aim to hold gross margins roughly flat with fiscal '21. It's worth noting that in addition to volume-related expenses, we will face several challenging headwinds, such as labor and freight inflation of nearly 25 million, as well as COVID cost add-backs and additional COVID-related costs of more than 13 million. I would point out that 3 million of those costs are for an incentive and marketing campaign to help us achieve compliance with the federal contractor vaccination mandate. These costs will likely occur in our first quarter. Please note that the quarterly progression, whether we're talking about sales growth or profitability levels, will not be a straight line. For example, we expect our fiscal first-quarter sales to face more difficult comparisons due to safety, janitorial, and government sales. Likewise, operating expenses will also face difficult comparisons in the first half of fiscal '22 as COVID-related cost-saving measures were still in place in the first half of fiscal 2021. Finally, keep in mind that our fiscal year '22 includes a 53rd week, and you can find our fiscal calendar on our IR website. Our Mission Critical transformation is gaining speed. With our recent Q4 performance as another strong data point, our market share capture rate is growing. Our efforts around gross margin and productivity improvements are beginning to lift ROIC toward our FY fiscal '23 goal of high teens. Looking to fiscal '22, we're set up for a strong year, including 20% incremental margins in our likely growth range. And we're accomplishing all of this in the face of difficult conditions. Your work is allowing MSC to stand out from competition and delight our customers.	compname posts q4 adjusted earnings per share $1.26. q4 adjusted earnings per share $1.26. q4 earnings per share $1.18. qtrly net sales of $831.0 million, an increase of 11.1%.
He expects to rejoin us shortly. When I handed over the CFO reins to Darren five years ago, one of the things that I was happy that went with it was the call. But although Darren is doing well and we expect his return to action shortly, I boldly volunteered to handle the call today. And just so you know, my agenda is that I do a good job but not such a good job that you won't be clamoring to have Darren back as soon as possible. Outside of our usual seasonal first-quarter surge in salaries and benefits, expenses remained well-controlled, and credit trends are indicative of the state of the loan portfolio and the forecasted improvements in the economy. Diluted GAAP earnings per common share was $3.33 for the first quarter of 2021, compared with $3.52 in the fourth quarter of 2020 and $1.93 in last year's first quarter. Net income for the quarter was $447 million, compared with $471 million in the linked quarter and $269 million in the year-ago quarter. On a GAAP basis, M&T's first-quarter results produced an annualized rate of return on average assets of 1.22% and an annualized return on average common equity of 11.57%. This compares with rates of 1.30% and 12.07%, respectively, in the previous quarter. Included in GAAP results in the recent quarter were after-tax expenses from the amortization of intangible assets amounting to $2 million or $0.02 per common share, little change from the prior quarter. Also included in the quarter's results were merger-related charges of $10 million related to M&T's proposed acquisition of People's United Financial. This amounted to $8 million after tax or $0.06 per common share. Consistent with our long-term practice, M&T provides supplemental reporting of its results on a net operating or tangible basis, from which we have only ever excluded the after-tax effect of amortization of intangible assets, as well as any gains or expenses associated with mergers and acquisitions. Net operating income for the first quarter, which excludes intangible amortization and the merger-related expenses, was $457 million, compared with $473 million in the linked quarter and $272 million in last year's first quarter. Diluted net operating earnings per share were $3.41 for the recent quarter, compared with $3.54 in 2020's fourth quarter and $1.95 in the first quarter of last year -- of last year. Net operating income yielded annualized rates of return on average tangible asset and average tangible common shareholders' equity of 1.29% and 17.05% for the recent quarter. The comparable returns were 1.35% and 17.53% in the fourth quarter of 2020. So let's take a look at some of the underlying details. Taxable equivalent net interest income was $985 million in the first quarter of 2021, compared with $993 million in the linked quarter. This reflects a higher level of average interest-earning assets, primarily cash equivalents, and a shorter calendar quarter. The margin for the past quarter was 2.97%, down 3 basis points from 3% in the linked quarter. The primary driver of the margin decline was the higher level of cash on deposit with the Federal Reserve, which we estimated reduced the margin by 5 basis points. And that was partially offset by a 2-basis-point benefit from the shorter quarter. Similarly, the $8 million linked-quarter decline in net interest income reflects the loss of income from two fewer accrual days. Changes in interest rates had a minimal effect for the quarter. Compared with the fourth quarter of 2020, average interest-earning assets increased by some 2%, reflecting a 9% increase in money market placements, including cash on deposit with the Federal Reserve, and an 8% decline in investment securities. Average loans outstanding grew by – grew nearly 1% compared with the previous quarter. Excluding PPP loans, average loans grew $1.1 billion or over 1%. Looking at the loans by category on an average basis compared to the linked quarter, commercial and industrial loans were essentially flat with increased dealer floor plan balances and other C&I loans, partially offset by lower average PPP loans. Due to timing of originations and the receipt of payments, average PPP loans declined $453 million from the prior quarter. Commercial real estate loans declined less than 0.5% compared to the fourth quarter, indicative of very low levels of customer activity. Residential real estate loans grew by 4%, consistent with our expectations. The increase reflects purchases from -- of loans from Ginnie Mae pools that we sub-service, partially offset by further runoff of the acquired mortgage loans. Consumer loans were up nearly 1%. That activity was consistent with recent quarters, where growth in indirect auto and recreational finance loans has been outpacing declines in home equity lines and loans. On an end-of-period basis, PPP loans totaled $6.2 billion, up from $5.4 billion at the end of the fourth quarter. Average core customer deposits, which exclude deposits received at M&T's Cayman Island office and CDs over $250,000, increased 4% or $5 billion compared to the fourth quarter. That figure includes $4 billion of noninterest-bearing deposits. On an end-of-period basis, core deposits were up nearly $9 billion. Foreign office deposits increased 17% on an average basis but were -- I'm sorry, decreased 17% on an average basis but were essentially flat on an end-of-period basis. Turning to noninterest income, noninterest income totaled $506 million for the first quarter, compared with $551 million in the linked quarter. The recent quarter included $12 million of valuation losses on equity securities, largely the remaining holdings of our GSE preferred stock, while 2020's final quarter included $2 million of gains. Over the past few years, M&T has received a distribution from Baby Lending Group in the first quarter of the year. Results for the first quarter of 2020 included a $23 million distribution and a change in the past timing. As you may know, M&T received a $30 million distribution in the fourth quarter of 2020, as expected. No distribution was received in this year's first quarter. Mortgage banking revenues were $139 million in the recent quarter, down $1 million from $140 million in the linked quarter. Our residential mortgage business continued to perform well. Revenues from that business, including both originations and servicing activities, were $107 million in the first quarter, improved from $95 million in the prior quarter. That increase reflects improved gain-on-sale margins. Residential mortgage loans originated for sale were $1.3 billion in the recent quarter, up about 5% from the fourth quarter. Commercial mortgage banking revenues were $32 million in the first quarter, reflecting the -- a seasonal decline from $45 million in the linked quarter. That figure was $30 million in the year-ago quarter. Trust income rose to $156 million in the recent quarter, improved from $151 million in the previous quarter. The increase is the result of growth in assets under management, in wealth, and institutional businesses. Service charges on deposits were $93 million, compared with $96 million in the fourth quarter. The decline from the linked quarter is the result of higher customer balances offsetting activity-based fees. Operating expenses -- turning to operating expenses for the first quarter, which exclude the amortization of intangible assets and merger-related expenses, were $907 million. The comparable figures were $842 million in the linked quarter and $903 million in the year-ago quarter. As is typical for M&T's fiscal first-quarter results, operating expenses for the recent quarter included approximately $69 million of seasonally higher compensation costs relating to accelerated – to the accelerated recognition of equity compensation expense for certain retirement-eligible employees, the HSA contribution, the impact of annual incentive compensation payouts on the 401(k) match and FICA payments, and unemployment insurance. Those same items amounted to an increase in salaries and benefits of approximately $67 million in last year's first quarter. As usual, we expect those seasonal factors to decline significantly as we enter the second quarter. Other cost of operations for the past quarter included a $9 million reduction in the valuation allowance on our capitalized mortgage servicing rights. You'll recall that there was a $3 million addition to the allowance in 2020's fourth quarter and a $10 million addition in last year's first quarter. The quarter's results also reflect an elevated contribution to the M&T Charitable Foundation. The efficiency ratio, which excludes intangible amortization from the numerator and securities gains or losses from the denominator, was 60.3% in the recent quarter compared with 54.6% in 2020's fourth quarter and 58.9% in the first quarter of 2020. Those ratios in the first quarters of 2020 and 2021, each reflect the seasonally elevated compensation expenses that we talked about. Next, let's turn to credit. The overall economy, of course, continues to improve. but some sectors such as hospitality, continue to face pressure. As was the case over the course of 2020, the recent quarter continued to highlight the differences between the former incurred loss accounting method and the CECL standard adopted at the beginning of last year. Previously, reported delinquencies and transition of loans from accruing to nonaccruing status evidenced by financial stress delinquency or default by borrowers preceded or accompanied the establishment of loss reserves. Under CECL, we increased our loss reserves last year based on worsening projected economic scenarios. Significant downgrades of specifically identifiable credits to nonaccrual emerged in the fourth quarter and criticized in the recent quarter -- and to criticize in the recent quarter, consistent with last year's additions to the allowance for credit losses. The allowance for credit losses amounted to $1.6 billion at the end of the first quarter. The $100 million decline from the end of 2020 reflects a $25 million recapture of previous provisions for credit losses, combined with $75 million of net charge-offs in the first quarter. The provision recapture and the resulting reduction in the allowance for the recent quarter continued to reflect the ongoing uncertainty as to the impact of the COVID-19 pandemic on economic activity, employment levels, and the ultimate collectibility of loans. That said, the improving economic outlook leaves us cautiously optimistic as to the ongoing effects of the pandemic compared with the greater levels of uncertainty in prior quarters. Our macroeconomic forecast uses a number of economic variables with the largest drivers being the unemployment rate and GDP. Our forecast assumes that the national unemployment rate continues to be at elevated levels, on average, 5.7% through 2021, followed by a gradual improvement, reaching 2.4% by the end of 2022. I'm sorry, 4.2% by the end of 2022. The forecast assumes that GDP grows at 6.2% annual -- at annual rate during 2021, resulting in GDP returning to pre-pandemic levels during 2021. Our forecast considers improved government stimulus, but not any further fiscal or monetary actions. Nonaccrual loans amounted to $1.9 billion or 1.97% of loans at the end of March. This was up slightly from 1.92% at the end of last December. As noted, net charge-offs for the recent quarter amounted to $75 million. Annualized net charge-offs as a percentage of total loans were 31 basis points for the first quarter compared with 39 basis points in the fourth quarter. Loans 90 days past due, on which we continue to improve interest, were $1.1 billion at the end of the recent quarter, 96% of those loans were guaranteed by government-related entities. M&T's common equity Tier 1 ratio was an estimated 10.4% compared with 10% at the end of the fourth quarter, and which reflects a slight reduction in risk-weighted assets and earnings net of -- and earnings net of dividends. As previously noted, the People's United merger is pending. We don't plan to engage in any stock repurchase activity while that is pending. Now turning to the outlook. While the economy continues to improve and funds from stimulus programs reach our commercial, and consumer clients, we haven't seen enough change in our outlook for 2021 in any significant way from what we shared on the January call. Aside from the improved credit outlook as evidenced by the reserve release this quarter, I don't intend to provide any updates. Darren's remarks as to net interest income, loan growth, fees, and expenses still hold. And those, of course, are predate our merger announcement and don't contemplate any impact from the merger. We supply the merger-related comments at the time of announcement. Of course, as you're aware, our projections are subject to a number of uncertainties and various assumptions regarding national and regional economic growth, changes in interest rates, political events, and other macroeconomic factors, which may differ materially from what actually unfolds in the future. So now let's open up the call to questions before which Maria will briefly review the instructions.	q1 operating earnings per share $3.41. recorded a provision for credit losses recapture of $25 million in the first quarter of 2021. qtrly diluted earnings per common share $3.33. qtrly net interest income expressed on a taxable-equivalent basis totaled $985 million, up from $982 million in q1 of 2020. net loan charge-offs were $75 million during the recent quarter.
These statements speak only as of the date made, and M&T undertakes no obligation to update them. I'm happy to say that our Chief Financial Officer, Darren King, will be leading the call today. Also joining us today is Brian Klock, who started with M&T in May and who will take over as the Head of Market and Investor Relations at the end of this year. And I have a rhetorical question for you: where would you rather be than right here right now? Let's jump into the business of the day. We continue to see improved customer activity across all sectors of the economy. Notably, while not back to pre-pandemic levels, we're seeing improvements in the leisure and hospitality sectors. While nonaccrual and criticized loans increased from prior quarter, loss emergence remains subdued, leading us to recognize a further moderate release from the allowance for credit losses. The balance sheet continues to strengthen as both capital and liquidity grew from already elevated levels, positioning the bank to continue to be a source of strength for our customers. We continue to make progress toward the fourth quarter close of the People's United merger, and we were pleased with the overwhelming shareholder support of the combination. Looking at the results for the quarter. Diluted GAAP earnings per common share were $3.41 for the second quarter of 2021, improved from $3.33 in the first quarter of 2021 and $1.74 in the second quarter of 2020. Net income for the quarter was $458 million, compared with $447 million in the linked quarter and $241 million in the year-ago quarter. On a GAAP basis, M&T's second-quarter results produced an annualized rate of return on average assets of 1.22% and an annualized rate of return on average common equity of 11.55%. This compares with rates of 1.22% and 11.57%, respectively, in the previous quarter. Included in GAAP results in the recent quarter were after-tax expenses from the amortization of intangible assets amounting to $2 million or $0.02 per common share, little changed from the prior quarter. Also included in the quarter's results were merger-related charges of $4 million related to M&T's proposed acquisition of People's United Financial. This amounted to $3 million after tax or $0.02 per common share. Results for this year's first quarter included $10 million of such charges amounting to $8 million after-tax effect or $0.06 per common share. Consistent with our long-term practice, M&T provides supplemental reporting of its results on a net operating or tangible basis, from which we have only ever excluded the after-tax effect of amortization of intangible assets, as well as any gains or expenses associated with mergers and acquisitions. M&T's net operating income for the second quarter, which excludes intangible amortization and the merger-related expenses, was $463 million, compared with $457 million in the linked quarter and $244 million in last year's second quarter. Diluted net operating earnings per common share were $3.45 for the recent quarter, up from $3.41 in 2021's first quarter and up from $1.76 in the second quarter of 2020. Net operating income yielded annualized rates of return on average tangible assets and average tangible common shareholders' equity of 1.27% and 16.68% for the recent quarter. The comparable returns were 1.29% and 17.05% in the first quarter of 2021. Now let's take a look at some of the underlying details in our results. Taxable equivalent net interest income was $946 million in the second quarter of 2021, compared with $985 million in the linked quarter. A decrease in PPP-related income accounted for approximately half of the quarter over quarter decrease in net interest income as the first round of PPP loans continues to wind down. The net interest margin for the past quarter was 2.77%, down 20 basis points from 2.97% in the linked quarter. Higher levels of cash on deposit at the Federal Reserve continued to contribute pressure to the margin, which we estimate accounted for seven basis points of the decline from the first quarter. Lower fee amortization from the PPP loan portfolio, both scheduled amortization and accelerated recognition from forgiven loans, contributed about six basis points of the margin pressure. The impact of interest rates, primarily lower income from our hedge program, partially offset by a lower cost of deposits, accounted for about three basis points of the decline. All other factors accounted for some four basis points of margin pressure. Compared with the first quarter of 2021, average earning assets increased by some 2%, reflecting a 13% increase in money market placements, primarily cash on deposit at the Fed and a 6% decline in investable securities. Average loans outstanding declined just under 1%, compared with the previous quarter. Looking at the loans by category on an average basis compared with the linked quarter, overall, commercial and industrial loans declined by $668 million or 2.4%. Dealer floor plan loans declined by $859 million, reflecting the well-documented auto production and inventory issues experienced by the industry. Due to the late first quarter timing of round two originations and delays in forgiveness of loans over $2 million in size, average PPP loans declined by less than $50 million from the prior quarter. All other C&I loan categories grew slightly over 1%. Commercial real estate loans declined by about 0.5%, similar to what we saw in the first quarter. We continue to see very low levels of customer activity. Residential real estate loans declined by 2%. We've seen little opportunity for additional buyouts of loans from Ginnie Mae servicing pools, as delinquency and payment trends continue to improve. Absent those, the ongoing runoff of acquired Hudson City mortgage loans continues at a moderate pace. Consumer loans were up 3%, consistent with recent quarters, as growth in indirect auto and recreation finance loans has been outpacing declines in home equity lines and loans. On an end-of-period basis, total loans were down 2%, reflecting the same factors I just mentioned. PPP loans totaled $4.3 billion at June 30, compared with $6.2 billion at the end of the first quarter. Average core customer deposits, which exclude deposits received at M&T's Cayman Islands office and CDs over $250,000 increased over 3% or $4 billion, compared with the first quarter. That figure includes $2.6 billion of noninterest-bearing deposits. On an end-of-period basis, core deposits were up by just under $700 million. I'll note here that the repeal of the prohibition of paying interest on commercial checking deposits has led us to reconsider the need for a Cayman Islands office. It held no deposits at the end of the quarter. Turning to noninterest income. Noninterest income totaled $514 million in the second quarter, compared with $506 million in the linked quarter. The recent quarter included $11 million of valuation losses on equity securities, largely on our remaining holdings of GSE preferred stock, while the prior quarter included $12 million of such valuation losses. Mortgage banking revenues were $133 million in the recent quarter, compared with $139 million in the linked quarter. Revenues for our residential mortgage business, including both origination and servicing activities, were $98 million in the second quarter, compared with $107 million in the prior quarter. Lower gain on sale margins were the primary driver of the decline. In addition, residential mortgage loans originated for sale were down about 5% to $1.2 billion, compared with the first quarter. Commercial mortgage banking revenues were $35 million in the second quarter, compared with $32 million in the linked quarter. Trust income rose to $163 million in the recent quarter, improved from $156 million in the previous quarter. This quarter's results included $4 million of seasonal fees arising from tax preparation work we undertake for clients, as well as the result of the growth in assets under management in the wealth and institutional businesses. Service charges on deposit accounts were $99 million, compared with $93 million in the first quarter. The primary driver of the increase were customer payments-related activity. Operating expenses for the second quarter, which exclude the amortization of intangible assets and merger-related expenses, were $859 million. The comparable figure was $907 million in the linked quarter. Salaries and benefits declined by $62 million to $479 million from the prior quarter. Recall that the first quarter's results included $69 million of seasonal salary and benefit costs. Our deposit insurance increased by $4 million to $18 million during the quarter, primarily reflecting higher levels of criticized loans, which factor into the FDIC's assessment calculation. Other costs of operations for the past quarter included an $8 million addition to the valuation allowance on our capitalized mortgage servicing rights. Recall there was a $9 million reversal from the allowance in 2021's first quarter. The efficiency ratio, which excludes intangible amortization from the numerator and securities gains or losses from the denominator was 58.4% in the recent quarter, compared with 60.3% in 2021's first quarter, which included the seasonally elevated compensation costs. Next, let's turn to credit. As I noted at the start of the call, we're pleased with the signs of spending and revenue trends for our customers as the overall economy continues to improve. That said, some industries are improving more rapidly than others, and the supply chain issues and pressures on costs go beyond just the automotive sector. The allowance for credit losses declined by $61 million to $1.6 billion at the end of the second quarter. That reflects a $15 million recapture of previous provisions for credit losses, combined with $46 million of net charge-offs in the quarter. The allowance for credit losses as a percentage of loans outstanding declined to 1.6% -- 1.62%. That ratio was little changed from 1.65% of loans at the end of the prior quarter. Annualized net charge-offs as a percentage of loans were 19 basis points for the second quarter, compared with 31 basis points in the first quarter. The allowance for credit losses at the end of the quarter reflects our assessment of credit losses in the portfolio under the CECL loss measurement methodology, which includes our macroeconomic forecast. As we've previously indicated, our macroeconomic forecast uses a number of economic variables, with the largest drivers being the unemployment rate and GDP. Our forecast assumes the national unemployment rate continues to be at elevated levels, on average, 5.4% through 2021, followed by a gradual improvement, reaching 3.5% by mid-2023. The forecast assumes that GDP grows at a 7.4% annual rate during 2021, resulting in GDP returning to pre-pandemic levels during 2022. Nonaccrual loans increased by $285 million to $2.2 billion or 2.31% of loans at the end of June. This was up from 1.97% at the end of March. We expect to disclose an increase in criticized loans with our second quarter 10-Q filing. This reflects the prolonged recovery in certain sectors of the economy, notably hospitality and healthcare. M&T's commercial loan grades reflect the performance of individual properties with limited consideration of property values or guarantor ability to sustain cash flows from other sources. Notwithstanding those increases, loss emergence on troubled loans continues to be moderate. Interest reserves are healthy, sponsors remain supportive and collateral values are well within our underwriting assumptions. The allowance for credit losses continues to reflect our ultimate loss expectations. Loans 90 days past due, on which we continue to accrue interest, were $1.1 billion at the end of the recent quarter, and 96% of these loans were guaranteed by government-related entities. M&T's common equity Tier 1 ratio was an estimated 10.7%, compared with 10.4% at the end of the first quarter, and which reflects lower risk-weighted assets and earnings net of dividends. As previously noted, while the People's United merger is pending, we don't plan to engage in any stock repurchase activity. Now turning to the outlook. As we reach the halfway point of the year, the cautious outlook we conveyed on the January and April earnings calls has been well aligned with what we're actually seeing. The fiscal and monetary stimulus programs, along with the vaccination programs, have clearly brought a turnaround in economic growth and employment. But the downside effects from these actions continues. Excess liquidity in the system has suppressed loan growth, particularly commercial loans for M&T in the broader industry. Customer deposits are at all-time highs and grew faster than our ability to deploy them into assets that earn above our cost of capital. The fundamental aspects of our outlook haven't changed. Total loan growth, roughly flat on a year-over-year basis, excluding the PPP loans, with pressure on C&I, especially dealer floor plan and CRE loans being offset by growth in consumer loans. Net interest income down low single-digit percentage from full year 2020. Low single-digit growth in total fees. We see the potential for a slowdown in mortgage banking in the second half, offset by stronger trust income, payments-related fees and commercial loan fees. Expenses for the first half of the year have been mostly in line with our expectations with year-over-year growth largely attributable to expenses directly tied to revenue growth such as Entrust, and to higher corporate incentive accruals coming as a result of improved overall profitability compared to last year. As these trends continue, together with costs associated with the reopening of the economy and costs incurred in preparation for the People's United merger, we expect there to be a little more pressure on expenses in the second half of 2021. The credit environment continues to improve along with the overall economy, but some segments are recovering more slowly than others. We're encouraged by the progress we're seeing in our hospitality portfolio with respect to bookings and cash flows, but that sector's return to normal will lag the overall economy. Lastly, the planned merger with People's United remains on track, and our estimated time line for approval by the regulators, closing and integration remains unchanged. Of course, as you are aware, our projections are subject to a number of uncertainties and various assumptions regarding national and regional economic growth, changes in interest rates, political events and other macroeconomic factors, which may differ materially from what actually unfolds in the future. Now let's open the call to questions before which Erica will briefly review the instructions.	q2 operating earnings per share $3.45. q2 gaap earnings per share $3.41. m&t bank - net interest income expressed on a taxable-equivalent basis totaled $946 million in recent quarter, compared with $961 million in q2 of 2020.
Specifically, we saw strong debit and credit card usage, both by consumers and business, which also manifested in an increase in merchant volumes. The mortgage market was robust in the third quarter, where we witnessed an uptick in both residential origination volumes and margins. Our trust business experienced the increase in money fund fee waivers we had been anticipating, but those were offset by strong equity and debt markets during the quarter. Expense trends were in line with our expectations as we continue to exercise diligence in a particularly difficult revenue environment. Also encouraging are the trends for commercial customers granted some form of COVID-19 forbearance and for which have reached its end point. Approximately 10% have asked for additional relief. The common equity Tier 1 ratio improved by 31 basis points to 9.81%. At the same time, the allowance for loan losses grew to 1.79% of loans, positioning M&T to meet the needs of our customers and communities. Now, let's review our results for the quarter. Diluted GAAP earnings per common share were $2.75 for the third quarter of 2020 compared with $1.74 in the second quarter of 2020 and $3.47 in the third quarter of 2019. Net income for the quarter was $372 million compared with $241 million in the linked quarter and $480 million in the year-ago quarter. On a GAAP basis, M&T's third-quarter results produced an annualized rate of return on average assets of 1.06% and an annualized return on average common equity of 9.53%. This compares with rates of 0.71% and 6.13%, respectively, in the previous quarter. Included in GAAP results in the recent quarter were after-tax expenses from the amortization of intangible assets amounting to $3 million or $0.02 per common share, little change from the prior quarter. Consistent with our long-term practice, M&T provides supplemental reporting of its results on a net operating or tangible basis, from which we have only ever excluded the after-tax effect of amortization of intangible assets, as well as any gains or expenses associated with mergers and acquisitions when they occur. M&T's net operating income for the third quarter, which excludes intangible amortization, was $375 million compared with $244 million in the linked quarter and $484 million in last year's third quarter. Diluted net operating earnings per common share were $2.77 for the recent quarter compared with $1.76 in 2020 second quarter and $3.50 in the third quarter of 2019. Net operating income yielded annualized rates of return on average tangible assets and average tangible common shareholders' equity of 1.1% and 13.94% for the recent quarter. The comparable returns were 0.74% and 9.04% in the second quarter of 2020. Turning to the balance sheet and income statement. Taxable equivalent net interest income was $947 million in the third quarter of 2020, marking a decline of $14 million or 1% from the linked quarter. That decrease primarily reflects the impact on loan yields from the 20 basis point decline in average one-month LIBOR compared to the second quarter. Higher premium amortization on residential mortgage loans and mortgage-backed securities was also a factor. The net interest margin declined by 18 basis points to 2.95% compared with 3.13% in the linked quarter. Average interest-earning assets increased by $4 billion to $128 billion for the third quarter, primarily reflecting a $4.4 billion increase in funds invested with either the Federal Reserve Bank of New York or into resale agreements. Those investments were funded by a similar increase in deposits, approximately evenly divided between interest and non-interest-bearing DDA. The increase in cash equivalent investments caused an estimated 10 basis points of pressure on the net interest margin while having little effect on net interest income. The lower interest rate environment, primarily the lower average rate on one-month LIBOR that I mentioned previously, contributed to approximately four basis points of the margin decline. The net impact of lower loan yields was somewhat mitigated by a six-basis-point decrease in the cost of interest-bearing deposits. The accelerated premium amortization on both residential mortgage loans and on mortgage backed securities contributed some three basis points of margin pressure. All other factors contributed to an additional one basis point of the decline. For context, since the fourth quarter of 2019, the combination of short term liquidity investments primarily placed at the Fed and investment securities has increased by $9.1 billion, reducing the net interest margin by approximately 25 basis points, while incrementally benefiting net interest income. Average total loans increased by $413 million or a little less than one half percent compared with the previous quarter. Looking at loans by category. On an average basis, compared with the linked quarter, commercial and industrial loans declined by $1.4 billion or 5%, primarily the results of a $1.2 billion decline in vehicle dealer floor plan loans. That reflects the usual seasonal softness, as well as the delays some dealers are having in replacing inventory being sold. PPP loans were effectively unchanged from the end of the second quarter at $6.5 billion. Commercial real estate loans grew by less than 1% compared with the second quarter. Residential real estate loans increased by just under $1 billion or 6%, reflecting loans purchased from Ginnie Mae servicing pools, pending resolution, partially offset by repayments. Consumer loans were up by 4%, reflecting higher indirect recreation finance loans, partially offset by lower auto loans and home equity lines of credit. Average core customer deposits, which exclude deposits received at M&T's Cayman Islands office and CDs over $250,000, grew by $4 billion, primarily in interest and noninterest checking or about 4% compared with the second quarter. Turning to noninterest income. Non-interest income totaled $521 million in the third quarter compared with $487 million in the prior quarter. The recent quarter included $3 million of valuation gains on equity securities, largely on our remaining holdings of GSE preferred stock, while the second quarter included $7 million of such gains. Mortgage banking revenues were $153 million in the recent quarter, improving from $145 million in the linked quarter. Residential mortgage loans originated for sale were $1.2 billion in the quarter, up 7% from $1.1 billion in the second quarter. Total residential mortgage banking revenues, including origination and servicing activities, were $119 million in the third quarter, improved from $111 million in the prior quarter. The increase reflects the higher volume of loans originated for sale, combined with strong gain on sale margins. Residential servicing revenues declined very slightly. Commercial mortgage banking revenues totaled $34 million, encompassing both originations and servicing and which was little changed from the second quarter. Trust income was $150 million in the recent quarter, down slightly from $152 million in the previous quarter. Recall that second quarter figures included $5 million of seasonal tax preparation fees. Aside from that, business remains solid with slightly higher money market fund fee waivers, offset by continued strong debt capital markets activity. Service charges on deposit accounts were $91 million, improved sharply from $77 million in the second quarter. The improvement comes primarily from some of the COVID-19 impacted categories on the consumer side, the result of higher levels of spending compared with the prior quarter. Similarly, the $20 million improvement in other revenues from operations compared with the linked quarter reflects a rebound in COVID-19-impacted payments revenues that are not included in service charges, such as credit card interchange and merchant discount with a slight improvement in loan-related fees, including syndications. Operating expenses for the third quarter, which exclude the amortization of intangible assets, were $823 million compared with $803 million in the second quarter. The $20 million linked quarter increase in salaries and benefits reflect the impact of one additional workday during the quarter and higher compensation tied to the uptick in both mortgage banking and trust related activity compared with the prior quarter. Recall that other cost of operations for each of the first and second quarters included a $10 million addition to the valuation allowance on our capitalized mortgage servicing rights. There was neither an addition nor release from the valuation allowance during the third quarter. The efficiency ratio, which excludes intangible amortization from the numerator and securities gains or losses from the denominator, was 56.2% in the recent quarter compared with 55.7% in the second quarter and 56% in the third quarter of 2019. Next, let's turn to credit. Net charge-offs for the recent quarter amounted to $30 million. Annualized net charge-offs as a percentage of total loans were 12 basis points for the third quarter compared with 29 basis points in the second quarter. The provision for loan losses in the third quarter amounted to $150 million, exceeding net charge-offs by $120 million and increasing the allowance for credit losses to $1.8 billion or 1.79% of loans. The allowance at the end of the third quarter reflects an updated macroeconomic scenario that is different and modestly less severe than those used at the end of the first and second quarters, which modeled the uncertainty of the COVID-19-driven damage to the economy. The allowance and the related provision in the recent quarter reflect the ongoing impacts of the COVID-19 pandemic on economic activity in the hospitality and retail sectors, the uncertainty over additional economic stimulus and the ultimate collectability of commercial real estate loans where borrowers are requesting repayment forbearance. Our current macroeconomic forecast uses a number of economic variables, with the largest drivers being the unemployment rate and GDP. Our forecast assumes the quarterly unemployment rate increases to 9% in the fourth quarter of this year, followed by a sustained high single-digit unemployment rate through 2022. The forecast assumes GDP contracts 5.1% during 2020 and recovers to prerecession peak levels by the third quarter of 2022. Our forecast assumes no additional government stimulus. Nonaccrual loans as of September 30 amounted to $1.2 billion, an increase of $83 million from the end of June. At the end of the quarter, nonaccrual loans as a percentage of loans was 1.26%. It is important to keep in mind that some of the usual credit metrics have been affected by the PPP loans on the balance sheet, which are zero risk-weighted and carry little or no credit risk. Excluding the impact of PPP loans, the ratio of the allowance for credit losses to loans would be 1.91%. Similarly, the ratio of nonaccrual loans to total loans would be 1.35% and annualized net charge-offs as a percentage of total loans would be 13 basis points. Loans 90 days past due, on which we continue to accrue interest, were $527 million at the end of the recent quarter. Of these loans, $505 million or 96% were guaranteed by government-related entities. Government-guaranteed loans under COVID forbearance in which we have purchased from servicing pools are generally not reflected in these figures. Consistent with regulatory and CARES Act provisions, loans that have received some sort of forbearance, whether payment deferrals, covenant modifications or other form of relief as a result of COVID-19-related stress, for the most part, are not yet reflected in our nonaccrual or delinquency numbers. A significant majority of commercial loans that were granted COVID-19 payment relief were for 90 days, with the ability for clients to request a second 90 days. For example, substantially all of the $4.2 billion of forbearance as of June 30 given to vehicle dealers was for 90 days, and less than $100 million are under some form of forbearance relief at the end of the third quarter. For the total commercial and industrial portfolio, including the aforementioned dealer portfolio, loans under COVID-19 forbearance have declined by 85% to slightly higher than $800 million or about 3% as of September 30. Customers in the commercial real estate portfolio generally received 180-day COVID-19 deferrals. In total, deferrals in the CRE portfolio have declined by 41% to $5.1 billion. Over two-thirds of the loans on active forbearance as of September 30 that have not reached their end point relate to the CRE portfolio segments most impacted by COVID-19, notably, hotels and retail CRE. We'll know more over the next 60 days or so as the 180-day deferrals reach their end of term. For the consumer portfolios, deferrals declined from just under $700 million at June 30 to under $150 million or less than 1% at the end of September. For residential mortgage loans we own, nongovernment-guaranteed loans under deferral amount to $1.6 billion, down about 19% from the second quarter. Total deferrals have increased to $3.3 billion from $2.3 billion 90 days ago. All of that increase reflects government guaranteed loans purchased from servicing pools that represent no credit risk to M&T. All of these figures do not include approximately $10 billion of forbearance on residential mortgage loans we service for others. M&T's common equity Tier 1 capital ratio was an estimated 9.81% as of September 30 compared to 9.5% at the end of the second quarter. This reflects the impact of earnings in excess of dividends paid and slightly lower risk weighted assets. M&T did not repurchase shares during the third quarter and will not be doing so in the fourth quarter. M&T's net income comfortably exceeded its common stock dividend, both for the quarter and under the trailing four-quarter calculation outlined by the Federal Reserve. Now, turning to the outlook. Our usual practice is to offer thoughts on the coming year in the January earnings call after we've completed our planning process. So, my remarks today will be somewhat brief. We're all pleased to see that the economy has improved, while recognizing that we're still a long way from conditions we saw in January and February. Core commercial loan growth, excluding PPP loans, has slowed, and we expect those balances to remain flat to slightly down over the remainder of 2020 compared to where we ended the quarter. Given that the auto manufacturers are still not running at normal levels, we don't expect the normal seasonal rebound in dealer floor plan loans during the fourth quarter. Our portal for receiving forgiveness requests of PPP loans is open and applications are being processed and sent on to the SBA. Most of the activity so far is on the smaller loans on which the SBA is expediting relief. The residential mortgage loans we purchased from servicing pools aren't fully reflected in the third-quarter average. Combined with the potential for further base, we should see modest growth in average residential mortgage loans for the current quarter. All in, we expect modest linked-quarter growth in total loans. More difficult to forecast has been our liquidity assets or short term investments in the deposits with the Fed, which continued to rise over the past quarter, although at a much slower pace. As I noted earlier, this was primarily the result of further deposit inflows. Although uncertain at present, we may be approaching the peak and may see declines in the current quarter. As those deposits and associated short-term investments decline, we'd expect that the net interest margin would benefit by about two to three basis points per $1 billion decline, with limited impact on net interest income. With LIBOR having reached a steady state and our expectation for additional modest downward trends in deposit costs, we expect net interest income to be slightly higher in the final quarter of 2020. If a significant balance of PPP loans are forgiven, the accelerated recognition of the PPP loan fees would be a further benefit. We've previously mentioned that the size of the active cash flow hedge position on our floating rate loan portfolio will step up during this quarter. To be more specific, the $13.4 billion notional amount of active cash flow hedges will step up to $17.4 billion this quarter and then remain at those levels for about one year. The benefit to net interest income is less substantive as the older swaps with higher fixed received rates mature and forward starting swaps with lower receive rates become active. Residential mortgage applications continue to be strong with rates as low as they are. We expect continued solid origination volumes this quarter, but likely with some pressure on margin. For trust income, we have seen the increase in waivers of money market mutual fund management be somewhat offset by strong debt capital markets activity. We expect those waivers will reach a steady state shortly and will persist while the zero rate environment endures. Service charge income was boosted by higher levels of customer activity, notably in payments, with some volumes at or even better than pre-COVID levels. Further upside from the current levels appears likely -- sorry, unlikely. We have no change to our expense guidance for the remainder of 2020. We continue to expect expenses for the second quarter -- or second half of the year to be in line with the first half, excluding the seasonal factors in this year's first quarter. Any additional loan loss provisioning will be determined by changes to the macroeconomic variables that we see at the end of the year and by the portfolio composition. Lastly, turning to capital. We are continuing to build capital levels as limited loan growth and profits in excess of the dividend bolster our capital ratios. Consistent with the guidance from our regulators, we won't repurchase stock or recommend that the board consider a change to the dividend during the fourth quarter. Of course, as you're aware, our projections are subject to a number of uncertainties and various assumptions regarding national and regional economic growth, changes in interest rates, political events and other macroeconomic factors, which may differ materially from what actually unfolds in the future. Now, let's open the call up to questions, before which, Maria will briefly review the instructions.	q3 operating earnings per share $2.77. q3 gaap earnings per share $2.75. net interest income expressed on a taxable-equivalent basis totaled $947 million in recent quarter, compared with $1.04 billion in q3 of 2019. m&t bank - provision for credit losses totaled $150 million in q3 of 2020, up from $45 million in year-earlier quarter. m&t bank - allowance for credit losses totaled $1.76 billion or 1.79% of loans outstanding at sept 30, versus $1.04 billion or 1.16% at sept 30, 2019.
Joining on the call today are Darren King, M&T's chief financial officer; and Don MacLeod, M&T's outgoing director of investor relations, who will be retiring after our annual meeting of shareholders in April. These statements speak only as of the date made, and M&T undertakes no obligation to update them. Don, it's hard to believe that it's the end of an era, 17 years at M&T and 40 years in the industry. You've been nothing but a true professional and certainly helped make my transition into the role a lot easier. I've learned a lot from you. Before we get into the details of the recent quarter's results, I'd like to pause and reflect on a few highlights of the past year. While the impact of the pandemic is still being felt by M&T and the rest of the banking industry, the turnaround in 2021 has been remarkable. We've seen a transition from economic contraction and a zero-bound interest rate environment to the prospect of persistent inflation and higher interest rates in 2022. Against that backdrop, GAAP-based diluted earnings per common share were $13.80 compared with $9.94 in 2020, up 39%. Net income was $1.86 billion compared with $1.35 billion in the prior year, improved by 37%. Those results produced returns on average assets and average common equity of 1.22% and 11.54%, respectively. Net operating income, which excludes the after-tax impact from the amortization of intangible assets, as well as merger-related expenses, was $1.9 billion, up 39% compared with $1.36 billion in the prior year. Net operating income per diluted common share was $14.11, compared with $10.02 in 2020, up 41%. Net operating income for 2021 expressed as a rate of return on average tangible assets and average tangible common shareholders' equity, was 1.28% and 16.8%, respectively. We increased the common stock dividend for the fifth consecutive year to an annual rate of $4.80 per share per year. Tangible book value per share grew to $89.80 at the end of 2021, up 11.5% from the end of 2020. And as we build capital in anticipation of the merger with People's United Financial, our CET1 ratio increased to an estimated 11.4% at the end of 2021 from 10% at the end of 2020. While the season -- pardon, made the year had its ups and downs, it sure felt like another division championship. Now, let's turn to the results for the quarter. Diluted GAAP earnings per common share were $3.37 for the fourth quarter of 2021 compared with $3.69 in the third quarter of 2021, and $3.52 in the fourth quarter of 2020. Net income for the quarter was $458 million compared with $495 million in the linked quarter and $471 million in the year-ago quarter. On a GAAP basis, M&T's fourth quarter results produced an annualized rate of return on average assets of 1.15% and an annualized return on average common equity of 10.91%. This compares with rates of 1.28% and 12.16%, respectively, in the previous quarter. Included in GAAP results in the recent quarter were after-tax expenses from the amortization of intangible assets amounting to $1 million or $0.01 per common share, little change from the prior quarter. Also included in the quarter's results were merger-related expenses of $21 million, related to M&T's proposed acquisition of People's United Financial. This amounted to $16 million after tax or $0.12 per common share. Results for 2021's third quarter included $9 million of such charges amounting to $7 million after tax or $0.05 per common share. Consistent with our long-term practice, M&T provides supplemental reporting of its results on a net operating or tangible basis, from which we have only ever excluded the after-tax effect of amortization of intangible assets, as well as any gains or expenses associated with mergers and acquisitions when they occur. M&T's net operating income for the fourth quarter, which excludes intangible amortization and merger-related expenses was $475 million. That compares with $504 million in the linked quarter and $473 million in last year's fourth quarter. Diluted net operating earnings per common share were $3.50 for the recent quarter compared with $3.76 in 2021's third quarter and $3.54 in the fourth quarter of 2020. Net operating income yielded annualized rates of return on average tangible assets and average tangible common shareholders' equity of 1.23% and 15.98% for the recent quarter. The comparable returns were 1.34% and 17.54% in the third quarter of 2021. Included in the recent quarter's GAAP and net operating results, was a $30 million distribution from Bayview Lending Group. This amounted to $22 million after-tax effect and $0.17 per common share. We received a like distribution in the fourth quarter of 2020. Prior to 2020, we had generally received such distributions in the first quarter of each year. Turning to the balance sheet and the income statement. Taxable equivalent net interest income was $937 million in the fourth quarter of 2021, marking a decrease of $34 million or 3% from the linked quarter. The primary driver of that decrease was a $30 million decline in interest income and fees from PPP loans as that portfolio continues to decline following forgiveness of those loans by the Small Business Administration. The net interest margin decreased by 16 basis points to 2.58%, that compares with 2.74% in the linked quarter. We estimate that the higher balance of low-yielding cash on deposit at the Federal Reserve diluted the margin by about 9 basis points in the quarter. The lower income from PPP loans, including declines in the scheduled amortization and accelerated recognition of fees from forgiven loans, contributed about 5 basis points of the margin pressure. All other factors, including lower benefit from hedges accounted for an estimated 2 basis points of the decline. Average earning assets increased by $4 billion compared with the third quarter. This includes a $5.3 billion increase in cash on deposit with the Federal Reserve and a $785 million increase in investment securities. On average, total loans decreased by $2.1 billion or about 2% compared with the previous quarter. Looking at the loans by category on an average basis compared with the linked quarter. Commercial and industrial loans declined by $1.4 billion or about 6%. That reflects a $1.6 billion decline in PPP loans, primarily reflecting loan forgiveness. Auto floor plan loans to vehicle dealers declined by $58 million on an average basis but grew by $554 million on an end-of-period basis. All other C&I loans grew about 1% compared with the prior quarter. Commercial real estate loans declined $830 million or about 2% compared with the third quarter. We've seen a higher level of paydowns and payoffs of some of the troubled loans, often being refinanced by other lenders. Residential real estate loans declined by $89 million or less than 1%, as a result of principal repayments, as well as the ongoing repooling of loans previously purchased from Ginnie Mae servicing pools. That was largely offset by the retention of new loans originated and held for investment. Consumer loans were up over 1%, reflecting growth in indirect auto loans and positive but seasonally slower growth in recreation finance loans, partially offset by lower home equity lines of credit. Average core customer deposits, which excludes CDs over $250,000, grew by $3.6 billion or 3% compared with the third quarter, primarily reflecting noninterest-bearing products. Turning to net interest income -- or sorry, non-interest income. Noninterest income totaled $579 million in the fourth quarter compared with $569 million in the prior quarter. The increase reflects the $30 million distribution from Bayview Lending Group that I previously mentioned. Mortgage banking revenues were $139 million in the recent quarter compared with $160 million in the linked quarter. As we noted on the October call, we have begun to retain a significant majority, around 85% of residential mortgage originations, to hold for investment on the balance sheet, which utilizes a portion of the excess liquidity we currently have. This includes the roughly 20% normally held for investment. As a result of increasing mortgage rates and the holiday slowdown, residential mortgage loan applications during the most recent quarter amounted to $1.7 billion compared with $2.2 billion in the third quarter. Of those, we recorded gains on sale on the $191 million that were locked for sale in the fourth quarter versus gain on sale on the $1.1 billion that were locked in the third quarter. Total residential mortgage banking revenues, including origination and servicing activities, were $91 million in the fourth quarter compared with $110 million in the prior quarter. The decrease reflects the lower level of loans originated for sale, partially offset by gains from the sale of loans previously purchased from Ginnie Mae servicing pools, that based on borrower reperformance recently became saleable. Residential servicing revenues improved slightly. Commercial mortgage banking revenues totaled $48 million, encompassing both originations and servicing compared with $50 million in the third quarter. Recall that in the third quarter's commercial servicing results, they included an $11 million fee for yield maintenance as a result of prepayment of previously securitized commercial mortgage loans. Trust income was $169 million in the recent quarter, improved from $157 million in the previous quarter. Business remains solid with very strong capital markets activity, continued growth in retirement plan assets and higher asset values. Service charges on deposits were $105 million in the recent quarter, unchanged from the third quarter. Operating expenses for the fourth quarter, which exclude the amortization of intangible assets and the merger-related expenses were $904 million compared with $888 million in the third quarter. Salaries and benefits increased by $5 million from the prior quarter. This reflects, in part, higher levels of branch staffing as customer traffic returns to normal, and our ongoing program of adding on-payroll IT professionals. Data processing and software increased by $6 million from the third quarter tied in part to higher business volumes, as well as the costs from software licensing agreements. The $6 million linked quarter increase in advertising and marketing reflects the beginning of the winter marketing campaign combined with incentives paid on new customer accounts. The efficiency ratio, which excludes intangible amortization, and merger-related expenses from the numerator and securities gains or losses from the denominator was 59.7% in the linked quarter, compared with 57.7% in the third quarter. It's cliche in sports that defense wins championships. In banking, credit is the defense. Let's take a look at credit. While some sectors of the economy remain challenged by supply chain and labor constraints, credit trends overall continued to improve, even in the most severely impacted sectors. The allowance for credit losses declined by $46 million to $1.47 billion at the end of the fourth quarter. That reflects a $15 million recapture of previous provisions for credit losses, combined with $31 million of net charge-offs in the quarter. At December 31, the allowance for credit losses as a percentage of loans outstanding was 1.58% compared with 1.62% at September 30. Annualized net charge-offs as a percentage of total loans were 13 basis points for the fourth quarter, down slightly from 17 basis points in the third quarter. With the advantage of hindsight, it would appear that criticized loans did indeed peak in the third quarter of 2021. And when we file our 10-K, we expect to report a noticeable decline in criticized loans, reflecting both payoffs and upgrades. Non-accrual loans as of December 31 declined to $2.1 billion, a decrease of $182 million from the end of September. Non-accrual loans, as a percentage of loans outstanding, were 2.22% compared with 2.4% at the end of the prior quarter. Loans 90 days past due, on which we continue to accrue interest, were $963 million at the end of the recent quarter. Of those loans, $928 million or 96% were guaranteed by government-related entities. In a difficult environment, one might argue our credit is the top-ranked defense in the league. M&T's common equity Tier 1 ratio was an estimated 11.4% as of December 31 compared with 11.1% at the end of the third quarter. This reflects the impact of earnings in excess of dividends paid and slightly higher risk-weighted assets. As previously noted, we increased the quarterly common stock dividend by 9% this quarter to $1.20 per share per quarter, raising the annual dividend rate to $4.80 per share. Now, turning to the outlook. As we look forward into 2022, we are pleased to see that the economy is improving, evidenced by the fact that GDP is growing and unemployment is falling. However, these conditions are driving inflation, which is impacting our cost structure, as well as that of our customers. It has also changed the outlook for interest rates as the forward curve now has embedded a number of increases in both 2022 and 2023. Our outlook considers these macro factors. Also, as we are still awaiting regulatory approval for our merger with People's United, we will focus our comments on M&T stand-alone. That said, there are no material changes to our expectations for the financial impact and benefits of the merger. Of course, the timing of those benefits will depend on the date we close the merger and complete the conversion. Starting with the balance sheet. There are a number of moving parts that will impact where we're headed. We don't expect the $42 billion of cash on the balance sheet at the end of 2021 to endure through 2022. We are managing deposit balances, both brokered and customer relationships that don't make economic sense in this rate and liquidity environment. We'd expect interest checking and MMDA accounts -- balance, excuse me, to decline over the course of the year. Our current plan is to continue securities purchases to increase the proportion of our liquid assets that are held in longer duration assets and have higher yields. We expect to do this by replacing maturities and principal amortization and to increase investment securities by an incremental $1 billion by the end of the year. On the commercial side, PPP loans on our balance sheet amounted to $1.2 billion at year-end. We expect a significant majority of those loans will be largely repaid or forgiven in the first half of 2022. We've seen a meaningful turnaround in vehicle inventory financing, and we believe we're past the low point and expect growth in 2022, although not fully back to pre-pandemic levels. The remainder of our C&I portfolio experienced growth this past quarter, and we believe we've also reached the inflection point in these balances. We expect this growth to continue. The pandemic resulted in a slow pace of new commercial real estate transactions over the past two years, putting pressure on balance growth. This leads us to expect low single-digit declines in CRE balances in 2022. Our efforts to make this portfolio more capital-efficient should result in a transition to more fee income, less interest income, less use of the balance sheet, and higher returns over time. In connection with those efforts, we may seek to participate CRE loan exposures to third parties while retaining the customer relationships and loan servicing. These factors are reflected in our outlook for interest and fee income. As noted earlier, we're retaining a large majority of the mortgage loans we originate, which we expect will grow balances by approximately $2.5 billion in 2022, depending on the level of refinance activity. Offsetting that growth, are $2.8 billion of mortgage loans purchased from Ginnie Mae servicing pools on our balance sheet at the end of 2021, more than half of which we believe will qualify for repooling over the course of 2022. On average, we expect the residential real estate loan portfolio will contract during 2022. We expect more of the same in the consumer portfolios with growth in indirect vehicle financing being partially offset by continued pressures on home equity balances. Taking all of this into account, the balance headwinds from PPP and Ginnie Mae buyouts will lead to average balance declines in 2022. However, excluding those impacts, we expect aggregate loan growth to be in the low to mid-single digits. We expect net interest income to be down in the low to mid-single digits on a year-over-year basis. Growth in securities, retention of mortgage loan originations, and a return to growth in C&I loans will help, but not fully offset the lower benefits from the PPP loans and our interest rate hedging program. We continue to expect net interest income to trough in the first quarter of the year and grow from there. That should result in a net interest margin, little change from full-year 2021 in the area of 2.75%. Our forecast incorporates three increases in short-term interest rates, although the third increase occurs late enough in the year, to not have a meaningful impact on either net interest income or margin. As we noted, residential mortgage gain on sale revenues will be diminished in 2022 by our programs to retain for investment, a large portion of originations, although repooling of Ginnie Mae buyouts should be a partial offset. Commercial originations and servicing, as well as residential mortgage servicing should still be solid. We see continued momentum in trust income based on the capital markets activity, continued growth in retirement plan assets and possibly higher asset values. We would need to see short-term interest rates rise by 50 to 75 basis points before we can fully recover the money fund fees we are currently waiving. Those amount to an annual run rate of approximately $50 million. We expect service charges on deposit accounts to be down, with modest growth in Commercial, offset by declines in Consumer, largely related to changes in our overdraft practices. All in, we're looking for low single-digit growth in noninterest revenues in 2022. Noninterest operating expenses in 2021 grew at an uncharacteristically high rate, rising 5.6% over prior years. Lower profitability and growth led to decreased compensation costs in 2020. The recovery in profitability in 2021 carried with it a return to more normal compensation costs, which accounted for over half of the increase. Our current estimate contemplates low to mid-single-digit operating expense growth in 2022. And like 2021, salaries and benefits, data processing and software, and advertising are the categories that will drive the majority of the increase. We would expect to see our typical seasonal surge in compensation expense during the year's first quarter. That amount last year was approximately $69 million. And we're encouraged by the improvement in credit conditions over the past several quarters. Overall, we expect net charge-offs to be consistent with the average of the past two years, although it could be somewhat lumpy from quarter-to-quarter. We expect loss provisioning to normalize as loan growth offsets potential declines in troubled credits. Lastly, turning to capital. We've paused our buyback program while we wait to close the merger with People's United. Since that pause, our CET1 ratio has increased by 140 basis points to 11.4%, leaving us positioned well in excess of what we believe we need to run the combined company. Our focus, as always, will be on deploying excess -- the excess capital we have beyond that needed to support growth in the business. Of course, as you're aware, our projections are subject to a number of uncertainties and various assumptions regarding national and regional economic growth, changes in interest rates, political events and other macroeconomic factors, which may differ materially from what actually unfolds in the future. Now, let's open up the call to questions before which Britney will briefly review the instructions.	q4 operating earnings per share $3.50. qtrly diluted earnings per common share $3.37. tangible equity per common share was $89.80 at december 31, 2021, $80.52 at december 31, 2020. net loan charge-offs were $31 million during recent quarter, compared with $97 million in final quarter of 2020. qtrly net interest income expressed on a taxable-equivalent basis totaled $937, down from $993 million in q4 of 2020. m&t bank - recaptures of the provision for credit losses of $15 million and $20 million were recorded in the fourth and third quarters of 2021.
I am joined today with Patrick Kaltenbach, our CEO; and Shawn Vadala, our Chief Financial Officer. Let me cover just some administrative matters. For a discussion of these risks and uncertainties, please see the discussion in our recent Form 10-K and other reports filed with the SEC from time to time. Just one other item. More detailed information with respect to the use of and the differences between the non-GAAP financial measure and the most directly comparable GAAP measure is provided in our Form 8-K. I'm happy to host the call tonight, which I'm doing from Switzerland, while Shawn and Mary are in Columbus, Ohio. I knew many of the analysts on the call have covered us for quite some time and know us well. We also have very long-standing shareholders who are also listening in. I look forward to our future interactions and hope that they can take place in person in the not-so-distant future. Let me make some brief comments on my impressions of the first several months at Mettler-Toledo. It is clear that the company's strategies and initiatives are well developed and well ingrained throughout the organization. A high level of accountability is evident throughout the company, which underpins the culture of strong execution. I am impressed with the interactions I have had with colleagues around the world, and I share their passion for customers and innovation that is very apparent in how they approach their responsibilities. It is exciting to join Mettler-Toledo at a time of such strong momentum, which I think is also a great reflection on Olivier's legacy as a CEO. Under his leadership, the company developed a strong foundation for future growth. I'm also grateful for the thorough onboarding process Olivier prepared for me. I am committed to the organic growth strategy of Mettler-Toledo, and will work with the team to enhance our performance and continue the strong track record of top and bottom line growth that has been in place for many years. Now let me turn to our financial results. It was apparent with our Q1 guidance that we expected a very good quarter. However, it came in even better than we expected. Local currency growth was 18%, and we had strong broad-based growth in all regions. China, in particular, had outstanding growth, and our growth in Americas and Europe was also better than we expected. Since the onset of the pandemic, the organization has been focused on identifying areas of growth and ensuring that we are strongly positioned once demand recovered. The team executed well to capitalize on recovering market demand and to meet customer needs. With the excellent sales growth, combined with good cost control and benefit of our margin and productivity initiatives, we achieved a 64% growth in adjusted EPS. Cash flow generation was also impressive as we achieved an almost 200% increase in our free cash flow generation. We believe the positive momentum will continue into Q2 and expect another quarter of robust sales and earnings growth. As we look to the full year 2021, we believe we can continue to gain market share and deliver very strong results. Let me now turn it to Shawn to cover the financial and guidance details, and then I will come back with some additional commentary on the business and an overview of the PendoTECH acquisition that we completed in the quarter. Sales were $804.4 million in the quarter, an increase of 18% in local currency. On a U.S. dollar basis, sales increased 24% as currency benefited sales growth by 6% in the quarter. On slide number four, we show sales growth by region. Local currency sales increased 14% in both the Americas and Europe and increased 29% in Asia/Rest of the World. Local currency sales increased 44% in China in the first quarter. On slide number five, we outline local currency sales growth by product area. In the quarter, Laboratory sales increased 20%, Industrial increased 17%, with Core Industrial up 26% and product inspection up 5%. Food Retail increased 13% in the quarter. We estimate that we benefited approximately 2% from COVID tailwinds in the quarter, mainly related to our pipette business for COVID testing. Let me now move to the rest of the P&L, which is summarized on the next slide. Gross margin in the quarter was 58.6%, a 90 basis point increase over the prior year level of 57.7%. We benefited from pricing, volume and temporary cost savings initiatives. These benefits were offset in part by higher transportation and material costs. R&D amounted to $39.3 million, which represents a 7% increase in local currency. SG&A amounted to $221.8 million, a 7% increase in local currency over the prior year. Increased variable compensation was offset in part by our temporary cost savings and ongoing cost containment initiatives. Adjusted operating profit amounted to $210.7 million in the quarter, a 49% increase over the prior year amount of $141.3 million. Adjusted operating margins increased 440 basis points in the quarter to 26.2%. We are extremely pleased with this margin growth, which reflects excellent sales growth combined with good margin and cost initiatives. Currency benefited operating profit growth by approximately 6%, but had very little impact on operating margins. A couple of final comments on the P&L. Amortization amounted to $13.9 million in the quarter, interest expense was $9.5 million in the quarter. Other income in the quarter amounted to $2.1 million, primarily reflecting nonservice-related pension income. Offsetting this was $2.8 million in acquisition costs that is excluded from adjusted EPS. Our effective tax rate before discrete items and adjusted for the timing of stock option deductions was 19.5% as compared to 21.5% in the first quarter of last year. Fully diluted shares amounted to $23.7 million in the quarter, which is a 3% decline from the prior year. Adjusted earnings per share for the quarter was $6.56, a 64% increase over the prior year amount of $4. Currency benefited adjusted earnings per share growth by approximately 7% in the quarter. On a reported basis in the quarter, earnings per share was $6.32 as compared to $4.03 in the prior year. Reported earnings per share in the quarter includes $0.12 of purchased intangible amortization, $0.10 of cost related to the PendoTECH acquisition, $0.04 of restructuring and a $0.02 benefit due to the difference between our quarterly and annual tax rate due to the timing of stock option exercises. That covers the P&L, and I'll now comment on the cash flow. In the quarter, adjusted free cash flow amounted to $139 million, which is an increase of 196% on a per share basis as compared to the prior year. We are very happy with our cash flow generation. DSO declined by approximately 6.5 days to 40 days as compared to the prior year. We continue to see good results from the new initiatives we put in place last year on the use of analytics and productivity improvements in accounts receivables collections in cash flow management. ITO came in at 4.4 times, similar to last year. Before I turn to guidance, let me provide some financial information on PendoTECH acquisition, which we completed late in Q1. We paid $185 million upfront, and there is a $20 million potential earnout as well as some post-closing amounts. We expect PendoTECH to contribute approximately 1% to sales growth beginning in Q2. The transaction was financed through borrowings under our bank facility. Patrick will have some additional comments on PendoTECH shortly. Let me now turn to guidance. Forecasting continues to be challenging. Market conditions are dynamic and changes to the business environment can happen quickly. Uncertainty also remains surrounding COVID-19 and the ultimate impact for the global economy. In addition, further shutdowns, unexpected material shortages and unforeseen logistic challenges can also create potential volatility. Our end markets have good momentum, and we are well positioned to capitalize on this growth potential by leveraging our Spinnaker sales and marketing initiatives, excellent product portfolio and service network. The organization continues to execute very well and has demonstrated a high level of resilience and agility in adapting to rapidly changing market conditions. We continue to feel positive in our ability to gain market share and generate margin improvement with our pricing and productivity initiatives. We will also resume our field turbo program and expect to add sales resources in the second half of 2021. Now let me cover the specifics. For the full year 2021, primarily due to the benefit of our Q1 results and with a strong outlook for Q2, we now expect local currency sales growth for the full year will be in the range of 10% to 12%. This compares to previous guidance range of 5% to 7%. We expect full year adjusted earnings per share guidance to be in the range of $31.45 to $31.90, which is a growth rate of 22% to 24%. This compares to our previous guidance of adjusted earnings per share in the range of $29.20 to $29.80. With respect to the second quarter, we would expect local currency sales growth to be in the range of 19% to 21% and expect adjusted earnings per share to be in a range of $7.50 to $7.65, a growth rate of 42% to 45%. Let me provide you with some additional details and guidance. As mentioned, we expect PendoTECH to contribute 1% to sales growth for the remaining quarters of the year. The impact to earnings per share from the acquisition is relatively neutral. We would expect local currency sales growth for the second half of the year to be in the mid-single-digit range as we will face tougher comparisons. The COVID-19 testing tailwind in our pipette business will turn into a headwind, and we won't see the same level of pent-up demand that we're currently seeing. We expect reported amortization will amount to $62 million, which is higher than previously communicated due to the PendoTECH acquisition. The purchased intangible adjustment for earnings per share will increase to $0.66 for 2021. Other income, which is below operating profit, will approximately -- will approximate $2 million per quarter for the remainder of 2021. We expect our effective tax rate in 2021 to remain at 19.5%. In terms of free cash flow for the full year, we now expect it to be approximately $735 million. We expect to repurchase 637 million shares in 2021 for the remaining three quarters of 2021. We would expect to end 2021 in our targeted net debt-to-EBITDA range of approximately a 1.5 times leverage ratio. Some final details on guidance. With respect to the impact of currency on sales growth, we expect currency to increase sales growth by approximately 3.5% in 2021 and 6% in the second quarter. In terms of adjusted EPS, currency will benefit growth by approximately 7.5% in the second quarter and 4% for the full year 2021. Let me start with some comments on our operating results. Our lab business had outstanding growth in the quarter. Pipettes had excellent growth and continued to benefit from COVID-19 related testing demand. All other product categories had also robust sales growth and growth in all regions was very strong. Biopharma trends continue to be very favorable and we also experienced improved customer demand in other segments such as chemical. We expect Lab to be very strong in the second quarter due to favorable biopharma trends, vaccine research and bioproduction scale-up and production. We also expect to continue to benefit from pent-up demand in segments outside biopharma. While Lab will face tougher comparisons in the second half of the year, we believe we are well positioned to continue to capture share given the strength of our product portfolio and continued strong execution of our Spinnaker sales and marketing initiatives. In terms of our Industrial business, Core Industrial did very well in the quarter with a 26% increase in sales driven by China, which had growth in Core Industrial in excess of 60%. Europe and Americas also had strong low to mid-teens growth in Core Industrial. Improving market conditions combined with the strength and diversity of our product portfolio, and our focus on attractive market segments contributed to the strong results. Our outlook for Core Industrial is very good for Q2, while they will face more difficult comparisons, particularly in China in the second half of the year. Product inspection came in pretty much as we expected with a 5% local currency sales growth in the quarter. Europe and Asia had growth, while Americas was flat with the prior year. We would expect modestly better growth in Q2, but this business continues to be challenged as large packaged food companies continue to face operational challenges related to COVID-19 and are careful with installing new equipment or even bringing service people into their facilities. We believe pent-up demand exists for our instruments, but ultimate timing is still hard to determine. Food retailing came in better than expected with 13% growth because of better market demand in Europe and Asia and the rest of the world. Now let me make some additional comments by geography. Sales in Europe increased 14% in the quarter, with excellent growth in Lab, Core Industrial and Food Retail. Americas also increased 14% in the quarter with excellent growth in Lab and Core Industrial, offset by flat results in Product Inspection and a decline in Food Retail. Finally, Asia and the Rest of the World grew 29% in the quarter with very strong growth in most product lines. As you heard from Shawn, China had outstanding growth of 44% in the quarter with excellent growth across most product lines. We are benefiting from robust demand in many of the market segments we serve. This includes very strong growth in Life Sciences, Food and Chemical. From a product point of view, our industrial customers are seeking greater automation and digitalization, which bodes very well for our product offering. We're also seeing benefits of government spending in key priority areas, such as new research labs, safety in food supply and packaged foods and investments in various strategic priorities. Our achievement in China are a great example of how we positioned ourselves to capture growth as demand recovered. Our Spinnaker sales and marketing techniques, including our go-to-market approach, which we adapted due to a new environment, have served us very well in terms of identifying and capturing these growth opportunities. We have also worked over many years to ensure that our product portfolio in China is well suited for the local market, which gives us an advantage. We expect good momentum to continue in China this quarter, And then you will see a more modest growth in the second half of the year due to very strong growth in the prior year. One final comment on the business. Service and Consumables performed well and were up 11% in the quarter. That concludes my comments on the business. Not only is our business off to a great start in 2021, we also made a strategic bolt-on acquisition to further expand one of our most attractive businesses, process analytics. Let me provide some additional insights into the acquisition. We are a global leader in real-time measurement of key process control parameters, which customers use to optimize their production processes. About 50% of the Process Analytics business is to the pharma and biopharma market, with an emphasis on sensors to monitor PH, dissolved oxygen, carbon dioxide and other parameters. Our solutions combine sensor technologies for specific measurements, transmitters and services. The sensors must be calibrated, maintained and replaced on a timely basis, which creates an attractive consumable stream. Process Analytics has achieved above-market growth for numerous years, benefiting from the strength in bioproduction and very successful Spinnaker sales and marketing strategies and techniques. We also have a great track record of technology innovation. We are a leader in the market with our innovative intelligent sensor management technology, which optimizes sensor replacement to avoid unexpected downtime. Other examples of innovations include in-line measurement of carbon dioxide and high-performance optical sensors for dissolved oxygen. The company we acquired, PendoTECH, is a manufacturer and distributor of single-use sensors, transmitters, control systems and software, serving the biopharmaceutical manufacturers and life science laboratories. Their primary focus is pressure, which is a common control parameter used in bioprocess applications. They are well recognized for the leading edge innovation in single-use sensors that are becoming increasingly important in bioproduction as it provides greater manufacturing flexibility. They have extensive knowledge surrounding disposable flow cells and connector designs, and have strong bioprocess downstream application know-how. This is an excellent strategic acquisition as it expands our presence in the very attractive high-growth bioprocess market. We have a complementary offering in bioprocessing applications of our strength in upstream and PendoTECH in downstream. With the combination, we will create one of the most competitive single-use sensor offerings in the market. We see attractive cross-selling opportunities as we believe there is significant customer benefit from using the same vendor in upstream and downstream bioprocess applications. Finally, we see good opportunity to expand PendoTECH's presence on a global basis, leveraging our global reach and large customer base. We are excited about this transaction and believe it will further our already strong leadership position in Process Analytics. Let me wrap up by commenting that we are off to a very good start to the year. The team has shown a tremendous level of resilience and agility in adapting and reacting to market conditions that are changing rapidly. We remain focused on meeting our customer needs and believe we can continue to gain market share and deliver strong results.	q1 adjusted non-gaap earnings per share $6.56. q1 earnings per share $6.32. management anticipates local currency sales growth in 2021 will be in range of 10% to 12%. fy adjusted earnings per share is forecasted to be in range of $31.45 to $31.90. for q2 of 2021, anticipates local currency sales growth will be in range of 19% to 21%. q2 adjusted earnings per share is forecasted to be $7.50 to $7.65.
I'm joined on the call today with Patrick Kaltenbach, our CEO; and Shawn Vadala, our Chief Financial Officer. Let me cover just a couple of administrative matters. For discussions of these risks and uncertainties, please see the discussion in our recent Form 10-K and other reports filed with the SEC from time to time. Just one other item. I am pleased to host the call tonight, which we are doing from Switzerland as Shawn and Mary are here with me, too. I'm excited to report another quarter of excellent results. Several factors contributed to these results. First, demand in our markets was very strong and broad-based. Second, we were able to capture these growth opportunities as a key priority since the onset of the pandemic was to stay close -- in close contact with our customers and be strongly positioned once customer demand recovered. And finally, the teams around the world have done an excellent job in execution and customer support. Our supply chain team has had more than the share of challenges due to part availability and logistics complications while our market organizations have executed well to meet increasing customer demands. Our teams have shown resiliency and agility in an environment where conditions change rapidly. Now let me turn to our financial results. Local currency sales growth was 27%, and we had very strong broad-based growth in all regions and most product lines. With the exception with this exceptional sales growth and combined with focused execution of our margin initiatives, we achieved a 45% growth in adjusted operating income and 53% increase in adjusted EPS. Cash flow generation was excellent in the quarter. Demand in our end markets remains positive, although our growth for the remainder of the year will reflect more challenging comparisons than we had in the first half of the year. We are making incremental investments, which will position us very well for future growth. We remain confident that we can continue to gain market share and deliver strong results in 2021 and beyond. Let me now turn it to Shawn to cover the financials and guidance details, and then I will come back with some additional commentary on the business. Sales were $924.4 million in the quarter, an increase of 27% in local currency. On a U.S. dollar basis, sales increased 34% as currency benefited sales growth by 7% in the quarter. The PendoTECH acquisition contributed approximately 1% to sales growth in the quarter. On Slide number four, we show sales growth by region. Local currency sales increased 29% in the Americas, 23% in Europe, and 28% in Asia/Rest of World. Local currency sales increased 35% in China in the quarter. The next slide shows sales growth by region for the first half of the year. Local currency sales grew 23% for the first six months with a 22% increase in the Americas, 18% in Europe, and 28% growth in Asia/Rest of World. On Slide number six, we summarized local currency sales growth by product area. For the second quarter, laboratory sales increased 35%, industrial increased 20%, with core industrial up 27% and product inspection up 9%. Food retail increased 9% in the quarter. The next slide shows local currency sales growth by product area for the first half. Laboratory sales increased 27% and industrial increased 19% with core industrial up 27% and product inspection up 7%. Food Retail increased 11% for the first six months. Let me now move to the rest of the P&L, which is summarized on Slide number eight. Gross margin in the quarter was 58.1%, a 50 basis point increase over the prior-year level of 57.6%. We benefited from volume and pricing, which was offset in part by challenges in the global supply chain, namely higher transportation, logistics, and raw material costs. These items are even more challenging than we had expected the last time we spoke. One additional factor, as you compare to the prior year, we now have in our cost structure, the impact of the temporary cost actions we undertook in 2020. R&D amounted to $42.6 million in the quarter, which is a 28% increase in local currency over the prior period. The impact of the temporary cost reductions undertaken last year as well as the timing of project activity contributed to this increase. SG&A amounted to $239 million, a 20% increase in local currency over the prior year. The impact of the temporary cost savings that we undertook last year, higher variable compensation, and increased investments in sales and marketing were the principal factors driving the increase. Adjusted operating profit amounted to $255.3 million in the quarter, a 45% increase over the prior-year amount of $176.6 million. Adjusted operating margins increased 200 basis points in the quarter to 27.6%. We are pleased with this margin growth, which reflects excellent sales growth, combined with focused execution on our margin initiatives. Currency benefited operating profit growth by approximately 7% but had little impact on operating margins. A couple of final comments on the P&L. Operating -- I'm sorry, amortization amounted to $16.2 million in the quarter. Interest expense was $10.4 million in the quarter and other income in the quarter amounted to $2.7 million primarily reflecting non-service-related pension income. Our effective tax rate before discrete items and adjusted for the timing of stock option deductions was 19.5%. Fully diluted shares amounted to $23.5 million in the quarter, which is a 3% decline from the prior year. Adjusted earnings per share for the quarter was $8.10, a 53% increase over the prior-year amount of $5.29. Currency benefited adjusted earnings per share growth by approximately 7% in the quarter. On a reported basis in the quarter, earnings per share was $7.85 as compared to $5.22 in the prior year. Reported earnings per share in the quarter includes $0.19 of purchased intangible amortization, $0.03 of restructuring, and $0.03 due to the difference between our quarterly and annual tax rate due to the timing of stock option exercises. The next slide shows our P&L for the first half. Local currency sales grew 23% for the six months. Adjusted operating income increased 47% with margins up 330 basis points. Adjusted earnings per share grew 58% on a year-to-date basis. That covers the P&L, and let me now comment on cash flow. In the quarter, adjusted free cash flow amounted to $233.3 million, which is an increase of 41% on a per-share basis as compared to the prior year. We are very happy with our cash flow generation. DSO was 36 days, which is four days less than the prior year. ITO came in at 4.6 times, which is slightly better than last year. For the first half, adjusted free cash flow amounted to $372.2 million, an increase of 75% on a per-share basis as compared to the prior year. Let me now turn to guidance. Forecasting continues to be challenging. Market conditions are very dynamic and changes to the business environment can happen quickly. Uncertainty remains surrounding COVID-19, in particular, the impact of the latest variance, the worldwide pace of vaccinations, and related potential shutdowns and/or restrictions. The ultimate impact on the global economy is also still uncertain. In addition, we are monitoring our supply chain very closely and recognize we must remain very agile in order to adapt to unexpected material shortages, inflationary pressures, and unforeseen logistic challenges, which can create unexpected volatility. As we enter the second half of the year, demand in our end markets is positive, although we face more challenging comparisons for the remainder of the year as compared to the first half of this year. The organization continues to execute well and has demonstrated a high level of resilience and agility and adapting to rapidly changing market conditions. We are making incremental investments for future growth and continue to feel confident in our ability to gain market share and drive earnings growth in 2021 and beyond. Now let me cover the specifics. For the full year 2021, with the benefit of our strong Q2 results and improved outlook for the remainder of the year, we now expect local currency sales growth for the full year to be approximately 15%. This compares to our previous guidance range of 10% to 12%. We expect full-year adjusted earnings per share to be in the range of $32.60 to $32.90, which is a growth rate of 27% to 28%. This compares to previous guidance of adjusted earnings per share in the range of $31.45 to $31.90. With respect to the third quarter, we would expect local currency sales growth to be in the range of 11% to 13% and expect adjusted earnings per share to be in a range of $8.12 to $8.27, a growth rate of 16% to 18%. In terms of free cash flow for the year, we now expect it to be in the range of $770 million. We expect to repurchase in total one billion in shares in 2021, which should put us in the range of a net debt-to-EBITDA leverage ratio of approximately 1.5 times at the end of the year. Some final details on guidance. With respect to the impact of currency on sales growth, we expect currency to increase sales growth by approximately 3% in 2021 and 2% in the third quarter. In terms of adjusted EPS, currency will benefit growth by approximately 3% in the quarter and approximately 3.5% for the full year 2021. Let me make some comments on our operating businesses, starting with Lab, which had an outstanding growth of 35% in the quarter. Pipettes had excellent growth. all other major product categories also had robust sales growth and growth in all regions was very strong. Biopharma continues to be very favorable and continuing the trend we saw in the first quarter, we see strong customer demand in other segments such as chemical. We expect demand for our laboratory products to continue to be positive due to favorable biopharma trends, vaccine research, and bioproduction scale-up and production. While we faced tougher comparisons in the second half of the year, we remain confident we can continue to capture share, given the strength of our product portfolio and continued execution of our Spinnaker sales and marketing initiatives. In terms of our industrial business, core industrial did very well in the quarter with a 27% increase in sales. All three regions of the world had robust core industrial growth. Improving market conditions, including some benefit from pent-up demand, combined with the strength and diversity of our product portfolio and our focus on attractive market segments contributed to the strong results. Similar to my comments on laboratory, we will face tougher comparisons for the second half of the year, but our outlook and our confidence in gaining market share remains positive for this business. Product Inspection had increased momentum and solid sales growth of 9% in the quarter. We saw good growth in all regions. We expect good growth in product inspection for the remainder of the year as we are gaining better access to our customer facilities and believe we will benefit from some pent-up demand in the business. Food retailing grew 9% in the quarter. Let me make some additional comments by geography. Sales in Europe increased 23% in the quarter with excellent growth in lab, core industrial, and food retail. Americas increased 29% in the quarter with excellent growth in lab and core industrial. Product Inspection did well in the Americas, while food retail declined. Finally, Asia and the rest of the world grew 28% in the quarter with outstanding growth in Laboratory and Industrial. As you hear from Shawn, China had another quarter of stellar growth. We would expect another good quarter of growth in Q3 in China, although not at the same level of the first half as China faces more challenging comparisons. We are strongly positioned in China, and the team is executing very well. One final comment on the business. Service and consumables performed very well and were up 23% in the quarter. We are very happy with the growth in this important and profitable part of the business. That concludes my comments on the business. With our better-than-expected sales growth in the first half, we are making incremental investments for future growth. These investments are centered on innovation and operational excellence. In product development, in our manufacturing facilities, and in our corporate programs such as Spinnaker sales and marketing. Let me give you some recent examples, starting with product development, where we have a proven track record of launching market-leading technologies. It all stems from our deep knowledge of customer processes and what our solutions can do to enhance or improve these processes. We think of innovation in product development as customer-centric rather than technology-centric. We are focused on the specific value of our solutions can provide to customers, for example, in terms of productivity, compliance-related matters, safety, or data integrity. On the website, we have recently launched our newest version of our LabX instrument control and data management software. This latest vision fully supports the lab digitalization, and with the strong adoption of our customer base, we have doubled the number of instruments that can be networked. LabX increases our customers' productivity by speeding up daily work through the management of data and development of workflows. It enhances security and compliance, ensuring data quality and full data traceability. Finally, LabX helps reduce complexity in asset managers data, assets and workflow centrally and seamlessly integrates into laboratory data management systems such as LIMS. Software is progressively becoming a deciding factor for customers in choosing a supplier for Benchtop lab solutions. With the increasing importance of software, LabX is helping to position us as a trusted advisor for certain global pharma customers as we meet their demands for instruments, service, and software. While lab receives the greater share of R&D investments, we also have some great examples of new products on the industrial side, including a best-in-class industrial terminal, which provides fully integrated weighing applications for -- with the industry's fastest processing speed. Similarly, we launched new load cell technology in our product inspection business, which provides industry-leading check weighing throughputs with maximum precision. Both of these products provide value by increasing customers' productivity. New products highlight our deep and great knowledge of our customers' processes and pain points and allow us to lead the market with technology to provide specific value to customers. We are also investing in our manufacturing facilities to boost productivity. Last quarter, we rolled out significant automation in our pipette and tip harvesting process, resulting in a meaningful increase in yield per molding machine. This quarter, we are unveiling a new expanded clean room for our pipette manufacturing as well as inaugurating a new facility for our secondary brand, Biotix, that will expand our pipette and tip manufacturing capacity and efficiency. We are also launching a project for our Process Analytics business in the U.S. to optimize production and its warehouse layout, which will yield improvements in material flow, in productivity, and production capacity. We also continue to invest in innovation in our corporate programs. You have seen over many years for tremendous innovation in our Spinnaker sales and marketing programs. A current priority area for us is maximizing our cross-selling capabilities. Because we utilize a specialized sales force, cross-selling techniques are different than what you might hear from companies that have -- that use a more generalist sales force approach. Our goal is to use data analytics to identify customer sites in which we have low cross-selling penetration. We then use contacts and references to develop warm and hot leads to other product categories. It involves data and qualification analytics, and these leads have proven to be very effective in converting to sales. Another innovative techniques we are using to stay fully engaged with customer is greater use of webinars. In the past, we would conduct a few hundred webinars annually. While our goal this year is to launch 2,000 webinars in local languages, which helps to overcome the limitations we face with customer interactions due to the pandemic. We have professionalized the delivery of the webinars and have expanded our topics to include items such as compliance, productivity, Industry 4.0, and data integrity. From a customer's perspective, webinars are very cost and time-efficient while still allowing for interactions with experts from various businesses. Our supply chain team and pricing team are also demonstrating a high level of innovation. For our supply chain team, agility continues to be a necessity in overcoming the many challenges of the current environment. At the same time, they also continue to make excellent progress on Stern Drive, our corporate initiative to continuously improve and drive world-class operations and supply chain. Stern Drive comprises several hundred projects throughout manufacturing and back-office operations focused on material cost reductions, shop floor productivity, and back-office productivity. Finally, the pricing team also shown great resilience and agility in reacting to inflationary pressures. They moved quickly earlier this year to implement certain midyear price changes and at the same time, they continue to work strategically on some pricing initiatives to help improve the efficiency and effectiveness of life quotes to customers. Incorporating data analytics into upfront processes will make quoting more effective and easier and more efficient for our salespeople. These are just a few of many examples we have internally in which we continue to move our initiatives to another level. We recently held a virtual leadership meeting with senior leaders from around the world with the theme of doubling down to drive growth. What we emphasize to our senior leaders and to you today is we have a great strategy in place, and we'll execute on it in an even more determined way than before. We will continue to invest in innovation to double down on enhancing our initiatives that are the foundation of our future growth. We remain confident that our strategies are effective in capturing market share and driving sales and operating profit.	q2 adjusted non-gaap earnings per share $8.10. q2 earnings per share $7.85. anticipates local currency sales growth in 2021 will be approximately 15%. sees 2021 adjusted earnings per share to be in range of $32.60 to $32.90. for q3 company anticipates that local currency sales growth will be in range of 11% to 13%. sees q3 adjusted earnings per share $8.12 to $8.27. qtrly net sales $924.4 million versus $690.7 million.
I'm Mary Finnegan, I'm responsible for investor relations at Mettler-Toledo and happy that you're joining us. I'm joined here today with Olivier Filliol, our CEO; and Shawn Vadala, our chief financial officer. I want to cover just a couple of administrative matters. Securities Act of 1933 and the U.S. Securities Exchange Act of 1934. For a discussion of these risks uncertainties, please see our Form 10-K. I will start with a summary of the quarter, and then Shawn will provide details on our financial results and updated guidance for 2020. I will then have some additional comments, and we will open the lines for Q&A. Sales growth in the quarter came in better than expected and was quite good given the excellent 8% growth in the prior-year quarter. Total local currency sales growth in the quarter was 4%. Growth in the Americas and China was strong. We again faced meaningful headwinds in the quarter due to adverse currency and impact of tariffs. With the benefit of our productivity and margin initiatives we were able to overcome these challenges and delivered strong growth in operating margins and earnings per share growth. For the full-year 2019, we exceeded $3 billion in sales and achieved 5% growth in local currency. Food Retail was down significantly in 2019. Excluding this business, we have 6% growth in local currency sales. We achieved a strong improvement in operating margins and a 12% increase in adjusted earnings per share. Given the material headwinds we faced in 2019, we are quite pleased with this performance. One final comment on full-year 2019, we generated more than $530 million in free cash flow. A very strong level. Let me make some comments upfront on the coronavirus that is impacting China. To date, we have had no health impact to our employees in China, for which we are grateful. We are working with the team of contingency and backup plans due to travel and back to work restrictions that the government has imposed. Even before these actions were undertaken, we had taken steps, such as eliminating our annual sales force meeting and noncritical travel to reduce the risk to our employees. We expect the coronavirus to significantly impact sales in China in the first quarter due to the loss of selling days. At this time, we would expect to recover the sales later in 2020, and therefore, have made no adjustments for full-year sales growth for the coronavirus. I wanted to mention this upfront so that you can put it into perspective as you evaluate our results and updated guidance for 2020. In terms of the full year, our view on 2020 has not changed significantly since we last spoke. We continue to remain confident in our growth, margin and productivity initiatives. We believe we can continue to gain market share and drive earnings growth. Excluding Food Retail and the near-term impact of the coronavirus, demand in our markets remained solid, although we are cautious on the macroeconomic environment, as uncertainty does exist, and there are pockets of weakness in certain end markets. We will continue to invest for growth, but remain agile if market conditions change. Based on market conditions today, we believe we are well-positioned to generate solid sales growth and strong earnings growth for 2020. Let me now turn it to Shawn to cover the financials and guidance. Sales were $844 million in the quarter, an increase of 4% in local currency. On a U.S. dollar basis, total sales increased 3% as currencies reduced sales growth by approximately 1% in the quarter. 4, we show sales growth by region. Local currency sales grew 6% in the Americas, 1% in Europe, and 5% in Asia/Rest of World. China had growth of 8%, a little bit better than what we expected the last time we spoke. The next slide shows year-to-date results. Local currency sales for the year grew 5%. And as Olivier mentioned, excluding Food Retail, local currency sales growth was 6% in 2019. By region for the year, sales increased 6% in the Americas, 3% in Europe and 6% in Asia/Rest of World. 6, we outline local currency sales growth by product area. For the fourth quarter, Laboratory sales grew 6%, Industrial increased 2%, with core industrial up 4%, while product inspection was flat. Food Retail declined 2% in the quarter. The next slide shows full-year sales growth by product. In 2019, Laboratory sales grew 7% in local currency, Industrial grew 4%, with core industrial up 6% and product inspection up 2%. Food Retailing declined 8% in 2019. Overall, total sales in 2019 were up 5% in local currency and 6% if we exclude Food Retailing. Let me now move to the rest of the P&L for the quarter, which is summarized on Slide No. Gross margin in the quarter was 59%, a 60-basis-point increase over the prior-year level of 58.4%. Stern Drive initiatives on material costs and productivity in pricing were strong contributors to margin growth. Partly offsetting these positives were tariffs from the U.S.-China trade dispute. R&D amounted to $35.3 million, which represents a 2% decline in local currency. This decline was impacted by timing of activity and the 15% local currency growth in R&D in the prior year. SG&A amounted to $206.7 million, a 3% increase in local currency over the prior year. The increase was driven by investments in our field force and growth initiatives and higher variable compensation, offset in part by cost savings initiatives. Adjusted operating profit amounted to $256.3 million in the quarter, which represents a 7% increase over the prior-year amount of $239.7 million. We estimate currency reduced operating income by approximately $3.5 million. We also estimate tariffs were a gross headwind to operating income by approximately $2.5 million. Absent adverse currency and the gross impact of tariffs, operating income would have increased 9% in the quarter. Operating margins reached 30.4% in the quarter, the first time we crossed 30% and represented a 110-basis-point increase from the prior year. We are quite pleased with this increase in the quarter. A couple of final items on the P&L. Amortization amounted to $12.8 million in the quarter. Interest expense was $9.6 million in the quarter. Other income amounted to $1.9 million. Our effective tax rate in the quarter was 20% before discrete tax items and adjust for the timing of stock option exercises. Moving to fully diluted shares, which amounted to $24.6 million in the quarter and is a 3.5% decline from the prior year, reflecting the impact of our share repurchase program. Adjusted earnings per share for the quarter was $7.78, a 14% increase over the prior-year amount of $6.85. Absent currency and the gross impact of tariffs, our adjusted earnings per share growth would have been 16% in the quarter, a level we are very pleased at. On a reported basis in the quarter, earnings per share was $7.84, as compared to $7.11 in the prior year. Reported earnings per share in 2019 includes $0.11 of purchased intangible amortization, $0.15 of restructuring, and a $0.32 difference between our quarterly and annual tax rate due to the timing of stock option exercises. In the quarter, we also incurred a one-time noncash deferred tax gain of $0.64 related to changes in Swiss tax law. We expect our effective tax rate to remain at 20%. One final point on reported earnings per share in Q4 of last year, 2018, we recorded a one-time noncash acquisition gain of $0.75. The next slide shows our full-year P&L. We are very pleased with our 2019 results. We achieved 5% growth in local currency sales, 100-basis-points improvement in operating margin, and 12% growth in adjusted earnings per share. We're particularly pleased we're able to overcome, to a degree, the headwinds from adverse currency and tariff costs. That is it for the P&L and we'll now cover cash flow. In the quarter, adjusted free cash flow amounted to $186.2 million, a 23% increase over the prior year on a per share basis. Our working capital statistics remained solid, with DSO at 40 days and ITO at 4.5 times. For the year, adjusted free cash flow amounted to $531.3 million, as compared with $455.9 million in the prior year. This represents a 20% increase on a per share basis and represents a net income conversion of approximately 95%. We are very pleased with this level and believe we can continue to further improve net income conversion in the future. Now let me turn to guidance. As you heard from Olivier, we're not making any changes to our full-year outlook for 2020. We continue to feel confident about our ability to execute on our growth and productivity initiatives. We believe we are well-positioned to continue to gain share regardless of the macro environment. We also believe we can continue to expand operating margins through our ongoing productivity and pricing programs. We remain cautious on the macroeconomic environment as certain indicators are weak. While we believe our business is less susceptible to an economic downturn than in the past, we don't believe we're immune to economic cycles. We will remain in the investment mode, but keep agile to adapt if market conditions necessitate. Now let me cover the specifics. We continue to expect local currency sales growth in 2020 will be approximately 4%. While the total sales growth is the same, we now expect Food Retail to be modestly down for the year and a double-digit decline in the first quarter. The last time we spoke, we had expected Food Retail to be up low single digits for the year and to be down in the first quarter, but not in the double-digit range. Our sales guidance for 2020 remains unchanged and we are also maintaining our full-year adjusted earnings per share guidance in the range of $24.85 to $25.10, which reflects a growth rate of 9% to 10%. While we have incorporated our Q4 beat, currencies have deteriorated since the last time. In total, for 2020, we expect currency and the gross impact of tariffs to reduce our earnings per share growth by 2%. Absent currency and tariffs, our earnings per share growth of 11% to 12% is the same as what we provided in November. Some further comments on 2020 guidance. We expect interest expense to be approximately $42 million in 2020 and amortization to be $53 million. Other income in 2020 will be approximately $7 million. You'll note this is higher than the last guidance, and it is related to pension accounting that is offset, to a degree, by higher pension costs that are above the line and included in operating profit. Now let me make some comments on Q1. Based on market conditions today, we expect local currency sales growth to be approximately 0% to 1%. We recognize this is not a level you were expecting, so let me walk you through a few factors that are impacting our Q1 sales growth. First, Q1 will be our toughest sales growth comparison for the year as we had 7% growth in the first quarter of last year; second, we expect food retail to be down double digits in the quarter, which impacts sales growth by approximately 1%; and third, as Olivier mentioned earlier, we expect the coronavirus to have an impact on our sales in the quarter, but not for the full year. In Q1, we would expect sales in China to be down mid- to high single digits which impacts our sales growth in the quarter by approximately 2%. The impact from the coronavirus is, of course, difficult to estimate and reflects our current view of the situation, which is based on the assumption that people return to work on February 10. For the full year, we continue to believe that China will have sales growth in the mid-single-digit range, the same level that we communicated last quarter. Let me summarize what this means to Q1 sales growth. Excluding the impact of the retail decline and adjusting our guidance for the estimated coronavirus impact, we would have expected sales growth in Q1 to be in the range of 3% to 4%. On a two-year stack basis, this would have been growth in the 10% to 11% range, which we're pleased with. I realize we are providing you a lot of numbers, but thought it would be helpful to put the Q1 sales guidance into perspective. We would expect that adjusted earnings per share in the first quarter to be in the range of $4.20 to $4.30, a growth rate of 2% to 5%. Absent currency and tariffs, adjusted earnings per share growth in the first quarter would be 7% to 10%. In terms of free cash flow, we expect approximately $560 million, which is a 10% increase on a per share basis. We plan to repurchase shares of approximately $800 million in 2020, which includes an incremental amount as we target a net debt-to-EBITDA leverage ratio of 1.5 times. As in the past, we will buy shares evenly throughout the year. With respect to the impact of currency on sales growth, we expect currency to reduce sales by approximately 100 basis points. In the first quarter, we would expect currency to reduce sales by 160 basis points. Let me start by providing some additional comments on our operating results. Our Lab business continues to perform very well with 6% local currency sales growth in the quarter. Most product lines did well, particularly if you look at it on a two-year basis. Sales growth in Americas and China was particularly strong. Our Laboratory business is well-positioned to continue to gain share, and we are very pleased with our robust product portfolio. We expect market demand to remain favorable, especially in pharma life sciences. We also sell our lab instruments into other end markets and see some pockets of weakness in certain end markets. Overall, we expect good growth in our Laboratory business in 2020, although we faced more challenging comparisons after several years of very strong growth. In terms of our Industrial business, product inspection was flat in the quarter, in line with our expectations. We continue to believe this business will grow low to mid-single digits in 2020. As we've discussed last quarter, we have not yet seen the large food manufacturers return to full investment mode, particularly with respect to global rollout. We believe this is a matter of timing and are well-positioned to capture growth once these food companies return to investment mode. Core industrial did great in the fourth quarter, increasing 4% against 13% growth in the prior year. This was better than we had expected, and we are very pleased with the performance. We're executing well in core industrial as this business continues to gain traction with Spinnaker sales and marketing initiatives. Core industrial is also benefiting from innovation. Underlying market demand is good enough, and we can capture growth given the diversity of our products, customers, end markets and geographies. Finally, Food Retail was down 2% in the quarter, pretty much on target with what we had expected. However, our outlook for this business has deteriorated since the last time we spoke. We expect it to be down double digits in the first quarter and be down for the year. Underlying market demand is weak. And although we have easy comparisons we don't expect meaningful improvement in the later part of the year. We had assumed last time we spoke that given the lower level of product activity in 2019, we would have some recovery in 2020. Based on our outlook for Q1, we don't see this happening until later in the year. As a reminder, we are managing this business for profitability, which also makes forecasting sales a bit challenging. We have an active cost reduction actions over the last year in light of the challenging conditions. Now let me make some additional comments by geography. I will start with Europe, which was up low single digits. Lab had growth while core industrial and product inspection were down against very strong growth in the prior-year period. We continue to think this business will be up low single digits for the year. We would expect a modest decline in the first quarter, principally due to a significant decline in Food Retail, as well as the 9% growth in Q1 2019. Americas continues to do very well with 6% growth in the quarter. Lab and core industrial had strong growth. We expect market conditions to remain favorable and expect solid growth in 2020, but this region will be impacted by prior-year comparisons. Finally, Asia/Rest of World had solid growth with most business lines doing well, except for Food Retail. China had strong growth in the quarter with double-digit Lab growth and high single-digit Industrial goal. Excluding the temporary impact of the coronavirus, our outlook for this region remains favorable, but they will continue to face strong multiyear comparisons. I want to point out that in Q1 last year, China grew 13%, the strongest quarter of the year. Due to these tough comparisons and the impact of the virus we discussed earlier, we now expect Q1 sales in China to be down mid- to high single digits. Our full-year sales growth in China remained unchanged from our previous level of growth in the mid-single-digit range for the full year, principally due to strong multi-year comparisons and a slightly more challenging industrial environment. One final comment on the business. Service and consumables together represent about one-third of our sales growth, and both grew 7% in 2019. Very happy with this strong accomplishment. That concludes my comments on the different pieces of the business. We often speak to you about how we view our Spinnaker sales and marketing programs as key differentiators in the market. Another important differentiator is the strength and breadth of our product offering. Let me give you some additional insights, starting with our Laboratory offering. We can provide more than 40% of the instruments that the scientists or chemists uses daily in a typical analytical lab. These instruments range from balances and pipettes to analytical instruments such as pH meters, titrators and UV/VIS, and finally, to our automated chemistry solutions, which can help in drug process development. We compete against different players across these product categories. No one has the breadth and leadership of the bench of instruments that we do. Our LabX software can link these instruments and provide connectivity to a LIMS, or Laboratory Information System. This is a very powerful competitive advantage as none of our direct competitors has anything close to this capability. More important than the number of instruments we can provide is the value these instruments provide to our customers. Across the portfolio of instruments, we focus on three important value dimensions: first is automation, our instruments provide greater efficiency, higher sample throughput and less errors in daily laboratory tasks and analysis; second is information, our instruments can perform complex analytics, often with one click of a button and also can ensure the integrity and traceability of the data, this is especially critical in regulated environments; the final dimension is measurement quality. We provide services such as calibration and good measurement practices to support the quality of our customer processes. We refer to the value outlined in these dimensions as the power of the bench. Our focus is to leverage and respond to global trends that our customers face, such as demand for greater productivity and digitalization and data management needs. Our Lab solutions ensure compliance, data integrity, and provide real advantages in terms of automation and productivity. We have additional product launches and R&D developments in 2020 that will continue to reinforce the strength of these value dimensions. Likewise, on the industrial side, our product offering is very strong, and we continue to distance ourselves from competition with the breadth of the offering. Our industrial customers are constantly striving to improve the productivity and streamline data management. We are launching several highly innovative products and applications that help with these challenges. For example, InVision is our breakthrough innovation for manual workplaces, where weighing, counting and packaging tasks have high error potential. InVision uses machine learning and combines WAN technology and camera recognition for fail-safe parts identification in milliseconds. Guided working steps, automatic data capture and process verification significantly increases production, quality and worker efficiency. The instrument directly connects to the customers' production and ERP systems, providing full data visibility and visual proof-of-order fulfillment. We expect customers could achieve productivity improvements of up to 30% with this revolutionary product. This is just one example of many new product developments under way where the combination of multiple sensor technologies and the use of machine learning and artificial intelligence enables us to develop breakthrough innovation with unique new value proposition. Furthermore, by utilizing different R&D expertise throughout the world, we can develop these products in very short time periods. These are just a few examples of the strength of our R&D innovation that continues to be an important component of our market share gains. That concludes our prepared comments. We are very pleased with our results in the fourth-quarter and full-year 2019. While uncertainty exists in the global economy, we believe we are well-positioned to gain share and deliver good earnings growth and solid cash flow generation in 2020.	q4 earnings per share $7.84. q4 adjusted non-gaap earnings per share $7.78. qtrly reported sales increased 3% compared with prior year. will face tough comparisons in q1 2020 due to strong sales in prior-year quarter. will face strong headwinds to adjusted earnings per share due to adverse currency and impact of tariff costs in q1. expects a significant impact on its china sales in q1 due to wuhan coronavirus. anticipates that local currency sales growth in q1 2020 will be approximately 0% to 1%. anticipates q1 adjusted earnings per share in range of $4.20 to $4.30. uncertainty remains in macroeconomic environment. qtrly net sales $844 million versus $817.9 million.
Catherine, and good evening everyone. I'm responsible for Investor Relations at Mettler Toledo and happy that you're joining us tonight. I'm joined on the call today with Olivier Filliol, our CEO and Shawn Vadala, our Chief Financial Officer. Let me cover just a couple of administrative matters. For a discussion of these risks and uncertainties, please see our most recent Form 10-K and other reports filed with the SEC from time to time. More detailed information with the respect to the use of and differences between the non-GAAP financial measure and the most directly comparable GAAP measure is provided in our Form 8-K. I'm calling in from Switzerland tonight, while Shawn and Mary are in Columbus, Ohio. Patrick Kaltenbach is also joining the call with me from Switzerland and we are excited to have him on board. Patrick, I will turn it to you as I know you want to make a few comment. I spent my time so far, working with Olivier, meeting senior leaders virtually throughout the world, and studying thorough strategy documents, comprehensive materials on Spinnaker approaches and detailed R&D and SternDrive priorities. I'm truly impressed with the depth and sophistication of the strategy, initiatives and programs that are in place. A fantastic foundation has been built and I'm committed to the organic growth strategy and look forward to leading a team to further enhance our performance and continue the successful journey. Call today and I look forward to the actions on the next call and in the future. Before I hand it back. Under your leadership, you have developed Mettler Toledo into a tool with a tremendous track record and future potential. I'm very pleased to note that you will continue to be part of the company. For this very kind words. From my side, we are off to a great start and I look forward to our continued teamwork. I will start with a summary of the quarter and then, Shawn will provide details on our financials. I will then have some additional comments and we will open the lines for Q&A. We ended the year with a very strong fourth quarter, which came in better than we expected. Local currency sales increased 7% in the quarter, our growth was relatively broad-based throughout the world. Our Laboratory business and our Chinese business did particularly well in the quarter. We benefited from strong execution and we're well-positioned to capture growth as customer demand improved. However, we continued to be negatively impacted by COVID-19 in certain areas. From the onset of the global pandemic, our focus has been to identify and pursue pockets of growth within our end markets and to be well-positioned to capture growth as demand improves, which is what we saw in Q4. Our innovative go-to-market approach really played very well into this environment and allowed us to capture this growth. Good cost control and the continued benefit of our margin and productivity initiatives contributed to strong growth in adjusted operating profit and very strong growth in adjusted earnings per share in the quarter. Finally, cash flow not one in the quarter, but also for the full year was excellent. 2020 was an extraordinary year with some of the most challenging market conditions we have faced in more than a decade. Our organizational agility helped us to quickly adapt approaches and processes to the new environment. Our broad end-market diversification and the use of sophisticated data analytics allowed us to shift our sales and marketing focus to the most promising end markets early on. It also helps to ensure we were well-positioned to capture growth as demand improved during the latter part of the year. We adopted our supply chain and service organization to maintain superior performance that strengthened our franchise and introduced many new digital sales and support tools to provides top quality customer interactions despite the remote settings of our customers and sales teams. Throughout 2020, we increased our customer engagement and customer satisfaction, which translated into accelerated market share gains in many product categories. With the strong ends to 2020, we have very good momentum as we start 2021, and believe we are well-positioned to continue to gain share and deliver good results. We will have some additional comments on 2021 but first, let me turn to Shawn to cover the financial results. Sales were $938 million in the quarter, an increase of 7% in local currency. On the U.S. dollar basis, sales increased 11% as currency benefited sales by 4% in the quarter. On Slide number 4, we show sales growth by region. Local currency sales increased 8% in the Americas, 7% in Europe, and 8% in Asia, rest of the world. Local currency sales increased 12% in China in the quarter. The next slide shows sales growth by region for the full year 2020. Local currency sales increased 2% in the Americas, 1% in Europe and 3% in Asia/rest of the world. China local currency sales grew 7% in 2020. On Slide number 6, we outlined local currency sales growth by product area. For the fourth quarter laboratory sales increased 12%, industrial increased 1%, with core industrial up 5%, and product Inspection down 5%. Food Retail increased 7% in the quarter. We estimate that we benefited 1% to 2% from COVID tailwinds in the quarter related to our pipette business for covered testing. The next slide shows sales growth by product area for the full year. Laboratory sales increased 5%, industrial declined 1% with core industrial up 2%, and Product Inspection down 7%. Food Retail declined 4% in 2020. Let me now move to the rest of the P&L for the fourth quarter, which is summarized on the next slide. Gross margin in the quarter was 59.6%, a 60 basis point increase over the prior-year level of 59%. Our margin initiatives centered on pricing in SternDrive, as well as temporary cost savings contributed to the margin growth, offset in part by higher transportation costs and unfavorable business mix. R&D amounted to $39.9 million, which represents a 6% increase in local currency. SG&A, amounted to $226.4 million, a 5% increase in local currency over the previous year. Increased variable compensation was offset in part by our temporary cost savings and ongoing cost containment initiatives. Adjusted operating profit amounted to $292.8 million in the quarter, which is a 14% increase over the prior year amount of $256.3 million. Operating margins increased 80 basis points in the quarter to 31.2%. We are very pleased with this margin growth. Currency benefited operating profit growth by approximately 2%, but actually hurt operating margin expansion by about 50 basis points. A couple of final comments on the P&L. Amortization amounted to $14.7 million in the quarter. Interest expense was $9.5 million in the quarter and other income amounted to $3.7 million. We reduced our effective tax rate for the full year from 20.5% to 19.5%. This is the rate before discrete items and adjusting for the timing of the stock option exercises in the quarter. We are very pleased with this reduction and expect to maintain this rate in 2021. Moving to fully diluted shares, which amounted to $24 million in the quarter and is a 3% decline from the prior year. Adjusted earnings per share for the quarter was $9.26, a 19% increase over the prior year amount of $7.78. Currency benefited adjusted earnings per share by approximately 2% in the quarter. On a reported basis in the quarter, earnings per share was $9.03 as compared to $7.84 in the prior year. Reported earnings per share in the quarter includes $0.12 of purchased intangible amortization and $0.11 of restructuring. We also had 2 offsetting items for income taxes. We had a $0.20 increase due to the difference between our quarterly and annual tax rate due to the timing of stock option exercises. This was offset by a $0.20 benefit from adjusting our tax rate to 19.5% for the first three quarters. The next slide shows our full year results. Local currency sales increased 2% in 2020 while adjusted operating income increased 8% and adjusted operating margins were up 130 basis points. Adjusted earnings per share amounted to $25.72, an increase of 13% over the prior year amount of $22.77. Currency was neutral to the full year adjusted EPS. Given the unprecedented challenges we faced in 2020, we are very pleased with our performance and believes it reflects the agility and the strong culture of our organization, the effectiveness of our growth in margin expansion initiatives, in resiliency of our end markets. That is it for the P&L. Now let me cover the cash flow. In the quarter, adjusted free cash flow amounted to $218 million, which is an increase of 20% on a per share basis, as compared to the prior year. We are very happy with our cash flow generation. DSO declined approximately 3.5 days in the quarter to 36.5 days as compared to the prior year. We are seeing concrete results from the use of analytics and productivity improvements in receivable collections and cash flow management during this period. ITO came in at 4.3 times. For the full year 2020, adjusted free cash flow was $648 million as compared to the prior year amount of $531 million. On a per share basis, this is a 26% increase in earnings flow-through of more than 100%. We are very pleased with this performance, which demonstrates the strength of our franchise as well as our focus on continuous process improvements to drive cash flow generation. Let me now turn to guidance. Forecasting continues to be challenging given the uncertainty surrounding Covid-19 and the ultimate impact for the global economy. Market dynamics are fluid and changes in customer demand can happen quickly. With our strong fourth quarter performance, we continue to feel confident about those factors within our control, namely executing on our sales and marketing initiatives, and continuing to launch new products with clear value-added benefits to our customers. We believe we have been successful in identifying and capitalizing on pockets of growth and are well positioned to continue to gain share. We also continue to feel positive in our ability to generate margin improvement by our pricing and SternDrive initiatives. Now let me cover the specifics. For the full year 2021, we now expect local currency sales growth will be in the range of 5% to 7% as compared to 2020. We expect full year adjusted earnings per share will be in the range of $29.20 to $29.80, which is a growth rate of 14% to 16%. This compares to previous adjusted earnings per share guidance in the range of $27.50 to $28.30. With respect to the first quarter, we would expect local currency sales growth to be in the range of 11% to 13% and expected adjusted earnings per share to be in the range of $5.55 to $5.70, a growth rate of 39% to 43%. Some further comments on 2021 guidance. Let me start with the pacing of the year. We expect the first half of the year will be much stronger than the second half. We are starting the year with excellent momentum coming off a strong Q4. The first half of the year will also benefit from easier comparisons and the continued tail -- Covid tailwind in our pipette business. As we look to the second half, we will face more difficult comparisons, particularly with respect to our business in China. Our Covid tailwinds will also turn to a headwind as we lack comparisons. We also feel more uncertainty exists for the second half of the year, especially with respect to Covid's potential impact to the global economy. We recognize that we're currently benefiting from strong momentum, which will not necessarily continue. We will provide additional quarterly guidance on our next call, but I thought it would be helpful to provide this context now. Some additional comments on guidance. We expect interest expense to be approximately $40 million in 2021 and total amortization to be approximately $55 million. Other income, which is below operating profit, will be approximately $9 million in 2021. As I mentioned earlier, we would expect our effective tax rate in 2021 to also remain at 19.5%. In terms of free cash flow for the year, we expect it to be approximately $690 million. We will continue to repurchase shares and expect to end 2021 in a targeted range of approximately 1.5 times leverage ratio. With respect to the impact of currency on sales growth, we expect currency to increase sales growth by approximately 3.5% in 2021 and 5% in the first quarter. In terms of adjusted EPS, currency will benefit growth by approximately 3% in 2021. Let me start with some comments on our operating results. Our Lab business have exceptional growth in the quarter. Pipettes have excellent growth and benefited from COVID-related testing demand. Process Analytics had another quarter of strong growth, while demand for analytical instruments and balances recovered nicely in the quarter. Sales growth in all regions was very strong. We expect Lab to continue to be very strong in the first half of 2021 due to favorable biopharma trends, vaccine research, and testing a bioproduction scale-up and production. Lab will face tougher comparisons in the second half of the year. With our excellent Lab product portfolio including our power demand solutions, focus on automation, digital interfaces and data management and prove -- proven Spinnaker sales and marketing strategies, we believe we are well positioned to continue to capture share. In terms of Industrial business, Core Industrial did well in the quarter with a 5% increase driven by double-digit growth in China. We will return to growth in Core Industrial in Europe, while Americas was flat, although they have very good growth in the prior year. We are particularly pleased at how resilient our Core Industrial has proven throughout 2020 given the challenges of the pandemic. We believe this reflects the strength and diversity of our product portfolio, our success in identifying on pursuing pockets of growth, and strong focus on execution. Product Inspection came in weaker than we had anticipated with a 5% decline in the quarter. Both Europe and Asia declined while Americas was flat with the prior year. While our outlook has improved for this business and we expect to start 2021 with solid growth, we are cautious as large package food companies continue to face operational challenges at their manufacturing sites related to COVID. We believe pent-up demand exists for our instruments but ultimate timing is still hard to determine. Food retailing came in better than we expected with 7% growth overall and growth in all regions. Now let me make some additional comments by geography. Sales in Europe increased 7% in the quarter with excellent growth in Lab and good growth in core industrial and food retail. We expect solid growth in Europe in 2021. Americas increased 8% in the quarter with excellent growth in Lab offset by flat results in both product inspection and core industrial. We expect good growth in Americas in 2021. Finally, Asia/Rest of the World grew 8% in the quarter with both Lab and Core Industrial doing very well. As mentioned, China have 12% growth in the quarter with excellent growth across product lines. We expect market conditions in China to be very favorable as we start 2021 while they face much tougher comparisons in the second half of the year. One final comment on the business, Service and Consumables were up 13% in the quarter and 8% for the full year. That concludes my comments on the business. As I reflect on 2020. I'm very pleased with our performance given the exceptional challenges we faced. This performance would not have been possible without the strong foundation and well-ingrained corporate programs that we have in place, which allowed us to quickly pivot and adapt to the new environment. We have always considered agility and focus on execution a key pillar of Mettler-Toledo and I think you saw evidence of both of these in our results. Probably most important, however, our success in 2020 sets the stage for us to continue to capture growth in 2021 and beyond. Our strategy over many years has been remarkably consistent. As a leader in fragmented market, we have established strategies that allow us to gain a little market share each year while continuously expanding our margin. The initiatives within these strategies will involve and develop but strategies remain the same. As we look to 2021, let me comment on how we are going about this. I would start with our Spinnaker sales and marketing initiatives. As we discussed on our last call, we made some leapfrog advances in digital transformation during 2020 that positioned us very well for the future. We will continue to refine our sophisticated Analytics to guide our sales force to the best opportunities. We will continue to support our market organization with tools and methodologies to increase sales force time with the most strategic account while leveraging our value-selling and cross-selling tools to further penetrate opportunities. We will also continue to leverage digitalization to develop new approaches that drives sales force efficiency and refine techniques to improve the effectiveness of telesales team, but also look forward to returning to visit accounts to generate new opportunities. Finally, we look to execute more telemarketing campaigns, enhance tools to increase order conversions. Service will continue to be essential element of our customer value proposition. Our almost 3,000 service technicians are an important competitive advantage for us. This year, we will focus on further I base penetration and utilizing many of the same sales force guidance telesales of digital tools that we use for product sales to further drive service sales. Our team in China did an exceptional job in 2020, not only continuing to serve customers and penetrate growth opportunities, but also in terms of manufacturing and supply chain. The team's priorities to continue to optimize the organization to focus on high potential growth areas and attractive segment and further leverage digital technology to engage customers and generate leads. Introducing products for the local market such as an entry-level x-ray instrument for our product inspection portfolio is also an important element to growth in China and throughout emerging markets. We remain very optimistic about the growth potential, not one in China, but throughout emerging markets over the medium term. Constantly coming to market with new product launches is another important strategy. Given the diversification of our product portfolio, a new product launch will never be material by itself, but together, these launches reinforces our market leadership, help trigger replacement in existing customers, help open doors to new customers, and help support our price differentiation. Later this month, we will launch a new automatic laboratory balance that will set a new standard for weighing of powders and liquids in research labs, testing labs and quality-control labs. Addressing the needs in the Laboratory for automation, smaller sample sizes, flexibility, ease of use, and seamless documentation, this new balances offers an unmatched value proposition. It is a simple fully integrated solution that will support our customers in their everyday operation. It is just one example of the many product launches we will have this year, but illustrates how we are continually focused on bringing products to market that demonstrate clear value to our customers. Similar to the continued evolution of growth strategies, we also continue to develop our pricing and productivity initiatives. We have good results -- good developments within pricing, utilizing Analytics, and so machine learning to most effectively price our offering. On the supply chain side, the team was able to continue to make progress on their SternDrive productivity goals in 2020, but we will be able to make further progress in 2021 when the team won't have as many challenges as they faced last year. Finally, I think you will continue to see us market strategic acquisition that leverage our technology leadership and global distribution. However, these acquisitions will be small and strategic, not transformational. I believe our franchise is stronger than ever as demonstrated in how we performed in 2020 despite all the challenges. As I look back over the last decade plus years, we have made much progress in many areas. Our continuous improvement programs of Spinnaker, sales and marketing, and SternDrive productivity, which I just discussed, are well ingrained throughout our organization and we'll continue to evolve and be important ingredients for the future. Emerging markets, an important growth driver are 35% of sales today compared with 25% in 2007. Similarly, our faster growing Laboratory business is now 54% of sales, up from 44%. Finally, Service and Consumable is now 33% of sales as compared to 28%. Redirecting resources and investments to faster growing businesses has always been at the heart of our initiatives and these businesses will continue to fuel growth in the future. The strength of the organization and how well we are positioned for the future contributed to my decision to step down as CEO. Under Patrick's leadership, I believe we have the organization, corporate programs, senior leadership team, and tools in place to continue to gain share and continue our successful track record.	compname reports q4 earnings per share $9.03. q4 earnings per share $9.03. q4 adjusted non-gaap earnings per share $9.26. international inc - qtrly total reported sales increased 11% to $938.0 million. anticipates local currency sales growth in 2021 will be in range of 5% to 7%. international inc - sees 2021 adjusted earnings per share is forecasted to be in range of $29.20 to $29.80.
Joining me on the call today to discuss the results for the second quarter of 2021 are Chief Executive Officer, Tim Mattke; and Chief Financial Officer, Nathan Colson. mgic.com, under Newsroom, includes additional information about the company's quarterly results that we will refer to during the call and includes the reconciliation of non-GAAP financial measures to the most comparable GAAP measures. I'm pleased to report that we produced another quarter of very strong financial results. During the quarter, we earned GAAP net income of $153.1 million. Our quarterly financial results reflect the solid credit quality of our insurance in force, a strong housing market, a decreasing delinquency rate and improving economic conditions as many local economies return to pre-pandemic levels of activity. We had another busy quarter as we wrote a record $33.6 billion of new business, which more than offset the pressure of lower annual persistency on our existing book of business and resulted in our insurance in force growing to $262 billion, nearly 14% higher than the same period last year. An increasing percentage of our new insurance written is from purchase transactions, accounting for 79% of our NIW in the second quarter compared to 60% last quarter. Our application pipeline, a leading indicator of NIW indicates this trend has continued with purchase transactions continuing to account for more than 85% of the applications received in recent months. While NIW in the first half of the year was strong, we expect that NIW will slow in the second half of the year, primarily due to the reduction of refinance activity. While the current supply of housing inventory available for purchase remains low, we still expect robust purchase market condition to persist. Consumer demand for many reasons remains strong and interest rates are attractive especially by historical standards. Home prices have been increasing rapidly given the low housing inventory and the strong demand. We believe that home prices may be increasing for more sound reasons than in 2005-2007 cycle. So while we do not expect broad declines in home prices we do expect that the rate of increase will slow. These conditions along with increasing annual persistency should allow our insurance in force to continue to grow, although perhaps at a slower annual rate than we have been enjoying in recent quarters. Taking a look at our insurance and force portfolio our loss ratio was a low 11.6% in the quarter. This result primarily reflects the improving economic conditions, the quality of our existing book of business and the low number of new delinquency notices received. I continue to be encouraged by the positive trends we are seeing in credit performance, which continued through July. At quarter end, we maintained a $2.3 billion excess over PMIERs minimum required assets and our PMIERs efficiency ratio was 167% at the end of the second quarter. Reflecting our capital position and long-term confidence in our transformed business model, a $150 million dividend from MGIC to our holding company was declared, and paid after the end of the second quarter, and the holding company Board authorized a 33% increase in the quarterly common stock dividend. Our capital management strategy centers on maintaining financial flexibility at both the holding company and the writing company to protect our policyholders and to create long-term value for shareholders. This value can be created by writing more primary mortgage insurance, pursuing new business opportunities, retiring debt, paying dividends or repurchasing stock. In summary, we continually look for ways to maximize near-term business opportunities, while remaining focused on the long-term success of the company. I believe the actions we have taken prior to and during the COVID pandemic support the statement. We have a strong and dynamic balance sheet. We are confident in our positioning in this market and we like the risk/reward equation that the current conditions offer. As Tim mentioned, we had another strong quarter of financial results. In the second quarter, we earned $153 million of net income or $0.44 per diluted share and generated an annualized 13% return on beginning shareholders' equity. This compares to $14 million of net income or $0.04 per diluted share in the same period last year. Of course, the second quarter of last year was impacted by the material increase in delinquencies, related to COVID-19 and the associated increase in net losses incurred. During the quarter, total revenues were $298 million compared to $294 million last year, with the increase primarily due to higher net premiums earned. The main driver of the increase in net premiums earned, the higher profit commission earned through our quota share reinsurance transactions in the current quarter compared to the second quarter of last year, mainly due to the lower level of losses ceded in the current period compared to last year. The net premium yield for the second quarter was 39.1 basis points, which was down 1.8 basis points compared to last quarter. The decrease was primarily a result in the decline in in-force premium yield with the runoff through attrition of the older policies, which generally have higher premium rates. As refinance activity decreased, we also realized less benefit from accelerated premiums earned from single premium policy cancellations. During the quarter, they totaled $20 million compared to $28 million last quarter and $33 million in the second quarter of 2020. Shifting over to credit. Net losses incurred were $29 million in the second quarter compared to $217 million in the same period last year and $40 million last quarter. In the second quarter, we received approximately 9,000 new delinquency notices, which represents less than 1% of the number of loans insured as of the start of the quarter and is 30% less than the number of notices received last quarter. We are encouraged by the credit trends we are experiencing, including the low level of early payment defaults and believe they are good indicators of near-term credit performance. The estimated claim rate on new notices received in the second quarter of 2021 was approximately 7.5%, compared to approximately 7% in the second quarter of 2020. The reserve for incurred but not reported or IBNR increased by $4 million to approximately $24 million compared to an increase of $30 million in the second quarter of 2020. The increase this quarter is primarily due to the recording of a small loss related to some lingering litigation associated with policy disputes from several years ago. A review of loss reserves on previously received delinquent notices, determined that there was immaterial loss reserve development in the quarter compared to $10 million of unfavorable development in the second quarter of last year. Barring any material economic shocks, it appears that the second quarter of 2020 was the exception rather than the rule, regarding the credit losses related to the pandemic. While we have seen cure activity from the large cohort of delinquency notices received in the second quarter of 2020, we have not yet seen enough evidence to make any reserve adjustments on these COVID-related delinquencies. Of the approximately 43,000 loans in our delinquency inventory at June 30, approximately 55% or 23,600 loans were reported to us to be in forbearance and we estimate that the substantial majority of those loans in forbearance will reach the end of their forbearance period in the second half of 2021. The number of claims received in the quarter, remained very low and were down 35% from the same period last year, due to the various foreclosure and eviction moratoriums and primary paid claims in the quarter remained low at $11 million. Since foreclosure and eviction moratoriums for GSE loans have been extended and the CFPB has introduced additional procedural safeguards, we expect claim payments to remain modest for the next few quarters. Next, I wanted to spend a couple of minutes talking about our balance sheet and capital position and our approach to capital management. We continue to believe that our balanced approach to maintaining a strong capital position, including the use of forward commitment, quota share treaties by accessing the capital markets for excess of loss reinsurance via ILN transactions, provides the most flexibility to maximize the long-term value of both the writing company and the holding company. As Tim mentioned, this value can be created by writing more primary mortgage insurance, pursuing new business opportunities, retiring debt, paying dividends or repurchasing stock. Our goal is to maintain financial flexibility at both the holding company and the writing company. At the holding company, this means maintaining a target level of liquidity well in excess of our near-term needs. At the operating company, it means maintaining a robust level of access to PMIERs, significant enough to enable growth even in times of stress and to be well positioned for any changes to our operating environment. These target levels are dynamic and changes the operating environment changes. At the end of the second quarter, we had approximately $772 million of holding company liquidity and a $2.3 billion access to the PMIERs minimum requirements at the writing company. There were two transactions subsequent to quarter end that directly support our goal of having financial flexibility at both the holding company and writing company. First, we completed our fifth excess of loss reinsurance transaction executed through an ILN, the third such transaction in the last 10 months. This most recent transaction provides $400 million of loss protection and increases our PMIERs' excess. Second, we paid a $150 million dividend from MGIC to our holding company. Taking a deeper dive on the holding company, we have said for some time that we have a target level of liquidity that is designed to maintain funds for multiple years of interest payments on outstanding debt, near-term maturing debt principal, strategic growth opportunities and our quarterly common stock dividend. The holding company liquidity is above our current target levels, which supported the 33% increase in the common stock dividend. Additionally, in the third quarter we intend to resume our share repurchase program and we expect that we will fully use the remaining $291 million repurchase authorization prior to its expiration at year-end 2021. Taking a closer look at the writing company. It is a $2.3 billion excess to the PMIERs requirement as of June 30, or 167% PMIERs sufficiency ratio, which was above our current target level and supported the $150 million dividend from MGIC to our holding company. Going forward, we will continue to assess MGIC's capital position and we'll continue discussions with the OCI about additional dividends to our holding company, as appropriate. As Tim mentioned we feel we are well positioned to capitalize on the market opportunities that a robust housing market should make available to us. Given our strong market presence, a growing in-force book of business that is currently generating a low level of delinquencies, a comprehensive reinsurance program and the quality of the new business being written, we believe that our holding company and writing company capital management strategy will create long-term value for shareholders, while allowing us to continue to be a well-capitalized counterparty for our customers. Before moving to questions, let me address a few additional topics. The early indications from the Biden administration that it is going to focus its housing policy efforts on access to sustainable and affordable housing for closure and eviction mitigation for homeowners impacted by COVID-19 and ensuring a successful economic recovery, opposed to large-scale changes to the housing finance infrastructure. Although, it's early in the 10 years of new FHFA acting Director Sandra Thompson, at this time we are not aware of any policy initiatives that will provide new challenges to our company or industry. I'd expect we will see a more coordinated effort from the various housing agencies of the U.S. government over the next several years. We will continue to advocate for the increased use of private mortgage insurance in the housing finance industry, in order to reduce taxpayer exposure to housing while still maintaining a resilient housing finance system. Long term, I remain encouraged about the future role that our company and industry can play in housing finance and believe that other regulators and policymakers share a similar view. The COVID-19 pandemic provided all housing finance participants with some options to credit enhancement for high LTV loans can be scarce or unavailable at various points of the economic cycle. However, our company and industry were organized solely to provide credit enhancement solutions to lenders, borrowers and the GSEs in all economic cycles. Not only does private mortgage insurance offer dedicated capital day in and day out to the housing industry, it offers many solutions and a great value proposition for lenders and consumers to overcome the number one barrier to homeownership the down payment. At MGIC, we are focused on providing critical support to the housing market, especially low and moderate income and first-time home buyers. In summary, we are currently writing high levels of new insurance and are experiencing decreasing levels of delinquencies both newly reported and those already in our delinquency inventory. We have a book of business that has strong underlying credit characteristics, which is supported by a strong and dynamic balance sheet with a low debt-to-capital ratio, an investment portfolio of nearly $7 billion contractual premium flow and a robust reinsurance program. I am confident in our positioning in the market and we like the risk/reward equation that the current conditions offer. We have the right team in place to build off our solid foundation to continue to deliver competitive offerings and best-in-class service to our customers and generate strong returns for our shareholders. With that, operator, let's take questions.	q2 earnings per share $0.44. q2 adjusted non-gaap operating earnings per share $0.44.
Joining me on the call today to discuss the results for the third quarter of 2021, are Chief Executive Officer, Tim Mattke; and Chief Financial Officer, Nathan Colson. mgic.com under Newsroom, includes certain additional information about the company's quarterly results that we will refer to during the call and includes a reconciliation of the non-GAAP financial measures to the most comparable GAAP measure. I'm pleased to report that we generated another quarter of very strong financial results. During the quarter, we earned GAAP net income of $158 million. Quarterly financial results continue to reflect the solid credit quality of our increased insurance in force, a strong housing market, a decreasing delinquency rate and improving economic conditions as more local economies return to pre-pandemic levels of activity. As we expected, refinance activity had slowed. However, the purchase market remains strong and accounted for nearly 90% of the $28.7 billion of new business we wrote in the third quarter. This level of new business writings combined with a higher annual persistency, resulted in our insurance in force increasing 2.4% to $268 billion, nearly 12% higher than last year. Reflecting the continued strength of the housing market, purchase applications in our application pipeline, the leading indicator of NIW, continue to account for more than 85% of applications received in recent months. The last five quarters' NIW were the five biggest in our company's 64-year history. So it did not surprise anyone that we do not expect to continue writing such high levels of new business. As we look out over the next several quarters, we expect the refinance activity will remain low, and the purchase activity, while lower than the records of the five prior quarters will remain robust as consumer demand for homes remains strong and interest rates, despite rising modestly, are still attracted by historical standards. This environment, combined with increasing annual persistency should allow our insurance in force to continue to grow, although perhaps at a slower annual rate than we have been enjoying in recent quarters. Taking a look at our in-force portfolio, our loss ratio was a low 8.1% in the quarter. This result primarily reflects the current economic conditions, the quality of our existing book of business and a low number of new delinquency notices received. I continue to be encouraged by the quality of new insurance written and the positive trends in credit performance, which continued through October. At quarter end, the excess of our PMIERs available assets over the minimum required assets increased by $300 million to $2.6 billion, and our PMIER sufficiency ratio was 180% at the end of the third quarter. As we discussed last quarter, our capital management strategy centers on maintaining financial flexibility of both the holding company and the writing company to protect our policyholders and to create long-term value for shareholders. This value can be created by writing more primary mortgage insurance, pursuing new business opportunities, retiring debt, paying dividends and/or repurchasing stock. We executed on this strategy during the quarter by writing $28.7 billion of new business and by returning nearly $180 million to shareholders through the repurchase of 10 million shares and paying the increased common stock dividend. In connection with our strategy, maintaining capital flexibility of the holding company means retaining a target level of liquidity well in excess of our near-term needs. At the operating company, it means maintaining diverse sources of capital and a PMIER sufficiency ratio that will enable us to grow even in times of stress and will position us for changes to our operating environment. Of course, these target levels are dynamic and changes with the operating environment changes. We believe that our holding company and writing company capital management strategy will create long-term value for shareholders while allowing us to continue to be well-capitalized counterparty for our customers. In summary, we continually look for ways to maximize near-term business opportunities while remaining focused on long-term success of the company and value for our shareholders. I believe the actions we have taken this quarter in the announcement of the new share purchase authorization that Nathan will discuss demonstrate our commitment to that strategy. We have a strong and dynamic balance sheet. We are confident in our positioning in the market, and we like the risk-reward equation that the current conditions offer. As Tim mentioned, we had another quarter of strong financial results. In the third quarter, we earned $158 million of net income or $0.46 per diluted share and generated an annualized 13% return on beginning shareholders' equity. Adjusted net operating income was $157 million compared to $150 million in the third quarter last year. During the quarter, total revenues were $296 million, the same as last year. The net premium yield for the third quarter was 38.4 basis points, which was down 7/10 of basis point compared to last quarter. The decrease was primarily results of a decline in the in-force premium yield as the older policies with generally at higher premium rates continue to run off. As refinance activity decreased, we also realized less benefit from accelerated premiums earned from single premium policy cancellations. During the quarter, they were $17 million, which was flat to last quarter but down from $32 million in the third quarter of 2020. Shifting over to credit. Net losses incurred were $21 million in the third quarter compared to $29 million last quarter and $41 million in the third quarter last year. In the quarter, we received approximately 9,900 new delinquency notices, which represents less than 90 basis points of the number of loans insured as of the start of the quarter and drove the low loss ratio of 8.1%. As a point of comparison, in the third quarter of 2019 before the onset of the COVID-19 pandemic, we received approximately 42% more new delinquency notices and they represented approximately 140 basis points of the number of loans insured at the beginning of that quarter, while the loss ratio in the third quarter of 2019 was 12.7%. We are encouraged by the strength of the housing market and the credit trends we are experiencing, including the low level of early payment defaults, I believe they are a good indicator of near-term credit performance. These positive credit trends continued in October, their notice inventory declining by another 1,500 notices as Cures continue to outpace new notices. The estimated claim rate on new notices received in the third quarter of 2021 was approximately 7.5% compared to approximately 8% in the third quarter of 2020. In the quarter, we realized $18 million of favorable loss reserve development compared to immaterial development last quarter and in the third quarter of last year. The favorable development in the quarter was primarily attributable to delinquency notices received prior to the start of the COVID-19 pandemic. At this point, we still have not seen adequate support to make any adjustments to the reserves associated with the large cohort of COVID-related delinquency notices received primarily in Q2 of last year, but we remain encouraged as we saw a similar level of notices in Cures in October as we did in September. The number of claims received in the quarter remained very low due to the various foreclosure and eviction moratoriums. Primary paid claims in the quarter were $18 million compared to $11 million last quarter. The modest increase in paid claims this quarter was primarily the result of a commutation of coverage on nonperforming loans in the third quarter. We continue to expect claim payments to remain low for the next few quarters given the timelines for foreclosure and eviction moratoriums for GSE loans and the additional procedural safeguards required by the CFPB. Next, I wanted to spend a couple of minutes talking about our capital position and capital actions in the quarter. As Tim mentioned, in the third quarter, we paid an $0.08 per share dividend for a total of $27 million and repurchased 10 million shares for a total of $150 million. In October, we repurchased an additional 3.8 million shares for a total of $60 million under a 10b5-1 plan, we put in place earlier this year. The Board also authorized an additional $500 million share repurchase program that expires at the end of 2023. And as previously announced, the Board declared an $0.08 per share dividend payable on November 23. At the end of the third quarter, we had $716 million of holding company liquidity and a $2.6 billion access to the PMIERs minimum requirements at the operating company. MGIC's access to the PMIERs requirements as of September 30 resulted in a PMIERs sufficiency ratio of 180% and remained above our current target level. Since MGIC's capital position continues to be above our current target level, we are having discussions with our regulator about a dividend to be paid in the fourth quarter of 2021. As of October 30 -- as of October 31, 2021, our holding company's liquidity also remains above our current target levels even if we fully use the remaining $81 million on the share repurchase authorization that expires at year-end 2021. Any additional dividends paid from MGIC to the holding company in the fourth quarter would increase the holding company's liquidity. At this time, our plan is to use those additional dividends if they are received to settle the eventual redemption of our 9% Convertible Junior Debentures due in 2063. Our most recent 10-K has additional details, but under the terms of the debentures, we can redeem the debentures for principal plus accrued interest when our share price closes above a certain level for 20 of 30 consecutive trading days. For 2021, that share price level is $17.20. And the share price level has reduced annually as a result of the dividends paid in the prior year and under certain circumstances as allowed under the debentures. We hope to provide a redemption notice for the debentures in the near term with the redemption date at least 30 days later. If we provide a redemption notice, we expect virtually all of the holders of the debentures will elect to convert their debentures into common stock before the redemption date. Under the terms of the debentures, we may elect to pay cash to converting holders in lieu of issuing shares, and we expect we would do so under most circumstances. Given our strong operating results and recent share price performance, we felt it was the right time to position the holding company to actively consider the retirement of the debentures. While the timing remains uncertain, retiring the debentures would eliminate approximately 16 million potentially dilutive shares and $19 million in annual interest expense. And would reduce our debt-to-capital ratio by approximately 300 basis points as of September 30 on a pro forma basis. As Tim mentioned, we continue to believe that our balanced approach to maintaining a strong capital position provides the most flexibility to maximize the long-term value of both the writing company and the holding company. This balanced approach includes using forward commitment quota share reinsurance treaties, accessing the capital markets for excess of loss reinsurance via ILN transactions and seeking dividends from MGIC to the holding company as appropriate. While not an indication of the amount of dividends we would see, our current expectation is that any future dividends paid from MGIC to the holding company will occur less frequently than the quarterly cadence we had pre-COVID due in part to the robust liquidity position of the holding company. Before moving to questions, let me address a few additional topics. The federal government through its various agencies, including FHFA and CFPB continues to focus its housing policy efforts on providing access to sustainable and affordable housing, promoting for closure and eviction mitigation for homeowners impacted by COVID-19 and ensuring a successful economic recovery and not on making large-scale changes to the housing finance infrastructure. We will continue to advocate for the increased use of private mortgage insurance in the housing finance industry in order to reduce taxpayer exposure to housing while still maintaining a resilient housing finance system. At MGIC, we are focused on providing critical support to the housing market, especially low and moderate income and first-time home buyers. Long term, I remain encouraged about the future role that our company and industry can play in housing finance and believe that other regulators and policymakers share a similar view because our company and industry organized solely to provide credit enhancement solutions to lenders, borrowers and the GSEs in all economic cycles. Not only does private mortgage insurance offer dedicated capital day in and day out to the housing industry, it offers many solutions and a great value proposition for lenders and consumers to overcome the number one barrier to homeownership-the down payment. In closing, let me recap by saying that we are currently writing high levels of quality new insurance and are experiencing low levels of delinquencies, both newly reported and those already are in our delinquency inventory. The housing market remains strong, and we have a book of business that has solid underwriting credit characteristics, which is supported by a strong and dynamic balance sheet with a low debt-to-capital ratio, an investment portfolio of nearly $7 billion, contractual premium flow and a robust reinsurance program. I'm confident in our positioning in this market, and we like the business opportunities that the current operating environment presents. We have the right team in place to build on our solid foundation to continue to deliver competitive offerings and best-in-class service to our customers and generate strong returns for our shareholders. With that, operator, let's take questions.	mgic investment corporation q3 earnings per share $0.46. q3 earnings per share $0.46. q3 adjusted non-gaap operating earnings per share $0.46.
Those and any other projections represent the current opinions of management, which are subject to change at any time, and we assume no obligation to update them. He's done a great job representing the company to our investors and analysts and he will be sorely missed. You have big shoes to fill and hope you are with us, at least 15 years like Brent. Now, this is the last panel I'll address you as Chief Executive Officer of Meritage Homes on an earnings call. As we have previously announced, effective January 1, Phillippe Lord will transition to the CEO role and I will retire after 35 years and become Executive Chairman of Meritage's Board. I will continue to participate on these calls, but Phillippe will be taking the lead. Phillippe and I have worked closely together for 12 years. During the past five years as Chief Operating Officer Phillippe was the co-architect of our strategy to focus on the entry-level and first move-up markets while driving operational excellence and efficiencies throughout our organization. I feel confident that Meritage will continue to be an innovative leader, provide exceptional quality and value to our customers and grow to new heights under Phillippe's leadership. I look forward to partnering with him in our new roles. So let's talk about the quarter ended September 30, 2020. Meritage had many remarkable achievements. We delivered our highest quarterly orders, our strongest absorption since 2005, record quarterly closing revenue and our best quarterly closing gross margins since 2014 despite record high lumber prices, while also achieving our lowest net debt to capital in our company's history. These outstanding results are due to both solid market dynamics and our strategy. So I'll start with slide 4. We sold 3,851 homes this quarter, which was 71% more than the third quarter of 2019 and surpassed the quarterly record we had just set in the previous quarter this year. Although we are still in a worldwide COVID pandemic, favorable macroeconomic factors for the new home industry that began last quarter continued in Q3 including historically low mortgage interest rates, increased demand for healthier and safer homes, limited supply of existing home listings and a decade long supplies toward new homes in the market. All these dynamics create the advantageous backdrop, which combined with our strategy focused on affordable entry-level and first move-up homes translate into another record same quarter for Meritage. Moving on to slide 5, we believe we have a solid strategy and have executed at a high level. We are achieving strong closing revenue growth with an increase in both pace and price, while we are increasing prices in all our geographies and aligning with local market conditions. We are not turning down sales where demand exists. We can and will capture demand whenever possible because of our available spec homes. Our spec homes strategy has allowed us to sell at a greater pace and take market share. In Q3 of 2020 we accelerated our land investments by spending nearly $300 million and put a record 9,000 new lots under control. Our balance sheet remains very strong, which provides a long runway for growth as well as a safety net in the event of another downturn. We have maintained plenty of liquidity and a low debt leverage even as we invest significantly for additional growth in all our existing markets. While the accelerated sales trend resulted in some early community closeouts this quarter we are still on pace to achieving 300 active communities by early to mid-2022. And consistent with our strategy our new entry-level communities will have a high volume of spec inventory immediately available for sale at community openings which could be closed relatively quickly. Steve's commitment to our employees, customers and shareholders as well as his vision and execution led us to the company's all-time records today. I am deeply honored to have the opportunity to serve this organization and its employees as the upcoming CEO and to continue working together with Steve in this next chapter of Meritage Homes story. Slide 6, now, we hit on all cylinders during the three months ended September 2020. Our absorption pace for the quarter was up 94% year-over-year. Five out of nine states had absorption increases over 100% year-over-year this quarter. Much of this sales outperformance is due to the strength in the entry-level market. Entry-level represents 60% of our average active communities during this quarter compared to 42% a year ago, which puts us near our target ratio of 65% to 35% between entry-level and first move-up. Absorption in our entry-level communities were 75% higher than last year and nearly 1.5 times the pace of first move-up communities. Entry-level comprised almost 70% of total orders for the third quarter, up from 54% in the third quarter last year. Our first move-up communities also experienced improved demand year-over-year with absorptions 86% higher than a year ago. Slide 7, the outsized demand in Q2 and Q3 of 2020 led to 23 early community closeouts this quarter. These sellouts happened across all existing geographies. We anticipate both continued strong sales demand and choppiness in our community count in the near future. We have ramped up land investments and we'll continue to do so to replenish our pipeline to keep up with demand and grow our community count. We have been aggressively securing new lots since mid-April following a pause due to COVID-19 related shutdowns. During 2019 we put 17,000 new lots under control which translates to 134 new communities. We put approximately 16,000 new lots under control in just the first nine months of 2020 almost as much as all of 2019 and nearly 80% more than 2018's 9,000 new lots. This translates into about 123 new communities put under control during the first nine months of this year with dozens more to come in the fourth quarter. At September 30, 2020 with nearly 48,000 total lots outstanding representing 4.4 years of lots supplied based on a trailing 12-month closings, we've increased our land book by almost 30% from September 30, 2019. As part of our entry-level strategy, the average size of our communities has also expanded. We've been putting larger land positions under contract often several hundred lots at a time targeting a three- to five-year community life even at an accelerated sales place. Year-to-date September 30, 2020 our new lots under control were 81% entry-level with an average community size of 130 new lots. We are scheduled to open up more than 150 communities in 2021 compared to opening 75 communities in all of 2019 and approximately 100 communities projected for full year 2020 after being shut down for six weeks due to COVID-19. We believe that our aggressive pace of securing new lots and a strong pipeline of community openings will start to meaningfully show increase in community count in the latter half of next year. At a pace of 50 sales per year and an average of 300 communities could reasonably produce 15,000 sales in 2022. Slide 8, moving to the regional level trends on slide 8, all of our regions reflected solid year-over-year performance in Q3. Our central region comprising Texas led in terms of order growth this quarter with an 82% increase in orders over the third quarter of 2019 despite a 14% decline in average community count. The central region's absorption doubled to six per month compared to three per month in the third quarter of 2019. Entry-level communities representing 63% of central region's average active communities during the third quarter of 2020. Our orders in the West region were up 68% over the third quarter of 2019, driven by an 88% increase in absorption with 10% fewer average communities. Entry-level communities represent 63% of the West region's average active communities during the quarter. California produced the largest year-over-year growth in orders at 158% for the quarter and the highest absorptions of all nine states we operate in, selling an average of seven per month during the quarter of 2020, which was an increase of 137% in absorptions year-over-year. Average community count in California also increased 9% year-over-year for the third quarter of 2020. We are seeing the success of the shift to newer affordable entry-level communities in California come through in the community count and sales performance there. Our each region experienced order growth of 63% on an 87% increase in absorptions year-over-year for the quarter, offsetting a 30% decline in average community count. 50% of our average active communities in the East region were entry-level during the quarter. We generated 56% earnings growth year-over-year in the third quarter of 2020 compared to the same period in 2019 as we had significant growth across all key metrics with 21% closing revenue growth, 170 bps increase in home closing gross margin and a 70 bps improvement in SG&A as a percentage of home closing revenue. This quarter's closings were up 24% year-over-year, with 71% of closings coming from previously started spec inventory. At September 30, 2020 approximately 14% of total specs were completed, less than the last couple of quarters understandably as we're selling more specs in earlier stages of production. Although this dynamic is also driving a decrease in our backlog conversion rate over the last several quarters, our backlog conversion rate for the third quarter was 68%, which is slightly up year-over-year evidence that our construction pace is keeping up with sales. We generated over $1.1 billion of revenue in Q3 2020 as the year-over-year increases in closing volume reflecting our record high sales more than offset the decline in ASP home closings resulting from the shift in product mix toward entry-level. Our closing gross margin improved 170 bps to 21.5% for the third quarter of 2020 from 19.8% a year ago. Higher home prices more than offset record lumber costs. The additional closing volume and the efficiencies achieved from our streamlined operations and national purchasing savings contributed to a 31% year-over-year increase in total closing profit. As we have previously covered, we have been able to continue to harvest savings in our material cost by reducing SKU count to achieve preferred vendor pricing and bulk purchasing discounts, while taking advantage of pre-cut material where available. Our streamlined production also allows us to obtain preferred labor pricing from our trade. SG&A as a percentage of home closing revenue was 10.1% for the current quarter which was a 70 bps improvement over 10.8% in 2019 due to greater leverage of fixed expenses and efficiencies and higher closing volume as well as cost savings from technology enhancements particularly as related to sales and marketing efforts. We also benefited from a lower tax rate with the extension of the energy tax credits into 2020 under the Taxpayer Certainty and Disaster Tax Relief Act enacted in December 2019, our effective tax rate was 19.5% for the third quarter this year versus 24.4% last year. Our third quarter diluted earnings per share of $2.84 also benefited from our repurchase of 1 million shares in the first quarter of 2020. To highlight just a few items for year-to-date results September 30, 2020, on a year-over-year basis we generated an 86% increase in net earnings, orders were up 40%, closings were up 26%. We had a 250 bps increase in home closing gross margin and a 90 bps improvement in SG&A as a percentage of home closing revenue. The strong start to 2020 and rapid recovery that started in mid-April more than offset any pullback experienced from COVID-related uncertainties in late Q1 and very early Q2. Moving on to slide 10, our balance sheet continues to be very strong even as we step up investments in land acquisition and development, we have plenty of liquidity including $610 million of cash, nothing drawn on our credit facility and a lower net-debt-to-cap -- in the lowest net-debt-to-cap in our company's history at 15.7%. We grew our spec inventory back to an average of 11.2 specs per communities this quarter after dipping in the second quarter to about 9.3. We are committed to increasing our per store spec count by year-end with inventory on the ground available for a quick close. We anticipate our heavy backlog and increased volume of available specs entering into 2021 would result in improved backlog conversions and solid closing into next year. Slide 11, our land acquisition and development strategy is very nimble and we can aggressively increase our purchases when housing market is hot and also pull back quickly when the housing market slows. We spent nearly $300 million on land and development this quarter our highest spend in a single quarter in our history. For the first nine months of 2020 we spent nearly $760 million on land acquisition and development, which was more than 28% higher in the same period of last year. We are using options or staggered purchasing terms to secure more lots, which allows us to preserve our liquidity. About 58% of our total lot inventory at September 30, 2020 was owned and 42% was optioned which improved compared to September 30, 2019 with 66% owned and 34% optioned. Finally, I'll direct you to the slide 12. 2020 will be a record year in spite of the pandemic. We anticipate continued strength in Q4 but caution these results could be impacted by uncertainty surrounding the election, COVID-19 or financial market volatility. Turning to slide 13, to summarize, Meritage Homes today is a different company than when I co-founded it in 1985. Our culture and our strategic shift has been transformative. I'm proud of the innovative product, energy efficiency, superior quality and affordability that we have delivered in every home that we build. Now as one of the leading entry-level first move-up home builders, Meritage is well-positioned to capitalize on current market demand and deliver strong results into the future. Demand is through the roof, pun intended. Our closing revenue growth benefits from our focus on affordable product, which allows us to push both price and pace. Layering the leverage of FC&A and streamline operations on top of closing revenue growth, we are seeing some of the strongest results in Meritage's history. Our financial flexibility to grow comes from having a strong balance sheet with excess cash and the lowest net debt to capital we've ever had. We are focused on growth by accelerating land investments to get to our goal of 300 community count by early to mid-2022. We are driving an increase in ROE and creating value for our shareholders. All this was the combination of the right strategy, ability to execute and the dedication of incredibly talented team. I truly believe the opportunities for future growth and success are boundless for Meritage. The executive team had a vision for this company and our people made it a reality. After 91 quarters of your thoughtful and brilliant questions, I'm not sure how we'll close without the anxiety of the quarterly full body scan. You know how much I will really miss all of you.	compname reports q3 earnings per share of $2.84. compname reports record third quarter 2020 orders 71% higher than prior year; 56% increase in net earnings with 21% revenue growth and 21.5% gross margin. q3 earnings per share $2.84. qtrly home orders 3,851 units versus 2,258 units. projecting about $4.2 billion-$4.4 billion total home closing revenue and home closing gross margin of 21.0-21.5% for full year 2020.
We apologize for the technical difficulties just now. Those and any other projections represent the current opinions of management, which are subject to change at any time, and we assume no obligation to update them. I'll start by giving a brief overview of our significant accomplishments in 2020 and current market trends. Phillippe will cover our strategy and quarterly performance. Hilla will provide a financial overview of the quarter and 2021 guidance. Despite the gravity and impact of the pandemic that affected so many individuals across the globe, 2020 ended up being a great year for the homebuilding industry and for Meritage in particular. We set the bar for new operational and financial records every quarter during the year, culminating in our all-time highest annual sales orders and home closings, and in turn our best average absorption pace of 5.2 per month since 2005. We also delivered our greatest annual home closing revenue and homebuilding gross profit and the second strongest annual homebuilding gross margin in our company's history. Even beyond the balance sheet and income statement, 2020 was quite a year. We closed our 135,000th home. And as the industry leader in energy efficiency, we were the first homebuilder to introduce MERV-13 nationwide, the most advanced air filtration system offered today for residential construction, which controls and improves air exchange within the home. In keeping with our commitment to innovation and enhancing the customer experience, we rolled out 100% contactless selling to our customers. Our homebuyers can begin their search online, qualify for mortgage through our models virtually, electronically remit their earnest money and earnest deposit, sign a sales agreement, and even close on home online and safety allow it. We are driving digital enhancements to continuously improve the way customers, employees and trade partners interact with Meritage. We'll have more to share with you on this initiative throughout 2021. We pride ourselves on our reputation as a premium homebuilder focused on customer satisfaction. 2020 marked the eighth straight year of award-winning recognition for Meritage as we received various Avid Diamond, Gold and Benchmark awards across nine separate divisions. In line with our dedication to fostering healthy communities in which we live and work, we donated over $0.5 million to our Meritage Care Foundation to nonprofits like Feeding America and Americares that are focused on helping those affected by COVID-19, fighting hunger and combating homelessness. And to promote racial equity nationwide, we donated $200,000 to INROADS and the United Negro College Fund and began our multiyear partnership with these organizations. Our Board of Directors and management are committed to drive DEI, diversity, equity and inclusion, throughout our organization and our industry. We'll have more to share on DEI in 2021 as well. And we were also one of the only three public homebuilders who Forbes recognized as one of America's Best Mid-size Companies. Our employees accomplished all these milestones in 2020 while keeping the health and safety of our fellow team members, customers and trades front of mind during this difficult year. As we turn to 2021 and beyond, we look to the favorable macroeconomic factors to provide some visibility into future demand. The housing market remains robust with low mortgage interest rates, and undersupply of new and existing homes for sale and advantageous demographic trends in new home ownership for the millennial and baby boom generations. The homebuilding industry has already experienced an uptick in demand prior to COVID-19. And after a brief pause in late March and early April, 2020's unprecedented strength in the housing market was particularly focused on increased demand for healthier and safer homes at affordable price points. We anticipate these fundamentals to continue into the foreseeable future, which aligned well with our strategic focus on entry-level and first move-up homes. Since 2016, our strategy has centered around the entry-level and first move-up markets, offering customers affordable yet high-quality homes. The strength in the housing market this past year enabled us to capture pricing power, which combined with our streamlined, more efficient operating model, produced growing sales volume, higher margins, improved SG&A leverage and our strong Q4 results. The fourth quarter of 2020 was another record quarter for Meritage, which reflected the continued momentum of the first nine months of the year. We sold 3,174 homes this quarter, which was 52% higher than the same quarter of 2019. This represented the hot third highest quarterly orders only to be surpassed by Q2 and Q3 earlier this year. Home closing revenue of $1.4 billion in the current quarter increased 28% year-over-year. In the fourth quarter of 2020, we delivered our best quarterly home closing gross margins in 2006 by improving 420 bps to 24% from 19.8% in the prior year. 2020 lacks the normal cadence of seasonality. The housing market remained robust during the traditionally quiet time of the year. Capitalizing on the overall industry demand as well as the expansion of our community mix toward entry-level homes, which sell at a higher pace than our first move homes, our absorption of 5.3 per month for the quarter was up 87% year-over-year, even as we increased pricing in all of our geographies in line with strong local market demand. The per store absorption accelerated faster than total order growth, demonstrating our capacity to generate significant sales volumes once we achieve our 300-community target. five out of the nine states had absorptions increase over 100% year-over-year this quarter, despite a 19% decline in average active communities. We continue to focus on growing our spec inventory for our entry-level communities as well as refining our offerings for the first move-up market, which has also experienced solid demand over the last two quarters. Entry-level comprised almost 70% of total orders for the quarter, up from 55% in the fourth quarter last year. Entry-level represents 67% of our average active communities during the current quarter compared to 45% a year ago. As we have hit our relative product mix goal, we expect these ratios to sustain for the next -- for the near to midterm, although mix in individual geography is always adjusting with communities opening and closing. Our first move communities also experienced improved demand year-over-year, with absorption 91% higher than a year ago. All our regions reflected solid year-over-year performance in Q4. The strength in the market was driven by low interest rates, limited supply and shifting buyer preferences for single-family, less densely populated homes. Our East region led in terms of order growth, with a 76% improvement over the fourth quarter of 2019. Absorption in the East region increased 118% year-over-year for the quarter, offset by a 20% decline in average community count. 64% of our average active communities in each region sold entry-level product during the quarter. The East region performance and product mix are now in line with the rest of the company. The shift to entry-level is nearly there had average absorptions exceeded five per month. Our Central region, comprising our Texas market, increased orders by 46% over the fourth quarter of 2019, despite a 20% reduction in average community count. Entry-level communities represented 71% of the Central region's average active community during the fourth quarter of 2020. This region continues to see solid demand with shifting migration into the state, particularly in the tech sector, with Austin and Dallas Fort Worth seeing outsized demand even by today's standards. Our fourth quarter 2020 orders in the West region were up 34% over the same quarter in the prior year, driven by a 65% increase in absorptions and partially offset by 18% fewer average communities. Entry-level communities represented 67% of the West region's average active communities during the quarter. Colorado had our highest first order absorption in the company this quarter, with an average of 6.4 homes per month in the fourth quarter of 2020 compared to 2.5 in the prior year. This produced a 48% year-over-year growth in orders, reflecting the hard shift down to ASP price band over the last four to six quarters. Turning to slide seven. We closed 32% more homes in the fourth quarter of 2020 than prior year. And our backlog was 4,672 units at the end of the fourth quarter, reflecting the high absorption pace we achieved this quarter. Of the 3,744 home closings this quarter, 71% came from previously started spec inventory compared to 61% a year ago. At December 31, 2020, less than 10% of total specs were completed versus 1/3, which is our typical run rate. We are selling more specs in early stages of production to meet the surge in demand and are focusing our production efforts on completing our backlog inventory. Our backlog conversion rates decreased to 71% in the fourth quarter this year compared to 80% last year, reflecting the early stages of construction in our sold homes. We expect similar trends over the next couple of quarters as demand in the market absorbs our spec inventory at an accelerated pace. Spec building is the core tenet of our entry-level market-focused strategy, which results in a higher spec inventory in these communities compared to first move-up communities. We try to keep a four to six month supply of specs on the ground of our entry-level product. We ended the fourth quarter of 2020 with a little over 2,500 spec homes in inventory or an average of 12.9 per community compared to approximately 3,000 or an average of 12.4 last year, reflecting the significant sales order growth during the fourth quarter. While specs for community grew, our total staff count did not quite achieve our goal of 3,000 as these homes converted to backlog as quickly as we started them. However, we are still focused on increasing our specs in January as we move into the spring selling season. As Philippe noted, the 28% year-over-year closing revenue growth in the fourth quarter was the net impact of 32% increase in home closings and 4% decline in ASP. While this ASP decline reflects the shift in product mix toward affordable entry-level homes, it also includes price increases throughout 2020 in all of our geographies from strong market demand. We had our highest quarterly home closing gross revenue since 2006 this quarter, reaching 24%, a 420 bps improvement from the prior year. The margin reflects our ASP increases achieved throughout the year, the additional leveraging of fixed costs from higher closing volumes as well as operational efficiencies. We have our entry-level and first move-up construction processes really dialed in today. We know all of the components of our home intimately and continue to focus on reducing our cost of materials. Due to the consistent purchasing volumes on a limited number of SKUs, we're able to negotiate lower pricing in bulk purchasing discounts from our vendors. This consistency and transparency also provide scheduling visibility to our trades and suppliers, allowing all of us to be more efficient and enabling us to attract local labor as we look to be the builder of choice for our contractors. With this clarity, we have maintained a tight control over our production and gain confidence to start our spec homes on a structured cadence. To date, we've not experienced elongated cycle times from shortages in the labor pool, but we continue to monitor the space for any changes. Although lumber inflation has retreated a bit its highest earlier in the year, these costs still remain elevated. We've been able to mitigate the cost inflation with price increases during 2020, although this is also an area that we are watching closely. SG&A as a percentage of home closings revenue was 9.3% for the current quarter, which was our lowest quarterly percentage since 2007. The 80 bps improvement over prior year reflects greater leverage of fixed expenses from efficiencies and higher closing revenue and ongoing permanent cost benefits from technology enhancements, particularly leading to our sales and marketing efforts. We believe we can sustain strong margins in 2021 despite higher commodity costs, but we will incur a minimal negative impact to our SG&A leverage over the next several quarters. As expected, we will have some additional costs relating to achieving our 300-community goal prior to the incremental closings and revenue from that new business. However, we expect to improve our SG&A leverage beyond 2021 once our higher community count starts materially contributing to closing. Included in our Q4 results are $20.3 million of impairment charges on land sales. The impairment consists of two projects: one in California that is no longer in strategy for us as it is not an entry-level or first move-up product. And another in our active adult market that we are looking to wind down. We anticipate those sales will close in the first half of 2021. The fourth quarter's effective income tax rate was 21.9% in 2020 compared to 6.3% in the prior year. In 2019, the extension of the eligible energy tax credit on qualifying homes occurred in December, resulting in the beneficial impact for full year 2018 and '19 reflected in Q4 2019 generating the low tax rate. With the extension of the 45L provisions into 2021, we expect to continue receiving energy tax credit in a significant percentage of our closings into this year. Our fourth quarter diluted earnings per share was $3.97, increasing 50% year-over-year compared to 2.65% in the same quarter of 2019. To highlight just a few items for the full year 2020 results: On a year-over-year basis, we generated a 70% increase in net earnings. Orders were up 43%, and closings were up 28%. We delivered $4.5 billion in full year home closing revenue, a 310 bps increase in home closing gross margin to 22%, and a 90 bps improvement in SG&A as a percentage of home closing revenue, ending the year at 10%. The trends I just covered for Q4 were primarily in place for most of 2020, translating to these record results. Moving on to slide nine. We continue to focus on strengthening our balance sheet even as we push toward our 300-community goal. We achieved several objectives this quarter. Late in the quarter, we amended our revolving credit facility to extend the maturity date to 2025, changing our revolver to a five year maturity. We opportunistically repurchased 100,000 shares for a total of $8.8 million in advance of the routine first quarter employee share issuance in 2021. On November 13, 2020, our Board of Directors authorized an additional $100 million for share repurchases under the existing stock repurchase program. And we also received two credit rating upgrades. At December 31, 2020, our cash balance was $746 million, reflecting positive cash flow from operations of $530 million despite increased land acquisition and development spend. Our net debt to cap reached an all-time low of 10.5%. We previously noted that we've adjusted our maximum net debt-to-cap target to high 20s to low 30s range from our prior low to mid-40s range as our assets turn quicker with entry-level and first move-up offering. We intend to use our excess cash on hand to aggressively pursue our community growth target, while also ensuring we do not overextend our balance sheet or liquidity. On to slide 10. We already control all the land we need to achieve our 300-community goal. Our focus now is on developing the land to prepare the communities to open. We also plan to increase our spend on additional land and development in order to sustain this growth level beyond 2022. We spent $506 million on land and development this quarter, our highest spend in a single quarter in the company's history and over a 100% increase year-over-year. For full year 2020, we invested nearly $1.3 billion in land and development. We anticipate spending more than $1.5 billion annually in 2021 and beyond to sustain and replenish our 300 communities. In the fourth quarter of 2020, we secured a quarterly record of approximately 11,200 new lots, which translates to 69 new communities. We put nearly 29,500 gross new lots under control in 2020, a 62% increase as compared to about 18,000 lots in 2019. Adjusting for land sales and termination, we secured approximately 27,200 net new lots in 2020, representing 192 new communities, of which approximately 81% are entry level. At year-end with over 55,500 total lots under control, we had 4.7 years' supply of lots based on trailing 12-month closings, in line with our target of four to five years' supply of lots on hand. We increased our land book by 34% from December 31, 2019. We are using options or staggered purchasing terms where financially feasible, allowing us to preserve our liquidity. About 59% of our total inventory at December 31, 2020, was owned and 41% was optioned, an improvement compared to the prior year of 63% owned and 37% optioned. We've been putting larger land positions under contract several hundred lots at a time to address our accelerated sales pace. Larger, higher-volume, entry-level communities reduce community level costs per lot and allow us to minimize the community count churn and inefficiencies associated with opening and closing out of communities. For full year 2020, our new lots under control have an average community size of about 140 lots. Finally, I'll direct you to slide 11. We're encouraged by the continued strength in the housing market. For full year 2021, we are projecting total closings to be between 11,500 and 12,500 units, total home closing revenue of $4.2 billion to $4.6 billion, home closing gross margin of 22% to 23%, and effective tax rate of about 23%, and diluted earnings per share in the range of $10.50 to $11.50. We ended 2020 with 195 active communities, down from 244 in the prior year. During the year, we opened up 105 communites, up 40% from 75% in 2019. Since we anticipate continued strong sales demand in 2021, community count will remain plus-minus 200 for Q1 and Q2 as new community openings will be offset by community closings. And our projected volume of closings between 11,500 and 12,500 for the full year, we expect to end 2021 with approximately 235 to 245 communities. The community count growth will continue into Q1 and Q2 of '22 when we anticipate achieving our goal of operating 300 communities by June 2022. As for Q1 2021, we are projecting total closings to be between 2,600 and 2,900 units, home closing revenue of $950 million to $1.05 billion, home closing gross margin of approximately 22.5%, and diluted earnings per share in the range of $2.25 to $2.50. Moving on to slide 12. Our results in 2020 validate that we have a solid strategy and are executing at a high level. We are achieving strong closing revenue growth due to market strength combined with an increase in both pace and price. While we are increasing prices in all of our geographies and in line with local market conditions, we are also optimizing sales volume. Spec building has allowed us to sell at a greater pace and capture market share while not sacrificing profit. Our efficiencies allowed us to accelerate 2020 closings into 2020, which in turn will let us redeploy the capital to fuel future growth. Our balance sheet strength reflects increases in operating cash flow at our lowest levels of net debt to capital. This in turn provides a long runway for growth as well as a safety net in the event of a market downturn. Since the start of 2019, we have accelerated investments in land acquisition and development to support and sustain future growth levels. In the fourth quarter, we spent a record $506 million on land and secured approximately 11,200 new lots. We already control all the land necessary to achieve our 300 active community goal by mid-2022. Our strong land position enables us to focus on developing lots to get those communities open and to continue to replenish the land pipeline beyond 2022. To summarize on slide 13, we are entering 2021 with a heavy backlog of almost 4,700 sold homes and more than 2,500 specs completed or under construction, giving us some additional visibility in 2021. With a solid strategy, strong balance sheet, a healthy land position and a great team that is executing at a high level, we are well positioned for growth.	compname reports q4 earnings per share $3.97. compname reports record fourth quarter 2020 results including a 420 bps increase in home closing gross margin, 50% increase in diluted earnings per share and 52% increase in orders over prior year. q4 earnings per share $3.97. sales orders of 3,174 homes for quarter were 52% higher than q4 of 2019. quarterly closings of 3,744 homes represented 914 additional units versus same quarter prior year. for 2021, projecting 11,500 to 12,500 home closings with home closing revenue between $4.2 - 4.6 billion. expect to close out 2021 with about 235-245 communities & to realize diluted earnings per share in range of $10.50 - 11.50.
Those and any other projections represent the current opinions of management, which are subject to change at any time, and we assume no obligation to update them. I'll start with a brief discussion about current market trends and provide an overview of our significant accomplishments in 2021. Demand in the fourth quarter continued to demonstrate the strength we have seen all year. Mortgage remained very affordable and home buying demand continued to outpace housing inventory, driven by favorable homeland activity from millennials and baby boomers. As such, Meritage again broke several company records in the fourth quarter of 2021. In the face of a prolonged supply chain constraints and a tightening labor market, we achieved our highest fourth-quarter sales orders and our second highest quarterly home closings while accelerating our spec starts. Our fourth-quarter results include the highest quarterly home closing revenue, home closing gross profit, and diluted EPS, as well as the lowest quarterly SG&A as a percentage of home closing revenue in our company's history. From a full year 2021 perspective, I couldn't be more proud of what our team has accomplished. We achieved our highest annual sales orders of 13,808 homes and closing of 12,801 homes. Our 2021 annual home closing revenue was also a record at $5.1 billion as was our full-year home closing gross margin of 27.8%. Price increases due to sustained strong demand, coupled with our operational efficiency and the leveraging of our fixed cost over higher home closing revenue drove our lowest full-year SG&A rate of 9.2%, translating to our next full-year diluted earnings per share of $19.29. Our community count grew 33% year over year. We're earning the spring selling season with 259 active selling communities and forecasting continued double-digit community growth into '22. We expect that our strategy capitalizing on the solid demand for the entry-level and first move of homes will produce increased volume coming from digital communities and will enable us to gain market share in all of our geographies. In addition to delivering impressive financial results, we achieved numerous milestones related to our corporate social stewardship in the fourth quarter. As the team organized around an ambition to Start with Heart, Meritage employees donated countless hours to deliver a new mortgage-free home to a deserving military veteran and his family on Veterans Day in Florida through Operation Homefront. We also donated to various nonprofit organizations to further strengthen diversity, equity, and inclusion missions and to help families during the holiday season and the communities in which we do business, and to support tree planting programs to share our ongoing approach to long-term sustainability practices. DE&I commitments and our ESG milestones, we issued our inaugural ESG report during the quarter. We also joined more than 2,100 other companies by signing the CEO Action for diversity and inclusion pledge. We'll have more to share about our ESG efforts with you throughout 2022. We're excited about our employees, executive, and board-level commitments to these important issues. I want to start by focusing on affordability, which with favorable pricing environment and the anticipated rate hikes coming this year is top of mind for everyone. Affordability is at the heart of our business strategy that is centered around entry-level and first move-up home. When we first shifted to this market segment more than five years ago, we did so knowing, eventually, interest rates would go up. Continue to buy land for even lower ASP products has been our focus over the past two years to act as a counterbalance to the pricing strength all markets have experienced since mid-2020. Although we have taken increases in line with the market conditions, we expect our new communities to come online at still attractive and affordable ASPs, especially in light of increased FHA limits in all of our markets. To ensure our product remains affordable, we constantly evaluate the credit metrics of our buyers. Our customers' FICO scores and DTIs remained stable in the fourth quarter and consistent with historical averages, demonstrating that they are not streaming financially to purchase our homes. Given the recent interest rate increases, we will continue to monitor the overall affordability of our homes. During the fourth quarter, we continued to meet our order base in most of our communities to manage margins through supply chain challenges and the tightening labor market and ensure we provide our customers a quality home buying experience. By focusing on our construction and simplified product strategy, we still achieved record orders and closings in 2021, demonstrating our ability to navigate delays associated with supply materials, labor, entitlement and permitting. In today's rising rate environment, we believe selling homes later in the construction cycle offers more favorable options to our buyers as they look to lock in their mortgage rate and close escrow, LIBOR rate lock expirations. With these quarterly results in 2021, we also displayed our ability to achieve industry-leading gross margins. This was a function of the favorable pricing environment first and foremost, but also our disciplined production approach to managing our construction costs. As we have mentioned before, spec building typically provide us the opportunity to lock in costs before determining ASP. However, in a rising cost environment riddled with supply chain issues, we went one step further to avoid cost risk and to better manage our margins. In cases where cost increases such as lumber, continued path to start of construction, our delayed sales releases allowed us to manage this additional cost exposure. Managing our order-pay helped generate the meaningful list we have experienced in our gross margins. Although we are not forecasting any improvement in supply chain challenges, once they do unwind, we expect to remove our sales meeting -- metering and fully allow our community to capture true market demand while maintaining our margin profile. Now, turning to Slide 5. Given the long-range cycle times, our fourth quarter closings totaled 3,526 homes, which was down 6% over the challenging comps of prior year. Entry-level comprised 81% of closings, up from 72% in the prior year. Total orders of 3,367 for the fourth quarter of 2021 reflected an increase of 6% year over year, driven by a 24% increase in average active community count, which was partially offset by the decrease in average absorptions. The decline from 5.3 per month in Q4 2020 to 4.5 per month in this current quarter was driven by the tightly metered order pace across most of our footprint, as well as our new community openings occurring late in the quarter. We continue to reiterate that our sales metering is an intentional choice in order to maximize both our margins and the customer home buying process as we manage through the current supply chain issues in the market today. Looking at our growing interest lift and the early month sellouts in our communities, we know that actual demand for our home is much greater than what we were seeing in our absorption pace. Entry-level provided 80% of total orders up from 72% in the fourth quarter last year. Entry-level also represented 79% of our average active communities, compared to 67% a year ago. Moving to Slide 6. The regional level trends we continue to experience strong demand in all of our regions. Our Central region, comprised of Texas, led in terms of regional average absorption pace with 5.3 per month this quarter. This 5% year-over-year decline was offset by 17% greater average asset communities, which together contributed to an 11% increase in order volume. With the state's favorable economic development and growth environment, sustained home buying demand generated a 20% year-over-year increase in ASP orders, the highest increase in all three regions. To address affordability challenges in the market, our East region continued to shift its product mix toward entry-level, which made up 81% of its average asset communities. Out of our three regions, the East Region average community count increased the most by 34% year over year, which generated order volume growth of 6%. The East region increase in community count was offset by a 21% decrease in average absorption pace. The West Region's fourth quarter 2021 order volume increased 2% year over year mainly due to 19% more average communities, which was partially offset by 14% lower average absorption pace. Overall, we had a solid performance from all our regions despite ongoing challenges with the supply chain. As we accelerate spec protection in all of our regions, we expect total order volume to increase throughout 2022. Turning to Slide 7. Of our home closings this quarter, 77% came from previously started spec inventory, which increased from 71% a year ago. We ended the period with nearly 3,200 spec home in inventory or an average of 12.3 per community as we push to get homes on the ground. This compared to approximately 2,500 specs or an average of 12.9 in the fourth quarter of 2020. At December 31, 2021, less than 5% of total stacks were completed versus our typical run rate of one-third due to sustained demand and supply constraints. We accelerate starts to over 3,700 homes in the fourth quarter from approximately 3,400 homes in the third quarter and in line with approximately 3,800 homes in the second quarter, and we expect to continue ramping up-spec parts in 2022 as our community count increases. Having available spec is not necessary for our 100% spec building strategy. Despite improving our total spec home inventory year over year, maintaining a four- to six-month supply of entry-level spec has been challenging given the surge in demand and supply chain constraints, and we expect that trend to continue at least in the near term. We ended the quarter with a backlog of over 5,600 units as our conversion rate declined from 71% last year to 60% this year, resulting from elongated cycle times. However, it was a slight improvement from 57% in the third quarter. As we look ahead into 2022, we aren't expecting any improvement in our backlog conversion since we do not anticipate any near-term improvements in the current supply chain. Once the supply chain stabilizes, we expect our cycle times will shorten and backlog conversion rate will pick up again, while order growth will also reaccelerate as we unwind sales metering. During the fourth quarter, ongoing supply chain disruptions lengthened construction time by about two weeks sequentially from Q3 to Q4 this year. Despite these expanded timelines, we still believe our streamlined operations and 100% spec building strategy for entry-level homes has given us a competitive advantage in today's supply chain and labor market conditions by locking in volume and providing workable consistency to our traders. Coupling these with our reduced SKU counts and streamlined product library has allowed us with some incremental cost advantages. The benefits of pre-starting homes with simpler products to build up and our steady predictable and repeatable construction work make us a preferred builder of choice. These strong vendor relationships helped us deliver over 12,800 homes in 2021 and are key to accelerating starts in 2022. Since we have our facility processes dialed in, we've been able to give our partners more visibility into our business than ever before, so they can plan for what we need. We provide our schedules to them well in advance to our dealers are preorder. Our strong partnerships with our suppliers and our limited build-to-order options also allow us to pivot our product selections based on availability, if necessary, as we continue to stay nimble in these unusual times. Our executive team has been meeting with our top vendors to short capacity commitments for 2022. Given our significant increase in its big starts as we grow our community count this year, we have also backed up our supplier group with secondary alternative sources to help us with incremental needs should that become necessary. The 6% year-over-year home closing revenue growth to $1.5 billion in the fourth quarter of 2021 was a result of a 13% increase in ASP due to strong market demand, even as we shifted our product mix toward entry-level homes. This was partially offset by a 6% decline in home closing volume due to closing time being impacted by supply chain issues. The 500-bps improvement in fourth quarter 2021 home closing gross margin to 29% from 24% a year ago was primarily driven by a full year of pricing power, which outweighed accelerated cost pressures in almost all cost categories. We believe that despite volatility in lumber and generally higher commodity costs, we can sustain strong margins into 2022. SG&A as a percentage of home closing revenue was 8.5% for the current quarter, an 80-bps improvement over prior year. The higher revenue, lower broker commissions, and the benefits of technology on our sales and marketing efforts allowed us to better leverage our SG&A. One-time items, including payments to our general counsel, who retired in December of 2021 and a change in the company's retirement vesting eligibility for equity awards totaled $5 million and impacted SG&A expenses by 30 bps in the third quarter of 2021. We continue to pursue back-office automation and greater technological strides to drive incremental leverage of our SG&A. The fourth quarter 2021 effective income tax rate was 23.8%, compared to 21.9% in the prior years. Both years reflected reduced rates primarily from the eligible tax credit when qualifying energy-efficient home closed under the 2019 Taxpayer Certainty and Disaster Tax Release Act. Increased profit in states with higher tax rates and the reduced benefit of the energy tax credit due to the greater overall profitability of the company, both contributed to the higher tax rate this year. Since the energy tax rate has not yet been enacted for future periods, we're not assuming any such benefit beyond 2021 at this time. Pricing power expanded gross margin and improved overhead leverage, combined with lower outstanding share count, all led to the 57% year-over-year increase in fourth-quarter diluted earnings per share to $6.25. To highlight a few full year 2021 results on a year-over-year basis, we generated a 74% increase in net earnings order unit held steady at about 13,800 for both years. Closings were up 8%. We had a 580-bps expansion of our home closing gross margin to 27.8% in 2021, and SG&A as a percentage of home closing revenue improved 80 bps to 9.2%. Diluted earnings per share was $19.29, a 75% increase from 2020. Turning to Slide 9. Our balance sheet remains strong even as we continued investing in land acquisition and development. At December 31, 2021, our cash balance was $618 million, compared to $746 million at December 31, 2020, reflecting increased investments in real estate and development and inventory rose $956 million during the year, as well as for share repurchases. During full year 2021, we repurchased about 640,000 shares of stock for $61 million, of which by 244,000 shares totaling $24 million were repurchased during the fourth quarter. Our net debt-to-cap ratio was 15.1% at December 31, 2021, compared with 10.5% at December 31, 2020. Our current maximum target for net debt-to-cap is still in the high 20s, which gives us the flexibility to manage liquidity and changing economic conditions. In December, we extended the maturity date of our $780 million unsecured revolving credit facility to December 2026. Given our strong balance sheet, we continue to focus our capital spend primarily on growth, concentrating on community counts and increased specs, both of which we expect will drive profitability and help us gain market share. We also plan to continue routine share buybacks to offset new grants and keep our dilution neutral and they opportunistically repurchase incremental shares. On to Slide 10. At December 31, 2021, with over 75,000 total lots under control, our land book increased 35% from year-end 2020, and we had nearly 60 years supply of lots, based on trailing 12-month closing. While this is slightly above our goal of four- to five-year supply of lots, since we're in growth mode, the calculation on prior year's closings is a bit misleading, based on our forward closing projection of about 15,000 homes for 2022, we have a five-year supply of lots. We secured 9,000 net new lots this quarter compared to approximately 11,200 in the prior Q4. This new loss will translate to an estimated 45 net new communities, of which 93% are entry-level. To address the higher orders pace of entry-level product, the average community size we contracted for this quarter was nearly 200 lots, up from the fourth quarter of 2020 where the average lot size was about 150 lots. During the fourth quarter of 2021, we navigated around municipal delays and supply and labor constructions to open 48 new communities. We grew our community count by 23 net communities from 236 at the start of the quarter to 259 at year-end 2021. On a year-over-year basis, we were up 33% or 64 net community. During the full year, we opened 163 communities, up 55% from 105 in 2020. We are already seeing increased volume from our higher community count and expect to continue to benefit from incremental orders and closings in 2022 and beyond. We spent about $507 million unlaid acquisition and development this quarter, in line with last year's Q4 spend and our targeted quarterly run rate. We expect land spend to be around $2 billion annually in 2022 and beyond as we get to and maintain our 300 communities. To finance plan, we use options or staggered purchasing terms to preserve liquidity were financially feasible. About 65% of our total lot inventory at December 31, 2021, was owned and 35% was optioned compared to prior year with 69% owned inventory and 41% options. With over 80% of our own land currently actively under development and ready to open as a new community over the next several quarters, we believe we are nearing an inflection point on our owned versus option percentages due to our community ramp up stabilizing over the next several quarters. At Meritage, we're dialed into our land playbook and our growth strategy. We are disciplined in our approach to refilling our land pipeline, even with strong competition and land price appreciation. We underwrite to normalized incentives and absorption. Although we haven't changed our underwriting gross margin hurdle, most deals are penciling above that, giving us some breathing room to absorb cost increases in future incentives while still exceeding our minimum margin threshold. We do not target an arbitrary percentage of option land, instead, we focus on managing our capital through balance sheet metrics and margin goals. We believe the current market demand trends, particularly at the entry-level, will be sustainable at least for the midterm. Once the supply chain stabilizes, the more communities we have, the great incremental market share we can gain in all of our geographies. Additionally, our focus on affordability starts with our land strategy as Phillippe already covered. Our future communities opening later 2022 and into 2023 are expected to have lower ASPs than what we're seeing in our existing active communities today. Our land strategy focuses on larger parcels, which limit some competition to land lowers the per lot cost by spreading community-level overheads across more lot and reduces the churn of new community openings and closings. Finally, turning to Slide 11. 2022 is off to a great start, pointing to a strong spring selling season, and we expect home buying demand to remain robust. At the same time, we will continue to manage our orders pace to preserve margin and maintain a high level of customer experience. We expect gross margins to remain elevated and SG&A rates to be at all-time lows. For the full year 2022, we're projecting total closings to be between 14,500 and 15,500 units, home closing revenue of $6.1 billion to $6.5 billion, home closing gross margin around 27.75%, an effective tax rate of about 25%, and diluted earnings per share in the range of $23.15 to $24.65. We expect full-year community count year-over-year growth of 15% to 20%. As for Q1 2022, we're projecting total closings to be between 2,800 and 3,000 units home closing revenue of $1.2 billion to $1.3 billion, home closing gross margin of 28.25% to 28.5%, and diluted earnings per share in the range of $4.45 to $4.85. To summarize on Slide 12, we enter 2022 with momentum and optimism. We believe Meritage is poised to capitalize on market demand and drive sustainable long-term growth with our proven strategy and operating model, our healthy land position, and flexible balance sheet continued with solid execution. We have already demonstrated our ability to grow community count. I would like to extend our deepest gratitude hardworking employees and trade partners who contribute to Meritage's remarkable 2021. Their leadership grow our significant order volume closing, as well as a 33% year-over-year ramp-up in community count growth while navigating challenging conditions.	33% increase in year-end community count to 259 and 57% increase in diluted earnings per share over prior year. q4 earnings per share $6.25. qtrly homes closed 3,526 versus 3,744. qtrly sales orders of 3,367 homes were 6% higher than prior year. qtrly total closing revenue $1.5 billion versus $1.41 billion. expect to continue to benefit from incremental orders volume and closings in 2022 and beyond. projecting 14,500 to 15,500 home closings for 2022, which we anticipate will generate $6.1 - 6.5 billion in home closing revenue. with projected effective tax rate of 25%, we expect diluted earnings per share to be in the range of $23.15 - 24.65 for 2022.
So with that said, let's turn to our fiscal 2021 second-quarter results. Given the challenging operating environment as a result of COVID-19 and we are very pleased with our results to this point in the 2020-2021 ski season across our 34 North American resorts. While our results for the second quarter continued to be negatively impacted by COVID-19, total visitation across our North American destination mountain resorts and regional ski areas were down approximately 5% compared to the same period in the prior year. The strong visitation for the quarter highlights the underlying resiliency of our business, the loyalty of our guests and the strong appeal of skiing in guests leisure travel plan. As we moved past the peak holiday period, which was constrained by capacity limitations driven by both COVID-19 and below average snow conditions, we saw improved results in January, particularly with lift ticket sales. While visitation trends improved throughout the quarter, our ancillary lines of business continue to be negatively impacted by COVID-19 related capacity constraints and limitation, particularly in food and beverage and ski school. We experienced strong results in the quarter from both our local and destination guests with local visitation up slightly compared to the same period in the prior year and destination visitation proving more stable than we expected. destination Mountain Resorts skier visit, excluding complimentary access. Despite the travel challenges associated with COVID-19, which compares to 57% in the same period in the prior year. International visitation, as expected, decreased significantly due to COVID-19 related travel situation. with destination guests, including international visitors, declining to 15% of Whistler Blackcomb visits, excluding complimentary access, which compares to 48% in the same period in the prior year. Our season pass unit sales growth of 20% for fiscal year 2021, created a strong baseline demand heading into the season across our local and destination audience and will be one of the most important drivers of our performance and relative stability for the season. For the fiscal 2021 second quarter, 71% of our visitation came from season pass-holders compared to 59% of visitation in the same period in the prior year. Our growth in pass-holders this past year also positions us well as we head into the 2021/2022 season. We remain even more committed to the benefits advanced commitment offers our company and intend to remain aggressive in providing the best value to skiers and riders who purchase in advance of the season and continuing our strategy to move lift ticket purchases into our Pass program. We are excited to launch our 2021/2022 lineup of Epic Pass products on March 23, 2021. We maintained disciplined cost control throughout the quarter as we operated the business at reduced capacity. Resort reported EBITDA margin for the fiscal 2021 second quarter was 40.3% compared to the prior year period of 40.9%, while resort net revenue decreased $240.1 million over the same period. As Rob mentioned, our results for the second quarter were impacted by COVID-19 and the resulting impacts to our North American mountain resorts. Net income attributable to Vail Resorts was $147.8 million or $3.62 per diluted share for the second quarter of fiscal 2021, compared to net income attributable to Vail Resorts of $206.4 million or $5.04 per diluted share in the prior year. Resort reported EBITDA was $276.1 million in the second fiscal quarter, which compares to resort reported EBITDA of $378.3 million in the same period in the prior year. And the decrease was primarily a result of the negative impacts of COVID-19. Turning to our season-to-date metrics for the period from the beginning of this ski season through Sunday, March 7, 2021, and for the prior year period through Sunday, March 8, 2020. The reported ski season metrics are for our North American destination mountain resorts in the most areas and exclude the results of our Australian ski resorts in both periods. The reported ski season metrics include growth for Season Pass revenue based on estimated fiscal year 2021 North American season pass revenue compared to fiscal year 2020 North American season pass revenue. Fiscal year 2020 season pass revenue was adjusted to exclude the impact of the deferral in Pass product revenue as a result of pass-holder credits offered to 2019/2020 North American pass-holders. Fiscal Year 2021 season pass revenue does not include the Pass product revenue recognized in the first quarter of fiscal year 2021 as a result of unutilized pass-holder credits. This approach results in a year-over-year comparison of season pass revenue, exclusive of the impact of discounts provided to our 2019/2020 pass-holders. The metrics include all North American destination mountain resorts and regional ski areas and are adjusted to eliminate the impact of foreign currency by applying current period exchange rates to the prior period for Whistler Blackcomb results. The data mentioned in this release is interim period data and is subject to fiscal quarter end review and adjustments. We continue to be pleased with the positive momentum we are seeing in demand as we begin the third quarter with visitation continuing to improve throughout the North American ski season. Season-to-date total skier visits were down 8.2% compared to the prior year season-to-date period. Season-to-date total lift revenue, including an allocated portion of season pass revenue for each applicable period, was down 8.9% compared to the prior year season-to-date period. Season-to-date ski school revenues decreased 43.2%. Dining revenue decreased 56.9%, and resort retail and rental revenue decreased 31.6%, all compared to the prior year season-to-date period. Our results continued to improve in January and February as we expanded capacity with more open terrain as conditions improved and has certain COVID-19 related restrictions eased. Additionally, as more reservations became available following the peak holiday period, we've seen a significant improvement in lift ticket purchases. Our ski school, food and beverage and retail/rental businesses continue to be more significantly impacted than visitation due to the significant capacity and operating restrictions associated with COVID-19. While our U.S. resorts saw a material improvements in financial performance since the peak holiday period, Whistler Blackcomb's financial performance continues to be severely impacted by the continued closure of Canadian borders to international travel, a trend that will likely continue through the rest of the season. Now turning to our outlook for fiscal 2021. As we approach the end of the North American ski season, we are providing guidance for the nine-month period ending April 30, 2021. We expect net income attributable to Vail Resorts to be between $204 million and $247 million, and Resort Reported EBITDA is expected to be between $560 million and $600 million, assuming current regulations, health and safety precautions and the levels of demand and normal conditions persist through the spring, consistent with current levels. Given the ongoing uncertainty of COVID-19, we will not be providing full-year guidance for fiscal 2021 at this time as we continue to evaluate the potential economic and operational impacts of COVID-19 on our fiscal 2021 fourth quarter results, particularly for our three resorts in Australia and our primary summer operations in North America, which we currently anticipate fully opening around our typical opening dates with certain capacity constraints associated with COVID-19. revolver availability under the Vail Holdings Credit Agreement and $179 million of revolver availability under the Whistler credit agreement. As of January 31, 2021, our net debt was 4.2 times trailing 12 months total reported EBITDA. As previously announced, the company raised $575 million of 0% convertible notes in December 2020, which provides added flexibility in terms of our ability to pursue high-impact acquisitions as well as reinvest in our resort portfolio. We remain confident in the strong cash flow generation and stability of our business model, and we will continue to be disciplined stewards of our capital with a focus on high-return capital projects, continuous investment in our people and strategic acquisition opportunities. While we are not reinstating the dividend this quarter, we remain committed to returning capital to shareholders, and our Board of Directors will continue to closely monitor the economic and public health outlook on a quarterly basis to assess the appropriate time to reinstate the dividend. Turning to our calendar year 2021 Capital plan, we remain committed to reinvesting in our resorts, creating an experience of a lifetime for our guests and generating strong returns for our shareholders. We plan to maintain a disciplined approach to capital investments, keeping our core capital at reduced level, given the continued uncertainty due to COVID-19. We have increased our core capital plan by approximately $5 million based on our updated outlook and now expect to invest approximately $115 million to $120 million, excluding onetime items associated with integration of $5 million and $12 million of reimbursable investments in real estate-related capital. As previously announced, the calendar year 2021 capital plan includes several signature investments which were previously deferred from calendar year 2020 as a result of COVID-19 and are subject to regulatory approvals. In Colorado, we are moving forward with the 250-acre lift-served terrain expansion in the signature McCoy park area of Beaver Creek, further differentiating the resort's high-end family focused experience. We also plan to add a new four-person high-speed lift at Breckenridge to serve the popular Peak 7, replace the Peru lift at Keystone with a 6-person high-speed chairlift, and replace the Peachtree lift at Crested Butte, with a new 3-person fixed-grip lift. At Okemo, we plan to complete a transformational investment, including upgrading the Quantum lift from a four-person to a six-person high-speed chair lift and relocating the existing four-person Quantum lift to replace the Green Ridge three-person fixed-grip chairlift. These investments will greatly improve uphill capacity, further enhance the guest experience and complete our $35 million capital plan for Triple Peaks. We remain highly focused on investments that will further our companywide technology enhancements to support our data driven approach, guest experience and corporate infrastructure. As part of these efforts, we are continuing to invest in resources and technology to improve our customer service experience including significant staffing increases in our call centers and self-service technology that will provide our guests the ability to better manage their own accounts. We will also continue to invest in ongoing maintenance capital to support our infrastructure across our resorts, including onetime items associated with integrations of $5 million and $12 million of reimbursable investments in real estate related capital we expect our total capital plan to be approximately $135 million to $140 million. We have had stronger-than-expected financial results, and our employees have been a primary reason for this success. I'm deeply grateful for the commitment our teams have demonstrated day in and day out to navigate a truly unusual season.	q2 earnings per share $3.62. expects resort reported ebitda to be between $560 million and $600 million for nine months ended april 30, 2021. given ongoing uncertainty of covid-19, we will not be providing full year guidance for fiscal 2021. in cy 2021 now expect to invest approximately $115 million to $120 million excluding one-time items.
Today's remarks also include certain non-GAAP financial measures. So with that said, let's turn to our fiscal 2021 third-quarter results. Given the continued challenging operating environment as a result of COVID-19, we are very pleased with our overall results for the quarter and for the full 2020, 2021 North American ski season. Results continued to improve as the season progressed, primarily as a result of stronger destination visitation at our Colorado and Utah resorts, including improved lift ticket repurchases relative to the fiscal 2021 second-quarter results. destination, mountain resorts and regional ski areas for the third quarter was only a down 3% compared to the third quarter of fiscal 2019. Whistler Blackcomb's performance continued to be negatively impacted due to the continued closure of the Canadian border to international guests, including guests from the U.S., and was further impacted by the resort closing earlier than expected on March 30, 2021, following a provincial health order issued by the government of British Columbia. Whistler Blackcomb's total visitation for the third quarter declined nearly 60% to the third quarter of fiscal 2019. While visitation and revenue trends improved throughout the quarter, our ancillary lines of business continue to be significantly and negatively impacted by COVID-19-related capacity constraints and limitations, particularly in food and beverage and ski school. We maintained disciplined cost controls throughout the quarter and continue operating our ancillary lines of business at reduced capacity. As Rob mentioned, we're very pleased with our overall results for the quarter and for the full 2020-2021 North American ski season. As a reminder, in the prior year, we announced the early closure of the 2019-2020 North American ski season for our ski areas, lodging properties, and retail rental stores as a result of the COVID-19 pandemic beginning on March 15, 2020. These actions had a significant adverse impact on our results of operations for the third fiscal quarter of 2020. Additionally, the ongoing COVID-19 pandemic and the resulting limitations and restrictions on our operations continued to have an adverse impact on our results for the third fiscal quarter of 2021. Net income attributable to Vail Resorts was $274.6 million or $6.72 per diluted share for the third quarter of fiscal 2021, compared to net income attributable to Vail Resorts of $152.5 million or $3.74 per diluted share in the prior year. Resort reported EBITDA was $462.2 million in the third fiscal quarter, which compares to resort reported EBITDA of $304.4 million in the same period in the prior year. ski season in the current year with particularly strong demand at our Colorado and Utah destination resorts. Resort-reported EBITDA margin for the third quarter was 52%, exceeding both the prior-year period of 43.9% and fiscal 2019 third quarter of 50.2%. These results reflect our rigorous approach to cost management, as well as a higher proportion of lift revenue relative to ancillary lines of business compared to prior periods. Now, turning to our outlook for fiscal 2021. Net income attributable to Vail Resorts, Inc. is expected to be between $93 million and $139 million for fiscal 2021. We expect the resort-reported EBITDA for fiscal 2021 will be between $530 million and $570 million, and we expect the resort-reported EBITDA margin for fiscal 2021 will be approximately 28.9% using the midpoint of the guidance range. Our guidance assumes all of our operations are open and aligned with current health and safety protocols and capacity restrictions. Current demand trends continue. We experienced normal weather conditions throughout the Australia's East season and North American summer season, and there is no impact from potential COVID-19-related shutdowns or lockdowns. The guidance specifically assumes no impact from potential demand or operational disruptions associated with the current lockdowns in Victoria, Australia. We continue to maintain significant liquidity. Our total cash and revolver availability as of April 30, 2021, was approximately $2 billion, with $1.3 billion of cash on hand, $419 million of U.S. revolver availability under the Vail Holdings credit agreement, and $203 million of revolver availability under the Whistler Credit Agreement. As of April 30, 2021, our net debt was 2.8 times trailing 12 months total reported EBITDA. We remain confident in the strong cash flow generation and stability of our business model, and we will continue to be disciplined stewards of our capital with a focus on high-return capital projects, continuous investment in our people, and strategic acquisition opportunities. While we are not reinstating the dividend this quarter, we remain committed to returning capital to shareholders, and our board of directors will continue to closely monitor the economic and public health outlook on a quarterly basis to assess the appropriate time to reinstate the dividend. We're very pleased with the results for our season pass sales to date with guests showing strong enthusiasm for the enhanced value proposition of our pass products, driven in part by the 20% reduction in all pass prices for the upcoming season. pass product sales through June 1, 2021, for the upcoming 2021-2022 North American ski season increased very significantly as compared to the sales through June 2, 2020, for the 2020-2021 North American ski season due to lack of any spring sales deadlines in 2020 as a result of COVID-19, making the year-over-year comparison to the spring 2020 results not relevant for performance trends. Compared to sales for the 2019-2020 North American ski season through June 4, 2019, pass product sales for the 2021-2022 season to June 1, 2021, increased approximately 50% in units and 33% in sales dollars. Pass product sales are adjusted to include Peak Resorts' pass sales in both periods and eliminate the impact of foreign currency by applying an exchange rate of $0.83 between the Canadian dollar and U.S. dollar in both periods for Whistler Blackcomb. As a reminder, pass product sales for the full selling season through December 6, 2020, as compared to the full selling season through December 8, 2019, increased approximately 20% in units and approximately 19% in sales dollars. Relative to season-to-date pass sale products -- relative to season-to-date, pass product sales for the 2019-2020 season through June 4, 2019, we saw very strong unit growth with our renewing passholders and even stronger unit growth in new passholders, which includes guests in our database, the previously purchased lift tickets or passes that did not buy a pass in the previous season and guests who are completely new to our database. We saw our strongest unit growth in our destination markets, particularly in the Northeast, and also had very strong growth across our local markets. Compared to the period ended June 4, 2019, effective pass price decreased 10% as compared to the 20% price decrease we implemented this year. We believe this highlights how our lower pricing has increased the propensity of passholders to spend a portion of the new discount to purchase higher-valued pass products. We expected that the price reduction would result in higher pass renewal rates, increased trade up to higher-value passes, and drive incremental guests to our network. We are encouraged that each of these trends is evident in the season-to-date pass sales results, which we believe supports our expected results for next year, as well as the expected long-term benefits of increasing guest lifetime value. The pass results exceeded our original expectations to the impact of the 20% price reduction. However, we still have the majority of our pass selling season ahead of us, and it is not yet clear if these trends will continue through the fall. In addition, we are very pleased that ongoing sales of the Epic Australia pass, which ends on June 15, 2021, are up approximately 43% in units through June 1, 2021, as compared to the comparable period through June 4, 2019, representing significant growth following the acquisition of Falls Creek and Hotham in April 2019. Given the recent COVID-19-related lockdowns in Victoria, Australia, we will be monitoring any impacts on the Epic Australia pass sales. Our commitment to reinvesting in our resorts and the guest experience remains one of our highest priorities. As previously announced this summer and fall, we will be completing several signature investments subject to regulatory approvals. In Colorado, we are moving forward with a 250-acre lift-served terrain expansion in the signature McCoy Park area of Beaver Creek, further differentiating the resort's high-end family focused experience. We also plan to add a new four-person high-speed lift at Breckenridge to serve the popular peak 7, replace the Peru lift at Keystone with a six-person high-speed chairlift and replace the Peachtree lift at Crested Butte with a new three-person fixed-grip lift. At Okemo, we plan to compete a transportational investment, including upgrading the Quantum lift from a four-person to a six-person high-speed chair lift and relocating the existing four-person Quantum lift to replace the Green Ridge three-person fixed-grip chairlift. These investments will greatly improve uplift capacity, further enhance the guest experience, and complete our $35 million capital plan for the season. We remain highly focused on investments that will further our companywide technology enhancements to support our data-driven approach, guest experience, and corporate infrastructure. As part of these efforts, we are continuing to invest in resources and technology to improve our customer service experience, including significant staffing increases in our call centers and self-service technology that will provide our guests the ability to better manage their own accounts. We will also continue to invest in ongoing maintenance capital to support infrastructure across our resorts. As we head into next year, we know that talent and staffing will be critical for our success, as it always is. And we have announced that we will be raising our minimum entry wages in Colorado, Utah, Washington, and California to $15 per hour while also making material increases in the entry wages of our Eastern resorts, which will be set based upon their local market dynamics. This will be our largest discretionary investment in operating expense this year, which we believe will be offset by a portion of other savings we will carry from this year into next year. I'm deeply grateful for the commitment our teams continue to demonstrate throughout these unprecedented circumstances.	vail resorts provides fiscal 2021 outlook. q3 earnings per share $6.72. net income attributable to vail resorts, inc. is expected to be between $93 million and $139 million for fiscal 2021. expect that resort reported ebitda for fiscal 2021 will be between $530 million and $570 million.
Participating on the call today are Aaron Ravenscroft, president and chief executive officer; and David Antoniuk, executive vice president and chief financial officer. However, actual results could differ materially from any implied or actual projections due to one or more of the factors, among others, described in the company's latest SEC filings. I was really pleased with our performance in the first quarter. Adjusted EBITDA and cash flow from operations exceeded our expectations. Frankly, this was accomplished in spite of a myriad of production and delivery issues created by the current supply chain and logistics environment, not to mention the ongoing challenges created by the COVID-19 pandemic. Nevertheless, the team persevered and delivered a very strong start of the year. In terms of orders, we were pleasantly surprised for the quarter. Our orders were up 26% versus the same period last year, and we ended the first quarter with a backlog of 663 million. The tower crane business was unusually strong during the period. I attribute this to three dynamics: First, certain European countries such as Italy implemented tax incentives to promote capital investments, which drove orders, particularly for self-erecting cranes. Second, we had several key dealers placed partial orders during the fourth quarter winter campaign due to economic uncertainties. As the economy reopened, these dealers placed follow-on orders in the first quarter. Lastly, as we implemented price increases to offset material cost increases, some dealers placed additional orders in advance of the price change. Unfortunately, however, the mobile crane business in Europe was not as robust and was more reflective of the cautious tones that we hear out of the EU. Net-net, we were genuinely surprised by the performance of the region during the first quarter. Moving east, we continue to feel good about the general activity in the Middle East and Asia Pacific. The project pipeline in the Middle East is encouraging. And China, South Korea, and Australia posted strong bookings during the quarter. Finally, I wanted to end in the Americas to ensure that nobody jumps to conclusion that our total performance for the quarter was reflective of a significant change in the U.S. market. The order increase in North America was high single digits, which is great news, but we remain tempered with our outlook on the U.S. market. The signals that we see in the marketplace don't necessarily match all of the positive information that you see in the news these days. Clearly, the vaccine news is positive, and there is a lot of speculation around the U.S. infrastructure bill. However, the major crane rental houses are still holding tight to the purses. Big oil companies are still cautious to invest even as oil is back above $60. And on top of that, used equipment prices still remain depressed. Finally, when I look at our dealer inventory levels and consider their orders that are on the books, I would say that our dealer network is well positioned to seize the opportunity for an uptick in business. So we have a measured view of the North American crane market. Given the volatility of the trade market, it's essential for us to keep investing in the Manitowoc Way to continuously improve the flexibility of our operations. As I mentioned, demand for self-erecting tower cranes has been surprisingly strong over the last two quarters. In order to meet customer demand, our team in Niella, Italy is in the process of executing several kaizens to increase our production by 30% with minimal capital investment. Using standard of work, the team will rebalance the main assembly line and create a few offline production cells to ensure that we can meet the overall tax time. In terms of capital investment, we will install a couple of manipulators, but really, this is much about improving safety as it is about increasing productivity. As always in lean, a little elbow grease and creativity can take us a long way in meeting our unpredictable spikes in the crane business. With that, I'll pass it to Dave to provide details on our financial results. Let's move to Slide 4. Our first-quarter orders totaled $474 million, an increase of 26% compared to $375 million of orders in the same period last year. On a currency-neutral basis, Q1 orders were up $78 million or 21%. Orders improved in all of our segments, driven by pockets of higher customer demand within each region. Our March 31 backlog of $663 million was better by 27% over the prior year and up 23% on a currency-neutral basis. Backlog also increased across all of our segments with over 85% scheduled to ship within the next six months. Compared to year-end, backlog was up 22% and, on a currency-neutral basis, up 25%. Net sales in the first quarter of $354 million increased $25 million or 8% from a year ago. Stronger results in the EURAF and MEAP segments were partially offset by a decline in the Americas segment. Net sales were favorably impacted by 5% from changes in foreign currency exchange rates. On an adjusted basis, SG&A expenses increased by approximately $1 million year over year. The increase was primarily driven by unfavorable foreign exchange rates, higher short-term incentive compensation expense and increased insurance and legal costs, mostly offset by a decrease in marketing and travel expenses. As a reminder, the 2020 marketing expenses were higher due to the Triennial CONEXPO trade show. Our adjusted EBITDA for the first quarter was $21 million, an increase of approximately 29% year over year. Higher volumes and a favorable product mix drove the year-over-year increase. As a percentage of sales, adjusted EBITDA margin improved to 6%, an improvement of 100 basis points over the prior year primarily due to leveraging of our fixed costs over a higher sales volume. First-quarter depreciation of $10 million increased $1 million compared to the prior year, reflecting the higher level of capital expenditures in the second half of 2020. In 2021, we anticipate total capital expenditures between $35 million and $40 million, which includes the investment in our European rental fleet. As a reminder, the company has tax valuation allowances established for certain countries, and therefore, losses in those countries are not available to offset income tax expense in profitable jurisdictions. Our GAAP diluted loss per share in the quarter was $0.09. On an adjusted basis, diluted loss per share of $0.06 improved by $0.12 from the prior year, driven by increased operating income and partially offset by higher income tax expense. We generated $41 million of cash from operating activities in the quarter compared to a use of $79 million in the prior year. Capital spending in the quarter amounted to $8 million, of which $7 million related to the European tower rental fleet. As a result, our free cash flow in the quarter was $34 million. The primary driver of our positive cash flow was a net decrease in working capital. We ended the quarter with a cash balance of $159 million, an increase of $30 million from year-end. Our total liquidity as of March 31 was $443 million with no borrowings on our ABL. Please move to Slide 5. As I communicated last quarter, I see 2021 as a year of transition. The COVID-19 pandemic is long from over and in fact our crawler production was significantly impacted during the first quarter when a few of our colleagues at the Shady Grove campus tested positive for COVID. We took immediate action to protect our workforce and to minimize the possibility of spreading the virus, which resulted in a temporary shutdown of certain production areas. And in Pune, India, hospitalizations have recently spiked due to COVID, which has resulted in an oxygen shortage. We have temporarily closed our welding operations and effort to help conserve the local supply of oxygen for medical uses. Turning to the economy. As we predicted, the return to normalcy is creating a multitude of dislocations throughout the world supply chain. A quarter ago, the industrial world forecasted steel prices spiked in the first quarter and to capitulate as the year we're on and capacity was headed. Unfortunately, today, the general view is that steel prices will remain at high levels for the entire year. We expect to see costs for steel, logistics, and transportation increased as much as $30 million year over year. We are raising prices to mitigate the impact, but there is always a lag between raw material lead times and the effective date of the price increase. The second major complication is the semiconductor chip shortage, which has created significant issues throughout our supply base. For example, the shutdowns in the heavy-duty truck industry will impact our boom truck shipments during the second quarter. So while we feel positive about order and backlog trends, we are nervous about inflation and the likely supply chain complications. In light of this and other headwinds that we discussed on our last call, such as insurance increases, short-term incentive plans, and nonrecurring COVID relief benefits, we anticipate our year-over-year contribution margins to be lower than normal in the second half of 2021. With that, we are introducing full-year 2021 adjusted EBITDA guidance of $90 million to $105 million. Please move to Slide 6. Looking beyond 2021, though we still have some questions about how the European tower crane market may cycle. We generally believe that momentum is building in the overall global crane market. Moreover, we believe that our four strategic initiatives will put us in a strong position to take advantage of the cycle. 1, our European tower crane rental fleet strategy is on track. During the first quarter, we invested approximately $7 million in capex on this initiative, with most of these cranes already rented and in service. We plan to expand the fleet by another $8 million during the year. 2, our Chinese tower crane business continues to move forward. We just launched a fourth new model designed by our China team, the Proton MCT 138. More than 100 customers visit our factory for this product launch and the customer feedback was excellent. While this strategy helps grow our position in China, it also permits us to grow our market share in the Belt and Road regions. 3, in our altering crane business, we are investing an additional $4 million during 2021 in an effort to fill in product gaps. While several of these new cranes will be launched at Bauma next year, this is a five-year strategy. Over the last three years, the main focus of our engineering team and the AT business was to improve our quality on legacy machines while updating designs to meet regulatory requirements, such as Tier 5 emission standards among a few others. It's a nice change in pace to refocus our attention on innovation. In addition, I'm very pleased to speak publicly about Grove Connect. This is a remote diagnostic technology that our engineering team picked off during the fourth quarter. We are currently testing it and expect to launch the first phase of this new technology by the end of this year with additional capabilities to follow. Adding Growth Connect to our all-terrain cranes will significantly improve the serviceability of these complex machines. 4, last but not least, we continue to pursue acquisition opportunities that will drive substantial long-term growth. In closing, the team has performed well under very difficult conditions. As we stated several months ago, 2021 will be a year of transition as the economy and our supply chain normalizes. We will continue to lean on The Manitowoc Way to guide us through these challenging times. Concurrently, we are confident that our four-point growth strategy will improve our ability to deliver greater value to our customers while generating greater long-term returns for our shareholders.	q1 adjusted loss per share $0.06. q1 loss per share $0.09. initiating full-year 2021 adjusted ebitda guidance of $90 million to $105 million.
Participating on the call today are Aaron Ravenscroft, our president and chief executive officer; and David Antoniuk, executive vice president and chief financial officer. However, actual results could differ materially from any implied or actual projections due to one or more of the factors, among others, described in the company's latest SEC filings. During our last call, I outlined Manitowoc's three key priorities for managing through the COVID-19 pandemic, which are: one, manage the health and safety of our employees; two, strengthen our balance sheet; and three, position the company for long-term growth. Orders for the quarter were $390 million and frankly, much stronger than we had anticipated. This laid the groundwork for us to increase our factory production in certain facilities where we had an aggressive shutdown plan and allowed us to deliver on a strong quarter. We generated $21 million of free cash flow during the quarter and ended the quarter with $101 million of cash on hand. Our total liquidity of $397 million at the end of September positions us well for the cyclical nature of the Crane business and to execute on our strategic growth initiatives. With that, I'll ask Dave to take us through the details of the financial results, and I'll close with some more color on the market outlook and our strategy. Let's move to Slide 3. Our third-quarter orders totaled $390 million, an increase of 10% compared to $353 million of orders last year. The year-over-year increase was driven by improved crawler crane demand in the Americas segment, partly offset by declines in other product lines due to the continued effect of COVID-19 on our end markets. In addition, we secured a couple of large mobile crane project orders in the MEAP segment, which contributed to the year-over-year increase. Favorable changes in foreign currency exchange rates positively impacted our year-over-year orders by approximately $6 million. The book-to-bill in the quarter was $1.1 million. Our third-quarter ending backlog of $465 million was essentially flat over the prior year and up $35 million or 8% on a sequential basis. Improved backlog in the MEAP and EURAF segments were fully offset by a decline in the Americas. On a currency-neutral basis, backlog decreased 4% year over year. Net sales in the third quarter of $356 million decreased $92 million or 21% from a year ago. market for most mobile crane products during the first half of the year due to the impact from COVID-19, resulting in a lower shippable backlog entering the quarter. Net sales were favorably impacted by approximately 2% from changes in foreign currency exchange rates. Our aftermarket revenue in the quarter declined slightly over the prior year. Gross profit decreased $23 million year over year, mainly driven by the lower volume in the Americas. Gross profit percentage decreased to 140 basis points to 18% from the same period in 2019, primarily due to the impact of lower production levels. Third-quarter engineering, selling, and administrative expenses of $50 million decreased by approximately $5 million year over year. The decrease was primarily due to lower employee-related costs, including short-term incentive compensation costs and reduced discretionary spending. As a result, third-quarter adjusted EBITDA amounted to $25 million or 7% of net sales. Our flow-through on the year-over-year sales decline was approximately 19%, reflecting excellent performance in managing our costs in this uncertain environment. Restructuring costs in the quarter totaled $4 million and were mainly due to headcount reductions in the Americas. Our GAAP diluted earnings per share in the quarter was a loss of $0.01 per share versus income of $0.51 per share in the prior year. On an adjusted basis, diluted earnings per share was income of $0.10 compared to $0.54 in the comparable period. The primary driver of the lower adjusted diluted earnings per share was the impact of reduced year-over-year sales volume. In the third quarter, we generated $28 million of operating cash flows, which was primarily driven by a reduction in working capital of $19 million. On a currency-neutral basis, we reduced inventories by approximately $18 million during the quarter. We continue to closely manage our working capital needs to current demand levels and remain on track to achieve our planned $80 million inventory reduction on a currency-neutral basis. During the third quarter, total liquidity increased approximately 12% from a year ago. In the quarter, we repaid the $50 million draw on our ABL facility and ended the period with zero borrowings on our ABL facility. Our liquidity remains sufficient to meet our obligations for the foreseeable future. Additionally, we do not have any significant debt maturities until 2026. And as stated in previous calls, our 2019 debt agreement simplified and eased covenant compliance, affording us greater flexibility to access our liquidity. Our net debt leverage ratio is 2.6 times, providing us with sufficient runway to deploy capital for growth initiatives. Due to the significant uncertainty regarding the impact that COVID-19 would have on our end-market demand and supply chain, on March 27, 2020, we suspended guidance for 2020. Although significant uncertainty continues to persist in the markets we serve, our line of sight to fourth-quarter results have improved. Accordingly, our forecast for revenue is between $425 million and $450 million and between $18 million and $23 million for adjusted EBITDA. Please move to Slide 4. The third quarter was a refreshing recovery from the steep decline that was experienced in the first half of the year, but we are not out of the woods yet. The COVID pandemic continues to create uncertainty and industry confidence remains weak. In the Americas, we still face headwinds, including COVID, presidential election dynamics, challenging oil prices, and elevated dealer inventory. Demand for crawler cranes has been better. However, when speaking to our customers and dealers, the consensus is that we won't see a broad recovery until mid-2021 at the earliest. In Europe, we saw good orders during the third quarter, reflecting a bounce back after business grounded to a halt in the second quarter, although looking forward we are most concerned with this region. The recent spike in COVID cases is weighing heavily on the general sentiment, even more so than in the United States as certain countries have implemented severe lockdowns. And if you recall, the tower crane business in this region was already cycling down before COVID hit. In MEAP, I would describe customer sentiment as mixed. China and South Korea have been relatively strong for us in 2020, and we've landed a couple of nice sized projects in the Middle East. That said, we have to see structural improvements in the Middle East economies that would give us confidence that a sustainable recovery is imminent. Southeast Asia and India remain very slow. Lastly, while Australia has been strong throughout the summer, we have seen some signs of a slowdown as the geopolitical situation with China evolves. There is no question that we are operating in unprecedented times. While we continue to manage the business closely during these challenging market conditions, we are also proactively taking actions to accelerate our growth when the market recovers. Our investment in new product development remains on track, and we are developing new strategies to get closer to our customers to grow the business. This slide breaks down the different revenue streams that are derived from a tower crane. Historically, we've primarily focused on the sale of new cranes, which serves us well in markets where we have strong distributors and partners. However, there are certain geographic territories such as Germany, where some of our partners don't have the balance sheet to take advantage of rental fleet of large top-slewing tower cranes. In addition, large international construction companies rely on crane rentals to help manage their fleet, and they are beginning to shift their preferences to rent from OEMs as part of bundled deals. Beyond the obvious benefits of having a rental fleet to run cranes, this business model helps facilitate greater service revenue and use equipment sales. Moreover, many customers prefer to rent a crane for two years to work down the acquisition price prior to the actual purchase. We see this approach as an opportunity to diversify our revenue streams and generate attractive returns in markets where we have opportunity to grow our share. We quietly trialed this initiative during 2020 with good success and intend to expand this initiative in 2021. We will continue to share more on this initiative as it matures. But we want to give you some insight on how we are changing our mindset around growth. In closing, improvement in our financial performance in the current down market is proof that we have created a sustainable stand-alone crane company. We have significantly transformed our cost structure with the implementation of the Manitowoc Way. Over the next five years, we will need to approach growth with the same rigor that we attacked safety, quality, and cost over the last five years. We will continue to utilize the Manitowoc Way as our platform for driving our company culture. We believe there are plenty of opportunities for organic and inorganic growth in segments of the crane business that are less volatile and offer a better margin profile.	q3 adjusted earnings per share $0.10. q3 loss per share $0.01.
Participating on the call today are Aaron Ravenscroft, president, and chief executive officer; and Dave Antoniuk, executive vice president, and chief financial officer. However, actual results differ materially from any implied or actual projections due to one or more of the factors, among others, described in the company's latest SEC filings. And with that, I will now turn over the call to you, Aaron. Clearly, in retrospect, the economic dislocations created by our return to normal were far greater than anyone anticipated. That being said, 2021 was a year of transition for Manitowoc on multiple fronts. While we bounced back operationally from the COVID shutdowns, we also made significant changes in our strategic orientation. As we laid out a year ago, we continued to build out our tower crane business and the [Inaudible] regions, launching two locally designed cranes. We accelerated our all-terrain new product development, which will bear fruit at the upcoming BAUMA trade show this October. We invested $15 million in our tower crane rental fleet in Europe, which helped us increase our market share in Germany and win some strategic orders with key accounts. And finally, we completed two acquisitions in North America, which lays the groundwork for us to grow our aftermarket presence in the local mobile cranes market. And currently, we continue to make progress on our ESG journey and more traditional safety terms. The team doubled our hazard observations that we call SLAMS, and our recordable injury rate, excluding acquisitions, was 1.39 for the year. While our RIR was up slightly year over year, it is still well below the industry benchmark, and I am very pleased with our performance in the face of the previous year. On the sustainability front, we implemented [Inaudible], a tracking system to help us account for our environmental footprint, and we are utilizing the Manitowoc Way to drive continuous improvement. For example, we assembled a global team to collaborate on paint booth emission reductions and have already begun to realize benefits. As for diversity, we've been leaning and hard on this initiative to help offset our labor shortages. Namely in Shady Grove, we implemented our first ESL program to help attract Spanish-speaking members of our community, and we have begun to offer relocation incentives to nearby cities such as Philadelphia to attract employees to our internal welding and machining schools. With respect to our balance sheet, we continue to position the company for long-term growth. After investing $40 million in capex and $186 million on two acquisitions, we closed the year with $75 million of cash on hand and $250 million of liquidity. Considering the difficulties of managing working capital in the current environment, I'm comfortable with where we ended 2021. For sure, the economic dislocations created by the return to normal were far greater than we anticipated a year ago, and I am extremely appreciative of all hard work by our team to minimize inflation as best as we could, implement price increases, and manage parts shortages while executing our long term strategy. Specifically, I would like to recognize Jim Glenwright and Sebastian Maleigh, who recently won the CEO award for the Manitowoc Way. In the midst of all of the economic chaos of 2021, Manitowoc encountered a cyberattack in June. Jim led our effort to restore our IT system all at the same time continue to implement a new ERP system for MGX Equipment Services. Meanwhile, across the pond, Sebastian earned his award for his contributions to the continuous improvement of our manufacturing processes and our tower factories. He led projects to implement an automated tube cutting machine and move on while kicking off another significant machining project in our [Inaudible] factory. I'm very proud of the commitment and passion of our employees at Manitowoc, and these two leaders truly represent the spirit of The Manitowoc Way. Finally, I am pleased to announce that our changes on the factory won our annual Manitowoc Way Lessons Learned competition for 2021. The Welding Value Stream and services support teams developed a homemade robot for welding mass rod bars. Through ingenuity, the team built a robotic [Inaudible] for less than $10,000 to buy the same machine when it costs 10 times as much, and it would not have been specifically designed for the job at hand. Turning to the financials, I would like to add a little color to our recent performance. Generally, the story on demand remains consistent with the last couple of quarters. Every region and every product category is doing well, except for the China market. Orders for the quarter totaled $615 million and our backlog ended the year just over $1 billion, our highest level in over 10 years. This was driven by continued solid activity in our end markets, rebounding customer sentiment, and improved dealer stocking levels. Looking at the P&L, I have to admit I was very surprised by how we ended the year. Inflation, part shortages, and logistical problems have been a serious issue for us for over six months, and unfortunately, they are creating a really volatile situation when it comes to predicting short-term results. On the back of third soft third quarter shipments during October and November, periods were $75 million lower than our internal forecasts. And as we entered December, vessels continued to be postponed while at the same time Omicron was spreading around the world. Much to our surprise, we were fortunate in the last couple of weeks of the year and received several key parts shipments, which enabled us to complete several cranes. In fact, we cut back over $25 million of shipments during December, which was nothing short of the heroic effort by our operations team. This, combined with tighter cost management and payroll mix, helped us deliver a healthy EBITDA of $34 million in the fourth quarter. Dave will officially step down as the CFO on May 2nd, at which time Brian Regan will assume the CFO role. Dave will, however, remain with Manitowoc Way advisory role until January 2, 2023. Dave has played an integral role in Manitowoc's evolution since 2016. He led us through the difficult times after the Foodservice business spin-off. He renegotiated our debt in 2019. And finally, he shepherded our recent acquisitions. Dave, it's been my pleasure working alongside of you for the last six years. We wish you the absolute best in the next phase of your life. the team wanted you to end on a high note. Please provide color on the fourth-quarter financial results. It's been an honor and a privilege to work with you over the past six years. The many thought-provoking questions and comments surely challenged my thinking for the betterment of Manitowoc. Now moving to our results for the quarter, which ended the year on a considerable high note. Please move to Slide 4. Our fourth quarter orders totaled $650 million of the book-to-bill of 1.24 and an increase of 21%, compared to $509 million of orders last year. The increase in orders was primarily due to higher global demand. Orders were unfavorably impacted by approximately $13 million from changes in foreign currency exchange rates. Our 2021 ending backlog of $1 billion was up 86% over the prior year and is at its highest level in over 10 years. The increase in backlog was across all segments and primarily due to higher global demand and lower than expected shipments in the fourth quarter due to supply chain challenges and logistic constraints. Backlog was unfavorably impacted by approximately $40 million from changes in foreign currency exchange rates. Net sales in the fourth quarter of $498 million increased $68 million, or 16% from a year ago. The incremental net sales from acquisitions in the quarter were $24 million, slightly below the $30 million we communicated in the prior quarter. Net sales were unfavorably impacted by approximately $9 million from changes in foreign currency exchange rates. SG&A costs are up $24 million. Due to confidential negotiations with the EPA, we are unable to provide any further updates at this time. Our acquisitions increased SG&A costs by $8 million in the quarter and the remainder of the increases were primarily inflation-related. Our adjusted EBITDA for the fourth quarter was $34 million flat year over year. The acquisitions accounted for approximately $3 million during the quarter, which was in line with our expectations. As I discussed last quarter, the Q4 adjusted EBITDA from the acquisitions was impacted by the elimination of intercompany profit and ending inventory. We expect the impact of the elimination of intercompany profits to be nominal going forward and target approximately $30 million on an annual basis from the acquisitions. As a percentage of sales, the adjusted EBITDA margin decreased to 6.9%, a reduction of 100 basis points over the prior year. The decrease in margin was primarily due to the price cost dynamic in the quarter. Income tax expenses in the quarter were $1.2 million, this was primarily driven by the jurisdictional mix of earnings, partially offset by a one-time tax benefit. Our GAAP diluted loss per share in the quarter was $0.10 a decline of $0.15 over the prior year. On an adjusted basis, diluted earnings per share increased $0.8 from the prior year to $0.27 per diluted share, primarily driven by lower income tax expense in the quarter. Now I will recap the full-year financial results. Orders total roughly $2.2 billion, up to $655 billion dollars, or 43% from the prior year. Foreign currency exchange rates impacted 2021 orders favorably by approximately $32 million. Net sales for the year totaled approximately $1.7 billion. A 19% increase from 2020 and were positively impacted by $31 million due to favorable changes in foreign currency exchange rates. The year-over-year increase was primarily due to higher global demand. As 2020 was significantly impacted by the COVID-19 pandemic. Our adjusted EBITDA improved by $33 million, or 40% from the prior year. Moreover, our adjusted EBITDA margins improved by 90 basis points to 6.7%. Our full-year 2021 adjusted net income was $31 million compared to a net loss of $12 million in 2020. We generated $76 million of cash flows from operating activities in the year, an increase of $111 million year over year. We spent $40 million in capital expenditures, which resulted in $36 million of free cash flows and an improvement of $97 million year over year and ahead of our expectations. We ended the year with a cash balance of $75 million, a decline of approximately $64 million year over year. As a reminder, we paid $186 million for the acquisitions using available cash, along with borrowing $100 million from our ABL credit facility. Our total liquidity on December 31, 2021, remained strong at $254 million. As most of you know, our current notes are callable on or after April 1, 2022, at a price of 104.5%. As I mentioned at our Investor Day on December 13, we continue to opportunistically look at our debt as the debt markets for new sources of capital or to reduce our total cost of capital. Our 2022 guidance assumes that our current capital structure will remain in place for the full year. As we look ahead to 2022, we expect continuing global supply chain and logistic challenges, moderation in inflationary pressure, and an unstable labor market throughout the first half of the year. In the second half of the year, we anticipate an improved price cost dynamic and a stabilizing supply chain, logistics, and labor market. Based on this outlook, our 2022 guidance is as follows. Net sales are approximately $2 billion to $2.2 billion. With regard to SG&A, it is important to note that our adjusted SG&A expenses for the year are expected to increase approximately 21% of which approximately $32 million is from acquisitions. Our adjusted EBITDA guidance is approximately $130 million to $160 million. Depreciation and amortization of approximately $65 million. Interest expense is approximately $28 million to $30 million. Provision for income tax expense approximately $13 million to $17 million. Adjusted diluted earnings per share approximately $0.65 to $1.35. And capital expenditures of approximately $85 million. With our recent acquisitions and growing rental fleets, I think it's worth taking a moment to discuss how these initiatives will impact our capital expenditure investments. As we have discussed before, oftentimes a crane is rented for two years and then sold after the acquisition value has decreased. As such, there is always a certain level of churn in a rental fleet. As we sell use machines, we will replenish the rental fleet with the proceeds. We expect this to be approximately $35 million in 2022. In addition, we are still growing our rental fleets strategically to support RPOs and market share growth and target markets such as the German Tower Crane Market. This capex investment will approximate $25 million in 2022. The remaining $25 million of capex will be for a normal factory capex. Please keep in mind that the management of our rental fleet and the related capex is far more dynamic than the traditional manufacturing capex. It is heavily dependent upon opportunistic sales transactions. In certain instances, capex could be generated by an unexpected sale of a crane that is on rent, which will likely need to need to be replaced. In other instances, capex can be generated by an RPO opportunity, which can be multi crane deals. Let's move to Slide 6. As we begin in 2022, our strategy remains unchanged and underpinned by our four strategic initiatives. We will continue to look for attractive acquisitions to help accelerate these initiatives, and we will opportunistically evaluate our capital and debt structure to help ensure that we have the necessary flexibility as the US economy faces increasing interest rates. Adding a little more clarity and focus to our strategy, I am pleased to announce our vision for aftermarket, which we call Cranes Plus 50. Our goal is to increase our aftermarket or non-new machine sales by 50% over the next five years. Historically, our business model has been highly product focus. Our objective is to grow beyond machines and products and to sell more aftermarket parts, field service, lifting solutions, RPOs, rentals for fleet management, used sales, remanufactured cranes, and digital solutions that provide greater customer connectivity. As a jumping-off point, we ended 2021 with $449 million in non-new machine sales, which will be outlined in our 10-K filing. In closing, Manitowoc continues to strive to get closer to our customers and to grow our less cyclical and higher-margin revenue streams. We continue to reposition the company for long-term growth while we weather the near-term economic storm. We are confident that our investment in our four growth initiatives will allow us to deliver on our Cranes Plus 50 strategies and increase our non-new machine sales by 50% over the next five years, which we believe will fuel greater long-term returns for our shareholders.	compname reports q4 loss per share of $0.10. q4 adjusted earnings per share $0.27. q4 loss per share $0.10. sees 2022 net sales about $2.0 billion to $2.2 billion. sees 2022 adjusted diluted earnings per share about $0.65 to $1.35.
Today's call will be led by Chief Executive Officer, Doug Dietrich and Chief Financial Officer, Matt Garth. And I'll also point out the Safe Harbor disclaimer on this slide. Statements related to future performance by members of our team are subject to these limitations, cautionary remarks, and conditions. We appreciate you joining today's call to discuss our first quarter 2021 results, and I hope you're all staying safe and healthy. I'll take you through the sales and operating highlights of our strong start to the year and touch on current market trends. I'll finish up the call today by outlining the progress we're making with a broad range of growth initiatives. Last year, our teams throughout the world, worked hard to efficiently operate our facilities, to protect our employees, serve our customers, and simultaneously position us to capitalize on the recovery. As a result of these actions and our continued focus on responding to this dynamic environment, we're well positioned to leverage the momentum from the end of the year to deliver a strong first quarter. Before going through the quarter highlights, I wanted to share that we will be discussing our business results today in three operating segments rather than four. I'll take you through this further when I speak about our growth highlights. Our first quarter performance was highlighted by sales and operating growth in every segment. Specifically, we drove solid geographic growth in our core product lines, increased volumes through capacity expansions and new PCC satellite start-ups, and improved sales from recently commercialized value-added products. In addition, we continued with our proactive operational measures including pricing and productivity improvements and overhead cost control, all of which drove income and cash flow higher compared to last year. Demand in many of our major end markets continued to trend upward. Several of our markets recovered to pre-COVID levels. These dynamics helped drive sales of $453 million, an increase of 5% sequentially and up 8% compared to last year. Generated $59 million of operating income and earnings per share of $1.17, up 4% and a record first quarter earnings per share for our company. In addition, cash from operations and free cash flow were up 68% and 142% respectively over last year. As we discussed on our earnings call in February, we expected the demand conditions in our end markets would continue to strengthen through the first quarter and that's how conditions played out. Consumer-oriented markets such as Pet Care, Fabric Care, and food and pharmaceutical remained robust through the first quarter, continuing our growth trajectory. Automotive and residential construction markets remained strong. Steel markets further improved from the fourth quarter with utilization rates reaching close to 80% in the US, and our paper end markets continue to rebound from a slow 2020. Project oriented businesses including Environmental Products and Building Materials are recovering and indications point to continued improvement through the second quarter. These mostly favorable end market conditions drove sales growth across the majority of our product lines. Performance Materials, sales in our Household Personal Care and Specialty business increased 14% driven by our Global Pet Care platform, but also double-digit increases in other specialty applications that we've been investing in to enhance our technology and manufacturing capabilities, including Fabric Care, Personal Care and edible oil purification. Metalcasting business performed well, as sales grew 32% driven by strong demand in both North America and Asia from foundries serving automotive, heavy truck, and agriculture markets. In both regions, improved foundry conditions that we saw in the fourth quarter maintained that trajectory through the first. Specifically, Metalcasting sales in Asia were up 52% over 2020 with much of this growth coming in China. Penetration of our blended products has also accelerated in China, and sales increased 62% compared to last year. In addition, we continue to extend our value proposition with customers beyond China. Last quarter in India, which is this -- which is the second largest casting market globally, sales of our blended products were up 21% over 2020. Within our Specialty Minerals segment, our Specialty PCC business had another strong quarter with sales up 17% over last year. Our new capacity expansions are supporting increased customer demand for our food and pharmaceutical and high performance sealant products. In addition, we benefited from exceptionally strong demand, higher than usual in a first quarter for our Ground Calcium Carbonate and Talc products that serve the automotive and residential construction markets. Paper PCC sales increased 5% driven by improving end market conditions and the ramp up of new satellites. In fact, the net of the mill closures over the past year, the new capacity additions that occurred in 2020, paper PCC volumes this quarter were slightly above the first quarter of 2019. Finishing up our sales highlights, our refractory segment had a great quarter with sales increasing 7% over 2020 and margins remaining at 16.2%. This was achieved despite lower laser equipment sales, commissioning of new orders continues to be difficult due to COVID travel restrictions. We also had a solid operating quarter. Our performance reflects our team's disciplined execution with managing costs, implementing pricing measures, and driving productivity improvements. As a result, margins expanded across the majority of our businesses. Strategically implemented price increases across our portfolio, these increases have fully offset the higher raw material, energy, and logistics costs we are beginning to see. Our margins dipped slightly for the company as a whole this quarter, this was primarily due to higher corporate expenses. We see margins above 14% in the second quarter, and have the potential to move higher toward the second half of the year with continued improvement across our businesses. I will review our first quarter results, the performance of our segments, as well as our outlook for the second quarter. Now let's begin by reviewing the first quarter results. Overall sales in the first quarter were 5% higher sequentially and 8% higher than the prior year as the majority of our end markets remained strong and each of our segments grew sales versus the prior year, now that we combined the Energy Services segment into environmental products within the Performance Materials segment this quarter. Operating income was $58.8 million or 1% higher than the prior year. As Doug mentioned, operating margins improved across the majority of our businesses as shown in the margin bridge on the bottom right of this page. However, a few discrete items impacted our overall margin in the quarter. First, our Environmental Products and Building Materials businesses have yet to experience a meaningful recovery due to ongoing project delays and COVID related restrictions. Lower contribution from these businesses had an unfavorable impact on our margin of approximately 80 basis points in the quarter. Second, while our underlying corporate expenses were stable, we experienced higher than usual mark-to-market adjustments related to the change in stock price during the quarter. This is a normal adjustment we make every quarter, and we are calling it out today because of the size of the variance, which was approximately $3.5 million year-over-year. Adjusting for these impacts, the rest of MTI grew operating margin by 60 basis points over the prior year. Continued pricing actions more than offset inflationary cost pressures on raw materials, energy, and logistics. In addition, we continue to drive productivity with a 6% year-over-year improvement in the number of hours worked per ton. Going forward, we expect operating margin to expand as our project oriented businesses recover and corporate expenses return to a more normal level. Earnings per share of $1.17 was a record for our first quarter, and was 4% above prior year and 8% above the fourth quarter, excluding special items. Our effective tax rate for the quarter was 18% and we expect our full year effective tax rate to be approximately 20%. Now let's review the segments in more detail starting with Performance Materials. First quarter sales for Performance Materials were $230.9 million, 5% higher sequentially and 9% higher than the prior year. Metalcasting sales increased 6% sequentially and 32% versus the prior year as foundry demand remained strong in both North America and China. Household, Personal Care, and Specialty product sales increased 7% sequentially and 14% versus the prior year on double-digit growth across several consumer-oriented product lines. Building material sales grew 11% sequentially and were 18% lower than the prior year as project activity started to increase late in the first quarter. Meanwhile, environmental products moved through a challenging quarter with sales down 4% sequentially and 29% versus the prior year. Operating income for the segment was $29.8 million, 9% higher than the prior year. Operating margin was 12.9% of sales, at the same level as the prior year. Just as a note, these results include the consolidation of energy services into the segment. Operating margin was impacted sequentially by seasonally higher energy and mining costs. I'd like to take a moment to provide some insight on the strength of the margins in this business. Excluding Environmental Products and Building Materials, which had a weaker quarter than last year, operating margins for the rest of this segment were above 15% in the quarter. As our project oriented businesses recover, we expect overall segment margins to improve accordingly. And looking to the second quarter, we expect continued strength in household and personal care with some leveling off from a strong start to the year. Meanwhile, the Environmental Products and Building Materials product lines are seeing signs of recovery as more of the types of projects that we serve are getting under way. Now overall for the segment, we expect a strong second quarter with sales at similar levels to the first quarter. We also expect operating margin to improve on a sequential basis, primarily due to incremental contribution from our project oriented businesses, continued pricing actions, and continued productivity. Now let's move to Specialty Minerals. Specialty Mineral sales were $147.8 million in the first quarter, 6% higher sequentially and 8% higher than the prior year. Paper PCC sales were 8% higher sequentially and 5% higher than the prior year, as paper mill operating rates continue to improve and all regions grew sales sequentially. In addition, ramp ups continued for our three new Paper PCC satellite plants in China, India and the United States. Specialty PCC sales increased 4% sequentially and 17% versus the prior year as automotive, construction, and consumer demand remains strong. Process Mineral sales increased 5% sequentially and 10% versus the prior year on strength in residential construction and automotive markets. Segment operating income was $21.1 million, 4% higher than the prior year. Operating margin was 14.3% of sales, and was temporarily impacted by seasonally higher energy costs. Looking ahead to the second quarter, we expect continued strength in specialty PCC and processed minerals. Second quarter is typically a seasonally stronger quarter for these product lines as construction activity ramps up. However, the seasonal dynamics may play out differently this year given the strong start we saw in the first quarter. We expect Paper PCC demand to remain steady, and our new satellites will continue to ramp up. We expect a temporary impact on volumes as North American paper makers take their typically scheduled maintenance outages in the second quarter. Now overall for the segment, we expect second quarter sales to be similar sequentially, and we expect higher margin on more favorable operating conditions and continued pricing actions. Now let's turn to the Refractories segment. Refractory segment sales were $73.9 million in the first quarter, at same level as the fourth quarter, and 7% higher than the prior year, as continued improvement in steel mill utilization rates was offset by fewer laser measurement equipment sales compared to the fourth quarter. Segment operating income was $12 million and represented 16.2% of sales compared to 15% in the fourth quarter and 16.2% in the prior year. Mill utilization rates improved to 78% in North America and 72% in Europe in the first quarter, up from 75% and 70% respectively in the fourth quarter. And looking ahead, we expect the second quarter to be similar from a market perspective. Note that there are several customer furnace relines scheduled for the second quarter, and these relines [Phonetic] result in temporarily lower demand for refractory products. In addition while our laser equipment sales are typically weighted to the second half of the year, we're also facing delays on laser equipment installations and servicing during the ongoing COVID restrictions. And overall for the segment, we expect sales to be relatively flat on a sequential basis and operating margins to remain strong. Now let's take a look at our cash flow and liquidity highlights. First quarter cash from operations was $51 million versus $30 million in the prior year, and free cash flow was $33 million versus $14 million in the prior year. We deployed $18 million of capital during the quarter to grow the business, develop our mines, and improve our operations. We used a portion of free cash flow to repurchase $20 million of shares in the first quarter, and we have repurchased $37 million so far under our current $75 million program. The company is in a solid financial position with over $650 million of liquidity and a net leverage ratio of 1.8 times EBITDA. Our balance sheet strength provides us with significant flexibility for how we deploy capital to the most attractive opportunities. Now let me summarize our outlook for the second quarter. In Performance Materials, we expect continued strength across the segment with the recovery of our project oriented businesses, which will improve segment margins. Specialty Minerals, we expect similar market conditions and typical North American paper mill maintenance outages. Our new PCC satellites will continue to ramp up, including a new packaging satellite in Europe starting at the end of the first quarter -- second quarter, and our margin should also benefit from improved operating conditions and pricing. In refractories, we expect market conditions to remain strong with temporarily lower refractory products volume due to the timing of scheduled customer furnace relines [Phonetic]. And overall for the company, we expect second quarter sales to be similar to the first quarter. We see continued strength and recovery across our end markets and in particular our project oriented business should start to see meaningful increases in activity. The only area of uncertainty is the potential impact of semiconductor shortages that may temporarily impact automotive and steel market end demand. Now from an operating margin perspective, we expect to return to above 14% of sales as we continue to implement pricing actions, proactively manage inflationary cost increases, and drive productivity improvements. We also expect another quarter of strong free cash flow. In summary, we have the elements in place to deliver another strong performance in the second quarter. With that, I'll pass it back over to Doug to discuss the progress on our growth strategy. Before opening the call to Q&A, let's take a few minutes to highlight the progress we continue to make with our strategic growth initiatives. As I touched on earlier, our portfolio of consumer products which represents approximately 25% of our total sales, remains a key part of our growth strategy, and we delivered double-digit sales increases in these core business. We continue to see opportunities to organically grow them. Geographic expansion of our core product lines is one of our growth strategies and Asia is a key region for that growth. The first quarter sales in Asia increased 33% with all of our major countries contributing. It was driven by broad base of businesses, new PCC capacity coming online at our sites in China and India, continued penetration of our green sand bond products, and an expanding customer base in Fabric Care, Pet Care, and edible oil purification. Specific highlight in the quarter was our PCC growth where we signed a contract with buying paper for a 50,000 ton satellite in China, which should be operational in the second quarter of 2022. 200,000 tons of new production capacity that came online at the end of last year in China and India will further contribute to volume growth this year as they fully ramp up. We're also on track to commission two additional satellites this year totaling over 70,000 tons, one for our packaging application in Europe and another for a standard PCC plant in India. For the past several years, we've invested in developing new technologies for treating industrial waste water and other environmental water challenges. Our FLUORO-SORB product that addresses PFAS contamination is one example of these newer technologies. As I mentioned earlier, we realigned energy services into environmental products. With this combination, we will accelerate the deployment of these technologies, as we bring together the technical knowledge and capabilities in our current Environmental Products business with the high flow rate processing expertise that we've built in Energy Services. This new structure will improve collaboration and better align complementary technologies and capabilities to further drive growth. New product development is an integral part of our growth strategy and we've taken significant steps to improve the speed of execution, increase the number of products commercialized, and enhance the impact of our latest solutions. [Indecipherable] mention our new product pipeline, our total portfolio comprises over 300 products from early stage development to commercialization, representing around $800 million of revenue at full potential. This is an increase of about 30% compared to where we were two years ago. We continue to expand sales of our latest specialty PCC products which are supported by our capacity expansions. Specific to the first quarter, we launched several new bentonite based formulations for construction drilling applications. Acquisitions are also an important part of how we intend to grow and move MTI to a higher return, more balanced portfolio. Continue to see a strong pipeline of minerals based opportunities that align with our strategic initiatives, and we have the balance sheet strength and flexibility to pursue them. As always we'll maintain our disciplined approach to M&A. To summarize our call today, the COVID pandemic has challenged our normal ways of working, and higher virus rates continue to affect several of our regions. Our culture of connectivity and collaboration has enabled us to differentiate MTI with our customers, maintain our strong safety and operating culture. We'll continue to build on these strengths during 2021. Even though a few of our end markets are only now beginning to improve, we had a solid first quarter with strong momentum across the majority of our businesses. With favorable demand trends in our markets, our new technology launches, capacity additions, and continued strong operating performance, we have the elements in place to go from one of our most challenging years to one of our strongest. With that, let's open up the call to questions.	compname posts q1 earnings per share of $1.17. compname reports first quarter 2021 earnings of $1.17 per share. q1 sales rose 8 percent to $452.6 million. q1 earnings per share $1.17.
Today's call will be led by Chairman and CEO, Doug Dietrich; and Chief Financial Officer, Matt Garth. And I'll also point out the safe harbor disclaimer on this slide. Statements related to future performance by members of our team are subject to these limitations, cautionary remarks and conditions. I do appreciate you joining our call. We've got a lot to cover today. I want to take you through the highlights of a very strong quarter and discuss our acquisition of Normerica. Matt will then review our financial results in more detail and our expectations for the third quarter. Let me start with a recap of the quarter. Building on the momentum generated over the past few quarters, we delivered a strong second quarter with several financial and operational highlights that I'll take you through. First and foremost, this was a record quarter for our company with earnings per share of $1.29. This milestone reflects robust demand across our markets, strong operating performance by our team and continued execution on our growth projects. For perspective, many of our product lines have now reached or exceeded pre-COVID sales levels, but others still have room to improve. Let me give you a feel for how the demand trends, our performance and strategic initiatives across each of our segments led to these results. In Performance Materials, our Metalcasting business continues to perform very well with strong foundry demand globally and our broad portfolio of consumer-focused businesses and household personal care and specialty remained on their steady growth track. Specifically, sales in our personal care business nearly doubled as we introduced new private label skin care formulations and expanded partnerships with major retail brands. Another large contributor to the segment sales growth in the quarter was the rebound in project activity in both Environmental Products and Building Materials. Within our Specialty Minerals segment, we delivered another quarter of sales growth across all product lines. Paper demand continues to improve in all regions, and we're benefiting from the ramp-up of our new satellites. Paper mill operating rates in Normerica have reached nearly 95%. And to underscore the current supply and demand situation, one of our customers in Normerica recently announced plans to restart a mill to meet the increased demand. In addition, our Specialty PCC, GCC and Talc businesses benefited from a robust activity in consumer, automotive and residential construction markets. Our refractory segment also had an impressive quarter marked by steel utilization rates, which are now above 80%. We've also secured several new contracts, which will drive growth in the second half of this year and into next for both our refractory and metallurgical wire product lines. A combination of these positive trends and business development actions in our segments yielded sales of $456 million, with growth in every segment and geography. We drove these higher sales into operating income of $64 million, up 53% compared to 2020, and margins expanded to above 14% as we expected. Our team's disciplined operational execution through pricing actions, productivity improvements and strong cost control enabled MTI to deliver these results. We also navigated challenges related to increased input and logistics costs that accelerated during the quarter. Our global teams have done a great job maneuvering through a more dynamic supply chain environment, which includes navigating logistics challenges and energy and raw material inflation. We're well positioned to offset these costs with pricing actions that we've been effectively implementing across our portfolio, and Matt will discuss this more in his comments. Generating strong cash flow, further strengthening our balance sheet and maintaining flexibility with how we deploy our capital to the highest return opportunities are priorities for us. Through the first half of the year, cash from operations and free cash flow were both up 25% over last year. We've been using our cash flow to pay down debt and bolster our liquidity. And we finished the quarter with our lowest net leverage ratio in the past six years. In addition, we've continued with our returns to shareholders through our $75 million buyback program and anticipate fully completing the program under the authorized time frame. Financial strength also provides us the capability to pursue acquisitions as we have demonstrated with the purchase of Normerica. We advanced our growth initiatives this quarter, focused on new product development and geographic expansion. Let me highlight a few specific areas. On previous calls, we mentioned several positive trials and interest with our FLUORO-SORB product that addresses PFAS contamination in groundwater. And I'm pleased to share that during the quarter, we were awarded our first major sale for a large-scale project at a North American department of Defense location. The project has been going very well as FLUORO-SORB efficacy has been demonstrated commercially. We have several other similar type projects in our sales pipeline as well as for waste municipal wastewater treatment sites, and we have the manufacturing capacity and technical capabilities to pursue them and further grow sales. On the front, we are ramping up production at our new satellites in Asia, which came online at the end of 2020 and represent 200,000 tons of new capacity on an annualized basis. We have another approximately 130,000 tons of capacity coming online now through the middle of next year, including our 40,000 ton expansion for a packaging application in Europe, where we will begin realizing the volume benefit in the third quarter. We are finalizing the construction of our 40,000 ton satellite in India, which will start-up late next quarter, and we have also begun construction on a new 50,000 ton satellite in China, which should be operational in the first half of 2022. And finally, we announced the acquisition of Normerica this week, which I'll go through in a moment. To sum up the quarter, it was a very productive one with many positive highlights. We navigated through challenges over the past 18-plus months and created opportunities for ourselves on all fronts, has put our company in an advantageous position to continue to drive profitable growth going forward. As I mentioned on the previous slide, the exciting news this week is our acquisition of Normerica, and I wanted to spend time discussing who they are, why we pursued the transaction and how Normerica fits into our global Pet Carebusiness. Acquisitions are an important component of how we plan to grow and move MTI to a higher return, more balanced portfolio, and we've discussed our pipeline of opportunities that align with our strategic initiatives. Normerica was one of those opportunities as it continues to shift to a more balanced sales portfolio and aligns extremely well with our overall growth strategy in pet care. For background on Normerica, the company was founded in 1992, headquartered in Toronto, Canada, and is a leading supplier of branded and private label Pet Care products in North America. Normerica has a long history as a well-run company with an impressive track record of innovation, customer service and profitable growth. Product portfolio consists primarily of bentonite based cat litter products, which are manufactured in facilities in Canada and the United States. Normerica has about 320 employees, and in 2020, generated revenue of approximately $140 million. Let me give you some more details on the transaction and its rationale. The combination is highly complementary from a geographic, product portfolio, customer and operating perspective. Normerica's portfolio of branded and private label bentonite based cat litter products fits well within our North America business. In addition, Normerica's strategically located footprint throughout the U.S. and Canada, combined with our vertically integrated mine-to-market model, gives us a unique position in the cat litter market. We are now one of the largest vertically integrated private label pet litter providers globally with a strengthened position in North America. We see further benefits as we can provide enhanced value in terms of consistency and quality and are positioned to serve a broader customer base more efficiently. The purchase price for the transaction was $185 million on pre-synergy EBITDA of approximately $20 million. We will realize synergies from the transaction by leveraging our combined operational footprint and vertically integrated model and through the deployment of our business processes. On a post-synergy basis, we expect the transaction to be about 7.5 times EBITDA, similar to the Sivomatic transaction and earnings accretion to begin in the fourth quarter of this year. We expect to fully integrate the business, employees, systems and processes over the next few quarters, and accretion will ramp up to 5% to 7% on a full year basis in 2022. Let me step back and describe our existing Pet Care business. We've been profitably growing this business since the acquisition of Amcol in 2014. Our acquisition of Sivomatic in 2018 gave us a differentiated mine-to-market private label presence in Europe, Normerica is an extension of that private label growth strategy. Pet Care sector provides stable growth rates and attractive dynamics as domesticated cat ownership continues to rise globally. We are uniquely positioned to serve this market and have invested in expanding our vertically integrated capabilities and product portfolio globally. In addition, the strength and resiliency of our Pet Care business was demonstrated during the past year when demand was at an all-time high during a period when our businesses serving industrial markets were impacted. On the lower left of the page, you can see how our Pet Care sales have grown organically and inorganically since 2017. And with the addition of Normerica and Sivomatic, our Pet Care business has grown from $78 million to $350 million, and our household and personal care business is now the largest product line at MTI. This represents a significant shift in our portfolio toward noncyclical, consumer-oriented markets, positioning our company to drive growth rates above our historical averages, and we see opportunities to further balance our portfolio. In sum, Normerica is a great strategic fit with our company, and this transaction provides many compelling opportunities for growth and value creation. I'll review our second quarter results, the performance of our segments as well as our outlook for the third quarter. And now let's begin with the second quarter review. Sales in the second quarter were 28% higher than the prior year and 1% higher sequentially as demand remained strong across the majority of our end markets, and we started to see higher levels of activity in our project-oriented businesses. Operating income, excluding special items, was $64.1 million, 53% higher than the prior year and 9% higher sequentially. Operating margin improved from 13% in the first quarter to 14.1% in the second quarter. The sequential margin improvement played out largely how we expected as we benefited from the incremental margins of our project-oriented businesses, a more normalized level of corporate expenses and continued pricing actions and productivity, all of which helped to offset higher-than-expected inflationary cost pressures. As you can see in the operating income bridges on this slide, we saw higher costs in the second quarter. The higher costs were primarily driven by energy, logistics and certain raw materials such as lime and packaging. Our teams have done an excellent job managing through these challenges, and we are in the process of implementing additional price adjustments in the third quarter, which will help mitigate the impact on our margins going forward. In some cases, the price increases are contractual as with the pass-through arrangements in Paper PCC and in other cases, they are negotiated based on the value that our products provide. Meanwhile, we continue to control overhead expenses with SG&A as a percentage of sales at 11.3% versus 11.7% in the first quarter and 13.1% in the prior year. Earnings per share, excluding special items, was $1.29, a record quarter for the company and represented 52% growth above the prior year and 10% above the first quarter. Our effective tax rate for the quarter was 18.9%, excluding special items, and we expect our effective tax rate to be approximately 20% going forward. And now let's review the segments in more detail, starting with Performance Materials. Second quarter sales for Performance Materials were $238.4 million, 24% higher than the prior year and 3% higher sequentially. Metalcasting sales grew 52% versus the prior year as foundry demand remained strong in North America and China. Sales were relatively flat sequentially, and were only modestly impacted by the global semiconductor shortage, which caused a limited number of foundry customers to take downtime in the quarter. Household, Personal Care and Specialty Products, our most resilient product line last year, grew 17% versus a relatively strong prior year quarter. Demand for our consumer-oriented products has remained strong and growing, driven by continued new product development and expansion into new customer channels and geographies. We also saw higher volumes of our specialty drilling products, which are benefiting from a rebound in construction, infrastructure and oil drilling activity versus the prior year. Environmental product sales grew 6% versus the prior year and were 53% higher sequentially, driven by improving demand for environmental lining systems, water and soil remediation and wastewater treatment. As Doug mentioned, we also delivered on the first major commercialization of our FLUORO-SORB technology for PFAS remediation in the second quarter. Building Materials sales grew 17% versus the prior year and were up 12% sequentially on higher levels of project activity. In North America, we are seeing more commercial construction and infrastructure projects move forward. While in Europe, projects have been slower to advance as countries are still in varying stages of reopening. Operating income for the segment grew 55% from the prior year to $34.7 million and was 16% higher sequentially. Operating margin was 14.6% of sales versus 11.7% in the prior year and 12.9% in the first quarter as higher volumes and our strong operating performance drove incremental margin improvement. Now looking ahead to the third quarter. We see continued strength in household and personal care and foundry demand remained strong for Metalcasting, with lower volume sequentially due to seasonal foundry outages. Meanwhile, the pipeline for our project-oriented businesses, environmental products and building materials continues to improve in North America, and the current outlook for the third quarter looks strong. However, we remain cautious on some of our international projects given the potential for a slower reopening outside the U.S. due to COVID. I'd also like to note that we are seeing higher costs for the plastic and fabric components of our environmental and construction mining systems. While this presents some near-term margin pressure, we expect to fully offset these higher costs through the ongoing efforts of our supply chain team as well as through pricing adjustments. Overall, we expect another strong quarter for this segment with organic sales and margins at similar levels to the second quarter. In addition, Normerica is now part of the Performance Materials segment, and the acquisition will contribute two months of sequential sales growth to the segment in the third quarter. As Doug stated earlier, we expect modest earnings per share accretion to begin in the fourth quarter this year as we move through the integration period, ramping up to full run rate accretion over the next 12 months. And now let's move to Specialty Minerals. Specialty Minerals sales were $142.7 million in the second quarter, 30% higher than the prior year and 3% lower sequentially. Paper PCC sales grew 31% versus the prior year on recovering paper demand and the continued ramp-up of three new satellites. Specialty PCC sales grew 24% versus the prior year and higher demand from automotive, construction and consumer end markets. Overall, PCC sales were 5% lower sequentially, primarily due to temporary paper mill outages in India related to COVID-19 and the typical seasonal paper mill outages we experienced in North America. Process Mineral sales were 31% versus the prior year and 2% sequentially on continued strength in residential construction and consumer end markets. Operating income for this segment grew 31% to $20 million and represented 14% of sales. Inflation impacted this segment the most, primarily driven by lime and energy cost increases. We have been managing the impact with our supply chain team, and we have been adjusting pricing throughout the first half of the year accordingly. We expect the inflationary cost environment to continue, and we will also continue with our price adjustments throughout the second half. As you'll recall, the price adjustments for Paper PCC are contractual, and they follow a predetermined schedule. Now moving to the third quarter, we expect higher volumes for Paper PCC on higher sales in India and the ramp-up of our packaging expansion in Europe. We also see continued strength in specialty PCC and processed minerals. And overall, for the segment, we expect the third quarter to be similar to the second quarter. Sales should increase modestly on a sequential basis. However, we do expect margin pressure to persist due to ongoing higher costs and the timing of Paper PCC increases. And now let's turn to the refractory segment. Refractory segment sales were $74.5 million in the second quarter, 33% higher than the prior year and 1% higher sequentially, as steel utilization rates continue to strengthen in the second quarter. Segment operating income was $11.7 million, 98% higher than the prior year and 3% lower sequentially, and operating margin was strong at 15.7% of sales. Steel utilization rates have improved to 84% in North America and 77% in Europe, up from 78% and 72%, respectively, in the first quarter. Steel production at these levels, we should continue to generate strong demand for our refractory products and the productivity that they provide for our customers' furnaces. As Doug mentioned, we see growth ahead for this business as we signed two additional long-term contracts in the second quarter. We've now signed a total of seven new contracts worth $80 million over the next five years, which will provide $16 million of incremental annual revenue ramping up through 2022. Looking ahead, strong market conditions are expected to continue in the third quarter. We should benefit from a few additional laser equipment sales in the third quarter. However, we expect the bulk of our laser equipment sales to occur toward the end of the year as our teams are able to perform more on-site installations. And overall, for this segment, we expect a similar performance sequentially. Now let's take a look at our cash flow and liquidity. Second quarter cash from operations was $67 million versus $64 million in the prior year, bringing year-to-date cash from operations to $118 million versus $94 million last year. This was a 25% increase. We deployed $22 million of capital during the quarter on sustaining our operations, mine development and other high return opportunities. We continue to expect capital expenditures in the range of $80 million to $85 million for the full year, split evenly between sustaining and growth capital. Year-to-date, we have used free cash flow to repurchase $37 million of shares. And in total, we have repurchased $54 million under our current $75 million share repurchase program. As of the end of the second quarter, total liquidity was over $700 million, and our net leverage ratio was 1.6 times EBITDA. For the acquisition of Normerica, we used $85 million of cash on hand and $100 million of our revolving credit facility. This will initially bring our net leverage ratio to approximately 2 times EBITDA on a pro forma basis, and we expect to pay down the incremental borrowing over the next 12 months. Our balance sheet remains in a very strong position. And this strength provides us with the flexibility we need to continue to invest in high value, high-return growth opportunities. We expect strong cash flow generation to continue in the second half of the year, and we see free cash flow in the range of $150 million for the full year. And now let me summarize our outlook for the third quarter. Overall, we see similar conditions in the third quarter across our end markets to what we saw in the second quarter. Our consumer-oriented businesses remain robust and paper demand should continue to improve through the third quarter. We will have the typical foundry customer maintenance outages, and our project-oriented businesses should continue their recovery. We continue to watch for potential COVID related shutdowns that may impact some of these projects. Inflationary cost pressures will continue in the third quarter. We are keeping pace with higher costs through pricing actions, some of which we have already implemented and other price adjustments, primarily in the paper business, which will be implemented contractually through the second half. Overall, for the company, we anticipate another strong performance in the third quarter with a similar level of operating income to that of the second quarter as well as continued strong cash flow generation. I'll note here again that we also see two months of sales from the acquisition of Normerica in the third quarter, along with purchase accounting adjustments and integration costs. Accretion from the acquisition will begin ramping up in the fourth quarter. With that, I hand it back over to Doug to give you the highlights of our latest sustainability report. Before we conclude, I'd like to take a quick moment to highlight the publication of our 13th annual sustainability report. This year's report is a significant step forward in terms of reporting and outlining the significant progress around our broad range of sustainability goals. You'll see in the report that we've already exceeded our reduction goals in four of six targets -- or six targets related to emissions, energy and water and are on pace to achieve the other 2. In addition, we provided more details regarding our safety culture, how we've evolved our product portfolio toward more sustainable solutions and initiatives around employee engagement, diversity and inclusion and community outreach. I'm very proud of the progress we've made advancing our objectives, which is a direct reflection of our employees' involvement and dedication to sustainability at MTI. I encourage you to review the report, which is available on our website. With that, let's open it up to questions.	compname reports second quarter 2021 earnings of $1.23 per share, or $1.29 per share excluding special items, a record quarter for the company. q2 sales $456 million versus refinitiv ibes estimate of $458.7 million. q2 earnings per share $1.29 excluding items.
Today's call will be led by Chief Executive Officer, Doug Dietrich and Chief Financial Officer, Matt Garth. And I'll also point out the Safe Harbor disclaimer on this slide. Statements related to future performance by members of our team are subject to these limitations, cautionary remarks and conditions. We appreciate you taking the time to join today's call and I hope you are all staying safe and healthy. Let me outline a brief agenda for the call. I'll begin by taking you through our third quarter highlights, including improving trends in our sales results, strengthened operational and financial profile, and progress made on the business development front. First, I want to comment on the 8-K we filed this week related to a ransomware attack we recently experienced which impacted access to some of our company's IT systems. We have procedures and protocols in place for situations like this. Immediately after detecting the incident, we implemented our comprehensive cyber security response plan, including taking steps to isolate and carefully restore our network to resume normal operations as quickly as possible. We've notified law enforcement and have been working with industry-leading cyber security experts to conduct a thorough investigation. Throughout this situation, we operated our facilities safely and met our customer commitments. Before going through the third quarter review, I'd like to note that I'm very pleased with how our global team and businesses have performed in what continues to be a complex and challenging environment. We remain focused on managing our company with an unwavering commitment to keeping our employees safe, operating our plants efficiently and serving our customers with value-added products. Dedication, engagement and resilience of our employees has been nothing short of exemplary during these times. Let me take you through how our third quarter unfolded. As we previewed in July, we anticipated that demand conditions in our end markets would improve with the second quarter having the most acute impacts from COVID-19, and that's largely how the quarter played out as we were prepared to respond to the volume recovery, which led to sequential sales growth in nearly all of our product lines. Overall, we had a solid quarter from an operational and commercial standpoint. These results reflect our team's disciplined execution related to cost control, pricing and productivity, which resulted in higher sequential and year-over-year operating margins. We also demonstrate how our strong product portfolio and end market mix has enabled us to capture opportunities with existing and new customers. From a financial perspective, total sales in the quarter were $388 million, an increase of about 9% sequentially, but still at lower levels compared to last year. As we indicated on our last call, our July sales were trending upwards and demand conditions in several markets continued to strengthen throughout the rest of the quarter. We generated $52 million of operating income and earnings per share were $0.92. In addition, we delivered $54 million in cash from operations, continuing our solid cash generation profile. After experiencing volatile conditions in our businesses that serve industrial-related end markets through the second quarter, we saw considerable demand improvements in the third quarter, one with continued strength in our consumer-oriented product lines. Let me touch on some of the highlights. Metalcasting business continued to rebound as our foundry customers in North America ramped up production to meet the demand increase in the automotive sector. At the end of the third quarter, our Metalcasting facilities were operating at about 95% of last year's levels, a noticeable improvement from the reduced levels seen earlier. In addition, penetration of our pre-blended products remains on a strong growth trajectory in China as sales increased 20% over last year and this momentum should continue moving forward. Sales in our portfolio of consumer products which includes Pet Care, Personal Care, and Edible Oil Purification remained resilient, led by an 11% year-over-year growth in Pet Care. We continue to strengthen our robust private label Pet Care portfolio in North America and Europe and have expanded our presence through partnerships with several new customers. Another area to highlight is our global PCC business which benefited from satellite restarts in India and North America, combined with an improved demand environment from the low levels in the second quarter. As we indicated on our last call, July volumes were trending approximately 15% higher compared to June, and these dynamics continued through the third quarter. Of note, Paper PCC sales in China continue to deliver a solid performance with 18% growth over last year. In addition, Specialty PCC sales increased sequentially as automotive and construction demand strengthened through the quarter and food and pharmaceutical applications remained at strong levels. Other pockets of strength came in our Talc and GCC business as demand improved for our products used in residential and commercial construction, as well as automotive applications. And in our Refractories business, we see steel utilization rates increased in the U.S. from a low of 50% in the second quarter to 65% at the end of September. While many of our businesses returned to a positive trajectory, we've had some challenges in our project-oriented businesses, such as Environmental Products, Building Materials and Energy Services, which are still experiencing volatility in order patterns and timing delays. Energy Services was further impacted by several hurricanes that occurred in the Gulf of Mexico during the quarter. As our volumes began to trend upward through the quarter, we were able to leverage these sales into income, resulting in overall operating and EBITDA margin improvement on both a sequential and year-over-year basis. We've maintained our focus on operational efficiency, including variable cost adjustments and structural overhead savings, as well as on continued pricing increases, capturing favorable raw material costs and increasing sales of higher-value products. As markets continue to recover, we are well-positioned to expand margins further on increased volumes. Our focus on strengthening our financial position also remains a priority with an emphasis on tightly controlling our cash generation cycle and creating more flexibility around our capital structure. We delivered another quarter of strong cash flow generation, the majority of which was used to pay down debt. While navigating through the current environment, we've remain focused on advancing our growth initiatives and made further progress this quarter on several fronts. Let me go through some of these highlights in more detail. The commissioning of two new PCC satellites scheduled for the fourth quarter continue to move ahead, currently ramping up production at our 45,000 ton facility in India, our 150,000 ton satellite in China should be operational by December. We will also be resuming production in November at our previously closed satellite in Wickliffe, Kentucky to support Phoenix Paper's restart of that mill. During the quarter, we made a small acquisition of a hauling and mining company to further strengthen our vertically integrated position at our bentonite mines in Wyoming. This transaction improves our cost position and enhances our flexibility with our mining and/or transportation in the region. In our Refractories business, we signed two new five-year contracts to supply our refractory and metallurgical wire products in the U.S. These contracts total approximately $50 million or about $10 million of incremental revenue on an annual basis. Our new product development efforts are progressing well as we look to accelerate the pace of commercialization and drive new revenue opportunities. We commercialized 36 value-added products so far in 2020 with contributions from each of our businesses. 12 of these products were introduced in the third quarter. We kept at a similar pace to last year, while conducting many of these product development activities virtually. All in all, there are a number of positives about our performance in the quarter, especially, how we've executed as a company, while navigating through difficult conditions. There are still some challenges ahead. With strong momentum across many of our businesses and with an enhanced cost profile, we expect to continue to deliver improved profitability as volumes recover. I'll now review our third quarter results, the performance of our four segments, as well as our cash flow and liquidity positions. Now, let's get into the review of the third quarter results. Third quarter sales were $388.3 million, 9% higher sequentially and 14% below the prior year. Gross margin, EBITDA margin and operating margin all improved sequentially and versus the prior year, driven by our continued pricing and productivity actions. SG&A expense was flat with the second quarter, and also contributed to the margin expansion. Earnings per share, excluding special items was $0.92 and we incurred special charges of $3.2 million after-tax in the third quarter or $0.09 per share. Our effective tax rate for the quarter was 19.8% versus 19.1% in the prior year and 16% in the prior quarter. Going forward, we expect our effective tax rate to be approximately 20%. Now, let's review the changes in sales and operating income in more detail. On this slide, we are presenting the year-over-year comparisons of sales and operating income on the left side, and the sequential quarter comparisons on the right side. Third quarter sales were 13% lower than the prior year on a constant currency basis. Slowdown in economic activity brought on by the COVID-19 pandemic continue to impact our volumes on a year-over-year basis in the quarter. The operating income bridge on the bottom left shows we were able to significantly offset the impact of lower sales versus the prior year, the favorable pricing and cost performance driven by the actions we have taken after the last year. These actions resulted in higher operating margin versus the prior year despite the lower volume. On a sequential basis, we saw significant improvement in demand with sales up 7% adjusting for currency and up 9% overall. Conditions improved across most of our end markets and we maintained pricing levels across the company. On our last call, we told you that sales rates in July were trending approximately 5% higher than June, and this trend accelerated through the rest of the third quarter. Daily sales rates in August were 6% higher than July and September was 7% higher than August. Operating income increased 18% sequentially on a constant currency basis, primarily due to the improvement in our end markets and continued cost control. Operating margin was 13.3% in the quarter versus 13.2% in the prior year, and 11.8% in the second quarter. Now, let's take a closer look at the operating margins and how they have improved on the next slide. On this slide, we are showing year-over-year and sequential operating margin bridges for the third quarter. Starting with the prior year comparison, our pricing and cost actions contributed 190 basis points of improvement, which more than offset the unfavorable volume impact. On a sequential basis, we leveraged additional volume into 60 basis points of margin improvement and our continued cost control contributed another 70 basis points of favorability. The actions we have taken on pricing, productivity, cost control and new product development have positioned us well to leverage incremental volumes into improved margins going forward. Another margin related highlight for the third quarter was that EBITDA margin improved by 70 basis points versus both the prior year and the prior quarter. Now, let's turn to the segment review, starting with Performance Materials. Performance Materials sales increased 10% sequentially and were 8% lower than the prior year. Metalcasting sales grew 26% sequentially as foundry production improved in North America and demand remained strong in China. The improvement in North America was primarily driven by the ramp up of automotive production. China Metalcasting sales grew 11% sequentially and 20% versus the prior year on continued strong demand from our customers and continued penetration of our specially formulated blended products. Household, Personal Care and Specialty Product sales remained resilient, up 7% sequentially and flat with the prior year on continued strong demand for consumer-oriented products. Meanwhile, Environmental Products and Building Materials continued to experience COVID-19-related project delays, and sales remained below prior year levels. Operating income for the segment was $28.2 million, up 34% sequentially and up 5% versus the prior year. Operating margin was 14.8% of sales, up 270 basis points from the second quarter and up 180 basis points from the prior year. Continued pricing actions, strong cost control and expense reductions, more than offset the operating income impact of lower sales versus the prior year. The chart on the bottom right shows daily sales rates by month this year compared to the prior year. This segment experienced a clear rebound in demand and sales increased steadily throughout the third quarter. We would normally expect a seasonal decrease in sales for this segment between the third and fourth quarters, driven by our construction and environmental end markets. However, this year, we expect to offset the typical seasonality with continued positive momentum in our other markets. Overall, we expect fourth quarter sales to be similar to the third quarter, despite the typical seasonal effects. I'd also like to note that we experienced higher mining and energy costs, while operating in colder months, and this will temporarily impact segment margins in the fourth quarter. Now let's move to Specialty Minerals. Specialty Minerals sales were $125.1 million in the third quarter, up 14% sequentially and 13% below the prior year. PCC sales increased 14% sequentially as paper mill capacity came back online in the U.S. and India, following temporary COVID-19-related shutdowns. Paper PCC sales in China grew 11% sequentially, and 18% over the prior year on continued penetration and strong customer demand. Specialty PCC sales increased 16% sequentially as automotive and construction demand improved through the quarter and consumer-oriented products remained strong. Processed Minerals sales increased 13% as end market steadily improved through the quarter. Operating income excluding special items was $18 million, up 18% sequentially and 17% below the prior year and represented 14.4% of sales, which compared to 13.9% in the second quarter and 15.2% in the prior year. The impact of lower volume versus the prior year was partially offset by continued pricing actions and cost control. Daily sales rates charged for this segment also shows improving conditions through the third quarter and we expect this trend to continue into the fourth quarter as paper production in the U.S., Europe and India continues to ramp up. In addition, we are bringing online new capacity in the next several months and most of this capacity will come online late in the fourth quarter. The sequential improvement in Paper PCC will offset the typical seasonality we experience in the residential construction markets served by the other path lines [Phonetic]. Overall, for the segment, we expect fourth quarter sales to be similar to the third quarter. Now let's turn to Refractories. Refractories segment sales were $59.3 million in the third quarter, up 6% sequentially as steel mill utilization rates gradually improved from second quarter levels in both North America and Europe. Segment operating income was $7.3 million, up 24% from the prior quarter and represented 12.3% of sales. Again, you can see improvement in the daily sales rates through the third quarter. We expect continued improvement in the fourth quarter as steel utilization rates improve and laser equipment sales pickup. And, overall, for the segment, we expect a modest sequential improvement in sales in the fourth quarter versus the third quarter. Now let's turn to Energy Services. Energy Services segment experienced significant customer project delays in the third quarter. These delays were related to COVID-19 restrictions, as well as several weather-related shutdowns in the Gulf of Mexico and what has been a very active storm season. As a result, sales were $13.3 million and operating income was breakeven for the third quarter. The daily sales rates chart shows the solid start to the year, followed by sales levels that have remained low relative to the prior year. We continue to see a strong pipeline of activity and we expect sequential improvement for this business in the fourth quarter. Now, let's turn to our cash flow and liquidity highlights. As Doug noted, third quarter cash from operations totaled $54 million and free cash flow was $40 million. We continued our balanced approach in deploying cash flow, paying down $30 million of debt and we resumed our share repurchases acquiring $3 million of shares in the quarter. We continue to repurchase shares in October and completed the expiring program with $50 million of shares under the $75 million authorization. As noted earlier, the Board of Directors has approved a new one-year $75 million repurchase program. Our net leverage ratio is 2.1 times EBITDA and we have $682 million of liquidity including over $375 million of cash on hand. And before I hand it back over to Doug for the market outlook, I'd like to summarize my comments on what we are expecting for the fourth quarter in each of our segments. In our Minerals businesses, we expect continued improvement and many of our markets to offset the typical seasonality, and we expect sales to be similar to the third quarter. Margins will remain strong on a year-over-year basis, though, sequentially, margins will be impacted by seasonally higher mining and energy costs. In our Services business, we expect continued gradual improvement in Refractories as utilization rates improve and we expect sequential improvement in Energy Services as delayed projects resume and activity levels pick up. Overall, we expect MTI sales in the fourth quarter to be similar to the third quarter. Before beginning the Q&A portion of the call, I wanted to take some time to provide a little more insight into the conditions across each of our businesses and where we see opportunities to drive incremental growth. The improving market trends experienced across most of our businesses will likely extend through the rest of the year, while our project-oriented businesses may continue to face persistent challenges with uncertain customer order patterns. In addition, as we build on the momentum from the third quarter, we're also executing on a wide range of attractive growth projects which will accrue to revenue in 2021. Let me now take you through what's happening by business segment, starting with Performance Materials, our largest and most diverse segment. Our Household and Personal Care product line will continue on its strong sales trajectory as demand for these products stays high and we leverage our expanded channels and presence with new customers. Specifically, we're growing our portfolio of premium Pet Care products in both North America and Europe with the expansion of new online retail channels with larger customers, and the introduction of new products such as our 100% carbon-neutral Eco Care product in Europe, an example of how we're satisfying customer preferences, while also contributing to our sustainability efforts. In addition, sales of our Edible Oil Purification products have more than doubled since last year as we grow this business through an expanded global customer base. In our Metalcasting business, we expect to continue to benefit from the automotive demand rebound in North America. Noted earlier, we expanded our customer base in China through the continued penetration of our higher value blended products, which led to sales growth of 20% over last year. Our solid growth trend there will continue for the rest of the year and into 2021. I'll touch on Environmental Products and Building Materials together as they are both experiencing similar dynamics. While each maintains a robust and active pipeline and continues to introduce more specialized products, these businesses have been impacted by timing delays around when customers will commence larger remediation and water proofing projects. Switching to the Specialty Minerals segment where I'll begin with Paper PCC. With paper demand in North America and Europe gradually improving, we expect sequential volume growth in all regions in the fourth quarter. Asia and, China more specifically, will continue its solid growth trajectory. We'll also benefit from the ramp up of our satellite in India, and our new satellite in China should be operational in December. On the horizon, we have two new facilities coming online in the first half of 2021, one for a packaging application in Europe, and another for a standard PCC facility in India. Overall, we're bringing online 285,000 tons of new PCC capacity over the next three quarters. We also maintain a very active business development pipeline across our broad portfolio of PCC technologies, including high filler, packaging and recycling. Each of these opportunities could add to our overall volume total next year. In our Specialty PCC, GCC and Talc businesses, sales for our pharmaceutical and consumer products, including food applications will remain strong. Demand for our high-performance sealant and plastic products that are used for automotive applications should strengthen as build rates continue to improve in North America and Europe. And sales for products used in residential and commercial construction applications should stay steady. For the Refractories segment, current steel utilization rates in North America and Europe are around 70% and 65%, respectively, and we expect these rates to gradually improve in the upcoming quarters. In addition, our order book for laser measurement equipment remains strong in the fourth quarter. As I mentioned earlier, we've recently signed two five-year contracts totaling $50 million to supply our broad portfolio of refractory and metallurgical wire products, which will start to accrue to revenue growth in 2021. Finishing up the discussion with Energy Services, where we maintain an active pipeline of offshore services, while COVID-19 and adverse weather conditions have led to some early demobilizations or postponements from our larger offshore projects, some of these projects have been rescheduled to resume in the fourth quarter. In addition, we've recently been awarded new large projects in the Gulf of Mexico, which we expect to commence over the next few quarters. We're focused on navigating through a highly dynamic environment and our culture of continuous improvement positions us to do so. Over the past six months, we've been successfully implementing virtual tools to help improve productivity, efficiency and connectivity with our employees and customers. And I've been impressed with how quickly we've adapted to the changing environment. These tools have enabled us to run our business smoothly as we connect seamlessly with our operating facilities for meetings and site visits, conduct problem solving Kaizen events and collaborate and communicate efficiently with our global customer base. Many of these new ways that we're operating on, on a daily basis will become permanent and we'll balance them with in-person activities. As we look ahead into 2021, I'm confident in the direction we're heading, the solid foundation we have in place to leverage improved market conditions and the growth projects we have in hand. While COVID-related uncertainties still persist, our end market conditions continue to show signs of improvement. With the operational actions we've taken, we are well-positioned to drive improved profitability. In addition, strength and flexibility of our balance sheet provides solid resources to support both organic and inorganic growth opportunities. With that, let's open the call to questions.	compname reports third quarter 2020 earnings of $0.83 per share, or $0.92 per share, excluding special items. q3 earnings per share $0.92 excluding items. q3 sales $388 million versus refinitiv ibes estimate of $386.1 million. incurred special charges of $3.2 million after-tax in q3, or $0.09 per share.
Today's call will be led by Chairman and Chief Executive Officer, Doug Dietrich; and Chief Financial Officer, Matt Garth. And I'll also point out the Safe Harbor disclaimer on this slide. Statements related to future performance by members of our team are subject to these limitations, cautionary remarks and conditions. Appreciate you joining today's call. I'll go through our third quarter results at a high level, including our sales performance and how we manage through a variety of challenging dynamics. I'll then take some time to describe the progress we're making with our growth initiatives and our team's solid execution on several fronts. And then we'll open the call to questions. Let me start with a recap of the quarter. First and foremost, market demand has remained robust across all of our product lines and geographies. We delivered strong results marked by another record quarter of earnings per share of $1.30. Performance was achieved while managing through a challenging operating landscape with supply chain and inflationary pressures across our businesses. Sales for the quarter were $473 million or 17% higher on an organic basis and up 22%, including sales from the recent Normerica acquisition. We saw sales increases in every segment and across every geography. For more perspective on our organic growth, the projects we've initiated and I've discussed with you over the past year contributed approximately 5% to our organic growth in the quarter. Said another way, about 5% of our growth was delivered from new projects and technologies initiated over the past year, 12% from market growth and 5% from the acquisition of Normerica. Strength of our operating capabilities is reflected in how we successfully managed through the external conditions we faced this quarter, which enabled us to generate $63 million of operating income, a 22% increase over last year. Performance was achieved within the context of a myriad of external issues, including rising costs, truck, rail and shipping logistics challenges, difficulties finding talented people to support expanding production, significant energy cost increases that became more pronounced during the quarter and continued challenges presented from the COVID pandemic. Despite these issues, we kept our inventory and supply positions for key raw materials and commodities in good shape. We acted quickly to solidify our pricing leadership across our product portfolio and to address the inflationary cost pressures that accelerated over the past few months. And we tightly controlled expenses and continued to drive productivity improvements. Not to be forgotten, we navigated everything while also seamlessly integrating Normerica into our company. Cash flow remains strong and, through the first nine months of the year, cash from operations is up 10% compared to 2020. We completed our share repurchase authorization. Last week, we initiated a new one-year $75 million program. Strong cash flow and solid balance sheet gives us the flexibility to continue to allocate capital to shareholders, while also investing in attractive organic and inorganic growth opportunities. Overall, we had a very strong quarter in terms of financial and operational performance. Needless to say, there was a high level of activity this quarter. And our execution speaks to the capabilities of our team who did a great job operating the company safely and efficiently while remaining focused on delivering for our customers. Now let me take you through some of the year-to-date sales highlights, outline the contribution from our recent growth projects and describe the initiatives that will further advance our sales trajectory. We've discussed with you the initiatives we've executed over the last year, which have been key contributors to our growth in 2021. We've also advanced several new projects this quarter that will support further sales growth going forward. Very encouraged with our continued progress on our growth strategy, which is focused on geographic expansion, new product development and acquisitions. Demand trends are favorable across our markets. But the sales growth demonstrated in our businesses has been further bolstered by our new projects aimed toward higher growth markets and also from investments we've made to strengthen our portfolio of value-added products. Let me provide some perspective on what we've realized through the third quarter from these projects and then detail our new initiatives, new technologies and recent acquisitions that will accelerate growth. I'll start with our household and personal care and specialty product line, where our broad portfolio of consumer-oriented businesses continues to perform very well, resulting in organic sales growth of 13% year-to-date and 20%, including the recent addition of Normerica. This growth is a result of our leading positions in structurally growing and stable markets, but it's been enhanced through our investments in new products, capacity expansions and by extending the geographical reach of each of these businesses. Our global Pet Care business is an example of this with its portfolio of premium products, new online sales channels and broad global presence, which has led to above-market growth rates. We're also realizing significant sales increases in other consumer specialty applications such as edible oil purification and personal care. These are businesses where we've made targeted investments to enhance our technology portfolio and expand our manufacturing capabilities to reach a broader customer base in Europe and Asia. Our global Metalcasting business remains on its consistent growth track with sales up 30% year-to-date, driven by strong demand from both North America and Asia foundries, serving a diverse customer base in automotive, heavy truck and agriculture markets. Specifically, penetration of our blended products continues to expand in Asia as sales increased 30% compared to last year with 29% growth in China alone. While much of our growth is driven by our penetration in China, we continue to demonstrate our value proposition in other countries with attractive long-term growth fundamentals. In India, which is the second largest gray and ductile iron casting market globally, sales of our blended products are up 50% over 2020. Our PCC business has been delivering a strong performance this year. Sales were up 17% year-to-date as uncoated freesheet paper demand continues to improve in all regions. We've also benefited from the ramp up of 200,000 tons of new capacity that we've brought online over the past year, which includes a 150,000-ton facility in China and another 50,000-ton satellite in India. Production at our 40,000 ton expansion for a packaging application in Europe was also just commissioned in the third quarter. For perspective, sales realized from these latest satellites were responsible for 5% of the 17% PCC growth so far this year. Our fourth quarter PCC volumes are currently projected to be above where they were in 2019, more than absorbing the volume loss from our four paper machine shutdowns that occurred since then. Moving forward, we have several other new satellite projects under construction that set this business up for continued sales growth next year. In addition to the capacity I just mentioned, another 40,000 ton satellite in India will start up this quarter and we've begun building another 50,000 ton satellite in China, which should be operational in the first half of next year. We've also just reached an agreement and expect to sign a contract over the next couple of weeks with a new customer in India for another 22,000 ton satellite. It will be our ninth satellite in India after entering the market with our PCC technology 10 years ago. In total, with the satellites just commissioned and ramping up, combined with these three new satellites, we see the 5% growth rate from new satellites continuing through next year. Pipeline of new satellite projects remains robust. We're expanding our addressable market opportunities with new products and technologies for the packaging market, which I'll describe in a moment. I'll finish up the year-to-date growth highlights with our Refractory segment. It's been a very impressive year for this segment with growth of 22%, marked by steel utilization rates noticeably improving over last year. Growth also reflects this team's success in capturing new business. Over the past six months, we've secured seven contracts worth $100 million over the next five years, two of which were signed during the third quarter. We've been able to secure these new contracts in the electric arc furnace market through the deployment of our new portfolio of differentiated refractory products and high performance laser measurement solutions, which reduced costs and improved furnace safety for our customers. I've discussed how we're investing in several new technologies and I want to share with you how they're beginning to pay off. Specifically, a few areas where we've broadened our product offering to enter adjacent growing markets. I'll highlight two significant areas. First, our Paper PCC business has been developing new technologies, processes and products to accelerate our growth beyond high value filler for uncoated freesheet paper and into the adjacent packaging market. We've made significant progress over the past two years deploying PCC into white top linerboard. More recently, we've been developing new products for other packaging applications, including ground calcium carbonate for white carton board and alternate mineral products for brown packaging. These are attractive and growing packaging markets and we're developing a more comprehensive product portfolio to reach this broader customer base. Currently, we're working to finalize a long-term contract with a premier white carton board customer in China that would represent a significant step for us into this adjacent market. We also recently concluded customer trials with our alternative mineral products for brown packaging here in the US. With an expanding product portfolio and a pipeline of potential customers, we believe the packaging market represents a real avenue for new long-term growth. Excuse me a second. Another project in our technology pipeline that we're very encouraged with is FLUORO-SORB, which addresses PFAS contamination in groundwater. In last call, I shared with you details about our first major commercialization for a large scale project at a North American Department of Defense location. This project went well and its success has helped to advance our other opportunities. In fact, we're currently working to secure several other large projects in the drinking water and soil stabilization markets. As this sector continues to develop and regulatory bodies focus on implementing changes, we're well positioned to capture new opportunities with our patented technology. To finish up the discussion on our growth for the future, I'll take you through how we've strengthened our business through recent acquisitions. First, we completed the Normerica acquisition during the quarter and the integration is progressing well. The team has been in place working on a variety of activities with our new colleagues to integrate all facets of the business and deploy our culture of safety and operational excellence. Everyone has done a tremendous job making this a seamless transition. We're still in the early stages, but the knowledge we've gained over the past three months has only further validated our thesis when we acquired Normerica. We've identified significant opportunities in the North America cat litter market for our broader portfolio of private label products and we see a clear pathway to drive higher growth rates and profits in our Pet Care business. In addition, yesterday we acquired the specialty PCC assets from Mississippi Lime Company. This bolt-on transaction helps expand our manufacturing reach into the Midwest United States and gives us a strategic logistics footprint at a key point along the Mississippi River. The strategy is to leverage our latest technologies such as rheology modifiers for sealant applications throughout our specialty PCC plant system in the US. Let me leave you with a few takeaways. We continue to build MTI into a stronger company on all fronts and take actions to balance our portfolio to generate higher more sustainable growth. Sales mix has evolved over the past few years with 30% of our revenue now coming from stable and growing consumer-oriented markets. Projects I described to you demonstrate how we're leveraging our newest technologies to drive growth in our current markets and enter attractive adjacent markets. We also underscore how we continue to drive penetration of our core product lines in growing geographies. Our recent acquisitions further supplement this momentum and, all taken together, we have meaningfully shifted our sales trajectory going forward. Specifically for next year, we see our sales growth moving north of 10% and this sales trajectory, along with our strong operating capabilities, provides a powerful combination for significant long-term value generation. I'll review our third quarter results, the performance of our segments as well as our outlook for the fourth quarter. And now, let's review the third quarter results. Sales in the third quarter were 22% higher than the prior year and 4% higher sequentially. Organic growth for the company was 17% versus the prior year and the acquisition of Normerica contributed the remainder of the growth in the quarter. Operating income excluding special items was $63.2 million, up 23% versus the prior year and was relatively flat versus the second quarter. Operating margin was 13.4%. It's worth noting that excluding Normerica, operating margin was 13.8% for the quarter. As we have stated previously, the Normerica acquisition will become income-accretive beginning in the fourth quarter as integration activities progress. The year-over-year operating income bridge on the top right of this slide shows volume and mix contributed $14.9 million, driven by our strategic growth initiatives and the broad-based volume growth we've seen across our end markets. You can also see the significant inflationary cost we experienced, $18.4 million in the third quarter alone, driven by energy, freight and raw materials such as lime and packaging. To give you some perspective, we saw energy pricing go up by anywhere from 50% to 400% depending on the location and power source with the most dramatic increases in the UK and Europe. We offset $10.7 million of these inflationary costs with continued price increases, including contractual pass-through mechanisms in paper PCC and negotiated price actions in the rest of the business. The sequential bridge on the bottom right shows how inflation accelerated from the second quarter to the third quarter by $10 million, more than half the total year-over-year impact. However, this bridge also shows how quickly we acted to implement pricing, offsetting nearly 70% of the sequential increase. In fact, we've implemented a variety of pricing mechanisms in several of our businesses to recoup the higher costs that we had to absorb in the third quarter due to the rapid nature of the increases, particularly on energy. The price adjustments we are making in the fourth quarter will help us to fully catch up on the cost we have absorbed by the first quarter of 2022. Meanwhile, we continue to control overhead expenses with SG&A as a percent of sales at 10.6%, 150 basis points below the prior year and 70 basis points lower sequentially. Earnings per share, excluding special items, was $1.30, the second consecutive record quarter for the company and represented 41% growth versus the prior year. And now, let's review the segments in more detail starting with Performance Materials. Third quarter sales for Performance Materials were $250.4 million, 23% higher than the prior year and 5% higher sequentially. The acquisition of Normerica contributed 10% growth versus the prior year and organic sales contributed an additional 13%. Household, Personal Care and Specialty Products sales were 30% above the prior year, driven by Normerica and continued strong demand for consumer-oriented products. Sales were 19% higher sequentially, primarily driven by the acquisition. Metalcasting sales were 10% higher than the prior year, driven by stronger demand globally and continued penetration of green sand bond technologies in Asia. The impact of lower automotive production has been limited on our sales as foundry customer demand has remained strong across a broad set of other industrial markets. Sales were 9% lower sequentially, primarily due to typical seasonal foundry maintenance outages. Environmental Products sales grew 32% versus the prior year on improved demand for environmental lining systems, remediation and wastewater treatment. Building Materials sales grew 18% versus the prior year and 3% sequentially on higher levels of project activity. Operating income for the segment was $32.6 million and operating margin was 13% of sales. Margin was temporarily impacted by unfavorable product mix, the timing of pricing actions relative to cost increases as well as the incremental sales from Normerica. Operating margin, excluding Normerica, was 13.9%. We are in the early stages of the integration process with Normerica and I'm pleased to report that the back office and financial process integration is progressing well. Now looking to the fourth quarter, we see continued strong demand for Household and Personal Care and we expect Metalcasting volumes to improve sequentially as foundry demand remained strong in both North America and Asia. In addition, acceleration of input costs that we saw in the third quarter is resulting in a lack of inflation versus pricing that we expect to continue in the fourth quarter. As I mentioned, we have pricing actions in place to catch up on these increases in the first quarter of 2022. Overall, we expect operating income for this segment to be slightly lower sequentially as higher operating costs will temporarily offset continued strength across our end markets. Also some uncertainty with respect to power outages in China, which could also temporarily impact our volumes in the fourth quarter. And now, let's move to Specialty Minerals. Specialty Minerals sales were $146.9 million in the third quarter, 17% higher than the prior year and 3% higher sequentially. SPCC sales grew 17% versus the prior year and 3% sequentially on recovering Paper PCC demand, the continued ramp up of three new satellite plants and higher SPCC demand from automotive, construction and consumer end markets. Process Minerals sales grew 18% versus the prior year and 2% sequentially on continued strength in residential construction and consumer end markets. Process Minerals sales, as I just spoke about, did grow 18% and segment operating income was $18.4 million and operating margin was 12.5% of sales. Ordering was temporarily impacted by the timing of contractual and negotiated price increases relative to cost increases. This segment has seen the most acute impact from energy and raw material cost increases with inflationary cost increases of $9 million, partially offset by $5 million pricing in the third quarter alone. We have implemented price adjustments to cover these cost increases and we should be caught up in the first quarter. And as we have demonstrated, we will continue to adjust pricing as necessary to keep pace with additional cost increases. Now moving to the fourth quarter, we expect modestly higher PCC volume sequentially as the ramp up of our new satellite in India will be partially offset by the paper machine shutdown in Jackson, Alabama. We see continued strength in Specialty PCC and Processed Minerals in what is typically a seasonally weaker period for our residential construction end markets. In addition, we will have a timing lag as our price adjustments catch up to the cost increases we have absorbed. We see margins rebounding to more normal levels as pricing actions take hold. And overall for the segment, we expect fourth quarter operating income to be similar to the third quarter. And now let's turn to the review of the Refractory segment. Refractory segment sales were $75.9 million in the third quarter, 28% higher than the prior year and 2% higher sequentially as demand remained strong for refractory and metallurgical products. We also had modestly higher laser measurement equipment sales in the quarter. However, we continue to experience delays in being able to perform on-site installations and maintenance in this product line. Segment operating income was $13.2 million, a quarterly record and 81% higher than the prior year and 13% higher sequentially. Operating margin was strong at 17.4% of sales and was also a record performance. Looking to the fourth quarter, we expect another strong performance from this segment. However, we expect slightly lower sales and operating income to be down approximately $2 million. Now let's take a look at our cash flow and liquidity highlights. Cash flow from operations was $163.1 million year-to-date compared to $148.4 million in the prior year, up 10%. Capital expenditures were $63 million year-to-date versus $45.8 million in the prior year as we continue to invest in high return projects. The company used a portion of free cash flow to repurchase $63 million of shares year-to-date and the share repurchase authorization from the prior year was completed in October. The Board of Directors authorized a new $75 million one-year share repurchase program on October 20, 2021. As of the end of the third quarter, total liquidity was over $500 million and our net leverage ratio was 2.2 times EBITDA. Our balance sheet is in a very strong position which provides us with the flexibility we need to continue to invest in high-value high-return growth opportunities. We expect strong cash flow generation to continue in the fourth quarter with free cash flow in the $150 million range for the full year. Now let me summarize our outlook for the fourth quarter. Overall, we see robust end market demand across our segments with typical construction end market seasonality. We expect demand for our growing portfolio of consumer-oriented products to remain strong. Inflationary cost pressures have persisted into the fourth quarter and we have pricing actions in place to mitigate these increases in the quarter and fully catch-up by the first quarter of 2022. While it's still early in the integration process for Normerica, it's progressing well and we will begin to realize accretion from this acquisition in the fourth quarter. And overall for the company, we expect another strong performance with operating income around $60 million. As we have demonstrated throughout the year, we have navigated uncertainty and a number of obstacles to deliver our strong financial performance and we expect to continue to execute well as we close out 2021. We have solid growth momentum across our segments. And with the growth initiatives outlined earlier in the call, we are set up well for a strong 2022. With that, let's turn to Q&A.	minerals technologies q3 earnings per share $1.30 excluding items. compname reports third quarter 2021 earnings of $1.22 per share, or $1.30 per share excluding special items, a record quarter for the company. q3 earnings per share $1.30 excluding items. q3 sales rose 22 percent to $473 million.
Today's call will be led by chairman and chief executive officer, Doug Dietrich; and chief financial officer, Matt Garth. And I'll also point out the safe harbor disclaimer on this slide. Statements related to future performance by members of our team are subject to these limitations, cautionary remarks, and conditions. I'll walk you through our results for the fourth quarter and the full year of 2021. I'll also give you my insights on the year, focusing on our key financial and strategic highlights, as well as the various dynamics we faced and successfully managed through. Matt will then discuss our financial results in more detail and outline our first-quarter outlook. Following that, I'll finish up by describing how we see 2022 shaping up as a strong year for us, touching on our key priorities, growth initiatives, and market conditions. Let me start by going through the takeaways for the fourth quarter, which concluded a very strong year for MTI. Market demand continued to remain robust, and we delivered sales of $477 million, 10% higher than last year, and earnings per share of $1.25, an increase of 16%. Despite the market conditions, this is, by far, the most difficult operating quarter of the year as we had to navigate through a variety of inflationary and logistics pressures, which became more pronounced late in the quarter. Cash flows remained solid through the fourth quarter, capping off a strong year. Operating cash flow was $69 million and free cash flow was $46 million, and we made progress to lower our debt levels by paying down $20 million of debt. Let me share how the quarter played out from an operational perspective and the actions we put in place to address the rapidly changing conditions. Heading into the fourth quarter, we anticipated that inflationary costs and logistics and supply chain challenges would persist, and we have positioned ourselves to recover these costs through implemented pricing actions. While much of this transpired as expected, we experienced significant additional cost escalations, notably due to rapid energy price spike in Europe. We also saw increase -- an increase in supply chain disruptions, mainly due to truck and rail availability for shipments. This was exacerbated by COVID-related labor challenges, primarily in the last month of the quarter. The combination of these dynamics led to higher plant operating costs and delayed shipments, resulting in about $5 million of reduced income in the quarter. Despite these circumstances, our global team did a great job executing, adjusting operating schedules, securing freight logistics, and taking further pricing measures. Our order books remain robust, and the actions we've taken should more than recover the additional cost pressures we faced, setting us up for a stronger first quarter. On the growth and business development front, we had several highlights during the quarter. The integration of Normerica is progressing well, and we executed on significant opportunities in the quarter to grow our Pet Care business further in 2022. We also made a small acquisition of a specialty PCC assets in the Midwest U.S., which strengthens our logistics and manufacturing capabilities. In addition, we signed two new satellite contracts in Asia, one for a PCC facility in India and another with a packaging customer in China. All in all, it was a productive quarter from a growth perspective, and the operating and pricing adjustments we've already made position us well for a stronger start to 2022. Before Matt gets into the financial details for the quarter, I'd like to review some highlights from 2021. It was a strong year for MTI, as our business recovered from the 2020 COVID demand lows to deliver record results. We accomplished this through a combination of operational execution and a focused commitment on advancing our key growth initiatives, which have meaningfully shifted our sales portfolio to be more balanced and stable. To demonstrate this transition over the past few years, revenue from our consumer-oriented businesses has doubled and today, they comprise 30% of our total sales portfolio. It is this portion of our portfolio that's positioned in higher growth noncyclical markets. First and foremost, we delivered record annual sales and earnings per share for our company. Sales increased 17% over last year to $1.9 billion. Operating income was up 13% to $241 million, and our earnings per share grew 26% to $5.02. Serving our customers and innovating to grow with them is what motivates our team. We continue to accomplish this while navigating through complex and rapidly changing conditions during the year. We operated in an environment with sharply rising input costs, which required frequent operational adjustments, strong supply chain management, and process improvements. Our teams work closely and transparently with our customers to manage through these dynamics, and we were successful in implementing a broad array of strategic pricing actions across our portfolio to offset the $50 million in extra costs we had to absorb. The past year required a significant amount of agility from our employees, and I'm proud how they engage to drive improvements, efficiently run our operations, and support our customers' evolving needs. Generating strong cash flow, further strengthening our balance sheet, and maintaining flexibility with how we deploy our capital are priorities. Our financial position gives us significant optionality to allocate capital to shareholders, while also investing in attractive growth opportunities. We demonstrated this in 2021 by deploying $86 million to fund high-return organic projects, as well as to maintain and improve the performance and safety of our facilities. We acquired Normerica and the Specialty PCC assets, while also returning $82 million to our shareholders through share repurchases and dividends. Our balance sheet remained strong, and we kept our net leverage ratio near our target level of two times EBITDA. Now, let me take you through how we advanced a broad range of initiatives, which sets us up nicely for continued growth in 2022. I'll start with our consumer-oriented products. Most of these businesses are in our household, personal care, and specialty product line, and they performed very well with sales growth of 21%. This growth is a result of our positions in the structurally growing and stable markets and has been bolstered by our investments in new technologies, capacity expansions, and through extending the geographical reach of these businesses. Normerica acquisition is one of those investments as it further expanded our Pet Care business in North America. We've also realized significant sales increases in other specialty applications, such as edible oil purification and personal care, which grew by 48% and 80%, respectively, last year. The next part of our growth strategy that we delivered on during the year was expanding our core product lines in faster-growing geographies. Our Metalcasting business continues to grow globally, leveraging our blended bond system value proposition with customers in large foundry markets. Metalcasting sales were up 21% in Asia as we expanded our customer base and further penetrated into China with sales of our pre-blended products increasing by 20%. We continue to demonstrate our value in other countries and specifically in India, where sales of our blended products were up nearly 40% in 2021. Our PCC business continues to grow geographically with a 22% sales increase in Asia. We benefited from 280,000 tons of new capacity that came online over the past year. In addition, we signed two new satellite contracts in 2021, totaling around 70,000 tons, which will be commissioned by the end of this year. And we're growing in our core markets. Our Refractory segment is a great example of this as we've captured significant new business in the electric arc furnace market. In 2021, we signed long-term contracts worth $100 million through the deployment of our new portfolio of differentiated refractory products and high-performance laser measurement solutions. Another area where we've successfully driven new profitable growth opportunities is by tapping into attractive adjacent markets through our broadened product offering. I'll highlight a couple of areas for you. We signed a long-term agreement in December to deploy ground calcium carbonate technology for a new coated paperboard mill in China with a premier packaging customer. And we're really excited about this one as it's MTI's first GCC satellite offering specifically tailored for packaging customers and represents a fundamental step in our ability to drive new growth opportunities in the white paperboard market. In addition, we have several trials underway with other technologies in both the white and brown packaging space. I've talked to you about our broad capabilities in water remediation and the traction we've made with FLUORO-SORB, our proprietary solution for remediating PFOS contamination in groundwater. 2021, we completed our first major commercialization for a large-scale project, and we generated interest in several other large drinking water and soil stabilization projects. Our growth this past year in wastewater remediation was 15%, and we see this trajectory continuing in 2022. New product development is an integral part of our growth strategy, and we've made significant strides to improve the speed of execution, increase the number of products commercialized and enhance the impact of our latest solutions. Over the past five years, we've cut the time from development to market in half. And during the same time frame, we've increased the sales generated from new products by more than 60%. In addition, half of our new products are geared toward a sustainability solution for either MTI or our customers. And lastly, we strengthened our company through the acquisition of Normerica, which met all of our M&A criteria. The addition has made us one of the largest vertically integrated private label pet litter providers globally. And as the commercial and operational integration progresses, we see a clear pathway to drive higher growth rates and profits in our Pet Care business. All told, this is a really productive year for us on all fronts. I'll come back to share my perspectives on the year ahead. But to sum up, our growth achievements in the past year puts us in an advantageous position for a strong 2022. I'll review our fourth-quarter results, the performance of our segments, as well as our outlook for the first quarter. Now, let's review the fourth-quarter results. Sales in the fourth quarter were 10% higher than the prior year and 1% higher sequentially. Organic growth for the company was 4% versus the prior year, and the acquisition of Normerica contributed the remainder of the growth. Operating income, excluding special items, was $54.7 million, and operating margin was 11.5%. The year-over-year operating income bridge on the top right of this slide shows that we experienced $27.4 million of inflationary cost increases versus the prior year, which we offset with $18.6 million of pricing. In addition, supply chain challenges, including trucking and labor availability, resulted in a delay of volumes from the fourth quarter, particularly in our Processed Minerals and SPCC product lines. The sequential bridge on the bottom right shows how inflation continued to accelerate from the third quarter to the fourth quarter. And heading into the quarter, we expected the pace of inflationary costs to moderate from the third quarter, and we expected to recapture some margin with our planned price increases. As we move through the fourth quarter, inflationary costs accelerated to nearly $10 million, including higher energy costs in Europe and Turkey. We were able to mitigate the unexpected increase with additional pricing in the quarter. However, a portion of the necessary price adjustments could not be passed through contractually until January 1. In addition, logistics and labor availability challenges resulted in shipment delays, lower productivity at our facilities, and ultimately, higher per-unit production costs in the period. These challenges, including the delayed sales volume and the unexpected spike in energy costs, resulted in approximately $5 million lower operating income than we originally expected for the quarter. We've already made additional price adjustments in January, and our pricing is expected to exceed inflationary pressures, expanding margins in the first quarter. We also expect to catch up on the operational challenges we faced in the fourth quarter. Meanwhile, we continue to control overhead expenses with SG&A as a percentage of sales at 10.8%, 80 basis points below the prior year. Earnings per share, excluding special items, was $1.25 and represented 16% growth versus the prior year. Earnings per share benefited from foreign exchange gains, driven by the depreciation of the Turkish lira, as well as lower interest expense and a lower share base versus the prior year as we continue to pay down debt and repurchase shares in the quarter. Full-year earnings per share was $5.02, a record for the company and represented 26% growth versus the prior year. Now, let's review the segments in more detail, starting with Performance Materials. Fourth-quarter sales for Performance Materials were $256.2 million, 17% higher than the prior year and 2% higher sequentially. The acquisition of Normerica contributed 13% growth versus the prior year, and organic sales contributed an additional 4%. Household, personal care, and specialty product sales were 24% above the prior year and 4% higher sequentially, driven by Normerica and continued strong demand for consumer-oriented products. Despite strong end-market demand and a full order book, our global Pet Care sales came in lighter than we expected due to logistics challenges in North America and Europe. Metalcasting sales were 9% higher than the prior year and 16% higher sequentially, driven by strong demand globally, continued penetration of green sand bond technologies in Asia, and the return of volumes from the third quarter seasonal foundry maintenance outages. Environmental product sales grew 13% versus the prior year on improved demand for environmental mining systems, remediation, and wastewater treatment. Building Materials sales grew 21% versus the prior year on higher levels of project activity. Sales in both of these product lines were lower sequentially due to typical seasonality. Operating income for the segment was $29.1 million and operating margin was 11.4% of sales. Margin was temporarily impacted this quarter by approximately $3 million of logistics challenges and inflationary cost increases that could not be passed through contractually until January 1 of this year, primarily in Pet Care and our Metalcasting business in China. The Normerica business has been navigating the same supply chain and inflationary cost challenges as the rest of our business, and we have deployed pricing and productivity actions to achieve accretion as planned in 2022. Now looking to the first quarter, we see a significant rebound in margins for this segment, driven by pricing actions that went into effect on January 1 and continued strong demand across the product lines. And overall, we expect the operating income for this segment to be approximately 20% higher sequentially. And now, let's move to Specialty Minerals. Specialty Minerals sales were $141.5 million in the fourth quarter, 2% higher than the prior year, and 4% lower sequentially. PCC and Process Mineral sales were both 2% above the prior year. This segment was the most impacted by the spike in energy in Europe, as well as logistics and labor challenges we saw in the fourth quarter. Segment operating income was $14.5 million and represented 10.2% of sales. In total, operating income was impacted by $4 million in the quarter, which came from approximately $2 million of unexpected energy inflation and additional $2 million due to the sales and productivity impact resulting from logistics and labor challenges, primarily in our Northeast U.S. plants. Pricing adjustments were made in January to cover these inflationary costs, and low logistics challenges continued into January. We do not foresee these challenges persisting through the quarter. Now moving to the first quarter. We expect higher PCC volumes sequentially on the ramp-up of our new satellite in India and the restart of the satellite in the U.S., and we expect continued strength in Specialty PCC and Processed Minerals. We see margins rebounding to more normal levels based on the pricing we have implemented. We should also see improved productivity in shipment volumes, depending on to the extent to which logistics and labor constraints ease. Overall, for the segment, we expect first-quarter operating income to be 20% to 25% higher than the fourth quarter. And now, let's move to the Refractory segment. Refractory segment sales were $79.2 million in the fourth quarter, 7% higher than the prior year, and 4% higher sequentially on new business volumes and continued strong steel market conditions in North America and Europe. Segment operating income remained strong at $12.4 million, 12% higher than the prior year, and operating margin was 15.7% of sales. Turning to the first quarter. We expect another strong operating performance from this segment with operating income up 20% on incremental volumes from new business. We did see a slight moderation in steel utilization rates in North America in the fourth quarter from the mid-80% range to the low 80s. However, the demand fundamentals for this segment remains strong. Now let's take a look at our cash flow and liquidity highlights. Full-year cash flow from operations was $232.4 million. Capital expenditures were $86 million as we invested in high-return growth and productivity projects, as well as sustaining our operations. Free cash flow was $146.4 million. The company used a portion of free cash flow to repurchase $75 million of shares, completing the prior-year share repurchase authorization and beginning the new $75 million 1-year share repurchase program that the board of directors authorized in October. As of the end of the fourth quarter, total liquidity was over $500 million, and our net leverage ratio was 2.1 times EBITDA. Our balance sheet remains in a very strong position, which provides us with the flexibility we need to continue to invest in high-value, high-return growth opportunities, both organically and inorganically. Looking ahead, we expect another strong year of cash flow generation with cash from operations increasing commensurately with higher income. Our capital spend will be in the range of $85 million to $95 million for 2022. We have a solid pipeline of high-return organic growth opportunities, and we plan to deploy capital spend toward these opportunities, as well as sustaining and improving our operations. And overall, we expect free cash flow increasing to the $150 million to $160 million range for the full year. So now, let me summarize our outlook for the first quarter. Overall, we see continued strong demand across our end markets and our order books reflect this. In the fourth quarter, we saw unusually high spikes in energy costs and increased challenges around logistics and labor availability. Our latest view for the first quarter is that the inflationary pressures and logistics challenges will continue. However, we have pricing actions and operational adjustments in place today to more than offset the known increases and significantly expand margins in the first quarter. Overall, for the company, we expect a strong performance in the first quarter, with operating income in the range of $63 million to $65 million, 15% to 20% higher than the fourth quarter, and with earnings per share around $1.25. As we look ahead, this is going to be another dynamic year with many of the same inflationary and logistics pressures continuing. But with the momentum across our businesses and the growth projects underway and our strong operating performance, 2022 is shaping up to be another record year for MTI. Overall, I'm very excited about where we are as a company and where we're going. We've transformed MTI into a higher-growth, higher-margin, and higher-value company. We have more opportunities in front of us beyond what I've shared with you today that will further enhance this trajectory. We're well-positioned to leverage our balanced portfolio, and we have a breadth of attractive projects across our businesses that will drive our sales and earnings momentum this year. We focused on accelerating our geographic penetration in our core product lines and building our growth opportunities in adjacent markets. In addition, we'll further strengthen our R&D pipeline with a focus on increasing the percentage of revenue from new products, as well as introducing solutions, which help us penetrate attractive markets. With our solid financial footing, we have the resources to execute on all of our growth initiatives. Our strong balance sheet and cash flow generation give us the flexibility to deploy capital to shareholders, while at the same time, accelerating our growth trajectory through acquisitions, similar to what we achieved this past year. We have a targeted list of inorganic opportunities that will continue to transform our company with a focus on profitable growth. Underpinning everything we do is our culture of continuous improvement. Operational excellence is embedded in our company with our employees at its center. It's our employees and their high level of engagement around problem-solving through kaizen events, utilizing standard work practices, and implementing suggestions to improve daily processes, which enables us to adapt to changing environments. It's this ingrained culture that is the foundation of MTI's unique operating capabilities. Sustainability is the core value at MTI. And over the past several years, we've made significant progress to embed our ESG priority deeper into our company, our operating mindset, and our growth strategies. In 2022, we'll be focused on promoting our safety culture of zero injuries, achieving -- or exceeding our six environmental reduction targets, increasing our product portfolio geared toward sustainable solutions, and making MTI a more diverse and inclusive place to work. We look forward to sharing more about these initiatives as we publish our 14th sustainability report in July. To sum it all up, we have a winning formula, an engaged team, and a leading portfolio of businesses. With sales growth of 10% to 15% expected this year, combined with our distinct operational capabilities, we have all the elements in place to deliver a very strong performance in 2022. I'll leave you with the final takeaway. Over the past two years, we've demonstrated two key attributes of our company. 2020 is financial resilience during very challenging conditions. In this past year, it's significant growth potential. It's our more balanced portfolio, which has enabled this performance and which will continue to deliver higher levels of profitable growth going forward.	compname reports fourth quarter 2021 earnings of $1.23 per share, or $1.25 per share, excluding special items. q4 earnings per share $1.25 excluding items. q4 revenue $477 million.
Should one or more of these risks or uncertainties materialize or should any of our underlying assumptions prove incorrect, actual results may differ significantly from results expressed or applied in these communications. In addition, we may use certain non-GAAP financial measures on this conference call. These discussions will be followed by a Q&A period. We expect the call to last about 60 minutes. We had another beat and raise quarter to have a lot of important things to talk about today. Today, I'll be reviewing our first quarter results as well as providing my outlook for the markets we serve. I'd like to start today by highlighting how proud I am of the men and women of MasTec. Their sacrifices, resilience, creativity and commitment during this pandemic have been inspiring. Millions of families throughout the U.S. relied on the power, communications, entertainment and other services we help our customers provide. Our team has again safely delivered. Before getting to quarterly results, this week, we announced the acquisition of INTREN. INTREN is one of the largest private electrical utility contractors in the United States. We believe the changes in electrical distribution needs, led by grid modernizations and hardening, coupled with the transition toward increased electrical vehicle usage, will have an enormous impact on the last-mile distribution of electricity. With over 2,000 team members, INTREN significantly expands our electric distribution and transmission capabilities and footprint. With a strong presence in both the Midwest and the West Coast, areas traditionally underserved by MasTec, this combination will enhance INTREN's capabilities as it continues to expand and allows MasTec to sell its full suite of services, including renewable power generation, substation construction and gas distribution to a relatively new customer base. With trailing 12-month revenues of approximately $550 million, and strong opportunities for future growth, we are very excited about our future opportunities. The purchase price of approximately $420 million represents a purchase price multiple of roughly seven times without taking into account tax benefits that on a net present value basis, represent over a full multiple turn. We believe, based on their prospects, the potential synergies and the cross-sell opportunities that while it's on the higher end of historical multiples for MasTec, we got very good value. On our year-end call, we announced two other acquisitions that closed during the first quarter. In addition to INTREN, we've acquired two other companies during the second quarter. The first Phoenix Industrial is a heavy industrial contractor that enhances our concrete piping and electrical capabilities with a strong West Coast presence. And the other is Buyers Engineering, one of the largest outside plant telecommunication engineering firms in the country. With approximately 900 employees across 31 states, Buyers brings new capabilities to MasTec that we've typically outsourced. With significant investments in fiber construction, supported by both private and public investments, including the Rural Digital Opportunity Fund, smart city funds, the 5G fund for rural America, and potential further telecom infrastructure spend, we expect engineering services to be a critical path to success. Being able to control schedule and resources will not only allow us to enjoy the engineering growth opportunities, but it will also allow us to bundle construction services along with engineering and hopefully, significantly expand our market share. Now some first quarter highlights. Revenue for the quarter was $1.775 billion. Adjusted EBITDA was $204 million. Adjusted earnings per share was $1.10. Cash flow from operations was $257 million. And backlog at quarter end was $7.9 billion. In summary, we had another excellent quarter, and are on track for another great year. Over the last few quarters, we've talked about our strategic long-term goals and our future business mix. Considering the pandemic challenges on the oil and gas industries, we laid out a path to achieving an annual revenue target of $10 billion with double-digit margins. One of our key highlights of 2020 was our ability to grow non-Oil and Gas revenues and EBITDA. Our guidance that we provided today, including our most recent acquisition, reflects continued diversification as we expect, our non-Oil and Gas business to grow approximately 27% in revenues and over 40% in EBITDA in 2021, with significant acceleration in the second half of 2021. We are encouraged by the size and scale of the growth opportunities in front of us. Now I'd like to cover some industry specifics. Our communication revenue for the quarter was $568 million, and margins improved 70 basis points year-over-year. Highlights for the quarter include our growth with T-Mobile, whose revenues increased fourfold over last year's first quarter, and for the first time, broke into our top 10 customer list. Comcast revenues were also very strong in the quarter, increasing 61% from last year's first quarter. That growth was offset with expected declines in both our Verizon and AT&T business, which were both down approximately 35%. Both AT&T and Verizon were vocal about the importance of the 5G spectrum auctions in their business. We expect revenues for these two customers, especially AT&T, to accelerate in the second half of the year with significant growth opportunities heading into 2022. We're also very excited with recent developments around the planned increased investments in the telecommunications wireline networks. The Rural Digital Opportunity Fund, or RDOF, which is a follow-up to the Connect America Fund, will provide $20 billion of funding over the next 10 years to build and connect gigabit broadband speeds in underserved rural areas. Additionally, in October of 2020, the FCC established the 5G run -- fund for rural America, which will provide up to an additional $9 billion in funding over the next decade to bring 5G wireless broadband connectivity to rural America. In addition, the early drafts of the infrastructure bill included additional direct investments in enhancing telecommunications networks, including 5G. I believe we are entering one of the most exciting periods in the history of telecommunications. And that the deployment of 5G wireless technologies and the associated networks is truly a game changer for the consumer, our customers, and for MasTec. Moving to our Electrical Transmission segment. Revenue was $134 million versus $128 million in last year's first quarter. We have now begun one of the larger projects we had been previously awarded, and expect a much better margin profile for the balance of 2021. We also expect backlog to improve as we've been awarded new MSA agreements, and are in late stages of negotiations on a number of larger projects. We believe we are well positioned for 2021 and beyond as the drivers for this segment remain intact, which include aging infrastructure, reliability, renewable integration and system hardening. Moving to our Oil and Gas pipeline segment, revenue was $726 million. We had a strong start to the year as we were working on projects that had been delayed in 2020. Based on our current backlog levels, we expect a strong 2021, and our guidance assumes some project activity will be pushed into 2022 because of regulatory delays. Last year, we forecasted a longer-term recurring revenue target of $1.5 to $2 billion a year, assuming a continued depressed oil and gas market. As a reminder, over the last three years, only 6% of our revenues have come from oil pipelines with the majority of our business being tied to natural gas. We continue to see strong demand for integrity service, gas distribution and line replacement activity. We are focused on continuing to diversify our revenues in this segment. Moving to our Clean Energy and Infrastructure segment. Revenue was $350 million for the first quarter versus $286 million in the prior year, a 22% year-over-year increase. We expect full year's revenues to approximate $2.1 billion, a 37% increase over 2020. Backlog was up sequentially by nearly $360 million. And more importantly, subsequent to quarter end, we've already been awarded approximately $550 million of new projects. While backlog was already at record levels in Q1 in this segment. We expect backlog to continue to increase over the coming quarters. We have made significant investments in this segment to profitably grow our business through organic opportunities in addition to our smaller tuck-in acquisitions. We continue to add talent and resources to meet the increasing demand for our services. We added nearly 2,000 new team members in this segment from the end of the first quarter in 2020 to the end of the first quarter in 2021. With the new administration and a clear focus on clean energy, we have seen a significant increase in planned clean energy investments from both traditional customers as well as oil and gas companies that are trying to improve their carbon footprint. As a leading clean energy contractor and partner, MasTec is uniquely positioned to benefit from these investments. I'd like to highlight the diversification within our Clean Energy and Infrastructure segment. While we got our start, and win, today, we are capable of meeting any of our customers' demands. We are actively working on baseload gas generation projects, renewable biofuel projects, and are seeing significant demand as we continue to quickly expand our solar capabilities and footprint. To recap, we had an excellent first quarter and are very excited about the opportunities in the markets we serve. We are encouraged with the recent developments related to an infrastructure bill. With a significant presence in the telecommunications market, which includes significant 5G build out capabilities, coupled with our exposure to the clean energy market including wind, solar, biofuels, hydrogen and storage, and our recent expansion into heavy infrastructure, including road and heavy civil, we feel we are uniquely positioned to benefit from this anticipated infrastructure spend. We are confident we can hit our growth targets with solely private investments in infrastructure, but do recognize the potential acceleration in our markets with significant government spend. I'm honored and privileged to lead such a great group. The men and women of MasTec are committed to the values of safety, environmental stewardship, integrity, honesty and in providing our customers a great quality project at the best value. These traits have been recognized by our customers. And it's because of our people's great work that we've been able to deliver these outstanding financial results in a challenging environment, and position ourselves for continued growth and success. Today, I'll cover our first quarter financial results and our updated annual 2021 guidance expectation, inclusive of the recently announced INTREN acquisition. As Marc indicated at the beginning of the call, our discussion of financial results and guidance will include non-GAAP adjusted earnings and adjusted EBITDA. In summary, we had strong first quarter results with record revenue of approximately $1.8 billion, a 25% increase over last year; record adjusted EBITDA of approximately $204 million, a 73% increase over last year; and record cash flow from operations of approximately $257 million, a 27% increase over last year. First quarter results exceeded our expectation, with revenue exceeding expectation by approximately $125 million, adjusted EBITDA exceeding our expectation by approximately $32 million and adjusted diluted earnings per share exceeding expectation by $0.30. We expect that $70 million of revenue and $20 million in adjusted EBITDA related to our first quarter beat, represents an increase to our annual 2021 view with the balance representing accelerated quarterly project timing within 2021. We continued our strong cash flow performance during the first quarter, reducing our net debt levels by approximately $65 million to approximately $815 million, despite funding approximately $90 million in acquisitions during the quarter. This equates to a book leverage ratio of less than one times, and we ended the first quarter with a record level of liquidity of approximately $1.7 billion. This balance sheet position, coupled with continued strong cash flow performance, allowed us to easily fund the second quarter 2021 INTREN acquisition, while maintaining ample liquidity and comfortable leverage metrics. Now I will cover some detail regarding our first quarter segment results and guidance expectations for the balance of 2021. First quarter Communications segment performed generally in line with our expectation, which incorporated the expected impact of lower wireless services due to the timing of recent C-band spectrum auctions. As Jose already mentioned, recently awarded C-band spectrum is expected to begin deployment in the latter part of 2021, and is expected to drive significant revenue opportunities for multiple years. First quarter Communications segment adjusted EBITDA margin rate was 8.6% of revenue, a 70 basis point improvement compared to the same period last year. Our annual 2021 Communications segment expectation is that revenue will approximate $2.7 billion to $2.8 billion, with annual 2021 adjusted EBITDA margin rate improving 90 to 110 basis points over 2020 levels. This includes the expectation that both revenue and adjusted EBITDA margin rate improvement will accelerate during the second half of 2021 as C-band spectrum deployment initiates. First quarter Clean Energy and Infrastructure segment, or Clean Energy, performed generally as expected during a seasonally slow quarterly revenue period. Clean Energy segment revenue was $350 million, and adjusted EBITDA was approximately $11 million or 3.1% of revenue. Looking forward toward the balance of 2021, we expect continuation of a very active bidding market in both the Clean Energy and Infrastructure markets. We continue to expect annual 2021 Clean Energy segment revenue will grow in the high 30% range and approach $2.1 billion, with annual 2021 adjusted EBITDA margin rate improvement in the 70 to 110 basis point improvement over the prior year. First quarter Oil and Gas segment revenue exceeded our expectation, with revenue at $726 million and adjusted EBITDA at $168 million. As expected, we initiated activity on selective large projects during the quarter, and we exceeded our estimated production. As I previously mentioned, a portion of this first quarter beat represents an expected improvement to annual 2021 results, while another portion represents an acceleration of expected project activity within the year. We currently expect annual 2021 Oil and Gas segment revenue will range between $2.4 billion to $2.5 billion, with the continued expectation that annual 2021 adjusted EBITDA margin rate for this segment will be in the high teens range. This expectation includes the assumption that selected large project activity over the last half of 2021 will move into 2022 due to permitting approval delays, and thus, second half 2021 Oil and Gas segment revenue is expected to approximate second half 2020 levels with a greater level of project activity expected during the third quarter and a lesser level during the fourth quarter due to the expected timing of project Winter Breakup activity. First quarter Electrical Transmission segment generally performed as expected, with revenue at $134 million and adjusted EBITDA margin rate at 2.7%, reflecting a seasonally slow quarterly revenue period, coupled with the continued impact of project inefficiencies discussed last quarter as we move toward project completion. Looking forward to the balance of 2021, including the expected partial year operations of the INTREN acquisition, we expect annual 2021 revenue for the Electrical Transmission segment to approximate $950 million, and annual 2021 adjusted EBITDA margin rate to approximate 7.5% of revenue. And this guidance includes approximately $330 million of revenue at a double-digit adjusted EBITDA margin rate for the recent acquisition of INTREN, which became effective in May 2021. Now I'll discuss a summary of our top 10 largest customers for the first quarter period as a percentage of revenue. Enbridge revenue was approximately 25%, comprised of Canadian Station and other project activity as well as a large project initiated during the first quarter that will resume in the latter part of the second quarter, once road frost bands are lifted. AT&T revenue derived from wireless and wireline fiber services was approximately 8%, and install-to-the-home services was approximately 3%. The on a combined basis, these three separate service offerings totaled approximately 11% of our total revenue. As previously indicated, this revenue level includes lower wireless services revenue due to the temporary impact of the C-band spectrum auction. Also, as a reminder, it is important to note that these offerings, while falling under one AT&T corporate umbrella, are managed and budgeted independently within that organization giving us diversification within that corporate universe. NextEra Energy was 7%. WhiteWater Midstream was 6%. Verizon and Energy Transfer were each at 3%. Nuke Energy, T-Mobile and Pattern Energy were each at 2% of revenue. Individual construction projects comprised 72% of our first quarter revenue with master service agreements comprising 28%. With the combination of expected resurgence in wireless MSA work, coupled with the INTREN acquisition, whose revenue is virtually all MSA-driven, future MSA revenue is expected to increase as a percentage of our total revenue, highlighting an increased level of MasTec revenue expected to be derived on a recurring basis. At March 31, 2021, our backlog was approximately $7.9 billion, essentially flat to $7.9 billion as of year-end 2020. For the sake of clarity, reported first quarter backlog does not include any amounts for the recently announced INTREN acquisition. Lastly, as we've indicated for years, backlog can be lumpy as large projects burn off each quarter, and new large contract awards only come into backlog at a single point in time. Now I will discuss our cash flow, liquidity, working capital usage and capital investments. During the first quarter, we generated a record level, $257 million in cash flow from operations, and ended the quarter with net debt of $815 million, which equates to a book leverage ratio of 0.9 times adjusted EBITDA. We ended the first quarter with DSOs at 80, just below our expected DSO range in the mid- to high 80s. We are proud of our continued strong cash flow from operations and believe this performance highlights the strength resiliency and consistency of MasTec's cash flow profile. We ended the first quarter with $512 million in cash on hand as well as record liquidity defined as cash plus borrowing availability of approximately $1.7 billion. During the first quarter, we reduced our net debt by $64 million despite approximately $90 million in first quarter acquisition funding. During the second quarter of 2021, given the working capital associated with an expected $320 million increase in sequential quarterly revenue, coupled with the cash outflow for the INTREN acquisition, we expect that our leverage will temporarily increase during the quarter, while still maintaining substantial liquidity of approximately $1 billion, and comfortable leverage metrics within our target range. As we look forward, past the second quarter to the balance of 2021, we expect continued strong cash flow generation despite the working capital associated with our planned 2021 revenue growth, with net debt at year-end, expected to reduce from second quarter levels and approximate $1.1 billion, leaving us with ample liquidity, and an expected book leverage ratio slightly over one times adjusted EBITDA. In summary, our long-term capital structure is extremely solid, with low interest rates, no significant near-term maturities and ample liquidity. This combination gives us full flexibility to take advantage of any potential growth opportunities to maximize shareholder value. We are pleased to significantly increase our annual 2021 guidance. We now project annual 2021 revenue of $8.2 billion with adjusted EBITDA of $930 million or 11.3% of revenue and adjusted diluted earnings of $5.40 per share. This represents a $400 million increase in revenue guidance, a $55 million increase in adjusted EBITDA and a $0.40 increase in adjusted diluted earnings per share, comprised of the combination of our strong first quarter performance and the benefit of the INTREN acquisition. As we have previously provided some color as to our annual 2021 segment expectations, I will briefly cover other guidance expectations. We anticipate lower levels of net cash capex spending in 2021 at approximately $100 million with an additional $180 million to $200 million to be incurred under finance leases, and this expectation is inclusive of expected capital additions for first and second quarter acquisitions. As we have previously indicated, as our end market operations shift with non-Oil and Gas segments, becoming a larger portion of our overall revenue, our capital spending profile should reduce as the Oil and Gas segment has historically required the largest level of capital investment. We continue to expect annual 2021 interest expense levels to approximate $58 million with this level, including over $500 million in first and second quarter 2021 M&A activity. We expect to maintain a strong cash flow profile with annual 2021 free cash flow, once again exceeding adjusted net income, despite the working capital requirements related to our projected $1.9 billion increase in annual 2021 revenue. For modeling purposes, our estimate for 2021 share count continues at 74 million shares. We expect annual 2021 depreciation expense to approximate 4.1% of revenue inclusive of first and second quarter M&A activity. As we have previously indicated, this expectation incorporates an increased level of 2021 Oil and Gas segment depreciation expense when compared to 2020, as we are utilizing conservative depreciation-wise and salvage values on previous capital additions to protect against potential market uncertainties. Given these trends, we anticipate that next year, annual 2022 depreciation expense as a percentage of revenue will decrease when compared to 2021 levels and approximate 3.5% of revenue. We expect annual 2021 Corporate segment adjusted EBITDA to be a net cost of approximately 1% of overall revenue. Lastly, we expect that annual 2021 adjusted income tax rate will approximate 25%. Our second quarter revenue expectation is $2.1 billion, with adjusted EBITDA of $229 million or 10.9% of revenue and earnings guidance at $1.25 per adjusted diluted share. In terms of some additional color on the expected timing of second half 2021 revenue performance, we expect third quarter consolidated revenue growth in the mid- to high 30% range over the prior year, with third quarter 2021 consolidated adjusted EBITDA margin rate approximating 12% of revenue. That concludes our remarks.	q1 revenue rose 25 percent to $1.8 billion. sees fy adjusted non-gaap earnings per share $5.40. sees q2 adjusted earnings per share $1.25. sees q2 revenue about $2.1 billion.
Should one more of our risk or assumptions prove incorrect, or should this information be changing, the results may differ significantly from results expressed or implied in these communications. In addition, we may use certain non-GAAP financial measures in this conference call. Just a note on the 10-Q availability, we've been attempting to file the 10-Q with the SEC since 5:00 p.m. yesterday, but an SEC filing system breach has prevented the filing from being uploaded and accessible. We expect this will be resolved shortly. These discussions will be followed by a Q&A period, and we expect the call to last about 60 minutes. I hope and pray that everyone's family is healthy and safe. We are truly in a challenging and unprecedented time as we continue to manage through the COVID-19 pandemic. During this time, the safety of our team members has been our top priority. I have to say, I'm so proud of the men and women of MasTec, their sacrifices, resilience, creativity and commitment have been inspiring. Millions of families throughout the U.S. rely on the power, communication, entertainment and other services we help our customers provide. First, a quick recap of our second quarter. Revenue for the quarter was $1.569 billion. Adjusted EBITDA was $166 million. Adjusted earnings per share was $0.95. Cash flow from operations was roughly $295 million, and year-to-date cash flow from operations was $497 million. And backlog at quarter end was a second quarter record at $8.2 billion. We had a solid second quarter, meeting our revenue guidance and exceeding our guidance for EBITDA and EPS. It's important to keep in mind that most of our services have been deemed essential under state and local pandemic mitigation orders, and all of our business segments have continued to operate. We are managing through the COVID-19 challenges, including: first and foremost, the safety of our employees and their families; and other challenges, including governmental permitting, crew social distancing mitigation and the impact that, that may have on project schedules and any potential project delays. Our 2020 guidance, which George will cover in detail, assumes the impact of these risks based on the best information we have as of today. While I'll cover our segments in more detail in a minute, I'd like to focus on how I feel MasTec is positioned for long-term success. I'm extremely optimistic about our future prospects. We are very well positioned to take advantage of the continued and growing investment in telephony networks, including Internet connectivity and 5G, the continued investment in grid reliability in the energy sector and the growth of the clean energy sector. As it relates to clean energy, during the second quarter, we made a decision to rebrand our Power Generation and Industrial group to Clean Energy and Infrastructure. We believe this better represents what we are actually doing today as this segment becomes a much larger and important part of MasTec's future. As one of the nation's leading clean energy construction companies, we have experienced significant growth over the last few years, growing revenues from $300 million in 2017 to over $1.5 billion of expected revenues this year. We expect continued growth in 2021 and believe that, by 2022, this segment will exceed the size of what our Oil and Gas segment is today. Today, we also announced record Oil and Gas backlog levels. I'd like to offer some color on this segment's backlog. First, we are highly confident that all of the projects in our current backlog will be built. We believe this backlog represents our strength in the market and our ability to offer value while still attaining solid margins. We view this level of backlog as a significant competitive advantage as we do believe new work will slow down through the first half of 2021. There will still be new work awarded but less of it. Basically, if you don't have a lot of backlog today, the next 1.5 years will be tough. We do expect an improvement in the market as conditions improve and demand increases in a post-COVID environment. In the meantime, between what we have in backlog and other work we have been negotiating with our customers, we believe revenue levels for our Oil and Gas segment in 2021 will be similar to 2020 levels. While George will cover guidance in detail later, we have lowered our annual revenue guidance in Oil and Gas based on the delay of two projects, which have been impacted by regulatory and judicial issues. As I think about our 2020 guidance, I think there are some important takeaways to highlight. First, in the midst of a pandemic, our revenue guidance for 2020 is only down about $200 million or 3% less than 2019 full year revenue. Within that, our Oil and Gas revenue expectation is that it will be down approximately $800 million in 2020 from 2019. That means the rest of our segment revenues will be up approximately $600 million versus last year in the middle of a challenging environment. More importantly, margins on a year-over-year basis are expected to be relatively flat at 11.4% EBITDA margins versus 11.7% last year. Between both the pandemic challenges and the impacts of demand and regulatory issues on our oil and gas markets, I think our financial guidance demonstrates the strength of our diversified portfolio and the efforts we have made over the years of having a strong, diversified service offering. Now I'd like to cover some industry specifics. Our Communications revenue for the quarter was $654 million. More importantly, margins came in strong, and we're up 370 basis points year-over-year and 380 basis points sequentially. We are seeing strong demand from our customers as they work to meet the demands in this changing environment. COVID has helped highlight the importance of our nation's telecommunications networks, and our customers are working hard at providing their customers with reliable and high-speed connectivity. We expect this trend to continue and believe there will be a renewed focus on continuing fiber expansions in the residential markets. This, coupled with the continued opportunities around 5G deployment, provide us with significant opportunities to grow our business. While margins were much improved in the quarter, our revenue has been negatively impacted by COVID. Our installation business has been impacted by strict mitigation efforts related to entering customers' homes, and we continue to have a couple of large markets where work has been very limited. Our guidance assumes these impacts continue through year-end and also include the potential impacts of local permitting delays as some areas slow reopenings or even move back to more strict closures. We have been working with these cities and municipalities to bolster remote permitting capabilities. Revenue in our Electrical Transmission segment was $124 million versus $100 million in last year's second quarter. While margins have been improving over the course of the last year, we had a project that negatively impacted margins based on the change in environmental requirements. We believe these increased costs are mostly recoverable and expect to benefit in the second half of the year. Backlog improved both year-over-year and sequentially, and we made good progress on diversification within this segment. We have been awarded four new MSAs, or master service agreements, as this has been a focus for us to drive consistent recurring work. We believe we are well positioned for 2021 and beyond as the drivers for this segment remain intact, which include aging infrastructure, reliability, renewables and system hardening. Between our strong backlog and the opportunities we see in the market, we expect to be able to deliver both strong revenue growth, coupled with margin expansion in the coming years. Moving to our Clean Energy and Infrastructure segment. Revenue was $426 million for the second quarter versus $250 million in the prior year, a 70% year-over-year increase. We continue to achieve significant growth rates in this segment, and backlog at quarter end exceeded $1 billion. Margins for this segment were strong at 7.1%, and we continue to expect margins to improve over 2019 by over 100 basis points. The size and scope of the opportunities we are seeing in this segment continues to grow. We have made significant investments in this segment to profitably grow our business through organic opportunities. We continue to add talent and resources to meet the increasing demand for our services. While we've highlighted this segment more over the last few quarters, I still think it's an underappreciated part of MasTec's portfolio. Between both the opportunities provided by future clean energy initiatives and the potential for an infrastructure bill after the election, we believe this segment provides significant opportunities for long-term growth. Our Oil and Gas pipeline segment revenue was down, as expected. Second quarter revenue was $369 million compared to revenues of $937 million in last year's second quarter. We ended second quarter with backlog of almost $2.7 billion. As a reminder, over the last three years, only 6% of our revenues have come from oil pipelines, with the majority of our business being tied to natural gas. We have also focused on growing both our distribution and integrity business over the last few years, and we are encouraged by our progress. To recap, we had a good second quarter and are confident we are mitigating the effects and impacts of the COVID-19 virus. While times are challenging and uncertain, opportunities always arise from these challenges. Our customers are looking for ways to change and improve their business models and are looking for strong partners to help them. In that lies our opportunity. Our greatest strength has been to understand the trends in our industry and our customers' needs. Our ability to provide services, whether existing or new, has always been a strength. I'm excited for what the future holds for MasTec. Keep up the good work. Today, I'll cover second quarter results, our guidance expectation for the balance of 2020, including the ongoing impact of the COVID-19 pandemic, as well as our strong cash flow performance, capital structure and liquidity. As Marc indicated at the beginning of our call, the discussion of financial results and guidance will include non-GAAP adjusted earnings and adjusted EBITDA. In summary, our second quarter 2020 results were better than expected, with adjusted EBITDA being the high end of our guidance expectation by $6 million, and adjusted diluted earnings per share exceeding the high end of our guidance expectation by $0.06. These results also exceeded Street consensus, with adjusted EBITDA of $166 million beating Street consensus estimates by $14 million, and adjusted diluted earnings per share of $0.95 beating Street consensus by $0.15. Second quarter 2020 results also continue our strong cash flow performance, generating $293 million in cash flow from operations and reducing sequential total debt levels by $177 million. Our first half 2020 cash flow from operations of $497 million represents a record performance level for MasTec. And we reduced total debt levels by $190 million during the first half of 2020 despite investing approximately $130 million in share repurchases and M&A. This strong performance gives us confidence in our expectation that annual 2020 cash flow from operations will be at a new record level, approximating $600 million. Subsequent to quarter end, we took advantage of favorable credit market conditions to refinance our four 7/8% $400 million senior unsecured notes, which we have called for redemption in mid-August. Due to the strong demand for the new issue, our new senior unsecured notes offering was upsized by 50% to $600 million, with a lower interest rate of 4.5% and extended maturity to 2028 and overall better terms. Our new senior notes offering is expected to close in early August. I will make further remarks on our capital structure later, but suffice it to say that our cash flow, capital structure and liquidity are in excellent shape, even stronger than last quarter. And this combination affords us full flexibility to invest in strategic opportunities as well as giving us a strong advantage as we navigate through the uncertain economic climate resulting from the COVID-19 pandemic. Now I will cover some highlights regarding our second quarter segment results and guidance expectations for the balance of 2020. Second quarter 2020 Communications segment revenue of $654 million was basically flat with the same period last year. Second quarter 2020 Communications segment adjusted EBITDA margin rate was 11.7% of revenue, representing a sequential increase of 380 basis points when compared to the first quarter of 2020 and a 370 basis point improvement when compared to last year's second quarter. As Jose mentioned in his remarks, this performance level includes disruption and lost revenue related to the COVID-19 pandemic as we had selected markets in which construction work slowed and, in some cases, stopped due to local municipality permitting approval delays. We believe that the evolution toward 5G technology, coupled with increasing remote workplace and education trends in the U.S. because of the COVID-19 pandemic, will drive significant long-term demand for our wireless and wireline services in 2021 and beyond as the COVID-19 pandemic effects begin to normalize. As we look to the remainder of 2020, we expect second half 2020 Communications segment revenue levels will approximate first half 2020 revenue levels, with some continued disruption and lost revenue primarily from local municipality permitting issues related to the COVID-19 pandemic. We are also increasing our annual 2020 Communications segment adjusted EBITDA margin rate expectation by approximately 100 basis points and now expect that Communications segment annual 2020 adjusted EBITDA margin rate will approximate 10% of revenue, which equates to a 200 basis point improvement over last year. While we are pleased with the expected 200 basis point improvement in 2020 Communications segment adjusted EBITDA margin rate, especially in light of challenging conditions in 2020, it is important to note that this performance level still leaves ample room for future improvement in 2021 and beyond as pandemic conditions normalize and telecommunications market trends continue to develop. As expected and previously communicated, second quarter 2020 Oil and Gas segment revenue of $369 million decreased 61% compared to the same period last year based on project start time. Second quarter 2020 Oil and Gas segment adjusted EBITDA margin rate was 21.7% of revenue, continuing our strong performance trend with this performance, including the benefit of project mix comprised of reduced levels of lower-margin, cost-plus activity and continued strong project productivity on numerous smaller pipeline projects. During the second quarter, we were awarded approximately $450 million in new Oil and Gas project awards, bringing the total of new backlog additions during the first half of 2020 to approximately $1.5 billion. Second quarter 2020 Oil and Gas segment backlog of $2.66 billion represented a new all-time segment backlog record. First half 2020 Oil and Gas segment award activity gives us strong visibility for solid project activity over the next 12 to 18 months. That said, predicting the project start timing has become more difficult due to the impact of regulatory and judicial challenges. Given the size of our large projects, a 30-day delay in project activity could impact monthly revenue by as much as $100 million to $150 million. Our current annual 2020 revenue guidance expectation incorporates revised project start dates for two large projects with late summer, early fall start dates. This results in annual 2020 Oil and Gas segment revenue now expected to approximate $2.3 billion, with solid backlog activity shifting into 2021. Given that the majority of project activity shifting to 2021 is related to lower-margin, cost-plus activity, we are increasing our annual 2020 Oil and Gas segment adjusted EBITDA margin rate expectation from the high teens to the low 20% range. Second quarter 2020 Electrical Transmission segment revenue increased approximately 24% compared to the same period last year to approximately $124 million, and segment adjusted EBITDA was a slight loss of approximately $3 million. As Jose indicated, during the quarter, we experienced production inefficiencies as we worked toward completion of a project. The project is approximately 90% complete as of the end of the second quarter, and we expect to recover a portion of these inefficiencies from our customer during the back half of 2020. As we look toward the remainder of 2020, we expect Electrical Transmission segment second half 2020 revenue will approximate first half 2020 levels, with second half 2020 adjusted EBITDA margin rate for this segment expected in the high single-digit range. Our second quarter 2020 electrical distribution segment backlog of $551 million increased sequentially 27% or $117 million when compared to the first quarter, and this supports our continued belief that end-market conditions for this segment are supportive for strong 2021 revenue and adjusted EBITDA growth in this segment. Second quarter 2020 Clean Energy and Infrastructure segment revenue of $426 million increased approximately 70% compared to the same period last year. Second quarter 2020 adjusted EBITDA margin rate was 7.1% of revenue, a sequential increase of 540 basis points relative to the prior quarter and 360 basis points compared to the same period last year. We are pleased with the second quarter 2020 adjusted EBITDA margin rate improvement in this segment, which begins to reflect our longer-term expectation of potential for this segment in the high single-digit range. As Jose indicated in his remarks, we expect strong annual 2020 revenue growth and improved adjusted EBITDA margin rate performance when compared to last year, with continued growth expectations into 2021 and a very active clean energy market. Now I will discuss a summary of our top 10 largest customers for the 2020 second quarter period as a percentage of revenue. AT&T revenue, derived from wireless and wireline fiber services, was approximately 16% and install-to-the-home services was approximately 3%. On a combined basis, these three separate service offerings totaled approximately 19% of our total revenue. As a reminder, it is important to note that these offerings, while falling under one AT&T corporate umbrella, are managed and budgeted independently within their organization, giving us diversification within that corporate universe. Permian Highway Pipeline was 10% of revenue. Verizon, comprised of both wireline fiber and wireless services, was 6%. Iberdrola, Comcast and Xcel Energy were each 5%. And NextEra Energy, NG, Duke Energy and Enterprise Products were each at 4%. Individual construction projects comprised 64% of our revenue, with master service agreements comprising 36%, once again highlighting that we have a substantial portion of our revenue derived on a recurring basis. Lastly, it is worth noting, as we operate in a COVID-19-induced period of macroeconomic uncertainty, that all of our top 10 customers, which represented over 66% of our second quarter revenue, have investment-grade credit profiles. Now I'll discuss our cash flow, liquidity, working capital usage and capital investments. During the second quarter, we generated $293 million in cash flow from operations and ended the quarter with net debt, defined as total debt less cash of $1.19 billion, which equates to a very comfortable book leverage ratio of 1.6 times. We ended the quarter with DSOs at 90 days compared to 102 days last quarter. During the first half of 2020, we generated a record-level $497 million in cash flow from operations, which allowed us to reduce our total debt levels by approximately $190 million, while investing in approximately $130 million in share repurchases and M&A. During the first half of 2020, we repurchased approximately 3.6 million shares, or approximately 5% of our outstanding share base, with the vast majority of this activity occurring in the first quarter. Regarding our share repurchase program, we expect to opportunistically invest in this program as conditions warrant, while also prudently managing our balance sheet. We currently have $158 million in open repurchase authorizations. And as of today, have not executed any share repurchases during the third quarter. We are fortunate that our business operations profile typically generates significant cash flow from operations, affording us the flexibility to invest strategically in efforts to maximize shareholder value. Based on our strong first half 2020 cash flow performance, we are increasing our expectation for annual 2020 cash flow from operations to approximate $600 million, a new record level. This cash flow performance expectation incorporates our view that second half 2020 revenue levels will accelerate, thereby increasing our working capital investment as we close out the 2020 year. As previously indicated, we opportunistically took advantage of market conditions after the end of the second quarter to further strengthen our capital structure through a successful offering of $600 million in new senior unsecured notes, maturing in 2028 with a favorable 4.5% coupon. This offering is expected to close in early August and will allow us to redeem our existing $400 million four 7/8% senior notes at a lower interest rate, extend our maturity profile and will increase our overall liquidity by approximately $200 million, which should approximate $1.3 billion post closing. In summary, our record 2020 cash flow expectation, coupled with solid long-term capital structure, low interest rates, no significant near-term maturities and ample liquidity, places MasTec's balance sheet in an extremely strong position. Regarding capital spending, during the second quarter, we incurred net cash capex, defined as cash capex net of equipment disposals, of approximately $63 million, and we incurred an additional $80 million in equipment purchases under finance leases. We currently anticipate incurring approximately $175 million in net cash capex in 2020, with an additional $115 million to $135 million to be incurred under finance leases. Moving to our current 2020 guidance. Our third quarter 2020 revenue expectation is approximately $1.9 billion, with adjusted EBITDA guidance approximately $254 million or 13.4% of revenue and adjusted earnings per share guidance at $1.67. We are projecting annual 2020 revenue to approximate $7 billion, with adjusted EBITDA expected to approximate $800 million or 11.4% of revenue and adjusted diluted earnings per share to approximate $4.93. These guidance expectations incorporate the impact of projected lower second half 2020 Oil and Gas segment revenue as regulatory delays on two large projects are expected to lower 2020 project activity and shift awarded work into 2021, as well as improved 2020 EBITDA margin rate expectations in our Oil and Gas and Communications segments. As we have previously provided some color as to our 2020 segment expectations, I will now briefly cover some other guidance expectations, as highlighted in our release yesterday. Based on our expected strong cash flow, lower nominal interest rates and our recent senior notes offering, we expect annual 2020 interest expense levels to approximate $63 million, with this level only including currently executed share repurchase activity. Our estimate for full year 2020 share count is now 73.6 million shares. It should be noted that, for valuation modeling purposes that based on the timing of repurchases, our year-end 2020 share count will approximate 73 million shares, and that's inclusive of the full impact of the repurchases made to date. We expect annual 2020 depreciation expense to approximate 3.7% of revenue due to the combination of lower expected 2020 revenue levels and timing impact of capital additions and acquisition activity. Lastly, we continue to expect that our annual 2020 adjusted income tax rate will approximate 24%. This expectation includes our existing first half 2020 adjusted tax rate as well as the expectation that quarterly adjusted income tax rates for the balance of 2020 will approximate 26%, and this blend leads to an annual 2020 adjusted tax rate that approximates 24%.	sees q3 2020 revenue about $1.9 billion. sees q3 2020 adjusted non-gaap earnings per share $1.67. sees fy 2020 adjusted non-gaap earnings per share $4.93. mastec - covid-19 pandemic has had a negative impact on co's operations and expects some continued negative impact for remainder of 2020.
Should one or more of these risks or uncertainties materialize or should any of our underlying assumptions prove incorrect, actual results may differ significantly from results expressed or implied in these communications. These discussions will be followed by Q&A period. We expect the call to last about 60 minutes. We had another great quarter and all good things to talk about. So I'll go ahead and turn over to Jose. Today, I will be reviewing our second quarter results as well as providing my outlook for the markets we serve. I'd like to start today by highlighting how proud I am of the men and women of MasTec. Their sacrifices, resilience, creativity and commitment continue to inspire me. Millions of families throughout the US rely on the power, communications, entertainment and other services we help our customers provide. Now some second quarter highlights. Revenue for the quarter was $1.963 billion. Adjusted EBITDA was $230 million, adjusted earnings per share was $1.30. And backlog at quarter end was $9.2 billion, a sequential increase of nearly $1.4 billion. In summary, we had another excellent quarter and are on track for another great year. The highlight of our quarter was the continued acceleration of customer demand and opportunities as evidenced by our growing backlog. We truly believe we are at the beginning of what we think will be transformational changes across our segments. We see several different catalysts that could have a significant impact on our growth. Within our communications segment, catalysts include; a ramp-up of 5G-related activity and spend; continued focus on expanding fiber networks both in rural communities and in major cities to support broadband services as well as wireless backhaul; an increased focus on smart city initiatives with increased availability of capital from both the public and private sector. In our electrical transmission and distribution segment, catalysts include; grid modernization including significant investments for improved grid reliability and system hardening to better prepare for storms and fires, the growing need for new lines to tap into renewable rich geographies, and the focus on grid architecture related to growing electrical vehicle charging demand. In our clean energy and infrastructure segment, catalysts include; growing focus on sustainability and climate initiatives, including zero carbon emission goals, significant investments in renewable power generation including wind and solar, a focus on other clean energy generating fuels including biomass, geothermal and hydrogen, opportunities around carbon capture and the potential benefits, and finally the role of battery storage and its improving economics. We believe we are very well-positioned to benefit from the growing and accelerating trends in our business segments. Changes in both the communication and power markets are accelerating. And so many of these changes directly impact the services we provide. The opportunities to be innovative and involved in this evolution in very early stages represents how far we've come as a business and the value that our customers know we can provide. For example, we continue to make significant investments in increasing our capabilities to meet customer demand. Our team member count increased year-over-year from 18,000 to 26,500 team members at quarter end and was up sequentially by nearly 6,000 team members. Over the last few quarters, we talked about our strategic longer-term goals and our future business mix. Considering the challenges in the oil and gas industries, we led our path to achieving annual revenue target of $10 billion, with double-digit margins. One of our key highlights of 2020 was our ability to significantly grow non-Oil and Gas revenues and EBITDA. Our full year guidance that we provided today reflects continued diversification, as we expect our non-Oil and Gas business to grow over 20% in revenue and over 30% in EBITDA in 2021, with significant acceleration in the second half of 2021. While this is good progress, we know we can do better. While our Communications segment is performing as expected financially, our Transmission and Clean Energy segment have underperformed their margins. This underperformance in both segments has been limited to a small number of projects. More importantly, we are nearing completion on these projects. And excluding these projects, the rest of the book of business is performing well. We expect sequential margin improvement in both segments in the third quarter, with further improvements in the fourth quarter. We expect to exit the year in both segments, with strong momentum, improved margins and significant opportunities for further growth in 2022. Now, I'd like to cover some industry specifics. Our Communications revenue for the quarter was $630 million and margins improved 290 basis points sequentially. Highlights for the quarter included our growth with T-Mobile, whose revenues again increased fourfold over last year's second quarter and was MasTec's seventh largest customer for the quarter. Comcast revenue was also very strong in the quarter, increasing over 30% from last year's second quarter. That growth was offset with expected declines in both our Verizon and AT&T business, which were both down over 25%. Both AT&T and Verizon were very vocal about the importance of the 5G spectrum auctions in their business. We expect revenues for these two customers, especially AT&T to accelerate in the second half of the year, with significant growth opportunities heading into 2022. Over the last few quarters, we've talked about the opportunities related to the Rural Digital Opportunity Fund or RDOF, which will provide $20 billion of funding over the next 10 years to build and connect gigabit broadband speeds in underserved rural areas and the 5G Fund for Rural America, which will provide up to $9 billion in funding over the next decade to bring 5G wireless broadband connectivity to rural America. Today, we are pleased to report the largest quarterly sequential segment backlog increase in the company's history. Communications segment backlog, increased sequentially by $489 million, and was driven by bookings across all segment end markets, including wireless, fiber deployments and fulfillment work. We are in early stages of what we expect to be a very robust and growing telecom infrastructure market and feel we are very well positioned. Moving to our Electrical Transmission segment. Revenue was $232 million versus $128 million in last year's second quarter. The increase was mostly due to the INTREN acquisition, which contributed two months' worth of revenue. INTREN performed well in the quarter and we're excited about their growing opportunities. Customer reaction to the acquisition has been very good and we're seeing a growing number of opportunities for them for 2022 and beyond. We believe the changes in Electrical Distribution & Transmission needs, led by grid modernizations and hardening, reliability and renewable integration, coupled with the transition toward increased electrical vehicle usage will have an enormous impact on the last mile distribution of electricity. Moving to our Oil and Gas pipeline segment. Revenue was $621 million and margins remained strong. Our guidance assumed project activity will be pushed into 2022, because of regulatory delays. As a reminder, last year, we forecasted a long-term recurring revenue target of $1.5 billion to $2 billion a year, assuming a continued depressed oil and gas market. As commodity prices have increased and maintained at strong levels, we have seen an increase in customer requests, as we are working with a number of customers, repricing previous projects and are optimistic that we will see an uptick in opportunities heading into 2022. We continue to see strong demand for integrity services, gas distribution and line replacement activity. We've also seen a number of developments around pipelines for both carbon capture and hydrogen. We are focused on continuing to diversify our revenues in this segment. Moving to our Clean Energy and Infrastructure segment. Revenue was $482 million for the second quarter. While we're focused on margin improvement as I discussed earlier, opportunities continue to expand. Segment backlog at quarter end was at record levels, with a sequential increase of $320 million and a year-to-date increase of $680 million. With the new administration and a clear focus on sustainability and clean energy, we have seen a significant increase in planned clean energy investments from our customers, as they improve their carbon footprint. As a leading clean energy contractor and partner, MasTec is uniquely positioned to benefit from these investments. We believe our diversification is our strength in this market as we're capable of meeting any of our customers' demands. We are actively working on renewable projects including wind, solar, and biomass; baseload gas generation projects including dual-sourced hydrogen capable projects, as well as our growing presence in the infrastructure market. To recap, we've had a solid first half of 2021 and are very excited about the opportunities in the markets we serve. Finally, I'd like to highlight the potential opportunities of an infrastructure build. With a significant presence in the telecommunications market which include 5G build-out capabilities, our involvement in maintaining and building the electrical grid coupled with our exposure to the clean energy market including wind, solar, biofuels, hydrogen, and storage and our recent expansion into heavy infrastructure including road and heavy civil, we feel we are uniquely positioned to benefit from potential infrastructure spend. We are confident we can hit our growth targets with solely private investments in infrastructure, but do recognize the potential acceleration in our markets with significant government spend. I'm honored and privileged to lead such a great group. The men and women of MasTec are committed to the values of safety, environmental stewardship, integrity, honesty, and in providing our customers a great quality project at the best value. These traits have been recognized by our customers and it's because of our people's great work that we've been able to deliver these outstanding financial results in a challenging environment and position ourselves for continued growth and success. Today, I'll cover second quarter financial results and our updated annual 2021 guidance expectations. As Marc, indicated at the beginning of the call, our discussion of financial results and guidance will include non-GAAP adjusted earnings and adjusted EBITDA. In summary, we had strong second quarter results with revenue of approximately $1.96 billion, a 25% increase over last year; adjusted EBITDA of approximately $230 million; and adjusted EBITDA margin rate at 11.7% of revenue. This represented a 39% increase in adjusted EBITDA dollars and a 120 basis point increase in adjusted EBITDA margin rate over last year's second quarter. Second quarter backlog of $9.2 billion represented an all-time record high for MasTec. Importantly, our non-oil and gas segment backlog sequentially increased $1.6 billion with record second quarter backlog in Communications, Clean Energy and infrastructure, and Electrical Transmission. We believe this backlog growth supports our expectation that end market trends are significantly shifting and gathering momentum in these segments affording MasTec significant future opportunity. Our continued focus on working capital management during 2021 has allowed us to easily fund organic working capital needs, while investing approximately $600 million in strategic acquisitions. As of the end of our second quarter, we maintained a strong balance sheet and capital structure with liquidity approximating $1.2 billion and comfortable leverage metrics. Now, I will cover some more detail regarding our second quarter segment results and guidance expectations for the balance of 2021. Second quarter Communications segment operations performed generally in line with our expectations with revenue of $630 million inclusive of expected temporary lower levels of wireless project activity prior to the upcoming construction ramp-up for C-band spectrum awards. Second quarter Communications segment adjusted EBITDA margin rate was 11.5% of revenue a 290-basis-point improvement sequentially. Our annual 2021 Communications segment expectation is that revenue will approximate $2.6 billion to $2.7 billion with annual 2021 adjusted EBITDA margin rate improving 90 to 110 basis points over 2020 levels. Regarding some color on expectations during the second half of 2021, we expect third quarter year-over-year revenue growth in the mid to high single-digit range with fourth quarter year-over-year revenue growth accelerating in the mid to high 20% range. We also expect that third quarter adjusted EBITDA margin rate will show a slight sequential improvement with more substantial acceleration during the fourth quarter as segment revenue growth accelerates. Second quarter Clean Energy and Infrastructure segment or Clean Energy, revenue was $482 million. Adjusted EBITDA was approximately $16 million or 3.2% of revenue. Second quarter revenue and operating results were negatively impacted by project start-up delays and project inefficiencies. As we have mentioned before, we have expanded our operations and headcount in this segment very quickly in order to meet increasing demand. And with that expansion, we've experienced some growing pain and efficiencies. During the second quarter, we estimate the combination of start-up delays and project inefficiencies inclusive of weather, negatively impacted second quarter segment operating margins by 350 basis points to 400 basis points. As we look forward, we expect improved performance during the second half of 2021 with second half revenue approximating $1.2 billion, slightly over a 40% increase, compared to first half 2021 levels with adjusted EBITDA margins in the range of 7% to 8% of revenue. And this is due to the leverage benefit of higher forecasted second half 2021 revenue levels. And the benefit of exiting two underperforming projects which are approximately 75% complete as of the end of the second quarter. We are very excited, that Clean Energy's second quarter backlog reached a new all-time record of $1.7 billion. And believe that this segment is well positioned, for significant long-term revenue growth and adjusted EBITDA margin rate improvement. Our annual 2021 Clean Energy segment expectation is that revenue range between $2 billion to $2.1 billion with annual 2021 adjusted EBITDA margin rate improvement in the 20 basis point to 70 basis point range over the prior year. Regarding our second half 2021 Clean Energy adjusted EBITDA margin rate expectations, we expect sequential improvement in the third quarter, as we continue to experience some impact of the two previously mentioned underperforming projects which will generate revenue at no margin. Additionally, we anticipate that our highest-margin performance will occur during the fourth quarter due to project mix with a diminished and minimal impact of these two underperforming projects as well as a heavier concentration of project completions expected during the fourth quarter. Second quarter Oil and Gas segment revenue was $621 million and adjusted EBITDA was $138 million, generally in line with our expectation. We currently expect annual 2021 Oil and Gas segment revenue will range between $2.4 billion to $2.5 billion with the continued expectation, that annual 2021 adjusted EBITDA margin rate for this segment will be in the high-teens range. This expectation includes the continued assumption that selected large project activity will move into 2022, due to permitting approval delays. This delay is expected to manifest itself during the fourth quarter and thus, we expect strong year-over-year revenue growth in the third quarter with a lesser level of fourth quarter project activity, as delayed project activity shifts into 2022. Second quarter Electrical Transmission segment revenue was $233 million and adjusted EBITDA margin rate was 4% of revenue. Second quarter backlog was $1.3 billion, an approximate $800 million sequential increase. We completed the acquisition of INTREN, which focuses primarily on electrical distribution mid-quarter and this added approximately $100 million of revenue to this segment during the quarter, as well as most of the segment's sequential backlog growth. Given the size and expanded offerings of INTREN's acquired operations, we are evaluating a segment name change to better reflect our operations. And we expect to advice on our determination, when we report third quarter results. In summary, INTREN's operations performed well, and as expected, during the partial quarter period, while our legacy Electrical Transmission operations were impacted by weather-related project inefficiencies and increased closeout costs on two projects which are over 90% complete, as of the end of the second quarter. These two projects negatively impacted second quarter Electrical Transmission segment operating results by approximately $8.5 million and 370 basis points. Looking forward to the balance of 2021, we expect annual 2021 revenue for the Electrical Transmission segment to approximate $950 million to $1 billion and annual 2021 adjusted EBITDA margin rate to approximate 6.5% of revenue. Relative to the remainder of 2021 expectations, inclusive of INTREN, we anticipate that second half 2021 revenue levels will range in the low $600 million range a year-over-year increase of approximately $350 million. Second half 2021 adjusted EBITDA margin rate for this segment is expected to approximate 8% of revenue, due to the combination of improved legacy operations as we exit two underperforming projects and the benefit of higher-margin INTREN MSA operations. We continue with the belief that, multiple macro end market trends including renewable power generation, increased distribution needs to support electric vehicle expansion, and required grid investments for storm and fire hardening are continuing to develop and should provide our expanded segment operations substantial future growth opportunities. Now I will discuss a summary of our top 10 largest customers for the second quarter period, as a percentage of revenue. Enbridge and AT&T were both 12% of revenue. AT&T revenue derived from wireless and wireline fiber services totaled approximately 9% and install-to-the-home services, was approximately 3%. On a combined basis these three separate service offerings, totaled approximately 12% of our total revenue. As previously indicated this revenue level included expected lower first half 2021 wireless services revenue as project activity has temporarily slowed, while AT&T prepares to initiate C-band spectrum construction. Also as a reminder, it's important to note that these offerings while falling under one AT&T corporate umbrella are managed and budgeted independently within the organization, giving us diversification within that corporate universe. Lastly with AT&T's recent divestiture of its DIRECTV operations, we will no longer report DIRECTV install-to-the-home operations as a part of AT&T revenues starting next quarter. NextEra was 8% of revenue comprising services across multiple segments including Clean Energy, Communications and Electrical Transmission. Equitrans Midstream and Comcast were each 5% of revenue. T-Mobile, Duke Energy and Energy Transfer were each 3% of revenue and Midstream and Elite were each 2%. Individual construction projects comprised 68% of our second quarter revenue with master service agreements comprising 32%. With the combination of an expected resurgence in wireless MSA work coupled with the INTREN acquisition whose revenue is virtually all MSA-driven, future MSA revenue is expected to increase as a percentage of our total revenue, highlighting an increased level of MasTec revenue expected to be derived on a recurring basis. Lastly, as we've indicated for years, backlog can be lumpy as large projects burn off each quarter and new large contract awards only come into backlog at a single point in time. At June 30, 2021, we had a record total backlog of approximately $9.2 billion, up about $1 billion from second quarter last year and up $1.3 billion sequentially from last quarter. Importantly this backlog reflects record segment backlog levels across our non-oil and gas segments namely communications, clean energy and electrical transmission. We believe this demonstrates the strength of demand in our non-oil and gas segments, validating our expectation that accelerating end market trends in these segments will offer substantial growth opportunities for MasTec. Now, I will discuss our cash flow, liquidity, working capital usage, and capital investments. During the second quarter, we easily funded working capital associated with over $120 million in organic revenue growth, as well as approximately $500 million in acquisition activity. We ended the quarter with $1.2 billion in liquidity and net debt defined as total debt less cash and cash equivalents at $1.3 billion, which equates to a very comfortable 1.4 times leverage metric. Our year-to-date 2021 cash provided by operating activities was $345 million, $118 million lower than in the first half of 2020. This performance is impressive as our first half 2021 cash flow includes working capital funding requirements associated with approximately $750 million in higher revenue levels when compared to last year and thus this performance was possible due to our strong working capital management. We ended the second quarter of 2021 with DSOs at 80 compared to 86 days at year-end 2020 and 90 days for the second quarter last year. And this level is slightly below our target DSO range in the mid to high 80s. In summary, we are proud of the strength, resilience and consistency of MasTec's cash flow profile. As we look forward to the balance of 2021, we expect continued strong cash flow generation despite the working capital associated with our 2021 revenue growth and expect that annual 2021 free cash flow will once again exceed adjusted net income. Assuming no second half 2021 acquisition,activity net debt at year-end is expected to approximate $1.1 billion leaving us with ample liquidity and expected book leverage slightly over one time adjusted EBITDA. In summary, our long-term capital structure is extremely solid with low interest rates, no significant near-term maturities and ample liquidity. This combination gives us full flexibility to take advantage of any potential growth opportunities to maximize shareholder value. Moving to our 2021 annual guidance view. We project annual 2021 revenue of $8.1 billion with adjusted EBITDA of $930 million, or 11.5% of revenue and adjusted diluted earnings of $5.45 per share. Our current view represents a slight decrease in the annual 2021 revenue expectation, primarily due to some project activity slippage to 2022 in communications and clean energy, while reaffirming the annual adjusted EBITDA view of $930 million, and increasing our adjusted diluted earnings per share by $0.05 to $5.45 per share. The increase in adjusted diluted earnings per share is primarily due to lower expected interest and income tax expenses. As we have previously provided some color regarding our segment expectations, I will now briefly cover some other guidance expectations. We anticipate net cash capex spending in 2021 at approximately $120 million with an additional $160 million to $180 million to be incurred under finance leases. And this expectation is inclusive of expected capital additions for first half 2021 acquisitions. As we have previously indicated, as our end market operations shift with non-oil and Gas segments becoming a larger portion of our overall revenue. Our capital spending profile should reduce as the Oil and Gas segment has historically required the largest level of capital investment. We expect annual 2021 interest expense levels to approximate $56 million with this level including approximately $600 million in acquisitions funding activity during the first half of 2021. For modeling purposes, our estimate for 2021 share count continues at 74 million shares. We expect annual 2021 depreciation expense to approximate 4.2% of revenue inclusive of first half 2021 acquisition activity. As we have previously indicated, this expectation includes an increased level of 2021 Oil and Gas segment depreciation expense when compared to 2020, as we're utilizing conservative, depreciation life and salvage value estimates on previous capital additions to protect against potential market uncertainties. Given these trends, we anticipate that next year annual 2022 depreciation expense as a percentage of revenue will decrease when compared to 2021 levels and approximate 3.5% of revenue. We expect annual 2021 corporate segment adjusted EBITDA to be a net cost of approximately 1% of overall revenue. And lastly, we expect that annual 2021 adjusted income tax rate will range between 24% to 25% with the expectation that the third quarter tax rate may be slightly lower than the annual rate. Our third quarter revenue expectation is $2.3 billion with adjusted EBITDA of $267 million or 11.6% of revenue and earnings guidance at $1.71 per adjusted diluted share.	sees fy adjusted non-gaap earnings per share $5.45. sees q3 adjusted earnings per share $1.71. sees q3 revenue about $2.3 billion.
Should one or more of these risks or uncertainties materialize or should any of our underlying assumptions prove incorrect, actual results may differ significantly from results expressed or implied in these communications. In addition, we may use certain non-GAAP financial measures in this conference call. The format of the call will be remarks and announcements by Jose, followed by a financial review from George. These discussions will be followed by a Q&A period, and we expect the call to last about 60 minutes. We had another great quarter and have a lot of things to talk about today. MasTec continues to excel during these challenging and unprecedented times as we manage through the COVID-19 pandemic. During this time, the safety of our team members has been our top priority. I have to say, I'm so proud of the men and women of MasTec. Their sacrifices, resilience, creativity and commitment have been inspiring. Millions of families throughout the United States rely on the power, communications, entertainment and other services we help our customers provide. First, some third quarter highlights. Revenue for the quarter was $1.7 billion. Adjusted EBITDA was $265 million. Adjusted earnings per share was $1.83. Year-to-date cash flow from operations is $712 million, and backlog at quarter end was $7.7 billion. In summary, we had another excellent quarter and are on track for another great year. I believe the third quarter demonstrated the strength of MasTec's business diversification. To me, the highlight of the quarter was the growth of our non-Oil and Gas segments. Revenue for these segments grew at 19% and EBITDA for these segments grew at 83% on a year-over-year basis. We expect continued growth of these segments in both revenue and earnings driven by a number of growth catalysts in both Communications and Clean Energy. Catalysts in Communications included the continued rollout of 5G and the ever-increasing fiber opportunities tied to it, the growing focus on increasing consumer broadband speed by both the telecom and cable TV carriers and the launch and growth of a 5G home product. Clean Energy catalysts include the continued focus on carbon neutrality. As one of the largest clean energy contractors in the country, our expertise in constructing wind farms, solar farms, biomass facilities, high-voltage transmission lines, substations, battery storage and hydrogen-enabled solutions uniquely position us to take advantage of growth in this market. Now I'd like to cover some industry specifics. Our Communications revenue for the quarter was $645 million. More importantly, margins came in strong at 12.3% and were up 390 basis points year-over-year and up sequentially. The pandemic has helped highlight the importance of our nation's telecommunication networks, and our customers are working hard at providing their customers with reliable and high-speed connectivity. We expect this trend to continue and believe there will be a renewed focus on continuing fiber expansions in the residential markets. To illustrate, on an earnings call earlier this week, the CEO of Verizon said, and I quote, "Fiber richness of our network is a core element". The CEO of Corning on their call this week said, "The density of fiber necessary to deliver its promise is yet another example, illustrating that up to 100 times more fiber is required to deploy 5G in the city than 4G". And at a conference in September, the CEO of AT&T made two statements. First, he stated, and I quote, "Anything we can do to put more fiber out into the network, serve both our consumer and business segments and use that to power what, over time, is going to become a much more dense and distributed wireless network. That's, first of all, one of our key focus areas and something we see is very important to us". He followed that up and reiterated, "That priority #1 is to make sure that we're investing in our core business, and that includes fiber and making sure we have broadband connectivity on 5G". And when you think about it, those two are not dissimilar. When you have a great 5G network, you're deploying a lot of fiber. Based on those comments, I think it's important to note that MasTec's wireline business has grown 180% over the last five years, 57% over the last three years and about 13% over the third quarter of last year. Couple this with the continued opportunities around 5G deployment, and this provides us with significant opportunities to grow our business. In September, Samsung announced a $6.6 billion deal with Verizon to provide network equipment and 5G radios through 2025. Deals like these are very important to MasTec as they need to be in place for the next phase of network expansion to take place. The analytics firm IHS Markit estimates that over the next 15 years, the 5G investment in the U.S. will approach $1 trillion. Over the coming months, we expect two important government initiatives that will be catalyst to our business. The first is the award of funds from the Rural Digital Opportunity Fund to help bring high-speed Internet to rural communities. The second is the mid-band wireless spectrum auctions expected later this year. Both of those should lead to significant opportunities for MasTec. I believe we are entering one of the most exciting periods in the history of telecommunications and that the deployment of 5G wireless technologies and the associated networks is truly a game changer for the consumer, our customers and for MasTec. Moving to our Electrical Transmission segment. Revenue was $129 million versus $103 million in last year's third quarter. Margins improved sequentially, and we expect further improvement in the fourth quarter. Backlog remained strong and improved year-over-year. We are confident that we can deliver strong revenue growth next year as we have a number of new projects starting. Scale in this segment is important for us as we strive to achieve double-digit margins. We believe we are very well positioned for 2021 and beyond as the drivers for this segment remain intact, which include aging infrastructure, reliability, renewable integration and system hardening. Moving to our Clean Energy and Infrastructure segment. Revenue was $469 million for the third quarter versus $262 million in the prior year, a 79% year-over-year increase. Margins for the segment were strong at 7.3%, and we continue to expect full year margins to improve over 2019 by over 100 basis points. The size and scope of the opportunities we are seeing in this segment continues to grow. Between verbal awards and projects we are competing on, we expect backlog to hit record levels over the coming quarters and expect revenues in 2001 (sic) [2021] to approximate $2 billion. We have made significant investments in this segment to profitably grow our business through organic opportunities. We continue to add talent and resources to meet the increasing demand for our services. While we've highlighted this segment more over the last few quarters, I still think it's an underappreciated part of MasTec's portfolio. Over the course of the last few months, the focus on Clean Energy has been palpable. We have seen companies like Shell, NextEra, Duke Energy and many others highlight their significant planned investments in lower carbon technologies. As a leading Clean Energy contractor and partner, MasTec is uniquely positioned to benefit from these investments. Moving to our Oil and Gas pipeline segment. Revenue was $463 million compared to revenue of $973 million in last year's third quarter. Revenue was impacted by the effects of COVID and its impact on demand for both oil and gas. While this was already factored into our guidance, we also had two major projects that have been impacted by regulatory delays. Those projects, whose construction was expected to begin in the third quarter, have now started in the fourth quarter with the majority of work slipping into 2021. Looking at third quarter results, large project activity represented a very small portion of revenue. We believe that third quarter revenue levels are representative of what levels would look like without large project activity. Margins for the quarter were very strong and positively impacted by the reimbursement of delayed project idle equipment costs. Without associated revenue, these reimbursements had a significant impact on margin. We expect a more normalized margin level as project revenues increase. We ended the third quarter with backlog just over $2.4 billion, and we expect Oil and Gas revenues to increase in 2021. Subsequent to quarter end, we have been awarded one large project and a number of smaller recurring-type projects. As a reminder, over the last three years, only 6% of our revenues have come from oil pipelines with the majority of our business being tied to natural gas. We continue to see strong demand for integrity services, gas distribution and line replacement activity. We are focused on continuing to diversify our revenues in this segment. I'd like to take a minute to cover 2020 guidance. Today, we increased our EBITDA guidance to a range of $800 million to $811 million versus our previous guidance of $800 million. We lowered our revenue guidance to $6.4 billion to $6.6 billion versus our previous guidance of $7 billion. The change in guidance is directly attributable to the two Oil and Gas projects I covered earlier. Our initial expectation was the projects would start in the third quarter. Our range takes into account the possibility of further delays. I'd also like to note, our guidance, at the midpoint of the range, assumes an almost $1.2 billion reduction in Oil and Gas revenues, while our total revenue will only be down about half that, meaning that we'll grow our other segments by nearly $600 million in 2020, again, showing the strength of our diversified model. I'd also like to comment on our longer-term goals. As I think about our future business mix, I think we have a solid path to becoming a $10 billion-plus revenue company, even in a depressed Oil and Gas backdrop. Based on market opportunities, we believe our Communications business should grow to the $3.5 billion to $4 billion in annual revenue; Clean Energy should exceed $3 billion; Transmission, over $1 billion; and Oil and Gas, on a recurring level, to be about $1.5 billion to $2 billion. To recap, we had a good third quarter and are confident that we are mitigating the effects and impacts of the COVID-19 virus. While times are challenging and uncertain, opportunities always arise from these challenges. Our customers are looking for ways to change and improve their business models and are looking for strong partners to help them. In that lies our opportunity. Our greatest strength has been to understand these trends in the industry and our customers' needs. Our ability to provide services, whether existing or new, has always been a strength. I'm excited for what the future holds for MasTec. Keep up the good work. Today, I'll cover our third quarter results, our current guidance expectation for the balance of 2020, including the ongoing impact of the COVID-19 pandemic, as well as our strong cash flow performance, capital structure and liquidity. As Marc indicated at the beginning of the call, our discussion of financial results and guidance will include non-GAAP adjusted earnings and adjusted EBITDA. In summary, our third quarter earnings results were better than expected with adjusted EBITDA beating our guidance expectation by $11 million and adjusted diluted earnings per share exceeding our guidance expectation by $0.16. Third quarter adjusted EBITDA of $265 million represents a record level for MasTec and was achieved despite lower than expected Oil and Gas segment performance, which was impacted by delays in large project start-ups that have now initiated in the fourth quarter. As Jose noted, it is important to note that year-over-year strength in our non-Oil and Gas segments, namely, the Communications, Clean Energy and Infrastructure and Electrical Transmission segments, which on a combined basis, despite COVID-19 impacts, showed third quarter year-over-year revenue growth of 19% and adjusted EBITDA growth of 83%. This performance highlights the strength, diversity and growth potential of MasTec. Third quarter 2020 results also continued our strong cash flow performance, generating $216 million in cash flow from operations and reducing sequential net debt levels by approximately $129 million. On a year-to-date basis, 2020 cash flow from operations of $712 million represented another record performance level for MasTec. And we have reduced net debt levels by almost $300 million since year-end 2019 despite approximately $150 million in share repurchases and other strategic investments. As indicated in yesterday's release, we continue to expect that annual 2020 cash flow from operations results will mark the third consecutive year of record performance. Regarding our capital structure, my belief is that we have never been in a stronger position, affording us full flexibility to invest in strategic opportunities as well as giving us a strong advantage with our customers as we navigate through the uncertain economic climate resulting from the COVID-19 pandemic. Now I will cover some more highlights regarding our third quarter segment results and guidance expectations for the balance of 2020. Third quarter 2020 Communications segment revenue of $645 million was down 5% compared to the same period last year and essentially flat sequentially. Third quarter 2020 Communications segment adjusted EBITDA margin rate was 12.3% of revenue, representing a sequential increase of 60 basis points and a 390 basis point improvement when compared to last year's third quarter. It's worth noting that this improved performance includes disruption and loss revenue related to the COVID-19 pandemic as we continue to have selected markets in which construction activity has been impacted due to local municipality permitting-approval delays. We expect annual 2020 Communications segment revenue levels will decline slightly from 2019 levels with fourth quarter activity slowing sequentially and with the continued expectation of strong double-digit revenue growth in 2021. Based on our strong adjusted EBITDA margin performance over the past two quarters, we currently expect annual 2020 Communications segment adjusted EBITDA margin rate to improve approximately 230 basis points over last year's rate to approximately 10.3% of revenue. We are pleased with the expected Communications segment adjusted EBITDA margin rate improvement in 2020, particularly considering the challenging conditions. We continue with the believe that the evolution toward 5G technology, coupled with increasing remote workplace and education trend in the U.S. because of the COVID-19 pandemic, will drive significant long-term demand for our wireless and wireline services in 2021 and beyond as the COVID-19 pandemic effects diminish and conditions begin to normalize. Third quarter 2020 Oil and Gas segment revenue of $463 million decreased 52% compared to the same period last year. Revenue fell short of our expectation as start-up activity on selected large projects was delayed due to regulatory and judicial issues. As a reminder, given the size of our large projects, a 30-day delay in project activity can impact monthly revenue by up to $200 million. As indicated in our release yesterday, during the fourth quarter, we've initiated start-up activity on two large oil and gas projects. And accordingly, we expect fourth quarter 2020 revenue levels in this segment to increase substantially and exceed last year's fourth quarter level. Due to the potential impact of final regulatory and judicial approvals or challenges, coupled with the volatility of the onset of winter weather, our expected fourth quarter 2020 Oil and Gas revenue is presented in a range. And we now expect annual 2020 Oil and Gas segment revenue to range somewhere between $1.8 billion to $2 billion. Third quarter 2020 Oil and Gas segment backlog was approximately $2.4 billion, and we have continued significant fourth quarter activity -- award activity, including the recent Keystone pipeline announcement by TC Energy. In summary, we have clear visibility into strong 2021 revenue growth in this segment. Third quarter 2020 Oil and Gas segment adjusted EBITDA margin rate was 34.7% of revenue. This continues our strong performance trend across numerous smaller pipeline projects as well as the benefit of approximately 10 percentage points for the combination of project closeout and change order recoveries and contractual fees on selected delayed project activity for the recovery of idle owned equipment and other costs. As a reminder, the Oil and Gas segment requires significant capital investment in equipment fleet, and these costs are primarily reflected in depreciation expense below the adjusted EBITDA line. Looking forward as we close out 2020, we anticipate strong Oil and Gas segment adjusted EBITDA margin trends will continue into the fourth quarter with an expectation in the mid-20% range. Third quarter 2020 Electrical Transmission segment revenue increased approximately 25% compared to the same period last year to approximately $129 million, and segment adjusted EBITDA margin rate was 7.1%. We anticipate fourth quarter results for this segment will slightly exceed and generally approximate the third quarter. Third quarter 2020 backlog remains strong at $545 million, and we continue to expect that market conditions for this segment are supportive for strong 2021 revenue, adjusted EBITDA and adjusted EBITDA margin rate growth. Third quarter 2020 Clean Energy and Infrastructure segment revenue of $469 million increased approximately 79% compared to the same period last year. Third quarter 2020 adjusted EBITDA margin rate was 7.3%, a sequential increase to 20 basis points and a 640 basis point increase compared to the same period last year. During the last two quarters, this segment has generated approximately $900 million in revenue, with adjusted EBITDA margin rate exceeding 7% each quarter. And this trend begins to reflect our longer-term expectation for this segment in the high single-digit range. We expect to close out 2020 with annual segment revenue in the $1.5 billion range, which equates to an annual growth rate in the mid-40% range. We also expect that annual 2020 adjusted EBITDA margin rate for this segment will show approximately a 140 basis point improvement over last year. As Jose indicated in his remarks, we have continued a significant growth expectations in 2021 and beyond for this segment in a very active Clean Energy market. I will now discuss a summary of our top 10 largest customers for the 2020 third quarter period as a percentage of revenue. AT&T revenue, derived from wireless and wireline fiber services, was approximately 12% and install-to-the-home services was approximately 3%. On a combined basis, these three separate service offerings totaled approximately 15% of our total revenue. As a reminder, it is important to note that these offerings, while falling under one AT&T corporate umbrella, are managed and budgeted independently within their organization, giving us diversification within that corporate universe. WhiteWater Midstream was 7%. Permian Highway Pipeline, Iberdrola Group and Comcast Corporation were each 6%. Energy Transfer affiliates, Xcel Energy, Duke Energy Corporation and Verizon Communications were each 5% and NextEra Energy was 4%. Individual construction projects comprised 68% of our revenue, with master service agreements comprising 32%, once again highlighting that we have a significant portion of our revenue derived on a recurring basis. Lastly, it is worth noting as we operate in a COVID-19-induced period of macroeconomic uncertainty that all of our top 10 customers, which represented over 63% of our third quarter revenue, have investment-grade credit profiles. Now I will discuss our cash flow, liquidity, working capital, usage and strategic investments. During the third quarter of 2020, we generated $216 million in cash flow from operations and ended the quarter with net debt, defined as total debt less cash, of $1.07 billion which equates to a very comfortable book leverage ratio of 1.4 times. As we have previously reported, during the quarter, we also strengthened our capital structure with a favorable refinancing of our four and 7/8% senior unsecured notes, and we ended the quarter with $238 million in cash on hand as well as record liquidity, defined as cash plus volume availability, of approximately $1.4 billion. During the nine months -- the first nine months of 2020, we generated a record-level $712 million in cash flow from operations, which allowed us to reduce our net debt levels by approximately $300 million while still investing approximately $150 million in strategic share repurchases and investments. During the first nine months of 2020, we repurchased approximately 3.6 million shares or approximately 5% of our outstanding share base, with the vast majority of this activity occurring in the first quarter. Regarding our share repurchase program, we expect to opportunistically invest in this program as conditions warrant while also prudently managing our balance sheet. We currently have $159 million in open repurchase authorizations, and as of today, have not executed any share repurchases during the fourth quarter. We ended the quarter with DSOs at 85 days, down five days from last quarter. Depending on the timing of our fourth quarter revenue activity, we anticipate some modest working capital usage as we close out 2020. We are proud of the expectation that annual 2020 cash flow from operations will mark the third consecutive year of record performance. In summary, our record 2020 cash flow expectation, coupled with a long -- a solid long-term capital structure, low interest rates, no significant near-term maturities and ample liquidity, places MasTec's balance sheet in an extremely strong position to take advantage of any and all opportunities our markets afford us. During the third quarter, we incurred net cash capex, defined as cash capex net of equipment disposals, of approximately proximately $39 million, and we incurred an additional $41 million in equipment purchases under finance leases. We currently anticipate incurring approximately $190 million in net cash capex in 2020, with an additional $130 million to $150 million to be incurred under finance leases. As we look forward into 2021, based on the investments we have made to date, we expect 2021 capex levels will decline significantly when compared to 2020 levels. Moving on to our current 2020 guidance. Our fourth quarter 2020 revenue expectation is expected to range between $1.7 billion to $1.9 billion with adjusted EBITDA guidance ranging between $252 million to $263 million and adjusted diluted earnings per share guidance between $1.64 to $1.73. We are projecting annual 2020 revenue to range between $6.4 billion to $6.6 billion with adjusted EBITDA expected to range between $800 million to $811 million and adjusted diluted earnings per share to range between $5 and $5.09. This includes our expectation of strong adjusted EBITDA performance across multiple segments as well as slightly improved expectations on below-the-line items such as depreciation, interest and income taxes. These guidance expectations incorporate the impact of projected lower 2020 Oil and Gas segment revenue, as regulatory delays on two large projects are expected to cause lower 2020 project activity and shift award work into 2021, as well as improved 2020 adjusted EBITDA margin rate expectations across multiple segments. As we have provided -- previously provided some color as to 2020 segment expectations, I will now briefly cover other guidance expectations as highlighted in our release yesterday. Based on our expected strong cash flow, lower nominal interest rates and our recent senior notes offering, we expect annual 2020 interest expense levels to approximate $60 million, with this level only including share repurchase activity executed to date. Our estimate for full year 2020 share count is now 73.7 million shares. It should be noted, for valuation modeling purposes, that our year-end 2020 share count will approximate 73 million shares, inclusive of the full impact of 2020 share repurchases. We expect annual 2020 depreciation expense to approximate 4% of revenue due to the combination of lower expected Oil and Gas 2020 revenue levels and the timing impact of capital additions and acquisition activity. And lastly, we expect our annual 2020 adjusted income tax rate will approximate 24% with the fourth quarter tax rate expected to be slightly higher than the annual rate.	sees q4 2020 revenue $1.7 billion to $1.9 billion. sees q4 2020 adjusted non-gaap earnings per share $1.64 to $1.73. q3 revenue $1.7 billion versus refinitiv ibes estimate of $1.92 billion.
In these communications, we may make certain statements that are forward looking, such as statements regarding MasTec's future results, plans and anticipated trends in the industries where we operate. Should one or more of these risks or uncertainties materialize or should any of our underlying assumptions prove incorrect, actual results may differ significantly from results expressed or implied in today's call. These discussions will be followed by a Q&A session. And we expect the call to last about 60 minutes. We had another good quarter and a lot of important things to talk about today, so I'll going ahead hand it over to Jose. Today, I will be reviewing our third quarter results as well as providing my outlook for the markets we serve. Before getting into the quarterly details, I'd like to offer my perspective on where I think MasTec stands today. At this time last year, during our 2020 third quarter call, we laid out a long-term goal of our pathway to achieving annual revenues of $10 billion plus. It's important to remember, at that time, MasTec was on a path to generate just over $6 billion of revenue in 2020. Still somewhat unsure of where the COVID pandemic would take us, we have seen a significant impact to our Oil and Gas business and the demand and pricing issues it had created. Our ability to provide that outlook was a testament to the strength we were seeing across our non-Oil and Gas business and the growing opportunities we were expecting. Fast forward 12 months, this year, we expect to generate $8 billion in revenue. And our long-term goal of reaching annual revenues exceeding $10 billion is now within reach in what we hope will be a much shorter time frame. Opportunities in our communication, transmission and clean energy segments continue to expand and give us great confidence we will be able to meaningfully grow revenue over the coming years. We believe we are in the midst of a very unique opportunity. Since becoming CEO in 2007, we've been able to grow MasTec from $900 million in revenue to $8 billion today. And while I've seen and experienced great cycles of growth during that time, I've never seen the number and scope of opportunities we are seeing across our business. Demand for our services is incredibly high, and again, our prospects to deliver long-term revenue growth are better than I've ever seen. While our business continues to expand and our mix continues to diversify away from Oil and Gas, our focus is on margin improvement and execution. Our margin execution across our non-Oil and Gas segments has been below our expectations in 2021. We've been challenged and impacted for multiple reasons, including COVID, labor availability, supply chain delays and poor performance on projects. With that said, we are confident we can achieve the margin targets we previously disclosed as we continue to grow the business in the coming years. We understand and believe that our ability to create shareholder value is driven not only by our revenue growth opportunities but more importantly by our ability to achieve our targeted margins. While we'd like to see our results materialize sooner, we believe the longer-term outlook is not only fully intact but actually improving. Now some third quarter highlights. Revenue for the quarter was $2.404 billion. Adjusted EBITDA was $278 million. Adjusted earnings per share was $1.81. And backlog at quarter end was $8.5 billion, a year-over-year increase of $821 million. In summary, we had another excellent quarter and are on track for another great year. There are a number of catalysts that could have a significant impact on our growth. These include within our Communications segment a ramp-up of 5G-related activity and the spend, including in-building solutions; continued focus on expanding fiber networks both in rural communities and in major cities to support broadband services as well as wireless backhaul; an increased focus on smart city initiatives, with increased availability of capital from both the public and private sector. Within our electrical transmission and distribution segment, catalysts include grid modernization, including significant investments for improved grid reliability and system hardening to better prepare for storms and fires; the growing need for new transmission lines to tap into renewable-rich geographies; and the focus on grid architecture related to growing electrical vehicle charging demand. In our Clean Energy and Infrastructure segment, catalysts include the growing focus on sustainability and climate initiatives, including zero-carbon emission goals; significant investments in renewable power generation, including wind and solar; a focus on other clean energy-generating fuels, including biomass, geothermal and hydrogen; opportunities around carbon capture and its potential benefits; and finally, the role of battery storage and its improving economics. We believe we are very well positioned to benefit from these growing and accelerating trends in our business segments. Now I'd like to cover some industry specifics. Our Communications revenue for the quarter was $670 million. We expected revenues to be slightly higher. And we continued to experience delays and COVID impacts that affected the acceleration of AT&T's and Verizon's build plans related to last year's spectrum auctions. Highlights for the quarter included our growth with T-Mobile, whose revenue more than doubled over last year's third quarter. In addition, we had another quarter of strong backlog growth. The second quarter of this year represented the largest quarterly sequential segment backlog increase in the company's history, and in the third quarter, we were again able to sequentially grow segment backlog by over $200 million. We expect another similar increase during the fourth quarter. Margins for the segment were 10.7% in the third quarter; and were impacted by both lower wireless revenues than expected, along with project closeouts related to a large fiber build that is nearing completion. We expect sequential margin improvement in the Communications segment in the fourth quarter and excellent momentum heading into 2022 based on our backlog build. Over the last few quarters, we've talked about the opportunities related to the Rural Digital Opportunity Fund or RDOF, which will provide $20 billion of funding over the next 10 years to build and connect gigabit broadband speeds in underserved rural areas; and the 5G Fund for Rural America, which will provide up to $9 billion in funding over the next decade to bring 5G wireless broadband connectivity to rural America. In addition to these programs, the current pending infrastructure bill has another $65 billion allocated for broadband infrastructure. While not built into any of our models, this amount of investment would likely have a significant impact on the potential opportunities for us in this segment. Moving to our Electrical Transmission segment. Revenue was $365 million versus $129 million in last year's second (sic) third quarter. The increase was driven by organic growth of nearly 50% in the quarter on a year-over-year basis; and the first full-quarter contribution of INTREN, which we acquired during the second quarter. Margins for the segment were 9.5%, which exceeded our expectations. The integration of our INTREN acquisition has gone very well, and we are seeing a number of cross-selling opportunities which are positively impacting both MasTec and INTREN. While backlog was flat sequentially, we have an increasing number of opportunities that should allow us to continue to grow this business at solid double-digit rates for years to come. We believe the changes in electrical distribution and transmission needs led by grid modernizations and hardening, reliability and renewable integration, coupled with the transition toward increased electrical vehicle usage, will have an enormous impact on a last-mile distribution of electricity. Moving to our Oil and Gas pipeline segment. Revenue was $858 million and margins remained strong. During the third quarter, we were able to accelerate project timing and complete some projects early. Our fourth quarter revenue guidance level is impacted by this acceleration. As a reminder: Last year, we forecasted a longer-term recurring revenue target of $1.5 billion to $2 billion a year, assuming a continued depressed oil and gas market. As commodity prices have increased and maintained strong levels, we have seen an increase in customer requests, as we are working with a number of customers repricing previous projects and are optimistic we will see an uptick in opportunities. A challenge our customers are facing has been the increased costs of steel pipe related to the supply chain issues. Pipe materials often account for nearly 50% of project costs. While we believe there will be an increasing number of large pipeline projects, we expect the opportunities to materialize in 2023 and beyond as the supply chain issues improve. That, coupled with the continued growth of carbon capture and sequestration and the potential of hydrogen, have improved our longer-term outlook of our pipeline business. While we still expect 2022 to be within our previously disclosed revenue targets, we are becoming a lot more bullish about our opportunities for 2023 and beyond in this segment. Moving to our Clean Energy and Infrastructure segment. Revenue was $518 million for the third quarter. As a reminder: Segment revenue has grown nearly sevenfold since 2017. We expected a slight sequential improvement in margins that did not materialize. While I believe we have done an amazing job in growing and diversifying the segment, margins haven't materialized as quickly. With that said, we believe we are at the cusp of seeing significant improvements in margins. At MasTec, we take great pride in having been able to perform at high levels over a long period of time. Our conviction in improving margins in this segment are no different. We understand and are addressing the issues that have led to the underperformance, and we have tremendous confidence in the potential of this market and the associated margins we can generate. We believe our diversification is our strength in this segment, as we are capable of meeting any of our customers' demands. We are actively working on renewable projects, including wind, solar and biomass; baseload generation projects, including dual-source hydrogen-capable projects; as well as our growing presence in the infrastructure market. With a clear national focus on sustainability and clean energy, we have seen a significant increase in planned clean energy investments from our customers as they improve their carbon footprint. As a leading clean energy contractor and partner, MasTec is uniquely positioned to benefit from these investments. Backlog at quarter end in Clean Energy was $1.570 billion versus $891 million at the end of last year's third quarter, a year-over-year increase of nearly $700 million and a slight sequential reduction of over $100 million from the second quarter. Since quarter end, we've either signed or been verbally awarded another roughly $800 million in projects. In addition, the level of project proposal activity and negotiations has never been higher. To recap: We're having a solid 2021 and are very excited about the opportunities in the markets we serve. Finally, I'd like to highlight the potential opportunities of the pending infrastructure bill. With a significant presence in the telecommunications market, which include 5G build-out capabilities, our involvement in maintaining and building the electric grid, coupled with our exposure to the clean energy market, including wind, solar, biofuels, hydrogen and storage; and our recent expansion into the heavy infrastructure, including road and heavy civil, we believe we are uniquely positioned to benefit from the potential infrastructure spend. We are confident we can hit our growth targets with solely private investments in infrastructure but do recognize the potential acceleration in our markets with significant government spend. I'm honored and privileged to lead such a great group. The men and women of MasTec are committed to the values of safety, environmental stewardship, integrity, honesty; and in providing our customers a great-quality project at the best value. These traits have been recognized by our customers. And it's because of our people's great work that we've been able to deliver these financial outstanding results in a challenging environment and position ourselves for continued growth and success. Today, I'll cover our third quarter financial results and our updated annual 2021 guidance expectations. As Marc indicated at the beginning of the call, our discussion of financial results and guidance will include non-GAAP adjusted earnings and adjusted EBITDA. In summary, we had strong third quarter results with revenue of approximately $2.4 billion, a 42% increase over last year; adjusted EBITDA of approximately $278 million; and adjusted EBITDA margin rate at 11.6% of revenue. This represented record-level third quarter revenue and adjusted EBITDA. Yesterday, we announced a new and increased credit facility of $2 billion, which adds to our ample liquidity, improves pricing and eliminates security requirements. Our strong cash earnings profile, coupled with our focus on working capital management during 2021, has allowed us to easily fund organic working capital needs associated with approximately $1.5 billion in year-to-date revenue growth while investing approximately $600 million in strategic acquisitions. At the end of our third quarter, we maintained a strong balance sheet and capital structure with liquidity approximating $1.3 billion, comfortable leverage metrics and with net debt at only 1.3 times adjusted EBITDA at quarter end. Given our strong balance sheet and cash flow performance, coupled with the unsecured nature of our new credit facility, we have approached credit rating agencies for review and are hopeful of a positive rating agency action in the near term. Now I will cover some detail regarding our third quarter segment results and guidance expectations for the balance of 2021. Third quarter Communications revenue was $670 million, approximately 4% growth compared to last year. This growth level was a few percentage points lower than our expectation, as project start-up issues slowed revenue during the quarter. Our third quarter Communications segment adjusted EBITDA margin rate was 10.7% of revenue, an 80 basis point sequential decline primarily related to the overhead impacts of lower-than-expected third quarter revenue levels. Our annual 2021 Communications segment expectation is that revenue will range somewhere between $2.5 billion to $2.6 billion, with annual 2021 adjusted EBITDA margin rate approximating 11%. This implies fourth quarter year-over-year revenue growth in the high-teens range despite some continued slower revenue impact on new project start-up activity. This also implies strong improvement in fourth quarter adjusted EBITDA margins, both sequentially and compared to the fourth quarter of last year, as we begin to ramp toward significant expansion in 2022. Third quarter Clean Energy and Infrastructure segment or clean energy revenue was $518 million. And adjusted EBITDA was approximately $14 million or 2.7% of revenue, below our expectation. As we indicated on our last quarter's call, we anticipated some continued negative impact on third quarter clean energy adjusted EBITDA margin rate as two underperforming projects, highlighted during the prior quarter, would generate third quarter revenue with no margin. We substantially completed those projects during the third quarter, with performance largely as expected. However, during the third quarter, clean energy segment results were also negatively impacted by a COVID-19 outbreak on a project that caused delays and additional cost. At one point during this project, approximately 1/3 of the project field crew and 50% of critical path electricians were either infected with COVID or in quarantine, effectively stopping project production. Absent this unique impact, third quarter clean energy segment adjusted EBITDA margins would have been generally in line with our expectation of a slight sequential adjusted EBITDA margin rate improvement. We believe the issues that have negatively impacted our clean energy segment year-to-date adjusted EBITDA margin performance are largely behind us and, based on project timing, expect that fourth quarter segment revenue will be the largest revenue quarter of the year with over 60% year-over-year revenue growth and strong fourth quarter adjusted EBITDA margin rate improvement to a high single-digit level. As we have previously indicated, our clean energy segment has grown from $300 million of revenue in 2017 and will approach $2 billion in revenue during 2021. In order to achieve this growth, we have significantly expanded our field crew operations and head count very quickly. This rapid expansion has caused some growing pain inefficiencies, which has impacted our annual 2021 adjusted EBITDA margin performance. As I just indicated, we expect improved performance during the fourth quarter and, importantly, continued strong revenue and adjusted EBITDA margin rate improvement in 2022. Third quarter Oil and Gas segment revenue was $858 million, and adjusted EBITDA was $171 million. During the quarter, we accelerated work on a large project and achieved substantial completion ahead of schedule. This increased our third quarter revenue by approximately $100 million, accelerating revenue previously expected to occur in the fourth quarter. We would like to recognize the men and women of our MasTec teams for their commitment to safety and quality during this difficult project. We currently expect annual 2021 Oil and Gas segment revenue will range between $2.5 billion to $2.6 billion, with annual 2021 adjusted EBITDA margin rate for this segment expected in the high-teens to low-20% range. Third quarter Electrical Transmission segment revenue was $365 million, and adjusted EBITDA margin rate of 9.5% of revenue. Third quarter results reflected a full quarter of electrical distribution and storm services from INTREN, which contributed revenue of approximately $175 million to the quarter. Excluding INTREN, organic segment revenue during the third quarter grew $64 million and adjusted EBITDA margin performance was strong. We expect annual 2021 revenue for the Electrical Transmission segment to approximate $1 billion and annual 2021 adjusted EBITDA margin rate to range somewhere between 6.5% to 7% of revenue. This expectation includes the assumption that second half of 2021 segment adjusted EBITDA margin rate will approximate a low-8% range, a significant improvement when compared to first half 2021 performance. We continue to believe that multiple macro end market trends, including renewable power generation, increased distribution needs to support electric vehicle expansion and grid investments for storm and fire hardening, are continuing to develop and should provide our segment substantial future growth opportunities. Now I will discuss a summary of our top 10 largest customers for the third quarter period as a percentage of revenue. Enbridge was 21% of revenue, reflecting the previously mentioned pipeline project acceleration. Newly defined AT&T services totaled 7% of revenue. As indicated on our 10-Q filed yesterday, reported AT&T revenue amounts have been reclassified to exclude DIRECTV services for all periods, as this entity has been spun off into a separate third-party entity. Revenue performed for AT&T includes wireless, wireline and other services, including smart city deployment projects. NextEra Energy was 6% of revenue, comprising services across multiple segments including clean energy, Communications and Electrical Transmission. Equitrans Midstream was 5%. Entergy and Comcast were each 4% of revenue. Duke Energy, DIRECTV and Exelon reached 3%; and Enel Green Power was 2%. Individual construction projects comprised 63% of our third quarter revenue, with master service agreements comprising 37%. With the combination of an expected resurgence in wireless MSA work, coupled with the INTREN acquisition whose revenue is virtually all MSA-driven, future MSA revenue is expected to increase as a percentage of our total revenue, highlighting an increased level of MasTec revenue expected to be derived on a recurring basis. Lastly, as we've indicated for years, backlog can be lumpy, as large contracts burn off each quarter and new large contract awards only come into backlog at a single point in time as a result of actual contract signs. As of September 30, 2021, we had total backlog of approximately $8.5 billion, up approximately $821 million when compared to last year. Importantly, each of our non-Oil and Gas segments' backlog represented a record third quarter level, reflecting continued and expanding strength in these end markets. And we continue with the expectation that 2022 segment revenue will range somewhere between $1.5 billion to $2 billion, with potential sizable growth opportunities in 2023 and beyond. Now I'll discuss our cash flow, liquidity, working capital usage and capital investments. As I mentioned earlier in these remarks, yesterday, we announced closing of a new unsecured $2 billion credit facility, which reflects a $250 million increase from our prior facility with improved pricing and extended term. We are hopeful the combination of our consistent and strong cash flow performance coupled with our new unsecured credit facility will provide us a path toward an investment-grade credit rating in the near term. And we are engaging with rating agencies for an updated outlook. During the third quarter, we managed to reduce our net debt levels by approximately $80 million despite the working capital associated with approximately $450 million in sequential revenue growth. We ended the quarter with $1.3 billion in liquidity; and net debt, define as total debt less cash and cash equivalents, at $1.26 billion, which equates to a very comfortable 1.3 times leverage metric. 2021 year-to-date cash provided by operating activities was approximately $500 million. We ended the third quarter with DSOs at 72 days compared to 85 days in Q3 last year. And this level is well below our target DSO range of mid- to high 80s. We are proud of the strength, resilience and consistency of MasTec's cash flow profile. As we look forward to close outing -- to the closeout of 2021, we expect continued strong cash flow generation despite the working capital associated with our 2021 revenue growth and expect that annual 2021 free cash flow will once again exceed adjusted net income. Assuming no Q4 acquisition activity, net debt at year-end is expected to approximate $1.2 billion, leaving us with ample liquidity and an expected book leverage ratio slightly over one times adjusted EBITDA. In summary, our long-term capital structure is extremely solid with low interest rates, no significant near-term maturities and ample liquidity, giving us full flexibility to take advantage of any potential growth opportunities to maximize shareholder value. Moving to our 2021 guidance view. We predict an annual 2021 revenue of $8 billion, with adjusted EBITDA of $930 million or 11.6% of revenue; and adjusted diluted earnings of $5.55 per adjusted diluted share, which is a $0.10 per share increase over our prior expectation of $5.45 per adjusted diluted share. And the earnings per share increase is primarily due to the benefit of lower expected annual 2021 income tax expense. This translates into a fourth quarter revenue expectation of $1.85 billion, with adjusted EBITDA of $218 million or 11.7% of revenue; and earnings guidance of $1.33 per adjusted diluted share. As previously mentioned, our fourth quarter revenue view includes approximately $100 million in lower revenue expectations for the Oil and Gas segment due to the acceleration of project revenue during the third quarter. As we have previously provided some color regarding 2021 segment expectations, I will briefly cover other guidance expectations. We anticipate net cash capex spending in 2021 at approximately $120 million, with an additional $160 million to $180 million to be incurred under finance leases. As we have previously indicated, as our end market operations shift with non-Oil and Gas segments becoming a larger portion of our overall revenue, our capital spending profile should reduce, as the Oil and Gas segment has historically required the largest level of capital investment. We expect annual 2021 interest expense levels to approximate $54 million, with this level including approximately $600 million in year-to-date acquisition funding activity. For modeling purposes: Our estimate for 2021 share count continues at 74 million shares. We expect annual 2021 depreciation expense to approximate 4.3% of revenue, inclusive of year-to-date 2021 acquisition activity. As we have previously indicated, this expectation incorporates an increased level of 2021 Oil and Gas segment depreciation expense when compared to 2020, as we are utilizing conservative depreciation life and salvage value estimates on previous capital additions to protect against future market uncertainties. Given these trends, we anticipate that annual 2022 depreciation expense dollar amount and percentage of revenue will decrease when compared to annual 2021 levels. We expect annual 2021 corporate segment adjusted EBITDA to be a net cost of slightly under 1% of overall revenue. And lastly, we expect that annual 2021 adjusted income tax rate will range approximately 22%, with our third and fourth quarter adjusted income tax rates ranging in the 19% to 20% range primarily due to the benefits of income mix and tax true-up adjustments.	sees q4 adjusted earnings per share $1.33. q3 revenue rose 42 percent to $2.4 billion.
Should one or more of these risks or uncertainties materialize or should any of our underlying assumptions prove incorrect actual results may differ significantly from results expressed or implied in these communications. In addition, when -- we may use certain non-GAAP financial measures in this conference call. The format of the call will be open remarks and announcement by Jose followed by a financial review from George. These discussions will be followed by a Q&A session and we expect the call to last about 60 minutes. We had another great quarter and a lot of good things to talk about today. Today I will be reviewing our fourth quarter and full-year results, as well as providing my outlook for 2021 and the markets we serve. And I hope in pray that you and your love ones are healthy and state. The safety of our team members has been our top priority. And as I reflect on the unprecedented challenges during 2020, I am incredibly proud of the men and women of MasTec. Our operations have exhibited tremendous resiliency during the pandemic. And as I look forward to 2021 and beyond, I am extremely excited about various significant growth opportunities as we provide critical power, communications and other infrastructure services to our customers. I am honored and privileged to lead such a great group. The men and women of MasTec are committed to the values of safety, environmental stewardship, integrity, honesty and in providing our customers a great quality project at the best value. These traits have been recognized by our customers and it's because of our people's great work that we've been able to deliver these outstanding financial results in the challenging environment and position ourselves for continued growth and success. Now some fourth quarter highlights. Revenue was $1.6 billion for the fourth quarter. Fourth quarter adjusted EBITDA was $262 million, and fourth quarter adjusted earnings per share was $1.75. For the full year, 2020 revenue was $6.3 billion, 2020 adjusted EBITDA was $810 million, and 2020 full year adjusted earnings per share was $5.11. And finally, cash flow from operations for the year was $937 million a record level. In summary, we had an excellent quarter and another great year. On our third quarter call in October, we talked about our longer-term goals and our future business mix. Considering the impacts of the pandemic on the oil and gas industries, we laid out a path to achieving an annual revenue target of $10 billion with double-digit margins. One of our key highlights of 2020 and was our ability to grow non-oil and gas revenues by almost 12% and non-oil and gas adjusted EBITDA by over 40% despite the pandemic. Our guidance that we provided today reflects continued diversification, as we expect our non-oil and gas business to grow approximately 20% in revenues and approximately 45% in EBITDA in 2021. While we didn't lay out a time line for our $10 billion revenue target in the third quarter, the visibility within our end markets has continued to improve. In just a matter of months since our last call, we believe the size and the scale of growth opportunities has significantly expanded. I believe the recent events in Texas, demonstrates the need for significant investment in both infrastructure and continued power generation diversification. We believe MasTec's diversification with capabilities in transmission grid and substation construction, power distribution maintenance, renewable construction including wind, solar, biofuels and battery storage coupled with our capabilities around gas-fired plant construction with its associated infrastructure uniquely positioned MasTec to benefit from continued and renewed investments in the power grid. These opportunities coupled with the growing investments in communication networks from both large carriers and smaller rural focused operators provide MasTec with significant growth opportunities in 2021 and beyond. In addition to our organic growth opportunities, we are seeing a growing number of potential acquisition targets. Acquisitions over the years have been a source of significant growth for MasTec. While we've been less active over the last few years, we believe the right companies can help us fully capture our current market opportunities. Subsequent to year-end in the first quarter, we closed on two acquisitions. The first company focuses on integrity work and maintenance work related to gas distribution and the second company is a fully integrated infrastructure contractor specializing in transportation projects. Included in today's 2021 guidance, revenue contribution for these two companies is about $300 million. In addition, we remain active and are focused primarily on clean energy, power grid services, telecommunications and infrastructure companies. Now I'd like to cover some industry specifics. Our communication revenue for the quarter was $569 million. EBITDA margins came in better-than-expected at 11.1% and were up 300 basis points year-over-year. For the year, revenues were $2.5 billion and margins were 10.7%, a 270 basis point improvement over last year. Fourth quarter and second half of the year communication revenues were impacted by a slowdown of our largest two customers in this segment. With the recent 5G spectrum auctions now complete, we expect revenue acceleration throughout 2021. While the first quarter of 2021 will be sequentially similar, we are encouraged by our customers' capital plans discussed this earnings season. A key highlight for us in 2020 was our ability to diversify our customer base within our Communications segment. Comcast became MasTec's third largest customer in 2020 growing over 100% from 2019 and our T-Mobile business also grew significantly in 2020 with sequential growth in the fourth quarter of approximately 60%. We're also very excited with recent developments with rural operators. The rural digital opportunity fund or RDOF which is a follow-up to the Connect America Fund will provide $20 billion of funding over the next 10 years to build and connect gigabit broadband speeds in unserved rural areas. Additionally in October of 2020, the FCC established the 5G fund for rural America which will provide up to $9 billion in funding over the next decade to bring 5G wireless broadband connectivity to rural America. We entered the rural telecom space in 1997 through an acquisition and have been serving this customer base for nearly 25 years. I believe we are entering one of the most exciting periods in the history of telecommunications and that the deployment of 5G wireless technologies and the associated networks is truly a game changer for the consumer, our customers and for MasTec. Moving to our Electrical transmission segment, revenue was $126 million versus $116 million in last year's fourth quarter. Margins decreased year-over-year and were impacted by poor performance on a particular project, which we expect to complete in the first quarter. We have now begun one of the larger projects we had previously been awarded and expect a much better margin profile in 2021. Backlog remained strong and improved both sequentially and year-over-year. We are confident that we can deliver strong revenue growth this year. Scale in this segment is important for us, as we strive to achieve double-digit margins. We believe we are well positioned for 2021 and beyond as the drivers for this segment remain intact, which include aging infrastructure, reliability, renewable integration and system hardening. Moving to our oil and gas pipeline segment, revenue was $600 million. While we had nice sequential revenue growth, revenues were negatively impacted by the delayed start of some of our larger projects. Margins for the quarter were again very strong and positively impacted by the reimbursement of delayed project idle equipment cost. Without associated revenue, these reimbursements had a significant impact on margin. Backlog in this segment is strong and we expect strong double-digit revenue growth in 2021. On our third quarter call, we forecasted a longer-term recurring revenue target of $1.5 million to $2 billion a year, assuming a continued depressed oil and gas market. As a reminder, over the last three years, less than 10% of our revenues have come from oil pipelines with the majority of our business being tied to natural gas. We continue to see strong demand for integrity services, gas distribution and line replacement activity. We are focused on continuing to diversify our revenues in this segment. Moving to our Clean Energy and Infrastructure segment, revenue was $1.5 billion for the full year versus $1 billion in the prior year, a roughly 50% year-over-year increase. More importantly, EBITDA margins for the year were 5.3%, a 140 basis point improvement over last year. The size and scope of the opportunities we are seeing in this segment continues to grow. While the segment has received a lot more attention over the last few quarters, I still think it's an underappreciated part of MasTec's portfolio. With the new administration and a clear focus on clean energy, we have seen a significant increase in planned clean energy investments from both traditional customers as well as oil and gas companies that are trying to improve their carbon footprint. For example, earlier this month, energy transfer announced the creation of an alternative energy group focused on renewable energy projects. As a leading clean energy contractor and partner, MasTec is uniquely positioned to benefit from these investments. I'd also like to highlight the diversification within our clean energy and infrastructure segment. While we got our start and win, today we are capable of meeting any of our customers' demand. While we've seen a significant demand uptick for solar and biofuels, we believe the recent Texas events will create even more demand for reliable baseload generation including gas-fired plants. In the first quarter, unrelated to the events in Texas, we began construction on a gas-fired plant in Alabama that is replacing an existing coal plant. This plant will be among the world's most fuel-efficient and lowest emission natural gas plants. It is important to note that while this plant plans to run on natural gas, the turbine we are installing is capable of eventually burning a mixture of natural gas and green hydrogen, thereby establishing power generation flexibility. This is another market that has tremendous potential for MasTec. While George will cover 2021 guidance in detail, I'd like to highlight that our 2021 guidance reflects strong 24% revenue growth. With all of our segments expected to approach double-digit top line increases when compared to last year. We expect both revenues and EBITDA in 2021 to be at record levels. To recap, we had another great year, while times can be challenging and uncertain, opportunities always arise from these challenges. Our customers are looking for ways to change and improve their business models and are looking for strong partners to help them, in that lies our opportunity. Our greatest strength has been to understand the trends in our industry and our customers' needs. Our ability to provide services whether existing or new has always been a strength. I'm excited for what the future holds for MasTec. Keep up the good work. Today I'll briefly cover our fourth quarter and annual 2020 financial results including cash flow, liquidity and capital structure as well as our initial guidance expectation for 2021. As Mark indicated at the beginning of the call, our discussion of financial results and guidance will include non-GAAP adjusted earnings and adjusted EBITDA. In summary, while fourth quarter 2020 revenue was slightly below our expectation at $1.63 billion, earnings margin exceeded our expectation with fourth quarter 2020 adjusted EBITDA at $262 million or 16% of revenue, a 370 basis point increase when compared to the fourth quarter of last year. This capped a strong year for MasTec, despite the negative impact of the COVID-19 pandemic with annual 2020 adjusted EBITDA of $810 million and strong adjusted EBITDA margin rate of 12.8%, a 110 basis point improvement over last year. It is worth noting, that 2020 results show significant strength and growth in our non-oil and gas segment results. With 2020 revenue growing approximately $470 million or 12% and, 2020 adjusted EBITDA for these segments increasing $90 million or 43% when compared to 2019. We expect this trend to continue and accelerate in 2021. We ended 2020 with a new record level of cash flow from operations of $937 million this allowed us to reduce our net debt levels during 2020 by $481 million to approximately $880 million which equates to a book leverage ratio of just over one. With this level representing one of the best leverage metrics ever recorded by MasTec. In summary, our capital structure is in an extremely strong position, allowing us to fund any and all worthwhile future growth opportunities. Now I will cover some detail regarding our 2020 segment results and guidance expectations for 2021. Fourth quarter 2020 Communications segment revenue of $568 million decreased 16%, compared to the same period last year. And this level was slightly below our expectation, primarily due to lower activity levels of Verizon One Fiber project activity. Fourth quarter 2020 Communications segment adjusted EBITDA margin rate exceeded our expectation at 11.1% of revenue, a strong 310 basis point improvement compared to the same period last year. Annual 2020 Communications segment revenue was approximately $2.5 billion with an adjusted EBITDA, at $270 million or 10.7% of revenue. Annual 2020 adjusted EBITDA for this segment increased $61 million or 29%. And adjusted EBITDA margin rate grew 270 basis points, when compared to 2019. These increases were achieved despite the impacts of the COVID-19 pandemic which negatively impacted both, top line revenue and operating results. Looking forward to 2021, we expect that annual Communications segment revenue will grow approaching a double-digit range and approximate $2.8 billion with continued 2021 adjusted EBITDA margin rate improvement approximating 75 basis points to 100 basis points over 2020 levels. As Jose indicated in his remarks, the US Telecommunications market is rapidly evolving. Trends include, multiple activities to support 5G development, including upcoming initial deployment of recently auctioned C band spectrum, expanding small cell deployments and necessary fiber backhaul investments. It also includes, expanding fiber to the home deployments to support growing telecommuting and tele-learning initiatives that have accelerated during the COVID-19 pandemic, increasing 5G home deployments and upcoming high-speed Internet expansion into rural communities across the country to the rural digital opportunity fund. We expect these trends will develop and accelerate over the course of 2021. With a slow first quarter, in which, revenue will approximate our fourth quarter 2020 level, followed by increasing levels of year-over-year revenue growth each quarter thereafter. Importantly, this ramping trend provides continued future revenue growth opportunities in 2022, as these trends are expressed over a full year period. Fourth quarter 2020 clean energy and infrastructure or clean energy segment revenue was $345 million, generally in line with our expectation. Annual 2020 clean energy revenue was $1.53 billion, an increase of $492 million or 48% compared to 2019. Fourth quarter 2020 clean energy adjusted EBITDA was $11 million, or 3.2% of revenue and annual 2020 clean energy adjusted EBITDA was $80 million or 5.3% of revenue, generally in line with our expectation. Fourth quarter 2020 adjusted EBITDA rate fell slightly below the annual 2020 rate of 5.3%, primarily due to fixed costs on seasonally lower fourth quarter revenue. At 5.3% of revenue annual, 2020 Clean Energy adjusted EBITDA margin rate increased 140 basis points compared to 2019. Looking forward to 2021, we expect to continue to experience a very active bidding market in the Clean Energy and Infrastructure Space. We anticipate that 2021 Clean Energy revenue will grow in the high 30% range and approach $2.1 billion in 2021, with continued 2021 adjusted EBITDA margin rate improvement of approximately 125 to 150 basis points over 2020 levels. Fourth quarter 2020 oil and gas segment revenue was $600 million, a 30% sequential growth over the third quarter, representing the first 2020 quarterly period in which this segment exhibited revenue growth over 2019, as we initiated project activity on selected large projects that will extend into 2021. That said, fourth quarter revenue was slightly below our expectation, as selected large project activity started later in the quarter due to regulatory delays. Annual 2020 oil and gas segment revenue was approximately $1.8 billion, a decrease of $1.3 billion when compared to 2019, again due to regulatory delays in large project activity, as previously discussed. Fourth quarter 2020 oil and gas adjusted EBITDA was $196 million or 33% of revenue and annual 2020 oil and gas adjusted EBITDA was $511 million, a $123 million decrease when compared to 2019. Looking forward to 2021, we expect increased large project activity, continuing the project activity started in the fourth quarter of 2020. We estimate that annual 2021 oil and gas segment revenue will grow in the 30% range and approach $2.4 billion, with virtually all this activity in backlog as of year-end 2020. Given that a larger portion of 2021 oil and gas project activity is expected to be comprised of lower-margin cost-plus activity. We are moderating our annual 2021 adjusted EBITDA margin rate expectation for this segment to the high teens range. Fourth quarter 2020 electrical transmission segment revenue was $126 million, generally in line with our expectation. And annual 2020 electrical transmission revenue was $506 million, a 22% increase over 2019. Fourth quarter 2020 electrical transmission segment adjusted EBITDA margin rate was below our expectation at 0.6% of revenue, due to inefficiencies and delays on a project that is approximately 85% complete as of year-end 2020. This project also impacted our annual 2020 electrical transmission segment adjusted EBITDA margin rate, which was 2.9% as compared to 7.1% in 2019. Looking forward to 2021, we expect annual 2021 electrical transmission segment will show strong revenue growth, somewhere in the high-teens to low 20% range. With 2021 adjusted EBITDA margin rate improving to the high-single-digits range. We also believe end market trends in this segment will continue to develop and support future growth as clean energy power generation initiatives require significant transmission grid investment coupled with expanding storm and fire hardening grid needs. Now I will discuss a summary of our top 10 largest customers for the annual 2020 period as a percentage of revenue. AT&T revenue derived from wireless and wireline fiber services was approximately 14% and installed to the home services was approximately 4%. On a combined basis, these three separate service offerings totaled approximately 18% of our total revenue. As a reminder, it's important to note that these offerings while falling under one AT&T corporate umbrella are managed and budgeted independently within their organization, giving us diversification within that corporate universe. Comcast, NextEra Energy, Crimean Highway pipeline and energy transfer affiliates were each at 5% of revenue. Verizon, Xcel Energy, Duke Energy, Iberdrola Group and Enbridge were each at 4% of revenue. Individual construction projects comprised 64% of our annual revenue with master service agreements comprising 36% and highlighting that we have a significant portion of our revenue derived on a recurring basis. At year end 2020, our backlog was approximately $7.9 billion, a slight sequential increase compared to $7.7 billion as of the 2020 third quarter and a slight decrease compared to $8 billion as of year end 2019. Lastly, as we've indicated for years, backlog can be lumpy as large contracts burn off each quarter and new large contract awards only come into backlog at a single point in time. Now I will discuss our cash flow, liquidity, working capital usage, and capital investments. For the year ended 2020, we generated a record level $937 million in cash flow from operations and ended the year with net debt of $880 million, which equates to a book leverage ratio of 1.1 times. We ended 2020 with $423 million in cash on hand as well as record liquidity defined as cash plus borrowing availability of approximately $1.6 billion. We are proud that annual 2020 cash flow from operations reached a new record level and that 2020 free cash flow, defined as cash flow from operations less net cash capex, once again exceeded adjusted net income. We believe this performance highlights the strength, resilience and consistency of MasTec's cash flow profile. During 2020, we reduced our net debt levels by approximately $481 million while still investing approximately $170 million in share repurchases and strategic investments. We ended 2020 with DSOs at 86 days down four days compared to 90 days last year and generally in line with our expected DSO range in the mid to high-80s. As we begin 2021, our long-term capital structure is extremely solid with low interest rates, no significant near-term maturities and ample liquidity. This combination gives us full flexibility to take advantage of any and all potential growth opportunities to maximize shareholder value. Regarding our spending on equipment, annual 2020 net cash capex, defined as cash capex net of equipment disposals, was approximately $177 million and we incurred an additional $114 million in equipment purchase under finance leases. We anticipate lower levels of capex spending in 2021 at approximately $100 million in net cash capex, with an additional $120 million to $140 million to be incurred under finance leases. As we have previously indicated, as our end market operations shift, with non-oil and gas segments becoming a larger portion of our overall revenue, our capital spending profile should reduce as the Oil and gas segment has historically required the largest level of capital investment. Moving on to our initial 2021 guidance. We are projecting annual 2021 revenue of $7.8 billion with adjusted EBITDA of $875 million or 11.2% of revenue and adjusted diluted earnings of $5 per share. As we have previously provided some color as to 2021 segment expectations, I will briefly cover some other guidance expectations as highlighted in our release yesterday. We expect annual 2021 interest expense levels to approximate $58 million with this level including approximately $110 million of first quarter 2021 acquisitions, while excluding any potential additional M&A, strategic investments or share repurchase activity that may occur over the balance of 2021. We expect to maintain a strong cash flow profile in 2021 with free cash flow once again exceeding 2021 adjusted net income despite expected working capital requirements related to our planned 24% revenue growth in 2021. For modeling purposes, our estimate for 2021 share count is 74 million shares. We expect annual 2021 depreciation expense to approximate 4.2% of revenue inclusive of first quarter 2021 M&A activity and capital additions. Included in this expectation is an increased level of 2021 oil and gas segment depreciation expense when compared to 2020 as we are utilizing conservative depreciation life and salvage value estimates on recent capital additions to protect against potential market uncertainties. We expect an annual 2021 other segment equity and earnings from our equity interest in Waha pipeline operations will approximate 2020's level. We expect annual 2021 corporate segment adjusted EBITDA to be a net cost of approximately 1.1% of overall revenue. We expect that net income attributable to non-controlling interest will approximate 2020 levels and cadence. And lastly, we expect that annual 2021 adjusted income tax rate will approximate 25%. Our first quarter 2021 revenue expectation is $1.65 billion with adjusted EBITDA of $172 million or 10.4% of revenue and earnings guidance at $0.80 per adjusted diluted share. First quarter results typically represent our lowest earnings level of the year due to winter weather seasonality and a transition into new customer capital budgets. Notable first quarter 2021 expectations include segment revenue levels expected to generally approximate fourth quarter 2020 levels with first quarter 2021 oil and gas segment revenue expected to significantly grow and approximate $600 million due to expanded cost plus project activity. Our first quarter 2021 expectation also includes expected negative productivity impacts of recent winter weather storm disruptions across Texas and other parts of the country. In terms of some additional color on the expected timing of 2021 consolidated revenue performance, we expect first half 2021 consolidated revenue to grow at a mid-teens growth rate with second half 2021 consolidated revenue growth rate accelerating to the high 20% to low 30% range and our annual 2021 revenue growth expectation is 24% over the prior year. When modeling 2021 revenue, it is worth noting that oil and gas segment revenue after a strong 2021 first quarter will moderate during the 2021 second quarter and revenue during this period is expected to approximate second quarter 2020 levels as select large project activity slows due to spring season road frost bands before then accelerating again in the third quarter once work resumes. Regarding our expected timing of 2021 consolidated adjusted EBITDA margin rate performance, we expect first half 2021 adjusted EBITDA margin rate will be in the high 10% range with second half 2021 adjusted EBIT margin rate in the high 11% range, with our annual adjusted EBITDA guidance at 11.2% of 2021 revenue.	compname reports q4 rev of $1.6 bln. q4 revenue $1.6 billion versus refinitiv ibes estimate of $1.8 billion. sees q1 adjusted earnings per share $0.80. sees q1 revenue about $1.65 billion. currently expects full year 2021 revenue will approximate $7.8 billion. qtrly adjusted diluted earnings per share of $1.75.
Joining us is Roger Jenkins, president and chief executive officer; along with David Looney, executive vice president and chief financial officer; Eric Hambly, executive vice president, operations; and Tom Mireles, senior vice president, technical services. Throughout today's call, production numbers, reserves and financial amounts are adjusted to exclude noncontrolling interest in the Gulf of Mexico. As such, no assurances can be given that these events will occur or that the projections will be attained. For further discussion of Risk Factors, see Murphy's 2020 annual report on Form 10-K on file with the SEC. Turning to Slide 2. I'd like to start with why Murphy Oil that illustrates our unique assets and abilities. Murphy produces from primarily three sources: the Eagle Ford Shale, Gulf of Mexico and onshore Canada. Unconventional Eagle Ford Shale and onshore Canada assets have complementary characteristics, which enables our onshore team to leverage shared capabilities and expertise. Further, we have deep roots and successful deepwater operations in the Gulf of Mexico business, which provides a large portion of our revenue. Murphy's exhibit unique ability to execute offshore projects faster than our peers with leading drilling and completion abilities and an average three year project time line from sanction to first oil. Our leading offshore execution capability augments our high potential exploration portfolio. Our assets achieve low carbon emissions intensity, which we believe will be in the top quartile as compared to our oil-weighted peers at the end of 2021. They continue to generate high levels of cash flow, which are directed toward delevering our business and returning cash to our shareholders through our long term dividend. Throughout all of this, our company has been supported by the multiple decade ownership of the founding Murphy family. Also, our board and directors and management team maintain one of the industry's highest levels of ownership compared to our peers, and we all have personal interest in our company's long-term success. Our three priorities this year are to delever, execute and explore. Murphy has made significant progress on delevering and derisking our company in the first quarter, with the monetization of our share of King's Quay floating production system and issuing new senior notes, utilizing proceeds to fully repay our revolver and take out senior notes that were due in 2022. Overall, we achieved a total of $233 million of debt reduction or 8% of our total debt since year-end 2020 from these transactions. Our current strip prices are maintaining the goal of reducing debt by an additional $200 million in 2021 for a total 15% debt reduction this year. Our execution ability remains topnotch with high levels of performance as our onshore business brought wells online ahead of schedule and under budget, while our operated and non-operated offshore projects remained on schedule. Our oil production beat guidance by 7% this quarter while our Eagle Ford Shale assets, in particular, were 4% above guidance despite experiencing impacts from the winter storm in Texas. Lastly, as we continue advancing our unique high potential exploration program. We're excited for drilling the two upcoming non-operated wells. The Silverback well was recently spud by Chevron in the Gulf of Mexico and later this year, we will turn our attention to the Cutthroat well in Brazil, Sergipe-Alagoas Basin with ExxonMobil. I'm excited to discuss these three simple priorities with investors and analysts today. On Slide 4, getting to the details of the quarter, Murphy produced an average of 155,000 barrels equivalent per day with approximately 63% liquids production. Significantly, our oil production was 88,000 barrels per day, which beat our guidance of 82,000 barrels per day. As shown in our 2021 quarterly well cadence, accrued capex with first quarter weighted and totaled $230 million net to Murphy. This amount excludes King's Quay spending but includes our $20 million acquisition of an additional 3.5 working interest in the non-operated Lucius field. Overall, we spent a third of our total capital plan for the year. Commodity prices rebounded significantly in the first quarter with oil realizations averaging $58 per barrel, slightly above the WTI benchmark, which we haven't seen since before the pandemic. Our natural gas realization prices averaged $2.55 per thousand cubic feet. David Looney, to give a financial update. For the quarter, we recorded a net loss of $287 million or $1.87 net loss per diluted share. After adjusting for several one-off after tax items, such as a $128 million non-cash impairment charge on Terra Nova and a $121 million non-cash mark-to-market loss on crude oil derivatives, we reported adjusted net income of $10 million or $0.06 adjusted net income per diluted share. Regarding Terra Nova, operations there have been off line since December of 2019. We recorded the impairment charge during this quarter due to the current status of operating plans. However, Murphy, other partners and stakeholders continue to evaluate options that could support a long-term production plan. Cash from operations for the quarter totaled $238 million, including the noncontrolling interest. After accounting for property additions of $258 million and proceeds from asset sales of $268 million, we achieved a positive adjusted cash flow of $248 million for the quarter. On the hedging front, Murphy continues to protect its future cash flow in the Tupper Montney with additional fixed price forward sales contracts for a portion of production all the way through 2024. As Roger mentioned, our 2021 capex plan is heavily weighted toward the first quarter with $230 million in total accrued capex or 33% of the annual total. Approximately 44% of total Eagle Ford Shale capex for the year was spent in the first quarter, while nearly 40% and 35% of the annual planned capex were spent in the Gulf of Mexico and offshore Canada, respectively -- onshore Canada, I'm sorry, respectively. This cadence will continue to stair-step down for the remainder of the year. Overall, we're maintaining our capex plan of $675 million to $725 million for 2021. However, we are tightening our production guidance range to 157,000 to 165,000 barrels of oil equivalent per day for the full year. For the second quarter of 2021, we're forecasting a production range of 160,000 to 168,000 barrels of oil equivalent per day. Importantly, our oil production is forecast at 95,000 barrels of oil per day for the second quarter. As Roger mentioned, Murphy had several significant cash flow events occurring in the first -- during the first quarter. So we've tried to simplify the ins and outs on Slide 7. In addition to cash from operations, nearly covering our regular capex, we received funds of $268 million from monetizing the King's Quay floating production system. We use these funds to pay off the $200 million outstanding on our revolving credit facility as well as $18 million in King's Quay capex that was incurred during the quarter. We also issued $550 million of new senior notes, raising proceeds of $542 million. This was used to pay off $576 million of 2022 notes. Once you take into account the $34 million of early redemption cost related to the payoff of those notes and account for dividends and other amounts, we ended up with an $80 million cash deficit, which was covered from cash on hand. At the end of the first quarter, we had $231 million of cash and equivalents available and had repaid a net $233 million or 8% of total debt, as Roger mentioned. At current commodity prices, we have a goal to repurchase an additional $200 million of senior notes later this year for a total debt reduction of approximately 15% for the full-year 2021. I'll be moving now to Slide 9, talking about our North American onshore business. Murphy continues to enhance our onshore well execution with operated wells coming on line ahead of schedule in the first quarter due to enhancements in drilling and completion efficiencies. Additionally, 16 non-operated Eagle Ford Shale wells came online at the end of the quarter, ahead of schedule. Overall, we remain on track to bring online three remaining operated wells and 29 gross non-operated wells in the Eagle Ford Shale and 10 operated Tupper Montney wells in the next two quarters. Our drilling and completion teams have worked hard to reduce the company's environmental impact by using clean-burning natural gas instead of diesel in drilling and completion activities, not only where emissions reduced, but Murphy saved $1.3 million in cost for the quarter, while bringing online 20 wells across North America onshore. We utilized approximately 800,000 barrels of recycled water across our completions programs, which Tupper Montney completions consume nearly 75% recycled water, saving $3 million in disposal costs. Further, we have reduced emissions with actions such as electrification of the third-party processing plant, which is secured power primarily from hydro in our Tupper Montney gas plant from the previous natural gas power supply. On Slide 10, our Eagle Ford Shale production of 30,000 barrels equivalent per day exceeded the midpoint of our guidance for the quarter despite more than 2,000 barrel equivalent per day of impact from February winter storm. Our first-quarter online wells, IP30 rate averaged 1,400 barrels of oil equivalent per day with the IP of the two best wells, reaching 2,000 barrels equivalents per day. Along with stronger well results, Murphy significantly reduced our costs from previous years. In 2018, our average well cost has dropped from approximately $6.3 million per well to now $4.5 million per well in first quarter of '21, with stand-alone completion costs down 40% during that period. I'm proud of the work our team has done and the meaningful impact it is having on our company's bottom line. As we work to derisk our Austin Chalk acreage in Karnes County, we're pleased to see the strong well results achieved in the first quarter and the potential they create for our Austin Chalk location count in the future. Our Tier 2 wells have outperformed our Tier 1 type curve and achieved an average IP rate of 1,400 barrels equivalent per day, and our recent Tier 1 Austin Chalk wells continue to perform in line with the type curve. Slide 11, on the Tupper Montney. Murphy produced 234 million cubic feet per day in the first quarter in Tupper and brought online four wells as planned. Our production was impacted in the quarter by a mechanical issue on one well as well as higher royalties. Drilling and completion costs continue to improve for this asset as well with an approximate 28% reduction since 2017. Average total well costs are now approximately $4.1 million in the first quarter of '21 as compared to $5.5 million in 2019. Looking at our Gulf of Mexico projects on Slide 13. Murphy's major projects in the Gulf continue to advance as planned. The top hole sections have been drilled at all three wells as part of Khaleesi/Mormont, Samurai and the Samurai-3 well is currently drilling as the first well in the drilling campaign. The project remains on track to achieve first oil in first half of 2022. The non-operated St. Malo waterflood project is progressing as scheduled. The first producer well is now in line, and the final well of the four well total campaign is currently being drilled by the operator. On King's Quay, on Slide 14. As previously announced, we closed the monetization of King's Quay floating production system in the first quarter. Construction is now complete with the sail away to the Gulf of Mexico planned for the third quarter of 2021. Moorings are currently being installed in the field in advancing this arrival, and the FPS remains on track for receiving first oil from Khaleesi/Mormont, Samurai in the first half of '22. We're pleased that this construction is kept to schedule despite the global pandemic. It is an integral piece of our Gulf of Mexico projects. Murphy's industry-leading team is doing an exceptional job in executing this significant project. We're excited to be partnered with Chevron as the operator for the Silverback prospect in the Gulf of Mexico, which commenced drilling in the second quarter of '21. Our 10% non-operated working interest provides access to 12 blocks with potential for an attractive play-opening trend and is adjacent to a large position currently held by Murphy and our partners. On Slide 17, our non-operated exploration position in Sergipe-Alagoas Basin in Brazil continues to progress and provides us further optionality. Today, we're highlighting our view of the resource potential at 500 million to 1 billion barrels. Again, illustrating what a significant opportunity Brazil is for our company. Murphy, along with the operator, ExxonMobil and partners plan to spud the Cutthroat well in the second half of '21, which is approximately net cost to Murphy of $15 million. We previously presented our long-range plan as far as our fourth-quarter earnings and highlight that the plan remains unchanged. By maintaining average capex spend of $600 million annually, we forecast a production CAGR of approximately 6% through '24, with oil weighting averaging 50% and offshore production averaging 75,000 barrels equivalent per day. This consistency leads to significant cash flow generation. An average WTI price of $60 per barrel enables Murphy to reduce its total debt level to $1.4 billion by 2024 while maintaining a quarterly dividend to shareholders. Further, we remain focused on executing our exploration program with a portfolio of more than 1 billion barrels of oil equivalent on a net risk resource basis. After we have our debt levels, we have the option to reduce debt further toward $1 billion. When debt reduction is behind us, we will do what is best for the company and shareholders based on market conditions while balancing increased asset development, funding exploration success, potential A&D opportunities and of course returning cash to shareholders. On to Slide 20 on our focused priorities. As we look ahead to the remainder of the year and beyond, we remain focused on our priorities of delevering, executing and exploring. With current strip prices above $60 per barrel and strong production volumes, we're on target for an additional $200 million of debt repurchases later this year, resulting in a 15% reduction for all of '21. By maintaining conservative capital spending, we project the total debt to be $1.4 billion by 2024, with potential for further reductions beyond that level. Murphy is committed to operating safely, in particular, as we continue moving forward on our major offshore projects ahead of first oil in the first half of 2022. Our onshore drilling and completions team have done a tremendous job improving our cost efficiencies and bringing wells online ahead of schedule, all while finding ways to cut emissions intensity and operate with minimal environmental impacts. Lastly, looking forward with our partners to drill exploration wells in the Gulf and Brazil this year and we look forward to this year's campaign. We've set a strong foundation for the remainder of the year of our future drilling campaigns with the work done to reduce costs and environmental impacts. I'm pleased with all the hard work and your accomplishments.	compname reports q1 loss per share $1.87. q1 loss per share $1.87. q1 production averaged 155 thousand barrels of oil equivalent per day (mboepd) with 57 percent oil and 63 percent liquids. onshore business produced approximately 80 mboepd in the first quarter. maintains its 2021 capital expenditures (capex) guidance of $675 to $725 million. qtrly adjusted income from continuing operations per average diluted share $0.06.
Joining us is Roger Jenkins, president and chief executive officer; along with David Looney, executive vice president and chief financial officer; Eric Hambly, executive vice president, operations; and Tom Mireles, senior vice president, technical services. Throughout today's call, production numbers, reserves, and financial amounts are adjusted to exclude noncontrolling interest in the Gulf of Mexico. As such, no assurances can be given that these events will occur or that the projections will be attained. A variety of factors exist that may actually cause results to differ. For further discussion of risk factors, see Murphy's 2020 annual report on Form 10-K on file with the SEC. On Slide 2, as we kick off our quarterly call and investor meetings, we would like to remind our investors of our story. Our ongoing execution in our three producing areas continues to show outstanding results, while progressing our offshore long-term projects and expansion of the Tupper Montney. Our competitive advantage of executing in offshore, again, is illustrated by the outstanding progress on our Khaleesi/Mormont, Samurai, and King's Quay projects. We also maintained strong cash flow that easily covers our planned spending for 2021 and supports shareholders through our long-standing dividend. Further, we were able to increase our cash position this quarter by nearly 190 million, which allows us to accelerate our delevering plans. Our ongoing meaningful level board and management ownership highlight our personal interest in the company's long-term success. Our three priorities are simply to delever, execute, and explore and I'm pleased with the progress we've made on all fronts in the second quarter and this year. After our initial delevering event, we repaid our revolver in full in Quarter 1. We stated our goal of reducing long-term debt by $200 million by year-end 2021. We recently announced the redemption of 150 million of 6.875% senior notes due in 2024. And now today, we're able to increase increased our delevering goal to 300 million assuming a $65 oil price for the remainder of 2021. Additional cash flow has been accomplished, not only through stronger oil prices, but also ongoing operational excellence as we've achieved less operated downtime offshore while experiencing the benefits of our optimization efforts and upgrades completed over the previous 18 months. Along with continuing to bring on our onshore wells online, below budget, and ahead of schedule. As a result of this work, production from every single asset was above the midpoint of guidance this quarter, with all onshore operations exceeding the high end of the guidance range. Additionally, we produced 100,000 barrels of oil per day in the second quarter, topping our guide by 5%. Offshore, our Gulf of Mexico projects remains on budget and on schedule. We also remain focused on advancing our exploration program. We participated in the drilling in Brunei in the second quarter with the Jagus SubThrust-1X exploration well along with the spudding with non-operated Silverback well in the Gulf of Mexico. In the fourth quarter, we participated in the drilling of the cut-throat exploration well in Brazil. On our sustainability report on Slide 4, our report has been published on our website and includes expanded disclosures to share our sustainability efforts and further align us with multiple international standards, such as the UN sustainable development goals, and five reporting principles outlined in sustainability reporting guidance for our industry. We've now established a goal of zero routine flaring by 2030 and obtained third-party assurance of our 2020 scope one and scope two greenhouse gas emissions. Additionally, we have revised and strengthened our climate change position instituted a human rights policy advanced our diversity equity inclusion efforts. Statistical highlights include receiving a 47% reduction in scope one and scope two greenhouse gas emissions since 2016 and a 10% decrease in greenhouse gas emissions from 2020 -- from 2019 to 2020, excuse me. Building upon our current top quartile, low carbon emission intensity for oil-weighted peers we are continuing the internal work to reduce our environmental footprint and advance the energy transition while protecting and supporting our people and the communities in which we work. On Slide 5, our second-quarter production volumes of 171,000 barrels of oil equivalent per day were 4% above our guidance midpoint for the quarter. Accrued capex for the quarter was $198 million, revenue of near 700 million, which is the highest in a year was achieved through strong realized pricing of $65.53 per barrel for oil. I'll start with Slide 6. In the second quarter, we reported a net loss of $63 million or $0.41 per diluted share. After adjusting for certain after-tax items, such as 103 million non-cash mark-to-market loss on crude oil derivatives and a $49 million non-cash mark-to-market loss on contingent consideration, we reported adjusted net income of $91 million or $0.59 per diluted share. Cash from operations for the quarter totaled $449 million, including the noncontrolling interest. After accounting for net property additions of $203 million, we achieved positive adjusted cash flow of $246 million. On the hedging front, Murphy continues to protect its future cash flow in the Tupper Montney with additional fixed price forward sales contracts for a portion of production through 2024. Our 2021 capex plan is heavily weighted toward the first half of the year with 198 million total accrued capex in the second quarter. While slightly above our previous guide, this was due to timing adjustments of non-operated activity and has no impact on our annual capex. Overall, our ongoing disciplined spending has led us to tighten our capex guidance for the year, now ranging from 685 million to $715 million, with $700 million maintained as the midpoint. As we established on our last earnings call, capex will step down for the remainder of the year. With the shift in Eagle Ford Shale spending, our fourth quarter capex is forecast lower than previously. Approximately 63% has already been spent in the Eagle Ford Shale as of June 30th, and 66% has been spent in the Gulf of Mexico, while 76% of onshore Canada capex has been spent by that date. We continue to proactively manage our supply chain exposure, particularly with our long-lead items. Since 60% of our 2021 capital plan is complete, and key contracts are in place for the remaining plan, we have minimal near-term supply chain risk to our capital spending. Our third-quarter production guidance range of 162 to 170,000 a barrels of oil equivalent per day includes 4,100 barrels of oil equivalent per day of assumed Gulf of Mexico storm downtime. Additionally, we are adjusting our full-year production guidance range to 157.5 thousand barrels of oil equivalent per day to 165.5 thousand barrels of oil equivalent per day, which includes fourth-quarter impacts of 1,300 barrels of oil equivalent per day for assumed Gulf of Mexico storm downtime and 7,900 barrels of oil equivalent per day for net planned offshore downtime. On Slide 9, in the second quarter, we brought online three operated and 29 gross non-operated wells in the Eagle Ford Shale, 10 wells are brought online in the Tupper Montney, that wraps up our activity in offshore Canada for the year. Our U.S. onshore drilling program is nearly complete with just four operated Eagle Ford wells planned to come online in the fourth quarter. Our Eagle Ford Shale wells produced 42,000 barrels equivalent per day in the second quarter in process of 75% oil and 88% liquids. For the remainder of the year, we plan to drill and complete 4 wells in the fourth quarter, I just mentioned, in our Catarina acreage, all within our planned annual capex of $170 million. The team continues to execute and generate efficiencies as evidenced of our 25% improvement in our rate of penetration completion cost per lateral foot since 2019. Overall, we've achieved a 40% reduction in completion costs in four years. Through strict focus on nonproductive time. And making operational improvements, our average per well drilling and completion costs has improved to 4.7 million from 6.3 million in 2018. As a result, we are now achieving well payouts of approximately nine months on our 2021 program at oil prices averaging nearly $62 per barrel in the first half of this year. On Slide 11, as Austin Chalk, one of our four Eagle Ford wells we plan to drill and bring online in the fourth quarter is targeted for the Austin Chalk formation. Overall, our recent Karnes Austin Chalk wells have nicely outperformed our average type curve. Additionally, other public operators near our Catarina acreage in the western portion of our Eagle Ford Shale acreage have reported strong Austin Chalk results from their recent wells. We're excited to drill this well and highlight potential derisk another 100-plus Austin Chalk locations in our portfolio in that area. On Slide 12, the Tupper Montney, we produced 248 million cubic feet per day in the second quarter. 10 wells are brought online, which completes all well activity for the year. Costs continue to decrease here as well. we've seen a 24% reduction in drilling and completion costs since 2017 while achieving a total well cost of just 4.4 million in 2021, compared to 5.5 million in 2019. The -- In particular, our completion cost per lateral foot have improved 25% since 2019 through lower nonproductive time, optimized wireline operations, enhanced water handling, and natural gas-powered frac pumps. Further, our average pumping average per day has increased more than 50% since 2017 from almost 12 hours to 18 hours per day, the ability to lower our cost per well by nearly $1 million will add significant value to our Tupper Montney project and represents the tremendous work of our drilling and completions team in that area. As to our Gulf of Mexico project done extremely well, -- On Slide 14, Murphy continues to progress as scheduled with major Gulf of Mexico projects, Samurai No. 3 well was drilled in the quarter, and we're now drilling the Khaleesi 3 well. Our next well is Samurai 4, which is planned for later in the third quarter before we begin completions work on all seven wells that make up the Khaleesi/Mormont, Samurai development. The team has been able to maintain the schedule and capital plan for this project, and we still anticipate flowing first oil in the King's Quay in the first act next year. Completions work on the final producing well of our non-operated St. Malo waterflood project is set to wrap up within the week and thereby completing rig activity on this project for the remainder of the year. We're pleased that a project this size has remained on schedule and highlight and completing the rig work for the remainder of '21 provides further certainty on our capital spending. As to King's Quay, the second quarter saw completion of the construction of the King's Quay floating production system, the FPS is now sailed away from Korea and is headed to the Texas Coast, where final work will be accomplished at the shore-based private placement in the Gulf in early 2022. This team has done an incredible job on this project not only remaining on schedule, but also keeping everyone safe and healthy through the pandemic. We're excited to see this come to fruition. This is yet another example of our industry-leading offshore execution ability. In Brunei, on Slide 17, in the quarter, we participated in the drilling of discovery well in Block CA1 in Brunei with the Jagus SubThrust-1X well for a total cost of Murphy of just $2.8 million at approximately an 8% working interest. Post this well, we reclassified our working interest in Block CA-1 of Brunei has not held for sale any longer. Partners are assessing development appraisal plans. We're evaluating seismic data, further prospectivity. This exploration in the Gulf of Mexico in the second quarter on Page 18, and drilling was commenced at the Chevron-operated sale back prospect in the Gulf, which we anticipate finishing this month. Our participation provides access to 12 blocks with potential for attractive play opening trend and is adjacent to the large position Murphy holds with our partners. On Slide 19, in Brazil, cited about our non-operated exploration position in Sergipe-Alagoas Basin and the additional optionality and resource potential that provides our company. Murphy along with the operator, ExxonMobil, and partners planned to spud the cut through one well in the fourth quarter of 2021 and approximate net cost of Murphy of just $15 million. On Slide 21 on to our capital program. I'm pleased with our excellent production results this quarter and our oil production exceeded by 5% has remained consistent in our ever-improving operations and operated offshore and in the Eagle Ford Jail. We remain on track with our full-year production at our midpoint of 161.5 thousand barrels equivalent per day with 55% oil weighting. We remain very disciplined on our capital spending with no intention to change our plans for the remainder of the year. As such, we affirm the 700 million midpoint of capex for 2021 and have announced today that we're tightening the range around this midpoint. On Slide 22, as we remain focused on our strategy of delevering, executing, and exploring, we note that our long-term plan remains unchanged. Our continued execution and capital discipline laid in maintaining our capital spend of 600 million from '21 through 2024 with a production CAGR of approximately 6% through that period. Of course, we're trending well in our current oil weighting and are above the plan for 2021 at 55%. Assuming an average long-term WTI price of $60 per barrel, Murphy is able to -- will be able to cut its debt in half to less than 1.4 billion by the end of '24 while maintaining a quarterly dividend payment to shareholders. We note that this plan accelerates using an average price of $70 per oil in '23, enabling us to reach the debt reduction by just mid-2023. Beyond delevering, we remain focused on our exploration program and portfolio of over 1 billion barrels of oil equivalent and net risked resource potential. Long term, once our major Gulf projects are complete, we'll have significant optionality when making capital allocation decisions, and we'll look to what's best for Murphy and our shareholders and stakeholders at that time. While we have many options, we'll seek to balance increased asset development with funding exploration success and potential A&D and execute additional debt repurchases and return more cash to shareholders. Throughout the remainder of '21 and longer term, we are steadfast and focused on our priorities of delevering, executing, and exploring. We decided to accelerate our long-term debt reduction goal for 2021 to 300 million from 200 million, assuming an oil price of $65 for the rest of the year, and look forward to achieving our goal of 1.4 billion in long-term debt reduction by '24 with a long-term average price of $60 per barrel. We're able to accomplish this in part by disciplined spending, but also continued execution of our major Gulf of Mexico projects ahead of first oil next year as well as keeping everyone safe and healthy while protecting the environment in which we're operating. Lastly, we're excited with the recent exploration success in Brunei. I look forward to drilling wells with operating partners in the Gulf and Brazil this year while planning for next year's exploration campaign. Murphy could not have achieved this successful second quarter without the effort of all of our employees who continue operating with excellence in every single department.	q2 adjusted earnings per share $0.59 excluding items. q2 loss per share $0.41. production for q3 2021 is estimated to be in range of 162 to 170 mboepd and includes assumed storm downtime of 4,100 boepd. murphy oil - tightened 2021 capital expenditures guidance to $685 to $715 million while adjusting fy 2021 production guidance to 157.5 to 165.5 mboepd. full year production is forecast to be comprised of about 55 percent oil and 61 percent total liquids volumes.
Joining us is Roger Jenkins, president and chief executive officer; along with David Looney, executive vice president and chief financial officer; and Eric Hambly, executive vice president, operations. Throughout today's call, production numbers, reserves and financial amounts are adjusted to exclude non-controlling interest in the Gulf of Mexico. As such, no assurances can be given that these events will occur or that the projections will be attained. For further discussions of risk factors, see Murphy's 2019 Annual Report on Form 10-K on file with the SEC. Before we get started reviewing our 2020 and looking-forward segment of our day to day, I would like to address the recent actions taken by the Biden-Harris administration. Murphy, like all operators across federal lands in the United States, is disappointed but not at all surprised by recent actions. Unfortunately, as a matter of public policy, we believe their efforts is misguided. U.S. emissions peaked over a decade ago in the United States and continue to fall every year. Growth in the worldwide greenhouse gas emissions comes primarily from the Far East, Southeast Asia and Africa. These new initiatives will punish domestic producers and workers but will not lower worldwide emissions. Ironically, any policy that includes the Gulf of Mexico actually hurts the carbon footprint as the deepwater Gulf has the lowest carbon intensity of all of the E&P business. Last week, the U.S. Department of Interior announced a temporary suspension of delegated authority for 60 days. It is important to note that this order does not limit existing operations under valid leases and provides a method for obtaining necessary approvals. There is real potential for delay in consolidation of approval authority. However, to date, we have been pleased with the progress and are moving forward. Murphy is well positioned to continue execution of our short-term and long-term projects, including Khaleesi, Mormont, Samurai, and our nonoperated projects based on approvals in hand, discussions with our regulators and progress made in the last week, obtaining actual approvals to conduct ongoing operations on current leases. We've also seen, in the past two weeks, over 20 approvals given for work in the Gulf of Mexico to not only us, but our peers. Yesterday the White house announced a pause on new oil and natural gas leasing on federal land and waters, pending completion of a comprehensive review and reconsideration of federal oil and gas permitting and leasing practices. This action is also not surprising. Existing and ongoing lease work which was not included in the announcement. The administration's recent actions have confirmed the viability of our company's strategy and increased the value of our diverse global portfolio. This includes large-private U.S. onshore acreage, both onshore and offshore Canada assets and a robust international exploration portfolio, including offshore Mexico, Brazil, and Vietnam. As you can imagine, there are many pieces here moving forward. We expect once the dust settles that permitting approvals will return to a process we can work with. It's not in the government's best interest to halt operations in the Gulf for a host of financial and legal reasons. And again, we have a diverse portfolio, and all these actions are highly likely to increase oil prices, which would be in our favor over time. Murphy remains steadfast in our strategy despite the turmoil of 2020, maintaining our diverse portfolio while operating in a safe, sustainable, and physically responsible manner. Our capital discipline leads to a targeted flatter oil production profile with additional free cash flow generation coming from the recently announced Tupper Montney development, along with long-term price recovery scenario. We remain focused on our shareholders through long-standing dividend, our employees, contractors, and communities by establishing and practicing our successful COVID-19 protocols. and Canada, which offers many advantages in today's time. And lastly, Murphy remains a strong company making exploration program on existing acreage in both the Gulf of Mexico and internationally. Slide 3, following the OPEC price war beginning of the COVID-19 global pandemic last year, we focused on a few primary areas to solidify the company and remain competitive over the long-term with some multi-basin operations. Murphy completed a significant companywide reorganization, resulting in reduced G&A costs as well as lowered our overall cost structure and capital program. Our focus on maximizing free cash flow and maintaining liquidity with the support of crude oil hedges and natural gas forward sale contracts led to the sanctioning of the low-risk Tupper Montney development and reduced capital allocation toward growing shale oil production. Additionally, we have continued to support development plans for both long-term deepwater Gulf projects as well as our international exploration program. Slide 4, Murphy produced an average of 149,000 barrels of oil equivalent to-date -- per day in the fourth quarter. These volumes include impacts totaling nearly 4,000 barrels equivalent from two subsea equipment issues with production expected to restart in the first quarter 2021. The unplanned events in the Gulf of Mexico were partially offset by strong North America onshore performance. Our cash capex totaled $111 million for the quarter, inclusive of $1 million in NCI spending. On an accrued basis, capex totaled $130 million net to Murphy, excluding King's Quay. Prices continued to improve in the fourth quarter with oil realizations at an average of $42, the highest, of course, seen since quarter 1, and natural gas at $2.36 per 1,000 cubic feet, also far ahead of prior quarters. On Slide 5, our full year 2020 production averaged 164,000 barrels of oil per day. Its a dynamic year and we experienced a record-breaking hurricane season following historically low prices resulting in industrywide production shut-ins for a short period. Overall, for the year, we averaged nearly $38 per barrel for realized oil prices with $1.85 per 1,000 cubic feet for natural gas. Cash capex for the year totaled $760 million, which included $23 million of NCI capex. On an accrued basis, capex totaled $712 million, excluding King's Quay and NCI spending as per our guidance. On reserves on Slide 6. Our proved reserve base remains sizable at year-end 2020, with 697 millions of oil -- barrels of oil equivalent, comprised of 41% liquids and 51% proved developed. Approved reserve life is maintained at more than 11 years. Overall, our total approved reserves were 13% lower from the year-end 2019 due to two primary events. The first was a combination of lower SEC crude oil prices, along with Murphy's shift and focus away from oil shale production growth, which resulted in transfer of Eagle Ford Shale and Kaybob Duvernay PUDs to probable reserves. The change in capital allocation of the current five-year plan reduced PUDs by over 100 million barrels equivalent. Separately, the sanction of the Tupper Montney development in the fourth quarter resulted in the conversion of probable reserves and contingent resources to proven undeveloped, totaling nearly 100 million barrels equivalent. On Page 7, while total proved reserves were lower year over year, our North American onshore proved plus probable resource remained near 2.5 billion barrels of oil equivalent. We maintain the ability to rebook our onshore shale PUDs with adjusted capital plan in the future if we decide to do so as the reserve transfers we're based on capital timing and not subsurface risk. As in any resource booking, it would also depend on prices, cost structure at the time and a five-year planning cycle change. Overall, Murphy continues to hold more than 3,400 undrilled locations across onshore North America. Further, our U.S. onshore Eagle Ford Shale position is located on private lands. Slide 8, Murphy recorded a net loss of $172 million or a $1.11 net loss per diluted share for the fourth quarter of 2020. After-tax adjustments, including, but not limited to, a noncash mark-to-market loss on crude oil derivative contracts and contingent consideration, totaling $159 million resulted in an adjusted net loss of $14 million or a $0.09 adjusted net loss per diluted share. Slide 9, Improving commodity prices led to further strengthening in revenue for the quarter. Overall, our net cash provided by continuing operations rose to $225 million in the fourth quarter, including a $13 million cash outflow from our working capital increase. When combined with property additions and dry hole costs of $135 million, including $38 million for King's Quay, we had positive free cash flow of $90 million in the quarter. Regarding King's Quay, the producer and owner groups continue to make good progress on the array of legal documents, and we look forward to a closing possibly within the next few weeks. For full year 2020, our net cash from continuing operations of $803 million included a $39 million outflow from working capital. Property additions and dry hole costs of $859 million, including King's Quay spending of $113 million, resulted in a negative free cash flow of $56 million for the year. If we exclude the King's Quay expenditures for the year, we would have some positive free cash flow of more than $55 million. We continue to maintain a high level of liquidity with $1.7 billion at year-end, including $311 million of cash and equivalents at December 31st. With our focus on cost reduction measures throughout 2020, we've achieved significantly lower G&A, with an approximately 40% reduction in full year costs from 2019. Lastly, Murphy continues to protect its future cash flow with the addition of '21 and '22 crude oil hedges as well as fixed price forward sales contracts for a portion of our Tupper Montney production through 2024. Liquidity remains a key focus for Murphy, and our balance sheet remains strong with $1.4 billion available under our $1.6 billion senior unsecured credit facility as well as $311 million of cash and equivalents as of December 31. We reiterate our goal of reducing total debt level over time with excess cash flow. This reduced leverage will give us even more resilience through the inevitable commodity price cycles to come. As a company, we're responsible to the environment, employees, and our stakeholders. We have a long history of protecting all in part due to our strong internal governance processes. I'm particularly proud of how quickly the team established COVID-19 protocols to also maintain safe offshore operations. We have zero downtime or disruptions due to those efforts. Murphy achieved another year of low metrics, including 46% reduction year over year in total recordable incidents. We expanded our internal diversity and inclusion practices and programs, and maintain a program to aid impacted employees in times of need through our Disaster Relief Foundation, which we used this summer with the hurricane relief on the Louisiana Coast. Our operations team continued their work on minimizing our environmental impact, such as building a new produced water handling system for recycled water in our sanctioned Tupper Montney project as well as utilizing bi-fuel hydraulic frac spreads on all well completions in Canada, which results in considerable CO2 emissions reductions. While smaller changes individually, they add up to a larger impact over time. On Slide 13, on sustainability. Last fall, we released our 2020 sustainability report, which features expanded disclosures and metrics. A key highlight is our goal of reducing greenhouse gas emissions intensity of about 15% to 20% by 2030 from 2019. The report also outlines diversity disclosures workforce development, employee engagement programs. Murphy has also expanded our HSE Board Committee to include oversight of corporate responsibility formed, and we formed an ESG Executive Committee and created a new Director of Sustainability role. We've taken many steps and we continue to evolve and advance our sustainability efforts. On Slide 15, on the Eagle Ford Shale business, we produced 31,000 barrels equivalents per day in the fourth quarter, now comprised of 71% oil. For the full year, production averaged 36,000 barrels equivalent per day, with $197 million of capex, which includes near $50 million for field development as well. We brought online 25 operated and 10 nonoperated wells earlier in that year. The team continued their efforts on improving well performance and high grading production enhancing projects, especially, our artificial lift optimization. Murphy is seeing an average base decline rate of 24% for all wells drilled prior to '21, which, in our view, is very well positioned. On Slide 16, on the Kaybob Duvernay project, the company produced 10,000 barrels equivalent oil per day in the fourth quarter, comprised of 75% liquids, and averaged 11,000 barrels equivalent per day for the full year. Overall, Murphy spent $94 million in capex during the year, including Placid Montney, breaking online 16 operated wells in Kaybob and 10 nonoperated wells in Placid. Also in 2020, Murphy completed its drilling program to hold all acreage, resulting in full discretionary future development. Most notable in the second quarter in the Kaybob East 15-19 Pad, which is achieving significant results as our best well in Kaybob Duvernay so far, ranking in the top 2% of all Murphy unconventional wells. Overall, it's competitive with top producing wells in Karnes County in the Eagle Ford Shale. In the Tupper Montney, we produced 234 million per day in the fourth quarter and averaged 238 million cubic feet per day full year 2020. Approximately, $14 million of capex was spent during the year to drill four wells with completions planned this year and ongoing. Additionally, the Tupper Montney plant expansion was completed during the fourth quarter. Since our last earnings call, Murphy has ended significant fixed price forward sale contracts at AECO Hub through 2024, which, combined with improving basis differentials and higher prices as well as higher EURs, can lead to stronger free cash flow generation. In the Gulf of Mexico, our assets there produced 63,000 barrels equivalent of oil per day in the fourth quarter, comprised of 78% oil. Production volumes were impacted by nearly 4,000 barrels of oil equivalent per day on unplanned downtime due to two subsea equipment issues, in addition to previously guided hurricane downtime in the fourth quarter. Our full-year 2020 production averaged 70,000 barrels equivalent per day. Short-term projects continued to progress with operated Calliope on schedule for first oil in the second quarter, Nonoperated wells in various stages of completions and tie-ins, and we expect oil to begin flowing in the first half of the year to plan. In the Gulf of Mexico, Slide 20, on all major projects. We remain on schedule with King's Quay construction at 90% complete and drilling beginning in the second quarter for Khaleesi, Mormont and Samurai development. The nonoperated St. Malo Waterflood continues to move forward with completions on the first producer well under way and preparations being made for drilling a second injector well as well as beginning of a producer well workover. In exploration, we participated in the latest OCS Gulf of Mexico lease sale during the fourth quarter, and we were awarded and fully awarded 8 blocks with 5 prospects at a net cost of approximately $5.3 million. As a result, our Gulf of Mexico interest today totals 126 blocks, spanning to more than 725,000 acres with 54 exploration blocks and 15 key prospects at this time. On Slide 24 on our capital program. For 2021, Murphy plans to spend $675 million to $725 million and achieve production of 155, 000 to 165, 000 barrels equivalent per day. For the first quarter, we forecast production of 149, 000 to 157, 000 barrels of oil equivalent per day. Approximately 47% of our 2021 capex is allocated to offshore Gulf of Mexico, with nearly all dedicated to the major long-term projects that achieve first oil in 2022. Another quarter of our 2021 capex is budgeted for the Eagle Ford Shale, with the remainder split between onshore Canada and exploration. Overall, we continue to focus on high-margin assets in our oil-weighted portfolio, resulting in free cash flow generation after our dividend. Our North American onshore capital budget is $265 million in 2021 and is also focused on maintaining flat production in the Eagle Ford Shale, with $170 million dedicated to bringing on 19 operated wells and 53 nonoperating wells as well as field development, which is 30% of the total spend. Approximately $85 million is earmarked for newly sanctioned Tupper Montney development program to bring 14 wells online during the year. The remaining $10 million of capex supports field development and maintenance in the Kaybob Duvernay and nonoperated Placid. Of note, our oil-weighted shale assets maintain a long runway of drilling with more than 1,400 locations in the Eagle Ford Shale and more than 600 in the Kaybob Duvernay. In the Tupper Montney project, we're excited for this opportunity that the development brings to our portfolio. We're seeking and -- we're seeing lowest basis differentials in five years. Beyond that, we have continual improvement in Murphy's well economics and EURs in the area, creating sustainable attractive cash margins for an asset that also generates the lowest greenhouse carbon intensity in our portfolio. Lastly, the macroeconomics have shifted significantly in our favor in the last few years with the additional takeaway capacity, achieving necessary debottlenecking work, both in the West and East ward boundary pipelines as well as some construction beginning on LNG Canada project with the planned in-service date of 2025. The Tupper Montney asset has been strong proven resource with rising EURs in recent years and ever-improving cost structure, while maintaining very low subsurface risk. We've recently put in place additional fixed price forward shale contracts in 2024, thereby protecting future revenue for the project and assuming cash flow generation. The asset generated free cash flow of approximately $50 million in 2020, which is more than sufficient to cover the cash flow requirements in the next 2 years as the development is initiated. And overall, the current sanction plan requires an average annual capex of $68 million and will generate cumulative free cash flow of approximately $215 million through 2025. In the fourth quarter, we farmed into an attractive play opening trend for a 10% nonoperated working interest with Chevron as operator. The first well plan is a Silverback prospect, and we will provide access to -- and we will also be provided access to about 12 blocks through our participation. On Slide 29, we continue to progress our various exploration projects and are excited with the optionality of the nonoperated position in Sergipe-Alagoas Basin in Brazil provides our company. Murphy is working with partners to mature our drilling inventory and our partner plans to spud the first Brazil well in the second half of 2021. In the Salina Basin in Mexico, on Slide 30, continue to advance our position there. We have many leads and prospects here and target spudding the first exploration well in late '21 or early '22. Overview of the LRP on Slide 32. Our long-term strategy of a dynamic plan to maximize cash flow while managing capex after dividend remains unchanged, as is our commitment to a flatter oil production profile. Our Tupper Montney development leads to an approximately 8% CAGR from '21 through '24, while oil growth remains at 3%. Through this, Murphy will generate cumulative free cash flow after dividend at our base price scenario with significant cash flow achieved in the mid-50s oil price recovery scenario, which will achieve a sizable debt reduction. As we began with our announcement in 2020 for a lower capital program, the average annual capex through 2024 is approximately $600 million, with 2022 being the peak year due to finalizing the major Gulf projects along with increased Tupper Montney development. Of course, we maintain a portion allocated to exploration strategy with a target of drilling three to five wells per year. Slide 33 is to close out 2020 and lean up to '21. Murphy is sticking with our priorities of managing capex to support a flatter production profile, when combined with protective hedges, allows for maximum free cash flow generation, strong liquidity and debt reduction, and long-term price recovery as well as consistently paying a dividend to our shareholders. Lastly, I want to extend my sincere gratitude to all of our employees for their efforts throughout 2020. And with their dedication and our new plans, we are well positioned heading into '21.	q4 adjusted loss per share $0.09 excluding items. q4 loss per share $1.11. q4 production averaged 149 thousand barrels of oil equivalent per day (mboepd) with 55 percent oil and 62 percent liquids. planning 2021 capital expenditures to be in range of $675 to $725 million. sees fy 2021 production to be in range of 155 to 165 mboepd, comprised of about 52 percent oil & 59 percent total liquids volumes. production for q1 2021 is estimated to be in range of 149 to 157 mboepd.
Scott Hall, our President and CEO; and Martie Zakas, our CFO, will be discussing our fourth quarter and full year results, end markets and expectations for fiscal 2022. Please review slides 2 and 3 in their entirety. I hope everyone listening to our call continues to stay safe and healthy. The fourth quarter was a disappointing end to a strong year, which we achieved despite the ongoing pandemic and other challenges. In addition to the pandemic, we have faced many obstacles over the past year, including significant raw material and other cost inflation, supply chain disruptions and labor availability challenges, which impacted fourth quarter operations and results. Our consolidated net sales increased 11.4% for the fourth quarter and 15.2% for the full year. Following record sales growth in the third quarter, we experienced continued strong demand in the fourth quarter, driven by both new residential construction and municipal repair and replacement activity. Fourth quarter orders remained elevated compared with pre-pandemic levels and we ended the year with record backlog for our infrastructure products. While our fourth quarter adjusted EBITDA decreased primarily due to the challenging operating environment, we still achieved 6.8% growth for the year. Although we realized improved pricing in the quarter for the majority of our products, it was not enough to offset the continued higher inflation. We do expect that our current pricing actions will more than cover anticipated inflation in 2022, assuming material costs do not increase beyond current levels. Additionally, during the quarter, our specialty valve product portfolio experienced longer delivery time for parts, delaying shipments and our ongoing plant restructuring has been impacted by the supply chain disruptions and labor challenges. I am especially pleased with our cash flow for the year, where we generated $94 million of free cash flow. We ended the year with a stronger cash position compared with the prior year after acquiring i2O Water for $19.7 million and allocating $44.8 million to shareholders. We repurchased $10 million of common stock during the fourth quarter and recently announced a dividend increase of approximately 5.5%. In summary, while we had a disappointing finish to the year from a conversion margin perspective, we delivered strong top line growth and remain focused on overcoming the operational challenges. We believe that the record backlog across our short-cycle products, coupled with the expected realization from higher pricing, have positioned us to deliver net sales and adjusted EBITDA growth in 2022. Additionally, we are nearing the completion of our three large capital projects, which we expect to drive gross margin benefits once they are up and fully running. I am confident that we are in a great position to accelerate our strategies and improve our culture of execution as we become a world-class water technologies company, bringing solutions to critical water infrastructure. I hope you and your families continue to be safe and healthy. I will start with our fourth quarter 2021 consolidated GAAP and non-GAAP financial results, then review our segment performance and finish with a discussion of our cash flow and liquidity. During the fourth quarter, we generated consolidated net sales of $295.6 million, which increased $30.3 million or 11.4% as compared with fourth quarter last year. The increase was primarily a result of increased shipment volumes and higher pricing at infrastructure. We generated a 10.8% increase in consolidated net sales when compared with the fourth quarter of 2019, which preceded the pandemic, reflecting improved end market demand. Our gross profit this quarter decreased $7.6 million or 8.1% to $86.3 million compared with the fourth quarter of the prior year, yielding a gross margin of 29.2%. Gross margin decreased 620 basis points compared with the prior year. Higher pricing at infrastructure and increased shipment volumes were more than offset by continued higher inflation and unfavorable manufacturing performance, which includes the impact of labor challenges, supply chain disruptions and our plant restructurings. Our total material costs increased 18% year-over-year in the quarter, primarily driven by higher raw materials, which increased sequentially and year-over-year. Our primary raw materials are scrap steel and brass ingot and prices of both were up over 50% year-over-year. While our price realization improved sequentially, our price/cost relationship was negative for the third consecutive quarter. Given the acceleration of raw material pricing in the quarter, the price/cost relationship did not improve as much as anticipated due to the level of inflation. Scott will discuss the drivers of the decrease in gross margin versus expectations in more detail later in the call. Selling, general and administrative expenses of $56.6 million in the quarter, increased $4.5 million compared with the prior year. The increase was primarily as a result of investments, including the i2O Water acquisition, IT-related activities and personnel-related costs, the reversal of temporary T&E savings relating to the pandemic and general inflation. SG&A as a percent of net sales was 19.1% in the fourth quarter compared with 19.6% in the prior year. Operating income of $27.8 million, decreased $12.9 million or 31.7% in the fourth quarter compared with $40.7 million in the prior year. Operating income includes strategic reorganization and other charges of $1.9 million in the quarter, which primarily relate to our previously announced plant restructurings. Turning now to our consolidated non-GAAP results. Adjusted operating income of $29.7 million decreased $12.1 million or 28.9% as compared with $41.8 million in the prior-year quarter. Higher inflation, unfavorable manufacturing performance and higher SG&A expenses more than offset higher pricing and increased volumes in infrastructure. Adjusted EBITDA of $45.6 million decreased $12 million or 20.8%, leading to an adjusted EBITDA margin of 15.4%, which is 630 basis points lower than the prior year. For the full year 2021, we generated adjusted EBITDA of $203.6 million, which grew 6.8%, yielding an adjusted EBITDA margin of 18.4%. Interest expense net for the 2021 fourth quarter declined to $4.4 million as compared with $6 million in the prior-year quarter. The decrease in net interest expense in the quarter primarily resulted from lower interest expense as a result of the refinancing of our senior 5.5% notes with senior 4% notes. The effective tax rate this quarter was 24.3% as compared with 24.8% last year. For the full year, our effective tax rate was 25.8% as compared with 23.5% for the prior year. For the quarter, we generated adjusted net income per share of $0.12 compared with $0.17 in the prior year. Turning now to segment performance, starting with infrastructure. Infrastructure net sales of $271.9 million, increased $29.9 million or 12.4% as compared with the prior year primarily as a result of increased shipment volumes, particularly of our hydrant, iron gate valve, service brass and repair products and higher pricing. Adjusted operating income of $46.2 million, decreased $10.6 million or 18.7% in the quarter as higher inflation, unfavorable manufacturing performance and higher SG&A expenses were only partially offset by higher pricing and increased volumes. Adjusted EBITDA of $59.3 million, decreased $10.3 million or 14.8%, leading to an adjusted EBITDA margin of 21.8%. For the full year, adjusted EBITDA margin was 25.2%. Moving on to technologies. Technologies net sales of $23.7 million, increased 1.7% as compared with the prior year primarily as a result of our acquisition of i2O Water. Organic net sales declined slightly compared with the prior year as higher pricing was more than offset by lower volumes. Adjusted operating loss was $4.3 million as compared with adjusted operating loss of $2.3 million in the prior year. This increase was primarily due to unfavorable performance, including inventory adjustments, increased expenses associated with our acquisition of i2O Water and higher inflation, which were partially offset by higher prices. Technologies adjusted EBITDA was a loss of $2.4 million as compared with adjusted EBITDA loss of $200,000 in the prior year. Moving on to cash flow. Net cash provided by operating activities for the year ended September 30, 2021, improved $16.4 million to $156.7 million, primarily as a result of the $22 million Walter Energy tax payment in the prior year. Our net working capital as of September 30, 2021, decreased $11.3 million to $207.1 million. Net working capital as a percent of net sales improved to 18.6% compared with 22.7%, primarily as a result of better inventory turns. We invested $16.6 million in capital expenditures during the fourth quarter, bringing the year-to-date total to $62.7 million as compared with $67.7 million in the prior year. The decrease in capital expenditures for the year, which was below our updated guidance range was primarily due to the supply chain disruptions that have slowed the pace of some planned expenditures, including spending for our large capital projects. Free cash flow for the year improved $21.4 million to $94 million and exceeded adjusted net income. At September 30, 2021, we had total debt of $446.9 million and cash and cash equivalents of $227.5 million. At the end of the fourth quarter, our net debt leverage ratio improved to 1.1 times from 1.3 times at the end of the prior year. We did not have any borrowings under our ABL agreement at year-end, nor did we borrow any amounts under our ABL during the year. As a reminder, we currently have no debt maturities before June 2029. Our senior 4% notes have no financial maintenance covenants, and our ABL agreement is not subject to any financial maintenance covenant unless we exceed the minimum availability thresholds. Based on September 30, 2021 data, we had approximately $158.7 million of excess availability under the ABL agreement, which brings our total liquidity to $386.2 million. In summary, we continue to have a strong, flexible balance sheet with ample liquidity and capacity to support our capital allocation opportunities. Scott, back to you. I'll touch on our fourth quarter results, new management structure, end markets and full year 2022 guidance. As mentioned earlier, there were a number of challenges during the quarter, which impacted our gross margins and led to the disappointing adjusted EBITDA conversion, which was below our expectations. The gross margin gap was approximately $15 million with the labor challenges making up more than one-third of the gap. Higher inflation, freight and electricity costs, combined, also accounted for more than one-third of the gap. Of the other factors, the operational challenges for our specialty valve product portfolio had the largest impact, along with unfavorable inventory adjustments. The labor challenges have led to an increase in costs associated with overtime, benefits and efficiencies. We provided additional performance incentives for team members at the plants, recognizing their hard work and dedication throughout this exceptionally challenging operating environment. Additionally, the pandemic continues to pose labor challenges for us even with the progress made with vaccinations. Our teams are working closely to continue to improve our relationships with our employees and enhance our efforts around hiring, training and retention. Raw material inflation continued to be a headwind during the quarter. We experienced another sequential increase in raw material inflation, resulting in scrap steel and brass ingot prices up over 50% versus the prior year. Raw material prices didn't start to accelerate higher until the second quarter of 2021. Therefore, we anticipate that raw material inflation will be most impactful in the first half of the year, if prices do not continue to increase. In the past, we have been successful in executing price increases as needed to more than cover inflationary expenses over the cycle. Our pricing actions during this past year, which include free price increases across most product lines, are helping to offset inflation as we saw a notable sequential increase on our price realization during the fourth quarter. Unfortunately, record backlogs are extending the timing for the realization of continued price benefits. So we do not expect to be in a positive price/cost position on a quarterly basis until the middle of 2022. At this time, we expect that our current pricing actions will more than cover anticipated inflation in 2022. This belief assumes that material costs do not increase beyond current levels. The strong demand we have experienced has also led to some manufacturing inefficiencies, triggered by the rapid increase in volumes, particularly in the second half of our year. With the increased demand, we are having to run our foundries during peak periods, leading to much higher energy costs. The supply chain disruptions have also led to higher freight costs and extended lead times for some third-party purchase parts. Our supply chain teams have been focused on obtaining needed supplies on a timely basis and working to find alternative sources where possible. While we believe our actions will put us in a better position to increase shipments to meet demand, we anticipate that supply chain disruptions and labor availability will continue to be headwinds well into next year. In the fourth quarter, the operational challenges were even greater for our specialty valve product portfolio, which accounts for approximately 15% of annual sales. These products are typically used in large projects with long lead times. Due to the longer manufacturing and delivery times, the gap between material cost inflation and pricing improvements can be more than nine months. Additionally, as a reminder, we announced a major plant restructuring project in the second quarter of 2021. At that time, we were anticipating a different operating environment. The strong demand, supply chain disruptions and labor challenges have impacted shipments for these products and increased the transition cost for our plant restructuring. We remain confident that we will fully complete the transition and ramp up in 2023 with the margin benefits following accordingly. We recently announced a new management structure beginning with the first quarter of 2022. The new structure is designed to increase revenue growth, drive operational excellence, accelerate new product development and enhance profitability. We believe that the new structure positions us for improved long-term growth and increase margins, while helping to accelerate the commercialization of our technology-enabled products and the Sentryx software platform. The two newly named business units are Water Flow Solutions and Water Management Solutions. Water Flow Solutions product portfolio includes iron gate valves, specialty valves and service brass products. Net sales of products in the Water Flow Solutions business were approximately 60% of 2021 consolidated net sales. Within the Water Flow Solutions business unit, we will advance manufacturing and assembly efficiencies across valve and brass products, while driving the expected benefits from our three large capital projects. Additionally, we will look to increase growth in existing product areas and support expansion of valves into adjacent markets. Water Management Solutions product and service portfolios include fire hydrants, repair and installation, natural gas, metering, leak detection, pressure control and software products. Net sales of products in the Water Management Solutions business unit were approximately 40% of 2021 consolidated net sales. Within the Water Management Solutions business unit, we look to leverage our hydrants, which provide a bridge for digital communications throughout the water system with enhanced coordination among products and services. Also, we plan to reduce product development cycle times with enhanced coordination of digitally enabled products and network management. Turning to our end markets. We again experienced strong demand and order growth in our fourth quarter, driven by both new residential construction and municipal repair and replacement activity. While we expect end markets to remain healthy in 2022, we do anticipate that growth will slow down relative to the strong recovery we experienced during 2021. State and local budgets appear to be in good shape, especially at the larger municipalities. The aging water infrastructure will continue to be a driver of repair and replacement activity at water utilities. We were pleased to see that the federal infrastructure bill was passed over the weekend. It is an important step forward for the needed investment in our aging water infrastructure. We have not built any benefits from the bill into our assumptions for our 2022 guidance. While we expect residential construction activity continue to be healthy relative to pre-pandemic levels, we expect that it will be difficult to achieve significant growth again in 2022. Residential construction activity was incredibly strong during 2021, highlighted by total housing starts increasing approximately 18% and single-family starts increasing around 23%. We believe that supply chain disruptions, which are extending overall build cycles for new residential construction, could support a healthy demand environment well beyond 2022. Moving on to our expectation for 2022. The record backlog across our short-cycle products and the expected realization from higher pricing position us to deliver net sales growth in 2022, continuing the strong net sales growth achieved in 2021. We believe the operating environment will remain challenging, especially in the first half of the year, with the potential for gradual improvement during the second half of the year. We currently anticipate that our full year 2022 consolidated net sales will increase between 4% and 8%, with our adjusted EBITDA also increasing between 4% and 8% as compared with the prior year. We expect to generate solid free cash flow during the year. These expectations assume the challenges associated with higher inflation, labor availability and supply chain disruptions and the pandemic's impact will modestly improve relative to 2021, and that material costs do not increase beyond current levels. Our focus remains on keeping our employees safe, protecting our communities, delivering exceptional products and support to our customers and generating strong cash flow. During 2022, we will remain focused on executing our strategic initiatives and overcoming the external and internal operational challenges. We are committed to improving our culture of execution as we become a world-class water technologies company, bringing solutions to critical water infrastructure. We are excited about the progress we have made in our new product development programs and the growing market acceptance for digitally enabled product offerings such as our Super Centurion Smart Hydrant, Sentryx software platform, and i2O pressure management solutions. Additionally, we are making progress on our sustainability initiatives, and we'll share our strategic goals and progress in our second ESG report to be published in January of 2022. With a strong balance sheet, liquidity and cash flow, we are very well positioned to accelerate growth and efficiencies through capital investments and acquisitions. We will continue to maintain a balanced approach to capital allocation, investing in our business and returning cash to shareholders. We recently announced another increase to our quarterly dividend, marking the fifth increase since the end of 2016. Additionally, we repurchased $10 million of common stock during the fourth quarter after resuming our share repurchases earlier this year. We currently have $135 million remaining authorization on our share repurchase program. That concludes my comments.	q4 sales rose 11.4 percent to $295.6 million. q4 adjusted earnings per share $0.12. sees fy sales up 4 to 8 percent. q4 earnings per share $0.12. earned net income per diluted share of $0.12 in quarter.
If you've not yet received a copy of the release, you can access it on our website at www. It's under the Investor Relations tab. These comments are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements are based on management's current expectations and involve risks, uncertainties and other factors which may cause results to differ materially from those expressed or implied in these statements. Further information concerning these risks, uncertainties and other factors are set forth in the company's periodic SEC filings and may be found in the company's 10-K and 10-Q filings. Today, I'm excited to report strong volume growth resulting from robust end-market demand. Sales were up 43% year-over-year, and this is the strongest growth Myers has obtained in over a decade. This demand appears to be sustainable. Strong end markets, a reengineered commercial organization and a new go-to-market model are delivering results. Our new strategy, combined with successful execution of our self-help initiatives, set the stage for a solid 2021 and beyond. I'm entering my second year at Myers, and I continue to see significant opportunities in our functions, businesses and end markets. It continues to be the most exciting opportunity I've seen in my career. Without further delay, let's get into the details. As I mentioned, sales were up 43% year-over-year, driven by strong growth in both the Material Handling and Distribution Segments and a meaningful contribution from the Elkhart acquisition. All end markets experienced healthy growth. Specifically, sales were up significantly in our vehicle end market as a result of continued momentum in the RV and marine markets. Wholesale RV shipments were up 79% in March and are projected to reach a record high in 2021. We also saw increased demand and double-digit growth in the auto aftermarket, food and beverage, consumer and industrial end markets. On an organic basis, sales were up 21%. Despite strong volume growth in -- volume and revenue growth, gross margins were impacted by higher raw material costs in the quarter. In response to the significant increases in raw material costs, partly due to Winter Storm Uri, we announced an 8% price increase across a broad portfolio of our products effective March 1. Then in response to continued raw material pressure and a tight supply chain, we announced a second price increase of 9% to 12% effective April 1. With these increases, we aim to protect, and in some cases, enhance our margins. Due to the top line momentum we are seeing and robust demand and the additional pricing actions we announced since our last call, we continue to be optimistic in our ability to manage through this dynamic environment. As a result, we are raising our full year sales guidance and now expect to be at the higher end of our previously provided earnings guidance. Sonal will provide the details during our financial summary. And after our comments, I will provide an update on the actions we've taken to execute our strategy. Starting with the first quarter financial summary on slide four. Net sales were up $52 million, an increase of 43%. Excluding the impact of the Elkhart acquisition, organic net sales increased 21% due to volume mix. Sales increased in both material handling and distribution segments as well as all key end markets and contributed to the strong organic growth. Price and FX accounted for 1% of the net sales growth. Adjusted gross profit was up $7.9 million, while gross margin decreased from 34.8% in the prior year to 28.9% in the quarter. Margin was negatively impacted by an unfavorable price-to-cost relationship, unfavorable sales mix and higher manufacturing costs during the quarter. The addition of Elkhart benefited profit but contributed to the unfavorable sales mix impacting gross margin. As a reminder, we are targeting $4 million to $6 million in annual cost synergies over the course of the upcoming two years. Additionally, we are encouraged by the growth synergies we have started to realize as we operate as One Myers. Adjusted operating income increased slightly to $11.9 million. The increase in gross profit was mostly offset by higher SG&A expenses, driven by the addition of Elkhart and higher incentive compensation costs, legal and professional fees and selling expenses. Adjusted EBITDA was $17 million, a decline of $400,000 compared to the prior year. Adjusted EBITDA margin was 9.8%. And lastly, adjusted earnings per share was $0.22, flat compared to the prior year. Turning now to slide five for an overview of segment performance. Beginning with Material Handling, net sales increased $46 million or 55%, including the Elkhart acquisition. On an organic basis, sales were up 22%, driven by strong volume mix. Price and FX accounted for 1% of the growth. Excluding Elkhart, sales were up double digits in the vehicle, food and beverage, consumer and industrial markets, driven by increased demand. Material Handling adjusted operating income increased 12% to $16.9 million, driven by higher sales volume and the addition of Elkhart, which were mostly offset by an unfavorable price-to-cost relationship, unfavorable sales mix and higher manufacturing expenses, incentive compensation costs and legal and professional fees. In the Distribution Segment, sales increased $6 million or 17%, driven by both equipment and consumable sales. Distribution's adjusted operating income increased 5% to $2 million, primarily as a result of higher sales volume, partially offset by an unfavorable sales mix and unfavorable price-to-cost relationship and higher incentive compensation costs. Turning to slide six. Cash provided by operating activities was $6.6 million, an increase of $1.6 million over the prior year, reflecting the benefit of working capital. Free cash flow decreased $1.1 million to $1.4 million, reflecting an increase in capital expenditures year-over-year. Our balance sheet remains strong. Cash on hand at quarter end was $16.6 million. Based on our trailing 12-month adjusted EBITDA of $66 million, leverage was 1.2 times. In mid-March, we amended and extended our credit facility, upsizing our borrowing capacity from $200 million to $250 million and extending the maturity date to March 2024, ultimately providing greater flexibility in our capital structure. Turning to slide seven. Let me now provide information on our revised outlook for fiscal 2021. Reported net sales are anticipated to increase in the high 30% range, including an incremental 10.5 months of sales related to the Elkhart acquisition. As a reminder, Elkhart's net sales at the time of acquisition were approximately $100 million. The increase in net sales from our previous guidance, which was mid- to high 20% sales growth, incorporates the strength experienced in the first quarter, along with continued sales momentum expected throughout the year. Additionally, the outlook includes the anticipated impact of the second price increase effective April one taken in response to continued increases in resin and steel costs. From a quarterly cadence, recall that our prior year second quarter sales were significantly impacted by the slowdown due to COVID-19, particularly impacting our industrial and distribution businesses. Given this comp, we expect strong sales growth in Q2 on a quarter-over-quarter basis. With respect to margins, our price increases generally take a quarter or so to start flowing through our results. Given this lag in price realization, we will continue to experience higher cost versus price in the first half of the year, but expect that relationship to turn favorable in the second half of the year as raw material costs flatten and eventually decline. As demonstrated, our teams will continue to take pricing actions as necessary to mitigate the impact of cost increases. SG&A expenses are now expected to approximate 23% of net sales benefiting from larger scale and the increase in our sales outlook. Below operating income, we are projecting approximately $4 million of interest expense and an effective tax rate of 26%. Our guidance reflects a weighted average share count of 36.5 million shares. Taking all of these assumptions into account, we are reaffirming our 2021 outlook for adjusted earnings per share of $0.90 to $1.05 per share with growing confidence of achieving the higher end of the range. Other key assumptions impacting EBITDA and cash flow include depreciation and amortization expenses of approximately $23 million and capex of approximately $15 million. capex is expected to trend higher than past years with our renewed focus on investing in our facilities. In closing, let me reiterate that we are encouraged by the sustainability of economic rebound and the impact on our business. Every time I talk about Myers, I highlight two documents: our long-term road map for the company, and the execution plan to make it a reality. And today is no exception. On our long-term road map, we're currently in Horizon 1, which is based on three elements: self-help, organic growth and bolt-on M&A. These three elements go well together. I've used this approach many times over the past 20 years to kick-start and deliver business transformations. Self-help consists of meaningful improvements in purchasing, pricing and SG&A optimization. Self-help is important because it typically has a sizable financial impact, and I like it because it's largely within our control. Self-help generates the cash and the returns that will be used to fund the two growth components, organic and M&A. In terms of organic growth at Myers, we are driving change and delivering results. We are strengthening our commercial processes, talent and capabilities. We are investing in e-commerce. We're changing how we go to market. Under the One Myers approach, we now go to market as a single company instead of several disconnected independent businesses. This scale brings strength. We are one of the only companies that has expertise in the four major plastic molding technologies: rotational molding, injection molding, blow molding and thermoforming. We now bring all of these solutions to our customers. The approach delivers value to our customers and growth for Myers. Our third element, bolt-on M&A, is focused on growing our businesses by acquiring companies that build out our current technologies, build on our competitive strengths or shore up our gaps. We believe significant shareholder value can be unlocked when consolidating fragmented industries, like plastics molding and auto aftermarket distribution. Myers will be a consolidator in these fragmented industries. Consolidation should allow us to better serve our customers, provide better opportunities for our employees and better returns for our shareholders. Once the key elements of Horizon one are in place, we'll move to Horizon 2, where we will execute larger enterprise-level acquisitions. We continue to expect that when we are ready for Horizon 2, several ideal targets will be coming to market so the timing should work well. Our long-term vision culminates with Horizon 3, which is focused on growing the company globally. In order to maximize our potential as a company, we will need to expand globally at scale. During Horizon one or 2, we will consider global acquisitions if they have the right strategic fit and are executable, though it will likely be Horizon three before we acquire internationally at scale. Our long-term vision is ambitious but well grounded and focused on building on technologies and markets that we know well. We still have a lot of work to do, but we have an experienced team, and we are making solid progress. I won't spend time today reviewing each pillar. However, I will say that each pillar has well-defined key performance indicators and an individual owner to drive results. We have a robust internal integration, PMO or program management office, that ensures that KPIs are met. In the organic growth pillar, we see significant opportunity to grow Myers faster. We are in the process of implementing an improved commercial structure that standardizes and strengthens our capabilities in sales, marketing and asset and product management. We recently reorganized our sales structure and launched the new sales training process focused on helping our teams improve their ability to cross-sell and bring all of the Myers solutions to our customers. In addition, we continue to focus on growing our e-commerce channel. In order to turbocharge this initiative, we held a summit to refine our strategy and approach to capitalize on the trends in digital and online. We're investing in our talent pool, and we'll continue to build out our e-commerce team. As a reminder, our goal for this channel is to be approximately 10% of sales by the end of 2023, and you can expect to hear more about our progress as we proceed through the year. Moving on to M&A. We are well under way having strengthened our portfolio with the acquisition of LCAR Plastics last year. The Elkhart acquisition has exceeded our expectations so far and has been instrumental in helping us further advance our integration playbook and our deal flow. We continue to build a robust funnel of potential acquisitions and believe that we have a strong opportunity to acquire complementary businesses in the near term. Now onto our accomplishments in the third pillar, operational excellence. Operational excellence involves multiple facets of how we work together to improve our performance every day. One example is our focus on procurement on lowering costs and on securing supply. Over the past months, supply scarcity has been an issue in the plastics value chain. Our newly centralized procurement team was able to leverage our scale and their individual relationships to ensure consistent raw material supply. I have several anecdotes where our purchasing professionals were able to work together, draw upon their individual areas of expertise to ensure Myers receive raw materials even in markets where product was very tight. On the pricing side, we worked with our customers on a fair and constructive approach to pricing, announcing and implementing our March one and April one price increases. We will continue to migrate to a value-based pricing approach where we will price to the value our products create with our customers. We anticipate this approach will deliver margins that will allow us to continue innovating and to continue delivering a high level of service and supply reliability to our customer base. Moving to the last of our four pillars culture. In order to execute and achieve breakthrough performance, we need to have a high-performing culture. Over the past several weeks, we took a significant step forward by holding companywide talent reviews across the organization, so we can build a strong succession planning road map that supports our aggressive growth strategy while developing our employees. We are seeding our employee base with various experts and leaders from outside the company. This approach is a catalyst and is accelerating our company's transformation. At the same time, we're also actively developing our employees and promoting from within. We have a lot of talent in-house as well. Part of having a high-performance culture is to have a culture focused on employee safety. To that end, this spring, we launched a robust companywide safety training curriculum, which includes live and online classes to ensure that we keep safety top of mind and work toward decreasing our incident rate on a year-over-year basis. In a short period of time, we've made respectable progress against our strategic initiatives. These work tracks and KPIs will ensure that our strategy comes to life and is delivered. I will close out today by reinforcing my optimism for Myer's future. I'm encouraged by the economic recovery we're seeing across all of our end markets. The demand is there, and it looks to be lasting. Myers' transformation is under way, and I anticipate it will create significant long-term value for our customers, our employees, our communities and our shareholders.	q1 adjusted earnings per share $0.22. sees fy 2021 adjusted earnings per share $0.90 to $1.05. sees fy 2021 net sales growth in high 30% range, including impact of elkhart plastics acquisition.
I'm Monica, Vinay, Vice President of Investor Relations and Treasurer at Myers Industries. If you've not yet received a copy of the release, you can access it on our website at www. It's under the Investor Relations tab. These comments are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements are based on management's current expectations and involve risks, uncertainties and other factors, which may cause results to differ materially from those expressed or implied in these statements. Further information concerning these risks, uncertainties and other factors is set forth in the company's periodic SEC filings and may be found in the company's 10-K and 10-Q filings. I'd like to start the call by expressing my sincere appreciation to our entire Myers team for their continued efforts during the pandemic. Our customers count us to deliver value added high quality products in the safe and timely manner in your efforts remain critical to ensuring that happens. There were an improvement over the last year and better than we had originally anticipated. In short, we had a great quarter. I'm pleased with our results, our direction and our progress. We still have a lot of work to do, but I'm excited about Myers performance in third quarter. Sales in our consumer end market increased significantly year-over-year as a result of higher demand for our fuel containers which is due primarily to heightened storm activity. We're also encouraged by the continued increase in demand that took place in our auto aftermarket business. In addition, demand for RV Products in our vehicle end market also continued to stay strong. Our businesses delivered gross margin expansion again this quarter. Gross profit margin increased 400 basis points, 35.6% for the third quarter of this year. This was due to solid execution in favorable price cost margin. As a result of the gross margin expansion, our adjusted operating margin increased 500 basis points to 11.8%. And our adjusted EBITDA margin increased 370 basis points to 14.8%. We generated solid free cash flow of $16.2 million during the third quarter and as a result we had $84 million of cash on hand as of September 30th. We also had $194 million available under our credit facility and our debt to EBITDA ratio was only 1.1 times. As a result, I feel very comfortable that we have more than enough liquidity and flexibility to execute on our new strategy that I will discuss later in the call. He is doing a great job and I appreciate all of his efforts and hard work. Net sales for the third quarter were $132 million, an increase of 5% compared with the third quarter of 2019. The increase in sales was due primarily to significantly higher fuel container sales in our consumer end-market driven by hurricane activity. We also increased our auto aftermarket sales both from stronger and market demand in our legacy business and from incremental sales due to the Tuffy acquisition. Gross profit margin increased 400 basis points to 35.6%. This was primarily due to higher sales volume and favorable price cost margin. Also gross profit in 2019 included a $3.5 million charge for estimated product replacement costs. Our adjusted operating income increased 83%, the $15.6 million for the quarter. This was the result of higher gross profit margin coupled with lower depreciation and amortization. Adjusted EBITDA increased 40% to $19.6 million and adjusted EBITDA margin was 14.8%. Adjusted diluted earnings per share was $0.30 compared with $0.15 for the third quarter of 2019. In the Material Handling segment, net sales increased 3%. Sales of fuel containers in our consumer end market were up nearly 40% primarily as a result of increased storm activity. However, food and beverage market sales were down high single digits due to lower seedbox volume year-over-year. Sales to our industrial end market decreased mid single digits due to lower sales to industrial distributors, partially offset by higher e-commerce sales. Sales in our vehicle end market were down double-digits as higher sales to RV customers were more than offset by lower sales to automotive OEMs. Material Handlings adjusted operating income was up 59% to $16.5 million due to higher sales volume, lower depreciation and amortization expense and favorable price cost margin. Also in 2019 adjusted operating income included a $3.5 million charge for estimated product replacement costs. In the Distribution segment, sales increased 10% due to $2.9 million of incremental sales from the August 2019 Tuffy acquisition, and higher domestic sales in the legacy business. Distribution's adjusted operating income increased 41% to $5.1 million primarily as a result of higher sales volume and lower SG&A expenses. Turning to slide six, I'll review our balance sheet and cash flow. For the third quarter of 2020, we generated free cash flow of $16.2 million compared with $22.1 million last year. Working capital as a percent of sales at the end of the third quarter was 9.2%, which was up compared to Q3 of last year but was lower than last quarter. The year-over-year working capital increase was primarily due to higher accounts receivable and inventory balances due to strong sales in September and strategic investments in inventory that we made earlier in the year to protect our supply chain during the pandemic. We have already begun reducing inventory balances and expect working capital to return to more normal levels by the end of the year. Cash on the balance sheet at the end of the third quarter was $84 million and our debt to adjusted EBITDA ratio was 1.1 times, which is consistent with previous quarters. Before we begin, please note that this outlook is based on current and projected market condition and there is still uncertainty around these projections. Starting with our consumer end market, the increase in demand during the third quarter was even greater than we had anticipated due to heightened storm activity. As a result, we now expect a full year sales increase in the double-digit range in this market, which is an improvement from our previous outlook of a mid single-digit increase. That said, we do not expect the increased demand we experienced in the second and third quarters to continue into the fourth quarter. Instead, we expect sales volumes in the consumer end market to return to more historical fourth quarter of [Indecipherable]. In our food and beverage end-market, we now anticipate a revenue decline in the mid-teens for the full year of 2020. Although, we expect feedback sales to increase year-over-year in Q4, we don't expect demand to be as high as we originally forecasted. And as a result, we expect the seedbox sales will be down for the full year of 2020. Additionally, annual sales to food processing customers are expected to be lower year-over-year due to impacts from COVID-19 including delayed product trials. Turning to our vehicle and market while RV demand has improved. We do not anticipate that the higher sales in that portion of the market will offset the decrease in sales year-over-year, the automotive OEM customers. Therefore, our outlook for the vehicle end market is unchanged. With sales expected to be down double-digits for the full year 2020. In our industrial end market, the soft demand environment and industrial manufacturing and distribution is expected to continue through the remainder of the year. Signs of end-market improvement that we saw late in the second quarter subsided during the third quarter. Therefore, we have lowered our industrial end market outlook to be down in the mid-teen percentage range for the full year of 2020. Finally, in our auto aftermarket, we have seen demand continue to improve and are now forecasting sales to increase in the low single digits, which is an improvement from our previous outlook of a low single-digit decline. Turning to slide eight, you can see our guidance for 2020. On a consolidated basis, we now anticipate full year sales to decline in the low to mid single-digit percentage range, which is a slight improvement from our previous expectation of the decline in the mid to high single-digit range. We continue to expect depreciation and amortization to be approximately $21 million. Net interest expense to be approximately $4 million. A diluted share count of approximately $36 million shares. And capital expenditures to be roughly $15 million. Lastly, we anticipate that the adjusted effective tax rate will be approximately 26%. Now I'd like to talk to our new long-term strategy in the strategic pillars we have in place to drive its execution. We've developed a long-term strategy that's broken down into three discrete horizons. Each of these horizons builds on the preceding one. The first phase, which we call Horizon one consists of three approaches, self-help, organic growth and bolt-on M&A. Self-help will focus on purchasing, on pricing and on SG&A optimization. In purchasing, as an example, we are centralizing procurement. In the past, each of our business units purchased their own products. So we had multiple units buying their own versions of a similar raw material. We didn't consolidate our buy and leverage. We're changing that approach. We're now consolidating purchasing into a single function, and we'll leverage procurement company wide. As a result, we've greater leverage with our suppliers and expect to lower our cost. A key objective of self-help is to improve our margins by driving a greater wedge between our raw material costs and our product sales prices, centralized purchasing will address our raw material costs. On the pricing side, we will be using pricing and data analytics to determine where and how we can improve our pricing. I believe an enhanced focus on pricing will help identify areas of opportunity for Myers to better capture the value, our products deliver to our customers. Next is SG&A optimization. Over the coming months, we will continue to move forward with the one Myers approach, combining key elements of the company together so that were stronger, more efficient and more effective. Over time, we will reorient some of our SG&A resources, prioritizing sales, product and market management and innovation. As an example, we will reduce our overhead costs, and we will redeploy these dollars into our sales function, increasing our number of salespeople. The self-help measures will drive profits and will fund our organic growth and bolt-on M&A opportunities. On the organic growth side, we will strengthen our commercial capabilities. We've developed a roadmap to bolster and improve our commercial function. This has been a key area of focus since I joined Myers. While we still have a lot to do in this space, I'm encouraged by what I see so far. Going forward, we will go to market as one company, one Myers. As one Myers, we will bring solutions that are based on all of our current capabilities, rotational molding, blow molding, injection molding and thermoforming. Having this full set of capabilities is a differentiator in the market. Instead of separate sales teams for each business unit, we were just selling one technology. Now our sales force will bring all of Myers technologies to the market. This new approach will turbocharge our organic growth efforts. In addition to the self-help and the one company approach and other big changes, our approach to bolt-on M&A. We will now focus our efforts in deal flow on building our plastics business. We will focus on deals that are close to home in terms of technology and markets. This is a change from the past. Now when we think about M&A, we plan to build on our current technologies in expertise in plastics molding. While we are strong in plastics -- we are strong in plastics, we have good brands, and we are Number one or Number two in the areas where we participate. Going forward, we will embrace our polymers heritage and we use bolt-on M&A to expand our offering and plastics molding. Speaking of M&A, I would like to provide a short update on the Tuffy acquisition. It's been just over one year since we purchased Tuffy Manufacturing and combined it with our Myers Tire supply business. We purchased Tuffy for the right price at the right time. We integrated smoothly and efficiently and as a result is performed above our expectations. In order to ensure that we successfully integrate future acquisitions that will likely be larger and more complex than the Tuffy acquisition. We brought on Dave Basque, who had many carve outs in integrations of down [Indecipherable]. Dave is putting in place a robust process to successfully integrate future acquisitions. Over the next quarter, I expect us to share proof points on this part of our strategy. We believe that by executing on the strategy under Horizon one, we can grow Myers to a billion dollars in annual revenue and our target is to be at that run rate by the end of 2023. Now I would like to speak to the second step, Horizon two. Horizon two will be built from the profits generated from successful execution of Horizon one. Horizon two will continue to include the self-help initiatives, organic growth initiatives and bolt-on M&A. However, in Horizon two, we shift gears and we'll begin executing larger enterprise level acquisitions. We will continue building and growing in the plastics and polymer space. We just execute at a greater scale. We'll continue to focus on specialized value-added products and stay away from commodity products just as we do today. The experience we gained from completing the bolt-ons and Horizon 1, will prepare us to successfully execute larger acquisitions under Horizon two. In addition to the enterprise level M&A and Horizon two, we also expect to be in a position to grow in adjacent technologies. As examples, we may build out the unique capabilities we have in thermoforming or in rubber processing or metal fabrication. As it stands today, we have a small presence in each of these. And it appears we have meaningful organic growth opportunities to build them out. Our long-term vision concludes with Horizon three which is geared around going global. I can see a path to grow Myers to approximately $2 billion in revenue while largely staying in the United States. However, to grow beyond that threshold and into Horizon three, we will likely need to expand globally via M&A. Although, this is a few years off, it's important to have the vision in the direction for the company, in order for Myers to reach its full potential, we will need to go global and expand in own risk attractive countries outside of the United States. On the organic side of Horizon three, we plan to further build on our Plastics backbone, but also evaluate expansion into other substrates. An example would be metal substrates and there'll be more to come there. Our roadmap for execution includes our strategic objective as well as four supporting pillars. Our strategic objective is to transform the Material Handling segment into a high growth customer centric innovator of engineered plastic solutions. While at the same time, we continue to optimize and grow the distribution segment. Myers is in a great position. We have excellent technologies and products in the material handling side and we have deep industry knowledge and experience in a strong foundation on the distribution side. Make no mistake, our company's future is bright, our runway is long and I can't think of anywhere else I would rather be. We have four pillars that are simple and clear and we'll drive execution. They are organic growth, strategic M&A, operational excellence, and high performing culture. These four pillars are the cornerstones of Myers transformation and will ensure we successfully deliver the goals and objectives of Horizon one. The first pillar focuses on organic growth and we will address four areas, sales and commercial excellence, innovation and new product development, sustainability, and e-commerce. These four areas are clear priorities of Myers and are the primary levers to drive organic growth. Speaking of sustainability, we recently announced, we've joined the alliance and plastic waste. A global non-profit organization committed to ending plastic waste in the environment. Our focus on sustainability will help drive innovation and our long-term growth. We are proud to be a part of the alliance and look forward to helping shape future projects that recover create value from and ultimately eliminate plastic waste. Our second pillar strategic M&A is geared around bolt-on opportunities that build on our Plastics franchise. Part of this effort is our integration playbook that will ensure a world-class approach to acquisition integration. The 3rd pillar operational excellence is part of the Myers D&A, part of the Myers foundation and we will build on it. We will continue to have a mindset of continuous improvement and we will build out the functions of pricing, purchasing, and sales and market management into our core capabilities. The 4th and final pillar is the heart of the company, our culture. We will build a high performance mindset in culture. A key tenet of our culture will be our focus on safety. We have a good safety record but must work to get better every day. Talent development will be a priority as well. We will develop our talent in-house, through the creation of continuing education, learning academies and on the job training. We can achieve greatness, without being an employment -- employer of choice. To that end, we must build our culture in three important areas, inclusion, servant leadership and community involvement. I'll close here and I'll share with you my confidence and excitement on our new direction. We have a strong plastics business with a broad suite of technologies and expertise. We are now focused on building this engine in growing its scale organically and through M&A. In addition, we have a well-regarded industry leading auto aftermarket distribution business with a promising outlook. I could not be more excited to lead this company today and into the future. Duane, we're now ready to take questions.	compname reports q3 adjusted earnings per share $0.30 from continuing operations. q3 adjusted earnings per share $0.30 from continuing operations. revised its outlook for 2020 revenue. now expects full-year revenue to decline in low-to-mid single digits. does not expect events that drove sales in consumer end market to recur in q4.
I'm Monica Vinay, Vice President of Investor Relations and Treasurer at Myers Industries. If you've not yet received a copy of the release, you can access it on our website at www. myersindustries.com, under the Investor Relations tab. These comments are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements are based on management's current expectations and involve risks, uncertainties and other factors, which may cause results to differ materially from those expressed or implied in these statements. Further information concerning these risks, uncertainties and other factors is set forth in the company's periodic SEC filings and may be found in the company's 10-K and 10-Q filings. I'd like to start the call by expressing my sincere appreciation to our entire Myers team for all their efforts in 2020. I'm especially proud of how well they faced the challenges that were presented throughout the year due to the COVID-19 pandemic. As a result of the resilience and hard work, we're able to continue to produce and deliver essential products to our customers. We delivered strong bottom-line results for the year, increasing adjusted earnings per share at 9% from $0.78 to $0.85. Sonal brings a proven track record of providing strong leadership in transformational environments along with considerable experience in capital markets, mergers and acquisitions and investor relations. I look forward to partnering with her as we continue to drive and execute our One Myers strategy. He did a great job helping us lay a strong foundation and we will continue to benefit from Dan's contributions as he returns to his role as Vice President and Corporate Controller. Before I discuss our performance, I'd like to review with you our long-term vision, the strategic pillars that we have in place to drive its execution, and the progress we've made against those pillars. I introduced this strategy and vision in our October 2020 earnings call, and we are successfully executing against it. To review, we're currently in Horizon-1, which consist of three elements: self-help, organic growth, and bolt-on M&A. Self-help focuses on purchasing, pricing and SG&A optimization, and you're going to hear about a number of strategic steps we've recently implemented along these lines in our discussion today. In terms of organic growth, we are strengthening our commercial capabilities, which includes going to market as one company, One Myers. Our third element, bolt-on M&A, is primarily focused on growing our plastics businesses by acquiring companies that build out our three technology platforms within the Material Handling segment. We will continue to focus on companies that manufacture durable, sustainable and/or reusable end products. Once the foundational drivers of Horizon-1 are in place, we will move to Horizon-2, where we will execute larger enterprise level acquisition. Our long-term vision culminates with Horizon-3, which is focused on growing the company globally. Our long-term vision is ambitious, but it's well-grounded and focused on building out the technology in markets that we know well. Granted, it's in their early innings, but we are making solid progress. The first pillar focuses on organic growth and addresses four critical areas: sales and commercial excellence, innovation and new product development, sustainability and eCommerce. Our second pillar, strategic M&A, is geared around bolt-on M&A opportunities that build out our Plastics platforms. You've already seen us executing one exciting acquisition in Elkhart Plastics during the fourth quarter, and our pipeline of opportunities continues to grow. Core to this effort is our integration playbook that will ensure a world-class approach to acquisition integration. The third pillar, operational excellence, continues the work we've done around continuous improvement, while also building our capabilities in what we call self-help, doing a world-class job in pricing, in purchasing and in internal integration, which is the process of transforming into a single company, our One Myers approach. As a part of this journey, we will also optimize SG&A, redeploying our dollars into investments, in sales, engineering and manufacturing resources. The final pillar is the heart of our company, our people. We are on our way to building a high-performance culture, focused on developing our employees and promoting from within, having a culture that's focused on employee's safety, and having an inclusive work environment in a culture of servant leadership. We continue to build out our values, focusing on integrity, customer focus, optimism, all with a can-do attitude. Our transformation opportunities through our culture are very exciting to me. In the organic growth pillar, we made significant progress in the second half of 2020, in particular in the area of sales and commercial excellence in eCommerce. Our Vice President of Sales and Commercial Excellence, Jim Gurnee, launched our new commercial structure that standardized and strengthened our focus in sales, marketing and product management. These elements will become critical parts of how we run our business. Jim also launched a new sales training curriculum focused on growth. This program will help our team improve their ability in cross-selling and in growing the new One Myers approach. One of the more meaningful parts of today's discussion is the new and more aggressive approach Myers Industries is taking to eCommerce. We believe that eCommerce will be a compelling channel for the future and we believe that Myers is well suited to capitalize on this trend. Just last year, in 2020, eCommerce sales grew more than 30% from our 2019 base. We achieved this growth with what was largely a skunk-works type project. In order to turbocharge eCommerce at Myers, we've now stood up an independent, focused organization to spearhead this channel in the market. E-commerce business will be led by Chad Collins, who was previously the President of our Akro-Mils and Jamco business units. Chad also helped develop our original relationship with Amazon for that business. Sales in the eCommerce channel for 2020 approached 5% of our total revenue. Our goal is to double that by the end of 2023. This is an ambitious target, but one that we believe is attainable. As I noted earlier, we are well under way with our strategic M&A pillar, having strengthened our portfolio with the acquisition of Elkhart Plastics in November. As a bolt-on acquisition within rotational molding, Elkhart fits perfectly into our strategy and our developing culture. The integration of Elkhart has gone smoothly. It has been instrumental to help us further advance our integration playbook and our deal flow. We continue to build out a healthy funnel of potential acquisitions. Next, I'd like to talk about our accomplishments in the third pillar, operational excellence. Last month we announced that we consolidated our Material Handling businesses into three distinct technology platforms: injection molding, rotational molding and blow molding. We believe that we are unique in having strength in all three of these core molding technologies. We strengthened our injection molding capabilities by combining Akro-Mils, Jamco and Buckhorn into one collective team. We've done the same in rotational molding by merging Ameri-Kart with our recent acquisition Elkhart Plastics. Our third technology platform, blow molding, is currently comprised of our Scepter business. This platform has tremendous opportunity for both organic and inorganic growth. By combining Akro-Mils, Jamco and Buckhorn into a single platform, and by combining Ameri-Kart and Elkhart Plastics into a single platform, we will be able to streamline our SG&A investments in overhead and redeploy these dollars into sales, engineering and manufacturing. As larger units with more scale and reach, these platforms will be more robust and we'll be able to deliver more innovation and more value for our customers. We are excited about this change in approach, and believe it moves us forward in Horizon-1, enabling growth while also managing costs. One last piece I'll mention on pillar three is that we consolidated our purchasing function and created a single centralized purchasing team across the company. This new approach allows us to aggregate our purchases and become an easier company to do business with. Longer term, this should help us negotiating more secure supply position and a more competitive cost position. Moving to the last of our four pillars. In order to execute and achieve breakthrough performance, we need to have a high performing culture. One of our noteworthy achievements this year is goal alignment. In order to ensure that we are collectively focus on achieving companywide success and fully executing our One Myers strategy, we replaced multiple legacy bonus plans with a single plan, centered on one performance metric: adjusted EBITDA. We believe this new one team approach will drive alignment, unity and will help us deliver solid results in the future. We also added talent in a number of leadership positions in our business. Most recently, on Tuesday, we announced the addition of Paul Johnson to lead our Distribution segment. Paul brings 30 years of leadership in the automotive and auto aftermarket industry, which includes the recent role as the President of International Brake Industries, and prior leadership positions with Federal-Mogul and General Motors. I believe Paul is the right leader to build, grow and take this business forward. Chris did an excellent job of leading the recent transformation of the Distribution segment, which led to sales growth and improved profitability. I'd like to wish Chris well, as he pursues the next chapter of his career and to returning back to his roots in healthcare. Finally, two dynamic leaders with significant transformation in growth experience joined our Board in February: Yvette Bright and Jeff Kramer. I've already had a chance to see both in action this quarter and look forward to their ongoing counsel and leadership. As you can see, we've made a lot of good progress against our strategic initiatives. We still have a lot of work to do, but I'm pleased with what we've been able to accomplish in a short time. Now turning to our fourth quarter performance, which starts on Slide 6. I'm pleased with our results for the fourth quarter, all things considered. In spite of several manufacturing plants being impacted by the COVID surge in mid-November and December, we're still able to finish the quarter with sales up 8% on an organic basis and 18%, including contributions from Elkhart acquisition. Top line organic growth was driven by continued momentum in the RV auto aftermarket and consumer end markets. We also saw demand improvement in our industrial and automotive markets, which gives me confidence that an economic recovery post-pandemic is on the horizon. During the quarter, we experienced rising raw material costs and an unfavorable sales mix, which impacted our gross margin. The raw material increases that began toward the end of 2020 has continued and accelerated into 2021; specifically, we have seen significant increases in resin prices as a result of tightening supply on the U.S. Gulf Coast. In response, we announced an 8% price increase across the broad portfolio of our products, primarily in the Material Handling segment, which was effective March 1, 2021. Please note, we will continue to be vigilant about managing our pricing actions throughout the year to offset these unprecedented cost increases. In addition to costs being a headwind, the recent freeze on the Gulf Coast has had a significant impact on the short-term supply of polyethylene and polypropylene. Certain grades of resin continue to be tight and we are working closely with our suppliers to secure materials to ensure that we can continue to meet the needs of our valued customers. As we enter 2021, we have solid top line momentum, balance with near term headwinds I just spoke to. While the majority of our top line growth will come from the Elkhart acquisition, both volume growth and pricing will also contribute. We expect organic sales growth across most of our end markets as a result of the continuation of the demand trends in select end markets and our enhanced focus on our sales capability and eCommerce. Sonal will provide more detail regarding our annual outlook, which includes both sales and earnings per share guidance. We are rapidly driving significant change in our organization, in our capabilities to ensure that we execute our Horizon-1 of our long-term strategy and create and deliver long-term shareholder value. Let me begin by saying I'm delighted to be joining Myers at this inflection point in the company's history, and I look forward to working with the team to drive and execute our long-term strategy. Turning to fourth quarter results on Slide 7. Net sales were up $21 million, an increase of 18%. On an organic basis, net sales increased 8%, excluding the impact of the Elkhart acquisition. Increased sales in both Material Handling and Distribution segments contributed to growth. Adjusted gross profit was up $1.2 million while gross margin decreased from 33.6% in the prior year to 29.4% in the quarter. Margin was negatively impacted by an unfavorable price-to-cost relationship, repairs and maintenance, employee benefit cost, and an unfavorable product mix. The addition of Elkhart benefited profit but impacted gross margin unfavorably due to product mix sold. As a reminder, we are targeting $4 million to $6 million in annual cost synergies over the course of the upcoming two years. Adjusted operating income decreased $700,000. The increase in gross profit was more than offset by higher SG&A expenses mostly due to the addition of Elkhart. Adjusted EBITDA was $11.3 million, a decline of $1.6 million compared to the prior year. Adjusted EBITDA margin was 8.2%. Lastly, adjusted earnings per share was $0.11 versus $0.12 in the prior year. Turning now to Slide 8 for an overview of segment profit performance in the quarter. Beginning with Material Handling, net sales increased 26% or 10% on an organic basis. Excluding Elkhart, sales in the Food and Beverage and Vehicle markets were up double digits, driven by increased sales in feed boxes and in the RV, marine and automotive end markets. Organic sales in the consumer market were up high single-digit due to fuel container sales while the industrial market was flat. Material Handling adjusted operating income was essentially flat at $9.1 million, as the impact of higher sales was offset by unfavorable price-to-cost relationship, repairs and maintenance, employee benefit cost, and an unfavorable product mix. In the Distribution segment, sales increased 4%, driven by increased sales of equipment and consumables, partially offset by lower sales of tire repair products and advance traffic marking tapes. Distribution's adjusted operating income increased 13% to $3.6 million, primarily as a result of higher sales. Turning to Slide 9. Fourth quarter free cash flow was $10.7 million, an increase of $7.8 million, reflecting an increase in cash provided by operating activities, including the benefit of working capital, net of deferred taxes. During the quarter the company utilized approximately $63 million in cash to fund the Elkhart acquisition. Cash on hand at year-end was $28 million. Based on our trailing 12 month adjusted EBITDA of $66.4 million, leverage was 1.2 times. Let me conclude my comments with additional color on our outlook for 2021. Turning to Slide 10. Net sales are expected to increase by mid to high 20%, including an incremental 10.5 month of sales related to the Elkhart acquisition and the expected impact of the March 1st price increase. As a reminder, Elkhart's annual net sales at the time of acquisition were approximately $100 million. Continued momentum in RV and marine business along with the rebound in industrial and automotive related revenues are expected to drive growth. As a reminder, fuel container sales in 2020 were unusually strong due to one of the most active hurricane seasons on record. Overall, commodity costs are projected to be higher, driven by increases in resin cost. As Mike mentioned, the company announced an 8% price increase, primarily across the Material Handling segment, effective March 1st. Higher cost versus price realization is expected to compress margins in the first half of 2021. Our teams continue to stay close to the changing market dynamics, including the need for additional pricing actions. SG&A expenses are expected to approximate 24% of net sales, benefiting from larger scale. The low operating income, we are projecting approximately $4 million of interest expense and an effective tax rate of 26%. Our guidance reflects the weighted average share count of 36.5 million shares. Taking all of these assumptions into account, we expect adjusted earnings per share to be in the range of $0.90 to $1.05 per share. Other key assumptions impacting EBITDA and cash flow include depreciation and amortization expenses of approximately $23 million in capex of approximately $15 million. Capex is expected to trend higher than past years given our renewed focus on investing in our facilities. In closing, let me reiterate that our One Myers vision is gaining momentum as we continue to execute against our strategy and strengthen the building blocks to drive long-term growth.	q4 adjusted earnings per share $0.11 from continuing operations. sees 2021 net sales growth in mid to high 20% range, including impact of elkhart acquisition. sees 2021 diluted earnings per share in range of $0.88 to $1.03; adjusted diluted earnings per share in range of $0.90 to $1.05. sees 2021 capital expenditures to approximately be $15 million.
With me on the call are Jeff Gennette, our Chairman and CEO; and Adrian Mitchell, our CFO. A detailed discussion of these factors and uncertainties is contained in our filings with the Securities and Exchange Commission. In discussing the results of our operations, we will be providing certain non-GAAP financial measures. Our Company delivered another strong quarter that exceeded our expectations on both top and bottom lines, outperforming 2020 and notably 2019. With strong cash generation year-to-date, we were able to execute on our capital allocation priorities including returning capital to shareholders. Our business has demonstrated resilience and we remain confident in our ability to deliver on Polaris strategy. And as a result, we are raising and narrowing our full year 2021 guidance. Our '21 results demonstrate the progress we've made with our Polaris strategy operating in a better economic environment as well as the strength of our digitally led omnichannel model. We are poised for sustainable and profitable growth and we'll continue to build and invest in our retail ecosystem to both maximize and accelerate our opportunities. Today, I'm pleased to announce that we are making a significant investment to launch a curated digital marketplace platform to enhance the existing Macy's, Inc. business fuel customer acquisition and drive growth across all of our channels. We will partner with the enterprise marketplace technology company, miracle to build the platform. Through this new digital marketplace platform which we'll launch in the second half of 2022, we will connect carefully selected third-party sellers with our customers in a scalable way and provide even greater breadth of assortment of exciting products to deliver on our promise of style and curation. Now, I'll provide some highlights from the third quarter. Comparable, owned plus licensed sales increased 8.7%, an improvement in trend from the 5.9% increase we saw in Q2, even after adjusting for changes in our marketing calendar. Adjusted diluted earnings per share was $1.23, up significantly from Q3 2019 and adjusted EBITDA was more than 2 times better than 2019. Gross margin for the quarter improved by approximately 100 basis points driven by stronger regular price selling, fewer markdowns due to leaner inventories and a number of pricing and promotion initiatives and offset by increased delivery expenses. Gross margins and inventory are benefiting from the outstanding work that our supply chain teams have done in navigating the recent disruptions. When they first begin the fourth quarter of 2020, our teams activated plans to mitigate bottlenecks and since then stayed agile and flexible, leveraging our strong networks and relationships with international carriers and variants and diversifying how we move product both up and downstream. Significantly, as a result, we don't expect to be materially impacted by supply chain issues during the critical holiday shopping season. Total Company AUR was up more than 12% across our three nameplates. SG&A dollars were significantly lower driven by a combination of ongoing expense discipline and unfilled open positions. Looking at each of our nameplates, comparable sales for Macy's brand were up 8.4% on an owned plus licensed basis which represents a nearly 1 point improvement versus last quarter, when you take into consideration, the friends and family marketing shift. Macy's brand full price sell-through improved 610 basis points while full price AURs increased by 6.9% driven by high demand and our gross margin initiatives. Our Bloomingdale's business performed well with comp sales on an owned plus licensed basis up 11.2%, which was in line with the second quarter. Results were driven by strong sales of luxury handbags, fine jewelry, home, men's shoes in contemporary apparel and both stores and bloomingdales.com outperformed 2019. Bluemercury continues to recover outperforming versus 2020, but was down 2.2% compared to the third quarter of 2019. We see strong sales performance of private brands, home fragrance and treatment. Turning to the health of our customer base, we brought in 4.4 million new customers into the Macy's brand, a 28% increase compared to 2019. Approximately 30% of these new customers were dormant customers over the last 12 months who have now reengaged. In addition to growth in new customers, customer loyalty has also increased. Star Rewards program numbers now make up nearly 70% of the total Macy's brand comparable owned plus-licensed sales, up approximately 10 percentage points compared to 2019. During the quarter, we saw Platinum, Gold and Silver customers reengage with average customer spend in these tiers up 16% compared to the third quarter of 2019. Bronze members who represent our youngest and most diverse loyalty tier continued to grow with the addition of 2.3 million members during the quarter and we're seeing average spend per customer increased 13%. Bronze is one of our best customer acquisition vehicles with approximately 35% of members under the age of 40% and 57% ethnically diverse. Our Star Rewards Loyalty customers have a more personalized and productive shopping experience with the most relevant offer presented to them, right down to the particular homepage they see. This is leading to increased conversion, higher revenue per visit and a decreased rate of customers leading the site and through targeted personalization and pricing science, we've been able to reduce the number of raw based promotional days and increase AURs. Having a strong integrated retail ecosystem that provides a seamless shopping journey enables us to successfully attract and retain our most productive omnichannel customers. The growth of our omnichannel ecosystem is powered by our thriving online business, relevant full line brick and mortar stores and growing off-mall format stores, all soon to be further accelerated by the new digital marketplace platform. Our data validates that in markets where we have a physical presence, our online business is stronger. The interplay between traditional and physical assets is more important than ever and we are focused on establishing an appropriate footprint in markets that drive our sustainable and profitable omnichannel growth. Turning to merchandising which we think about in three buckets. First, our products and categories were strong during the height of the pandemic such as fragrance, watches, jewelry, sleepwear and home continue to perform well during the third quarter. Second, occasion based categories such as dresses and men's tailored and luggage are continuing to see renewed interest from our customers. And third, our emerging categories and new brands are expected to drive sustainable and profitable growth in the future. These complement our core categories, while satisfying the customer shopping journey and we're seeing encouraging results. To give you an example, since bringing the Toys "R" Us business to macys.com in August, our toys sales have more than doubled in stores and online compared to 2019 and we continue to expand on our assortment in these emerging categories. During the quarter, we had another important new brand partner, Fanatics which offers our customers, the largest selection of licensed sports products and increases our fan apparel offering 20 fold. This expanded assortment drove a 22% AUR increase in sports apparel and head gear compared to 2019. Using data and analytics, we continue to grow key brand partnerships with more vendors looking to us for expanded relationships. One element of this is the B2B monetization of our advertising partnerships that we realized through our in-house media agency Macy's media network which continues to generate solid results and recently expanded the scope to include Bloomingdale's. We see a lot of potential to further strengthen our relationships with vendor partners and cultivating greater customer engagement. Overall through Polaris, we laid a solid foundation for digital growth and we're seeing that growth come to fruition. We are now able to focus on additional strategic investments to refresh the digital experiences to create more experiential customer engagements, enhance our stores and further empower our colleagues who drive to the success of our business on every level. Our important digital initiatives during the quarter included a refresh of Macy's mobile app, the launch of live shopping at both Macy's and Bloomingdale's and a fragrance finder. We also rolled out our 3D Room Planning Expansion, added PayPal and Venmo to in-store and online payments and launched a sustainability product segment. As a result of these and other investments digital conversion for the quarter was 4.25%, up 14% compared to the third quarter of 2020 and up 27% compared to the third quarter of 2019. Turning from digital to stores, we also continue to invest in our brick and mortar business and are seeing ongoing trend improvement in store conversion. During the quarter, sales in our non-downtown locations continue to sequentially improve. But due to the slow return of international tourism and office workers, our downtown doors continue to significantly lag our other doors versus 2019. A good example of stores recovery is our backstage store within store format with sales up 24 percentage points compared to the full-line stores. Backstage store customers are more diverse with 56% of customers ethnically diverse and have a higher spend. Across our ecosystem, everything we do starts with and is driven by our colleagues. They are our most significant contributors to our success and we are pleased with the strength of our performance this year has made it possible for us to double down on our investment in talent. Last week we announced the plan to launch a best-in-class benefit program to give our colleagues access to debt free education. We are also raising our minimum wage rate to $15 an hour which will be in effect nationally by May of 2022. This will increase our average total pay for hourly colleagues to about $20 an hour. Our workplace culture and colleague engagement have never been stronger and we see it as a meaningful competitive advantage in this tight labor market. Adrian will now summarize the financial details before I make brief closing remarks. As Jeff shared, our third quarter results demonstrate the strength and momentum of our digitally led omnichannel Polaris strategy. Top line sales continue to grow. Gross margin continue to expand. SG&A continue to gain leverage. And as a result, we delivered EBITDA and earnings per share far above our expectations. Additionally, we continue to successfully execute on our capital allocation priorities aimed at strengthening our balance sheet and returning capital to shareholders. Our strong results combined with our continued confidence as we move into the holiday season are leading up to narrow and waiting for our full year of 2021 guidance, which I will expand upon in a few moments. Now, as I review each quarter and summarizing our results I'll focus on the metrics that are most important to value creation, sales, gross margin, inventory productivity, expense management and capital allocation. First, for the second quarter in a row, we have generated top line sales above 2019 levels. In the quarter, net sales increased by $267 million or 5.2% to $5.4 billion while we posted comparable owned plus licensed sales of 8.7%. Keep in mind that compared to 2019, October benefited from the pull forward of some sales from the fourth quarter into the third quarter. The early start of our friends and family sale in late October contributed to this adding about 200 basis points to owned plus licensed sales comp. Additionally, holiday shopping began earlier as it did last year, but we won't know the full extent of the pull forward until we get further into the season. Nevertheless, even when adjusted for friends and family, we produced solid sales growth and continued to expand our trend of sequential improvement. Now, I want to take a moment to highlight the progress we've made as a true omnichannel retailer as we have become increasingly focused on the sustainability of omnichannel sales growth. The true performance and potential of our omnichannel performance is hidden when sales outcomes are viewed as digital results versus brick and mortar results. Recall that Jeff said, we see stronger digital sales in those markets where we have physical stores and we certainly saw this to be the case in the third quarter. Moreover, while digital sales continue to grow and store sales trends continue to improve, notably more than 70% of our omnichannel market saw overall sales growth over and above 2019 levels which represented approximately 85% of Macy's brand comparable owned-plus licensed sales. So digital isn't merely benefiting from a shift of sales from stores. It is actually growing beyond that. Within these markets, here is an added potential to expand our market share further with the addition of new off-mall locations. During the quarter, we opened five new locations in the Washington DC, Dallas and Atlanta markets. We've seen a strong sales response and solid net promoter scores from customers well above our current expectations. We are very encouraged by the initial results and we now see a clear path to new store off-mall growth. So, through a combination of difficult stores and the best malls, the most productive off-mall locations and a best in class e-commerce platform, our sales growth is accelerating as we meet customers whenever, wherever and however they choose to shop. In addition, an omnichannel view has also highlighted the need for us to take a second look at the timing of when we close approximately 60 remaining stores we previously planned to close this part of Polaris. Those markets that are performing best in aggregate include many of the stores previously slated for closure. With this in mind, we are considering the fallen points as we approach the optimization of our store portfolio. First, as it relates to underperforming mall-based stores, the lane [Phonetic] closure of certain stores allows us to maintain a physical presence in the market which is critical to our topline growth. Second, these stores are cash flow positive and support the funding of investment needed to reposition our store portfolio over time. And lastly, we're adapting our learning in the smaller off-mall formats to more quickly introduce these concepts to more markets with plans to open more of these stores next year. Scaling our off-mall formats will allow us to reposition our brick and mortar assets within markets to more effectively support omnichannel sales growth. As a result, we expect to announce about 10 closures in January with more details on the remaining stores to come later in 2022. Moving on to gross margin. We saw another quarter of rate expansion to 41%, an increase of 100 basis points compared to the third quarter of 2019. We continue to generate very healthy merchandise margin which improved by 270 basis points to 45.3%. The primary drivers were the consistent improvement we maintain in lower markdown and inventory productivity, which I'll expand upon shortly. Markdown levels were the result of a combination of lower inventory levels and further scaling of pricing science including location level pricing and POS pricing work. As Jeff noted, these efforts drove higher full price sell-throughs and full price AURs compared to 2019. We continue to roll out additional initiatives including a new promotional effectiveness tool, given our teams access to advanced analytics to better understand the profitability of prior promotional events. The improvement in merchandise margin was offset by a rise in delivery expense due to increased digital penetration. Delivery expense was 4.2% of net sales, 170 basis points higher than the third quarter of 2019. With regards to inventory productivity, inventory levels were down 15.4% compared to the third quarter of 2019, a product of ongoing market dynamics and our own Polaris initiatives. Our sales to stock ratio remains healthy and the improved use of data science continues to enhance our inventory management practices from order placements, all the way to customer sales. Inventory churn for the trailing 12 months improved by nearly 18%, while for the trailing six month, inventory churn improved by approximately 22%. Additionally, given the macro challenges facing the retail industry, we're staying ahead by making further shift in our inventory management practices and implementing a number of initiatives. As we noted on our last call, we do not anticipate improvements to many of the macro supply chain constraints until mid to late 2022. Moving on, we again exercised strong expense management discipline, our net value creation metric. SG&A expenses of $2 billion improved by about 10% or $229 million from the third quarter of 2019 levels. As a percent of net sales, SG&A expenses were 36.3%, a significant improvement of 630 basis points compared to the third quarter of 2019 as we continue to benefit from permanent cost savings and reduced cost due to elevated job openings. The impact of the labor shortages are transitory and we expect them to moderate going into the next quarter as well as into the next year. Improved bad debt levels driven by strong customer credit health continued to contribute to the growth of credit card revenues to $213 million, up $30 million from the third quarter 2019 and ahead of what we expected. Credit card revenues were also ahead as a percent of net sales increasing by 40 basis points to 3.9% and trending ahead of our prior annual guidance. As it relates to our credit card program, we are close to finalizing our decision on a partner and expect to announce the decision in the upcoming weeks. As a digitally led retailer, we must have a partner with strong digital capabilities today and a strong innovation pipeline with the prospect to further expand that pipeline in the future. Our loyalty and personalization initiatives serve as key growth levers in our ability to obtain and retain more customers to drive omnichannel sales growth. That said, over the next few years, we expect credit card revenue levels will be slightly lower as a percent of sales in the 3% or so that we have historically experienced. Given our strong performance across these areas as well as the $50 million of asset sale gains recognized during the third quarter, we generated positive adjusted EBITDA of $765 million. Notably, adjusted EBITDA margin of 14.1% exceeded the margin in the third quarter of 2019 by 780 basis points on the strength of expense management discipline and gross margin expansion. After accounting for interest and taxes, collectively, these results helped to generate quarterly adjusted net income of $386 million and adjusted diluted earnings per share of $1.23 versus $21 million and $0.07 respectively in 2019. Our final value creator is capital allocation and our meaningful free cash flow generation of $574 million year-to-date has served us well in this regard. In the third quarter, we repaid approximately $1.6 billion of debt early, which brings our leverage ratio well under our year end target. And while we drew on our credit facility to support the build of seasonal merchandise during the quarter we did so at a much lower interest rate than that of the debt we retired. Going forward, we expect to use the facility periodically based on the needs of the business. Now, we successfully regained an investment grade profile well ahead of schedule. We will continue to pay down debt as debt matures with an aim to achieve a leverage ratio below 2 times in the upcoming years. Additionally, we paid $46 million in cash dividends and announced our fourth quarter dividend earlier this month. And we repurchased 13 million shares for more than 4% of total shares outstanding for a total share buyback of $300 million. With $200 million of authorization remaining, we're trying to look for further opportunities to repurchase shares. These actions underscore our confidence in our business and our commitment to our capital allocation priorities that create shareholder value in the near term and the long-term. Turning to our outlook. As mentioned, we are narrowing and raising our full year guidance. We have strong momentum entering the fourth quarter, but the headwinds that we noted on the last quarter's call remain in place, the supply chain concerns, the tight labor market, elevated levels of holiday shipping surcharges and potential unforeseen impacts of COVID variants. The low end of our guidance considers the impact of these headwinds. But here are some of the highlights. For the full year, we now expect net sales to be between $24.1 billion and $24.3 billion, which at the midpoint of the range is an increase of over $400 million from our prior guidance. We now increased our adjusted earnings per share range to $4.57 to $4.76 from $3.41 to $3.75, an increase of more than a $1 compared to our prior guidance. Now for the fourth quarter. Comparable sales on an owned plus licensed basis versus 2019 are expected to increase between 2% and 4%. This includes an approximately 125 basis point adverse impact due to the shift of the friends and family promotional event from the fourth quarter into the third quarter as compared to 2019. Gross margin rate expectations are between 100 basis points and 150 basis points lower than 2019. SG&A expense as a percent of sales is expected to improve by approximately 75 basis points compared to 2019 and adjusted diluted earnings per share is expected to be between a $1.67 and $1.87 events excluding the impact of any additional share repurchases other than those already executed in the third quarter. Our progress to date combined with our Polaris initiatives already underway put us well on the path to profitable and sustainable sales growth. As such, we have increased clarity on our business outlook over the next few years. In 2022, we see several incremental tailwinds for our business beyond those from our Polaris initiatives. The consumer mix is healthy, and we expect the strong demand to continue, particularly as people return to work. As borders open, we anticipate an uptick in tourism, although we don't yet see tourism returning back to 2019 levels in 2022. At the same time, we're keeping a watchful eye on headwinds. As mentioned, we are actively managing supply chain disruptions with success. We're continuing to navigate the labor shortages and competition for talent by investing in our current and future colleagues. We are also focused on mitigating inflationary pressures on our customers by leveraging our pricing science while continuing to provide our customers with clear value. In summary, our team is committed to accelerating and sustaining top and bottom line growth through the continued successful execution of our digitally led omnichannel Polaris strategy, which in turn will strengthen the health of our balance sheet and deliver strong returns to our shareholders. Next quarter, we look forward to sharing with you further detail on our guidance for 2022 and our outlook for 2023 and beyond. So in summary, we remain focused on executing our Polaris strategy to position Macy's Inc. for sustainable and profitable growth. We regularly review the structure of our business and our strategy and are open to all options that are likely to create long-term shareholder value. This past year, we conducted an analysis of our e-commerce and brick and mortar operations evaluating how each contribute to the value of the Company as well as how each benefits from being integrated and working together. In collaboration with our Board and with assistance from our advisors, we look at multiple business models that would create long-term shareholder value, while always respecting the omnichannel behavior of the customer. This work supported our digitally led omnichannel Polaris strategy that we are successfully executing. That said, we also recognize the significant value of the market at this time in a pure e-commerce businesses. And as we look at the landscape today, we are undertaking additional analysis that could help inform our long-term strategy to further unlock value for Macy's Inc. To help in these efforts, we have recently engaged AlixPartners to work with our Board and financial advisors. It is too early to tell what the result of this additional analysis will be, but we plan to update everyone after the work is complete. I am confident that we have a lot more opportunity ahead. Our colleagues focus on both strengthening the fundamentals of our business and driving innovation, gives me great confidence that a bolder and brighter future for Macy's, Inc. lies ahead. And operator, please begin the Q&A.	qtrly diluted earnings per share of $0.76 and adjusted diluted earnings per share of $1.23. added 4.4 million new customers into macy's brand in quarter, a 28% increase over 2019. qtrly results were driven by effective execution of polaris strategy and an improved economic environment. qtrly in quarter, macy's brand added 4.4 million new customers. robust omnichannel ecosystem is showing resilience in face of labor and supply chain challenges. encouraged by momentum of our business and its strong financial health. inventory was up 19.4% in quarter from q3 2020 but down 15.4% from q3 2019. sees 2021 net sales $24.12bln - $24.28bln. sees 2021 adjusted diluted earnings per share $4.57 - $4.76. implemented several measures to mitigate supply chain disruptions and does not expect to be materially impacted during q4 2021.
With me on the call are Jeff Gennette, our chairman and CEO, and Adrian Mitchell, our CFO. [Operator instructions] As a reminder, today's call is scheduled for 90 minutes. A detailed discussion of these factors and uncertainties is contained in our filings with the Securities and Exchange Commission. In discussing the results of our operations, we will be providing certain non-GAAP financial measures. As we kick off 2022, I'm proud to say that Macy's, Inc. today is a stronger, more agile and financially healthier company than we were before the pandemic. We delivered strong results in the past quarter and year. We continue to make good progress on the transformation of our company and build momentum. And we are much better positioned for long-term success. Our business has changed dramatically since 2019 when we began to lay the groundwork for our Polaris strategy. We stayed focused on that plan, and we have delivered. We are now more digitally led and customer-centric in our planning and execution. We have also demonstrated the value of an integrated company, meeting customer expectations for a more seamless shopping experience across digital and store offerings. Digital has been a particular priority for us. Then I'll discuss the outcome of the board's recent review of our operating structure and how we are enhancing shareholder value. From there, I'll review the specific initiatives we are accelerating to enable sustainable sales growth and strong and stable margins in the future. Adrian will wrap up with details on our financial outlook for 2022 and beyond. Let me start with the performance highlights. Comparable owned plus licensed sales for the fourth quarter increased 6.1% versus 2019. This performance reflects strong November and December holiday sales that exceeded our expectations, as well as softer sales in January. Total company AUR was up 11.5% for the fourth quarter and for the full year, was up over 11%. For the year, comparable owned plus licensed sales increased 3% compared to 2019. For the year, we generated $984 million more in adjusted EBITDA than 2019, growth of 42%. Our full year adjusted EBITDA margin was 13.6%, and a rate we have not achieved since 2014. As a result, we achieved adjusted diluted earnings per share of $5.31 for the full year, up 82% versus 2019. With reduced debt and ample cash, our balance sheet is healthy, and we are in a stronger financial position. This enables us to navigate challenges that lie ahead while meeting our capital allocation goals to deliver shareholder returns through modest yet predictable dividends, strong returns on invested capital and meaningful share repurchases. We completed our current $500 million share repurchase program during the past quarter. And I am pleased to announce that our board has authorized a new $2 billion program. Additionally, we have announced a 5% increase in our dividend after reinstating it during 2021. These accomplishments are the result of our focus of our organization has placed on the Polaris strategy, efforts that I have spoken to you about frequently over the past two years. This transformation strategy has evolved as the external environment changed and new opportunities arose, and the actions we took have led to a stronger, digitally led retail business. Here are just a few highlights of what we've accomplished. Number one, we have modernized our digital platform and now offer an engaging and convenient experience with the power to meet customers whenever and however they choose to shop. In 2019, our digital team worked as a siloed organization. Today, it is fully integrated. We have a scaled platform, operating the No. 2 website in our categories in the nation with 39% digital penetration, an increase of nine percentage points versus fourth quarter of 2019. 2, in 2019, our store strategy was largely focused on the highest quality A and B malls, while accelerating the closure of stores in C and D malls. Today, the consumer is increasingly more omnichannel, and we are focused on establishing a more appropriate footprint in markets to drive sustainable and profitable omnichannel growth. Given this, as we said on our last call, we have delayed most of the remaining closures we earmarked in 2019 in order to maintain a physical presence in many markets while we scale up our off-mall format stores. In addition to being in place for discovery and shopping, our stores are also fulfillment hubs, supporting our digital operations through buy online, pickup in store, curbside pickup, and same-day delivery. Keeping these cash-positive stores open also helps us to fund the investments we're making to reposition our fleet over the next several years. 3, in 2019, we were over-indexed on occasion-based apparel, had less disciplined buying behavior and our approach to promotions was overly complicated for customers, all of which was driving high levels of markdowns and low inventory productivity. Today, our pricing is simpler and clearer, allowing our customers to better understand the value they are receiving. Today, we offer a more balanced, curated merchandise assortment that reflects our disciplined purchasing behavior with new categories, products and brands that inspire our customers' style across the value spectrum from off-price to luxury. And today, we remain best positioned based on the health of inventory and multi-category and multichannel capabilities to pivot with greater agility in response to changing customer trends. 4, in 2019, the spread between customer acquisition levels and customer attrition levels was narrow. In 2021, we flipped that dynamic. While also benefiting from recovery driven demand, our initiatives have led to an accelerated rate of customer acquisition that far outweighed the rate of attrition. 5, in 2019, we had just created a new integrated team to reimagine our supply chain that previously segregated store and digital inventories and relied on a distribution network that lacked efficiency. Today, as a result of our investments, we have a more modern supply chain network that is agile, data-driven and increasingly automated. We've seen the results of this work pay off throughout 2021 from increased speed of delivery to operational efficiency and to better inventory utilization. And finally, we have invested in advanced technology and data science throughout our operations, enabling us to increase productivity and profitability of the entire business. To best realize our strategic goal of building profitable lifetime customer relationships, we successfully built a new enterprise data and analytics organization that is helping us to embed data and analytics into everything we do. We have already seen improvements in our efforts around personalization and pricing. today than we were in 2019, more agile, more profitable, and more relevant to our customers. That said, as we enter 2022, we see both headwinds and tailwinds ahead that together encourages us to offer a more measured outlook for the year. Now, I'd like to take you one level deeper into the work we've done to achieve our performance this past year across customers, merchandising, digital initiatives and stores. Our customer focus is paying off. 44 million customers shopped with our Macy's brand in 2021, up 1% from two years ago. They bought more and combined with higher AURs, spent more on each visit. We are adding new customers with 7.2 million new customers in the fourth quarter, an 11% increase compared to Q4 2019, with 58% coming in through digital. Nearly 30% of these new customers were dormant over the past 12 months who are now reengaged. For the full year, new customers increased 26% over 2019 to 19.4 million. This trend reversal and customer acquisition is an important marker for us and a strong indication of the increasing relevance of the brand. We will continue pursuing our strategies to build on this momentum. Let's turn to merchandising. Through our data-driven merchandising approach and our team's agility and creativity, we successfully navigated supply chain challenges, ensuring we had a strong assortment for the holiday season. We placed bets on categories like fragrances, fine jewelry, home decor, men's outerwear, toys, sleepwear and watches, which all performed well in the quarter. Bloomingdale's, which helps us reach affluent consumers, continued to see strength in luxury throughout the quarter with strong performance from handbags, fine jewelry, men's shoes and contemporary, fragrances, and home. In addition to enhancing the shopping experience of our core customers, we also focused on new offerings to further attract the under-40 shopper. In the fall season, we added a curated selection of brands, products and categories to 160 Macy's stores that appeal specifically to this younger, more diverse customer. These brands include COTTON ON, Steve Madden, Michael Kors and Levi's, as well as our new private brands, And Now This and Oak. We are pleased with our customer response and the results we've seen to date. This in-store strategy aligned well with the digital strategy to attract the under-40 customers that we rolled out in the spring through our contemporary sitelet. At Bloomingdale's, brands geared toward the under-40 customer had a record year. Our private brand AQUA and various luxury brands outperformed in both sales and margin in 2021. This brings me to our digital initiatives. Aided by the shift in consumer preferences, the growth of our digital business continued in 2021. Sales remained strong, and we saw healthy levels of conversion for Macys.com at 4.2%, a 13% increase compared to 2019. During the fourth quarter, Macy's app had the largest quarterly gain in downloads across our peer set with an 81% increase in downloads over the third quarter of 2021. Today, our Macy's and Bloomingdale's digital teams operate more efficiently within a single back-end structure while each nameplate retains separate dedicated site merchandising and customer-facing benefits. Compared to 2019, Bloomingdale's digital sales grew 51% during 2021 with traffic increasing 28%. Lastly, stores, a critical part of our integrated omnichannel ecosystem. The role of stores has evolved with customer shopping habits. The interplay between our digital and physical assets is critical, and we remain focused on sustainable omnichannel sales growth. During the quarter, 58% of our omnichannel markets, representing 80% of our sales, had growth above 2019 levels, and half of these grew by at least 10%. For the year, we grew sales in 52% of our omnichannel markets versus 2019. Now, to the macroeconomic environment that we see in 2022. We believe the consumer demand will remain healthy as the job market improves and wages continue to rise. We expect demand to increase, particularly as people return to the office and to social events. International tourism remains a tailwind, particularly beyond 2022. This past year, international tourism was down 50% from 2019 levels, with the fourth quarter strengthening before Omicron weighed on consumer sentiment. With headwinds, we expect inflationary cost pressures, both for us and consumers, uncertainty of industry promotional behavior, supply chain disruptions, competition for talent, lapping of stimulus packages, and potential COVID variants. But we are confident that our financial health and operational agility put us in a stronger position to navigate the dynamic environment and challenges we expect in 2022. Let me now pass it to Adrian for additional color on our Q4 results. We're excited about the momentum we gained through Polaris in 2021 and are focused on maintaining that momentum over the course of the coming year. Our top priority remains driving shareholder value through a combination of strong performance and the strategic allocation of capital. is even bolder now given a much healthier business and our increased confidence and conviction in our Polaris strategy. With this context, I will walk through a summary of our fourth quarter performance against our five value creation metrics: sales, gross margin, inventory productivity, expense management and capital allocation. We generated $8.7 billion in net sales during the quarter, up $328 million or 3.9% from the fourth quarter of 2019. Comparable sales on an owned plus licensed basis increased by 6.1% despite the approximately 125 basis point headwind from the Friends and Family shift we mentioned on our last call. Holiday sales were stronger than expected. Yet with the emergence of the Omicron variant, tempered consumer sentiment contributed to weaker January sales than we had anticipated. To a lesser degree, the absence of the 2021 government stimulus payouts was also a factor. The overall softness in the month of January appeared to be industrywide and temporary in nature. Now, on to gross margin. Gross margin for the quarter was 36.5%, down 30 basis points from the fourth quarter of 2019. Notably, holiday delivery surcharges, which were essentially nonexistent in 2019, reduced margin by approximately 85 basis points. Merchandise margin increased 160 basis points from the fourth quarter of 2019. Leaner, more productive inventories and lower markdowns were the primary drivers. Our pricing initiatives also helped drive higher full-price sell-throughs and AURs. Versus 2019, full-price sell-throughs improved 660 basis points and full-price AURs increased 10% for the Macy's brand. Including holiday surcharges, delivery expense accounted for 5.9% of net sales, 190 basis points higher than the fourth quarter of 2019, but down from the fourth quarter of 2020. Delivery expense reduction is a top priority for us. Here, our focus is on reducing split shipments and increasing the efficiency of in-store fulfillment. Improving order throughput per labor hour is one initiative that we're working on, and we have been pleased with the improvements we achieved in the fulfillment test stores that we deployed in November. Based on these results, we plan to roll this initiative out to an additional 35 locations before holiday 2022. Now, let's shift to inventory productivity. Our gains in this area have been a vital source of our gross margin achievements, which are driven by the evolution and scaling of data science into our working teams and decision-making. During the critical holiday period, inventory levels remained healthy. And for the full year, the gains we made were impressive no matter which period you compare performance against. Inventory was down 16% versus 2019, while full year sales were almost flat. And versus 2020, inventory was up only 16% on sales growth of more than 40%. As a result, inventory turn improved by 22% compared to 2019. We also saw another quarter of strong expense management discipline. SG&A expenses were $2.4 billion in the quarter, down $80 million or 3.2% versus 2019. SG&A expenses improved as a percent of net sales to 28%, down 210 basis points from the fourth quarter of 2019. This was driven by the expense leverage we gained as sales grew, the continued benefit of permanent Polaris cost savings and the revenue generated by Macy's media network, all of which were partially offset by increased labor costs. Macy's media network exceeded our full year expectations, generating more than $105 million in net revenues that offset SG&A expenses. During the quarter, we also made significant headway in filling open positions, provided premium weekend pay to our colleagues and accelerated the adoption of $15 per hour minimum wage in another 200-or-so stores. Credit card revenues were $264 million, up $25 million from the fourth quarter of 2019. As a percent of net sales, credit card revenues were up 10 basis points versus 2019 to 3%. Better-than-expected bad debt levels continue to benefit credit card revenues during the quarter. Now, for bottom line profitability. Adjusted EBITDA margin was 14.4% or 50 basis points higher than the margin achieved in the fourth quarter of 2019 despite asset sale gains that were $65 million less in 2021. After accounting for interest and taxes, these results generated adjusted diluted earnings per share of $2.45, up from $2.12 in 2019. The final value creation metric is capital allocation. We ended the year in a strong cash position. Our full year capital expenditures of $597 million were focused largely on technology-based initiatives, including those that support our digital business, our data science initiatives and the simplification of our technology architecture. We generated $2.3 billion of free cash in 2021, which includes the receipt of the majority of the CARES Act tax refund in January of $582 million. Our strong free cash flow allowed us to pay off $1.6 billion of debt early. This, coupled with our solid performance, resulted in a year-end leverage ratio of 1.8 times, well below our initial target of 2.5 times, and materially better than prepandemic levels. At the same time, we remain committed to returning capital to shareholders. As Jeff referenced, during the quarter, we exhausted the remaining $200 million of share repurchase authorization, repurchasing 7.5 million shares. In total, under the full $500 million authorization, we repurchased 20.5 million shares or more than 6.5% of shares outstanding. As we discussed on our call last quarter, our board of directors undertook a more extensive review of our e-commerce and brick-and-mortar operations to determine the best path forward for Macy's, Inc. to enhance value for our investors. This was additional work to review business and strategy that our board and management team perform on a regular basis. Throughout this extensive review, the board and management were focused on two core objectives. One, ensuring we deliver for our shareholders in the near, medium, and long term. And two, provide the most convenient and seamless shopping experience for our customer across all omnichannel touch points. In every scenario we considered, we found that the combination of our profitable digital platform with our national footprint will deliver greater value to shareholders than a separation of our digital and physical assets. This was true at both Macy's, Inc. and brand levels. Furthermore, after a comprehensive review, we found that the integrated omnichannel Macy's, Inc. with multiple nameplates from off-price to luxury continues to be the most appealing to our diverse and multigenerational customer base. We conducted the review with the assistance of AlixPartners and our financial and legal advisors. There were no constraints imposed on AlixPartners or our advisors with regard to the options analyzed. This review included a valuation of a separation of the digital business overall, as well as the potential merits of a separation of the Macy's or Bloomingdale's digital businesses individually. We analyze revenue growth drivers, unit economics and the financial profiles of our digital and store businesses. We also evaluated possible benefits of a third-party investment, considering any need for capital, as well as a potential exit path for a financial partner. And we considered whether there would be value in issuing a special equity offering that would track the financial performance of our digital business. Key to the board's decision-making were the significant separation and ongoing costs from operating separated businesses, including potential debt separation costs, and for Bloomingdale's business, a significant loss of benefits available to Bloomingdale's through leveraging the scale of Macy's, Inc. Also, another important consideration was our view of the damage to gross margin for both the digital and store businesses due to the potential transfer costs and markdown liability. We also found that in every alternative scenario we considered, the execution risk for the business and our customers was too high. From that, we determined that Macy's, Inc. has a stronger future as a fully integrated business, with Macy's and Bloomingdale's together and assessing a broad range of brands, price points and customers across digital and stores. In undertaking this review, we also asked our advisors to pressure test our Polaris strategy. Their findings reaffirmed our confidence in the strategy and boosted clarity on several initiatives that could be accelerated over the next several years to unlock greater value for our investors. These initiatives begin with digital. We have a number of new capabilities in the works. First, the marketplace we announced last quarter is expected to deliver incremental value above our $10 billion digital sales target. In addition to our owned and vendor direct platforms, this third-party marketplace will allow our teams and partners to expand and enhance our strong digital experience. Through the marketplace, we can dramatically expand our categories, brands and online SKU assortment to respond more quickly to the changing and diverse needs of our customers. In addition, we continue enhancing our digital platform and launching new offerings. These investments are paying off, and we are pleased with the active user and conversion increases we're seeing across our apps, bloomingdales.com and macys.com. Beyond digital, we've identified several other focus areas. First, our merchandise categories. We have identified key categories where we will continue to build upon our already strong foundation. Example of these categories include furniture, men's tailored clothing, women's shoes, beauty, dresses and jewelry, and watches. Today, I'm pleased to announce our partnership with Pandora to broaden our already strong assortment in fine jewelry. In November, we launched Pandora in five stores. The fine jewelry business in those stores saw an incremental 23 percentage point increase in sales growth over 2019 from the new assortment. Pandora attracts younger customers, and we will now expand to 28 additional locations in 2022. There's new categories like toys. And our partnership with Toys "R" Us has been instrumental in attracting new customers to the Macy's brand. Of the customers that shop Toys "R" Us, 25% were new customers to the Macy's brand, and 93% of these toy customers cross-shopped other categories. We doubled our toy business in 2021, and we are excited for more aggressive growth when we opened Toys "R" Us stores within store in all of our locations during the second half of this year, creating a completely new and immersive experience for our customers. Both Bloomingdale's and Bluemercury are also working with best-in-class categories and brands. During the quarter, Bloomingdale's saw success in its holiday Carousel collection with Giada De Laurentiis. The partnership was a key to Bloomingdale's gifting performance in the fourth quarter. We are excited to announce that next month, Bloomingdale's will unveil its latest Carousel collection with Netflix's Bridgerton. Another focus area is marketing and loyalty. Our Star Rewards loyalty membership is growing every day. Through enhanced personalization capabilities, we can increase engagement that drives positive brand perception, additional visits and purchases. We are testing advanced and AI-driven targeting to help determine the best communication channel, frequency, message and offer for customers. We view personalization as a growth engine for our company in the early innings of development. Consistent with our digital focus, we have significantly shifted our media mix toward digital marketing. Today, 66% of our total spend is on digital versus 35%, five years ago. Over this time, Macy's has experienced a 25% improvement in our return on advertising spend. We see big upside in repositioning our physical store footprint by scaling up our small-format Market by Macy's and Bloomies stores. We opened three Market by Macy's stores in 2021 and are seeing encouraging customer response. Sales exceeded our expectations, and we found that these stores are more productive to run and staff and stock with inventory. This new format is also bringing in new customers who are engaging with our curated under-40 brands and products. In 2022, we will open Market by Macy's and Bloomies in additional markets as part of our omni market strategy. Finally, the shopping experience. One common thread across our Polaris initiatives is the need to build new capabilities to ensure the shopping experience is as convenient and compelling as possible. This will drive growth in our active customer base and increased shopping frequency and spend per visit. Customers shop both online and in stores, so maximizing the combined experience remains key to our success. We look at our stores as destinations for both discovery and experience, as well as fulfillment hubs. So we will continue to invest appropriately in our stores to create a more connected, tech-enabled omni ecosystem. Now, I'd like to speak to one of our most valuable assets, the Macy's brand. Starting next month, we're repositioning it with a promise to help our customers express and own their style. Expert in-person advice and personalized data-driven recommendations that help people express their personal style will differentiate us in a cluttered marketplace. This brand transformation is a key step within our Polaris strategy to win with fashion and style. We will also announce details of our new social purpose platform and commitments in a few weeks. Macy's, Inc. has been a strong partner to the local communities in which we operate. But today, as stakeholders' expectations of corporations and of us change, we're prepared to better align how we do our work with the common good. As we transform our business, we see the opportunity to create a social purpose platform that leverages our scale, unique strengths and culture to create more meaningful change in the world. Now, I'll pass it on to Adrian for our outlook for 2022 and beyond. We believe that shareholder value will be enhanced through strong performance, driven by the successful execution of our Polaris strategy, combined with the efficient allocation of capital. We will make disciplined risk-adjusted decisions when deploying the cash we generate. Given the ebbs and flows of consumer sentiment and the need to weather unforeseen risks, our first capital allocation priority is maintaining balance sheet strength. By doing so, we preserve the ability to fund investments that foster profitable sales growth and deliver healthy long-term returns. We will fund these types of investments and return excess cash to our shareholders, and we'll deliver direct returns to shareholders through a modest, yet predictable dividend and meaningful share repurchases. With that in mind, let me walk you through our updated three-year outlook. In light of the headwinds and tailwinds that Jeff spoke to earlier, we do believe that the macro environment will continue to offer some challenges. Nevertheless, we remain committed to achieving low double-digit adjusted EBITDA margin annually, and in 2024, expect to be within a range of 11.5% to 12%. For sales, we're targeting a low single-digit compound annual growth rate for net sales. We expect our long-term sales growth to be driven three ways. First, the scaling of our digital marketplace, including expanding the depth and breadth of our merchandise categories, as well as the replatforming of our core digital platform. Second, improving mall-based trends, supported by our investments in omnichannel capabilities and technologies. And third, the expansion of our off-mall stores. As we referenced earlier, the recovery of international tourism to prepandemic levels is not anticipated for some time. So there is potential upside should that occur within the next several years. For gross margin, we're targeting a rate in the high 30s even as digital penetration increases to the low to mid-40s as a percent of net sales. To do this, we're looking to maintain solid merchandise margins, aided by lean inventories, as well as additional profitability from our pricing initiatives and the growth of digital marketplace. At the same time, we'll be closely monitoring the promotional environment within the industry, which we recognize has been at historic lows this past year. In regard to future delivery costs, we've developed several initiatives to mitigate delivery expense while improving our customers' delivery experience. These include optimizing fulfillment algorithms, reducing split shipments through the use of data science and enhancing inventory placement and assortment allocation. In addition, we began rolling out initiatives aimed at increasing item-level profitability for online SKUs this past quarter. Now, let's move on to SG&A. We are targeting to improve SG&A leverage with increased digital sales and a more efficient staffing model in stores. The $900 million in permanent cost savings we realized over the last two years will remain a significant benefit to our SG&A leverage. At the same time, 2021's SG&A benefited from a number of open positions that we expect to fill. In 2022, a portion of the savings achieved through our Polaris initiatives will be reinvested to support our colleagues' financial, educational and well-being initiatives. Based on this and wage inflation expectations, SG&A as a percent of sales is targeted to be elevated over the next three years from 2021 levels, peaking in 2022. Within SG&A, we also expect to continue benefiting from other profit pools, such as Macy's media network and additional opportunities that could arise when scaling our digital marketplace. Next, credit card revenues. In the near term, we're targeting credit card revenues as a percent of net sales to be slightly below our historic average of 3%. This reflects our expectation that bad debt within the credit portfolio will migrate to prepandemic levels over the next few years and thus, pressure returns. However, in the medium term, we expect proprietary credit card sales penetration to rise, which will offset the increased pressure from bad debt and help facilitate the rebound of credit card revenues to about 3% of net sales by 2024. Now, let's turn to our long-term capital allocation plans. We're targeting capital expenditures of approximately $3 billion over the next three years. Our spend will be primarily allocated toward our technology architecture, data science applications across our retail operations, digital platform enhancements, fulfillment capabilities in stores and further upstream and our personalization efforts. In 2022, we're targeting approximately $1 billion of capital expenditures. At the same time, we also expect to continue to meaningfully monetize our real estate. We have a robust monetization program that has reduced more than $2 billion in asset sale proceeds over the last six years. Our plan is to continue the strategic development of our assets to maximize our real estate values while repositioning our physical footprint to provide our customers a seamless and convenient omnichannel experience. After accounting for capital expenditures and asset sale proceeds, we're targeting to generate between $3.2 billion and $3.6 billion of free cash flow over the next three years with up to an additional $900 million of incremental debt capacity with strong financial flexibility given our leverage and EBITDA targets. This level of cash generation and cash capacity will continue to support our capital allocation priorities, which are grounded on our commitment to enhance shareholder value. Those priorities include: first, maintaining a healthy capital structure that is focused on best positioning Macy's, Inc. for access to bank and capital market funding under all economic scenarios; and second, maintaining investment-grade credit metrics with well-laddered debt maturities, which includes targeting an adjusted debt to adjusted EBITDAR leverage ratio of 2.0 times or below. Next, we're committed to investing in initiatives that further strengthen our digitally led capabilities across the enterprise, including investments through our capital planning program, as well as other value-creating strategic investments. And lastly, we will return capital to shareholders in the form of a healthy yet modest dividend that increases annually and meaningful share repurchases, absent more attractive investment alternatives. As just mentioned, we announced the first dividend increase today and the authorization of a new open-ended $2 billion share repurchase program. As part of our three-year outlook, I want to provide more detail on our guidance for fiscal 2022, as well as the first quarter. We believe 2022 will be a transitional year as we move beyond the recovery and the market begins to normalize. At the same time, we expect high levels of inflation to erode consumer discretionary income. Our 2022 expectations reflect our strategic positioning and the associated risks in what may be a more challenging market. Despite these challenges, we are committed to continuing the discipline we demonstrated in 2021 to drive strong margin performance through our pricing initiatives for merchandise margin, our continued focus on delivery expense mitigation and our SG&A cost discipline. Now, let me provide the details of our full year 2022. For Macy's, Inc., we expect net sales to be flat to up 1% with continued strong AUR performance at more modest levels than we saw during most of 2021. For our owned plus licensed comp sales, we expect a three-year compound annual growth rate of between 1.1% and 1.4%. That's growth from 2019 results. Digital sales are expected to be approximately 37% of net sales. We expect a gross margin rate between 38.1% and 38.3%, slightly down from last year, largely due to increased digital penetration and expected inflationary cost pressures. Credit card revenue of approximately 2.9% of sales is expected. From a rate perspective, SG&A is expected to be in the range of 33.7% to 33.9%. Asset sale gains are expected to be between $60 million and $90 million. Adjusted EBITDA margin is expected to be between 11% and 11.5%. Net interest expense is expected to be approximately $190 million for the year. Adjusted diluted earnings per share is estimated between $4.13 and $4.52 and does not include the impact of any share buyback that might occur throughout the year. Now, a few comments on sales trend within the year. We are targeting strong year-over-year growth in the first quarter, but we expect our quarterly net sales penetration as a percent of annual net sales to more closely align to our prepandemic quarterly cadence. Recall that we were still early in the recovery at this point last year and that our results in the first quarter of 2021 were significantly affected by the pandemic. Impacts from the acceleration of the recovery and stimulus payouts more significantly benefited our results in the second and third quarters of 2021. This makes the year-over-year net sales growth in the first quarter of this year more favorable than that in the subsequent quarters. We also expect between 55% and 60% of our annual adjusted EBITDA, excluding asset sale gains, to be generated in the fall season. Of this, nearly 70% is expected in the fourth quarter. Additionally, outside of the first quarter, the remainder of asset sale gains are modeled in the fourth quarter. With those factors in mind, we expect net sales in the first quarter to be between $5.3 billion and $5.4 billion. For adjusted earnings per share, we expect the first quarter will be between $0.77 and $0.85 compared to $0.39 in 2021. This includes an anticipated benefit of approximately $25 million from asset sale gains and again, does not include any impact from share buybacks. In summary, we are pleased with the results that we generated in 2021 and look forward to building upon our success not only in 2022, but over the next several years. We have proven that we have a highly resilient business, one with further capacity to grow profitably and enhance shareholder value. Today, Macy's, Inc. is a transformed organization. We are well positioned to compete successfully and profitably in today's market. We operate one of retail's largest e-commerce businesses, integrated with a nationwide footprint of stores and fulfillment centers. We are confident in our path forward as one integrated company, continuing to execute our Polaris strategy and the accelerated initiatives we shared today, allowing us to unlock additional value, acquire new customers and grow market share. I want to express my gratitude to the entire Macy's, Inc. team for their passion and dedication in serving our customers and delivering strong results. We have a lot of work ahead, but I am excited to put these plans into action and deliver an even bolder and brighter future for our company, our shareholders and our customers. And with that, let's begin the Q&A.	macy’s, inc. fourth quarter and full-year 2021 results exceed expectations.
Today, we will follow our customary format with Tony Petrello, our chairman, president, and chief executive officer; and William Restrepo, our chief financial officer, providing their perspectives on the quarter's results along with insights into our markets and how we expect Nabors to perform in these markets. Since much of our commentary today will include our forward expectations, they may constitute forward looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934. Also, during the call, we may discuss certain non-GAAP financial measures, such as net debt, adjusted operating income, adjusted EBITDA and free cash flow. We have posted to the investor relations section of our website a reconciliation of these non-GAAP financial measures to the most recently comparable to GAAP measures. Then I will follow with the discussion of the markets and highlights from the quarter. William will discuss our financial results. Our performance in the first quarter exceeded the expectations which we laid out on our last conference call. We made further progress on our twin priorities of generating free cash flow and reducing net debt. Our free cash flow was especially noteworthy. In the first quarter, we generated $60 million. We accomplished this after funding semi-annual cash interest payments on the outstanding notes. We generated adjusted EBITDA of $108 million. All our major segments performed well. Highlighting the earnings power of Nabors portfolio. We believe this accomplishment will rank favorably compared to the market. I am pleased with this start to 2021. I'm looking forward to reporting further progress as the year unfolds. Now, I would like to spend a few moments on the macro environment. The quarter began with WTI in the high 40s. By early March, WTI exceeded $66. The price held back has been in the tight range around $60 since. Global oil supply demand continued to rebalance in the first quarter. The EIA reports global inventories of approximately 185 million barrels during the quarter. These trends to commodity prices and inventory are supportive of generally increasing oilfield activity across markets. Comparing the first quarter and fourth quarter averages, the Baker Hughes Lower 48 land rig count increased by 28%. According to Inverness, from the beginning of the first quarter through the end, the Lower 48 rig count increased by 116 or approximately 30%. The growth rate among smaller clients outpaced the growth of the larger operators at 39% versus 13%. Among the larger clients, approximately two thirds only modestly increased their operating rig counts or held them flat. In comparison, with our focus on larger midsized companies, our own average working rig count increased by 21%. Our total recount increased by three rigs as we add our rigs with multiple customers, while the number of rigs stacked on rate declined by six. Once again, we surveyed the largest Lower 48 clients. This group accounts for approximately 40% of the working rig count. Our review of these clients shows flattish activity plans for the balance of 2021. Smaller and medium sized operators are responding faster to the recent trends in commodity prices. In our international markets, we saw the expected demand increase in selected geographies as measured by the number of active rigs. This trend extends across major markets in Latin America and in Saudi Arabia. In summary, global oil supply and demand continues to approach equilibrium as inventories rationalized. Commodity prices seem to have stabilized at levels which generate acceptable operator economics. In response, drilling activity is increasing. Having said that, virtually every day there is a report of a major outbreak of COVID in some geography, the most recent example is India. The possibility of a resurgence of COVID remains a drag on confidence in the recovery. Overall, assuming global economics continue to improve the oilfield market environment is poised to support higher levels of activity. Now, I will comment on our first-quarter results. Total adjusted EBITDA was 108 million in the quarter. These results reflect operating performance that was somewhat better than anticipated. With this performance, we generated approximately $60 million in free cash flow. Our global rig count for the first quarter increased by eight rigs. We saw growth across all our drilling segments. In our Lower 48 business, reported daily big margin of 8,466 was in line with our guidance. For the international segment, adjusted EBITDA for the quarter met our expectations. Daily margin at 12,917 was near the upper end of our guidance range driven by expert performance in the field. Once again, we had outstanding operational execution at our high spec rig fleet. Strong operations are leading safety performance, continued cost control and capex discipline all drove the quarter's results. Next, I would like to mention some specific highlights. During the first quarter, we completed additional debt exchange transactions. Between these in our free cash flow, we lost another quarter of balance sheet improvement. Adjusted EBITDA in our drilling solution segment again increased sequentially. We saw continued growth in the penetration of our SmartDRILL app. SmartDRILL is Nabors' proprietary rig activity sequencer that digitizes workflows and optimizes rig processes. Our installations on Nabors' Lower 48 rigs increased by nearly 25% versus the fourth quarter. Overall, NDS penetration of five or more services, our Nabors' Lower 48 rigs increased versus the prior quarter. It now stands at more than 70%. A year ago, this penetration rate was 60%. As we are adding rigs, clients increasingly realized the value in NDS services. We see this reflected in NDS's results. Also, in NDS client use of our RigCLOUD platform for digital operations increased. In the first quarter, clients utilized RigCLOUD on nearly all of our working rigs in Lower 48. Our third-party installations also grew sequentially. We continue to roll out our differentiated rigs our Analytics platform. This innovative platform aggregates a wide spectrum of drilling and well data, including KPIs and wellbore placement statistics. Clients receive this information with customizable dashboards that enable real time decision making and drive optimal results. We successfully completed the restart of eight idle rigs in Saudi Arabia. This is notable considering the logistical and staffing challenges of starting up a large number of rigs in a compressed timeframe. The local team in the kingdom collaborated closely with our customer to plan the idling process. This arrangement yielded significant cost benefits while the rigs were idle, and as they were restarted. We recently published our updated ESG report for 2020. I think you will be impressed with our progress in this area. On a related note, we now have two rigs running advanced battery-based hybrid energy management solutions in the Lower 48. We believe Nabors has the first successful installation on a natural gas fueled rig in the industry. This system has yielded significant fuel savings, as well as an improved emissions profile. A third Lower 48 system is expected to deploy in the near future. We are in early discussions with multiple operators or systems in our international markets as well. In addition to these highlights, I would like to discuss RigCLOUD Analytics in more detail. As a reminder, the RigCLOUD value chain combined our Edge, Analytics and digital workflow capabilities. These create a unique and compelling value proposition during the well construction process. RigCLOUD Analytics is powered by high-end edge computing at the rig site. This infrastructure enables us to deliver real time analytics that drive database decisions across multiple wells and rigs. In addition, RigCLOUD Analytics offers key differentiators brands Yes digital and automated solutions, such as our Smart Suite. With RigCLOUD Analytics, clients can explicitly determine the value generated by our apps and drilling services. In turn, these features to support a faster pace of technology adoption and mutually beneficial performance-based contracts. The initial focus of our RigCLOUD Analytics is the prediction of future outcomes, answering the questions, what is likely to happen and when. Our roadmap should lead us beyond this functionality, and ultimately facilitate through automation of the drilling process. I would also make some comments on the energy transition and our initiatives to position Nabors as a leader as our industry evolves. I mentioned earlier, increased deployment of the power management system for rigs. We are also examining several alternatives to improve Nabors own carbon footprint, including technologies aimed at carbon capture, emissions, minimization and power management. We look forward to leveraging our expertise, global footprint and proven record of innovation to develop and deploy impactful clean energy Solutions. We expect to make tangible progress in the near future and are excited with the potential of the strategic initiatives. Before turning the call over to William, I will discuss our view of the market in more detail. The Lower 48 industry has added 197 rigs, or 87% since its low in August. Based on the commodity price backdrop, and our conversations with clients, we expect Nabors rig count to increase each quarter through the balance of 2021. Along with this activity outlook, and the resulting increases in utilization, we see pricing traction in the second half of the year. In our international markets, we continue to see steady increases in activity across our major markets. There are two specific developments which I would like to draw your attention to. First, the standard joint venture in Saudi Arabia has now received four awards for new buildings from Saudi Aramco. We expect the first of these to deploy in early 2020. These new deployments are the first step to scale the operation to a new level, backed by the support of our key customer. We are excited at the beginning of this phase of relationship with our partner, and the future growth opportunity presents. In Latin America, we are seeing the customer base broaden in both Argentina and Colombia. We have rigs working for three customers in Colombia, and five in Argentina, where we hold 38% of the market. We think this diversification is healthy for Nabors. It indicates the wide appeal of our value proposition across the customer base. The net loss from continuing operations of $141 million in the first quarter represented a loss of $20.16 per share. First-quarter results compared to a loss of $112 million, or $16.46 per share in the fourth quarter of 2020. The fourth quarter included $162 million of pre-tax gains from debt exchanges and repurchases partially offset by charges of $71 million, mainly from asset impairments for a net after tax gain of $52 million or $7.40 per share. Excluding this unusual item, the net loss improved by 23 million, primarily reflecting lower depreciation and interest expense. Revenue from operations for the first quarter was $461 million, a sequential gain of 4%. Revenue improved in most of our segments, driven by increased drilling activity in the markets we serve. In the Lower 48, drilling revenue of $110 million increased by 6.2 million, or 6%, as a rig count improved by 5%. Despite some deterioration in the average pricing for a fleet, revenue per day increased by $700, reflecting a significant reduction in the number of rigs stacked on rate. Generally, stacked on rate rigs return to work as day rates increase substantially. Lower 48 average rig count at 56.2 was up sequentially by 2.6 rigs in line with our expectations. International drilling revenue at $247 million increased by 1.7 million or 1%. Despite the absence of 4 million in early termination revenue from the prior quarter. Average rig count of 64.8 increased by 2.2 rigs or 3.5% matching our expectations for the quarter. As anticipated, eight rigs were reactivated in Saudi Arabia progressively during the first quarter. However, average rig count in the eastern hemisphere fell, reflecting mostly the contract terminations we experienced in the fourth quarter. Canada drilling revenue was $21 million, an increase of $6.2 million or 42%. Rig count increased by four rigs on the seasonal ramp up in activity. Daily revenue increased by nearly $400. Nabors drilling solutions revenue was $35.7 million, up 3.7 million or 12%, primarily driven by improved performance software and manage pressure drilling. Notably, there was continued growth of rocket with third parties and further adoption of SmartDRILL by new clients. Rig technologies revenue of $25.7 million increased by $1.6 million or 6% due to lower capital equipment sales and fewer rentals. Although assets certification and repair activity were favorable, federal clients deferred deliveries of new equipment. Total adjusted EBITDA for the quarter was $108 million in line with the fourth quarter, and somewhat ahead of our expectations. Sequentially, improved results in Canada and NDS offset reductions in our other segments. US rolling adjusted EBITDA of $58.8 million was down by 3.4 million or 5.4%. Lower 48 performance was in line with our expectations. As we expected daily rig margin came in at $8,466, a $1,000-impact compared to the fourth quarter. Quarter on quarter, although rig count increased, the additional volume was more than offset by a reduction in the number of rigs working at pre pandemic rates and of rigs stacked on rate. I would like to point out that margins for the stacked-on rate rigs are generally higher than the fleet average. For the second quarter, we expect daily rig margins are between $7,000 and $7,500 drew mainly by the signing of renewals or new contracts with current day rates, which are lower than the average for a fleet. We forecast as six to seven rig increase for the second quarter, or an 11 to 12% sequential improvement. Our rig count in the Lower 48 currently stands at 64 rigs or about 7.8 rigs higher than the average for the first quarter. Our other markets within the US drilling segment are expected to improve somewhat as compared to the first quarter, reflecting incremental recount. International adjusted EBITDA decreased by $1.9 million to $62.6 million in the first quarter, or 2.9% sequentially. The improvement in rig count was more than offset by the absence of early termination revenue that occurred in the fourth quarter. Daily gross margin for the quarter was $12,917, a $600 reduction as compared to the prior quarter. The fourth quarter included approximately $700 per day in early termination revenue. Turning to the second quarter, we expect an international rig count increase of three to four rigs, or 5 to 6% driven by units that return to work in Latin America and Saudi Arabia over the course of the prior quarter. We expect gross margin per day of approximately 12,500 reflecting a long rig move in Mexico and general strikes in Argentina. These strikes could result in a period on standby rates for some of the rigs. Current rig count in the international segment is 69 rigs, which translate into a 6.5% increase over the average of the first quarter. We believe that activity in international markets where we operate, already reflected in the fourth quarter of last year. Canada adjusted EBITDA of $9.7 million increased by $6.2 million. Rig counts at 13.7 rigs was four higher sequentially. Gross margin per day of 8160 also increased due to the higher activity level and the receipt of $3.5 million in governmental wage subsidies. In the second quarter, we expect the effects of the seasonal spring breakup to impact results, with average rig count around six rigs and daily margins between $5,500 and $6,000. We currently have six rigs operating in Canada Drilling solutions adjusted EBITDA of $11.5 million was up $1.2 million in the first quarter, or 12%. On the strong performance drilling and manage pressure drilling revenue. We expect adjusted EBITDA in the second quarter to be in line with the first quarter. Rig technologies reported negative adjusted EBITDA of $500,000 in the first quarter, a decrease of roughly $1 million. For the second quarter, the segment should once again deliver positive EBITDA and improved capital equipment sales. Now, before I turn to liquidity and cash generation, let me remind you that the mandatory convertible preferred shares will be converting next Monday May 3, approximately 668,000 common shares will be issued and a final dividend will be paid on the conversion. In the first quarter, free cash flow totaled $60 million. This compares to free cash flow of approximately $66 million in the fourth quarter. I would like to point out that in the first quarter of 2020, we delivered $8 million in free cash flow. Our EBITDA in that quarter was almost twice the EBITDA of the first quarter of 2021. This improvement in cash flow conversion as compared to a year ago reflects the stain efforts and costs and capital discipline that will continue over the years to come. As in the past, the first quarter was marked by the semi-annual interest payments and a senior note of over $70 million and by approximately $25 million in several annual payments that we incur at the beginning of the year. These payments which will not recur during the remainder of the year include property and other taxes, as well as employee incentive bonuses. These outflows were offset by strong customer collections in the first quarter, including some catch up from last year end as well as by lower capex and higher asset sales. Our capital expenditures of $40 million in the first quarter included $7.5 million in payments related to SANAD newbuilds. To date, we have been awarded four rigs by Saudi Aramco. During the second quarter, we expect to incur $80 million in capex, of which 30 million will be paid by SANAD for the new bill program. Our target remains at 200 million for the full year 2021 excluding in Kingdom newbuilds for SANAD. For this year the total payments by SANAD for the newbuilds will depend on the achievement of construction milestones by the local manufacturer. Although the local rig program has been delayed by multiple years, Saudi Aramco has now demonstrated its commitment to SANADs rig building program. Given the recent awards, and additional rig purchase orders by SANAD, we now expect SANAD's total payments for these new rigs to approach $100 million for this year assuming milestones are met. In January, SANAD distributed a combined 100 million of the excess cash it had accumulated to its partners. Half of that amount was paid to a Nabors subsidiary, and the other half to Saudi Aramco. On a consolidated basis, the payment to Saudi Aramco partially offset the free cash flow generation. As a result, the net debt reduction for the quarter was limited to $6 million. Nonetheless, with a standard distribution to Nabors and other cash regenerated, we continue to reduce our total debt. During the quarter, we retired approximately 40 million in senior notes, including convertibles, which resulted in a 30-meter reduction in our total debt as reported. We also reduce the amount of standing on a revolving credit facility by an additional $40 million. Our total debt reduction for the quarter was $70 million. At the end of the first quarter, the amount drawn in our credit facility was $633 million and our cash balances stood at $418 million. For the second quarter, we are targeting approximately $50 million in free cash flow. Although our interest payments will decrease sharply in Q2. We anticipate a reduction in customer collections, higher capex and lower asset sales as compared to the prior quarter. We will continue to focus on delivering industry leading drilling performance to our customers and sustained growth and market penetration in our drilling solutions business. We're continuing to push for cost and capital discipline We believe that successful implementation of these goals will support our exceptional free cash flow generation. We will continue to allocate our future cash flow to debt reduction until we reach our leverage targets. As we review the first-quarter results, I cannot lose sight of the fact that it was just a year ago that we began to understand the full impact of the COVID-19 virus, the effects of a global pandemic were far reaching. I think it is fair to say that virtually every aspect of our lives was impacted. The same is true for our company. As we adapted to the demands of the pandemic environment, we were forced to reexamine all of our business processes, policies and procedures. The beginning of the second year of this pandemic era reinforces our concentration on several priorities. First, we maintain a laser focus on safety. Over the past year, we continue to improve our work processes and procedures. What has become more evident is a palpable change in our underlying safety culture for the better. For this reason, I now believe that mission zero, our goal of zero safety incidents is closer to reality than any time since we introduced it. Second, our commitment to operational excellence continues, client's value and compensate for performance. Our industry-leading rig level economic results stems from a multiyear company wide effort at extending Nabors position as the global performance pillar of choice. And we're not finished yet, which brings me to the third priority. Nabors remains dedicated to extending its position as the drilling industry's technology leader. Nabors has been an innovation engine for decades; it has become clear that our industry must now transform itself. Looking ahead, our Advanced Solutions will enhance performance and efficiency, as well as sustainability. We believe our investments in robotics and automation technology will catapult us to a new level of performance. I hope you sense my enthusiasm and genuine excitement for our future. I look forward to reporting on our progress.	q1 revenue $461 million. q1 loss per share $20.16 from continuing operations.
Today, we will follow our customary format with Tony Petrello, our chairman, president, and chief executive officer; and William Restrepo, our chief financial officer, providing their perspectives on the quarter's results along with insights into our markets and how we expect Nabors to perform in these markets. Also, during the call, we may discuss certain non-GAAP financial measures, such as net debt, adjusted operating income, adjusted EBITDA, and free cash flow. We have posted to the investor relations section of our website a reconciliation of these non-GAAP financial measures to the most recently comparable GAAP measures. Then I will follow with highlights for the quarter and a discussion of the markets. William will discuss our financial results. Let me start by saying our operations performed quite well in the second quarter. We also made significant progress across multiple strategic initiatives. Adjusted EBITDA in the second quarter topped $117 million. Execution across all of our segments was strong. Our global rig count for the second quarter increased by seven rigs, driven by growth in the U.S. drilling and international segments. Once again, we made progress on our priorities to generate free cash flow and reduce net debt. Free cash flow in the quarter approached $70 million after funding capex of 77 million. These results for the second quarter exceeded the expectations, which we laid out on our last conference call. Net debt improved by 58 million in the second quarter, driven by our free cash flow. I am very pleased with our financial performance through the first half of 2021. I'm looking forward to reporting further progress over the balance of the year. Next, I would like to highlight five key focus areas as you think about Nabors. First, our leading daily margin performance in the Lower 48; second, the upturn in our international business; third, the improving outlook for our technology and innovation; fourth, progress on our commitment to delever; and fifth, our progress in ESG and the energy transition. Let me start with Lower 48 drilling margins. The margin performance in this core business remains strong. Daily margin once again exceeded $7,000 mark. Clients realize value from our leading fleet capabilities and field performance. We maintained our disciplined approach to pricing as we deployed rates. This unique combination is responsible for these robust results. Another way to look at our performance is to combine our drilling margin with the margins generated by NDS in the Lower 48. That increment amounts to approximately $1,900 per day, so we're generating almost $9,000 per rig per day on this basis. As you compare results and business models from our peers across the industry, we think it's important to consider this point. Next, our international business. Our financial results benefit from our historic pricing discipline and our performance in the field. Coming out of the pandemic, significant improvements have occurred in Argentina, Colombia, and Russia. These markets collectively account for approximately 25% of our international rig count. Saudi Arabia has seen an upturn in activity. We currently have 38 rigs working in the Kingdom. There's potential to add a few additional rigs before the end of the year. In addition, our SANAD joint venture has been awarded five newbuild rigs to date. These five units are expected to be deployed at approximately one per quarter starting in Q1 of 2022. They are estimated to contribute approximately annualized EBITDA exceeding $50 million. As you know, there is a long-term plan by Saudi Aramco to add successive generations of five rigs per year for an additional 45 rigs. The Saudi Aramco procedure of this plan, we expect a similar EBITDA contribution in each successive year. These newbuild rigs and their economics were one of the main attractions for our participation in the joint venture. Next, technology and innovation. Our technology pipeline remains full. NDS' penetration on our own Lower 48 rigs with at least five services exceeded 70%. On third-party rigs, we are seeing strong growth in penetration. Revenue on third-party rigs increased sequentially by more than 50%. Growth occurred across most of the service lines. The third-party rig market remains fertile for NDS. We are investing to ensure that our products are rig agnostic. Even though the full potential of the MDS product suite is still maximized when run on Nabors rates. For NGS in total, we are expanding our digital platform and expect to see greater penetration of these products across the market. Now let's discuss delevering. We had quite a bit of significant moves on this topic recently. We completed the pro rata distribution of equity warrants to our shareholders. This innovative structure places value in the hands of our equity holders. The warrants can be exercised with cash or certain of our outstanding notes. This transaction could result in substantial delevering of our capital structure. We also signed an agreement to sell our Canadian drilling assets. This sale will result in cash proceeds of approximately $94 million, plus we will liquidate the working capital in the business. With this deal, we pull forward multiple years of free cash flow, which we can deploy into our strategic priorities. In summary, we've made material progress even through the downturn. We look forward to making additional headway in the future. I'll finish this discussion of our highlights with ESG and the transition. We continue to refine and enhance our focus on ESG. We recently updated our annual ESG report with additional disclosure. This drove a two-point improvement in our environmental score from ISS. In addition to the environmental performance, we also recorded improvements in several categories of our social score. Our position in the energy transition also began to take firmer shape. Our strategy here is fully supported by the Nabors board and our investors. The scale of the energy transition opportunity is potentially huge. We believe it holds very attractive prospects for Nabors in two broad areas. First, to optimize the environmental footprint of our own operations, and second, to drive the transition in adjacent markets. Significantly, we believe our global footprint, technology and scale can be applied to drive initiatives in the transition space. For example, we are working both to reduce our own carbon footprint and to apply our expertise in the broader energy market. We have exclusive agreements to market multiple fuel additives, which materially reduced fuel consumption and emissions of our own large diesel engines, as well as other fleets. We have also identified adjacent areas, which we think are synergistic with our core operations. These include investing in several early stage geothermal energy companies, we believe the geothermal market holds enormous promise as a source of baseload renewable power. These ventures will enable us to deploy our expertise into this burgeoning field. We expect to realize investment returns commensurate with the opportunities. We recently agreed to license innovative IP in the carbon capture area. The target markets are in drilling as well as other verticals. We're excited about this technology, which we see ultimately reaching beyond the oil field to stay tuned. We are evaluating a variety of investment structures in the energy transition. Our intent is to enable our participation across the spectrum of investment opportunities. We are confident in our ability to participate in and ultimately help drive the energy transition. We think this is a compelling opportunity. Now I will spend a few moments on the macro environment. The quarter began with WTI just below $60 for early June WTI broke above 70. Since then, it has climbed into the mid-70s and fluctuated between there and the high 60s. This range should be conducive to increases in drilling activity across markets. Next, I'll review the rig count. Comparing the averages of the second quarter to the first quarter, the baker Lower 48 land rig count increased by 16%. According to Inverness, from the beginning of the second quarter through the end the Lower 48 rig count increased by 31 or approximately 6%. The growth rate among smaller clients significantly outpaced the growth in larger operators at 8% versus 2%. With our focus across the spectrum of clients, our average working rig count in the second quarter increased by 21%. This comparison excludes rigs stacked on rate. Our total average rig count increased by seven rigs, while the number of rigs stacked on rate declined by four. Once again, we surveyed the largest Lower 48 clients. This group accounts for approximately 35% of the working rig count. In comparison on the last call, the same group accounted for 40% of the working rig count. Our review of these clients show a modest uptick in activity planned for the balance of 2021. In our international markets, we saw demand increase about as expected. In our served markets, we gained incremental share in the second quarter as activity levels in those markets continue to recover from their pandemic lows. To sum up, commodity prices have risen significantly as global economic activity increased. In their current range, oil prices generate acceptable operator economics in virtually all areas where we operate. With that in mind, we remain vigilant to the potential impact of a resurgence of the virus. That risk and outstanding, the current commodity environment remains conducive to increased drilling activity. The net loss from continuing operations of $196 million in the second quarter represented a loss of $26.59 per share. Results from the quarter included a net loss of $81 million or $10.80 per share related to onetime impairments, which were largely attributable to the sale of our Canada drilling assets and to reserves for tax contingencies in our international segment. Second-quarter results compared to a loss of $141 million or $20.16 per share in the first quarter. Excluding the previously mentioned onetime items, the $26 million quarterly improvement primarily reflects better operational results, as well as lower depreciation and income tax expenses. Revenue from operations for the second quarter was $489 million, a 6% improvement compared to the first quarter. Revenue continues to increase quarterly with higher commodity prices. Revenue for all of our segments increased substantially, both domestically and internationally, with the exception of Canada, which experienced its normal seasonal downturn. Total adjusted EBITDA expanded by almost $10 million to $117 million for the quarter. This was significantly higher than we anticipated primarily reflecting the strong increase in revenue across our markets. This quarterly improvement is part of a trend that we expect to continue during the second half of the year. drilling adjusted EBITDA of $59.8 million was up by 1 million or 1.7% sequentially and a 14% increase in revenue. Although our rig count increased, our average margins fell in the Lower 48 market. Lower 48 performance was in line with our expectations. Daily rig margins came in at $7,017 and falling within our expected range. Nonetheless, leading-edge day rates have inflected and high-quality rig utilization continues to increase with market tightening for those rigs. For the third quarter, we expect average daily rig margin to remain stable with second quarter as market day rates continue to grind upward. Second-quarter Lower 48 rig count averaged 63.5 and a quarterly increase of 13%, which was somewhat above our expectations. Currently, our rig count stands at 67. We forecast an increase of four to six rigs in the third quarter versus the second-quarter average. Adjusted EBITDA from our other markets within the U.S. drilling segment improved moderately. For these markets, in the third quarter, we expect to remain at the second-quarter levels. International-adjusted EBITDA gained almost $9 million in the second quarter or 14% sequentially. The improvement came primarily from higher activity markets with larger rigs, principally Saudi Arabia and Colombia, and generally strong operational performance in the Eastern Hemisphere. In the quarter, as anticipated, we experienced some headwinds in Mexico that we expect to persist into the third quarter. We continue to move rigs between platforms to accommodate modifications to the activity profile of our customer. We believe these changes in activity are linked to the higher commodity price. The unfavorable impact to our margins from these moves was $3.7 million in the second quarter and is forecast at $6 million in the third quarter. Also, we lost $1.9 million of revenue in the second quarter related to the general strikes and unrest in Latin America. Despite this friction, international delivered a strong quarter. Average rig count increased in line with expectation by 3.5 rigs to 68.3 or 5%. Current rig count in the international segment is 68. Daily gross margin for international increased by over $500 to 13,420 in the second quarter beating our expectations by more than $900. The second quarter included approximately $900 per day in lost margin from the moves in Mexico and in rest in Latin America. Turning to the third quarter. We expect international rig count to decrease slightly by one to two rigs, as two over rigs move between clients. We forecast our average daily rig margin to remain in line with the second quarter. Our third quarter forecast includes approximately $1,000 in early termination fees from one of our rigs, offset by additional lost margin from the moves in Mexico. As anticipated, Canada-adjusted EBITDA of $3 million fell by 6.7 million, reflecting the seasonal spring breakup. At this point, we expect to close the divestiture of our Canada drilling assets by the end of the month. In the third quarter, we will include one month of activity for our Canada drilling operations before the closing of the transaction. Drilling solutions adjusted EBITDA of $12.8 million was up 1.3 million in the second quarter and a 10% revenue increase, trending positively in all product lines. Most notably, improved performance software and casing running services. Penetration of the performance drilling software in the Lower 48 and TRS internationally, strengthened driving the improvement. Lower 48 gross margin for our drilling solutions segment totaled $8.9 million for the second quarter. This comes on top of our Lower 48 drilling gross margin of $40.5 million. We expect adjusted EBITDA in the third quarter to improve on the strong second-quarter results. Rig technologies generated adjusted EBITDA of $2 million in the second quarter, an improvement of $2.6 million on a 34% revenue increase. The growth was primarily related to higher repairs and equipment sales. For the third and fourth quarters, adjusted EBITDA should move gradually upward on improved capital equipment sales. Now I will turn to review our liquidity and cash generation. In the second quarter, total free cash flow was $68 million. This compares to free cash flow of approximately 60 million in the first quarter. Our cash generation was driven by improved collections and lower semiannual interest payments, offset by higher capital expenditures and other outflows, mainly annual insurance premiums. Capital expenses in the second quarter of $77 million were up from $40 million in the first quarter. These amounts include investments for the newbuilds of 32 million and 8 million for the second and first quarter, respectively. In the third quarter, we forecast $80 million in capital expenditures including 35 million Versata newbuilds. Our targeted capital spending for 2021 continues to be around $200 million, excluding approximately 100 million required for Saudi new builds. Free cash flow for the third quarter should total around 10 to $20 million, excluding proceeds from the Canada divestiture and moderate strategic transaction outflows. At the end of the second quarter, our cash balance closed at $400 million, and the amount drawn on our 1 billion credit facility was $558 million. Our net debt on June 30th was $2.4 billion, down from 2.9 billion at the start of the pandemic. We will continue to prioritize our future cash generation to debt reduction until we reach our leverage targets. We previously announced the distribution of warrants to shareholders. By the end of the quarter, we had seen a small amount of the warrants exercised with notes. This transaction is another demonstration of our commitment to delevering. Putting things in perspective, the last 15 months have probably been some of the toughest Nabors has faced. Activity dropped across the globe, driven by industry fundamentals and COVID shutdowns. Our rig count plummeted and our leading-edge pricing dropped. Despite that, we maintained our EBITDA at levels higher than the combined EBITDA of our three closest public competitors. These results were the fruits of our absolute focus on cost control and capital discipline. But we have also benefited from our overall strategy of maintaining the highest quality fleet with leading drilling performance, driven by our investments in automation, software, remote operations, and data infrastructure. As a result of our new revenue profile, our capital expenditures as a percent of revenue have dropped. In addition, our international business has delivered once again by helping us to much better absorb the sharp drop-off in U.S. activity in comparison to our competitors. Together with our superior operational results, we generated meaningful cash flow for the past 15 months, while also reducing our net debt by $500 million during the period. Despite the headwinds at the beginning of last year, just before the pandemic, we also issued $1 billion of new long-term debt to address near-term maturities. And we then renegotiated our credit facility during the worst of the pandemic to avoid potential covenant breaches and allow us to complete a material debt exchange transaction at the end of last year. I am convinced we have been good stewards of our shareholders' capital during the toughest of times. As we now launch a significant new initiative into the rapidly expanding field of new energy, we will maintain our commitment to absolute capital discipline and continued debt reduction. As you may have seen from recent announcements, despite the scope of our initiatives, we have limited our cash deployed into these activities. We have restricted ourselves to placing minority investments with companies adjacent to our own business, and we have signed alliance agreements with these companies to help them develop their technologies. In concluding, I would like to emphasize something. Despite our aspirations to develop our clean energy initiatives into a significant portion of Nabors' portfolio over time, we will retain our capital discipline, as well as our focus on cash generation and debt reduction. These second-quarter results on top of our performance in the first quarter reinforced that our strategy is working, and we are making progress toward our goals. Once again, we made significant headway to delever. At the same time, we advanced our imperative to provide better execution with our portfolio of leading-edge technologies. The resilience of our financial results through the depths of COVID and now into the recovery is testament to our robust portfolio of businesses. This process began years ago as we continually reevaluate the portfolio. We sold assets and businesses pressure pumping and well servicing most notably, and now we're investing in digitalization and automation and the transition. This active management has served us well, and we expect it to continue. We have entered a new phase in the evolution of the global energy industry. Nabors has played a key role throughout the development of the drilling industry. We are investing now to extend this leadership in the future.	compname announces qtrly loss per share $26.59. q2 revenue $489 million versus refinitiv ibes estimate of $465.3 million. qtrly loss per share $26.59. expect continued increases in drilling activity both in u.s. and internationally. expect pricing to increase in second half of 2021. for second half of 2021, expect further improvement in oilfield industry fundamentals.
Today, we will follow our customary format with Tony Petrello, our chairman, president, and chief executive officer; and William Restrepo, our chief financial officer, providing their perspectives on the quarter's results along with insights into our markets and how we expect Nabors to perform in these markets. Also, during the call, we may discuss certain non-GAAP financial measures, such as net debt, adjusted operating income, adjusted EBITDA and free cash flow. We have posted to the investor relations section of our website a reconciliation of these non-GAAP financial measures to the most recently comparable GAAP measures. I will begin my remarks with some overview comments. Then I will detail the progress we made on our five keys to excellence and follow with the discussion of the markets. William will discuss our financial results. Our operating performance in the third quarter was strong. All of our segments met or exceeded the outlook we gave a quarter ago. On top of that, we completed several milestones across our strategic initiatives. Adjusted EBITDA in the third quarter reached $125 million. We maintained our execution at a high level while we grew the overall business. Our global average rig count for the third quarter increased by two rigs, excluding the impact of the sale of our Canadian drilling assets. Volumes in our Drilling Solutions and Rig Tech segments both grew quarter-on-quarter. That drove sequential increases in both revenue and EBITDA in those operations. The third quarter again marked progress on our twin priorities to generate free cash flow and reduce net debt. Free cash flow in the quarter exceeded $130 million, including the Canada sales proceeds. Without those proceeds and the funding for our geothermal investments, we generated free cash flow of $55 million. This result was significantly above our expectations. In line with the cash generation, net debt decreased to $2.3 billion in the third quarter, driven by the combination of our strong operating performance, disciplined capital spending, improved working capital and our strategic capital allocation evidenced by the Canadian sale. I am pleased with our financial performance both in the third quarter and year to date. Last quarter, I highlighted five key themes that we believe support the Nabors' investment thesis. These drivers include our leading performance in the U.S., the upturn in our international business, improving results and the outlook for our technology and innovation, our commitment to sustainability and the energy transition and our progress on our commitment to delever. Our margin performance in the Lower 48 remains strong. As we expected, for the third quarter, we held daily margins above the $7,000 mark. This accomplishment was in line with our second quarter and with the outlook we gave last quarter. We believe our value proposition leads the industry, specifically in operational excellence, advanced technology, top safety performance and sustainability. Our financial results validate this. Next, our international business. We bring the same elements to support our Lower 48 business to our International segment. Our financial results are benefiting from outstanding performance in the field and highly disciplined capital spending. Daily drilling margin in this segment remains robust. As you look through the end of the year and into next, we have visibility to reactivations of three more rigs in Saudi Arabia. This is in addition to the two restarts that recently occurred. Currently, we have 40 rigs working in Saudi Arabia. The in-Kingdom rig new build program is progressing. Based on the manufacturer's delivery schedule, we expect to deploy the first of SANAD's five awards in the first quarter of 2022. The balance should come at approximately one per quarter. We expect each of these rigs to contribute annual EBITDA of approximately $10 million. SANAD's long-term plans call for a total of 15 new builds over 10 years. Each successive generation of five rigs today at $50 million annually. Through the end of 2022, we have excellent visibility to growth at SANAD from expected rig activations and new builds. With that expected growth, our International EBITDA could increase by 20% versus the third quarter just reported. Let me next turn to technology and innovation. Our advanced technology is one of the key drivers of our industry-leading performance. Our portfolio continues to gain traction in the market. Quarterly EBITDA in our Drilling Solutions segment increased sequentially by 22%. This business has scale and is an earnings multiplier on top of our drilling business. Beyond this performance, our technology pipeline remains full. Penetration on Nabors' Lower 48 rigs and on third-party rigs increased. Revenue on third-party rigs improved sequentially by more than 20%. We continue investing in apps and products that are deployable on third-party rigs. Notwithstanding that feature, the full potential of this portfolio is maximized on Nabors rigs. In the third quarter, 74% of our rigs in the Lower 48 ran five or more NDS services. This compares to 62% in the second quarter. For NDS in total, we are committed to expanding our digital portfolio further. Over time, we expect to see greater penetration of these products across the market. Next, I would like to highlight a significant technology breakthrough. During the quarter, we deployed the industry's first fully automated land rig, the PACE-R801. Earlier this month, Rig 801 reached total depth of 20,000 feet on its initial well. This rig incorporates a number of innovations. Features our fully automated robotic drilling package. It also incorporates leading edge controls and smart suite drilling software. The rig runs casing automatically with a high degree of precision and without the need for a separate casing crew and equipment. With this design, we have removed the rig hands from the rig floor. With less physical labor required, Rig 801 has the potential to greatly expand the pool of talent available to work on our rigs. By removing people out of harm's way, we are confident this rig will experience a step change improvement in safety performance. With all this rig has to offer, we've already seen interest from other operators. Now, let's discuss delevering. The third quarter marked significant progress to improve our capital structure. Free cash flow in the quarter was strong. We remain committed to a multifaceted approach to delever. The primary focus is to continue delivering free cash flow. I think our results thus far this year demonstrate our commitment and illustrate our success, but we're not finished. We look forward to reporting additional progress in the future. I'll now finish this discussion of our themes with sustainability and the energy transition. We continue to refine and enhance our focus on sustainability. We made additional progress on our environmental and social scores from ISS. We remain on track for an additional 5% reduction in greenhouse gas emissions in the U.S. in 2021. Our employee safety record measured by TRIR has improved each quarter this year. This TRIR performance leads our industry. We also made progress in our energy transition initiatives. We are currently testing prototypes of our carbon capture and hydrogen technologies. These results have been encouraging. We have several more projects underway. As these proceed, we'll be reporting the results. During the third quarter, we completed investments in three early stage geothermal companies. We now have a portfolio that covers the spectrum of innovative geothermal technologies. We view geothermal as immediately adjacent to our existing business. Each of these companies will benefit from our asset platform as well as our engineering and manufacturing expertise. We are excited to help drive the widespread development of this source of renewable baseload energy. We will help these companies cut down the time required to reach their respective commercial stages. Our global presence, technology and scale will be applied to drive these and other initiatives in the transition space. We are taking a three-pronged approach to the transition. We reduced our own carbon footprint by applying new technologies. We expand these technologies to other verticals. And we can take advantage of the opportunities in areas adjacent to our activity by investing in these companies and helping them to reach scale. Now, I will spend a few moments on the macro environment. The quarter began with WTI above $70. But at the end of September, WTI was in the mid-70s. Since then, it has reached the $80 mark where it remains recently. This range should be conducive to increases in drilling activity across markets. Next, I'll review the rig count. Comparing the averages of the third quarter to the second quarter, the Baker Lower 48 land rig count increased by 11%. According to Inverness, from the beginning of the third quarter through the end, the Lower 48 rig count increased by 47 or approximately 9%. Smaller clients accounted for nearly all of this growth. Once again, we surveyed the largest Lower 48 clients at the end of the third quarter. This survey group accounts for approximately a third of the working rig count. Our survey indicates an increase in activity approaching 10% for this group by the end of the year. This outlook is consistent with E&P spending increasing going into the end of the year. It is very encouraging as we look into 2022. We also see potential activity increases in our international markets. In particular, we have visibility to reactivation of suspended rigs in Saudi Arabia. We recently added an additional rig in Latin America and we are optimistic for additional rigs beginning early next year. I'll wrap up this macro discussion with an update on our labor availability and the global supply chain. For labor, we have been successful at recruiting and staffing to support our increases in activity. Recently, this has become more difficult, particularly in Lower 48. As a consequence, we raised compensation in this market during the last quarter. This increase has helped and we are monitoring whether additional steps will be necessary. Now, let me address the supply chain. We continue to see moderate cost inflation and lead times have stretched significantly. With our global systems, we are able to maintain operational continuity. I would also like to point out that we have delivered on our margins. The cost increases we have experienced have been offset by similar increases in our day rates for the fleet. To sum up, commodity prices have continued to rise as global economic activity has increased. In their current range, oil prices generate favorable operator economics in virtually all areas where we operate. Natural gas prices have increased to levels not seen in more than 10 years. We have observed early signs of increased interest from operators, which can benefit from these higher prices. With that in mind, we remain vigilant to potential disruptions from the virus and challenges in the economy. Those risks, notwithstanding the current commodity environment supports an increase in the level of drilling activity. The net loss from continuing operations was $122 million or $15.79 per share. The third quarter included a $13 million after-tax nonrecurring expense or $1.63 per share related to the purchase of technology in the energy transition space. This compares to a loss of $196 million or $26.59 per share in the second quarter. The second quarter results included charges of $81 million after taxes, mainly for an impairment of assets on the sale of our Canada drilling rigs and a tax reserve for contingencies in our International segment. Revenue from operations for the third quarter was $524 million, a 7% improvement compared to the second quarter. Excluding Canada, revenue increased by 9% with all of our segments providing strong contributions both in the U.S. and internationally. rig technologies and Drilling Solutions were particularly strong, growing by 22% and 17%, respectively. The constructive commodity price environment has continued to drive additional rig awards throughout our markets. In the Lower 48, we are seeing increased rig demand from larger public customers in addition to continued expansion for private operators. Internationally, we expect continued expansion in Latin America and the Middle East. Total adjusted EBITDA of $125 million increased by $8 million or 7%. Early termination revenue in international and improved activity in the U.S. more than offset lower rig count in Latin America and lower margins in Mexico. Drilling EBITDA of $62.1 million was up by $2.3 million or 4% sequentially. Our Lower 48 rig count increased by 4.1 from 63.5 in the second quarter to 67.6 in the third quarter. Daily rig margins came in at $7,025, in line with the prior quarter. As utilization for high-spec rigs continues to improve, increases in leading-edge day rates have accelerated significantly. Although this price momentum has translated into higher average revenue for our fleet, the resulting quarterly improvement was offset by wage increases for rig crews. For the fourth quarter, we expect average daily rig margin to remain in line with the third quarter. Market day rates should continue to move upward as the market tightens, but we expect further wage adjustments for our rig crews. Although these wage increases are largely recovered from our customers, the compensatory day rate increases normally come with a lag. Currently, our rig count stands at 72. We forecast an increase of five to six rigs in the fourth quarter versus the third-quarter average. Drilling segment remained in line with the second quarter. For the fourth quarter, we expect to add one rig in Alaska. However, the EBITDA impact of this increased activity will be offset by expected downtime related to recertifications on our largest offshore rig. International EBITDA gained almost $5 million in the third quarter or 7% sequentially at $7 million in early termination revenue more than compensated for a move-related decrease in Mexico. Daily gross margins for International increased by almost $1,000 to $14,375. Early termination revenue added $1,100 per day to our margins but the Mexico moves offset some of the improvement. Mexico performance should improve in the fourth quarter, but we expect rig moves and idle time between contract exploration and renewal to still affect their fourth-quarter margins. Without the early termination revenue and with the anticipated improvement in Mexico, the fourth-quarter daily margin should come in between $13,000 and $13,500 per day. International average rig count came in at 67 rigs, a one rig reduction as compared to the second quarter. The lower rig count reflected incremental rig count in Saudi Arabia, offset by idle time between contracts in Latin America. Current rig count in the International segment stands at 69. Turning to the fourth quarter, we expect International rig count to increase by four rigs as additional rigs are reactivated in Saudi Arabia and Latin America. Drilling Solutions EBITDA of $15.6 million was up $2.8 million or 22% in the third quarter. Penetration improved across all of our product lines, with the largest contributions coming from performance software in the U.S. and casing running services globally. Activity in the Lower 48 generally improved, taking our combined drilling rig and Drilling Solutions daily gross margin to $8,900. This translates into a $1,900 per day contribution from our rapidly growing solutions segment. We expect adjusted fourth-quarter EBITDA for this segment to further improve on the strong third-quarter results. Rig technologies generated adjusted EBITDA of $3 million in the third quarter, a $1 million improvement. The growth was primarily related to higher equipment sales. In addition to the already increase in spare parts, repairs and certification revenue, we're starting to see additional sales for rig components. We believe that rig upgrades as well as upgrade cycles for specific components like top drives and catwalks should drive higher capital equipment sales going forward. For the fourth quarter, EBITDA should continue to improve on higher capital equipment sales and repairs. In line with the stronger results, liquidity and cash generation exceeded our expectations. In the third quarter, total free cash flow reached $133 million. This compares to free cash flow of $68 million in the second quarter. The third quarter included a net benefit of $78 million from strategic transactions, namely the sale of our Canadian business for $94 million, partly offset by several investments in geothermal and other energy transition initiatives. Outside of these transactions, our free cash generation of $55 million reflected the strong operational results, disciplined capital spending and continued progress on working capital reductions. Free cash flow for the fourth quarter should reach $80 million to $90 million. This translates into a total 2021 free cash flow of around $350 million. Capital expenses in the third quarter of $62 million, including $19 million for SANAD newbuilds were down from $77 million in the second quarter. The $15 million reduction reflected $13 million lower spend for the SANAD newbuilds. In the fourth quarter, we now forecast roughly $80 million in capital expenditures, including $30 million for the SANAD newbuilds. Our forecast capital spending for 2021 is approximately $270 million, including $90 million for Saudi newbuilds. Our net debt on September 30 was $2.3 billion, a reduction of $120 million in the quarter. At the start of the pandemic, our net debt stood at $2.9 billion. We have reduced our net debt materially despite the challenging environment. The third quarter was a further demonstration of Nabors leading operational performance both in the U.S. and internationally, with a potential for meaningful growth in the year ahead. Our strong operational performance is also translating into robust free cash generation, allowing us to reduce our debt materially. We expect further net debt reductions in the fourth quarter and in 2022. With a rapid progress in technology introduction, our modern industry-leading fleet and our close relationships with customers across the globe, Nabors has never been stronger operationally. And with our deleveraging efforts over the last five years, our capital structure and debt profile are considerably stronger than they have been in a long time. We believe we are much better positioned to reach our leverage targets while taking advantage of the numerous opportunities presented by the improving industry environment. These third-quarter results on top of performance in the second quarter reinforced our conviction that we have the right strategies to reach our goals. We made significant progress to improve our capital structure. At the same time, we advanced both the development and deployment of multiple impactful technology solutions. We are committed to responsible hydrocarbon production as we pursue initiatives to support the energy transition. In the face of the challenge brought on by the pandemic, Nabors has demonstrated material progress along both fronts. As well, our financial results have proved resilient, demonstrating the value embedded in our global portfolio of businesses. With all that we've achieved so far, I am confident the best is yet to come.	q3 revenue $524 million. q3 loss per share $15.79 from continuing operations. q4 international quarterly average rig count is expected to increase by about 4 rigs over q3 average. nabors industries - q4 international daily drilling margin is expected to decline to $13,000 - $13,500, reflecting non-recurring early termination revenue in q3. q4 u.s. drilling quarterly average lower 48 rig count is expected to increase by approximately five rigs over q3 average. capital expenditures for full year are expected to total approximately $270 million. q3 included a $13 million after tax expense, or $1.63 per share, related to purchase of technology in energy transition space.
Joining me on the call today are Mike Hayford, president and CEO; Owen Sullivan, COO; and Tim Oliver, CFO. I will begin with some of my views on the business, including an update on our shift to NCR becoming a software and services-focused company with a higher level of recurring revenue. Tim will then review our financial performance and outlook into the second quarter. Let's begin on Slide 4 with some highlights from the first quarter. NCR delivered a solid performance that included accelerated recurring revenue growth, significant margin expansion, and strong cash flow production. Although there remains uncertainty regarding when businesses return to pre-pandemic levels in certain geographies, we are starting to experience green shoots across parts of our business. A year ago, we were facing unprecedented uncertainty over the depth and length of the pandemic. We were focused on taking care of our employees. We asked our team to stay focused on taking care of our customers. I believe that that relentless focus is starting to pay dividends in improved customer satisfaction and brand loyalty. Although we still haven't fully recovered from the crisis, we are in a much stronger position today than we were a year ago. We are building momentum in our NCR as-a-Service strategy and improving execution. First, we expanded the adjusted EBITDA margin to 16.7% in the first quarter, which represents an increase of 420-basis-points from the first quarter of 2020. Second, we delivered 9% recurring revenue growth in the quarter. That brings recurring revenue to 57% of total revenue. We continue to make steady progress increasing our recurring revenue, which is consistent with our 80/60/20 goals. Third, we delivered strong free cash flow. We generated $98 million of free cash flow in the quarter, which represents the first time in many years that NCR has generated positive free cash flow in the first quarter of the year. And finally, we are very excited about the opportunity combined with Cardtronics. The proposed transaction will accelerate the NCR as-a-Service strategy and further shift NCR's revenue mix to software, services, and recurring revenue. We have successfully completed the financing for the transaction and remain on track to close mid-year 2021, subject, of course, to regulatory and shareholder approval. Now moving to Slide 5. We have continued to progress executing our strategy and remain focused on our transition to drive NCR as-a-Service and achieve our 80/60/20 strategic goals. We have made significant progress against these goals, particularly as we accelerate margin expansion toward our 20% adjusted EBITDA margin target. In Banking, we continue to have positive momentum in our digital banking platform, with 11 new deals signed in the first quarter. We also had cross-sold success with existing clients with new products, including three business banking deals done in the quarter. Banking software continues with strong growth as we continue to shift the business to a recurring model. The first quarter saw strong growth in our end-to-end multi-vendor ATM solutions as well as continued momentum with our Digital First strategy, integrating our physical assets into our digital banking solutions. In addition, we are beginning to shift to multi-year professional service engagements that are aligned with our software projects. We are receiving increased interest in our ATM as-a-Service solution and in the first quarter, signed Arkea, one of the leading retail banks in France to a 10-year ATM as-a-Service agreement. In Retail, we are gaining traction with our NCR Emerald offering, which is our next-gen cloud-based retail point of sale solution. The acceleration in digital transformation is being driven by consumer demand, and retailers will need to respond. We believe this is starting to drive an upgrade cycle for retail POS software. We recently signed a new NCR Emerald deal with Brookshire Grocery, a Texas-based super-regional grocery with more than 180 stores across three states. We are also seeing increased adoption of our self-checkout solutions. We experienced demand across customers and geographies as consumer preferences accelerate. In Hospitality, the momentum of Aloha Essentials, which bundle software, services hardware, and payments continued in the first quarter. This model is proving itself in our ability to attract new customers and better service existing customers. During the first quarter, over 90% of all Aloha sites sold through our direct offices were sold as subscription bundles. The payment attaches rate is also strong at roughly 85% of sales into new sites. NCR and Steak 'n Shake recently entered into an agreement for NCR to support Steak 'n Shake for over 500 restaurants globally with the subscription-based point of sale software, hardware, and end-to-end IT services in support of their restaurants. As we focus on executing our NCR as-a-Service strategy and drive the transformation of our businesses, we will strive to become an even more efficient steward of our resources. We continue to focus on taking care of our customers, advancing our product capability with investments in our strategic growth platforms, and improving our productivity. With that, let me pass over to Tim. As Mike just described, the execution of a strategy that was launched a little over two years ago is starting to be evident in both our competitive and financial results. Turning to Slide 6, which presents the top of the overview of our first-quarter financial performance. Starting on the top left, consolidated revenue was $1.54 billion, up to $41 million or 3% versus the 2020 first quarter, driven by solid growth in our retail and hospitality segments. Revenue was down $87 million or 5% sequentially. Although there is still some seasonality in our business and the lumpiness that can result from major hardware orders, we are driving significantly improved linearity. This year's Q1 sequential decline in revenue compares to an average step down of over $300 million from Q4 to Q1 over the last four years. Importantly, our strategy to shift to recurring revenue streams again accelerated. Recurring revenue was up 9% and comprised 57% of our revenue in the quarter. In the top right, adjusted EBITDA increased $70 million or 37% year over year to $258 million. Adjusted EBITDA margin rate expanded 420-basis-points to 16.7%. This improvement is almost ratably attributable to three things: direct cost productivity in our operations; significant cost reduction in our indirect and overhead layers; and revenue growth in the right, more profitable places. On our last call, we detailed the more permanent productivity improvements that accumulated to more than $150 million in recurring annual cost savings. While we will judiciously add cost back to businesses with particularly high growth rates, we intend to preserve the productivity we have already generated and to identify further efficiencies both in our current operations and those synergistic from acquisitions. Similar to the discussion of revenue, we are driving improved linearity in adjusted EBITDA. The flat performance from the fourth quarter of 2020 compares to an average Q1 sequential decline of roughly $90 million in the first quarters of each of the last four years. In the bottom left, non-GAAP earnings per share was $0.51, up to $0.20 or over 65% from the prior year's first quarter. The tax rate of 28.2% was higher than the 2020 Q1 tax rate of 13.5% and our full-year guidance of 26%, up in both cases due to higher income and a decrease in discrete tax benefits. And finally, and maybe most importantly, we generated $98 million of free cash flow in the quarter. This compares to a use of cash of $20 million in the first quarter of 2020 and represents the first time in many years that NCR has generated positive free cash flow in our first quarter. The $60 million declines from the fourth quarter of 2020 compared to an average Q1 sequential decline of roughly $425 million in the first quarters of the prior four years. Moving to Slide 7, which describes our banking segment results. Banking revenue decreased by $7 million or 1% year over year, with more than all of that decline attributable to lower ATM hardware sales. Software and services revenues both increased despite the lower hardware pull-through and the shift to recurring revenue. This business extended its trend of replacing revenue that was traditionally recognized with the sale of ATM hardware with revenue streams and software and services that are more durable, predictable, and valuable. Our banking sales funnel has improved to above pre-COVID levels, with close rates also starting to trend more positively. Our sales funnel mix now has a much larger and richer recurring and subscription component. Q1 2021 total contract value signed was more than twice the value from a year ago. Banking adjusted EBITDA increased $14 million or 10% year-over-year despite the lower revenue. As a result, the adjusted EBITDA margin rate expanded by 210-basis-points to 20.4%. On a sequential basis, revenue was down 5%, while adjusted EBITDA increased 17%, and the adjusted EBITDA margin rate expanded 380-basis-points. The improved profitability both year over year and sequentially was driven by a favorable mix of revenue and lower expenses. The bottom of the slide shows our key metrics for the Banking segment. On the left, while the conversion of current quarter wins that Mike described will have a typical 9-month lag to conversion and eventual revenue generation, prior period wins at digital banking drove a 6% year-over-year growth rate in the first quarter. Digital banking registered users increased 13% compared to Q1 2020, and despite the decline in total banking revenue, we did grow in the right places. Recurring revenue in the Banking segment increased 8% year over year. Moving to Slide 8, shows our Retail segment results, which were uniformly strong. Retail revenue increased $60 million or 13% year over year, driven by strong self-checkout and services revenue. Retail adjusted EBITDA increased $36 million or 97% year over year, while adjusted EBITDA margin rate expanded by 590-basis-points to 13.7%. This first-quarter performance demonstrates the impact of double-digit revenue growth accompanied by cost discipline, with incremental EBITDA conversion of $0.60 on the dollar. Lower on the page, we depicted the three key metrics for retail. Self-checkout revenue increased 31% year over year, driven by broad-based demand both by the customer and by geography. Platform lanes increased 51% compared to the prior-year first quarter. We continue to see accelerating adoption and implementation rates of our next-generation retail POS software solutions. And importantly, recurring revenue in this business increased 14% versus the first quarter of 2020. Slide 9 shows our Hospitality segment results, which returned to year-over-year growth. Hospitality revenue increased by $10 million or 6% as we are beginning to see restaurants reopen, rework existing locations, and expand. Our signed total contract value more than doubled from the year-ago first quarter. Our sales pipeline is getting stronger, and we are adding resources to our selling effort to catalyze this improving trend. First-quarter adjusted EBITDA increased $18 million or more than tripled from the first quarter of 2020 due to higher revenue and lower operating expenses. Hospitality's key metrics include Aloha Essential sites and recurring revenue. Aloha Essentials sites, which bundle software, services, hardware, and payments into a single offering grew 61% when compared to the prior year's first quarter and grew 21% sequentially. Recurring revenue in the graph at the bottom right has stabilized as the attrition rate caused by restaurant closure has abated. Recurring revenue in this business was down 1% from last year and was flat sequentially. Turning to Slide 10. We provide our first-quarter results for 80/60/20 strategic targets that are now very familiar to you. We strive to generate 80% of our revenue from software and services or, described as the inverse, less than 20% of our revenue from discrete hardware sales. In the first quarter, software and services represented 72% of our revenue, which is an increase from 71% in the fourth quarter. The decline from 74% in the first quarter of 2020 was driven by higher SCO revenue this year. We aim for 60% of our revenue to be recurring, to drive more resilient, more predictable, and more valuable revenue. Recurring revenue represented 57% of total revenue, compared to 54% in the fourth quarter, and 53% in the first quarter of 2020. And we aspire to a 20% adjusted EBITDA margin rate. As I've already emphasized, we made significant progress in this metric with an adjusted EBITDA margin rate of 16.7%, compared to 12.5% in the first quarter of 2020, and 15.8% in the fourth quarter. On Slide 11, we present free cash flow, net debt, and adjusted EBITDA metrics to facilitate leverage calculations. As I described earlier, we extended the trend of strong, more linear free cash flow through the traditionally challenging first quarter of the year. Free cash flow of $98 million in this quarter, compared to free cash outflow in last year's same quarter of $20 million. Versus Q1 of 2020, all categories of inventory were down an aggregate of 17%, with days on hand down seven days operationally. Receivables were down 11%, with a 9-point improvement in those longer than 90 days, and days sales outstanding improved by nine full days. This slide also shows our net-debt-to-adjusted-EBITDA metric, with a leverage ratio of 3.2 times. We ended the first quarter with $319 million of cash and remain well within our debt covenants. We ended the first quarter with credit facility leverage of approximately 3.3 times, well under our debt covenant maximum of 4.6. In anticipation of the Cardtronics transaction, we have augmented our financial position with two important debt transactions. We amended and extended our senior secured credit facility which provided an incremental $1.3 billion of new Term Loan A, and issued new $1.2 billion in the 8-year senior notes. The weighted average interest of these transactions is about 3.7%, which is significantly lower than our original model. At the eventual close of the transaction, these funds will all become available, and our total leverage covenant will widen to 5.5 times to allow us to execute our plan to delever rapidly from a forecasted post-close level of 4.5 times. These borrowings are structured so that in the absence of a close, NCR would not be left with excess borrowing. We greatly appreciate the partnership and strong support from our lending group. And my last slide is Slide 12, which provides an outlook for Q2 of 2021 for NCR on a stand-alone basis. While the successful completion of our proposed Cardtronics transaction at midyear would complicate both year modeling efforts and our reported results, we intend to report the second quarter and our current format to facilitate that analysis. So for Q2, for NCR is currently comprised, and relative to 2020's results, we expect revenue growth of 9% to 10%. Strengthening demand signals from our end markets and improving competitive position will both support that growth. We expect particularly strong growth in our Retail and Hospitality businesses and a growth rate in our recurring revenue streams that is similar to Q1. On profitability, we expect the adjusted EBITDA margin rate to expand by 250-basis-points to 300-basis-points to more than 16%. And finally, we also expect free cash flow to be similar to Q1 of 2021 as we continue to drive improved cash generation linearity. I expect our second-quarter performance to be another proof point that NCR is emerging from the pandemic in a more productive, more competitive, and more valuable company. Now turning to Slide 13. I want to provide an update on the proposed transaction with Cardtronics. Cardtronics shareholders will vote on the transaction at their shareholder meeting scheduled for May 7. From a regulatory perspective, the Hart-Scott-Rodino waiting period expired on March 11, and the transaction is still under review in South Africa and the United Kingdom. We anticipate the transaction to close midyear, subject to shareholder and regulatory approval. We remain very excited about the transaction as the addition of Cardtronics will accelerate our NCR as-a-Service strategy and is expected to be accretive to non-GAAP earnings per share for the first year by 20% to 25%. It will enhance our scale and cash flow generation while advancing our 80/60/20 strategic targets by roughly two years. We believe the combination of NCR and Cardtronics will drive significant value for our customers and our shareholders. It is a unique opportunity that is both strategically consistent and financially accretive to NCR. Now turning to Slide 14. Looking forward, our key priorities are clear; First, we will continue to accelerate our NCR as-a-Service and 80/60/20 strategy. We have made notable progress and strive to build on the positive momentum; Second, we have momentum in the business and are well-positioned to drive accelerated growth while improving revenue and cash flow linearity as we shift more of our revenue to a recurring revenue stream; Third, we expect the combination of a lower cost structure along with positive operating leverage will continue to drive margin expansion; Fourth, we will continue to allocate capital to the highest growth and return opportunities with the goal of driving free cash flow and increasing returns for our shareholders; and finally, we are preparing to hit the ground running and executing on the opportunities that Cardtronics will bring us once the transaction closes. And operator, please open the line.	compname reports q1 non gaap earnings per share $0.51. q1 non-gaap earnings per share $0.51. q1 revenue rose 3 percent to $1.544 billion.
It contains significantly more details on the operations and performances -- performance of our Company. Please take time to review it. Net income was $69.7 million or $6.38 a share compared to net income of $85.5 million or $7.67 a share for the first quarter of last year was our performance. Petroleum additives net sales for the first three months of 2021 were $564.9 million compared to $557.4 million for the same period in 2020 or an increase of 1.4%. Sales increased about $8 million mainly due to a 2.6% increase in shipments with increases in lubricant additive shipments partially offset by decreases in fuel additive shipments. All regions, except for Europe contributed to the increase in lubricant additive shipments, and Asia Pacific was the only region reporting an increase in fuel additive shipments. Petroleum additives operating profit for the quarter was $94.1 million lower than the first quarter operating profit last year of $113.7 million. This decrease was mainly due to the lower selling prices and higher raw materials and conversion costs partially offset by increased shipments. The operating margin was 15.6% for the rolling four quarters for the first quarter of 2021. Margin improvement will continue to be a priority in 2021 as we see continuing upward pressure in our raw material costs. During the quarter, we funded capital expenditures of $20.5 million and paid dividends of $20.8 million. In March, we also issued new 10 year -- a new 10 year $400 million bond, pre-funding our current $350 million bond that come due in the fourth quarter of 2022. We continue to operate with very little leverage with net debt to EBITDA ending the quarter at 1.1 times. For 2021, we expect to see capital expenditures in the range of $75 million to $85 million. We hope you're all healthy and staying safe. And while we expect another challenging year ahead, we continue to see a bright future ahead for our Company. Melinda, that concludes our planned comments. So, please feel free to contact us directly.	newmarket corporation q1 earnings per share $6.38. q1 earnings per share $6.38.
We intend to file our 2019 10-K toward the middle of February. It will contain significantly more details on the operations and performance of our company. Please take the time to review it, and I will be referring to the data that was included in last night's release. Now onto the fourth-quarter results. Our profit before tax was $66.6 million, a 6.3% decrease, compared to the profit before tax for the fourth quarter of 2018 of $71.1 million. With the Tax Reform Act affecting the quarterly earnings per share numbers, this profit before tax number is a good way to compare periods. The next set of numbers I will mention does include the impact of the Tax Reform Act. Net income for the fourth quarter of 2019 was $50.1 million or $4.48 a share, compared to net income of 20 -- or $62.8 million or $5.58 per share for the fourth quarter of 2018. Income tax expense was $16.5 million for the fourth quarter of 2019, compared to $8.3 million for the fourth quarter of 2018. The rate for 2018 was lower due to the onetime benefits recorded in 2018 associated with the Tax Reform Act. Now on to petroleum additives performance. Sales for the fourth quarter were $582 million, down 1% compared to sales for the same period last year. Petroleum additives operating profit for the quarter was $73.6 million, down 7.4% versus the fourth quarter of 2018. The decrease was primarily due to changes in selling prices and foreign currency rates, partially offset by lower raw material costs. Shipments increased 1.4% between periods with increases in lubricant additive shipments partially offset by decreases in fuel additive shipments. North America and Europe were the primary drivers for the lubricant additives increases, partially offset by decreases in Asia Pacific. The decrease in fuel additive shipments was primarily driven by Latin America. The increase in shipments between the fourth-quarter periods represents the first time since the second quarter of 2018 that we have seen an increase. During this past quarter, in addition to funding of $21 million of dividends, we spent $22 million on capital expenditures in support of our long-term capital plan. Turning to the full year, our petroleum additives operating profit was $359 million, up 15.5% versus the prior year with our profit before tax of $332 million, up 14.2% versus 2018 and net income of $254.3 million, up 8.3%. The income tax rate for 2019 is more consistent with management's expectations in the post-tax reform environment. Full-year petroleum additive shipments decreased 5.5% versus 2018, with decreases in both lubricant additives and fuel additive shipments across all regions, except North America, which reported an increase in lubricant additive shipments and Asia Pacific, which reported an increase in fuel additive shipments. We saw market weakness throughout 2019 with it easing as the year progressed, with steady improvement reflected in each of the quarters in 2019 as we narrowed the shipments gap versus 2018, ending in Q4 with a year-on-year increase in shipments. In 2019, we began to see a turnaround in the operating performance of the petroleum additives segment as compared to the prior year. In the two years prior to 2019, our operations were impacted by a challenging economic environment, marked by a sustained increase in raw materials. While we've seen evidence that this trend improved in 2019, we will continue to make operating margin stability a priority. Petroleum additives operating profit for the rolling four quarters ended December 31, 2019, was 16.5%, which is more in line with the historical ranges our shareholders have come to expect. Along with our substantial investments in petroleum additives from both a capital and R&D perspective, we returned value to our shareholders through dividends of $82 million. We ended the year with a very healthy balance sheet and with net debt to EBITDA at 1.1 times. As we have stated before, we are comfortable maintaining net debt to EBITDA in the 1.5 to 2 times range. And at times, it will go outside that range. In 2020, we expect to see capital investments in the $75 million to $85 million range. Petroleum additives continued its steady performance as we continued to extend the reach of our products and services across the globe. Our global supply network is suited to continue our growth in all geographic regions through our passion for solutions model. We have maintained measured cost control and continue to make internal progress on our cost-to-serve efficiencies across the enterprise. We continue to see the global economic challenges, and we will remain committed to making decisions for the long term through our consistent strategy of excellence in the petroleum additives business. Our business continues to generate significant amounts of cash and our priorities for using cash remain the same as we reinvest in the business for growth, find acquisitions that can strengthen our competitive position in petroleum additives and reward our shareholders through dividends and stock buybacks. As we look forward to 2020, we expect to build on the successes of the last year and will continue emphasis on margins. It should be a solid year for our petroleum additives segment and the company as we are well-positioned for the long term. We will continue to focus our research and development efforts to bring higher-value products to our customers and will continue to improve quality and cost to be more effectively serving the market. We appreciate your support. I need to make one clarification. For petroleum additives, fourth-quarter sales were $532 million. I misspoke and said $582 million, apologies for that. Jim, that concludes our planned comments. If there are any questions, please contact us directly via email or via phone and we will expeditiously get back to you with a response and an answer. That concludes our conference call for the quarter, and we'll talk to you all next quarter.	compname reports q4 earnings per share $4.48. q4 earnings per share $4.48.
We intend to file our 2020 10-K toward the middle of February. It will contain significantly more details on the operations and performance of our Company. Please take time to review it. I will be referring to the data that was included in last night's release. Net income for the fourth quarter of 2020 was $67 million, or $6.12 per share, compared to net income of $50 million, or $4.48 per share, for the fourth quarter of 2019. Net income for the year was $271 million, or $24.64 per share, compared to net income of $254 million, or $22.73 a share, for the full year of 2019. Net income for the year benefited from a gain of $16.5 million related to the sale of a non-operating parcel real estate, along with a reduced effective tax rate compared to 2019. Now onto petroleum additives performance. Sales for the quarter were $525 million, down 1% compared to the sales for the same period last year. Petroleum -- excuse me, petroleum additives operating profit for the quarter was $84 million, up 14.6% versus the fourth quarter of 2019. Shipments increased 1.9% between the periods with increases in lubricant additive shipments in all regions except Asia Pacific partially offset by decreases in fuel additive shipments driven by the North America and European regions. During this past quarter, in addition to funding $21 million of dividends, we spent $33 million on capital expenditures in support of our long range capital plans. Turning to the full year, petroleum additives sales were $2 billion compared to sales in 2019 of $2.2 billion. This decrease was mainly due to lower shipments and decreased selling prices. Petroleum additives operating profit for 2020 was $333 million, a 7.2% decrease compared to 2019 operating profit of $359 million. This decrease was mainly due to changes in selling prices, lower shipments and higher conversion costs, partially offset by lower raw material costs and selling, general and administrative costs. Shipments decreased 5.2% between full year periods with decreases in both lubricant additives and fuel additives shipments. The effective tax rate for 2020 was 18.3% compared to 23.3% for 2019. The decrease in the tax rate in 2020 was mainly the result of finalizing prior-year tax filings and releasing certain tax reserves. Petroleum additives operating results for 2020 have been marked by an economic uncertainty, resulting from the ongoing effects of the COVID-19 pandemic and the related restrictions on the movement of people, goods and services. While we have continued to operate throughout the year in each of our regions, we have at various times seen significant changes in some of the key drivers that affect the performance of our business. Our business continues to generate strong cash flow. During the year, we funded capital expenditures of $93 million, paid dividends of $83 million and repaid $45 million of borrowings on our revolving credit facility. We also purchased 271,000 shares of our common stock for a cost of $101 million. Along with our substantial investments in petroleum additives from both the capital expenditure and R&D investment perspective, we returned value to our shareholders through dividends and share buybacks totaling $184 million. We ended the year with a very healthy balance sheet and with net debt to EBITDA at 1.1 times. As we have stated before, we are comfortable maintaining net debt to EBITDA in the 1.5 to 2 times range, and at times, may go outside of that range. In 2021, we expect to see capital expenditures and investments in the $75 million to $85 million range. As we look back at our results for the year, we are extremely proud of the operational performance we achieved given the volatility the COVID-19 pandemic introduced into the global economy. We are very proud of them all. As we look forward to 2021, we will continue to monitor government restrictions on the movement of people, goods and services, as well as the status of vaccination programs that are being implemented globally. The pace and stability of improvement and demand for our products will continue to depend heavily on economic recovery and the rate at which government restrictions are lifted and remain lifted. Our business decisions will continue to be focused on the long-term success of our Company, including emphasis on satisfying customer needs, generating solid operating results, and promoting the greatest long-term value for our shareholders, customers and employees. We believe the fundamentals on how we run our business, a long-term view, safety and people first culture, customer-focused solutions, technologically driven product offerings, and a world-class supply chain capability, will continue to be beneficial for all of our stakeholders. We appreciate your support, and we look forward to a very successful 2021. Matthew, that concludes our planned comments. If there are questions, please contact us directly via email or phone, and we will expeditiously get back to you with the response.	compname reports q4 earnings per share $6.12. q4 earnings per share $6.12.
With us on the call from National Fuel Gas Company are Dave Bauer, President and Chief Executive Officer; Karen Camiolo, Treasurer and Principal Financial Officer; and John McGinnis, President of Seneca Resources. We may refer to these materials during today's call. While National Fuel's expectations, beliefs and projections are made in good faith, and are believed to have a reasonable basis, actual results may differ materially. National Fuel will be participating in the Scotia Howard Weil Energy Conference in March. If you plan on attending, please contact me or the conference planners to schedule a meeting with the management team. Overall, the first quarter was a good one for National Fuel. Earnings were right in line with our expectations. And from an operations perspective, we continue to execute on the plans we've laid out in prior quarters. At Seneca, production for the quarter was up nearly 20% over last year. Seneca continues to see excellent results from the Marcellus and Utica wells it brought on production in recent quarters. Our team has done a great job cracking the code on our Utica development program, both in the WDA and at Tract 007 in Tioga County. It's also worth highlighting our California oil production, which was up about 5% over last year on the strength of our recent Pioneer and 17N development programs at Midway Sunset. Lower Natural Gas prices are obviously a concern. Earlier this month, we dropped a rig and are currently operating two rigs in our Western Development Area. Given the challenging pricing environment, as we said in last night's release, we intend to make further reductions in Seneca's activity level in the coming quarters. John will have more to say on Seneca's program later on the call. Our lower E&P activity level will also lead to reduction in Seneca-related gathering capital at NFG Midstream. Having said that, as you can see in last night's release, we're raising the midpoint of our gathering capital spending guidance for the year by $10 million. This increase is driven by capital expenditures related to a new gathering agreement with a third-party producer in the vicinity of our Trout Run system in Lycoming County. This is a nice little project. It is expected to add roughly $5 million to $10 million per year in third-party revenues starting in fiscal 2021. It's a great example of how we can optimize our existing assets to generate new growth opportunities. The first quarter was fairly routine for our regulated businesses. Utility segment continues to perform well with earnings up $0.01 a share over last year. In the fall, we wrapped up another successful utility construction season, and as we have for the past several years, we continue to allocate capital for the modernization of our system. For the calendar year, our modernization program replaced over 150 miles of older distribution pipeline, including 113 miles in New York where we have a regulatory tracking mechanism that provides us with timely recovery of this rate base investment. The warmer weather we've experienced in the Northeast will likely lead to lower second quarter earnings in our Pennsylvania jurisdiction, where we don't have a weather normalization clause. On a consolidated basis, the impact shouldn't be overly significant. Our customers should see a real benefit from low natural gas prices. We expect winter heating bills will be more than 10% lower than last year. In the Pipeline and Storage segment, though earnings were down due to the lingering effects of the KeySpan contract expiration, looking to next year and beyond, the outlook for this business is excellent. The Empire North and FM100 projects will add combined $60 million in incremental annual revenue over the next few years. Both projects are proceeding according to plan. Empire North is under construction and on track to be in service late summer or early fall of this year. If FERC stays on its expected timeline, we expect a certificate for the FM100 project later in the fiscal year. continues to work through its rate case before FERC. We've held multiple settlement meetings with parties, and I am optimistic we'll reach a settlement. Our balance sheet is in great shape and our reduction in spending at Seneca will help ensure it stays that way. Just recently, S&P affirmed our investment grade credit rating and maintained a stable outlook on our credit. In the near term, we expect a modest outspend as we build the Empire North and FM100 projects, but beyond that we should be generating significant free cash flow. 2020 is looking to be a challenging year for natural gas producers, but National Fuel is well positioned. We're financially strong and our integrated yet diversified business model provides a large measure of stability to earnings and cash flows. Looking to the future, though we're slowing the pace of our E&P program to match the reality of natural gas prices, our regulated segments remain on track to see meaningful growth. Seneca had a solid first quarter. We produced 58.4 Bcfe, an increase of around 19% compared to last year's first quarter, and a slight decrease quarter-over-quarter. While we continued to see strong operational results with drilling and completion activity on our recent pads coming in ahead of schedule, given the current natural gas price environment, we are reducing our fiscal '20 activity level and associated capital. As Dave mentioned, this last week, we dropped one of our rigs after drilling a four-well Utica pad in Tioga County. We now have two rigs operating in the basin, both of which are in the WDA. Additionally, during last quarter's earnings call, we discussed the possibility of a further reduction in the activity, should prices not rebound during the winter. And obviously, prices have not rebounded, and in fact have continued to decline. As a result, we are now planning to drop a second rig this summer and defer some of our EDA completion activity into the next fiscal year. We are lowering our fiscal '20 capex guidance around $42 million or 10% at the midpoint to now range between $375 million to $410 million. This reflects approximately $100 million reduction or 20% in Seneca's expected fiscal '20 capital expenditures versus 2019 levels. Because of this further activity reduction will occur relatively late in our fiscal year, we do not expect to see a significant production impact in fiscal '20. As to production timing, last quarter, I had mentioned that we expected to see increases during our second and fourth quarters. We still expect to see increased production in our second quarter as we turned in line 12 wells in late January and expect to turn in line another six wells later next month. However, by deferring some EDA completion activities into next year, we now expect to see flat to slightly declining production during our third and fourth quarters. Overall, our production guidance for fiscal 2020 remains unchanged with our strong first quarter results, largely offsetting our lower production expectations in Q4. Moving to our marketing and hedging portfolio. We will remain well-positioned for the remainder of the year. We have approximately 102 Bcf or 60% of our remaining fiscal '20 East Division gas production locked in physically and financially at a realized price of $2.28 per Mcf. We have another 43 Bcf of firm sales providing basis protection to over 85% of our remaining forecasted gas production that's already sold. In California, we produced around 6,000 barrels of oil during the first quarter, an increase of around 5% over last year's first quarter. This increase was due primarily to our recent drill activity in both Pioneer and 17N, both located within our Midway Sunset field. These properties are now producing around 800 barrels a day. And as we look out for the remainder of fiscal '20, we expect Q2 oil production to be down modestly from our Q1 production level and relatively flat thereafter. And finally, over 70% of our oil production for the remainder of the year is hedged at an average price of around $62 per barrel. National Fuel's first quarter operating results were $1.01 per share, down $0.11 per share quarter-over-quarter. Lower natural gas price realizations were the largest driver of the decrease. In addition, the expiration of a significant contract on our Empire Pipeline late in last year's first quarter and an increase in our effective tax rate contributed to the drop in earnings. Our higher effective tax rate was driven by two factors. As mentioned on previous calls, the enhanced oil recovery tax credit that was in place last year is no longer available due to the current crude oil prices. And second, the difference between the book and tax accounting rules and expensing of stock-based compensation grants can lead to effective tax rate impacts on the periods in which they struggle. Last year, we had a large favorable impact resulting from this, which did not recur this year. Looking to the remainder of the year, our earnings guidance has been revised downward to a range of $2.95 per share to $3.15 per share, a decrease of $0.10 at the midpoint. This is primarily related to the reduction in our natural gas price outlook, which now reflects a $2.05 per MMBtu NYMEX price and $1.70 per MMBtu Appalachian spot price assumptions for the remainder of the year. This is partially offset by stronger first quarter pricing and production relative to our expectations. The remainder of our major guidance assumptions are unchanged. Given that our earnings guidance range is based upon the forward strip at a given date and the recent volatility in commodity prices, I'll provide some earnings sensitivities for your reference. The $0.10 change in NYMEX pricing would change earnings by $0.04 per share, a $0.10 change in spot pricing would impact earnings by $0.02 per share, and a $5 change in WTI oil pricing would also impact earnings by $0.02 per share. On the capital side, taking into account our reduced activity level, our new consolidated guidance is in the range of $695 million to $785 million, a decrease of approximately $33 million at the midpoint. With our revised earnings projections and lower capital spending planned for the year, we now expect our funds from operations and capital expenditures to be roughly in line with each other. Adding our dividend, we expect a financing need of approximately $150 million for the full year. We started the year with nearly $700 million of liquidity available under our revolving credit facility, and we plan to use that as the first source of financing. Given the favorable conditions in the capital markets, we will remain opportunistic as it relates to long-term financing needs and nearer-term maturities. As John and Dave said, operationally, things are moving along in line with expectations. While natural gas prices are challenged financially, we are in a good spot to weather this period of low commodity prices and remain flexible to take advantage of opportunities when they are available.	sees fy 2020 earnings per share $2.95 to $3.15. low natural gas prices weighed on national fuel’s first quarter earnings. national fuel gas- facing continued deterioration of natural gas prices, co slowing down development pace in appalachia. co's other earnings guidance assumptions, including production, remain largely unchanged from the previous guidance.
With us on the call, from National Fuel Gas Company are Dave Bauer, President and Chief Executive Officer; Karen Camiolo, Treasurer and Principal Financial Officer; and John McGinnis, President of Seneca Resources. We vmay refer to these materials during today's call. While National Fuel's expectations, beliefs, and projections are made in good faith and are believed to have a reasonable basis, actual results may differ materially. National Fuel will be participating in the Barclays Energy Conference in September. Please contact me or the conference planners to schedule a meeting with the management team. As with most oil and gas companies, lower commodity prices weighed on the third [Technical Issues] gathering business. However, the remainder of the system had a very solid third quarter with pipeline earnings up nearly 45% on the strength of Supply Corporation's recent rate settlement and stable utility earnings, in spite of the COVID pandemic. Also the quarter was another great example of the benefits of our integrated, diversified model where the earnings and cash flows of our regulated businesses provided a strong measure of stability against the more variable earnings of our E&P business. Operationally, this was a really significant quarter for National Fuel, one in which we reached several important milestones that make us well positioned to deliver meaningful growth in the years to come. First and foremost, last week we closed on the acquisition of Shell's upstream and midstream properties in Appalachia. This is a terrific opportunity to check all the boxes we are looking for in an acquisition. From start to finish, it was the results of the exceptional work of dozens of employees across our upstream and midstream operations. Hats off to the team on a job well done. The acquisition meaningfully increases our presence in Appalachia. In fact, earlier this week Seneca's gross natural gas production crossed the 1 Bcf per day threshold. This is a great milestone. And to put in perspective, in fiscal 2018, our average daily production was only about half of that. With the added scale, we expect to realize immediate cost synergies and you can see that in our guidance on cash operating costs, which we expect will be down about $0.05 per Mcfe in '21. The financing for the transaction is complete. Kudos to our finance team and the banks that supported them. We're getting the deals done in the face of a challenging backdrop in the capital markets. As I described a few months ago, the plan was to finance the deal with roughly 50-50 debt and equity, and I'm happy to say that we achieved that objective. In May, we issued $500 million of bonds, the proceeds from which were used to fund the debt component of the acquisition and to term out our revolver. We also raised just under $175 million through a common equity offering that was done at a better price than we would have received under the equity backstop arrangement available to us under the Shell purchase-and-sale agreement. And lastly, earlier this week, we signed an agreement to divest substantially all of our Appalachian timber properties for approximately $116 million, which will fund the remaining equity needed for the transaction. The timber properties are our non-core asset that we've held for some time. The earnings and cash flows associated with them are modest, in fact, pretty close to break-even. Reinvesting the proceeds from the sale allows us to avoid issuing another roughly 2 million common shares at the midpoint of our fiscal 2021 guidance. That saves approximately $0.08 per share of dilution. In addition, the timber properties have a very low tax basis. By selling them now, we're able to structure the timber sale and Shell acquisition, is a like kind of exchange and by doing so, defer a large tax gain. The remainder of Seneca's operations continue to run smoothly and John will have a full update later on the call. But I'd like to emphasize the improvement we expect in this business in fiscal '21. As you can see in last night's release, the midpoint of our production guidance is 320 Bcfe, a 32% increase over our expected production for fiscal 2020. In addition with the NYMEX strip in the $2.65 to $2.75 area, there is cause for optimism on natural gas prices and we've been aggressive with our hedging program. At this point about two-thirds of our fiscal '21 gas production is hedged. Both of these factors should cause cash from operations to grow meaningfully. On top of that, as a result of moving to a single rig program, capital spending at Seneca and NFG midstream is expected to decrease by $105 million or about 25%. So, putting it all together, assuming the current strip, next year we expect more than $150 million in free cash flow from our E&P and gathering businesses. The Pipeline and Storage segment is also positioned to deliver meaningful growth in 2021 and beyond. And several noteworthy events occurred during the quarter to help make that a reality. On the expansion front, we placed a portion of our Empire North project into service ahead of schedule, which allows us to capture some modest short-term growth -- short-term revenue opportunities this summer. Once it's fully in service, which we expect will occur by the end of September, this project will add $25 million in annual revenues. In July, we received our FERC certificate for the FM100 project and Transco also received their FERC approval for the companion Leidy South project. Both projects are on track for a late calendar 2021 in-service date. And as a reminder the expansion portion of this project is expected to add $35 million in annual revenue. Lastly, in early June, FERC approved the settlement of Supply Corporation's rate case. As I discussed on last quarter's call, new rates went into effect this past February and are expected to add $35 million in annual revenues. Settlement also addressed the rate-making treatment of the modernization component of the FM100 project. On the later of the in-service date of that project or April 2022, a step up in rates will go into effect, providing an incremental $15 million in annual revenues. In total, the expansion projects and rate case settlement are expected to provide in excess of $100 million of incremental annual revenues for our pipeline business by mid-2022. To put that in perspective, our fiscal 2019 pipeline revenues were $288 million. So we're looking at some really meaningful growth in the next two years. In addition to improving earnings and cash flows, the growth in our pipeline business will help us maintain relative balance between the regulated and non-regulated portions of our company. On the utility front, despite the pandemic, our operations and financial performance remain right in line with our expectations. With the reopening of most of the economies in our New York and Pennsylvania service territories, our capital program has returned to pre-pandemic levels. We continue to focus on modernization projects that enhance the safety and reliability of our system, while at the same time reducing emissions. In New York, our system modernization tracker allows us to do this in a manner that minimizes the regulatory lag to recover these large investments. And given that we can add rate base to this tracker, through March of 2021, we expect to maintain consistent returns at our utility for at least the next few years. Lastly, a few words on the COVID-19 pandemic. Overall the business continues to run smoothly across the system. Employees who can work from home are doing so and those who cannot, mostly our field personnel, have been provided appropriate PPE and are practicing social distancing. In closing, despite the backdrop of a pandemic it's an exciting time for National Fuel, we just closed the most significant acquisition in the company's history and next year we'll construction on what will be our largest pipeline expansion project to-date. Our balance sheet is strong and will likely get stronger as we generate free cash flow and we've extended our impressive dividend track record having increased it in June for the 50th consecutive year. All of this makes National Fuel well positioned to deliver significant value to our shareholders in the coming years. In echoing Dave's remarks we are excited to move forward after successfully closing on the acquisition of Shell's Appalachian upstream and midstream assets last week. At the time of closing these shallow declining properties were producing around 220 million cubic feet per day net. This additional scale is expected to be immediately accretive to Seneca's cost structure and to put this into context our G&A expense as a result of the Shell acquisition is expected to increase, less than 5% in fiscal '21, while our net production is expected to increase by over 30%. Although, our purchase price for these assets ascribe no value for the reserves beyond proved producing, we are working towards maximizing the upside as we integrate these assets into our overall development plan. We have now added significant Utica and Marcellus inventory in Tioga County, contiguous to our existing operations, an area we have been active for over a decade and we know very well. In addition, we've also acquired valuable low cost pipeline capacity, including 200 million a day of firm transport on National Fuel's Empire system and 100 million a day on Dominion. In fact, as a result of this Dominion capacity, which provides access to Leidy Hub, Seneca is in the unique position of being able to flow production from each of its three major producing areas into its FM100 Leidy South capacity. Moving forward, we'll work closely with our midstream group to determine how to best integrate our development and pipeline activity, minimize capital deployment, drive operating efficiencies and maximize the value of these assets. Turning to our third quarter, Seneca had strong operational results, producing 56 Bcfe, an increase of around 2% compared to last year's third quarter despite 7.3 Bcf price related curtailments. In response to sustained, low natural gas prices, we reduced our activity to a single rig in June and have since curtailed an additional 2 Bcf of production in the month of July. We have now curtailed around 13 Bcf of our gas production so far this year. Moving forward, we expect prices to remain low over the next couple of months and therefore we are now forecasting to curtail our remaining spot volumes for the rest of this fiscal year. While pricing and related curtailments put a damp around Seneca's results for the quarter, operationally, we're very pleased with our business. We continue to drive down our well costs and have seen an 18% to 20% improvement this year compared to last. This cost reduction has been driven primarily through fewer drill days per well, improved efficiencies and lower service costs across the sectors. We will provide an updated well cost economics table in the investor deck next quarter. In California, we produced around 584,000 barrels of oil during the third quarter, an increase of 2% over last year's third quarter. Fortunately, with approximately 80% of our oil production hedged for remainder of the year at an average price of about $60 per barrel. We are well-positioned to weather the downturn in oil prices. Taking into account our price-related natural gas production curtailments, we are decreasing our fiscal '20 production guidance slightly to range between 240 to 245 Bcfe. We are reiterating our capex range of $375 million to $395 million around 20% lower than fiscal '19 at the midpoint. Moving to fiscal '21 guidance. We are currently planning to remain at a one rig pace in Pennsylvania, due to our lower activity level with only a single rig and completion crew operating in Pennsylvania, our $290 million to $330 million range of capital expenditures for the year represents a 20% decrease at the midpoint of our fiscal '20 guidance and a 35% decrease from fiscal '19. Fiscal '21 net production is expected to be in the range of 305 to 335 Bcfe, a 32% increase versus fiscal '20. This increase is driven almost entirely by the production acquired from Shell. With only a single rig operating in Pennsylvania, we plan to bring to production 32 wells next year, 16 Marcellus and 16 Utica. As to production cadence, 27 of the 32 wells are to be brought on line during the first seven months of our fiscal year. In California, we have deferred our development program until oil prices improve and therefore we are only currently forecasting to spend around $10 million in capex next year. Unlike other oil producing basins in the U.S., however, our California assets enjoy a low rate of decline. However, if prices improve we will move to quickly return to our development program and with approximately 49% of our oil production hedged in fiscal '21 at an average price of $58 per barrel, we will continue to generate free cash flow even at today's low prices. In fiscal '21 through physical firm sales contracts, as well as our firm transport capacity, we have secured marketing outlets for around 91% of our expected Appalachian production and two-thirds protected with price certainty where the downside production -- protection of callers with a floor at $2.37. That leaves only 9% available for sale onto the spot market. But as always when we see opportunities we will layer in additional firm sales to minimize price related curtailments. And finally, we continue to be very pleased with how our Seneca team has conducted business through the impact of the pandemic. Our offices remain close except for those who need access and our operations team has done a great job continuing to operate successfully and safely in the field during this period. GAAP earnings per share were $0.47 for the third quarter, adjusting for items impacting comparability, including the ceiling test impairment charge recorded in our E&P segment, adjusted operating results were $0.57 per share, a decrease of $0.14 from the prior year. Strong results from our Pipeline and Storage segment due to the impact of the supply rate case and lower operating expenses were more than offset by lower natural gas and oil price realizations. Last night's release explains the major earnings drivers. So I won't repeat them here, instead, I'll discuss our expectations for the remainder of the fiscal year and our initial guidance for next year. As it relates to fiscal '20 our updated earnings guidance is $2.75 to $2.85 per share, a decrease of $0.10 at the midpoint. This change is due to a few main drivers. As John mentioned, the largest decrease can be attributed to price related curtailments during the third quarter and approximately 6 Bcf of additional curtailments expected during the fourth quarter. These curtailments will have a corresponding reduction to throughout in the Gathering segment. From a pricing perspective, we've revised our NYMEX Gas and WTI oil assumptions, but given our strong hedge position, these changes generally offset each other from an earnings perspective. Additionally, we've reflected the execution of our permanent financing for the Shell acquisition. Given the market backdrop, we completed the necessary financing well ahead of closing and upsized our debt issuance to term out our revolver and enhance liquidity in advance of our December 2021 maturity. As it relates to the rest of our assumptions there were some movement of expenses between the third quarter and fourth quarter in our regulated subsidiaries, but substantially all of our other guidance items for fiscal '20 remain intact. Looking forward to fiscal '21 we are expecting material increase in earnings per share when compared to fiscal '20. We are initiating preliminary guidance in the range of $3.40 to $3.70 per share, an increase of nearly 27% at the midpoint. This range excludes the impact of any future ceiling test impairments which we expect to incur in the fourth quarter of this fiscal year as well as the first quarter of fiscal '21 based on the forward curve as of today. So I won't repeat that information. As a reminder even with the level of hedges we have given our base of production, changes in pricing can impact earnings for the year. For reference, a $0.10 change in natural gas prices is expected to impact earnings by $0.11 per share, a $5 change in oil by $0.04 per share. The biggest driver of the year-over-year earnings increase related to the impact of the Shell acquisition in both the E&P and Gathering segments. Production is expected to be up nearly 80 Bcfe at the midpoint, in excess of 30% from fiscal '20, the bulk of which comes from the acquired assets. All of this incremental production will flow through our gathering systems and is expected to lead to $185 million to $200 million in revenue for our Gathering segment. This is an increase of approximately $50 million from fiscal '20 or approximately 35% of the midpoint. A portion of this revenue growth will be offset with slightly higher expenses related to the acquisition, where we now expect O&M expense in the segment to be approximately $0.08 to $0.09 per Mcfe of gross throughput. This is driven by higher compression lease expense. With respect to our legacy gathering facilities, we typically don't lease compression equipment. So therefore, this has the effect of a higher per unit O&M expense as we recognized the lease costs on the income statement. In addition, we are forecasting higher depreciation expense related to the allocation of the acquisition purchase price and the higher plant balances on existing operations due to capital spending during the course of fiscal '20. We generally assume a 25 year depreciable life on these assets, which will drive an $8 million to $9 million increase in depreciation in the Gathering segment. In our regulated businesses, we are expecting relatively flat earnings in the utility business and a nice increase in the Pipeline and Storage segment due to the Empire North expansion project and the full year impact of the Supply Corporation rate case. Focusing first on the utility, there are three major moving pieces. First, we are forecasting a return to normal weather. For the first nine months of fiscal '20 weather was 8% to 11% warmer than normal across our service territory. This reduced margin by about $5 million, the majority of which was in our Pennsylvania service territory, where we do not have a weather normalization costs. In addition to normal weather, we are forecasting a continued increase in margin related to our system modernization tracker in New York, which we expect will add approximately $3 million to margin in fiscal '21. Going to the other direction is a modest 1% to 2% increase in O&M expense in line with inflation. Touching briefly on the Pipeline and Storage segment, we expect revenues to increase approximately 10%, driven by the full year impact of the supply rate case, of which we only saw eight months of impact in fiscal '20 on the Empire North project, both of which Dave touched on earlier. Collectively, these items will add approximately $35 million in revenue next year. Partially offsetting these revenue additions is forecasted recontracting that happens in the normal course of business, as well as the reduction in short-term contracts, which we don't assume to recur. On the expense side, we expect O&M to increase by approximately 3% to 4%, partially driven by general inflationary assumptions and the remainder due to expenses from the operation of two new compressor stations associated with the Empire North expansion project. Additionally, we expect to see an increase in depreciation expense due to higher depreciation rates that were part of the Supply Corporation rate settlement, as well as normal increases due to higher plant balances and placing Empire North in service. From a financing perspective, given our relatively flat capital spending forecast and 25% plus forecasted earnings growth, we anticipate generating in-excess of $100 million in consolidated free cash flow in fiscal '21, exclusive of our dividends. Combining this with our anticipated cash-on-hand at the end of the year, resulting from the timber sale, we don't anticipate the need for incremental borrowing next year, even as we embark on one of the most capital-intensive pipeline projects in our history. Looking beyond fiscal '21, we expect our cash from operations to cover capital spending and our dividend, which will lead to the continued strengthening of our balance sheet. In summary, we're in a great spot financially, we've successfully financed the acquisition of Shell Appalachian asset, anticipate closing on the sale of our timber properties in the next few months and capitalized on the opportunity to enhance our liquidity with an upsized debt issuance. We don't have a debt maturity until December of 2021, so we have a good amount of time to monitor the capital markets for the right opportunity to complete debt refinancing.	q3 gaap earnings per share $0.47. sees fy earnings per share $3.40 to $3.70.
With us on the call from National Fuel Gas Company are Dave Bauer, President and Chief Executive Officer; Karen Camiolo, Treasurer and Principal Financial Officer; and Justin Loweth, President of Seneca Resources. We may refer to these materials during today's call. While National Fuel's expectations, beliefs and projections are made in good faith and are believed to have a reasonable basis, actual results may differ materially. The third quarter was another strong one for National Fuel with our Upstream and Midstream businesses continuing the positive momentum they established during the first half of the year. Seneca had a great quarter with production up nearly 50% on the strength of last year's acquisition and its 2021 drilling program. That growth in production, along with higher commodity prices, drove nearly 70% increase in EBITDA from our combining Upstream and Gathering operations. The acquisition continues to impress with both production and operating costs better than we expected. With the near-term run up in winter natural gas prices, along with increased confidence around online date for Leidy South, we've decided to move up some completion connectivity at Seneca. This will allow us to more fully utilize our Leidy South capacity from the start and capture some of the valuable winter premiums in the Transco Zone 6 market. As a result, we expect them [Phonetic] to shift forward a few months. And while we aren't raising the upper end of guidance, now it's likely Seneca's capital spending for 2021 will be closer to high end of our previous range. Justin will have a full update on Seneca's operations later on the call. At the pipeline storage business, construction of the FM100 project has been going well despite a really rainy month of July. At this point, everything remains on schedule for a late calendar 2021 in-service date. Pipeline construction is well underway. Almost 90% of the pipe has been strung on the right away and nearly 40% is in the ground. The two compressor stations are nearing mechanical completion and once automation and electrical work is complete, commissioning will begin. I took a tour of the construction site a couple weeks ago and was really impressed with what the team and our contractors have accomplished in such a short period of time. Truly a great job by all. As I've said in the past, this is a great project for National Fuel. It increases revenues on our regulated pipelines by $50 million a year and when combined with Seneca capacity [Phonetic] on Transco's companion Leidy South project will allow for higher E&P production volumes and gathering throughput; the perfect example of the power of our integrated approach to the business and positions National Fuel to deliver solid near-term growth and sustainable free cash flow. Turning to the utility, our summer construction program is well underway. Consistent with prior years, our goal is to replace 150 miles of older pipeline, and the team is right on track to hit that mark. Replacing older pipe goes a long way to reducing methane emissions on our system. To-date, our program has been the driver of a 64% reduction in emissions from our delivery system compared to 1990 levels. Earlier this year, we filed for an extension of our system modernization tracking mechanism in our New York division, which makes up a little more than two-thirds of our replacement program. As you recall, that mechanism allows us to recover in near real time the costs associated with our modernization spending. It's a great program and that we're able to lower emissions on our system and make it more reliable all without the need to file annual rate cases. We expect the New York Commission will act on this petition during our fiscal fourth quarter. Looking to next year on the strength of the FM100 project, our preliminary guidance for fiscal 2022 is $4.40 per share to $4.80 per share and to mid-point a 12% increase from our expected 2021 earnings. In addition NYMEX pricing of $3.50, we expect about $250 million in free cash flow, which is well in excess of our expected dividend payments and which positions us well to continue to improve our investment grade balance sheet. Those of you who have followed us for a while, know that we have a disciplined hedging program designed to mitigate price volatility and protect the returns on our upstream and gathering investments. The goal of that program is to be between 50% and 80% [Indecipherable] at the beginning of a fiscal year, and we typically layer in those hedges over the preceding three to five years. Our fiscal 2022 hedging program is right on track with those targets through a combination of fiscal firm sales and financial instruments. We have hedges on roughly three quarters of our expected fiscal 2022 Appalachian production. So we're well ahead, we still have considerable upside from natural gas prices. Every $0.25 change in realized prices impacts cash flows by about $20 million and earnings by about $0.15 per share. Switching gears, as we all know, natural gas has been a significant, if not the biggest driver of greenhouse gas emissions reductions since 2005. In addition, natural gas and its related delivery systems have consistently proved their reliability, resilience, and affordability. And without a doubt, consumers recognize and appreciate those benefits. Notwithstanding the anti-fossil fuel commentary from Washington and Albany, we continued to add customers to our utility system year in and year out. But in spite of these obvious benefits, our policymakers, particularly on the Coast are pursuing avenues to restrict consumers access to natural gas, including in some cases outright bans. Taking an electrify everything approach is neither rationale nor practical. The natural gas delivery [Phonetic] system is safe and largely underground, which ensures greater reliability and resilience compared with above-ground electric infrastructure. And this past winter was a textbook example of the importance of resilience. In addition, unlike the tens of thousands of windmills and millions of solar panels that would be needed to electrify the country's heating load, the natural gas delivery system already exists and is largely paid for. To abandon it makes little sense, particularly when you consider that aggressive emissions reduction targets can be met through a mix of energy efficiency measures, hybrid heating technologies and low carbon fuels like renewable natural gas and hydrogen. I'm all in favor of reducing emissions. So then all of the above approach is necessary, if we're to have reliable, affordable energy in this country. Before I give you -- before I close, I'd like to give you a heads up on the second annual edition of our Corporate Responsibility Report, which will be published early next month. Last year's report was a great first start to our efforts to enhance our ESG related disclosures. We look to build on it in several important ways this year. In addition to reporting under the sustainability accounting standards board framework, we'll also include due disclosures under the Task Force on Climate-related Financial Disclosures or TCFD framework. We're also enhancing our emissions disclosures to include full Scope 1 and 2 CO2 and methane emissions. And importantly, we'll be using this data to establish what we think are very credible and realistic methane and greenhouse gas emissions reduction targets. Now, lastly, we're expanding our diversity disclosures using the EO1 framework. Overall, it's a great report that's responsive to the disclosure requests our shareholders had asked for. In closing, this is an exciting time for National Fuel. Construction of the largest pipeline in our Company's history is on time and on budget. Seneca's production is an all-time high and will continue to increase as new capacity on Leidy South and FM100 becomes available. And at the same time, the stability of our utility business adds to our financial strength. All the while, we remain committed to reducing the emissions profile of our operations. When you bring it all together, National Fuel is in a great position to deliver significant earnings and free cash flow to our shareholders. Seneca had a strong third quarter with operational results slightly ahead of our expectations. We produced 83.1 Bcfe, an almost 50% increase from last year, driven by increased Tioga County volumes from our acquisition, which closed in late July 2020, combined with solid results from our Appalachian development program. We continued to see the benefits of our increased scale with per unit cash operating expenses dropping $0.06 per Mcfe versus the prior year to a $1.13 per Mcfe driven by a significant year-over-year decrease in our per unit G&A expense. During the quarter, we drilled 12 new wells, five in the WDA and another seven in the EDA. Notably, this included the commencement of drilling on our first Tioga County pad from our acquisition. Similar to our activity in the WDA over the past few years, the Tioga pad will be a return trip. This allows us to utilize existing roads, pads and gathering infrastructure, which significantly enhances our consolidated E&P and gathering returns. We have approximately ten additional pads within the acquired acreage footprint, where we believe we can take advantage of similar capital efficiencies. Further, given the contiguous nature of this acreage and continued operational success, we expect most of our Tioga Utica Wells will exceed 10,000 feet treated lateral link generating outstanding returns. For the remainder of the year, we were on track with our plans to ramp up production to fill Leidy South and capture premium winter pricing. We have begun the process of accelerating our completion phase, and now have two active completion crews, which is a level of activity we expect to continue throughout the first half of fiscal 2022. This will drive our production cadence in the coming quarters with most of our new production coming online toward the end of our current fiscal year and in the first half of next year. As a result, we expect modestly lower sequential production in Q4 of fiscal 2021. Later this quarter, we plan to turn in line one operated pad within our Western Development Area. Additionally, in the next few weeks, we expect to see production brought online for six well non-operated pad in Lycoming County. Seneca holds a 25% working interest in this pad. However, 100% of the production will flow through National Fuel's wholly owned gathering system, driving throughput growth and revenues for our sister company. Moving to fiscal 2022, our operations plan is right on track, as we expect to turn in line about 40 wells during the first half of the fiscal year and another ten or so wells over the balance of the year. As a result, we expect sequential quarter-over-quarter production growth in the first three quarters of the year with production leveling out in our fourth quarter. Our increased completion base, along with our plans to operate two drilling rigs throughout fiscal 2022 is projected to drive an increase in our capital expenditures by $45 million year-over-year, which is consistent with our prior expectations. Looking beyond next year, we expect capital to trend downward as we decrease our activity levels and move to a maintenance to low growth mode. On the marketing front, Seneca's Appalachian production is well protected in fiscal 2022. With firm sales contracts in place for approximately 93% of our expected fiscal 2022 production volumes, minimizing our exposure to invasive spot pricing. We also have hedges in place on approximately three quarters of our expected Appalachian production. Overall, the setup remains very constructive for natural gas prices. With Appalachian producers, currently exercising capital discipline, LNG and Mexico exports near all-time highs, and storage levels remaining below both last year and five-year inventories. However, with prices north of $3.50 per MMBtu for our fiscal 2022 and $3 for fiscal 2023, the caveat will be whether this capital constraint will continue over the coming months and whether producers will stick to their current focus on free cash flow generation and maintenance production levels. While I'm cautiously optimistic the new found discipline will hold, at Seneca, we expect to continue adhere to our long-standing methodical approach to risk management, by layering in additional hedges over the coming quarters. At current forward prices, our program will continue to generate attractive returns and significant free cash flow. Looking out beyond fiscal 2022, our activity level will be geared toward generating sustainable free cash flow. Absent the ability to enter into significant additional long-term firm sales or acquire firm capacity that would result in strong realized prices. Seneca expects to shift into a maintenance to low growth production mode focused on fully utilizing our existing and diverse marketing portfolio. Moving to California, we expect to invest $10 million to $15 million a year, generating substantial free cash flow or moderating production declines, and we'll look for ways to increase our activity to the extent oil prices remain at current levels. That said, our opportunities to increase our activity levels remain limited by the challenging regulatory environment and tempered by the lengthy timeline to obtain new permits. On the renewable side, we're making excellent progress on our new solar plant at our South Midway Sunset field in California, which is expected to be completed later this year. We are also moving forward on an additional solar plant at our South Lost Hills production field, which we expect to complete in fiscal 2022. With the ability to generate California low carbon fuel standard credits and reduced grid power consumption, these projects are not only highly economic, but they also reduce our emissions. Upon completion of these projects, approximately 20% of our power needs in California will be met with solar. We also continue to make considerable strides in our sustainability initiatives in Appalachia. Last month, we commenced a comprehensive real time in-field study, evaluating the emissions generated by various types of completion equipment. And just last week, we announced that we are in the process of completing a six-well EDA pad using e-frac technology. The results of these field trials will provide Seneca with high quality comparative data on the emissions profile of these completion technologies, supporting our efforts to select equipment that aligns with our long-term sustainability goals. Additionally, we are also actively evaluating the various responsibly sourced gas initiatives and expect to move toward one or more of these frameworks over the coming months. As a best-in-class operator and the lowest carbon intensity shale basin in United States, we are well positioned to be an upstream leader in ESG. National Fuel's third quarter GAAP earnings were $0.94 per share and after adjusting for an unrealized gain on our non-qualified benefit plan investments, operating results were $0.93 per share. Last night's release explained the major drivers for the quarter. So I'll focus on our guidance updates for the remainder of the year and our initial projections for next year. Starting with fiscal 2021, we're increasing and tightening our earnings guidance to a range of $4.05 per share to $4.15 per share. In addition to the strong results from the third quarter, we've incorporated the significant strengthening of natural gas prices for the remainder of the year. Moving into fiscal 2022, we are projecting a 12% increase in earnings at the mid-point with our preliminary guidance in the range of $4.40 per share to $4.80 per share. At a high level, the increase in earnings relative to fiscal 2021 can be boiled down to three main drivers. The first two are related to integrated upstream and midstream development tied to the FM100 expansion and modernization project. Starting first with the Pipeline and Storage segment, the direct benefit of the project will be approximately $50 million per year of incremental revenues. Given the late calendar [Technical Issues] we expect approximately $30 million to $35 million of revenue from this project during fiscal 2022. A large portion of this revenue will flow through to the bottom line, but will be partially offset by the associated operating costs and depreciation expense. In addition, in fiscal 2022, we expect a decrease in AFUDC that was accrued during the FM100 construction period. Next, this project along with its companion Leidy South expansion will provide Seneca with a key outlet for its growing natural gas production. Seneca's expected production range for next year is 335 to 365 Bcfe. This nearly 8% increase relative to fiscal 2021 will also benefit our gathering business, driving higher throughput and related revenue. While there is a modest amount of associated expected gathering segment expense, the vast majority of this incremental revenue will flow through to the bottom line. The third major driver is higher commodity price expectations. For fiscal 2022, we're assuming $3.50 per MMBtu with spot prices of $2.85 in the winter months, and $2.25 in summer period. On the oil side, we're assuming $65 per barrel. As Dave mentioned, we're well hedged going into next year, but for reference, even with the level of hedges we have given our base of production, changes in pricing could impact earnings for the year. For reference, a $0.25 change in natural gas prices is expected to impact earnings by $0.15 per share, a $5 change in oil by $0.03 per share. While those are the major drivers year-over-year, I'll touch on a few other smaller assumptions around our guidance range. In our utility for the first three quarters of this year, we averaged about 13% warmer than normal -- warmer than normal weather. For fiscal 2022, we're forecasting a return to normal weather, and as a result, we expect margins to be higher by approximately $10 million year-over-year, particularly in our Pennsylvania jurisdiction where we don't have a weather normalization clause. This will be largely offset by modestly higher expected O&M expense, which we anticipate to increase 3% to 4% compared to fiscal 2021 driven by higher personnel costs, principally related to negotiated wage increases with our collective bargaining units along with normal inflationary increases to labor and other items that we see each year. In the Pipeline and Storage business, we expect O&M to increase by 4% to 5% versus fiscal 2021. This was principally driven by a one-time favorable benefit to O&M expense of approximately $4 million in fiscal 2021 that will not recur in fiscal 2022. Outside of this item and operating expenses related to FM100 underlying cost in this business will be relatively flat year-over-year. Lastly, from a guidance standpoint, we're expecting a modestly lower effective tax rate next year at 25% to 26% to stem from our ability to take advantage of tax credits related to our enhanced oil recovery activities at our California facilities for fiscal 2022. These credits are available based upon historical oil prices and given the low pricing environment in calendar 2020 we expect to be able to take advantage of this credit next year. However, where oil prices are today we'd expect this to phase out again for fiscal 2023. Turning to our capital plans for next year, we're projecting a roughly 10% decrease relative to fiscal 2021. This is driven by the completion of the $280 million FM100 project early in the year. We expect that reduction would be somewhat offset by modestly higher upstream and associated gathering spending that we'd been planning for over the past year. As a reminder, Seneca added second drilling rig in January, and we expect to see an increase in our completion phase this fall in advance of new transportation capacity. With respect to our cash position as we discussed previously, we expect to live within cash flow this year when you consider the proceeds of our timber sale and our dividend payments. This hasn't changed as the slightly higher expected spending at the mid-point of our updated guidance is largely offset by higher cash flows from the expected increase in earnings for the year. We started the year with a modest amount of short-term borrowings and well, we've had roughly $120 million of cash on hand at the end of June. We expect to be back in a borrowing position as we continue to spend on the FM100 project. As we look to fiscal 2022, assuming a $3.50 NYMEX natural gas price we expect funds from operations to exceed capital expenditures by roughly $250 million. This more than covers our dividend and is expected to leave us nearly a $100 million of excess cash flow positioning as well going into fiscal 2023. While our balance sheet is already in a good spot, we expect the combination of higher EBITDA and increased cash flows along with lower leverage to lead to continued improvement in our investment grade credit metrics. We would have stepped over the course of fiscal 2022 to trend toward 2.5 times debt to EBITDA and with sustainable free cash flow beyond next year to seek further improvement beyond that level. With this leverage trajectory, we will have significant flexibility to deploy capital, whether that's in making growth investments or returning cash to shareholders, we will look to deploy capital in the most valued creative manner for our shareholders.	national fuel gas q3 gaap earnings per share $0.94. q3 gaap earnings per share $0.94. qtrly adjusted operating results of $85.7 million, or $0.93 per share. initiating its fiscal 2022 earnings guidance with a range of $4.40 to $4.80 per share. increasing its fiscal 2021 earnings guidance to a range of $4.05 to $4.15 per share.
With us on the call from National Fuel Gas Company are Dave Bauer, President and Chief Executive Officer; Karen Camiolo, Treasurer and Principal Financial Officer; and John McGinnis, President of Seneca Resources. We may refer to these materials during today's call. While National Fuel's expectations, beliefs, and projections are made in good faith and are believed to have a reasonable basis, actual results may differ materially. National Fuel will be participating in the Bank of America Global Energy Conference next week. Please contact me or the conference planners to schedule a meeting with the management team. As we reported in last night's release, National Fuels fourth quarter operating results were $0.40 per share. Consistent with earlier quarters, lower commodity prices were the main driver, contributing to the $0.14 per share drop in operating results, contributing to non-cash ceiling test impairment charge. Despite the drop in earnings, the quarter went as planned, with operating results right in line with our expectations. Fiscal 2020 was a remarkable year for National Fuel. Against the backdrop of a pandemic, we completed a highly accretive Appalachian acquisition and brought online a significant pipeline expansion project, all while continuing to safely and reliably operate our businesses across the natural gas value chain. Looking ahead, the outlook for natural gas has improved significantly, and National Fuel is well positioned for meaningful earnings and cash flow growth. We continue to see success with our expansion projects at our FERC-regulated pipeline businesses. We placed our Empire North Project in service on September 15th. As a reminder, this project is fully contracted, with the bulk of the commitments extending for 15 years. The project is expected to add about $27 million in annual revenues. It looks like the final capital cost will come in around $129 million, which is more than 10% below our initial cost estimate. Constructing in placing this project into service safely on schedule and under budget in the midst of a pandemic was quite an accomplishment. We continue to make progress on our FM100 Project, and Transco's companion Leidy South expansion is also on track. As a reminder, all of the facilities for both projects are in Pennsylvania. There are few permits still outstanding, and we expect to receive them this winter. We've started to order longer lead-time items, and once we receive the remaining permits, we'll file for our notice to proceed. All of this keeps us on pace to be in service near the end of calendar 2021. And again as a reminder, FM100 will add approximately $50 million in annual revenues between the $35 million expansion component and the additional $15 million modernization rate step-up agreed to in our February rate case settlement. Moving to our upstream and gathering operations. We closed the acquisition of Shell's Appalachian assets back in July, and now have a few months of operations under our belt. The transition could not have gone more smoothly, and we're very excited about the long-term benefits of this acquisition. It added significant scale, lowered our per unit cost structure and added hundreds of highly economic development locations in Tioga County, which are supported by Company-owned gathering systems and valuable firm transportation, including our National Fuels Empire Pipeline. In addition, production and reserves continue to be in line with our initial expectations, and as we spend more time operating the assets, we're finding additional efficiencies and revenue enhancement opportunities. Seneca is currently operating a single rig that moves between our Eastern and Western development areas. On last quarter's call, we discussed the possibility of adding a second rig prior to the start date of Leidy South. Given both the meaningful improvement in natural gas prices for fiscal 2022 and our expectations on the timing of the FM100 in Leidy South projects, we've decided to move up the rig out into January. This will allow us to line up first production with the in-service date of Seneca's new capacity. It will also allow us to capture the benefits to higher winter pricing. As you can see from last night's release, we've already hedged the fiscal 2022 production expected from the wells that will be drilled by the second rig. Because we won't see production from these wells until late in calendar 2021, there is no impact to our fiscal 2021 production or earnings guidance. Nevertheless, in spite of the incremental $60 million in capital associated with this rig, we still expect to generate in excess of $100 million of free cash flow from our upstream and gathering businesses. While this increase in activity level differs from the approach taken by many of our peers, the strength of our balance sheet, our methodical approach to hedging and our significant depth of high-quality inventory allows us to take this step to accelerate value, while still generating significant free cash flow. Over time, the second rig is expected to focus principally in our Eastern Development Area, where we have some of the most economic development opportunities in Appalachia. If you recall, our valuation of the Tioga County acquisition was based solely on PDPs and the related gathering assets. We did not attribute any value to the highly economic undeveloped locations. By adding a rig, we are now able to pull forward the development of these properties, further enhancing the value of the assets, including growing throughput on our gathering facilities. Our utility business continues to run smoothly in spite of the pandemic. Our team has done a terrific job adapting to the new reality. Because of the economic backdrop in our service territory, we've seen a drop in large volume commercial and industrial throughput. In spite of the pandemic, we had a very successful construction season, replacing over 150 miles of older pipe on the system. More than two-thirds of the spending associated with the program will be captured in our system modernization tracking mechanism. Taking all this together, our outlook for earnings and cash flow growth is strong. As a result of the improved outlook for natural gas prices, we are revising our earnings guidance up to $3.70 at the midpoint, an increase of more than 25% over our fiscal 2020 results. Despite the backwardation in the natural gas curve, as we look to fiscal 22, the increased activity at Seneca, combined with the expected in-service date of the FM100 project and a continued modest growth in our utility segment are all expected to drive further earnings growth. In September, we published our initial Corporate Responsibility Report. This was an important step in furthering our ESG disclosures and highlighting our ongoing initiatives, while continuing the course we've been on for a number of years. Over the past two decades, we've made significant investments to modernize our natural gas distribution, transportation and storage facilities. This has significantly reduced emissions across our system. For example, relative to 1990 levels, our utilities EPA Subpart W emissions are down by over 60%. We recognize the importance of reducing the global carbon footprint, and we continue to find ways to further reduce our own emissions profile as we grow our business. This is perhaps most evident on the Empire North project, where we installed our first electric motor-drive compressor station, which virtually eliminates combustion emissions from those operations. We also continue to look for ways to incorporate renewable natural gas into our transportation and distribution systems. This past year, we built our system's first interconnect with an anaerobic digester facility. All of these initiatives highlight our natural gas will continue to be part of the long-term energy solution. In closing, I'm excited about the future for National Fuel. 2020 was a year of challenges but also one of opportunity. We've taken several critical steps that have strengthened the Company and positioned it for near-term growth. When we look to fiscal 2022 and beyond, we expect to generate consistent, meaningful cash flow at current strip pricing. This should more than cover our growing dividend and further improve our already strong balance sheet, giving us the flexibility to pursue additional growth opportunities as they arise. Seneca had a strong fourth quarter. We produced 67.3 Bcfe, an increase of around 14% compared to last year's fourth quarter. Despite low-end basin and natural gas prices, which led us to voluntarily curtail about 6 Bcf, we achieved our largest quarterly production ever. For the year, we curtailed 17 Bcf and annual net production came in just over 241 Bcfe. This new fiscal year high for Seneca was supported by our development program and the impact of our recent acquisition. For the year, capital expenditures, excluding the acquisition, ended up at around $384 million, a reduction of approximately $108 million or 22% from the prior-year. Expenses on a per unit basis were down 8% from last year, and we're all within our fiscal 2020 guidance ranges. PUD reserves increased by 359 Bcfe or 12% to just under 3.5 Tcfe, with the increase largely driven by our acquisition during the fourth quarter. PUD developed reserves now make up approximately 84% of total reserves. As a result of our recent acquisition, we now have substantial inventory of both Utica and Marcellus drill locations in Tioga, and our inventory has expanded to approximately 300 locations in the EDA. Moving to the WDA, our near-term development is expected to shift toward the Rich Valley Beechwood Development Area, which is located immediately to the south of our CRV area, where we are focused over the past few years. In the Rich Valley Beechwood area, we have around 100 Utica drill locations, and we'll be able to utilize our existing gathering trump line [Phonetic]. Based on results to-date, we believe the economics will be superior to those related to our WDA Utica return trips. These pads are performing at or above our previously posted Utica type curve. In California, we produced around 555,000 barrels of oil during the fourth quarter, a decrease of around 9% from last year's fourth quarter. Year-over-year, oil production was largely flat, with a slight increase of 26,000 barrels. Earlier this year, in order to cut costs as a result of low oil prices, we significantly reduced well work and steam volumes across most of our heavy oil fields. This modestly impacted our production decline rates in these fields during our third and fourth quarters. However, we are recently increasing volumes to previous levels in some of these fields, and we will continue to permit new wells to allow for return to drilling in the event oil prices improve. As we are currently planning to differ much of our fiscal 2021 development program in California, we have budgeted only $10 million in capex, but again as prices rebound, our intention is to increase our activity in California to return to our development programs in Midway Sunset and Coalinga. So moving to our fiscal 2021 guidance. As Dave mentioned earlier, in connection with the continued development of the Leidy South and FM100 projects and a deep inventory of highly economic Utica development locations in Tioga as a result of our recent acquisition, we intend to add a second rig early in 2021. This additional rig will focus on our EDA assets in both Lycoming and Tioga, and longer term, we would expect relatively balanced activity between the EDA and the WDA. As part of our recent acquisition, we secured 100 million [Phonetic] a day on Dominion, with access to Transco Leidy line and the Leidy South project, providing us with optionality to utilize this capacity from Tioga, in addition to Lycoming and the WDA. First production from the additional rig is expected in early fiscal 2022 to align with the expected Leidy South in-service date, allowing Seneca to utilize this 330 million [Phonetic] a day of incremental pipeline capacity to reach premium markets during the winter heating season. As a result of adding the second rig for approximately nine months of the fiscal year, we are increasing our fiscal 2021 capex by around $60 million from our previous guidance to a total of $370 million at the midpoint. Even with a second rig, we are forecasting a decrease in capital expenditures of around $15 million year-over-year. Most of our production growth in fiscal 2021, forecasted to be up over 30% of the mid-point, should occurred during the first half of the year with a moderate decline during the back half, as we defer completion and flowback activity until the winter season when our new capacity is targeted to be in service. Moving forward, we have 234 Bcf around 77% of our fiscal 2021 East Division gas production locked in physically and financially. We have another 41 Bcf of firm sales providing basis protection. So 90% -- around 90% of our forecasted gas production is already sold. We currently estimate that we'll have around 30 Bcf of gas exposed to the spot market. So as always these volumes are potentially at risk for curtailment. And finally in California, around 50% of our oil production is hedged at an average price of just over $58 per barrel. As Dave stated at the beginning of the call, National Fuels operating results for the quarter came in at $0.40 per share, adjusting for items impacting comparability, which was in line with our expectations. Although our upstream business continued to face significant commodity price headwinds, each of our businesses performed well during the quarter, setting the Company up for a strong fiscal 2021. One item of note during the fourth quarter was our effective tax rate, which at approximately 15% was much lower than expectations and the prior year. Periodically, we're required to assess the appropriate tax rate to use for recording deferred tax assets and liabilities. Our recently closed acquisition included significant additional firm transportation capacity to markets outside of Pennsylvania, which resulted in the forecasted percentage of total revenues allocable to Pennsylvania to be lower in the future. As a result, we were required to remeasure the deferred taxes on our balance sheet to reflect the lower-expected state tax rate. Since we are in a net liability position, we recorded the differences of benefit to deferred income tax expense, reducing our effective tax rate for the quarter. Looking to fiscal 2021, we revised our earnings guidance higher to a range of $3.55 to $3.85 per share or $3.70 at the midpoint. There are a couple of major drivers behind that increase. First, we've increased our NYMEX assumption to $3 per MMBtu and correspondingly increased our in-basin pricing forecast to $2.50 in the winter months and $2.10 in the summer and shoulder months. Second, as a result of the ceiling test impairment charge recorded during the quarter, we now expect DD&A at Seneca to be in the range of $0.60 to $0.65 per Mcfe. This does not include any future impairments at Seneca. Going in the other direction, reflecting recent changes in forward crude oil prices, we've reduced our WTI assumption to $37.50 per barrel and made a slight adjustment to our California basis differential, moving it down from 95% to 94% as a result of recent trends we are experiencing in the region. Additionally, while the increase in natural gas prices is a significant benefit to earnings, there are a few natural offsets to this. First in Pennsylvania, we are subject to the state impact fee. This shows up in our other taxes line item on the income statement, and is calculated based upon the age of each well and the average NYMEX gas price for the year. There is a tipping point into a higher tier as we hit the $3 per MMBtu mark. So our updated forecast reflects this increased fee, which is approximately $3 million higher for the fiscal year. Additionally, as John mentioned, we're forecasting return to normal steam volumes in California. One of the key inputs in our steam generation is natural gas, and with the increase in pricing, we expect modestly higher LOE in the region, which is reflected in the slight widening of our guidance range now forecast between $0.83 and $0.86 per Mcfe. Overall, these adjustments on the cost side are more than offset by the benefit of expected higher realizations on our natural gas production. Further on production, as John mentioned, we continued to actively hedge as the forward curve moves up, and now have price protection on 77% of our natural gas volumes. We also have 50% of our crude oil production hedged at $58 per barrel. Moving to the regulated businesses. As a reminder, we are forecasting a return to normal weather at the utility, which will drive a $5 million increase in margin year-over-year. Combining this with $3 million of incremental revenue related to our New York system modernization tracker, we expect to see margin growth of approximately 2% for the year. Going in the opposite direction, we now project O&M to increase approximately 3% to 4%, which is modestly higher than our previous guidance. As a result, we now expect operating income to be relatively flat year-over-year. At our pipeline and storage business, our assumptions remain unchanged for the year. We still expect revenues to be in the range of $330 million to $340 million, and O&M expense to increase approximately 4% for the year. On a consolidated basis, we are in line with our expectations for fiscal 2020. Looking to this year, as Dave and John both mentioned, we expect Seneca's capital to increase by approximately $60 million, as a result of the increased Appalachian activity level. All of our other guidance ranges remain unchanged. So at the midpoint of our range, we expect spending to be $775 million. Tying everything together, we now forecast our funds from operations to exceed capital spending by $50 million to $75 million on a consolidated basis. This is a great outcome when considering our expectation that we will be constructing a large portion of the FM100 project in fiscal 2021, which is the most capital-intensive pipeline project in the Company's history. Combining this free cash flow with the proceeds from our timber sale, which we expect to close next month, we don't expect any external financing needs [Indecipherable] seasonal working capital changes.	now projecting that fiscal 2021 earnings will be within the range of $3.55 to $3.85 per share.
With us on the call from National Fuel Gas Company are Dave Bauer, President and Chief Executive Officer; Karen Camiolo, Treasurer and Principal Financial Officer; and Justin Loweth, President of Seneca Resources. We may refer to these materials during today's call. While National Fuel's expectations, beliefs and projections are made in good faith and are believed to have a reasonable basis. Actual results may differ materially. National Fuel had a great fourth quarter with operating results of $0.95 per share, up 138% over last year. The value of our integrated model and the underlying strength of our business were both clearly evident with each of our reporting segments contributing to the increase. The improvement in commodity prices, the ongoing benefits of our Appalachian acquisition and the continued investment in the expansion of our interstate pipeline system drove the increase and will remain as tailwinds into fiscal '22. The fourth quarter capped an outstanding year for the Company, one in which the underlying fundamentals of our business continued to strengthen. Against the backdrop of capital discipline by producers and strong domestic and global demand for natural gas, the long-term outlook for pricing has improved substantially to levels where we expect to generate increasing amounts of free cash flow from our upstream and gathering businesses. On the pipeline side of the business, our recent Empire North and FM100 projects are two of the largest interstate pipeline expansions in the Company's history. Combined, these projects represent incremental pipeline revenues of more than $75 million and provide much needed capacity out of the basin. And lastly at the utility, we continue to see customer and demand growth which supports the need for further investment in our distribution system. To that end, in August, the New York Commission approved an extension of our system modernization tracker, which will allow us to add the cost of new replacement projects to that mechanism through March 2023. This is a great program that enhances the safety and reliability of our system and reduces emissions. Construction of the FM100 expansion and modernization project is nearly complete. Earlier this week, we made a filing with FERC, which would allow us to place this project fully in service on December 1. This is an important project for us. In addition to growing our regulated pipeline earnings and cash flows, FM100 when combined with Transco's Leidy South expansion project create the path to attractive markets in the Mid-Atlantic for production from each of Seneca's major development areas. This path gives Seneca considerable flexibility in its development plans and supports growth in both Seneca's production and our gathering systems throughput. Without a doubt, this project is a perfect example of the inherent benefits of our integrated approach to development. The project team has done a terrific job leading an aggressive in-service timeline amid the global pandemic and supply chain disruptions. Total project costs are expected to come in nearly 15% under budget. Those of you who have followed us for a while know that safety is a top priority at National Fuel. We strive to have a strong safety culture where everyone in the organization, from me at the top, to our newest employee sees the value of a safe work environment. I'm happy to say that in fiscal '21, our systemwide dark injury rate was the lowest it's been since we've been keeping track. This is a great accomplishment and I'd like to congratulate the team on our continued improvement. As we look to the future, it's clear that Natural Gas will play an important role in meeting the world's energy needs. As is evident from recent events in Europe and Asia, global demand for Natural Gas is growing and we see continued growth here in Western New York and Northwest Pennsylvania where Natural Gas' resilience reliability and affordability compared with other alternatives make it the energy of choice for both space heating needs and commercial and industrial processes. But as the world decarbonizes we too much lower the carbon footprint of both our customers and our own operations. By doing so will require us to embrace low carbon fuels like renewable natural gas and hydrogen and new solutions like hybrid heating. At the same time through our Conservation Incentive Programs, we have to encourage our customers to use less. And lastly, we have to improve the emissions profile of our own operations. To that end, in December, coincident with the publication of our 2020 corporate responsibility report. We announced aggressive emissions reduction targets. In particular, we committed to reduce methane intensity at our major operating segments by 30% to 50% from 2020 levels by 2030. In addition, we pledged to reduce absolute greenhouse gas emissions by 25% again by 2030. Importantly, unlike the aspirational goals that have become commonplace, these targets while challenging are based on tangible projects that use today's technology. This is an important step for the Company, one that demonstrates our commitment to sustainably operating our assets for the long term. Before closing, I want to spend a minute on our expectations for free cash flow. As you can see from page 7 of our current IR deck, at $4.50 natural gas prices, we project free cash flow of approximately $320 million in fiscal '22. Looking beyond 2022, I expect that to trend even higher as capital moderates and FFO continues to grow across the system. Our first priority for that free cash flow will be our dividend, which we paid for the last 119 years and grown for the last 51. After paying the dividend, we'll still have considerable free cash. And I see three options for redeploying that capital. First is reducing leverage on the balance sheet with the goal of gaining an upgrade from the rating agencies. While our credit metrics will likely improve with the recent rise in pricing, we need to be able to sustain those metrics through the cycles. And to do so, we'll probably require a reduction in our absolute debt levels. We see the ability to start that deleveraging over the next few quarters. Ideally we'd also use that capital to fund growth projects. We continue to pursue expansions of our pipeline system and while projects of the size of FM100 aren't likely in the near future. I do see the opportunity for us to build more modestly sized projects. In addition should Seneca secure additional firm transportation or long-term firm sales. It certainly has the acreage to continue to grow production. M&A is also a possibility. If the right assets come on the market, we'd certainly take a look at them. And lastly should those growth opportunities not materialize, we'd look to return capital to shareholders. In closing, National Fuel had a great quarter and a great fiscal year. Our integrated model continues to deliver considerable benefits that are clearly evident in our financial and operating results. Looking forward, we expect to transition to a period of substantial free cash flow which will give us significant financial flexibility and our focus on ongoing emissions reductions will improve the sustainability of our operations and position us well for the future. The fourth quarter concluded a great year for Seneca Resources. Production came in at 79.6 Bcfe nearly a 20% increase from the prior year's fourth quarter. This increase was driven by strong operational performance from our two rig development program as well as an additional month of production from our Appalachian acquisition that closed in July 2020. For the full year, production increased 36%, which along with significant realized synergies from our acquisition helped to drive a 7% reduction in cash operating unit costs. We've also updated our reserve estimates with proved reserves increasing nearly 400 Bcfe to 3.9 Tcfe up 11% from last year. We remain conservative in our approach to reserve bookings with 84% of our reserves being proved developed. Before diving into some operational and marketing updates, I wanted to hit on the growing benefits of last year's Appalachian acquisition. The growth in production and related drop in unit costs help to expand operating margins and deliver significant accretion to Seneca's earnings and cash flows. Additionally, as we talked about in the past, given the depressed natural gas price environment at the time of the acquisition, we ascribe no value in our [Technical Issues] long-term upside. Since closing the acquisition last July, our team has continue to evaluate the undeveloped potential. From a geologic operational and Midstream synergy perspective, this highly economic inventory has been more fully incorporated into our development plans both this year and into the future, resulting in a shift of more drilling activity to Tioga County. In fiscal '22, we expect to bring online thee pads in Tioga with two targeting the Utica and the other in the Marcellus, incorporating more of this inventory into our program enhances capital efficiency further improving consolidated upstream and gathering returns. Our ability to ship activity across our three major operating areas is supported by our diverse marketing portfolio including the incremental 330,000 per day of new Leidy South capacity expected to come online in December. As we've discussed previously, Leidy South will provide an outlook to valuable Mid-Atlantic markets for each of our three major operating areas, giving us additional flexibility to optimize our development activity and maximize returns. As Dave mentioned, the project is on track and we should be able to start using this capacity next month. With more clarity on the Leidy South in service date, we've been very active on the marketing front. Since last quarter, we've converted a significant portion of our existing Leidy South firm sales from a Transco Zone 6 index sale to a NYMEX based sale, providing basis certainty on those volumes. Overall, at this point we have hedges and fixed price firm sales in place for about three-quarters of our expected fiscal '22 natural gas production. We have another 17% with basis protection that is not hedged, which leaves less than 10% of expected production exposed to in basin pricing. This is a great spot to be in and allows us to be opportunistic in our marketing and hedging activities over the remainder of the year. Shifting gears, our operating and spending plans for the year remain largely unchanged. As we talked about previously, our plan to ramp up production over the course of the year to fill our new Leidy South capacity is right on track. I expect Q1 production to be sequentially flat, and we are timing several pads to come online during the quarter in conjunction with the new Leidy South capacity. From there production should ramp up in Q2 and Q3, then level out around 1 Bcf a day net toward the end of the fiscal year. Capital is the opposite, with the extensive completion activity driving capital higher in Q1 and Q2 then decreasing over the second half of the year. Also on capital, there has been a lot of industry discussion around cost inflation and service availability. On the latter point, we think we're well positioned to avoid meaningful impacts. We've been in regular communication with our key vendors and do not expect service availability will pose any issues. However, we do see some modest headwinds on the cost front as is the case with most industries, labor challenges, supply chain issues and increased fuel costs are impacting our service providers. Cost of certain materials such as tubulars are up as well. All that being said, we expect these increases to be largely offset by continued operational efficiencies. In aggregate drill and complete drill and complete costs are likely going to rise a few percent, but this is all accounted for in our capital guidance range, which remains unchanged from last quarter. In California, our team has done a great job managing through the last 18 months and we are forecasting relatively flat oil production from fiscal '22 to fiscal '20, excuse me, for fiscal '21 to fiscal '22. This is a result of long-term planning for permits for our drilling program and a more active workover program in the second half of fiscal '21 that will carry into fiscal '22 while we are facing some modest cost headwinds largely from increasing steam fuel costs, those are more than offset by rising oil prices and we expect to generate significant free cash flow this year. Also, our new solar facility at South Midway is substantially complete and should go in service very soon and we are moving full speed ahead with our next solar facility at South Lost Hills, which is expected to go in service late next year. [Technical Issues] honestly, I want to provide an update on Seneca's sustainability efforts. As I mentioned last quarter, we are undertaking a comprehensive study of emissions generated by various types of completion equipment. We have completed all testing and are working with our completion service providers as well as air hygiene and West Virginia University to evaluate the data and develop a comprehensive report. This is a landmark study that will provide truly comparative data across a wide array of completions equipment including e-frac technology. Most importantly, with this data, we will be able to make more informed decisions and selecting completions equipment that aligns with our sustainability values as well as our cost and performance requirements. We also announced our plans to seek a responsible natural gas certification for 100% of our Appalachian production through Ekahau [Phonetic] origin. This ISO based framework evaluates our operations under a rigorous set of ESG performance criteria with independent verification. The third party verification is ongoing and we expect to conclude the process in the next couple of months. Additionally, we are working with project canary toward the responsibly sourced gas designation for approximately 300 million a day of our production utilizing their trust well process. As part of our relationship with project canary, we are also installing continuous emissions monitoring devices on three of our well pads. We expect -- we expect these installations to be completed by the end of the year. In addition, since June of this year, we have committed to the use of compressed air or electric power pneumatics on every new Seneca development pad. And we are retrofitting existing natural gas pneumatics [Phonetic] on return trip pads to also run on compressed air. This will continue to reduce our already low methane emissions intensity as we strive to meet our long term emissions reduction goals. All of these initiatives are key steps that demonstrate our commitment to sustainability and we will remain focused on furthering and building upon these efforts throughout the coming years. In closing Seneca's business is fundamentally sound with a great outlook. The added scale and synergies from our 2020 acquisition and recent growth have reduced operating costs and strengthened our margins. Our larger scale and increased inventory has given us the opportunity to further optimize our development program leading to improved capital efficiency and driving earnings and cash flows higher. We also operate in one of the lowest emissions intensity basins in the world and work hard to be on the leading edge of the industry sustainability initiatives. This dual focus on enhancing free cash flow, while reducing our environmental footprint positions us well for ongoing success. National Fuel closed out its fiscal year on a strong note with earnings coming in at $0.95 per share. For the full year after adjusting for several items impacting comparability, operating results were $4.29 per share. This is well above the high end of our guidance range and was driven by several factors. First, the significant improvement in natural gas and crude oil prices during the quarter drove higher after hedging price realizations. Second, operating cost came in below expectations as we continue to find ways to optimize our cost structure across all of our businesses. Lastly, we completed some tax planning around intangible drilling costs. This resulted in an adjustment to a state tax valuation allowance reducing our effective tax rate. Turning to fiscal '22, we now expect earnings to be in the range of $5.05 to $5.45 per share, an increase of $0.65 per share or 14% at the midpoint from our preliminary guidance. A few items are driving this change. First, we've increased our commodity price assumptions. We're now forecasting NYMEX natural gas prices of $5.50 per MMBtu for the first half of our fiscal year and $3.75 from April through September. We've also increased our NYMEX crude oil price assumption to $75 per barrel. While we're well hedged for the year approximately 25% of forecasted production remains unhedged. For reference, a $0.25 change in our natural gas price assumption is now expected to impact earnings by $0.12 per share. Given the cadence of our production profile, roughly two-thirds of this price impact would occur in the second half of the year. On the oil side, our sensitivities remain unchanged with a $5 change oil impacting earnings by $0.03 per share. The second major driver is a modest increase in Seneca's LOE. We've increased our range of $0.01 [Phonetic] now projecting $0.83 to $0.86 per Mcfe for the year. This is entirely driven by streaming operations in California. The higher price of natural gas will lead to higher steam fuel costs. However, this increase will be more than offset by the forecasted increase in oil revenues. The last major driver is the impact of the system modernization tracker extension in our New York utility. We expect us to increase margin at the utility by approximately $4 million for the year. One other major item of note related to a recent preceding in our Pennsylvania Utility jurisdiction. While this doesn't impact earnings or cash flow, it will have an impact on the utility's EBITDA, it's a bit complex, so I'll hit the high point. Due to the over-funded status of our Pennsylvania jurisdictions post-employment benefit plans, we made a regulatory filing to stop recovering these costs from our customers each year, using money previously set aside in the trust we also agreed to pass back a regulatory liability through one-time and ongoing bill credits. [Technical Issues] material impact to our ongoing earnings or cash flows. The point of note here is that the annual collection of OPEB funding costs is reflected as margin in the utility's financial statements. While the vast majority of the OPEB expense is related to non-service costs which sit below operating income. By reducing our OPEB collections from approximately $10 million to zero, we expect to see an equivalent reduction in utility EBITDA. This doesn't fundamentally change the business in any way, but we wanted to point out the negative impact to EBITDA despite no change to our expected earnings or cash flows. Switching over to capital. Fiscal '21 came in at $770 million for the year, which was toward the lower end of our guidance range. This was primarily driven by costs coming in below expectations in our Midstream businesses including the FM100 project Dave mentioned earlier. For fiscal '22, our guidance was $640 million to $760 million remains unchanged. Bringing this altogether, our balance sheet is in a great position and our free cash flow outlook is strong. In fiscal '21, funds from operations exceeded cash capital expenditures by approximately $120 million for the year. Adding to that, the proceeds from the sale of our timber assets which closed in December, we generated free cash flow in excess of our $165 million dividend payment for the year. As we look to fiscal '22, we would expect our funds from operations to exceed capital spending by $300 million to $350 million. At this level, our free cash flow, we are projecting more than $150 million of excess cash after funding our dividend for the year. This provides additional cash flow that can be directed toward the debt-reduction efforts Dave referenced to earlier. While our free cash flow is in line with previous expectations, I did want to spend a minute talking about one item on the balance sheet. Given the recent run up in prices, we recorded $600 million mark to market liability associated with our hedge portfolio. Well, this is a rather large liability, our investment grade balance sheet minimize collateral requirements such that we were limited to approximately $90 million posted with counterparties at the end of September. Today, the collateral amount has been further reduced now sitting closer to $25 million. As we progressed through the winter, most of those hedges driving the current liability will settle and as a result, we expect to have minimal, if any collateral requirements. In conclusion and echoing, Dave's earlier comments, we're in a great spot, the outlook for the business is strong and our ability to generate significant and sustainable free cash flow, positions us well to deliver shareholder value well into the future.	q4 gaap earnings per share $0.95. qtrly adjusted operating results of $87.3 million, or $0.95 per share. co is now projecting 2022 earnings to be within range of $5.05 to $5.45 per share.
Investors are urged to carefully review various disclosures made by NHI and its periodic reports filed with the Securities and Exchange Commission including the risk factors and other information disclosed in NHI's Form 10-K for the year ended December 31st, 2019. sec.gov or on NHI's website at www. We are pleased to report our fourth quarter and full year results for 2019, which were at the top-end of our guidance range despite the many headwinds that we faced last year. We started 2019 in a much more defensive posture than is usual for NHI and we experienced good momentum throughout the year. We are in much better shape as we enter 2020. We are not out of the woods by any means as the senior housing industry continues to be challenged by new deliveries and labor issues, which we do not expect to improve for at least the next several quarters, but we are generally encouraged by slowing inventory growth and very strong net absorption, which in 2019 showed the highest level of demand in the 13 years since NIC has been collecting this data. Furthermore, our skilled nursing portfolio continues to show very strong coverage and we expect that the new PDPM reimbursement system will moderately improve on that coverage. We have remained optimistic despite some of the headwinds and announced $329 million in acquisitions in 2019 primarily with existing partners. We also added three new partners with whom we are excited to grow with for many years to come. In 2020, we have already announced $150 million, including $135 million for Timber Ridge, which is a Class A CCRC just outside of Seattle and we are thrilled to partner with LCS on this deal. Kevin will share more details later. With the Timber Ridge acquisition, we are dipping our toes back into RIDEA with a 25% interest in OpCo, but unlike other RIDEA structures more common with healthcare REITs, we've done so with an embedded triple net lease that mitigates volatility of the underlying operation to NHI's shareholders. We are always open to creative financing solutions with premier operators like LCS and investors should inspect that our focus will continue to be on the triple net strategy. We recently announced a 5% increase in our dividend, which marks the 11th straight year we have increased the quarterly dividend by 5% or more while maintaining a coverage ratio below 80% of normalized FFO for the last seven years. This makes us a dividend achiever, if you keep track of such things. We are not satisfied with the limited per share growth that we experienced in 2019 and our G&A reflects that in the form of reduced executive compensation this year. This demonstrates accountability to shareholders. We worked hard to anticipate areas that need attention and proactively addressed issues in a transparent manner. As we talked about on our third quarter call, we expect that we will return to mid single-digit growth this year. John will discuss the guidance in more detail, but I will add that we have good visibility on our outlook and that our desire is always to under-promise and over-deliver. I'm pleased to report a solid quarter and year-end to 2019 as well as 2020 guidance more representative of historic NHI growth. Beginning with our three FFO performance metrics on a diluted common share basis for the fourth quarter ending December 31st, 2019, NAREIT FFO increased 6.9% to $1.39, normalized FFO increased 4.4% to $1.41, and adjusted FFO increased 2.4% to $1.30. On a full year basis, NAREIT FFO per diluted common share increased 2.4% to $5.49, normalized FFO increased 0.7% to $5.50, and adjusted FFO increased 1.2% to $5.10, which as Eric previously mentioned, was at the top-end of our guidance range. I want to now talk about our cash NOI. Cash NOI is a metric we use to measure our performance. We define cash NOI as GAAP revenue excluding straight-line rent, excluding escrow funds received from tenants, and excluding lease incentive and commitment fee amortizations. For the year ending December 31st, 2019, cash NOI increased 7% to $290.5 million compared to $271.5 million in the prior year. Our increase in 2019 cash NOI was reflective of our organic NOI growth from lease escalators, our partial year contributions from newly announced 2019 investments, our continued fulfillment in 2019 of the prior year's announced investments offset by impacts due to the Holiday master lease restructuring, and finding new homes for the nine transition properties. A reconciliation of cash NOI can be found on Page 17 of our Q4 2019 SEC filed supplemental. G&A expense for the 2019 fourth quarter increased 28% over the prior year fourth quarter and for the entire year increased 6.8% over 2018 to $13.4 million. Included in the fourth quarter and full year 2019 G&A expense was approximately $716,000 in severance. Excluding the severance expense, G&A increased 2.7% in the fourth quarter over the prior year's fourth quarter and 1.1% for the full year compared to 2018. Turning to the balance sheet, we ended the year with $1.44 billion in total debt, of which a little over 90% was unsecured. At December 31st, we had $250 million capacity on our $550 million revolver. During December, NHI entered into privately negotiated agreements with certain holders of our 3.25% convertible senior notes under which we issued 626,397 shares of NHI common stock plus cash consideration and payment of fees totaling $22.1 million to redeem $60 million in aggregate principal amount of our outstanding convertible notes. As a result of the redemption at year-end, NHI's aggregate balance of convertible notes is now $60 million, which will mature in April of 2021. Our debt capital metrics for the quarter ending December 31st were net debt to annualized adjusted EBITDA at 4.7 times, weighted average debt maturity at four years, and our fixed charge coverage ratio at 5.7 times. For the quarter ended December 31st, our weighted average cost of debt was 3.54%. We've mentioned in prior calls that we expect 2020 to be a transformative year for NHI's balance sheet and the interest rate is currently favorable. Our announced public credit ratings allow us to consider the public debt markets. Our current shelf registration is expiring and we will be filing a new shelf registration in the coming weeks. Stay tuned of more to come in the forthcoming quarters as we look to term off our revolver balance and make room for future growth. We expect NFFO to be in the range of $5.67 to $5.71 per diluted share or an increase of 3.5% at the midpoint. We also expect AFFO to be in the range of $5.31 to $5.35 or an increase of 4.5% at the midpoint. Our guidance continues to reflect management's intent to under-promise and over-deliver. Our guidance issued today includes effects from the recently announced Brookdale purchase option, expected contributions from the recently announced Timber Ridge joint venture, continued fulfillment of our commitments as detailed in our 10-K, and line of sight on unannounced investments under LOIs totaling approximately $50 million. Our guidance also reflects our views on our transition properties. While we don't expect the cash NOI in the nine transition properties to return to 2018 levels this year, we do expect them to get to between 40% and 45% of the way back to 2018 levels. We do believe though after straight-line rent, the GAAP revenues for the transition properties will get to between 60% and 65% of the way back to the 2018 levels. Our guidance this year includes assumptions for terming off our revolver debt and further assumes that we will continue to make additional investments on a leverage neutral basis. In addition to our per share guidance, we wanted to also give guidance on several items that many of you use to evaluate our FAD performance. Moving forward, we wanted to also provide you with pro forma routine capital expenditure and non-refundable entrance fee cash flows attributable to our 25% share in the Timber Ridge OpCo. We increased our quarterly dividend 5% or $0.0525 [Phonetic] to $1.1025 per common share. The first quarter dividend is payable May 8th to shareholders of record March 31st, 2020. Looking at the overall portfolio, at the end of the third quarter, the EBITDARM coverage ratio was 1.66 times for the total portfolio compared to 1.65 times in the year earlier period and 1.69 times in the prior quarter. Senior housing coverage declined year-over-year as expected to 1.14 times compared to 1.23 times last year in 1.15 times in the prior quarter, and our skilled portfolio at 2.73 times improved from 2.55 times last year, but declined from 2.8 times in the June quarter. The sequential decline is attributable to NHC as the non-NHC SNF coverage improved to 1.92 times from 1.87 times in the June quarter and we are still very comfortable with the NHC coverage, which was 3.69 times in the third quarter. Our ample SNF coverage is a testament to the hard work of our best-in-class operators and while the senior housing industry continues to be challenged by supply and labor issues, we have not seen a meaningful shift in operating trends and feel our operating partners are doing a good job of competing in their respective markets. According to recent NIC data, properties with an average age of 10 years to 17 years have the highest occupancy followed by properties with an average age of 25 plus years. Interestingly, the lowest occupancy was reported for properties with an average age of 2 years to 10 years. This tells us that performance is operator-driven, consistent with our philosophy and that the newest buildings will not always garner the most market share. Turning to our operators by revenue, Bickford Senior Living represents 18% of our cash revenue and had an EBITDARM coverage ratio of 1.07 times for the trailing 12 months ended September 30th. On a same-store basis. The Bickford EBITDARM coverage was 1.12 times, including a development property, which will roll into the coverage calculation in the fourth quarter, the Bickford total and same-store coverage was 1.09 times and 1.14 times respectively. Due to the lagging nature of EBITDARM coverage and in an effort to provide more transparency, we have continued to disclose Bickford's occupancy. Bickford's occupancy started to turn positive in the second quarter which continued through the third quarter. We are pleased to report that Bickford's fourth quarter occupancy remained steady on a sequential basis and showed significant improvement year-over-year. Bickford's total and same-store leased portfolio occupancy improved by 160 basis points and 230 basis points respectively in the fourth quarter of 2019 compared to the same quarter in 2018. Importantly, Bickford has maintained price discipline while showing this improved occupancy. Lastly, NHI exercised its purchase option on the Bickford Shelby property for $15.1 million at an initial yield of 8% during the first quarter of 2020. This transaction is similar to the Bickford Gurnee deal and that it replaces a $14 million construction loan we had in place previously. We have similar agreements on two other Bickford properties, which we believe will help stabilize and improve our coverage with this operator. Developing new assets with Bickford will help us continue to evaluate additional asset sales while maintaining our relationship with Bickford and upgrading the portfolio. Moving to Senior Living Communities. Our relationship with SLC represents 16% of our annualized cash revenue. Including net entry fee income, their EBITDARM coverage ratio was 1.1 times on a trailing 12-month basis. This compares to 1.28 times in the year earlier period and 1.1 times for the June quarter. As discussed on prior calls, we are watching entry fee sales closely and leading sales indicators have started to turn positive where SLC has purchased additional unit inventory. The benefit of entry fee sales will take some time to roll through the coverage calculation as the quarters with those inventory repurchases roll out of the calculation. Our next largest partnership is with NHC, which accounts for 14% of our annualized cash revenue. As previously mentioned NHC had a corporate fixed charge coverage of 3.69 times in the September quarter. Lastly, Holiday Retirement, which represents 12% of our cash revenue, had an EBITDARM coverage ratio of 1.21 times, which is a slight improvement on both a year-over-year and sequential basis. Recall that we restructured the master lease with Holiday at the beginning of 2019, which required some difficult decisions at the time, but the goal was always to put Holiday in a better position operationally and financially while acting in the best interest of our shareholders. While the story continues to play out, we are encouraged by the outcome just over a year later. Moving on to new investments. In the fourth quarter, we continued to expand our relationship with 41 Management with the acquisition of a 48-unit assisted living and memory care community in the St. Paul, Minnesota area for $9.34 million at an initial cash yield of 7.23%. We also extended a second mortgage loan of $3.87 million at a rate of 13% on an assisted living community in Bellevue, Wisconsin. This is a one-year loan with extension options and NHI has a purchase option on the community upon stabilization. We also exercised our purchase option and formed a joint venture with LCS to own and operate the 401-unit Timber Ridge CCRC for $135 million effective January 31st. As Eric mentioned earlier, this deal includes a RIDEA structure whereby NHI holds an 80% interest in the PropCo and a 25% interest in the OpCo. PropCo is leasing the community to OpCo under a seven-year triple net lease at an initial yield of 6.75%. NHI is also providing financing of $81 million to PropCo or approximately 60% of the purchase price. This is a Class A property in a high barrier to entry and affluent market outside of Seattle with one of the premier CCRC operators in the country. Regarding the acquisition environment and pipelines, we announced $329 million in acquisitions during 2019 and we are off to a good start in 2020 with announced deals already totaling $150 million. We look forward to our new building opening in Milwaukee with Ignite Medical Resorts. Our $25 million investment has a yield of 9.5% and we expect rent to commence when it opens in the second quarter. Valuations are still very competitive, but through a relationship driven approach, we continue to see additional opportunity as we survey the market and are committed to adding high quality operators and communities to the portfolio yields comparable to what we have done in the last few years. With that, I'll hand the call back over to Eric. The challenges in this industry cannot simply be lumped into general categories like AL versus IL or primary versus secondary. NHI is committed to succeeding in all of the markets and products in which we invest. We are constantly reviewing our portfolio to identify opportunities that we can proactively address. We do this through a number of methods and our preference is to always do it in unison with our operators and through our financial structure, which leads to stability in our cash flow. As I mentioned earlier, we have good visibility in our outlook this year and we look forward to updating you on our progress throughout the year.	compname reports q4 adjusted ffo per share of $1.30. q4 adjusted ffo per share $1.30. quarterly ffo per share $1.39. compname says normalized ffo for 2020 to be in range of $5.67 to $5.71 per share. compname says normalized affo for 2020 to be in range of $5.31 to $5.35 per share.
Slides for today's call are available on nisource.com. Before turning the call over to Joe, Donald and Shawn, just a quick reminder. Information concerning such risks and uncertainties is included in the MD&A and Risk Factors sections of our periodic SEC filings. With the successful completion of last month's convertible issuance, NiSource is well-positioned to execute the next stage of our growth plan, driven by safety and asset modernization programs, as well as our electric generation transmission strategy. In Indiana, we kicked off our 2021 Integrated Resource Plan process, which will inform our strategy beyond 2023 and we initiated four new renewable energy projects. We continue to expect that our infrastructure and generation investments will drive compound annual growth of 7% to 9% in diluted net operating earnings per share from the midpoint of our narrowed 2021 guidance through 2024. We also expect to reduce greenhouse gas emissions 90% by 2030. Let's turn now to slide 3 and take a closer look at our key takeaways. In the first quarter, we delivered non-GAAP diluted net operating earnings of $0.77 per share. These results include increased earnings from our safety and modernization investments and reflect the profile of our business without Columbia Gas of Massachusetts. As you saw in our release, today we narrowed our 2021 non-GAAP diluted net operating earnings guidance to a $1.32 to a $1.36 per share, which represents the upper half of the previous range. This narrowed range reflects lower than previously expected COVID impacts and more certainty with regulatory outcomes offset by slightly higher diluted share count resulting from the equity unit issuance. We expect to make approximately $10 billion in capital investments through 2024. These include annual investments of $1.9 billion to $2.2 billion in growth, safety and modernization programs. In addition, our investments in renewable generation are now expected to total approximately $2 billion over this period. As we outlined at our 2020 Investor Day, NiSource expects to grow its diluted net operating earnings per share by 7% to 9% on a compound annual growth rate basis from 2021 through 2024 including near-term annual growth of 5% to 7% through 2023. In addition, we have continued to successfully execute on our renewable energy strategy adding four new renewable energy projects as part of our Your Energy, Your Future initiative. Looking at our first quarter 2021 results in slide 4, we had non-GAAP net operating earnings of about $305 million or $0.77 per diluted share compared to non-GAAP net operating earnings of about $291 million or $0.76 per diluted share in the first quarter of 2020. I would note that 2021 results exclude earnings related to Columbia Gas of Massachusetts or CMA due to the sale closing in October of 2020. Looking more closely at our segment three-month non-GAAP results on slide 5, gas distribution operating earnings were about $374 million for the quarter, representing a decline of approximately $18 million versus last year. Operating revenues, net of the cost of energy and tracked expenses were down about $84 million due to the sale of CMA, partially offset by increased infrastructure program revenues and customer growth. Operating expenses also net of the cost of energy and tracked expenses were lower by about $66 million, mostly due to the CMA sale and lower employee-related costs, partially offset by increased depreciation and amortization expense. In our Electric segment, three-month non-GAAP operating earnings were about $91 million, which was approximately $11 million higher than the first quarter of 2020. This increase was driven primarily by an approximately $9 million increase in operating revenues, net of the cost of energy and tracked expenses due to infrastructure investments and increased customer usage. Operating expenses net of the cost of energy and tracked expenses were slightly lower due to environmental and employee-related cost. Now, turning to slide 6, I'd like to briefly touch on our debt and credit profile. Our debt level as of March 31 was about $9.8 billion, of which about $9.1 billion was long-term debt. The weighted average maturity in our long-term debt was approximately 15 years, and the weighted average interest rate was approximately 3.7%. At the end of the first quarter, we maintained net available liquidity of about $1.9 billion, consisting of cash and available capacity under our credit facility and other accounts receivable securitization program. Our credit rating from all three major rating agencies are investment grade and we remain committed to maintaining our current investment grade ratings. Taken together, this represents a solid financial foundation to support our long-term safety and infrastructure investments. Let's take a quick look at slide 8, which highlights our updated financing plan. I would just note that following last month's equity unit issuance, we no longer expect to issue block or discrete equity through 2024. This issuance that received 100% equity credit from all three agencies allows NiSource to capture share price upside and provide timely proceeds for our renewable investment. Most importantly, this issuance significantly de-risks our financing plans and is consistent with all of our earnings and credit commitments. Now, let's look at some NiSource utilities highlights for the first quarter of 2021 starting with our gas operations on slide 9. In Pennsylvania, the Public Utility Commission approved an annual revenue increase of $63.5 million in the rate case we filed in 2020. This reflects our investments to modernize and upgrade our natural gas distribution system, as well as maintain the continued safety of the system. The commission also approved an ROE of 9.86% with rates effective as of January 23 of this year. In addition, the company filed another base rate case in March to support its ongoing safety and modernization program. In Kentucky, we received an order on April 30 from the Public Service Commission in our Safety Modification and Replacement Program Tracker filing. This order approves $40 million in upgrades and replacements under way in 2021 and $2.6 million of incremental revenue. In Indiana, NIPSCO continues its long-term gas modernization program. Nearly $950 million in capital investments are planned through 2025 to be recovered through semi-annual adjustments to the existing gas transmission, distribution and storage improvement charge or TDSIC tracker. Rates approved in our 2020 filing became effective in January of this year. In Virginia, we implemented rates approved in our 2020 Steps to Advance Virginia Energy or SAVE tracker filing. Now let's look at our electric operations on slide 10. NIPSCO has filed notice to terminate its current electric transmission, distribution and storage improvement charge or TDSIC plan. We expect to file a new five-year plan on or soon after June 1. The updated plan will include newly identified projects aimed at enhancing service and reliability for customers, as well as some previously identified projects. As mentioned earlier, we have begun our 2021 Integrated Resource Plan or IRP process. Similar to our 2018 IRP, the process will include an RFP for new resources. We plan to receive input from customers in a wide variety of other stakeholders throughout the year and expect to submit our plan to the Indiana Utility Regulatory Commission by November. I would now like to ask Shawn to provide more on the significance of the IRP and an update about our renewable generation projects. We continue to make strong progress on our renewable generation transition. In total, we have announced 14 renewable projects which will likely fill the balance of capacity necessary to replace the retiring units at our Schahfer generating station, which continues to track for retirement by May 2023. Four new projects have been announced in 2021. They include two projects with EDP renewables, Indiana Crossroads Solar Park, which is a build-transfer agreement and is expected to enter service in 2022. And Indiana Crossroads II which is a wind project announced as a power purchase agreement or PPA and is expected to enter service in 2023. We also announced Fairbanks Solar, a build-transfer agreement with Invenergy for a 250-megawatt project expected to be online in 2023. And finally, we signed a build-transfer agreement with Capital Dynamics for a 200-megawatt project expected to be operational in 2023 named Elliot Solar. We've already begun the regulatory approval process for these projects. Upcoming shortly in the second quarter of 2021 we expect an order from the IURC on four previously filed projects our Dunns Bridge I and II, Cavalry Solar Energy Center and Green River Solar Projects. All of these updates continue to track on time to retire nearly 80% of our remaining coal-fired generation by 2023 and retire all coal generation by 2028 to be replaced by lower cost, reliable and cleaner options. The plan is expected to drive a 90% reduction in our greenhouse gas emissions by 2030 and is expected to save our electric customers an estimated $4 billion over 30 years. The executed agreements we've announced are also within budget, representing approximately $2 billion of renewable generation investments. The projects these agreements support represent NIPSCO's investment interest in the replacement capacity which equates to approximately half of the total capacity needed. The remaining new capacity is in the form of power purchase agreements. Finally, as Joe has highlighted, in the fourth quarter of 2021, NIPSCO plans to submit a new integrated resource plan to the IURC that will continue to outline its long-term generation plans including the planned retirement of Michigan City Generating Station. The preferred plan that emerges from the 2021 IRP could create additional capital investment opportunities. We are excited about the significant progress in executing our plan and we look forward to more updates in the future quarters. I'd like to turn to our foundational commitment; safety. Our Safety Management System, SMS, is an established operating model within NiSource. Recent advances in SMS include expanded quality management and achieving Gold Shovel Standard Certification. We are continuously enhancing process safety capabilities and ensuring effective asset management to reduce risks. I'd also like to note that we've begun a third-party validation of our SMS implementation and we are working toward accreditation in 2022. Before turning to the Q&A portion of today's call, I'll share and reiterate a few key takeaways. With last month's convertible issuance, NiSource is well positioned to execute the next stage of our growth plan driven by continued execution of our safety and asset modernization programs as well as our electric generation transition strategy. We are narrowing our 2021 non-GAAP deluded net operating earnings guidance to $1.32 to $1.36 per share, which represents the upper half of the previous guidance. We expect to make approximately $10 billion in capital investments through 2024. These include annual investments of $1.9 billion to $2.2 billion in growth, safety and modernization programs. In addition, our investments in renewable generation are now expected to total approximately $2 billion over this period. As we outlined at our 2020 Investor Day, NiSource continues to expect to grow its deluded net operating earnings per share by 7% to 9% on a compound annual growth rate basis from 2021 through 2024 including near-term annual growth of 5% to 7% through 2023. In addition, we now have a total of 14 renewable energy projects as part of our Your Energy, Your Future initiative.	q1 non-gaap operating earnings per share $0.77. narrowed 2021 guidance (diluted noeps) to upper half of previous rang. reaffirmed all other near- and long-term growth rates outlined at investor day.
slides for today's call are available on nisource.com. Before turning the call over to Joe, Donald and Shawn, just a quick reminder. Information concerning such risks and uncertainties is included in the MD&A and Risk Factors sections of our periodic SEC filings. We made significant progress in our generation transition and the current renewable replacement plan, with Indiana Commission approval now received for all of our joint venture renewable projects. In addition, we have received more than 180 proposals in our 2021 integrated resource plan, or IRP process, which will inform our generation replacement strategy in Indiana beyond 2023. We continue to expect that our infrastructure programs and generation investments will drive compound annual growth of 7% to 9% in diluted net operating earnings per share from 2021 through 2024, while reducing greenhouse gas emissions 90% by 2030 compared to 2005 levels. Let's turn now to slide three and take a closer look at our key takeaways. In the second quarter, we delivered non-GAAP diluted net operating earnings of $0.13 per share. Results reflect safety and modernization investments, COVID impacts, and they reflect the profile of our business without Columbia Gas of Massachusetts. We are reaffirming our earnings guidance and long term financial commitments. We expect 2021 earnings of $1.32 to $1.36 per share in non-GAAP diluted net operating earnings. We continue to expect annual growth, safety and modernization investments of $1.9 to $2.2 billion, plus approximately $2 billion in renewables and associated transmission investments through 2023. NiSource expects to grow its diluted net operating earnings per share by 7% to 9% on a compound annual growth rate basis from 2021 through 2024, including near-term annual growth of 5% to 7% through 2023. As I mentioned, the Indiana Utility Regulatory Commission has approved 13 of our 14 proposed renewable energy projects and the new RFP for electric capacity and energy associated with NIPSCO's 2021 IRP, that is currently underway, has drawn strong engagement from the vendor community. In other parts of our business, we filed rate cases in Ohio, Kentucky and Maryland during the quarter, in addition to the case filed during the first quarter in Pennsylvania, where we are in advanced settlement discussions. Safety advancements continue across NiSource, guided by our implementation of the industry's safety management system, which serves as our core operating model. Recent advancements include the accelerated integration of contractors into our safety plans and deployment of Picarro advanced leak detection technology in two more states. Our environmental performance targets represent another vital commitment. I'm pleased to say that we remain on target. We expect to reduce total greenhouse gas emissions 90% by 2030 from 2005 levels. That includes a 50% reduction in methane emissions from gas mains and services by 2025. On that commitment, NiSource has already achieved an estimated 39% reduction in pipeline methane emissions compared to 2005 levels. Our infrastructure replacement programs are driving these improvements. Also, last year, more than one million of our customers participated in our energy efficiency programs. On that note, let's look at some NiSource utilities highlights for the second quarter, starting with our gas operations on slide nine. The Ohio rate case is one of three new rate cases filed in the second quarter. We are requesting an annual revenue increase of approximately $221 million, net of the trackers being rolled into base rates. Pending a decision from the PUCO, new rates would be effective in mid-2022. In Kentucky, we filed a request for an approximately $27 million annual revenue increase net of trackers. And in Maryland, we filed a case on May 14, once again, net of trackers, requesting about a $5 million annual revenue increase. New rates are proposed to go into effect in December of this year. In Pennsylvania, we filed a case just before the end of the first quarter, requesting an annual increase in revenue of approximately $98 million. Now let's look at our electric operations on slide 10. I'll touch on NIPSCO's electric TDSIC plan. We filed a new five year plan in June. The $1.6 billion plan includes newly identified projects aimed at enhancing service and reliability for customers as well as some previously identified projects. We expect to receive an order from the IURC in December of this year. We continue to be encouraged by the strong progress advancing our renewable generation projects stemming from NIPSCO's 2018 IRP. Over the course of the last three months, eight renewables projects informed by the 2018 IRP preferred pathway received approval from the Indiana Utility Regulatory Commission. This brings NIPSCO to the verge of an important milestone with 13 of 14 renewables projects approved to advance and replace the retiring capacity of the Schahfer generating station. Importantly, this includes all joint venture projects and leaves Crossroads II Wind, a power purchase agreement, as the only project to waiting approval. Combining these new generating facilities with a number of transmission projects to support system reliability across the new footprint, NiSource continues to track toward approximately $2 billion of renewable generation investments through 2023. We are excited these projects will produce clean, reliable power for our communities, while saving NIPSCO customers approximately $4 billion over the long term. While the commercial and regulatory processes have advanced to support the preferred pathway for the 2018 IRP, NIPSCO's 2021 IRP process is well underway and continues to track within its time line. As noted in our release, in second quarter, we completed a request for proposal solicitation, similar to the process deployed in 2018. We are pleased with the response in terms of both the quality and the quantity of the proposals, which continues to show high levels of engagement in the vendor community as we advance our generation transition. Furthermore, with these more than 180 proposals covering a wide range of technologies and ownership constructs, it continues to point to a robust market across generation technologies, which will drive value for our customers and stakeholders. A few notes about the process and timing. The IRP analysis that we are currently stepping through will utilize data from the RFP to help inform the broad resource portfolio options for NIPSCO in terms of Michigan City retirement timing, choices of replacement technologies and ownership constructs. We will share directional findings with stakeholders at public advisory meetings in the third quarter, incorporating stakeholder feedback along the way. We expect to develop a stakeholder supported preferred resource path within the 2021 IRP, which will be submitted to the IURC on or before November 1. Once the preferred plan is finalized and communicated, execution activities could commence, which may include commercial negotiations and further due diligence on specific assets or projects. Any specific projects then identified, which support this preferred plan would represent incremental projects beyond the 14 highlighted earlier and in addition to the approximately $2 billion in renewable investments NIPSCO has already filed. These are significant steps within NiSource and are part of our energy transition, which we are calling Your Energy, Your Future, as we work with stakeholders to create a dependable, affordable and sustainable energy model, delivering the reliability our customers can trust. Looking at our second quarter 2021 results on slide four, we had non-GAAP net operating earnings of about $53 million or $0.13 per diluted share compared to non-GAAP net operating earnings of about $50 million or $0.13 per diluted share in the second quarter of 2020. I would note that 2021 results exclude earnings related to Columbia Gas of Massachusetts due to the sale closing in October of 2020. Looking more closely at our segment three months non-GAAP results on slide five. Gas distribution [Technical Issues] operating earnings were about $66 million for the quarter, representing a decline of approximately $8 million versus last year [Technical Issues] down about $28 million due to the sale of CMA [Technical Issues] upward in expenses also [Technical Issues] offset by higher employee related [Technical Issues] costs and outside services [Technical Issues], which was nearly $5 million lower than the second quarter of 2020. Operating revenues rose about $11 million, net of the cost of energy and tracked expenses due to infrastructure investments and increased customer usage. Operating expenses, net of the cost of energy and tracked expenses were up about $16 million due to generation related maintenance and employee related costs. Now turning to slide six. I'd like to briefly touch on our debt and credit profile. Our debt level as of June 30 was about $9.2 billion, of which about $9.1 billion [Technical Issues] was long term debt [Technical Issues] in years, and the weighted average interest rate was approximately 3.7%. At the end of the second quarter, we maintained net available liquidity of about $2.2 billion, consisting of cash and available capacity under our credit facility and our accounts receivable securitization programs. With Moody's recently concluding their latest credit review, all three major rating agencies have reaffirmed our investment grade credit ratings with stable outlooks in 2021. Taken together, this represents a solid financial foundation to continue to support our long term safety and infrastructure investments. Let's take a quick look at slide eight, which highlights our financing plan. There are no changes to our plan since last quarter's equity unit issuance. Last quarter's issuance has significantly derisked our financing plans and it's consistent with all of our earnings and credit commitments. As Joe mentioned in our key takeaways, we are reaffirming our 2021 earnings guidance and long term financial commitments. I should remind everyone that we're stating the guidance and diluted earnings per share due to last quarter's equity issuance.	compname posts q2 non-gaap operating earnings per share $0.13. q2 non-gaap operating earnings per share $0.13. remains on track to achieve 2021 guidance and long-term earnings per share growth rates. nisource - remains on track to achieve 2021 non-gaap diluted net operating earnings guidance of $1.32 to $1.36 per share. expects to make capital investments of $1.9 billion to $2.1 billion in 2021.
I'm joined here today by Steve Westhoven, our President and CEO; Pat Migliaccio, our Senior Vice President and Chief Financial Officer; as well as other members of our senior management team. This could cause results to materially differ from our expectations, as found on slide one. We'll also be referring to certain non-GAAP financial measures such as net financial earnings, or NFE. We believe that NFE provides a more complete understanding of our financial performance. However, it is not intended to be a substitute for GAAP. Our non-GAAP financial measures are discussed more fully in Item seven of our 10-K. Our agenda for today is found on slide two. Steve will begin today's call with highlights from the quarter, followed by Pat, who will review our financial results. Midway through fiscal 2021, NJR has delivered strong performance for our shareowners. On slide three, I'll take you through the highlights. During the second quarter, periods of widespread cold across the U.S. led to an unusually high demand for natural gas. And as in the past, Energy Services strategically located in geographically diverse Storage & Transportation assets enabled that business to meet the needs of its customers during a time of unprecedented volatility. The outsized performance of Energy Services illustrates the limited risk, high upside value proposition of our long option strategy. The combination of this strategy and the generation of more fee-based revenues, such as the 10-year asset management agreement we announced in December, provides for a powerful business model. Pat will provide a more detailed look at the drivers behind Energy Services' performance later in the call. The contribution from Energy Services enabled us to increase our NFE guidance for fiscal 2021 for the second time this year to a range of $2.05 to $2.15 per share from our original guidance of $1.55 to $1.65 per share. I'll provide more color on the next slide. At New Jersey Natural Gas, we filed a base rate case to recover almost $850 million of infrastructure investments in the settlement of our last rate case. This includes costs associated with the Southern Reliability Link, which is over 90% complete and expected to be placed into service this fiscal year. New Jersey Natural Gas received approval for SAVEGREEN 2020, our largest-ever energy efficiency program. This new program authorized $259 million in spending over three years, furthering our commitment to sustainability by helping customers lower their energy usage, save money and reduce their carbon footprint. The rollout of the program is expected to begin this year. At Clean Energy Ventures, we completed our first commercial solar project into service, adding 2.7 megawatts of installed capacity. We continue to develop our pipeline of projects to achieve our goal of doubling our installed capacity by the end of fiscal 2024. Leaf River, our storage facility located in Mississippi, performed well during the February weather event, meeting all of our customer commitments under very challenging circumstances. And finally, we continued construction of Adelphia Gateway South zone. Adelphia Gateway has received all necessary Pennsylvania DEP permits and is working to obtain FERC notice to proceed for construction of laterals. We expect to place a number of the project facilities into service by the end of the year. Turning to slide four. We are increasing our fiscal 2021 NFE guidance to $2.05 to $2.15 per share, an increase of $0.20 per share compared to our March 15 update. Our initial guidance's increase incorporated estimated bad debt to account for any Energy Services customers negatively impacted by the February weather event. Today's upwards guidance revision reflects payment by all of Energy Services customers apart from one due to bankruptcy. Our fiscal 2022 and long-term NFE guidance remains unchanged. As a reminder, guidance for fiscal 2022 is $2.20 to $2.30 per share. And we are maintaining our long-term annual growth rate of 6% to 10% for fiscal 2022 NFE, excluding hedged services. slide five provides additional detail on our base rate case filing. On March 30, we requested an increase to base rates of $165.7 million, equivalent to an increase of $118 million in operating income. Since the conclusion of our last case in 2019, New Jersey Natural Gas has invested nearly $850 million to upgrade and enhance the safety and reliability of our transmission and distribution systems. This includes the installation of the Southern Reliability Link at a cost of more than $300 million. We hope that the BPU's review of our filing will be complete before the end of 2021. We look forward to a successful conclusion announced at the interest of our customers and the company. On slide six, I'll take you through some operational highlights of New Jersey Natural Gas. Looking at the top left, we invested $198 million this fiscal year with about 26% of the capex providing near real-time returns. We added almost 3,700 new customers over the first six months of the year, below our regular growth rate due to the ongoing pandemic. However, we still expect to add approximately 28,000 to 30,000 new customers during the three-year period from fiscal 2021 to 2023. As I mentioned earlier, construction on SRL continues to progress as well. On slide seven, I'll take you through the operational highlights of Clean Energy Ventures. During the quarter, we completed our first out-of-state project in Connecticut. This is a small but noteworthy step toward executing on the regional solar investment strategy we discussed during our November Analyst Day. We now have over 360 megawatts of installed capacity. Total invested capital at CEV for the first six months was $38 million. We expect to see some in-service dates shift from the beginning of fiscal 2021 to the beginning of fiscal 2022 as a result of permitting and interconnection delays related to the pandemic. However, we remain on track to meet our goal of adding incremental 160 to 180 megawatts of capacity by the end of fiscal year 2022. The bottom right shows our expected CEV revenue for fiscal 2021, a significant portion of which is secured through our SREC hedging program. While we adjusted our capital forecast for this year, most of these projects were scheduled to be in service toward the end of the fiscal year, marginally affecting expected revenue. In January, we issued our 2020 corporate sustainability report. For the first time, this year's report includes disclosures in line with SASB, the Sustainability Accounting Standards Board, and the American Gas Association's frameworks, furthering our commitment to transparency and reporting on ESG matters. And on Earth Day this past month, we launched a significant new sustainability program, NJR's Coastal Climate Initiative. This program supports local-based climate solutions that have an impact on the communities we serve. CCI's first endeavor will be to work with the New Jersey chapter The Nature Conservancy to support the restoration of saltwater tidal wetlands in the Barnegat Bay, part of New Jersey Natural Gas' service territory. These areas of coastline are carbon sinks ecosystems that remove carbon dioxide from the atmosphere, storing it in the ground soil. And they also act as natural barriers that mitigate storm surge, protecting people and properties in our coastal communities. slide 10 shows the main drivers of our NFE for the second quarter. As a reminder, we're now utilizing the deferral method accounting for investment tax credits at CEV and, as such, recast our financials for the comparable periods. Reported NFE of $170.6 million or $1.77 per share compared to NFE of $84.3 million or $0.88 per share in the second quarter of fiscal 2020. NJNG's NFE was lower due to higher loan expenses partially offset by utility gross margin. The higher loan was primarily due to increased compensation and technology expense. CEV's NFE was basically flat compared to last year. Storage & Transportation saw an increase in NFE during the quarter, most related to increased operating income from Leaf River relating to hub services revenue. Energy Services improved $94 million primarily due to higher financial margin compared to last year, the details of which I'll take you through on the next slide. Slide 11 provides the additional detail around Energy Services performance during the quarter. And that illustrates how temperatures were partly abnormal during the February weather event in the Mid-Continent and Gulf markets and also the storage assets that Energy Services holds in these regions. Through this period of colder weather, there was high demand for natural gas, which Energy Services was able to satisfy by using storage assets to supply natural gas to a variety of customers, and usually high demand resulted in a strong process -- operation, which in turn drove Energy Services profitability. Turning to slide 12, we'll take you through some of the changes in our capital plan for fiscal 2021 and 2022. As Steve mentioned earlier, we're starting to see some of the in-service dates for certain CEV projects shift to fiscal 2022 due to permitting and interconnection delays related to pandemic. We've adjusted our capital plan accordingly. For fiscal 2021, we now expect to spend between $96 million and $180 million at CEV compared to our prior forecast of approximately $165 million. However, the capital is simply shifting to fiscal 2022. We still expect to reach our goal of adding 160 to 180 megawatts of capacity over the two-year period. It's also important to note that the NFE for fiscal 2021 were largely unaffected by the shift in capital. Revenues will be minimally impacted given the majority of our projects have expected in-service dates toward the end of the fiscal year. And with the change in financing accounting methods, the impact related to ITTs will be a fraction of what would have been previously. On slide 13, you can see our product pipeline for fiscal 2021 and 2022 was about $255 million, which represents 80% of our targeted capex for the next two years. Approximately 1/3 of our project pipeline is currently out-of-state projects. And for the projects in New Jersey, we expect to earn an average TREC factor of 0.9 per kilowatt hour. Turning to slide 14, you can see the update to our cash flows and financing projections. Our cash flow from operations remained strong, with no equity needs for the foreseeable future aside from our normal DRIP program. Demonstrating the strength of our cash flows, Fitch recently affirmed NJNG's investment-grade credit rating with a stable outlook. On slide 15, we've highlighted the details of our SREC hedging program. As you can see, we are well hedged in the next three energy years. We have 93% of our 2024 volume hedge. And for the first time, we've been able to hedge SRECs four and five years out. The market fundamentals for energy years 2025 to 2026 are supporting strong pricing, with SREC trading at or above 85% of SACP, with 36% and 10% hedged for 2025 and 2026, respectively. I'll now hand the call back to Steve for some closing remarks. Before I open the call to questions, I'd like to summarize the quarter. Through the first half of the year, NJR delivered strong results. The overperformance from Energy Services allowed us to increase our guidance for the fiscal year and provides the flexibility to reinvest in our business. We file the rate case to recover our infrastructure investments, including the costs associated with SRL, received approval for SAVEGREEN 2020, our largest-ever energy efficiency program. CEV has a strong pipeline of projects that will allow us to reach our goal of adding 160 to 180 megawatts of capacity by the end of fiscal 2022. And we received all necessary Pennsylvania DEP permits and filed with FERC for a notice to proceed for construction of laterals for Adelphia Gateway.	second-quarter fiscal 2021 nfe $1.77 per share. increased nfe per share (nfeps) guidance to a range of $2.05 to $2.15 for fiscal 2021.
We would like to allow as many of you to ask questions as possible in our allotted time. So, we would appreciate you limiting your initial questions to one. NIKE creates value through our relentless drive to serve the future of sport and as we saw again in Q1, our strategy is working with business results that reflect our deep connection to consumers around the world. Q1 was another strong quarter for NIKE with revenue growth of 16%. And even as we saw physical retail traffic return across much of the portfolio, digital continued its momentum with 25% currency-neutral growth led by North America at over 40%. Our digital success is evident of the product innovation, brand strength and scale that drives our meaningful relationships with consumers as we continue to show momentum against our biggest growth priorities. As has been the case since the start of pandemic, I'm proud of the way our entire NIKE team has delivered through macro volatility. Over the past 18 months, we've demonstrated our ability to manage through turbulence to emerge even stronger and better positioned. And that's what we'll continue to do as we navigate through these current supply chain issues. We'll focus on what we can control, while leveraging the many levers. You'll hear Matt walk through our mitigation efforts in a few minutes. Today, we're in a stronger position relative to our competition than we were prior to the pandemic. Because the changes happening in the market work in our favor. Consumers shift to digital that might have taken five years, will now only take two. That plays to NIKE's advantage and our consumer direct acceleration strategy is capitalizing on this marketplace transformation. We know that when we get to the other side of this, we'll be in even stronger shape. We'll be more agile, more direct and more digital. So, we remain focused and confident in our long-term business outlook. Our competitive advantages, including our innovative product, brand strength fueled by compelling storytelling, our roster of the world's best athletes and increasingly our industry-leading digital experiences at retail, will continue to create separation. As we drive strong sustained consumer demand, our confidence remains undiminished. We've just wrapped up an incredible summer of sport, highlighted of course by the Olympics and Paralympics. And moments like these are exciting for our company because sport energizes our roughly 75,000 employees around the world. You can just feel it. And it's through that passion for sport that we continue to innovate and connect to the consumer. In this summer in Tokyo, our leadership as the world's most innovative sports brand was demonstrated once again. If NIKE were a country, we would have eclipsed the competition, capturing 226 medals, including 85 golds. Here are a few examples of what excited us most this summer. We saw the emergence of Gen Z as a powerful next generation of athletes led by a pair of 13-year-old skateboarders who showed us the joy in the expansion of the definition of sport. We signed in key team sports including football where NIKE teams took home gold in both men's and women's, and basketball where NIKE and Jordan teams combined to take five of the six medals, including both golds. And we continued our great legacy in track and field with NIKE athletes winning more individual medals in track and field events than all other brands combined. And at the same time, the European championships brought incredible energy to football in Q1 with England making it to the final. The film saw more than 800 million impressions across all channels as more than half of EMEA's Gen Z population viewed it at least once. And the summer sport also saw Giannis in the Milwaukee Bucks win the NBA title after an electrifying finals against Chris Paul, Devin Booker in the Phoenix Suns. Days later, we released Giannis' latest signature shoe, the Zoom Freak 3, which is built to support the dominant physicality that defines his style of play. We continue to see strong response to the Zoom Freak and we're excited by what we're seeing with our growing Giannis business. And speaking it Devin Booker, Q1 was a great reminder of how we're investing in the next generation of superstars as we continue to build our roster of athletes. Jordan Brand signed the NFL's Dak Prescott in the quarter, joining emerging global icons in NIKE Inc's family, including U.S. Open winner Emma Raducanu and Manchester United's Jadon Sancho. At the end of the quarter, the summer sport gave way to back-to-school season. So far this fall, we've seen sell-through in our kids business up almost 30%, led by digital with growth of almost 70. As we focus on the kids opportunity, our new consumer construct through that we are connecting with families more authentically than ever before. We're creating kid-specific designs and leveraging new channel for us to connect with these consumers. Take, for example, Playlist, which is a just for kid series on nike.com and YouTube. It's filled with games, challenges and exclusive athlete content, all aligned to our mission of encouraging movement in play. Its latest season began a few months back with a new video starring LeBron James and some of his co-stars from their movie Space Jam, a new legacy. Playlist has been a hit with kids and parents alike with viewership numbers well above our expectations. And our kids business remains an important connection point for us, an organic incubator of the brand across multiple generations as we look long term. We're the largest kids' athletic footwear brand in the world, but we know that there is still so much potential ahead. And as I've said before, at NIKE, everything starts with innovation. Our culture of innovation is our most profound competitive advantage. In this week, I toured our new LeBron James innovation center here at our world headquarters with LeBron. At over 750,000 square feet, this new home for our innovation teams is five times the size of our previous lab and is continued proof of NIKE's leadership in sports science. We expect this facility to act as an accelerant as it helps extend our advantage in innovation even further. And looking at our innovation agenda, the two areas that I'd like to touch on today where our relentless pipeline of innovative product continues to create separation between us and our competition, apparel and sustainability. First, let's take a look at apparel. We're seeing strong over indexing growth of 16% in this key growth driver. And the investments we're making in our new consumer construct are fueling higher parallel growth for women, led by our yoga business. Our yoga collection today features multiple industry leading innovations, including Dri-FIT and Infinalon. These innovations are resonating with consumers and have helped us nearly quadruple our yoga business over the past two years. Another key apparel story for us in Q1 was our bras business. This quarter, we maintained our number one market share in sports bras in North America and introduced the NIKE Dri-FIT ADV Swoosh bra. Dri-FIT ADV combines the ultimate in cooling fabrics with highly engineered methods to make. it's an innovation that's connected with consumers as we scale this technology across our line. And now to take a look at sustainability, look at what we've done with Space Hippie. Space Hippie as you may recall is quite literally made from trash and it was originally introduced at our 2020 Future Forum and debuted four separate sustainable material innovations for us including crater foam and space waste yarn. Now since then we have strategically grown this franchise to global scale and what's more, we've also scaled these individual material innovations across our entire portfolio. So today, one year after that initial launch, there are more than 43 styles using Space Hippie innovations across four sports, three brands and our full consumer construct. For instance, you could see it come to life and iconic franchises such as the Air Force 1 Crater. New performance innovation platforms like Cosmic Unity and even in our hands-free accessibility line with styles like Glide FlyEase. By driving new dimensions across platforms, our work to scale Space Hippies innovations catalyze growth. Consumers are clearly responding to sustainability as we're seeing very strong full price sell-through for this family of product, with vast opportunity to drive continued consumer and business value still ahead. And this is just one example of how we lead with platforms and not just products. Our deliberate franchise and innovation management create scalable and sustainable impacts on our business and I'm excited by the upcoming new innovation platforms we'll be introducing soon. Next, let's discuss NIKE's increasing digital advantage. We continue to lead the industry by creating a premium consistent and seamless experience that deepens relationships between consumers and our brand. Our advantage comes to life at retail in both digital as well as at the intersection of digital and physical. I'll discuss both here. Even as physical retail revenue approach pre-pandemic levels, our digital business this quarter grew double-digits. This is the result of an unwavering focus on our strategy and the investments we've made against our end-to-end digital transformation. And so we continue to expect digital to be our leading channel for growth in fiscal '22. Now one of the best agents for success in our digital business is how strongly we're connecting with members. Our digital growth is led by outsized member buying, which has seen a penetration increase of 14 points since last year. Our membership strategy is working as we increasingly use data and analytics to personalize member product offering and experiences. And we're seeing this come to life as repeat buying members grew more than 70% in the quarter. Now part of our success stems from our constant focus on expanding what it means to be a NIKE member. We brought this to life in Q1 by introducing a new launch experience, exclusive to the SNKRS app that revolutionizes how we serve consumers. The new experience debuted in one of the year's most highly anticipated launches the Off-White Dunk. For the launch last month, we rolled out our new elevated SNKRS exclusive access. This approach sends personalized purchase offers to members based on their engagement with SNKRS past purchase attempts and other criteria using data science to drive digital member targeting. for example, 90% of the invitees for the Off-White Dunk went to members who have lost out on a prior Off-White collaboration over the past two years. The result the Off-White Dunk end up in the hands of hundreds of thousands of our most deserving members creating what we call exclusivity at scale. And this improved consumer experience has a positive impact on the entire business. We've seen that those who benefit from exclusive access on SNKRS spend more across NIKE, fueled by the energy of their win. So our increasingly personalized approach to launch, along with benefits like member days an exclusive NIKE By You access highlights how we continue to increase the value proposition of NIKE membership. We're also leveraging our digital advantage by investing in our brick-and-mortar fleet to create a compelling retail footprint that super charges how we serve consumers across physical and digital. A couple of weeks ago, I was in Los Angeles and toward some of our great retail there. I got to see a wide variety of stores including our NIKE Live door in Long Beach, a community door in East LA and more. And across each and every store what jumped out to me was our team. Their love for their community and their passion for our product and bringing it to life for consumers was inspiring and just awesome to see. I also enjoyed visiting a few strategic partner doors,including DICK's and Foot Locker. What's clear across the marketplace, both owned and partnered is how online to offline is becoming second nature. We know that higher level of the connectivity across physical and digital are driving better consumer experience and loyalty. Other services such as buy-online-pick-up-in-store and ship-from-store, as well as the in-store shopping features of the NIKE app drive our premium and seamless consumer experience. And we're starting to extend these innovative experiences globally. In Q1, we brought our NIKE Rise, an immersive concept to Seoul. NIKE Seoul introduces new features to Rise rather including inside track and interactive RFID enabled digital footwear table where shoppers can compare details for any two shoes simply by placing them on the table. Our digitally connected retail experiences are clearly resonating with consumers. This quarter our inline fleet grew over 70% in revenue approaching pre-pandemic levels. We're seeing over index growth from members, not just in digital, but also in physical retail with member buying penetration up double digits since last year. And so, we'll continue expanding these compelling experiences across our fleet in fiscal '22, driving that interplay between physical and digital retail. In the end, NIKE is doing what we always do, staying on the offense. The strength of our consumer demand around the world continues to give us confidence in our playbook and execution. I said it earlier and I'll say it again, I am proud of our resilient and creative team across NIKE, Jordan and Converse and the work we continue to deliver for consumers. Our confidence as we look long term has not changed one bit. We've already gotten stronger through this pandemic and we're going to emerge from it even stronger yet. NIKE's acceleration to a more direct member-centric business model continues to fuel deep connections between consumers and our portfolio of brands, drawing upon our culture of innovation, unmatched global scale and our industry-leading digital platform, we continue to serve the modern consumer as only NIKE can. Our first quarter results proved again that our strategy is working and NIKE's Consumer Direct Acceleration is fueling the transformation of our long-term financial model. Our relentless focus on serving the consumer translated into revenue growth of 16% and EBIT growth of 22% versus the prior year. The NIKE brand remains distinctive and deeply connected in our key cities around the world from New York to Paris, Shanghai to Tokyo, NIKE continues to be consumers number one cool and favorite brand with a position that has gained strength as we've navigated through the pandemic. Consumer demand for NIKE, Jordan and Converse remains incredibly high and our first quarter financial results would have been even stronger if not for supply chain congestion resulting in lack of available supply. Despite these headwinds, retail sales still grew double digits versus the prior year, including a record-setting back-to-school season in North America. Sneakers has increasingly become an indicator and barometer of brand heat, now being operational at scale in 50 countries around the world. NIKE Digital is now 21% of total NIKE brand revenue, which is an increase of 2 points versus last year, with strong double-digit growth versus the prior year even with broad reopening of physical retail. Digital is increasingly becoming a part of everyone's shopping journey and we are well positioned to reach our vision of a 40% owned digital business by fiscal '25. And coming back to marketplace health for a moment, we delivered strong growth in average selling price this quarter with continued improvement in full price realization. This performance reflects our intentional efforts to manage the health of our product franchises as demand surges to move available inventory to serve demand in the right channels and to drive a more premium experience for consumers. This quarter, we exceeded our 65% full price sales realization goal, which reflects the expectations that we put forward at our last Investor Day. As we accelerate our consumer led digital transformation, we are developing and refining new capabilities that are transforming our operating model, quickly becoming a competitive advantage for NIKE. Central to these capabilities is scaling our digital first supply chain to enable NIKE's digital growth while optimizing service, cost, convenience and sustainability. We are evolving our distribution network and forward deploying inventory closer to the consumer, leveraging data and advanced analytics. These actions will improve service levels, reduce carbon impact and ultimately reduce cost to fulfill an order. Our regional service center outside of Los Angeles opened one year ago and we're excited with the opening of two more centers in Q1, pne on the East Coast and one in Spain. Our investments in Odoo services are putting our products in the path of more consumers and more efficiently optimizing our inventory. Today, we have at least two Odoo services in each of our NIKE owned stores in the U.S. and we are aggressively scaling these services across the globe. Our Express Lane offense is also creating more and more agility across our portfolio from creating locally relevant product on shorter lead times to leveraging a shared inventory pool across the marketplace. We are better conserving consumers with more operational flexibility, yielding higher profitability. This quarter Express Lane grew roughly 20% versus the prior year and it increased its share of overall business. And last, the NIKE App continues to enable a convergence between physical and digital shopping journeys, eliminating friction for consumers. From member driven personalization and localization to building an endless aisle through digital integration with our most important wholesale partners, Consumer Direct Acceleration is transforming NIKE's operating model to move at the speed of the consumer. Now, let me turn to the details of our first quarter financial results and operating segment performance. NIKE Inc revenue grew 16% and 12% on a currency neutral basis with growth across all marketplace channels. NIKE Digital grew 25% and NIKE owned stores grew 24%. Wholesale grew 5% in the quarter, negatively impacted by lower available inventory supply due to worsening transit times. Gross margin increased 170 basis points versus the prior year, driven primarily by higher NIKE Direct margins and partially offset by increased ocean freight surcharges. SG&A grew 20% versus the prior year. This was due to higher wage related expenses, higher levels of brand activity connected to return to sport and strategic technology investments. Our effective tax rate for the quarter was 11% compared to 11.5% for the same period last year. This was due to increased benefits from stock-based compensation and discrete items, offset by a shift in our earnings mix. First quarter diluted earnings per share was $1.16, up 22% versus the prior year. Now, let's move to our operating segments. In North America, Q1 revenue grew 15% and EBIT grew 10%. Demand for NIKE remained incredibly strong for the fifth consecutive season, energized this quarter by back-to-school and the return to sport. Retail sales for our Performance business grew strong double digits during the fall season, led by running, fitness and basketball, powered by excitement from the Olympics, the new WNBA season and the NBA finals. NIKE Direct grew more than 45% with NIKE Digital now representing 26% share of business. Digital continued its momentum and grew more than 40%, increasing market share by outperforming industry trends with strong growth in traffic and repeat buying member activity. The return to physical retail accelerated NIKE owned store growth of over 50% as we served members with elevated experiences. NIKE owned inventory increased 12% versus the prior year. This was driven by highly elevated in-transit inventory levels as transit times in North America deteriorated during the last quarter, now almost twice as long as pre-pandemic levels. This impacted product availability across the marketplace and our ability to serve strong levels of consumer demand, particularly in the wholesale channels. Closeout inventory was down double digits versus the prior year. In EMEA, Q1 revenue grew 8% on a currency neutral basis and EBIT grew 26% on a reported basis. This region was energized by the EURO this summer, where NIKE players scored more goals than all other brands combined and more than half of those goals were with our Mercurial boots. We saw a strong consumer response to both the Mercurial boot and replica jerseys during the tournament. NIKE Direct grew 10% on a currency neutral basis, led by our NIKE owned stores. Following a full reopening, we saw traffic increase by double digits versus the prior year, with better than expected conversion rates. In EMEA, while NIKE Digital grew 2% in the quarter, demand for full-priced products grew nearly 30% as we compared to higher liquidation levels in the prior year. NIKE owned inventory declined 14% on a reported basis with closeout inventory down double-digits. Transit times to EMEA have also deteriorated over the past 90 days, causing higher levels of in-transit inventory and negatively impacting product availability to serve strong consumer demand. In Greater China, Q1 revenue grew 1% on a currency neutral basis, EBIT grew 2% on a reported basis as the team delivered in line with our own recovery expectations. Retail sales were impacted in late July and August due to regional closures and lower levels of foot traffic due to COVID containment. Prior to late July, physical traffic had been approaching prior year levels. In July, we engaged with consumers through the launch of our joy of sports local marketing campaign. This campaign generated over $1 billion local views, demonstrating strong brand connection with Chinese consumers. NIKE Direct declined 3% on a currency neutral basis, partially impacted by retail closures. NIKE Digital declined 6% as we compare to higher liquidation in the prior year, partially offset by double-digit improvement in full price sales mix. We experienced a strong 6.18 consumer moment where we grew nearly 10% versus the prior year and remained the number one sports brand on Tmall. Demand in our SNKRS app grew more than 130% for the quarter. Our experienced local team continues to navigate through marketplace dynamics. we finished the quarter with healthy marketplace weeks of supply and inventory normalization is on plan. Now moving to APLA. First quarter revenue grew 31% on a currency neutral basis and EBIT grew 72% on a reported basis. Revenue growth was led by SOKO, Japan, Mexico and Korea with more muted growth in Pacific and Southeast Asia and India due to COVID restrictions and government-mandated store closures. NIKE Digital grew more than 60% on a currency neutral basis, highlighted by the expansion of our NIKE app. in June, the app went live in Mexico and six additional countries across Southeast Asia generating 3 million local downloads during the quarter. Earlier on the call, John spoke about the new NIKE Rise retail experience in Seoul. To mark the opening of the store, our Express Lane, SNKRS and NIKE Rise teams created the NIKE Seoul [Phonetic] Dunk. This collaboration drove more than half of day 1 sales and highlights how digital and physical experiences are converging in our own stores, leveraging local insights and a more agile supply model. Now, I will turn to our financial outlook. Consumer demand for NIKE remains at an all time high and we are confident that our deep consumer connections and brand momentum will continue. However, we are not immune to the global supply chain headwinds that are challenging the manufacturer and movement of product around the world. Previously, I had shared that we were planning for transit times to remain elevated for the balance of fiscal '22. Unfortunately, the situation deteriorated even further in the first quarter with North America and EMEA seeing increases in transit times due primarily to port and rail congestion and labor shortages. Additionally, several of our factory partners in Vietnam and Indonesia were required to abruptly cease operations in the first quarter. As of today, Indonesia is now fully operational, but in Vietnam nearly all footwear factories remain closed by government mandate. Our experience with COVID related factory closures suggests that reopening and ramping back to full production scale will take time. Therefore, we're revising our short-term financial outlook to incorporate the following factors: 10 weeks of production already lost in Vietnam since mid July. Factory reopening to occur in phases beginning in October with a ramp to full production over several months and elevated transit times consistent with where we are now operating today. We now expect fiscal '22 revenue to grow mid single digits versus the prior year versus our prior guidance of low double-digit growth due solely to the supply chain impacts that I just described. Specifically for Q2, we expect revenue growth to be flat to down low-single digits versus the prior year as factory closures have impacted production and delivery times for the holiday and spring seasons. Lost weeks of production combined with longer transit times will lead to short-term inventory shortages in the marketplace for the next few quarters. We expect all geographies to be impacted by these factors. However, those geographies in Asia with less in-transit inventory at the end of the first quarter will experience a disproportionate impact beginning in Q2. For the balance of fiscal '22, we expect strong marketplace demand to exceed available supply. We are optimistic inventory supply availability will improve heading into fiscal '23 against the backdrop of a very strong brand and healthy pull market across all geographies. Turning to the rest of the P&L. We still expect gross margin to expand 125 basis points versus the prior year, at the low end of our prior guidance, reflecting stronger than expected full price realization, the ongoing shift to our more profitable NIKE Direct business and price increases in the second half. This more than offsets roughly 100 basis points of additional transportation, logistics and airfreight costs to move inventory in this dynamic environment. We also expect a lower foreign exchange benefit now estimated to be a tailwind of roughly 60 basis points. And for the second quarter, we expect gross margin to expand at a rate lower than the full year due to higher planned airfreight investment for the holiday season. We expect SG&A to grow mid-to-high teens. We intend to maintain our position as the number one cool and favorite brand and to celebrate the return to sport as we inspire and engage consumers around the world. We will also maintain pace on our multi-year investment plans in order to transform our business for the future as I've outlined in prior quarters. NIKE's financial strength is a competitive advantage and it is in moments like these where our competitive strengths and strong balance sheet affords us the ability to remain focused on what's required to win and serve consumers for the long term. In closing, our vision for NIKE's long-term future remains unchanged. NIKE is a growth company with unlimited potential. Despite new short term operational dynamics, our consumer-direct acceleration offense is driving our business forward and transforming our financial model toward the long-term fiscal '25 financial outlook I shared last quarter. This quarter's impressive results are additional proof that our strategy is right, not only for the moment we find ourselves in, but also for the opportunity to serve the future of athlete and sport like only NIKE can. I wouldn't trade our position with anyone. And there is no better team to navigate through volatility and lead long-term transformational change.	nike q1 earnings per share $1.16. q1 earnings per share $1.16. qtrly gross margin increased 170 basis points to 46.5 percent. qtrly revenues for nike, inc. increased 16 percent to $12.2 billion compared to prior year, up 12 percent on a currency-neutral basis. qtrly revenues for nike brand were $11.6 billion, an increase of 12 percent to prior year on a currency-neutral basis. saw growth across all channels, led by nike direct growth of 25 percent during quarter. contributing to nike direct growth was steady normalization of owned physical retail, which grew 24 percent during quarter. nike brand digital business continued strong growth, increasing by 25 percent, led by north america growth of 43 percent during quarter.
We would like to allow as many of you to ask questions as possible in our allotted time. So, we would appreciate you limiting your initial questions to one. Since 2016, Virgil has been a beloved member of the Nike, Jordan and Converse family. He was a brilliant creative force who shared a passion for challenging the status quo and pushing forward a new vision, while inspiring multiple generations along the way. But what stood out to me personally about Virgil, was his humility and humanity. We offer our condolences to the many who shared a connection with Virgil. He will be missed greatly. As we look at Q2, the creativity and resilience of our entire NIKE, Inc. team helped deliver another strong quarter. The results we delivered offer continued proof that our strategy is working, even as we execute through global macroeconomic constraints. Whenever there's turbulence, I always go back to the fundamentals and for Nike, that means putting the consumer at the center and leveraging our long-term competitive advantages, which include a culture deeply rooted in innovation, a brand that deeply connects with consumers, fueled by compelling storytelling, and an unmatched sports marketing portfolio and we believe a fourth emerging competitive advantage for us is Digital, as we are one of the few brands that can directly connect with and serve consumers at scale. We also continue to benefit from structural tailwinds that have accelerated during the pandemic. Tailwinds that include a larger movement of health and fitness that is taking place around the world, consumers' desire to wear athletic footwear and apparel in all moments of their lives and an expanding definition of sport, and last, the fundamental shift in consumer behavior toward digital plays to our increasing digital advantage. As I've said before, challenges create opportunities for strong brands to get stronger and that's what's happening here. And we are now in a much stronger competitive position today than we were 18 months ago, and that trend continues. We are seeing this strength come to life this holiday season. Our brands' deep connection with the consumer is driving strong holiday sales, most notably with North American Digital leading the industry over Black Friday week, with close to 40% growth. And our Singles Day performance showcased our brand strength in greater China as we added 13 million new members, and Nike was again the number one sport brand on TMall. More broadly, this holiday season has shown the power of our digital transformation across the globe. Digital is the engine driving our Consumer Direct Acceleration strategy. And Q2 was another incredible quarter for sport led by our deep roster of athletes and teams. Let me just touch on a few of the highlights from the quarter. Following the exciting end of the WNBA and MLB seasons, the energy around sport continues with the NBA, NFL, European soccer and upcoming college football bowl season, where 16 of the top 20 teams and three out of the four Playoff participants are Nike teams. When these leagues are as exciting as they are today, our business benefits. Nike athletes continue to lead the way across the sports landscape, highlighted by Barcelona captain Alexia Putellas, who won the Ballon d'Or as the best female footballer in 2021. We were also thrilled to see Marcus Rashford receive his MBE from Prince William last month, an honor very well deserved for his work to support vulnerable children during the pandemic. And congratulations to Cristiano Ronaldo for reaching yet another remarkable milestone by becoming the first player in recorded history to score 800 career goals in official matches. And I also have to give a special shout-out to Shalane Flanagan who was wearing the Nike Air Zoom Alphafly Next%, when she completed the six World Marathon Majors in six weeks running each of them in under two hours and forty-seven minutes. This achievement offers all of us a reminder of the joy and unrelenting spirit of sport. As we deliver against our Consumer Direct Acceleration Strategy, we continue to drive separation as the most innovative sports brand by delivering a constant pipeline of new products that sets the standard and what's more, we're aligning against our key growth drivers of Women's, Jordan and Apparel, as well as to our commitments to sustainability. In Women's, we launched a brand new shoe designed specifically for dancers. The Nike Air Sesh, was designed by Tinker Hatfield, in collaboration with professional dancers and it choreographers prioritizes both style and performance with a mid-cut leather upper and a cushion foam under the foot. We launched the Air Sesh for Nike members first, with a wider release to take place soon. As we continue to accelerate our strategy and fuel the expanded definition of sport, we are able to more deeply connect with women and create an even sharper focus. And this quarter also saw the debut collection from the Serena Williams Design Crew, our apprenticeship program that advances diversity in design. The Crew connects innovation, design and purpose in a uniquely powerful way, fueled by our commitment to the full spectrum of sport for women, across performance and lifestyle. Serena joined us on campus a few months back to help open the Serena Williams Building at our World Headquarters. Along with our LeBron James Innovation Center, these two buildings represent the most remarkable investment in sport innovation in the world. We were also thrilled to see the Jordan Brand launch the AJ36. The AJ36 is NIKE Inc.'s first shoe using leno-weave, a process that creates material that is uniquely strong, lightweight and adaptable to all foot shapes making the AJ36 one of the lightest Air Jordans ever. Consumers can expect to see us iterate on this innovation in future seasons. In Apparel, we're driving energy in the market through design that resonates with consumers. The latest NBA City Edition and MLB City Connect uniforms are great examples as we grow the culture of the sport by listening to local team communities and using thoughtful design to celebrate the game. We also launched FIT ADV, the next generation of performance apparel that combines weather-ready tech and innovative design to help athletes take on extreme conditions. This represents the pinnacle of Nike apparel innovation and is currently in Nike's performance apparel collections. And next year, it will be available in Nike lifestyle products across all platforms. And finally in sustainability, we launched Alphafly Next Nature, our most sustainable performance shoe and our first sustainable performance running shoe. This continues the progress made by our Cosmic Unity sustainable basketball shoe by reaching more than 50% total recycled content by weight. Learnings from the Alphafly Next Nature will be scaled across our running line, creating higher performing products with more sustainable materials. We know the future of sport depends on a healthy planet and we remain committed to doing our part to protect that future. As we connect consumers with the strongest innovation, athlete roster and brand storytelling in the world, we are also elevating their experience through One Nike Marketplace. We are creating the marketplace of the future, where we serve consumers with seamless, consistent, and premium experiences. Through Nike membership, we increasingly know and serve our consumer across a connected marketplace. I'd like to highlight three examples from this quarter of how Nike is driving a more elevated and premium member experience across the marketplace. First, we recently launched new wellness content and workouts featuring Megan The Stallion in our Nike Training Club app. Megan's content drove record high engagement, drawing 2 times increase in daily active users in NTC, and her curated looks saw more than double the demand, compared to any other product content viewed during that same time period. Second, ahead of Singles Day in Greater China, we activated a new member experience on TMall and improved the onboarding journey. As a result, the Nike Flagship store on TMall was the number one brand for new member recruitment across sport, driving a 20 point increase in member demand penetration this year. And third, just last month, we announced a partnership with one of our strategic retail partners, Dick's Sporting Goods, who shares our vision for the future of retail specifically, shopping and experiences that are amplified by digital and personal to each consumer's journey. This new partnership allows shoppers to link their Nike member account and their DSG account together to unlock exclusive offers, products and experiences. Recently, I had an opportunity to visit one of DSG's newest concepts, the House of Sport door in Rochester, NY. I must say I was blown away at the store's unique service model, interactive sport experience and enhanced showcasing of product, which creates a true destination for consumers and will alter future expectations at retail. Our partnership with DSG is a new model for how brands and retailers work together delivering product, experience, and connection service to delight consumers at scale. We are fulfilling our vision, that through connected member experiences and inventory, powered by connected data and technology, we can provide consumers with greater access to the very best of Nike with more speed, convenience and connection to our brand and sport than ever before. As we look forward there is even more opportunity to connect consumers with Nike across digital platforms that integrate sport, innovation, culture, and commerce. For example, we recently opened a new space in our New York digital studio to produce the weekly Sneakers livestreams that are driving industry leading engagement metrics. Weekly content includes launch previews in our Sneakers Live Heating Up show, and a new Jordan franchise presented through the lens of female Jordan fans, called J-Walking. Our stories go deep and engage a two-way interaction with the community. As a result, our consumer engagement is 3 times the industry average for livestreams. And speaking of Sneakers and Jordan, the first set of invitations for the AJ11 Cool Grey was sent to the largest female-focused group yet and sold out in the first hour. The group was selected utilizing our new Dedication Score designed to reward member groups with high product affinity. We continue to see exclusive access serve as a defining marketing mechanism to connect with consumers. In Q2, we also launched the 3D immersive world of NIKELAND on Roblox. Nike is meeting young athletes wherever they are, encouraging them to let their imaginations run wild and rewarding real-world movement through new virtual experiences. The Nike, Jordan and Converse brands have always thrived at the intersection of sport, creativity, innovation and culture. The RTFKT acquisition allows us to extend this reach to serve and delight consumers and creators in both the physical and virtual worlds. We will invest in the very talented RTFKT team, creator community and cutting-edge innovation to deliver next generation experiences that involve the RTFKT and NIKE Inc. brands. Today, we are stronger than we were before the pandemic, and I couldn't be more excited by the opportunity ahead of us. Our results this quarter are evidence that our strategy is working. Through all we've navigated, this team has worked together with creativity and resilience to serve our consumers and serve our communities. As you've heard us say before, Nike is a growth company with boundless potential. And our Consumer Direct Acceleration strategy is transforming our operating model by driving deeper and more direct connections with consumers through digital. Our teams continue to navigate through unprecedented levels of volatility with flexibility, agility and grace, leveraging the operational playbook we created at the onset of the pandemic to stay focused on what matters most. We have embraced new ways of working, elevated experienced players into new leadership roles, reorganized the company to create even deeper focus on the consumer, and developed new capabilities to serve consumers directly with speed and at scale. Nike's second quarter financial results were in line with the expectations we established 90 days ago, fueled by continued Brand momentum, the strength of our product franchises with extraordinary levels of full price realization, and strong season-to-date Holiday sales, offset by lower levels of available inventory supply relative to marketplace demand. As John mentioned, we had an incredible Black Friday week with Nike Direct in North America and EMEA increasing over 20% versus the prior year, on top of last year's meaningful gains. To accomplish this, I'm particularly proud of the work by our supply chain teams. In late October, I was able to visit our North America distribution centers in Pennsylvania, Tennessee and Mississippi, to review our expanding digital fulfillment capabilities and holiday readiness plans. Our teams are executing those plans with precision, optimizing available inventory to meet demand with improved service levels and lowering carbon impact, all enabled through technology and automation. Staying on the topic of supply chain a little longer. Factory reopening in Vietnam is on plan. Nearly all impacted factories began reopening in October. As of today, all factories are operational and employee attendance rates have improved, with weekly footwear and apparel production now at roughly 80% of pre-closure volumes. In total, Vietnam factory closures caused us to cancel production of roughly 130 million units due to three months of lost production volume and several months to ramp back to full production. Compared to ninety days ago, we are increasingly confident supply will normalize heading into fiscal '23. Turning to our digital business. Nike's digital growth is outperforming comparisons and being fueled by our member-centric focus. Nike Digital grew 11% in the quarter, on a currency neutral basis, setting the pace for the industry. Nike Digital is now 25% of total NIKE Brand revenue, up 3 points versus the prior year and more than double the digital mix in fiscal '19. Enhanced onboarding experiences are attracting millions of new members into the top of the funnel, and we are focused heavily on member engagement and buying. Member engagement grew 27% and repeat buyers grew 50% versus last year, driving overall higher AUR, AOV and member buying frequency. 40% of total digital demand this year is coming from our mobile apps, highlighting the strength of our digital platform. We now have over 79 million engaged members across our Nike ecosystem. And as Nike's digital ecosystem continues to grow, we are beginning to see the compounding benefits of scale from brand awareness and consumer connection, to data informed personalization and inventory utilization, to loyalty. This quarter, we held our first globally coordinated Member Days event, setting records in member engagement. From member exclusive product offerings to our first livestreamed member events from our Nike Town London and Passeig de Gracia Store in Barcelona, we created a distinct member experience and set a record for weekly active users on the Nike App in North America. Now moving to one final topic. Connecting with today's consumer means serving them with the product they want when and where they want it. Consumers want a premium, seamless and personalized experience, with minimal friction across their journey to explore, engage, connect and purchase products from the brands they love. As we've discussed before, Nike is focused on creating One Nike Marketplace that elevates the brand by creating direct consumer connections through fewer, more impactful wholesale partners, with a connected mobile digital experience at the center built for the Nike member. Over the past four years, North America has reduced the number of wholesale accounts by roughly 50%, while delivering strong growth and recapturing consumer demand through Nike Direct and our strategic wholesale partners leading the way for Nike. In the second quarter, North America Digital grew 40% versus the prior year, pushing Nike Digital to 30% of total North America marketplace, bringing Nike Direct to 48% of total. In order to enable this growth and drive the shift in marketplace composition, we have accelerated investment to evolve our distribution network and scale a digital first supply chain, leveraging advanced analytics, automation and technology. We have opened two new regional service centers on both coasts, which are able to deliver more units to consumers with shorter delivery times. We also enabled ship from store capabilities across our store fleet, all leveraging advanced analytics from our Celect acquisition. On automation, we have added more than 1,000 robots in our distribution centers to handle the digital growth. In our digital distribution center in Memphis, robots handled more than 10 million units that would have otherwise required manual labor. We continue to scale O2O consumer services across our store fleet, including buy online, pick up in store, and digital order returns in store. Volumes are relatively small today, but we have significant opportunity to scale. We have also established new fulfillment models with key strategic partners to create inventory visibility across the marketplace and optimize full price digital demand. When we do this right, the consumer wins. The progress being made to create One Nike Marketplace has accelerated North America's revenue growth and gross margin expansion for yet another quarter, illustrating how Consumer Direct Acceleration will fuel Nike's growth and profitability toward the fiscal '25 outlook we shared in June. Now let me turn to the details of our second quarter financial results and operating segment performance. NIKE, Inc. revenue grew 1% and was flat on a currency neutral basis, led by 8% growth in Nike Direct offset by a 6% decline in wholesale, due to optimization of available inventory supply. Nike Digital grew 11% and Nike-owned stores grew 4% with significant improvements in traffic and higher conversion rates. Gross Margin increased 280 basis points versus the prior year, driven primarily by higher Nike Direct margins due to lower markdowns, higher full price mix and foreign currency exchange rates, partially offset by increased freight and logistics costs. SG&A grew 15% versus the prior year primarily due to normalization of spend against brand campaigns, digital marketing investments to support heightened digital demand, strategic technology investments and wage related expenses. Our effective tax rate for the quarter was 10.9% compared to 14.1% for the same period last year. This was due to a shift in our earnings mix and the effects of stock-based compensation. Second quarter diluted earnings per share was $0.83, up 6% versus the prior year. Before we move into operating segment results, I want to recall a few points I made last quarter regarding the impact of Vietnam factory closures on the short-term performance of each of our geographies, beginning in the second quarter. North America and EMEA finished the first quarter with high levels of in transit inventory, resulting in prior season supply that was arriving late due to longer transit times, which could be sold in the second quarter. We saw that in our Q2 results. However, Greater China and APLA, located closer to our sourcing base with shorter standard transit times, experienced a decline in units sold in the second quarter due to lost production and lower available inventory supply. We also saw that reflected in our Q2 results. With that in mind, let's review the operating segments. In North America, Q2 revenue grew 12% and EBIT grew 21%. Demand for Nike remained incredibly strong, with season-to-date holiday retail sales across the total market growing double-digits, energized by the continued momentum from the return to sport and the beginning of an outstanding holiday season. Performance sport dimensions delivered strong double-digit retail sales growth, led by Running, Fitness, and Basketball, on lower levels of sell-in due to available inventory supply. Womens retail sales grew high double-digits, more than twice the rate of men's, with strong growth across both footwear and apparel. Nike Direct had an outstanding quarter, growing 30% versus the prior year. As I mentioned earlier, Digital maintained its momentum growing 40% and setting holiday records on Black Friday week. Nike-owned stores also delivered strong double digit growth, with traffic trending toward pre-pandemic levels, and strong increases in AUR, due to lower closeout inventory levels and significant year-over-year improvements in markdown rates and promotions. Despite strong retail sales momentum in the wholesale channel, revenue declined 1% as marketplace inventory levels remain lean, and Vietnam factory closures and longer transit times disrupt the flow of inventory supply to meet marketplace demand. In EMEA, Q2 revenue grew 6% on a currency neutral basis and EBIT grew 22% on a reported basis. Season-to-date holiday retail sales across the total market grew double-digits, with strong growth across all consumer segments. The region was energized by the start of the global football season and the Champions League tournament across the continent. Nike players continue to dominate on the pitch with the Mercurial boot being the lead scorer in a number of European professional leagues. We saw a strong consumer response for the Mercurial boot and launch of the Champions League third kit. Wholesale revenue grew 6% on a currency neutral basis as we comp prior year market closures. Nike Direct also grew 6% led by double digit growth in Nike-owned stores as we comp prior year store closures, with traffic improvement due to tourism picking up and back to school holidays. Nike Digital was down 1% as we compare to extraordinary levels of off price sales in the prior year, as the geography leveraged digital in the prior year to liquidate excess inventory. This quarter, our full price Digital business grew over 20%, resulting in a 30 point improvement in full prices sales mix, double-digit growth in AUR and improvement in markdown rates and promotions. This contributed to strong year-over-year expansion in gross margin and return on sales profitability. In Greater China, Q2 revenue declined 24% on a currency neutral basis and EBIT declined 36% on a reported basis, however, season-to-date holiday retail sales across the total market have trended more favorably. Results for this quarter were as expected, as we navigated lower full price product supply due to the Vietnam factory closures. We saw disproportionate impacts to our wholesale revenue, which declined 27% on a currency neutral basis. Nike Direct declined 21%, with declines in both digital and physical retail channels. COVID-related lockdowns continue to drive volatility in retail traffic, however, we did see traffic recover to pre-pandemic levels at times throughout the quarter. Digital declined 27%, partially impacted by delay in product launch timing on Sneakers. Over the 11.11 consumer moment, we drove stronger digital performance with significant member acquisition and higher AOV through better engagement with consumers. While challenging, we continue to leverage our operational playbook and remain optimistic about the longer term in Greater China. This quarter, we extended our Joy of Sport brand campaign, utilizing local influencers, Olympians and other athletes that are part of Nike's leading sports marketing portfolio in Greater China. The Jordan brand added to the energy by announcing their first female athlete signing in Asia, with basketball player Yang Shu Yu. To support this activity and normalize our marketing investment levels, we increased our investment in demand creation in the second quarter by more than 40% versus the prior year. Our local team remains focused on creating distinctive and authentic connections with Chinese consumers. We celebrated the 40th anniversary of Nike's operations in China by using the Express Lane to reintroduce the original Nai-ke collection, with robust storytelling on the history and heritage of these iconic products. During our first launch, all product sold through in the first hour. We will continue to expand the Express Lane to bring unique, localized offerings to the consumer, leveraging our most popular global product franchises to drive uniquely Nike energy in the marketplace. We see encouraging signs in Greater China and while inventory supply has been a major disruption in the marketplace, we continue to expect fiscal '22 to be a year of recovery. Having said that, we expect to see sequential improvement from here, beginning in the third quarter. Now moving to APLA. Q2 revenue declined 6% on a currency neutral basis and EBIT declined 8% on a reported basis. Double-digit revenue growth, on a currency neutral basis, in SOCO was offset by declines in Asia Pacific territories which faced a greater impact from Vietnam factory closures as well as the business model shift in Brazil. Season-to-date holiday retail sales across the total market grew versus the prior year, despite supply disruptions and door closures in SEA&I and Pacific. Nike Direct grew 6%, led by Nike Digital growth of 25%. Our teams maximized market moments with all territories delivering successful Member Days and locally relevant activations including Singles Day in South East Asia, Buen Fin in Mexico and Cyber Week in Japan. Mexico's digital business more than doubled as we enabled a localized assortment and fulfillment capabilities through the Nike App. Finally, APLA continues to leverage the Express Lane, their digital ecosystem and global partnerships to create locally relevant product and meaningful engagement with consumers around the world. Consumers in APLA are highly connected, and our team continues to innovate on digital experiences that are locally relevant. The Dia De Los Muertos footwear pack saw 100% sell through and this story was extended to the world through our new partnership with Roblox. Now let's turn to our financial outlook. As we approach the end of the second year of the pandemic, it is becoming even more challenging to compare quarters and fiscal years due to multiple waves of COVID-related disruption at different times, across the consumer marketplace and now supply chain. We expect the operating environment to remain volatile as COVID-variants continue to cause disruption to business operations. Our fiscal '22 financial outlook reflects inventory supply significantly lagging consumer demand across Nike's portfolio of brands. However, Nike's long-term market opportunity is larger than ever, and so we remain focused on what we can control in the short-term and on where we are heading through our Consumer Direct Acceleration strategy and on what is required to deliver on our fiscal '25 financial outlook. Specifically for fiscal '22, we continue to expect Revenue to grow mid single-digits versus the prior year, in line with guidance from 90 days ago. For Q3, we expect revenue to grow low single-digits versus the prior year, due to the ongoing impact from lost production from COVID-related disruptions in Vietnam. We are raising our gross margin guidance to expand 150 basis points versus the prior year. We expect to continue benefiting from exceptional demand against the backdrop of lean marketplace inventory. Full price realization will remain above our long-term target, with lower channel markdowns. However, we expect product costs to rise in the second half due to higher macro input costs. We are also planning for supply chain cost for the full year to increase relative to our estimates 90 days ago, with a greater impact in the second half. Last, we now expect foreign exchange to be a 55 basis points tailwind versus prior year. We continue to expect SG&A to grow mid-to-high teens for the full year as demand creation spend normalizes and we continue to invest in the capabilities to support our consumer-led digital transformation. We now expect our effective tax rate to be in the low teens for the full year. Consumer Direct Acceleration is driving our business forward and it is transforming our financial model. We continue to prove that we can manage through the uncertainty and volatility in the current operating environment But we are doing more than just managing through, we are building Nike for the future with deeper consumer connections, a pipeline of product innovation to serve the needs of the modern athlete, and new operational capabilities required to serve consumers directly and digitally, at scale. We have a clear vision of our brands' long-term future, and so we remain focused on what is required to win over the long-term.	compname reports q2 earnings per share of $0.83. q2 earnings per share $0.83. q2 revenue rose 1 percent to $11.4 billion. qtrly nike brand digital sales increased 12 percent, or 11 percent on a currency-neutral basis. qtrly gross margin increased 280 basis points to 45.9 percent. nike - qtrly revenue in greater china & apla declined, largely due to lower levels of available inventory resulting from covid-19 related factory closures. while closures had impact across portfolio, n. america & emea delivered growth due to higher levels of in-transit inventory entering q2. higher quarter-end inventories driven by elevated in-transit inventories due to extended lead times from ongoing supply chain disruptions.
We would like to allow as many of you to ask questions as possible in our allotted time, so we would appreciate you limiting your initial question to one. It's a time of great concern for all of us, and it is simply devastating to see the impact it's having on the lives of so many people. As always, our primary focus is the safety and well-being of our teammates and their communities, and we remain hopeful for a peaceful resolution soon. Now turning to our Q3 performance. More than two years since the start of the pandemic, our teams continue to prove their ability to operate through volatility while also staying focused on the long term. And we once again demonstrated that agility in Q3. It's clear that our strategy is working, with business results that reflect our deep connection to consumers around the world. I'm proud of our results this quarter. We met and even exceeded what we said we would deliver 90 days ago. For Q3, our revenue growth was 5%, led by double-digit growth in NIKE Direct. This success, amid the dynamic macroeconomic environment, is what continues to give us confidence in our long-term outlook and it's why I would not trade our position with anyone. The power of NIKE is our consistency and the strength of our global portfolio. Our investments are making us stronger and we're excited by what we see as we execute against our growth opportunities. As a team, we're driven by our shared purpose to move the world forward through the power of sport. And earlier this month, we released our fiscal '21 impact report. This report, which marks our 20th year reporting on our environmental and social impact is our first since we set new quantifiable ESG targets last year. We're focused on a wide range of priorities from building a diverse, inclusive team and culture, to meeting the challenges of climate change, to helping kids access the joy of play and movements. I encourage all of you to learn more about the measurable progress we've made at purpose. nike.com as we continue to create long-term value by shaping a better future through sport. And of course, 2022 isn't just an anniversary for our impact report. It's also a big year for NIKE itself. This May, NIKE will be celebrating our 50th anniversary as a company. 50 years ago, our journey began with a dream to serve athletes, and today, we're humbled by what we've achieved and we're thrilled and excited by what's to come. Looking at Q3, NIKE's growth was and it will continue to be the result of three areas I'll touch on today: first, connecting with consumers through our strong portfolio of brands; second, driving a relentless flow of new product innovation; and third, expanding our digital advantage to create the marketplace of the future. So let's start with NIKE's strong brand and our connection to sport, which differentiates us all over the world. NIKE's connections with consumers are driven by sport and cultural authenticity. And our roster of athletes is second to none. Rafael Nadal made history by becoming the first male tennis player to win 21 majors with his victory at the Australian Open, and he now stands alone at the top of the men's game. Aaron Donald, Cooper Kupp and Odell Beckham Jr. led the L.A. Rams to a thrilling Super Bowl victory. And in the NBA All-Star game, a face-off between Team LeBron and Team KD ended with LeBron hitting the game winner. I was able to attend the game and I loved getting to see the league showcase of its 75th anniversary team. It was just an awesome reminder of the power of sport and what sport has meant to so many of us over the years. The quarter also saw the Winter Olympics and Paralympics produce some extraordinary athletic performances. Nathan Chen won gold for the U.S. in the men's singles figure skating. And Chloe Kim won gold in the U.S. in the halfpipe, making her the first woman to win two gold medals in the event. And throughout the Olympics, our Never Done brand campaign was awesome. In Greater China, it featured snowboarder Cai Xuetong, and it saw an incredible response in that geo with over 6.1 billion impressions. And we're also in the middle of an amazing March Madness with NIKE, Inc. having more teams still alive across the men's and women's brackets than all other brands combined. As you know, Mike Krzyzewski is coaching in his final season at Duke, having already announced his retirement as the winningest coach in NCAA men's basketball history. Coach K has been a member of the NIKE family for nearly 30 years, and his leadership and clear set of values have meant so much to this company and to me personally. My leadership role models have always been head coaches, leaders that serve their players, serve their programs and serve a broader cause, and Coach K has been right up there at the top of that list. So from the entire NIKE family, happy retirement, coach. This was also a quarter where the world was reminded of how the NIKE Brand drives the culture around sport. In January, Sotheby's auctioned off 200 pairs of the Louis Vuitton Air Force 1 by Virgil Abloh and reported that it set the record for the most valuable sneaker and fashion auction ever at more than $25 million, with all proceeds going to Virgil Abloh's Post-Modern Scholarship Fund. The auction drew the most bidders of any auction in Sotheby's history and was their most valuable charity auction over the past decade. It's simply another reminder of how the NIKE Brand, our most iconic product franchises and our partnerships, can come together for the kind of power and cultural energy and excitement that only NIKE can create. In fact, that power was also felt in one of the biggest stages of the quarter. During the halftime show of the Super Bowl, in front of the largest U.S. TV audience of the last five years, we saw NIKE Jordan and Converse footwear all on stage during the performance, which was simply an incredible moment for our portfolio of brands. Our portfolio is one of our best competitive advantages, fueling energy to consumers worldwide. And we also connect that energy to consumers through the investments we make. Driven by our commitment to women's sport, this quarter, we furthered our 25-year commitment to the WNBA by becoming an equity investor in the league. We'll work together to deepen WNBA's storytelling and bring more girls into basketball at the local level. The consumer response to our long-standing commitment has been clear. This season, we sold more WNBA jerseys on nike.com on launch day alone than we did over the entire previous year. And this is just simply the latest example of how driving the sport of basketball to a new generation of fans connects us to a vast market with plenty of growth ahead. As you know, at NIKE, everything starts with innovation. And our relentless pipeline of innovative product continues to create separation between us and our competition. And we don't just create new franchises, we grow them to global scale. Take a look at FlyEase. We've talked before about our hands-free accessibility line, and we're excited by our work to scale this innovation across our entire portfolio. Here's just three examples from Q3. As part of the Metal Stand look for the Team USA, Olympians and Paralympians, we designed the ACG Gaiadome FlyEase Boot, FlyEase's first crossover into our celebrated outdoor ACG line. And FlyEase also moved into Converse for the first time with the Chuck Taylor All Star CX FlyEase, as Converse now joins NIKE and Jordan in adding the hands-free innovation to footwear icons. And in kids, where helping make spontaneous play easy is one of our goals, the new Dynamo Go uses FlyEase to help kids quickly get their shoes on and off. Dynamo Go debuted in Japan, Korea and Greater China to become one of the season's top five sellers, and we have a North America launch scheduled for April. By driving impact across platforms, our work to scale FlyEase catalyzes growth. We expect FlyEase to be roughly $0.25 billion business by fiscal next year, with vast opportunity for even greater growth and value to come. Looking at performance innovation. In Q3, we launched the ZoomX Streakfly, our lightest road racing shoe yet. The Streakfly offers an engineered knit upper and responsive ZoomX midsole, all designed for speed in the middle-distances. Also in running, the Pegasus 38 saw very strong sell-through in the quarter, continuing the Peg's lineage as one of our powerhouse franchises. And we're also always innovating in apparel. I mentioned the Olympics earlier. The hockey jersey worn by our federations, including the U.S. and Canada, were designed using brand-new 4D body mapping technology from our NIKE Sports Research Lab. This 4D body mapping, which gives our teams a fast, accurate and high detailed way to design, offers a hint of the future as we stay focused on bringing new technology into our growth opportunity in apparel. And last but not least, we continue to set the standard for sustainable product creation. A few weeks ago, we announced the NIKE ISPA Link, a new proprietary platform where shoes are built with interlocking modules and they're connected without any glue. From a manufacturing standpoint, ISPA link is revolutionary in its simplicity. One pair takes about eight minutes to assemble, a fraction of the time needed for a traditional sneaker. And it doesn't require energy-intensive processes like heating, cooling and conveyor belt systems. So with no sacrifice to comfort or stability, the ISPA link will be available at retail in June and we can't wait for consumers to give it a try. Now let's move to the marketplace as we align our business to build deeper and more meaningful relationships with consumers. Our marketplace strategy is a growth strategy, and it's driven by the consumer, fueled by their expectations of a consistent, seamless and premium shopping experience. Our approach begins with the understanding that consumers expect us to know who they are regardless of channel, online or offline, across the full array of mono brand stores, NIKE Digital and our wholesale partners. Our wholesale partners continue to play a very important role in our marketplace strategy, so let me start there. Last quarter, we announced a new partnership model that makes real our vision to give consumers personalized experiences regardless of channel. It gives shoppers the benefits of NIKE membership to unlock exclusive offers, products and experiences in partner stores. And it also recognizes the importance of onboarding members in stores, which in turn accelerates in-store conversion and improve customer lifetime value. This quarter, we extended this model globally, including two new connected partners in Greater China, Topsports, Pou Sheng. This is an exciting step on our journey within our marketplace strategy because it continues to prove how powerful it is when brands and retailers work together for the benefit of consumers. We value the strong strategic relationships we have with our partners, particularly through our shared vision of connected data and inventory. And this approach lets us serve consumers with the greatest access to the best of NIKE and to do so with speed and convenience in a more personalized, engaging and sustainable way. And what's more, in Greater China, this partnership model takes us into a new era of marketplace transformation. Moving forward, all of our existing contracts with our NSP partners in the geo will follow this connected membership model. And over time, we plan to convert all partner mono brand stores into digitally connected NIKE retail concepts as we unlock the benefits of data and inventory across the Greater China marketplace. We're excited by the promise of this new model, and we strongly believe it will elevate the entire marketplace and drive growth for both NIKE and our partners over the long term. Next, let's dig a little deeper into our growing digital advantage. As we create the future of retail, we build on our own digital capabilities that connect and serve consumers at scale. In Q3, digital revenue was up 22% on a currency-neutral basis as we continue to drive greater competitive separation, particularly through our app ecosystem. The NIKE mobile app was up more than 50% in the quarter and overtook Nike.com on mobile for our highest share of digital demand. And SNKRS continues to gain momentum, particularly as its strong consumer engagement leads to improved conversion. The live streaming on SNKRS remains incredibly popular with new features continuously coming online. For instance, we started to drop product launches within live streams, which helps lead our audience to quadruple since our live streaming began last fiscal year. And in December, the AJ11 Cool Grey launch on SNKRS was the largest for a single style in the history of NIKE Direct. We drove this unprecedented demand by engaging with consumers in new ways, including leveraging Snapchat's Try On lens, a #InMyJs Instagram activation and a Fortnite partnership with custom skins and a digital scavenger hunt. Looking forward, we're excited about the opportunity for SNKRS to continue to explore new dimensions and experiences like live streaming and to do so particularly for women's product and for apparel. More to come here soon as we continue to use digital to engage all consumers in ways that integrate culture, commerce, sport and innovation. And at the same time, our growing participation in new digital platforms lets us create innovative ways to connect with consumers, letting them unlock virtual experiences, products and rewards as we expand access points to NIKE across the digital ecosystem. For instance, to celebrate the Super Bowl, we collaborated with EA Sports, giving NIKE members who ran five miles in our Nike Run Club rewards and unlocks within the Madden game. Members had to link accounts between NIKE and EA to join the challenge, representing the first incidence of account linking with our gaming partners. The number of new members we acquired surpassed our expectations. And the framework we developed with EA Sports will allow future membership connects to come to life even more efficiently with new partners. And we expect that this, in turn, will lead to increased engagement, membership and revenue growth down the line. And during NBA All-Star Week, LeBron visited NIKELAND on Roblox to inspire its community toward physical movement in play. On the NIKELAND court, LeBron coached and engaged with players, and participants were rewarded for physical gameplay with the ability to unlock virtual products. Since its launch, a total of 6.7 million players from 224 countries have visited NIKELAND on Roblox. And we plan to continue driving energy there with virtual products like LeBron 19 styles special to Roblox. In addition, we announced NIKE Virtual Studios this quarter, following our acquisition of RTFKT. With NIKE Virtual Studios, our vision is to take our best-in-class experiences in digital and build Web 3 products and experiences to scale this community so that NIKE and our members can create, share and benefit together. In Q3, RTFKT released the first official NIKE-branded NFT, our first step into the world of digital product creation. We're pleased by the positive momentum and energy we're already seeing in the space, and we're excited about the future as we continue to extend our digital leadership in the industry. In the end, NIKE is doing what we always do. We are staying on the offense. Our confidence as we look long term hasn't changed one bit. We've been resolute in fueling innovation and our brand is as strong as ever. NIKE's unique strengths continue to set the pace and keep us in the lead. NIKE has become more agile, responsive and resilient over the past two years through the operational capabilities and playbook that we have developed to navigate the unexpected. This past quarter, the operating environment shifted rapidly as the latest COVID variant presented new challenges to business operations. And our teams around the world were prepared to do what was necessary to continue to serve the consumer. Our ability to optimize near-term performance through heightened levels of volatility while continuing to make strategic progress on Consumer Direct Acceleration reinforces NIKE's positioning as a portfolio of leading brands with unlimited potential. Marketplace demand continues to significantly exceed available inventory supply, with a healthy pull market across our geographies. When inventory supply is available in region, we are quickly moving it to the appropriate channels to serve consumer demand. Consumers continue to shift toward digital to find the products they love, and NIKE's digital experience continues to build deep consumer connections and capture digital market share. Now let me briefly update on the supply chain. Nearly all of our supplier base is operational without restrictions, and we are working closely with our partners around the world to navigate through the most recent risks related to COVID. Inventory supply in our geographies is beginning to improve from here. Transit times, however, remain elevated. And in the case of North America, transit times in the third quarter have worsened. We have taken numerous actions to address these challenges, and in many cases, to protect against lead times increasing even further. Despite these ongoing challenges, we have been able to mitigate our transit delay impact by nearly four weeks versus industry averages. I am so proud of how our teams continue to respond, demonstrating how to win in a dynamic and rapidly changing environment. Now consumer demand for all three of our brands, NIKE, Jordan and Converse, remains incredibly strong. Our growth in the third quarter would have been even higher if we had greater quantities of available inventory to meet marketplace demand. Across the marketplace, holiday retail sales finished strong, and spring retail sales are off to a great start, fueled by strong demand for performance men's running, Air Jordan 1, classics footwear and our apparel fleece franchises. We are also sustaining a higher full-price mix with year-over-year improvement in markdown activity. NIKE Digital has seen improvement in conversion rates and lower customer returns despite having lower levels of available inventory in our most desired product franchises. And in Greater China, we saw improvement in full price realization versus the prior season. Speaking of product, we continue to refresh and reimagine our most iconic franchises through design, collaboration and creative storytelling. We are expanding the contribution of our Express Lane in all geographies to make more locally relevant product on shorter lead times, yielding higher rates of sell-through and profitability for NIKE and our partners. We continue to deliver a consistent flow of product innovation in performance sports like running, basketball and training and through platforms like ZoomX, FlyEase and with the Space Hippie with crater foam. Our product is our most valuable form of demand creation, and we have a highly loyal and engaged audience eager to share in the stories we have to tell around our athletes and products. This quarter, the NIKE Brand registered as both the No. 1 cool and No. 1 favorite brand in all 12 of our key cities around the world. Recent product announcements ranging from our collaboration with Drake on the NOCTA line of apparel and sneakers. To the Ted Lasso, AFC Richmond kits for the show's third season speaks to the depth of our cultural reach. Our brands live at the intersection of sport, media, music and increasingly, technology, enabling us to be highly relevant to today's youth. As I've said repeatedly over the past year, NIKE's market opportunity is larger than ever. Consumer interest in sport, health and well-being has never been greater. And consumers' desire to wear athletic inspired footwear and apparel in more moments of their lives is here to stay. NIKE will always be a growth company, fueled through innovation to help all athletes achieve their full potential. Now continuing with the theme of growth, John said earlier that our marketplace strategy is a growth strategy. And so I'd like to go a little deeper on where we are in our journey to create the marketplace of the future, including how we have managed our wholesale portfolio. Over the past four years, we have reduced the number of wholesale accounts worldwide by more than 50% while delivering strong revenue growth through NIKE Direct and our remaining wholesale partners. We are now moving into the next phase of our marketplace strategy. We have finished communicating the big account pivots. And our go-forward growth plans are aligned with our wholesale partners. Wholesale partners play an integral role in our future marketplace, first, to authenticate our brands and then to create scale of distribution through a consistent consumer experience across a larger retail footprint. We will drive healthy wholesale growth with our remaining wholesale partners and recapture dislocated demand by elevating our partner's retail environment and digitally connecting NIKE membership with their retail experience. Take, for example, our collaboration with James Whitner's Whitaker Group, owner of Social Status and other sneaker boutiques. We recently partnered with The Whitaker Group to develop unique silhouettes of Jordan and Dunk products, as well as produce SNKRS Live content to connect our brand to important communities. We are committed to driving growth with partners like this as they create authentic, deeply connected consumer concepts in key cities and communities around the world. NIKE Digital continues to be our fastest-growing component of the marketplace. This quarter, downloads of the NIKE mobile app accelerated, and member buying frequency and average order values improved again as we continue to test member engagement across activity, content, community and commerce. In Q3, NIKE Digital gained 3 points from the prior year and now represents 26% of our total NIKE Brand revenue. We're investing in NIKE stores to specifically address gaps in distribution to serve the growth opportunities we see in women's apparel and Jordan. Our NIKE Live concept is showing promising levels of productivity per square foot, store profitability and new member acquisition. We continue to obsess over the consumer experience and perfect the concept for her to maximize the incremental growth opportunity in the marketplace. We will also begin testing a Jordan-only concept in North America in fiscal '23, leveraging a popular consumer experience that has been wildly successful in Greater China, the Philippines and Korea. Our approach is to first pilot these new concepts, iterate and perfect, and then move to scale. Since the onset of the pandemic, we have seen how creating the marketplace of the future will deepen our connections with consumers, fuel marketplace growth and expand the profit pool for NIKE and our wholesale partners. Now let me turn to the details of our third quarter financial results and operating segment performance. NIKE, Inc. revenue grew 5% and 8% on a currency-neutral basis, led by 17% growth in NIKE Direct. Wholesale returned to growth, up 1% on a currency-neutral basis. NIKE Digital grew 22%, fueled by strong demand through our NIKE app. NIKE-owned stores grew 14% with significant improvements in traffic during the quarter. Gross margin increased 100 basis points versus the prior year, driven primarily by higher NIKE Direct margins due to lower markdowns, favorable foreign currency exchange rates and a higher full price mix, partially offset by increased freight and logistics costs. SG&A grew 13% versus the prior year, primarily due to strategic technology investments, normalization of investment against brand campaigns, wage-related expenses and digital marketing investment to fuel heightened digital demand. Our effective tax rate for the quarter was 16.4% compared to 11.4% for the same period last year. This was due to a shift in our earnings mix, effects of stock-based compensation and recently finalized U.S. tax regulations. Third quarter diluted earnings per share was $0.87. Now let's review the operating segments. In North America, Q3 revenue grew 9% and EBIT was flat. NIKE continued to drive momentum through key product franchises across men's, women's and kids. This was highlighted by double-digit growth in key men's running franchises like Pegasus, as well as updates on franchises like the Winflo and Zoom Air. NIKE Direct grew 27% versus the prior year, led by NIKE Digital delivering industry-leading growth, increasing 33% versus the prior year, driven by double-digit growth in traffic, strong growth in new members and member engagement and improvements in member buying frequency. NIKE Digital in North America now has the highest penetration of all the geographies, representing one-third of total North America revenue in the quarter. North America continues to experience strong full price realization and low markdown rates across the marketplace as inventory supply begins to improve. NIKE-owned inventory levels increased 22% versus the prior year, with in-transit inventory now representing 65% of total inventory at the end of the quarter, as transit times are now more than six weeks longer than pre-pandemic levels and two weeks longer than the same period in the prior year. In order to ensure the right assortment of products arrive on time for the fall selling season, we have moved forward our buying time lines to accommodate for longer transit times. In EMEA, Q3 revenue grew 13% on a currency-neutral basis, with growth across all consumer segments, and EBIT grew 34% on a reported basis. Retail sales across the marketplace grew strong double digits with improvements in full price realization and lower average markdown rates. Team sports continues to make its comeback and the continuation of the Champions League tournament enabled global football to drive energy across the region. The momentum behind the Jordan brand in EMEA is also driving strong growth across all consumer segments, led by women. NIKE Direct grew 22% on a currency-neutral basis, led by growth in NIKE-owned stores of 44% as we compare to uneven store closures due to COVID-related government restrictions in the prior year. NIKE Digital rose 11%, fueled by member-only access and app-exclusive releases and another quarter of strong double-digit growth in full price demand. Wholesale revenue grew 10%, led by even stronger growth rates from our strategic accounts. As John mentioned in his remarks, we remain focused on the safety and well-being of our teammates regarding the deeply troubling crisis unfolding in Ukraine. Our own stores and digital commerce operations remain paused in Russia and Ukraine. As a note, our business in both countries represent less than 1% of total company revenue. In Greater China, Q3 revenue declined 8% on a currency-neutral basis, and EBIT declined 19% on a reported basis. Our results for this quarter were in line with our expectations, with sequential improvement versus the prior quarter. As we continued rebuilding local brand activities again this quarter, NIKE was rated the No. 1 cool and No. 1 favorite brand in China, creating separation and distinction versus the competition. And as I said earlier, we are observing continued improvement in full price realization. Greater China delivered over $2 billion in revenue this quarter, driven by the Lunar New Year period as Nike.com saw record weekly traffic. We leveraged our Express Lane capabilities to design hyperlocal products with the Year of the Tiger elements, resulting in strong sell-through across men's, women's, kids and Jordan. Speaking of Jordan, the brand had a record quarter for revenue in the region, growing versus the prior year through momentum in both footwear and apparel. NIKE Direct was down 11% on a currency-neutral basis, with declines in both digital and physical retail channels. COVID-related lockdowns continue to create challenges for retail traffic. NIKE-owned stores were down 5% and Digital declined 19% due to the ongoing supply delays that negatively impacted timing of product launches. We created marketplace energy with the opening of NIKE Beijing, the first connected partner-operated Rise door and two new Unite doors that set consecutive records for global opening sales. Our relentless focus on sport, product innovation and our most iconic product franchises, combined with local athlete storytelling, remains a competitive advantage for us in Greater China. We are closely monitoring the current situation regarding the virus, but we are encouraged by the momentum we are building in the marketplace. Now moving to APLA. Q3 revenue grew 19% on a currency-neutral basis and EBIT grew 17% on a reported basis. This quarter was the largest and most profitable in the history of the APLA region. We saw double-digit currency-neutral growth across nearly all territories led by Korea, Mexico and SOCO. We're winning with the consumer and sport across performance and lifestyle, demonstrated by strong growth in running, fitness, Jordan and Classics. NIKE Direct grew 39%, led by NIKE Digital growth of 61% due to record-setting member days across a number of territories, delivering more than two and a half times the demand versus a typical week. NIKE-owned stores grew 17% while the wholesale channel grew 9%. Our focus on localized product and content, particularly the launch of our Kwondo 1 collaboration with K-Pop star G-Dragon demonstrated yet again our deep connection to consumers. It was APLA's biggest hyperlocal launch ever, reaching 91 million users on social and 3.8 million entries across SNKRS and our marketplace partners. Now let's turn to our financial outlook. We continue to expect revenue for the full year to grow mid-single digits versus the prior year. As you know, comparing quarters to prior periods has not been intuitive, so we continue to look at the size, trend and health of our business, market share and profitability relative to pre-pandemic periods, and we remain confident we are on track toward our long-term financial goals. Specifically for the fourth quarter, in North America, we expect a decline in revenue due to year-over-year comparisons. And in Greater China, we expect to see another quarter of sequential improvement while we closely monitor the operational impact related to recent COVID lockdowns. We now expect gross margin to expand by at least 150 basis points versus the prior year as strong consumer demand continues to fuel high levels of full price realization, low markdown rates and low customer returns. Benefits of strategic pricing expected in Q4 are being partially offset by elevated product costs, primarily due to higher macro input costs, supply chain costs and strategic actions to expedite delivery of product in North America. Despite the recent strengthening of the U.S. dollar, we continue to expect foreign exchange to be a 55 basis point tailwind versus the prior year. We now expect SG&A to grow mid-teens for the full year as our spend normalizes, and we continue to advance our capabilities to support our ongoing digital transformation. We continue to expect our effective tax rate to be in the low teens for the fiscal year. And as we look ahead to fiscal '23, we are optimistic as our brand strength is unparalleled with a strong product pipeline and momentum against our largest growth drivers. Marketplace demand continues to exceed available supply as inventory supply begins to normalize in the fourth quarter, against the context of a healthy pull market, setting the foundation for another year of strong growth. We are focused on what we can control while there are several new dynamics creating higher levels of volatility. As a result, we will provide more specific financial guidance for fiscal '23 during our fourth quarter earnings call. In closing, our strategy is working. NIKE's brand strength and consumer demand remains at an all-time high and we are confident in our business momentum. Our deep focus on the consumer and sport is what sets us apart from the rest. We continue to leverage the same principles for how we are strategically and financially managing the company. And as we approach our 50-year anniversary, we are reminded of NIKE's rich history of delivering consistent results even through periods of uncertainty as we build NIKE for the future.	compname reports q3 earnings per share of $0.87. q3 earnings per share $0.87. q3 revenue rose 5 percent to $10.9 billion. marketplace demand continues to significantly exceed available inventory supply, with a healthy pull market across our geographies.
We would like to allow as many of you to ask questions as possible in our allotted time. So we would appreciate you limiting your initial questions to one. In the event you have additional questions that are not covered by others, please feel free to requeue and we will do our best to come back to you. Looking at Q4 and the full fiscal year we just concluded, our strong business results proved yet again NIKE's unique competitive advantage. Our relentless focus on our objectives is clear and our strategy is working. We're excited by the momentum we continue to see. In Q4, we saw growth of over 95%, which translates to 19% growth for the fiscal year. This full-year growth was led by our owned digital business, which is now more than double versus fiscal '19, prior to the pandemic. I've said before, these are times when strong brands can get stronger. And each quarter this reality becomes even more clear. Today, we are better positioned to drive sustainable long-term growth than we were before the pandemic. Our team has proven their ability to be unrelenting and executing against the macro complexities while also building the future. We saw broad-based growth this quarter, led by North America at over 140%. Greater China's currency-neutral growth of 9% was impacted amid marketplace dynamics with improving trends as we exited the quarter. One of NIKE's strengths is our diverse global portfolio. And through the power of that portfolio, we once again over delivered on our expectations for the quarter. As we look ahead to fiscal '22, the opportunity ahead of us is significant. We remain very confident in our long-term strategy and our growth outlook. The structural tailwinds we discussed before, including the return to sport and permanent shifts in consumer behavior toward digital and health and wellness continue to create energy for us. And we remain focused on our largest growth drivers, including our women's business, apparel, Jordan and international. NIKE sets the pace through a continuous flow of new innovation, the world's greatest roster of athletes and compelling experiences for consumers that create lifelong relationships with our brand. Our strengths and proven playbook give us the confidence to move even faster to invest even a more accelerated pace against the opportunities we see ahead. As the world's largest athletic, footwear and apparel brand we take seriously our leadership position to promote sport participation and an active lifestyle through inspiration and innovation. Our goal isn't merely to take market share. Our goal is also to grow the entire market. NIKE's growth has been and will continue to be the result of three areas I'll walk through today. Connecting with consumers through compelling brand experiences across NIKE Jordan and Converse, driving product innovation against our greatest growth opportunities and expanding our digital advantage. First, let's discuss how we serve consumers. As sport continues to return, NIKE leads with our unique rich heritage and our deep roster of global superstars and up new comers who connect us with consumers everywhere. Euro 2020 started two weeks ago with Cristiano Ronaldo becoming the leading scorer in Euros history. England, France, Portugal and the Netherlands are among the teams with great momentum heading into the tournament's next stage. And we're proud that more goals have been scored thus far wearing NIKE boots than all other brands combined. On the club side, Chelsea won the Champions League on the men's side and Barcelona was the top team on the women's side. In the US, the WNBA season is under way with the Seattle Storm in first place led by Sue Bird and Jewell Loyd. And in the NBA, a captivating playoffs showcased our unmatched rosters of the game's greatest players across NIKE and Jordan including KD, LeBron, Luka, Jokic and several who are still in the hunt like Giannis, Chris Paul, Devin Booker, and Paul George. And earlier this week, I was in Eugene for the US Track and Field trials and got to see incredible performances from Sha'Carri Richardson, Michael Norman, Ryan Crouser and many others. We remain excited for the power of sport on full display during the Olympics and Paralympics in Tokyo this summer and in Beijing next year. This authentic connection with consumers is also fueled by our belief in redefining how we open access to sports for consumers everywhere. Our recent campaign Play New, launched in May kicking off our largest ever invitation to Gen Z and marking the ignition point of a month long rally around finding joy and movement in play. We focus Play New on TikTok and Snapchat to show Gen Z apps, in their words sport is a change accelerator. And their response has been remarkable. The apps augmented reality lenses featuring yoga, dance, and [Indecipherable] led to more than 600 million Gen Z impressions in just the first two weeks. Earlier I mentioned our goal to grow the market well by inspiring people to try something for the first time, we vastly expand the community of athletes. And we continue to bring the emotion and power of our brand to life through our digital ecosystem, which is led by the sneakers out. In Q4 sneakers grew over 90% in demand and saw nearly 80% growth in monthly active users. We're now offering this growing audience of high-value members in almost daily flow of compelling content and product launches. For Air Max Day in March, six different live stream events gave sneakers live its highest viewership ever. So whether it's through sneakers live or user generated style inspiration, sneakers is the perfect intersection of content, community and commerce. Moving to my second point, our relentless pipeline of innovative product continues to create separation between us and our competition. Our product is fueled by sharp consumer insight supported by marketing data and analytics as we continue to invest in our digital transformation. And through our new operating model, we are bringing more precision to the art of product creation as we blend the heart and science of innovation. For Q4, let me touch on two great examples of how we're investing in our top growth opportunities, our women's business and Jordan brand. We're investing and focused across the entire value chain to unlock the vast opportunity we see for women's. For the full year, our women's business drove outsized growth of 22% versus the prior year. And despite the tremendous momentum we're seeing in women's, we know that there is even greater growth ahead as we move even faster with our new organization structure and invest far more resources in serving women end-to-end. For instance, in the marketplace, we continue to provide more compelling retail environment through our NIKE Live format. In fact, this past year, we opened nine new NIKE Live doors, which offer personalized experiences and services for female consumers. Our investments also mean a larger sharper focus on women's only insights, services and product innovation. And we're already seeing this work come to life. Consumer insight from our female consumer drove the new Pegasus 38, which kept the best cushioning innovations from this popular franchise while improving and tailoring comfort and fit that she wants. The Peg 38 has sold extremely well and we continue to be energized by the potential we see in footwear for her. For WNBA's 25th season this year, we created the most comprehensive player, team, and fan apparel collection in league history. The new WNBA uniforms were completely reengineered to deliver the exact fit, movement, and comfort players said that they want from their Jersey and sport. The players love them and consumers have agreed, with sales growth well above our expectations. And that heightened demand extended to the larger product assortment with the WNBA 25th anniversary T selling out in one day. This is just one example of how we drive energy for women's sport across the marketplace, as we remain excited by this enormous opportunity looking forward. Next, let's discuss Jordan brand whose momentum continues to be driven by its unique blend of heritage and innovation as well as its deep connections to consumers and communities around the globe. In fiscal '21, Jordan brand grew 31% propelling the business to nearly $5 billion. This growth was driven by continued energy for Jordan's most coveted icons including the AJ1 and AJ11 as well as new product dimensions. For example, Jordan's women's business nearly tripled in Q4, fueled by compelling product such as the flight essentials apparel collection. We are also increasingly are excited about our delivery of exclusive access for women through [Indecipherable] AJ1, which drove over 40% female buyers, more than 10 points higher than average AJ1 buyer profile. In Q4, Jordan also launched Zion Williamson's first signature shoe, the Zion 1 as well as the apparel collection. As the first Gen Z signature shoe in Jordan brands history, Zion offers both transcended athletic possibility as well as a deep personal connection with fans. The strong sell-through of Zion signature shoe collection demonstrates the continued love for Jordan brands roster of athletes all over the world. Quickly looking to the summer in Tokyo. In the next few weeks, we will be officially launching more of our Olympic product including our USA women's basketball and football uniforms, our four skateboarding Federation kits, and a new medal stand shoe featuring our hands-free FlyEase technology. We're excited by the strong reaction we've seen for our Olympic product thus far. And we're also thrilled to see our innovation continue to separate us. In running, this includes our Vaporfly NEXT% 2 for distance runners as well as our best-in-class track spikes. As you probably heard, our spikes are creating dominant performances at the US track and field trials, not just for NIKE athletes but competitor athletes as well. From performance to the medal stand, to sustainability, we're excited for the world stage this summer in Tokyo to put a global spotlight on our advantage and innovation. One final observation on innovation. I recently got the chance to see the long-term product plans that our teams are developing against our new consumer construct of women's, men's, kids and Jordan, with sharpness against poor performance and sport lifestyle and I could not be more excited. It's safe to say that we're more confident than ever in our product pipeline, as our focus on the consumer of the future drives our relentless innovation engine. And as we start welcoming employees back to work in our new state-of-the-art design and innovation centers, I know that our innovation pace will only quicken as we reinvent what's possible. My third and final point is increasing our digital advantage. As I said earlier, our owned digital business has more than doubled over the past few years to over $9 billion. And at the center of our digital ecosystem is our suite of apps, which in Q4 reflected over 40% of our owned digital business. This is the result of deeper consumer connections fueled by compelling product and content. A key differentiator for us is membership. It has proven to be a compelling driver of repeat engagement and buying across digital and physical retail. In Q4, we continue to see growth and member demand outpace total digital growth hitting a new record of $3 billion. This member demand growth was underscored by strong results across the consumer funnel including member engagement, average order value and buying frequency. In this fiscal year, we met the goals we set at our last Investor Day around membership of full year early and now have more than 300 million NIKE members. More importantly buying member growth is outpacing new member growth, signaling progress on a deeper member led commerce funnel. We're always looking to elevate our unique member proposition, whether that means expanding the number of member exclusive products or creating new and meaningful retail experiences through Member Days, our NIKE only retail moments. And this engaging membership experience fuels a virtuous cycle feeding insight to product creation, inventory optimization and more. Knowing and serving our members drives greater competitive separation. Today, we're the clear leaders in our industry and we continue to see digital as our leading channel for growth in fiscal '22. The combination of owned and partner digital revenue is now nearly 35% of our total business, more than three years ahead of our prior plan. And we see no sign of this shift slowing. In fact, we believe we will achieve 50% digital mix of business across owned and partnered in fiscal '25. As part of our overall One Nike Marketplace, we are also actively engaged with our strategic wholesale partners who share our vision. Today, we're working closely with large strategic partners like Dick's Sporting Goods, Foot Locker, and JD Sports, as well as compelling local neighborhood partners who are authentic to sport performance and lifestyle. Together, we are driving change to create a new more connected and seamless experience for consumers around the world, which is exactly what consumers want. It's a shift that speaks to our belief that the strong get stronger. We're super charging how we serve consumers with convenience, innovation, content and services. This is how we stay ahead of the pack and expand our lead. We've all been through a lot this past year. And at NIKE that's included store closures, supply chain challenges, digital transformation, a new accelerated strategy and more. And throughout it all our team has delivered for our consumers and communities. You've demonstrated creativity, teamwork, and resilience and you are the reason NIKE leads. I've said it before and I'll say it again, the people of NIKE are our greatest competitive advantage. They've delivered extraordinary results over the past year. I also want to take a moment and recognize Andy Muir, this will be her last earnings call as Vice President of Investor Relations after recently becoming CFO of our Jordan Brand. I wish you the best of luck in your new role, I know you'll do great. And backfilling Andy in this role as Paul Trussell, who many of you already know. Paul joins us from Deutsche Bank. Now I'd like to begin today's call with a baseline on where we are in our recovery. Just as we anticipated, NIKE is emerging from the pandemic stronger and better positioned to serve the consumer. And the reason for this is clear. NIKE's Consumer Direct Acceleration is fueling a deeper consumer connection with our brands and driving business results, although highlighting in greater strategic and financial opportunity ahead. Over the past 15 months we have navigated through this challenging environment with outstanding execution of our operational playbook. We have faced every challenge head on, focused on what we could control, all while keeping the consumer at the center. These actions had help set a strong foundation for sustainable growth and profitability with business performance, now exceeding pre-pandemic levels. In the fourth quarter, we delivered over $12 billion of reported revenue, our largest quarter ever. Our NIKE Direct business is now approaching 40% of total NIKE brand revenue. NIKE Digital represents 21% of total NIKE brand revenue, a milestone we have reached several years ahead of our prior plan. And finally, our fiscal '21 EBIT margin reached 15.5%, reflecting more than 300 basis points of expansion when compared to fiscal '19. These metrics now become the new baseline from which we expect to grow. As we recover from the global pandemic, it is clear that our Consumer Direct Acceleration strategy is transforming NIKE's financial model. So later on the call, I will share our financial outlook through fiscal year '25, reflecting a more direct member-centric business model. However, first I would like to provide additional detail on our extraordinary fourth quarter results and operating segment performance. NIKE Inc. revenue increased 96% and 88% on a currency neutral basis. This was driven by strong wholesale shipments and NIKE owned store performance as we anniversary pandemic related store closures. Even as physical retail reopened, we continue to see strong growth in NIKE Digital of 37% versus the prior year. Gross margin increased 850 basis points versus the prior year, driven by favorable NIKE Direct margins and the anniversary of higher costs including actions taken to manage supply and demand in the face of the COVID-19 pandemic. SG&A grew 17% versus the prior year due to higher levels of brand activity connected to return of sport. Digital marketing to drive digital demand, technology investments to support our digital transformation and higher wage related expenses. Our effective tax rate for the quarter was 18.6% compared to 1.7% for the same period last year due to decreased benefits from discrete items in the prior year and a shift in earnings mix primarily related to pandemic recovery. Fourth quarter diluted earnings per share was $0.93 and full year diluted earnings per share was $3.56, up 123% versus the prior year. Now let's move to our operating segments. In North America, Q4 revenue grew 141%. This also marked the first ever $5 billion quarter for North America, driven by notable improvements in full price sell through as the marketplace reopened and sport activity returned. Demand for NIKE remained incredibly strong. And as we expected, delayed revenue from the global supply chain disruption in the third quarter was recaptured during the fourth quarter. NIKE Direct grew over 120% as NIKE owned stores returned to positive sales growth versus pre-pandemic levels. More importantly, NIKE Digital grew over 50% while physical traffic continued to improve across the marketplace. NIKE Direct performance was propelled by our members across both digital and physical retail. Member demand nearly doubled versus the prior year and the number of buying members grew roughly 80%. Across the total marketplace, we continue to see strong retail sales growth and consumer demand for our brands exceeding marketplace supply, with marketplace inventory down double digits versus the prior year. NIKE owned inventory declined 7% with double-digit declines in closeout inventory. In transit full price inventory remains elevated as we continue to experience longer end to end lead times for supply. We expect supply chain delays and higher logistics costs to persist throughout much of fiscal '22. In EMEA, Q4 revenue grew 107% on a currency neutral basis with strong growth across the region, including the UK and Ireland, France, Germany and Italy. NIKE Direct grew 57% despite government restrictions requiring nearly half of our NIKE owned stores to remain closed for the first two months of the quarter. In May, as restrictions eased, we saw a strong consumer response with incredible pent-up demand and this momentum has continued into June. NIKE Digital grew nearly 30% versus the prior year. Through our Member Days, we saw strong engagement with member demand outpacing total NIKE Direct revenue growth with all-time highs for female active members during Air Max week. In the fourth quarter, we also expanded the NIKE mobile app to more than 10 new countries across the region. During our last earnings call, I shared our expectation that inventory in EMEA would normalize in the first quarter of fiscal '22. We have exceeded that goal due to stronger-than-anticipated consumer demand, ending fiscal '21 in a healthy and normalized inventory position. In Greater China, Q4 revenue grew 9% on a currency neutral basis. For the full year, Greater China delivered its seventh consecutive year of double-digit growth, demonstrating our consistent brand strength and commitment to serving the consumer. NIKE Direct grew 2% in Q4, with strong growth in NIKE owned stores, partially offset by declines in NIKE Digital. As John mentioned earlier, Q4 business results were impacted by marketplace dynamics. After a strong March, our business in Greater China was impacted in April and we adjusted our operations by suspending marketing activities and product launches. We then began to see a recovery trend improving to a single-digit decline in May and sequentially improving into June with month-to-date retail sales trends approaching prior year levels. And for the 6.18 consumer movement, our flagship store on Tmall ranked number one driving the highest demand across the sports industry. Building on our 40-year history in Greater China, we continue to invest in serving consumers with the best products NIKE has to offer in locally relevant ways. We also continue to invest in the creation of a premium seamless consumer digital experience. And supply chain capabilities and we plan to open a new digital technology center in Shenzhen to better serve Chinese consumers. We have an experienced local team in Greater China who helped create our operational playbook at the beginning of the pandemic. They have proactively managed marketplace supply and demand in order to navigate through these dynamics. And we expect inventory to be normalized by the end of Q2. Now moving to APLA. Q4 revenue grew 76% on a currency neutral basis with growth across all territories led by Japan, SOKO and Mexico. And Korea, grew double-digits this quarter on top of the 8% growth they delivered in the fourth quarter of last year. NIKE Digital grew more than 50% enabled and amplified by our membership offense. This was highlighted by Member Days, which drove all-time highs for member demand. This momentum also extended to our marketplace partners in APLA as they returned to growth versus pre-pandemic levels and achieved their highest level of full price realizations, since the beginning of the pandemic. During Golden Week in Japan, the Express Lane assortment was heavily influenced by member insights and delivered a sell-through rate that was two times the rate of the rest of NIKE Digital in Japan, showcasing the power of blending art and science that John referenced earlier. APLA was the last geography to launch our Express Lane offense and we see significant opportunity to leverage these capabilities to drive deeper authentic consumer connections across the region. Now, as we look ahead to fiscal '22 and beyond, I want to provide a new financial outlook through fiscal '25. As we emerge from the pandemic accelerate our Consumer Direct Strategy and transform the operating model of the company. First of all NIKE is a growth company and we expect to sustain strong revenue growth going forward. This is based on the significant market opportunity that we see for our brands across the portfolio. As well as our accelerated shift to a more direct member-centric business model. As a result, we expect revenue growth to inflect upwards to a range of high single-digit to low double-digit growth on average. With outsized marketplace opportunities in women's, apparel, Jordan, digital and international. Growth will be led by NIKE Direct and our strategic marketplace partners. Earlier I mentioned NIKE Direct is approaching 40% of our brand business today. And we expect it to represent approximately 60% of the business in fiscal '25, led by growth in digital. And as John said earlier, we expect owned and partnered digital to achieve 50% business mix in fiscal '25 with NIKE own digital to represent 40% of the business. We will continue reshaping our wholesale business portfolio which includes divesting from undifferentiated retail, while investing in our strategic wholesale partners for healthy growth. Overall, we expect wholesale revenue to remain roughly flat versus fiscal '21. We will support partners who continue to authenticate our brand as well as those who have the scale to create a consistent premium digitally connected experience for consumers across the marketplace. Our longer-term revenue outlook reflects higher growth expectations across several operating segments. We will continue to leverage the power of our diverse global portfolio. And we expect on average, North America to grow mid-single to high-single digits. EMEA to grow high single-digits and APLA to grow low double-digits. And with respect to Greater China, while marketplace dynamics still exist, we are optimistic that we can continue to grow low to mid-teens over the long term. We remain committed to investing in the local consumer experience and inspiring the next generation of athletes in China. We will continue to serve consumers with NIKE performance innovation and sports style product franchises, while also increasing local customization of style and fit for consumers. For several quarters now, I've highlighted that the strategic and financial benefit of shifting to a higher mix of business through NIKE Direct led by digital and leveraging enhanced data and analytics capabilities to optimize inventory, drive higher full-price realization and lower digital fulfillment costs. We now see gross margin rate reaching the high 40s by fiscal '25. We will continue to reallocate resources and invest to enable our digital transformation and fuel the long-term growth and profitability opportunities that we see. Having said that we expect to invest in SG&A at a rate that drives leverage versus pre-pandemic levels, which averaged roughly 32% to 33% of revenue. As a result of all of this, we see our EBIT margin reaching high teens by fiscal '25 with earnings-per-share growth of mid to high-teens on average over this period. As we drive toward a more direct business model we remain committed to create long-term value for our shareholders through serving consumers and sustaining our disciplined financial management. We expect to deliver strong growth in free cash flow, maintain annual capital expenditures at roughly 3% of revenue, drive returns on invested capital above prior guidance at the low 30% range. And deliver consistent returns to shareholders through dividends and share repurchases. Now that I've discussed our updated financial outlook through fiscal '25, I will provide guidance for fiscal '22. As I've already said, we entered the fiscal year, strong confident that our deep consumer connections and brand momentum will continue, despite being in a dynamic operating environment. Our confidence is rooted in the fact that consumers in key cities rate NIKE as their favorite brand. As retail sales continue to grow strongly on lean marketplace inventory and our organization is aligned against our new consumer construct, which will help us accelerate even faster against our largest growth opportunities. In fiscal '22, we expect revenue to grow low double digits and surpassed $50 billion, reflecting strong consumer demand across our operating segments, as we lead with digital, scale NIKE owned physical retail concepts and grow with our strategic partners. It's important to note as we normalize our post-pandemic business and continue to reshape the marketplace, we do not expect quarter-by-quarter growth to be linear. Therefore, we expect first half growth to be slightly higher than second half growth. We expect gross margin to expand 125 basis points to 150 basis points, reflecting our continued shift to a more profitable NIKE Direct business and sustained strong full price realization, partially offset by higher product costs, supply chain investments and the annualization of certain one-time benefits in fiscal '21. Foreign exchange is estimated to be a tailwind of roughly 70 basis points. We expect SG&A growth to slightly outpace revenue growth as we normalize spend with return to sport and more consistent store operating schedules as well as investments focused against our largest growth opportunities, which I've shared previously. However, we do expect leverage relative to pre-pandemic rates of investment. And last, we expect the fiscal '22 effective tax rate to be mid-teens. As we begin our next fiscal year, NIKE continues to navigate through a dynamic and rapidly changing environment. At the same time we are on the offense and accelerating our strategy to serve more consumers personally and at scale. Our unmatched innovation continues to enable world-class athletes to reach new levels of performance has sport returns to the main stage. Our product pipeline is strong, and we are even more deeply connected to consumers than before the pandemic. We are building upon the strong foundation we set in fiscal '21 and accelerating our pace for the next leg of the race. We have a clear vision for our brand, long-term future and we are focused on what it will take to get there.	nike q4 earnings per share $0.93. q4 earnings per share $0.93. gross margin for q4 increased 850 basis points to 45.8 percent. q4 revenue growth was led by higher wholesale shipments. q4 reported revenues were $12.3 billion, up 96 percent compared to prior year. during q4 of 2021, nike, inc. resumed share repurchase activity.
Additionally, the content of this conference call may contain time-sensitive information that is accurate only as of the date hereof. We do not undertake and specifically disclaim any obligation to update or revise this information. As a reminder, Annaly routinely posts important information for investors on the company's website. Please also note this event is being recorded. Back on our first-quarter 2020 earnings call, I discussed the conceptual three-phase process for how our portfolio strategy would evolve coming out of COVID. To review briefly, the first phase was about preserving capital and shoring up liquidity, which we did successfully as the crisis unfolded, positioning us with the healthiest liquidity and capital position this company has exhibited in years. Phase two characterized the majority of last year, was about deploying capital in the agency sector, which I referred to as the shelter in the storm, while making opportunistic investments within credit, while the Fed and fiscal intervention provided strong support for both our assets and liabilities. We then outlined phase three, which involves more transformative and strategic reallocation of capital to best position the company in a new environment. We were prepared to utilize our liquidity, benefit from the dislocations across markets and sharpen our strategic focus. Today, I will provide an update on our progress on this third phase which reflects our macro views and the vision for the company going forward. Following changes to the senior leadership team, including my appointment as CEO last March, was an opportune time to reevaluate certain businesses and revisit our expense structure, while also actively building out the necessary infrastructure and personnel to broaden our operational capabilities within residential housing finance. Now before I go too far down that path, I'll begin with the commentary on the rates market, the price action this past quarter was notable. First quarter was marked by a meaningful sell-off in interest rates as the 10-year note rose over 80 basis points, signifying one of the largest quarterly sell-offs in the past 5 years. The sharp repricing was driven by a meaningful boost in economic growth expectations, best seen in the Federal Reserve's economic forecast for 2021 GDP growth. While FOMC members had forecasted a strong 0.2% growth this year at the December meeting, they revised their projections up to 6.5% by the March meeting. annual growth would be the strongest in nearly 40 years as the significant progress made on vaccinations appears to be paving the path out of the pandemic. And at the same time, substantial government stimulus, a very healthy consumer balance sheets are also boosting the U.S. economy. Longer-dated rates also reflect the anticipation of higher inflation base effects and consumers' willingness to pay elevated prices given the receipt of stimulus checks are noticeably lifting prices. Inflation is likely to temporarily rise above the Fed's 2% target in the near term, but it remains uncertain as to whether persist and higher inflation will take hold until we see meaningfully higher wages for consumers. In addition, all the factors that have been associated with lower inflation over the past three decades, changing demographics, automation, and increased globalization to name a few remain in place, which does reduce the risk of a continued sharp sell-off. That being said, volatility in rate markets suggests that investors are not yet efficient in pricing the economic response to consumer enthusiasm. However, any turbulence should be dampened by a Federal Reserve that continues to signal patients when it comes to its monetary policy decisions despite the strong improvement in the outlook in recent months. Further down the road, the Fed will face difficulties extricating its sizable policy footprint for markets, necessitating any withdrawal to be gradual and well communicated. While we still see strong tailwinds for Agency MBS, which Joe will expand upon following my commentary, the forecasted strong economy and the interest rate landscape tilts the relative value equation modestly in favor of certain pockets of credit. Our capital allocation to credit rose from 22% to 27% this past quarter primarily driven by $1.4 billion of gross residential credit investments. I'll also note that the nominal increase in the percentage was in part due to capital optimization decisions for certain credit products made possible by our excess liquidity cushion. Now turning to our strategic activity in the quarter. We announced the sale of our commercial real estate business to Slate Asset Management for a purchase price of $2.33 billion. And we feel the transaction achieves great execution for our shareholders and is a validation of the quality of the portfolio that has been on balance sheet since 2013 and the experience of our team. The rationale for the transaction is best illustrated by briefly revisiting history. Turning back to the environment when we acquired CreXus, bringing commercial assets onto our balance sheet, the Fed was a few months into QE3, and Agency MBS looked rich on a risk-adjusted basis relative to credit given the first-order impacts of the MBS bond-buying program. Moreover, we were still in the somewhat early stages of the economic cycle and could therefore pick up 200, 300 basis points of excess spread and senior transitional light loans with strong visibility of business plan in top markets. That relationship has sharply reversed over time as the commercial market has seen strong investor interest and record levels of capital raised, which subsequently eroded the compatibility of the commercial platform with our core Agency strategy. We had embarked upon an evaluation of the optimal size and structure of the commercial business pre-COVID, but the pandemic required CRE participants to confront the fundamental structural changes in the industry that we expect to occur over time. With the unprecedented support injected in the economy, we had certainty the recovery would prevail when the data began to turn, we were well prepared and confident that the sale of our commercial platform would provide the strongest outcome for the company and our shareholders. After a comprehensive exploration and a process to find firms that represent strong fits for the business going forward, we identified a potential buyer to acquire the platform, including its assets in the majority of the people. In addition to the economics to the buyer, we will maintain a favorable carry profile on the assets until close, mitigating our reinvestment risk. With respect to use of proceeds, while Agency may serve as a placeholder for capital return, considerate of spreads, over time, we will rotate the capital across our other investment strategies as opportunities arise. Given the customary closing conditions and regulatory approvals, we're still multiple months away from receiving the capital back from the sale, which will be approximately $650 million. The transaction will give us additional capacity to further expand our leadership and operational capabilities across all aspects of the residential mortgage finance market, which has been the cornerstone of Annaly's strategy since our founding. The current environment reaffirms the strength of the housing sector, and we continue to be excited about the growing synergies between our agency and residential credit businesses. Now the first area in which we're expanding our capabilities is the MSR sector. Previously, we owned MSR via a servicer that we acquired in connection with our Hatteras acquisition and later sold. But our portfolio has been in runoff mode for the past year, and therefore, we've employed a multifaceted approach to investing in the asset class today. We have committed third-party partnerships that we've developed as part of our build-out to own and overseas servicing of MSR in-house, and we have made several key hires with decades of industry experience, lead this effort. Additionally, we've witnessed significant progress with licensing our base subsidiary, established a satellite office, and have begun to grow our portfolio again. We are a complementary strategic partner to originators because of the breadth of products we can acquire from them and the certainty of our capital as a takeout. This has become particularly useful as the primary-secondary spread has contracted, reducing originator profitability, leading to increased secondary MSR volumes. MSR is highly additive to our prospective returns as a positive yielding hedge to our core agency strategy, while also modestly reducing our agency basis exposure. However, as we have said in the past, in the absence of a severe pricing dislocation, we do not see capital allocated to the sector much above 10% on a run-rate basis given the implied structural leverage and liquidity of the asset. Our view is that MSR is a very attractive ingredient in the portfolio, but the measurements and the recipe require precision in light of potential volatility and risks. Now additionally, we continue to add to our third-party and in-house sourcing capabilities on the residential credit front, which drove the over $450 million of whole loan purchases we saw in the quarter, and our pipeline continues to grow. We also continue to believe that a diversified platform beyond residential is a key differentiator for us, including the optionality embedded in our alternative strategies like our middle-market lending platform. Through that business, which has been on balance sheet since 2010, we generate leading returns with cycle agnostic investments. And we'll also retain a $500 million commercial mortgage-backed securities portfolio, which we expect to grow over time depending on pricing and our outlook. The portfolio delivered another solid quarter despite a very volatile interest rate environment, characterized by sharp sell-off in the intermediate and long end of the curve. MBS performance was mixed with lower coupon price performance lagging higher coupons due to extension of the cash flows and resulting delta hedging costs. However, spreads generally continued their trend tighter as investor demand outpaced issuance, which remains near-record levels. Most notably, the bank demand we discussed last quarter remained robust, as expansionary and fiscal policies continue to drive the level of deposits higher, while commercial and industrial loan growth has been muted. The size of our agency portfolio remained stable as we reinvested runoff primarily into TBAs, which benefited from negative implied financing rates over the quarter. Within our TBA position, we shifted exposure into two and a halfs and threes, while we reduced lower coupons as we expect Fed and bank purchases to migrate hiring coupons following the rise in rates. In specified pools, our average portfolio payout declined by approximately three-quarters at a point due to higher rates. However, their good prepayment and resulting profile contributed to specified pools outperforming both TBA and duration hedges over the quarter. While the sell-off brought mortgage rates above 3%, we remain in high prepayment environment due to technological latencies and increased capacity in the originator community. And therefore, we expect protection to continue to prove valuable part in higher coupon specified pools. Now shifting to our hedges. We were well-positioned for the steepening of the yield. As we mentioned on our Q4 call, we added additional treasury futures and swaption positions during Q3 and Q4 of last year. These lower-cost duration hedges, especially on the longer end of the curve, proved instrumental to our portfolio performance as yields rose sharply on the back of fiscally induced inflation fears. In particular, the options that we bought throughout 2020 at lower levels of implied volatility and lower float rates proved to be an excellent convection duration hedge against the extended duration in Agency MBS assets. Although we actively rebalanced our portfolio through the rising yields this quarter, due to our prior positioning, delta hedging needs were minimal compared to the size and momentum of the sell-off. These hedges were primarily in treasury and interest rate swaps and all swaps were executed with floating retails benchmark as we continue to decrease our LIBOR footprint. Finally, as yields stabilize at the of the quarter, we took the opportunity to add protection against a rally as we were able to purchase receiver options at attractive levels with the market commanding higher price protection against the sell-off. We expect to grow this position in coming quarters as it complements our planned growth in our MSR portfolio. After the performance in Q1, spread tightening potential for MBS looks somewhat limited. But the framework we have been operating still holds. tailwinds such as Fed and bank demand are likely to persist, financing rates remain extremely attractive and nearly all other asset classes are trading to tight valuations. So looking ahead, we anticipate maintaining our conservative leverage posture, while our existing core portfolio provides a solid income and enables us to grow our higher-margin businesses that David talked about. Turning to our residential credit business. We continue to remain bullish on both consumer and housing fundamentals given considerable government stimulus monetary policy in addition to a systemic undersupply of one to four single-family homes. consumers have been able to successfully navigate the COVID pandemic with household net worth at all-time highs personal savings rates in excess of 10%, household debt to income at historical lows, and year-over-year declines in credit card and auto delinquencies. The health and resurgence of the consumer has also benefited the residential credit market with outstanding forbearance plans declining to 4.4% of the total market as of mid-April, down from 5.2% as of year end and first-lien delinquencies down over a hundred basis points on the quarter coming in at five spot zero two percent. The housing market continues to exhibit strong momentum regarding both construction and home price appreciation as a result of low mortgage rates, limited available inventory for sale, strong household formation, and changing homeowner preferences regarding both location and the desire for space. National home prices were up 12% on a year-over-year basis in most recent release, and will most likely continue to see outsized depreciation as the supply/demand imbalance is a long-term structural issue that will not be resolved at the current pace of housing completions. Regarding our rental credit portfolio, consistent with our comments on our last earnings call surrounding attractive residential credit spreads and net interest margin, we were active in deploying capital by purchasing approximately $910 million of residential credit securities and settling $467 million of predominantly expanded credit residential whole loans. The residential credit portfolio ended the quarter at $3.4 billion of economic risk, excluding our committed loan pipeline. Leverage across the residential credit portfolio has remained conservative with financial recourse leverage at one spot zero debt equity, with resi ending the quarter comprising $1.8 billion of the firm's capital. Within securities, greater than 95% of our purchases were concentrated in the unrated MPL, RPL, and seasoned CRT subsectors. In the beginning of the year, both of these products displayed attractive ROEs per unit of spread duration and have benefited from continued improvement in the financing market. The shorter duration par priced assets should yield high single digits to low double-digit lifetime ROEs and serve as an excellent accretive hedge to our longer-dated CMBS portfolio. Moving to residential whole loans. We continue to be proactive in sourcing accretive assets and had a robust pipeline of $410 million that we anticipate will settle over the next few months. We continue to see opportunities in the non-QM market and have started to capitalize on opportunities in the agency investor market given recent changes to the GSE's preferred stock purchase agreements. Turning to our resi securitization platform. In March, we securitized $257 million of expanded credit hold loans in a non-QM transaction, generating $15 million of term-funded subordinate securities with an expected low mid-double-digit ROE with minimal recourse leverage. We also priced our inaugural prime jumbo securitization earlier this week, a $354 million transaction where we retained all of the subordinate securities, approximately $14 million in market value. The organic creation of nonrecourse term funded assets through our whole loan strategy, allowing us to control asset acquisitions, overseas diligence, and the selection of our preferred subservicers with the ability to control loss mitigation remains our team's primary focus. With the reopening of the economy on the horizon, a healthy consumer, and the housing market poised for strength in 2021, the residential credit market should see continued positive performance. Q1 of the middle market lending group was influenced by a combination of our portfolio success through the pandemic as exhibited by the year-end watch list decreasing by 41% versus the prior year, followed by a very intense refi driven market in the absence of any meaningful new issue M&A throughout Q1. This resulted in the portfolio modestly declining from $2.39 billion at year end to $2.07 billion at quarter end $331 million. Returns, both economic and core increased meaningfully in the quarter versus year end as the team remains disciplined about new investment activity and we'll protect the existing portfolio selectively. As in 2020, we are very pleased with underlying portfolio performance with continuation of zero nonaccrual credits versus the Water Direct Lending index average of 2.9% and and a watch list presenting less than 4% of the Annaly middle market total portfolio size. In addition, the portfolio continues to migrate toward a first lien -- moving three full percentage points from 66% at year end to 69% at 331. As we have reiterated over the past 10 years, Annaly middle-market significant outputs during periods of intense turbulence is a function of staying true to the industries in which we want to invest, the forecastability of underlying credits to survive tumult, and partnering with private equity owners that exhibit like-mindedness and track records consistent with our own inside the very industries in which we want to be active. Consistent with our behavior since joining in 2010 we have historically countered market periods dominated by refinancing with pipelines weighted alongside sponsors that acquire businesses differently. We anticipate 2021 will be no different in that respect. and investing in concert with freshly contributed equity from sponsors, will continue to dominate our thinking when putting money to work. Reignited convergence in the fixed income market and more specifically the loan markets makes us wary of leverage multiples more so than pricing. With refi-driven markets coming out of the pandemic, the broad array of issuers capturing contracting spreads for last year's performance seems to be an acute contradiction, but nonetheless, our reality. Inside of Annaly, middle-market lending is very aware of the current credit risk versus interest rate risk equation. And with today's yield curve, we are comfortable with middle markets current allocation. As always, middle markets growth or contraction for the balance of the year will remain subject to the underlying credit and our perception of adequate unlevered compensation for the risk, both absolute and relative. We continue to generate strong core results from the portfolio for the first quarter of 2021, benefiting from the continued low interest rates in the funding market and sustained specialness in dollar to set the stage with some summary information, our book value per share was $8.95 for Q1, a slight increase from Q4 2020. Book value increased on GAAP net income of $1.75 billion or $1.25 per share, partially offset by the common and preferred dividends of $335 million or $0.24 per share and lower other comprehensive income of $1.7 billion or $0.98 per share. A significant impact to GAAP net income and therefore, book value for the quarter was the held-for-sale accounting entries recorded in association with the announcement of the sale of our commercial real estate platform, particularly the impairment of goodwill of $71.8 million or $0.05 per share. We generated core earnings per share, excluding PAA, of $0.29, a decrease of 3% or $0.01 per share from the prior quarter. Combining our book value performance with the $0.22 common dividend we declared during Q1, our quarterly economic return was 2.8%. As I noted earlier, our book value increase reflected a $0.05 impairment of goodwill. Excluding this impairment, our tangible economic return for the quarter was 3.6%. Economic return and tangible economic return for Q4 were 5.1% and 5.2%, respectively. Taking a closer look at the GAAP we generated GAAP net income of $1.8 billion or $1.23 per common share, up from $879 million or $0.60 per common share in the quarter. GAAP net income increased primarily on higher unrealized gains on our interest rate swaps and derivatives portfolio. Specifically, GAAP net income benefited from rising interest rates reflected in unrealized gains on interest rate swaps of $772 million, which was $258 million in the prior quarter; other derivatives led by futures of $517 million, which was $12 million of unrealized losses in the prior quarter, and swaptions of $306 million, which was $4 million of unrealized losses in the prior quarter. GAAP net income also benefited from lower interest expense on lower average repo rates and slightly lower average repo balances at roughly $65 billion. I will cover more details on interest expense later on. Now to provide more color on the impact to book of the commercial real estate divestiture. The transaction is expected to close in the second or third quarter, following receipt of customary consents and approvals from regulators and joint venture partners. As a result, as of March 31, 2021, we met the criteria for held-for-sale accounting, including the small number of commercial real estate assets excluded from the transaction, given our intent to exit those positions. The held-for-sale criteria require all assets in the disposal group to be recorded at the lower of cost or fair value. Therefore, under held for sale accounting, assets are written down, but not up with gains recognized at closing. This evaluation resulted in recognition of valuation allowances and impairments of approximately $157.4 million on loans, real estate, and securities offset by annualized gains on CMBS available for sale of $16.8 million. As the various closings of the traction occur, we will realize gains that more than offset the net valuation allowances and impairments recorded on the portfolio. As the portfolio is now held for sale, it is no longer in the scope of CECL. And in Q1, we reversed the previously recorded reserves of $135 million through earnings. In aggregate, the divestitures of our commercial real estate platform through the sale to Slate Asset Management and our opportunistic sale of a portion of our skilled nursing facilities in the fourth quarter of 2020 will result in a $0.02 portfolio benefit to tangible book value at closing, which will be fully recognized over time due to GAAP accounting. In conjunction with the acquisition of CreXus in 2013, we recognized an intangible asset of Given our intention to exit the commercial real estate business, we have impaired the carrying value of the goodwill, again, $71.8 million or $0.05 per share in Q1. Moving on now to CECL reserves. Consistent with the prior quarter, we continue to see a general improvement in market sentiment and the economic models we use in this process. And given the commercial real estate disposition, The CECL reserve now relate solely to our middle-market lending assets. We recorded a decrease in reserves of $6.2 million on funded commitments during Q1, driven by a reduction in the portfolio and improved macroeconomic assumptions. Total reserves net of charge-offs comprised 1.58% of our MML loan portfolio as of March 31, 2021. We expect that CECL reserves will be an immaterial part of our financial statements in the future. Turning back to earnings. I wanted to provide more detail surrounding the most significant factors that impacted core earnings quarter over quarter. First, consistent with my commentary around GAAP drivers, interest expense of $76 million was lower than $94 million in the prior quarter due to lower average repo rates and balances. We had increased expenses related to the net interest component of interest rate swaps of $80 million relative to $67 million in the prior quarter as the swap portfolio position increased by $5.5 billion. Finally, We had lower interest income primarily driven by lower average agency balances and a reduction in average agency yield. And while the amount is consistent with Q4 at $97 million, dollar roll income contributed meaningfully to core for the quarter, given continued record levels. Our treasury group's view on the funding markets came to fruition in Q1, with continued tightening of rates and flattening in term curves. Today, we see overnight rates in the low single digits and term market north of six months at 12 to 14 basis points in the bilateral market. As a result, we successfully executed our strategy to add duration to our repo book, with our weighted average days to maturity up compared to prior quarter at 88 days versus 64. Providing further color regarding our reduced interest expense for the quarter, while overall cost of funds is consistent with the prior quarter at 87 basis points, the composition differs from Q4, with repo interest expense lower, the cost of funds associated with hedges increasing due to the increase in added. Our average REPO rate for the quarter was 26 basis points compared to 35 basis points in the prior quarter. And we ended March with a repo rate of 20 basis points, down from 32 basis points at the end of December 2020. We continue to actively manage our repo book and look for further opportunities to reduce our cost of funds and improve liquidity. For instance, we experienced lower haircuts across the board for our agency book. And considering our liquidity profile, we selected to fund the most liquid credit assets and utilize capital to The portfolio generated 191 bps of NIM, down from 198 bps as of Q4, driven primarily by the decrease in asset yields. Moving now to our efficiency ratios. Previously, we've provided a range of OPEX targets associated with potential cost savings from our internalization of 1.6% to 1.75%. And in the prior year, we incurred G&A costs for an annual OPEX ratio in this range of 1.62%. We expect to realize cost savings due to the disposition of our commercial real estate business, and began to see these in Q1 with an OPEX to equity ratio of 1.4%. Giving consideration to the pivot in our strategy in commercial real estate to resi credit MSR and our MML business, we believe that a revised estimated range For OPEX to equity for 2021 would be 1.45% to 1.6%. And to wrap things up, Annaly ended the quarter with an excellent liquidity profile with $8.9 billion of unencumbered assets, slightly up from prior quarters of $8.7 billion, including cash and unencumbered Agency MBS of $6.2 billion. And, operator, we can now open it up to Q&A.	q1 gaap earnings per share $1.23. qtrly book value per common share of $8.95, up $0.03 quarter-over-quarter.
Additionally, the content of this conference call may contain time-sensitive information that is only accurate as of the date hereof. We do not undertake and specifically disclaim any obligation to update or revise this information. As a reminder, Annaly routinely posts important information for investors on the company's website, www. Today, I'll provide an overview of the current macro environment, briefly discuss our performance during the quarter and full year 2021 and close with our outlook for the year ahead. Ilker will then provide more detailed commentary on our investment portfolio, while Serena will discuss our financial results. And as noted, our other business heads are also here to provide additional color during Q&A. Now, beginning with the macro landscape, we saw increasingly challenging market conditions in the fourth quarter and into 2022 as the robust performance of the U.S. economy has made it evident that a withdrawal of pandemic era stimulus is imminent. economy grow 5.7% in real terms in 2021, marking the best annual growth in nearly 40 years. Meanwhile, the labor market has seen a rapid recovery as employers added 6.4 million jobs last year and the unemployment rate fell to 3.9%. Both measures suggest that the labor market has recovered significantly since the onset of the pandemic. Stimulus measures fueled this rapid recovery, which has also spurred inflation to generational highs as seen in December when the consumer price index reached 7% year over year. Although much of this increase in prices was initially seen as temporary, ongoing elevated price gains across various categories of goods and services raise the risk that inflation could persist for some time. Accordingly, current macroeconomic conditions have led to a meaningful shift by the Fed, which now views less accommodative monetary policy is the primary way to ensure parts of its mandate, full employment and stable prices are being met. In addition to an accelerated taper, Fed has begun to signal a larger number of hikes than previously expected. Front-end rate markets are pricing roughly 25 basis point rate hikes this year beginning in March, up from just two -- one quarter ago. Given the uncertainties around the economy, the Fed is likely to direct market pricing and hike in line with it rather than provide forward guidance well ahead of time. The Fed has also begun to discuss shrinking its balance sheet, and we expect the Fed will let assets run off at a pace faster than the prior taper of $50 billion per month. Now, this notable shift in policy expectations and higher volatility have led to a tightening of financial conditions and an underperformance of assets most closely tied to monetary policy, best seen through the spread widening in agency MBS in recent weeks. Turning to Annaly's portfolio, agency MBS underperformed given weaker demand following the initiation of Fed taper and a flattening of the yield curve. In anticipation of wider spreads, we managed the portfolio to decrease leverage and optimize our asset allocation with total assets decreasing by approximately $5 billion to $89 billion in the quarter. As a result, economic leverage declined slightly from 5.8 times to 5.7 times. Now, we were certainly not immune to the spread volatility as we experienced an economic return of negative 2.4% however, we generated earnings available for distribution of $0.28, unchanged from the prior quarter and exceeding our dividend by $0.06 per share. With respect to capital allocation, in line with recent quarters, we increased the allocation to our credit businesses by approximately 200 basis points to 32% in the fourth quarter as prospective returns continued to favor credit. Looking back on the full year, our credit allocation increased approximately 10 percentage points from December 2020, even with the successful sale of our commercial real estate business, which underscores the favorable fundamentals and strong execution from our resi credit and middle market lending businesses. Now, I'll touch more on our outlook shortly, but notably, both market and business-specific tailwinds remain favorable for our credit businesses. Now, 2021 was a transformative year for Annaly, marked by the sale of our CRE business, the launch of our mortgage servicing rights platform and the expansion of our residential credit business. The collective impact of these initiatives has increased our presence throughout residential housing finance and allow us to allocate capital effectively where returns are most attractive, a key differentiator for Annaly. Now, I'd like to briefly touch on notable milestones in our businesses and how they have better equipped Annaly to be nimble in the midst of volatility. First, our MSR business had a solid year with assets increasing over $500 million throughout 2021 to $645 million. We successfully established our MSR platform last year through the addition of key hires, procurement of strategic partnerships and build out of the operations and infrastructure necessary to scale the business efficiently. As a result of these efforts, we have proven to be a key player in the market ending the year as the fifth largest bulk buyer of MSR. And with over $200 million of MSR commitments already through the end of January, we're continuing to see progress toward fully scaling the platform and we expect to see increased market activity given diminished originator profitability. Our residential credit platform, which grew nearly 90% last year, remains diversified with the ability to deploy capital efficiently in either whole loans or securitized markets. The generation of assets for Annaly's balance sheet, while controlling strategy, diligence and servicing outcomes remains paramount to our investment approach. Business activity was enhanced by the launch of our whole loan correspondent channel which expanded our sourcing capabilities through the addition of new strategic partners and product offerings. We've also benefited from new bulk partnerships established outside of our correspondent channel and altogether, these efforts helped drive the group's record $4.5 billion in whole loan purchases last year, which exceeded the amount of originations in both the prior two years combined. Further, Onslow Bay remains a programmatic issuer of securitizations, pricing 13 whole loan transactions totaling $5.3 billion since the beginning of 2021 with OBX being the fourth largest nonbank issuer of prime jumbo and expanded prime MBS over the past two years. And with housing fundamentals expected to stay strong, residential credit should remain a key driver of our overall portfolio growth in the year ahead as we build on our origination and securitization momentum. Now, shifting to our 2022 outlook. Our portfolio is well prepared for volatility, which we anticipated would materialize as the Fed normalizes monetary policy. First, we have thoughtfully reduced our economic leverage to one and a half turns since the onset of COVID to 5.7 times, the lowest it's been since 2014. Our defensive leverage profile is further supported by our low capital structure leverage with 88% of our equity in common stock and minimal asset level structural leverage as highly liquid agency MBS make up the vast majority of our portfolio. Second, we have substantial liquidity with $9.3 billion of unencumbered assets up $500 million year over year. And this liquidity is complemented by a wide array of financing options, including our own broker-dealer. And finally, we are conservatively hedged to mitigate interest rate risk with a year-end hedge ratio of 95%, and we expect to remain close to fully hedged over the near term. Now, with ample liquidity and historically low leverage, we are well positioned to take a more offensive posture if and when the opportunity presents itself. While agency returns are increasingly attractive as Ilker will elaborate on, we believe there will be better tactical opportunities out the horizon, and we'll be patient given uncertainty around the market and the Fed. But should assets continue to widen past current levels, which we deem close to fair value, we stand ready to add fundamentally desirable assets. Now, Finally, before handing it off to Ilker to discuss our portfolio in greater detail, I wanted to congratulate him on recently being named our Chief Investment Officer. I've worked with Ilker at three different institutions for the better part of the past 20 years, and I cannot think of an individual more knowledgeable about mortgages and prepayments or better suited to help us drive success for Annaly into the future. As you discussed, the fourth quarter was challenging for Agency MBS due to a combination of factors. The Fed initiated and then accelerated the taper, which in conjunction with risk of sentiment caused by the virus variant and geopolitical risks led to significant curve flattening and an uptick in interest rate volatility. Mortgage investors, notably banks turned their attention to 2022 without Fed support and decreased the pace of their purchases. MBS underperformance was broad-based across the coupons stack with supply weighing on to upside threes, while higher coupons struggled into the curve flattening. Although our portfolio was not immune to these sectors, we had been proactively reducing our MBS based exposure throughout 2021. In fourth quarter, we reduced our agency holdings by roughly $5 billion, primarily through TBA sales, bringing the total 2021 portfolio reduction to $10 billion. Through this resizing, our portfolio construct remains well positioned across the coupon stack. In lower coupons, we continue to favor TBAs, which maximize our liquidity profile and despite the initiation of the taper, dollar roll financing remains special in the context of 30 to 40 basis points. Meanwhile, our specified portfolio is based up in coupon, up in quality and is roughly four years season, which should provide resilient cash flows as we shift out of the financing environment and into on debt favors for extension protection. In terms of our interest rate exposure, we adjusted hedges toward the front end of the yield curve by selling additional short-term treasury futures, which increased our hedge ratio to 95% of our liabilities. We have also added short-term software swaps, which are an efficient hedge to our repo-funding levels. Our conservative hedge portfolio is integral to managing high volatility market environments like the one we experienced recently. At the current rate levels, to converge the profile of the Agency MBS market has improved meaningfully, but we continue to pursue a conservative approach to managing interest rate risk. Since the year-end, we have seen a higher in rates and repricing in MBS as the market digests technical impact of Fed monetary policy tightening. Following the move, wider MBS spreads are within a few basis points of their average 2018 levels, which was the last time the Fed was reducing balance sheet. When drawing historical comparisons, we believe mortgage cash flows are currently more attractive compared to 2018 for multiple reasons. Other fixed income alternatives are relatively tight from a historical perspective. More of the mortgage universe is locked away in Fed and bank held-to-maturity portfolios and the prepayment outlook is much better for the mortgage universe. In higher coupons, remaining borrowers did not refinance after months with historically low mortgage rates. So we anticipate they would be less reactive to changes in rates going forward. Meanwhile, due to very high realized home price appreciation, cash-out refinancings should alleviate extension risk in lower coupon mortgages. All these factors should materially improve the profile and predictability of mortgage cash flows. Consistent with these trends, our portfolio paid 21.4 CPR in Q4, 7% slower than in Q3, and we expect a further deterioration of approximately 15% in Q1 of 2022. With respect to our MSR platform, our fourth quarter purchases brought the portfolio to nearly $650 million in market value net of runoff. Additionally, as David mentioned, with over $200 million in bulk MSR commitments in January and the recent price appreciation due to the sell-off in rates, our current MSR portfolio has reached nearly $1 billion in market value. The sector remains very active due to consistent disposition of MSR by the originator community. Coupled with wider spreads, we see this as an attractive growth opportunity for our MSR business which is complementary to our core agency strategy. Turning to residential credit. We continue to execute our primary strategy of acquiring expanded residential whole loans through Onslow Bay. The economic value of residential credit portfolio grew by approximately $330 million quarter over quarter, primarily through the addition of $1.7 billion of whole loans, the retention of assets manufactured through our OBX securitization platform and the deployment of capital into short spread duration securities. Return on our securitization strategy remains in the low double digits with minimal recourse leverage. The residential credit portfolio ended Q4 with $4.6 billion of assets representing $3.1 billion of the firm's capital. Our view on housing fundamental strength remains intact despite mortgage rates increasing as the shortage of one to four units single-family housing in the United States continues to be a long-term structural issue that has no near-term resolution. The supply demand imbalance of housing stock, combined with the strength of the consumer's balance sheet has continued to play out in outsize on price appreciation, positive resolution out of forbearance agreements and stable delinquency roll rates, all benefiting our existing portfolio. Lastly, our middle market lending portfolio had an active quarter closing nine deals totaling over $325 million in commitments, while five borrowers repaid. Middle market lending ended the fourth quarter with nearly $2 billion in assets, up 4% from the prior quarter. The portfolio's strong credit profile is demonstrated through a 10% increase in underlying borrowers' average EBITDA since closing and a nearly 30% reduction in system reserves throughout the year with no loans on non-accruals. And as discussed last quarter, the close of our private closed-end fund allows for increased capital allocation flexibility and provides recurring fee revenue to the REIT. As David discussed, the current environment is marked by challenging conditions as the Fed begins to remove with accumulative policy that has supported asset prices and financial conditions since the onset of the pandemic nearly two years ago. We remain focused on protecting the portfolio through defensive positioning and proactive hedging. In addition, a key focus will be to opportunistically grow our MSR and residential credit businesses which should provide strong returns and diversification benefit to our broader portfolio. Although we remain patient in light of recent spread widening in Agency MBS, the improving cash flow fundamentals and increased prospective returns on the sector should provide attractive reinvestment opportunities and even potentially bring leverage back to levels more consistent with our historical leverage considerate of our overall capital allocation framework. With this, I will hand it over to Serena to discuss our financials. Today, I'll provide brief financial highlights for the quarter and as of December 31, 2021 and discuss select year-to-date metrics. As discussed earlier, the last quarter of the year exhibited challenging market conditions resulting from a risk off sentiment over the Omicron variant and anticipation around the initiation of the Fed tapering. Notwithstanding this more difficult economic return environment, we have again delivered solid earnings and ample coverage, approximately 125% of our dividend. To set the stage with some summary information. Our book value per share was $7.97 for Q4, and we generated earnings available for distribution per share of $0.28. Book value decreased $0.42 for the quarter primarily due to lower other comprehensive income of $680 million or $0.47 per share on higher rates and spread widening and the related declining valuations on our agency positions, as well as the common and preferred dividend declarations of $349 million or $0.24 per share, partially offset by GAAP net income of $418 million or $0.29 per share. Our multifaceted hedging strategy continued to support the book value, albeit in a more muted fashion this quarter due to the aforementioned spread widening with swaps, futures and MSR valuations contributing $0.16 per share to the book value during the quarter. Combining our book value performance with our fourth quarter dividend of $0.22, our quarterly and tangible economic returns were negative 2.4%. Subsequent to quarter end, as Ilker and David both mentioned earlier, we continue to see significant spread widening impacting the valuation of our assets, which is partially offset by the benefit of our MSR investments and rate hedging strategy through January with our book value ending the month down 3% compared to December 31, 2021. Diving deeper into the GAAP results, we generated GAAP net income for Q4 of $418 million or $0.27 per common share, net of preferred dividends, down from GAAP net income of $522 million or $0.34 per common share in the prior quarter. The most significant drivers of lower GAAP income for the quarter is the unrealized losses on investments measured at fair value through earnings of $15 million in comparison to unrealized gains of $91 million in Q3 and realized losses on disposal of investments in the quarter of $25 million as compared to gains of $12 million in Q3 along with the previously referenced lower net gains on the swaps portfolio by $42 million. As I mentioned earlier, the portfolio continued to generate strong income with EAD per share of $0.28, consistent with Q3 earnings, and we continue to generate strong earnings while prudently managing lower leverage resulting in an EAD ROE per unit of leverage of 2.3%. We have previously communicated that we anticipate earnings to moderate. Notwithstanding this, we expect earnings to sufficiently cover the dividend for the near term, all things equal. Average yields remained flat at 2.63% compared to the prior quarter. However, dollar roll income contributed to EAD in Q4 reaching another record level at $118.5 million. EAD also benefited from higher MSR net servicing income associated with the growth of the MSR portfolio and lower G&A expenses, which I will cover further later. The portfolio generated 203 basis points of NIM ex PAA, down one basis point from Q3 driven by the improved TBA dollar roll income, offset by higher swap expense on a lower average receive rate. Now, turning to our financing. As I noted in the prior quarter, we have benefited from our ample liquidity position and the robust financing market during 2021 with the previous quarter marking nine consecutive quarters of reduced economic cost of funds for the company and our year-to-date economic cost of funds being 79 basis points, down 55 basis points in comparison to the prior year. During Q4, the market pricing a more aggressive Fed tightening cycle, resulting in repo rates increasing across the curve. This upward trend along with higher swap rates impacted our overall cost of funds for the quarter rising by nine basis points to 75 basis points in Q4, and our average REPO rate for the quarter was 16 basis points compared to 15 basis points in the prior quarter. Moving now to our operating expenses. Efficiency ratios improved by seven basis points in the fourth quarter with opex to equity of 1.21%. And for the entire year, the opex to equity ratio was 1.35% compared to full year 2020 of 1.55% as we realize the benefits we projected from the reduction in compensation and other expenses following the disposition of our acreage business and the internalization of our management. As a result of our continued build-out of our MSR and residential credit businesses, which are more labor-intensive and additional vesting of stock compensation issued in prior years, we anticipate that the range of opex to equity for 2022 and long range will be 1.4% to 1.55%. And to wrap things up, Annaly maintained an abundant liquidity profile with $9.3 billion of unencumbered assets down modestly from the prior quarter at $9.8 billion, including cash and unencumbered Agency MBS of $5.2 billion. Much of the reduction in unencumbered agency securities was due to pressure on valuation, which is partially offset by increased unencumbered CRT, CMBS and non-agency securities. Operator, we can now open it up to Q&A.	q4 gaap earnings per share $0.27.
First, let me say that our hearts go out to all the families affected by the COVID-19 coronavirus and the related economic dislocation across the country. All of that steady execution occurred largely prior to the unprecedented spread of the coronavirus across the United States and the related global financial market instability that exploded in March. Based on the current uncertainty about the depth and duration of the economic turmoil that almost all companies are enduring at the moment, we have withdrawn our guidance for 2020 results. We hope to be able to provide updated guidance later in the year, but for now, there is simply too much uncertainty to project how 2020 will play out. Before discussing our quarterly performance, let me highlight some of the attributes of our long-term strategy that have positioned National Retail Properties to weather the current disruption. First, our balance sheet remains in excellent shape. We ended the first quarter with $217 million cash on hand and a zero balance drawn on our $900 million line of credit. Our next debt maturity is not until 2023 and we've taken a pause in our acquisitions in order to marshal our cash in this uncertain moment. Second, our portfolio consist primarily of large, well-capitalized tenants. Our largest tenants operate over 1,000 units each on average and are typically the leaders in their respective lines of trade. These are large regional and national companies that are generally better positioned than smaller operators to withstand a major disruption in their business, such as occurring at the moment. Third, our well-located real estate parcels remain integral to our tenants' business success once this disruption is passed. As we've often said, National Retail Properties is at its heart, a real estate company. Our properties were highly occupied before all this started and we're confident that those same well-located properties will continue to be in high demand after all this passes. And lastly, we've been here before. Our entire management team was with the company during the great recession in 2008 and most of us have been through a number of other major downturns in the past. We're a seasoned real estate company with in-house expertise to handle all the issues that might arise. Turning now to our first quarter 2020 results. Our portfolio of 3,125 single-tenant retail properties ended the quarter with an occupancy rate of 98.8%, which is consistent with our long-term average occupancy. We do expect our occupancy rate to fall in the second quarter, but we're working with many of our tenants to structure rent deferral programs that we hope will enable them to get through this period of business interruption and get their businesses back in full operation. We acquired 21 new properties in the first quarter, investing slightly over $67 million at an initial cash cap rate of 6.9%. As usual, about two-thirds of our investments were with our relationship tenants with whom we do recurring off-market business. Our acquisition volume was muted compared to prior quarters. We elected to postpone or cancel some acquisitions scheduled for late in the quarter as we saw the economic downturn beginning to grow. We also sold 14 properties during the quarter, generating proceeds of just over $36 million at a cash cap rate of 4.7%. Once again our ability to raise capital for accretive recycling highlights a strategic advantage of National Retail Properties over many other REITs. Due to the sudden impact of the COVID-19 pandemic on retail businesses and the economy beginning in mid-March, we are reporting today that we received approximately 52% of our rents due for the month of April. We also entered into rent deferral agreements or are currently negotiating such agreements with tenants representing approximately 37% of our annualized base rent. While we are dealing with deferrals on an individual case-by-case basis, generally our rent deferral discussions involve deferring one to three months of second quarter base rent with the deferred rent to be repaid commencing in late 2020 through late 2021. Generally, the tenants remain responsible for paying the triple net charges on a current basis. We are not discussing or agreeing to rent forgiveness with tenants nor are we advancing funds to tenants to be repaid as rent. As to the balance of the tenants, which did not pay or agree to deferral arrangements, we are pursuing our legal remedies. Many of those cases involved tenants that we felt could pay some or all of their April rent, but have so far chosen not to do so or tenants that insisted on some immediate rent forgiveness, which as I said, was not the way we wanted to approach this fast moving and fluid situation. We remain in dialog with many of these tenants and are hopeful about our ability to reach some agreement for payment with many of these tenants over-time. Lastly, before turning the call over to Kevin, I want to remind you all that we declared our regular quarterly common stock dividend in April. Our Board will continue to review our dividend policy as we work through the current economic turmoil and by no means is our dividend untouchable. We do believe however that our impressive streak of consistently increasing the dividend for 30 consecutive years is a powerful indicator of the value of our consistent, conservative balance sheet philosophy and business model. So with the first quarter behind us, you see National Retail Properties conserving its capital, working with its tenants to address the reality of their current business disruption and planning ahead for the new normal. And just a couple of comments about the first quarter, which I'm guessing few are focused on at this point, but our AFFO dividend payout ratio for the quarter was 72.4% and that was consistent with full year 2019 levels. Occupancy was 98.8% at quarter-end, G&A expense was 5.8% of revenues for the first quarter and that's flat with the prior fourth quarter and we ended the quarter with $677.5 million of annual base rent in place for all leases as of March 31, 2020. As Jay mentioned, on February 18th, we issued $700 million of unsecured debt, $400 million with a 10-year maturity and a 2.5% coupon plus $300 million with a 30-year maturity and a 3.1% coupon. We used about half of those proceeds to redeem our $325 million of 3.8% 2022 notes due in March -- we paid those off in March, they weren't due till 2022. I will note that first quarter interest expense include $2.3 million of accelerated note discount and no cost amortization as a result of that early 2022 note redemption. Absent this, incremental non-cash expense that would have allowed us to report $0.71 of core FFO per share, representing 6% growth over prior year results. But more importantly though, this transaction enhance our liquidity, just as the flu pandemic was beginning to unfold in the United States and pushed down our next debt maturity to 2023. We ended the quarter of $217 million of cash on the balance sheet and we have no amounts outstanding on our $900 million bank line. These transactions pushed our weighted average debt maturity to 11.2 years with a weighted average interest rate of 3.7%. So we're in a good liquidity position with very few capital obligations during the next three years. Leverage metrics remain very strong, debt to gross book assets was 35.3% that was flat with year-end, net debt to EBITDA was 4.9 times at March 31, interest coverage was 4.6 times and fixed charge coverage was 4.1 times for the first quarter. If you excluded the $2.3 million of note discount and note cost amortization, those two metrics would have been 5.0 times and 4.3 times respectively for interest coverage and fixed charge. Only five of our 3,125 properties are encumbered by mortgages, totaling $12 million. Till we get a better read on the duration of the shutdown, the shape of the recovery and what the new normal might look like, we're not able to reasonably predict how things will play out. While we are dealing with these deferrals on an individual tenant basis generally, as Jay mentioned, they involve one to three months of rent deferral with that deferred rent to be repaid over a period of months from late 2020 to late 2021. So we will be continuing to work with a number of our tenants to find a path forward for them to pay the rent owed to us. Our approach has been to work with the tenants and allow rent deferrals to help them get to the other side of the shutdown and then get repaid in the not too distant future. So much depends on the duration of the shutdown and the shape of the subsequent recovery. This level of uncertainty does not make it clear if we may have done too much or too little with our rent deferrals, but we're hoping we struck a reasonable balance. As we work through what undoubtedly will be a difficult 2020 for the global economy, we continue to work to give NNN the best opportunity to succeed in the coming years. And Jes with that, we will open it up to any questions.	qtrly affo per common share $0.71. national retail properties - determined to withdraw previously issued 2020 earnings guidance.
And we're pleased to report another solid quarter for National Retail Properties with increasing acquisition volume, high occupancy and rent collections and a rock-solid balance sheet. We increased our common stock dividend in August, making 2021 our 32nd consecutive year of increased dividends. Only 86 other U.S. public companies, including only two other REITs, can offer that impressive track record of consistent dividend growth to investors. We're also issuing guidance for 2022 core FFO per share of $2.90 to $2.97, reflecting approximately 4% growth over 2021 from midpoint to midpoint. Kevin will provide more details on the individual factors behind our guidance for both 2021 and 2022. But the Reader's Digest version of the story is that National Retail Properties is humming on all cylinders. Turning to the highlights of our third quarter financial results. Our portfolio of 3,195 freestanding single-tenant retail properties continues to perform exceedingly well. Occupancy ticked up slightly from the prior quarter to 98.6% and remains above our long-term average of 98%. We also announced collection of 99% of rents due for the third quarter. Collection of previously deferred rent remained at an equally high percentage, and we forgave no rent during the quarter. These impressive collection results compare very favorably to other retail real estate companies, including those with a significantly higher percentage of investment-grade tenants. Moreover, we believe these results validate our strategy of doing direct sale-leaseback transactions with large regional and national operators for well-located real estate parcels at low cost per property and reasonable rents. Our acquisitions, which are sourced primarily from our portfolio of relationship tenants with which we do repeat programmatic long-term sale-leaseback transactions, continued to ramp up. During the third quarter, we invested $247 million in 49 new properties at an initial cash cap rate of 6.4% and with an average lease duration of 19 years. Year-to-date, we've invested $455 million in 107 new properties at an initial cash cap rate of 6.5% and an average lease duration of 18 years. Our relationship tenants with which we do the majority of our business have returned to growth mode, and our transaction volume has ticked up accordingly. We've increased our 2021 acquisition guidance to a range of $550 million to $600 million. And we've issued initial guidance for 2022 acquisitions in the range of $550 million to $650 million as we anticipate returning to our typical pre-pandemic run rate of acquisition volume. During the third quarter, we also sold 27 properties, raising $30 million of proceeds to be reinvested into new acquisitions. Year-to-date, we've now raised over $70 million from the sale of 53 properties, divided roughly equally between leased properties and vacant properties. Our balance sheet remains one of the strongest in our sector, highlight by -- highlighted by our issuance of $450 million of 3% interest-only 30-year notes in September. With over $200 million of cash remaining after redemption of our 5.2% preferred in October, a zero balance on our $1.1 billion line of credit, no material debt maturities until 2024 and a weighted average debt duration of almost 15 years, we have one of the strongest balance sheets in our sector and remain well positioned to fund future acquisitions and take advantage of opportunities that may present themselves. We reopened our office fully in July, and I'm absolutely certain that we are all better together under one roof. I'm also proud of our company's recent recognition as a 2021 Cigna Well-Being Award recipient. Let me close by reiterating our long-term approach to all aspects of our business. Although we will continue to review and refine our strategy, we believe that the right long-term approach for creating consistent per share growth on a multiyear basis is to own a broadly diversified portfolio of well-located real estate acquired at reasonable prices and leased to strong regional and national tenants at reasonable rents, all supported by a low-leveraged balance sheet and long-tenured staff of industry experts. This strategy has once again proven to be resilient and durable during a period of upheaval and crisis and has put us in a great position to play offense as we look ahead to 2022 and beyond. As usual, the cautionary statement. That's up $0.01 from the preceding second quarter $0.70 per share and up $0.09 from the prior year's $0.62 per share. Today, we also reported that AFFO was $0.75 per share for the third quarter. That's down $0.02 from the preceding second quarter $0.77, and that's largely a result of scheduled deferral repayments beginning to taper off from the peak levels in the first half of 2021. We did footnote this AFO -- this AFFO amount included $4.3 million of deferred rent payment in our accrued rental income adjustment for the third quarter, without which would have produced AFFO of $0.73 per share. Excluding all deferral repayments, our AFFO dividend payout ratio for the first nine months was 73.5%, and that's fairly consistent with prior year levels. As Jay noted, occupancy was 98.6% at quarter end. That's fairly consistent with recent quarters. G&A expense was $11.1 million for the third quarter, and that increase for the quarter and the nine months is really largely driven by incentive compensation. We ended the quarter with $706 million of annual base rent in place for all leases as of September 30, 2021. As Jay mentioned, rent collections continue to remain strong in the third quarter with rent collections of approximately 99% for the third quarter. Collections from our cash-basis tenants, which represent about $50 million or 7.1% of our total annual base rent, improved to approximately 94% for the third quarter. That's up from 92% in the second quarter and 80% previously reported in the first quarter of 2021. We -- today, we did increase our 2021 core FFO per share guidance to a range of $2.75 to $2.80 per share, and that's up from a range -- I'm sorry, we increased it from a range of $2.75 to $2.80 to a new range of $2.80 to $2.84 per share and similarly increased the AFFO guidance to a range of $3 to $3.04 per share. Notably, this guidance exceeds our 2019 results by approximately 2% to 2.5% despite the headwinds and reduced acquisition levels in 2020. Today's 2021 guidance incorporates the continued strong collections and increased acquisition activity. And they're largely unchanged from last quarter's guidance with the exception of the increased acquisition guidance of $550 million to $600 million of acquisitions versus the previous guidance of $400 million to $500 million. We expect to continue the high level of rent collection rates but have assumed a total of 1.5%, 1.5% of potential rent loss. In time, we're optimistic that will drift back toward our usual 1% rent loss assumption in our guidance. Today, we also initiated 2022 core FFO per share guidance of $2.90 to $2.97 per share. That represents a 4.1% increase over 2021 results using the guidance midpoint for both years. We've assumed rent collections remain at high levels and have assumed potential rent loss of 1.5% of annual base rent. Switching over to the balance sheet. Largely as a result of the $450 million, 30-year 3% debt offering we completed in September, we ended the third quarter with $543.5 million of cash on hand. However, $345 million of that cash was used shortly after quarter end on October 15 to redeem our 5.2% preferred stock. So that would have left us with approximately $200 million of cash on a pro forma basis and no amounts outstanding on our $1.1 billion bank credit facility at quarter end. So our liquidity remains in excellent shape. Weighted average debt maturity is now approximately 14.9 years with a 3.7% weighted average fixed interest rate. Our next debt maturity is $350 million of 3.9% coupon debt that's due in mid-2024. So with leverage and liquidity in very good shape, the balance sheet is well positioned for 2022. A couple of leverage debt -- net debt to gross book assets was 39.8%. Net debt-to-EBITDA was 5.4 times, and that's at September 30. And that's pro forma for the preferred redemption that we completed soon after quarter end. Interest coverage was 4.8 times and fixed charge coverage was 4.2 times for the third quarter of 2021. That is not pro forma for the preferred redemption and the dividends on preferred. So 2021 looks to be another very solid year. We're well positioned to continue that performance into 2022. And as Jay noted, our focus remains on the long term as we continue to endeavor to grow per share results on a consistent basis. So with that, Matthew, we will open it up to any questions.	qtrly affo per common share $0.75. compname says core ffo per share guidance for 2021 increased to $2.80 to $2.84 from $2.75 to $2.80. compname says 2021 affo is estimated to be $3.00 to $3.04 per share. sees fy 2022 core ffo guidance of $2.90 to $2.97 per share and sees 2022 affo to be $2.99 to $3.06 per share.
These risks and uncertainties may cause actual company results to differ materially. On the call today are Kathy Warden, our chairman, CEO, and president, and Dave Keffer, our CFO. I want to congratulate the Northrop Grumman team for a very strong start to 2021. One year after the onset of the pandemic, we have adjusted to a new way of working and we continue to support our employees, our customers, our suppliers and our communities, which has enabled us to deliver outstanding results to our shareholders. Our results demonstrate the strength of our team, our portfolio, our strategy and our operating performance. Our solid bookings and competitive wins, robust organic sales growth and excellent operational performance resulted in strong margin rates, earnings and cash in the quarter. We also closed the divestiture of our IT services business, and successfully transitioned those employees and programs to Peraton. Elaborating on financial highlights. We booked new awards of $8.9 billion, grew sales 6% and increased segment operating income, 13%. GAAP earnings per share of $13.43 reflects the IT services gain and transaction-adjusted earnings per share increased 28% in the quarter. First-quarter operating cash improved by more than $900 million year over year. Using cash on the balance sheet and divestiture proceeds, we executed a $2 billion accelerated share repurchase agreement that retired an initial 5.9 million shares. We also retired $2.2 billion in debt, including early redemptions of $1.5 billion. Even with share repurchases, dividends and deleveraging, all of which totaled more than $4.4 billion, we exceeded the first -- we ended the first quarter with $3.5 billion of cash on the balance sheet. As I outlined in January, this year's capital deployment plans continue to include robust investment to drive innovation and affordability and at least $1 billion of additional share repurchases. Based on what we see now over the next couple of years, we expect to return the majority of our free cash flow to our shareholders through share repurchases and dividends. With the strength of our first-quarter results, a solid outlook for the remainder of the year and confidence in our portfolio, we are raising our sales and earnings per share guidance. We now expect sales will increase to between $35.3 billion and $35.7 billion, a $200 million increase to the prior range. And we are raising transaction-adjusted earnings per share guidance by $0.85 to a range of $24 to $24.50. As we look forward, we believe our capabilities will remain well aligned with US national security priorities. In early policy guidance, such as its interim national security strategy, the Biden administration has signaled that it views competition with China as the most pressing long-term security challenge and will invest in the capabilities needed to maintain US national security advantages. In its recent budget framework for fiscal year 2022, the administration described several priority efforts that are closely aligned with our portfolio and technology leadership. These include space, modernizing the nuclear deterrent, advanced weapons and long-range fires capabilities and R&D for breakthrough technologies, such as artificial intelligence, advanced computing and cyber. Turning to operational highlights in the quarter. Our space business doubled its backlog in 2020 and achieved 30% revenue growth in each of the last two quarters. This performance confirms our competitive capabilities and our ability to capture market share as our nation ramps up investment in space. Three competitive awards in the first quarter are good examples: The Hypersonic and Ballistic Tracking Space Sensor, the Protected Tactical SATCOM, rapid prototype program, and the next-generation interceptor. On HBTSS, we received $155 million award to build a prototype sensor satellite capability capable of tracking hypersonic weapons from space. For Protected Tactical SATCOM, we were down selected for a follow-on award to proceed with our ongoing prototype development with a flight demonstration of our PTS payload expected in 2024. We also were awarded a $2.6 billion contract for the next phase of the Missile Defense Agency's next-generation interceptor, known as NGI, with a period of performance through 2026. This contract is for the rapid development and flight test of an interceptor designed to defend against the most complex long-range threats. Opportunities for Northrop Grumman space also extend to civil and commercial space. NASA's fiscal year 2022 discretionary requests is $24.7 billion, a 6.3% increase over the 2021 enacted level. Importantly, the request supports human exploration of the moon, Mars and beyond. Support for the NASA budget enables our efforts on space launch systems and HALO, the Habitation and Logistics Outpost program. And in commercial space, MEV-1 continues to provide life extension services to an Intelsat satellite and have received via Satellite Technology of the Year award. The award recognizes the technology breakthrough that reshapes the way the satellite industry works now and for years to come. I'm also pleased to report that earlier this month, MEV-2 successfully docked with another Intelsat satellite. MEV-2 will provide five years of service before undocking and moving on to provide services for a new mission. Northrop Grumman is a pioneer in this field and remains the only provider of flight-proven life extension services for satellites. As the US continues modernizing its strategic deterrent capabilities, we are proud to be the prime contractor for two legs of the TRIAD. The B-21 bomber and the Ground Based Strategic Deterrent, or GBSD, as well as a key supplier on the third leg. These modernization programs, which were initiated in the Obama administration, are expected to begin feeling at the end of this decade. Both GBSD and B-21 are benefiting from our use of innovative digital tools to reduce technical risk and cost. As the Air Force has noted, B-21 development has been unique and that the test aircraft are more mature than other systems have been at this point, allowing us to validate our production processes much sooner in the program life cycle. And our GBSD program successfully completed two major milestone reviews and remains on track to field an initial operating capability by 2029. We are working closely with the Air Force partner and industry teammates to use digital engineering and agile software development to reduce risk and shorten development timelines as we modernize this critical system. The GBSD program has earned the e-series designation from the US Air Force, affirming the program's cutting-edge approach to digital transformation. All four of our sectors are aligned to the high priority investment areas needed to maintain military superiority. In addition to developing new platforms and weapon systems, we are enabling the modernization of existing platforms to ensure our war fighters have the best technology that their platforms can be modularly upgraded to counter evolving threats. In the first quarter, we received orders totaling approximately $500 million for additional SABR radar systems for the F-16. With these additional orders, we're now under contract to produce approximately 900 systems in the support of F-16 upgrades and new jet procurements for eight FMS countries, as well as upgrades to our US Air Force, Guard and Reserve F-16 fleets. Also on the F-16 for the US Air Force, we were down selected as the sole offer for the EMD in production of a modern electronic warfare fleet to provide next-generation self-protection and ensure an upgrade path for advanced capabilities against highly agile future threats. And during the quarter, the US Army approved our Kirkham system, for full rate production following a successful six-month initial operational test and evaluation on its helicopters. We also continue to demonstrate how we can connect platforms and sensors to enable Joint All-Domain Command and Control or JADC2. Our fifth-generation connectivity solutions will be featured on multiple platforms in the upcoming Northern Edge 21 Exercise in May. We expect to participate in several other exercises over the next 12 months, including the Army's Project Convergence, where IBCS is expected to be featured. And we're responding to the ABMS digital infrastructure investment priority, requiring secure processing, connectivity and data management. And finally, we are maturing our advanced weaponry and long-range fires capabilities. We conducted a successful live fire demonstration of our integrated counter UAS solutions this quarter. The demonstration showcased our next-generation proximity ammunition and its capability to defeat class one, two and three unmanned aerial systems. In addition, AARGM-ER had two successful static motor tests of a rocket motor, marketing nine consecutive successful tests in preparation for the upcoming flight tests. All of these successes reflect the quality of our team and the benefits of our recent investment in new technology to support national security for the US and our allies. We are focused on competing and winning the programs that enable continued growth and affordably delivering the capability our customers need. This quarter was another demonstration of our commitment to maintain strong returns and cash flows while growing the business. My comments begin with Q1 sales growth on Slide 4, which provides a bridge between our first quarter of 2020 and first quarter of 2021. We reported Q1 sales growth of approximately 6%. And as you can see, the IT services divestiture was an approximately $400 million headwind to first-quarter sales. In addition, due to the timing of our accounting calendar convention, we had three more working days in the first quarter of 2021 than in the first quarter of 2020. We view this tailwind as purely timing as it normalizes in Q4 when we will have four fewer days than in the fourth quarter of 2020. The three additional days in Q1 2021 result in an approximately 5% benefit to sales across all of our segments for your modeling purposes. So at the consolidated level, the divestiture and extra working days are largely offsetting for Q1. Adjusting for these two items, revenue growth was 6.4%. As I review the sector results, I'll refer to organic sales growth, adjusting only for the IT services divestiture. Slide 5 provides a bridge of our earnings per share between first-quarter 2020 and first quarter 2021. GAAP earnings per share increased to $13.43, primarily due to the gain on sale. When we adjust for the divestiture-related items, transaction adjusted earnings per share are up 28% to $6.57. The increase reflects strong segment performance, which drove $0.75 of the year-over-year improvement. Recovery in the equity markets generated favorable earnings on our marketable securities, especially compared to the volatility we experienced in the equity markets last March. Corporate unallocated expense contributed $0.27, primarily due to lower state tax and lower amortization expense in the period. Referring to sector results on Slide 6. Aeronautics systems sales were up 5% for the quarter, reflecting higher Manned Aircraft sales due to stronger volume on restricted programs and E-2D, partially offset by lower sales in autonomous systems as certain Global Hawk production programs near completion. At defense systems, first-quarter sales decreased 17% or 2% on an organic basis. Lower organic sales reflect the closeout of our Lake City activities, which represented a headwind of roughly $140 million this quarter. Higher volume on GMLRS and AARGM helped to offset that impact. Turning to mission systems, we saw a third consecutive quarter of double-digit sales growth, with revenues up 10 or 15% on an organic basis. Organic sales were higher in all four MS business areas as its diversified portfolio continues its strong momentum from last year. In Airborne Multifunction Sensors, we had higher volume for the SABR and MESA radar programs and higher restricted sales. Maritime land systems and sensors increased primarily due to ramp up on the G/ATOR program, as well as higher volume on marine systems. Navigation, targeting and survivability sales increased principally due to higher volume on targeting programs, including LITENING. Networked Information Solutions sales were driven by higher volume on electronic warfare programs, including JCREW and restricted programs. Space systems continues to be our fastest-growing segment, with sales up 29% in the quarter, or 32% on an organic basis. Sales were higher in both business areas, with continued ramp-up on the GBSD program, driving revenue growth in launch and strategic missiles. Space programs were driven by higher volume on restricted programs, NASA's Artemis programs and the Next Gen OPIR program. Turning to operating income on Slide 7. Segment operating income includes a Q1 benefit of approximately $100 million from lower overhead rates, a reflection of our disciplined approach to cost and affordability. This quarter's benefit includes the reduction in projected CAS pension costs that we mentioned on last quarter's call. While lower CAS costs do present a modest revenue and cash flow headwind going forward, they improve our competitiveness by making our solutions more affordable, and that will be a key competitive differentiator in a flattening budget environment. At AS, operating income increased 17% and margin rate increased to 10.3% due to higher net favorable EAC adjustments driven by reduced overhead rates. Defense systems operating income decreased 11%, primarily due to the IT services divestiture, and operating margin rate increased 80 basis points to 11.3%. The increase in operating margin rate was largely driven by improved performance in battle management and missile systems programs. Operating income at mission systems rose 12%, and operating margin rate increased to 15.3%. Higher operating income reflects higher sales, as well as the benefit recognized from reduced overhead rates, partially offset by lower net favorable EAC adjustments at network information solutions. Space systems operating income increased 37%, primarily due to higher sales volume. Operating margin rate rose to 10.9% due to higher net favorable EAC adjustments, driven by the reduction in overhead rates. At the total company level, segment operating income increased 13% in Q1, and operating margin rate increased to 12%. Higher operating income was driven principally by favorable overhead rates, as well as operational performance at the sectors, which more than offset the lower business base due to the IT services divestiture. Turning to sector guidance on Slide 8. As a result of a continued robust growth in our space business and the recent win of the NGI program, we are increasing space sales guidance to approximately $10 billion. Sales guidance remains unchanged for AS, DS and MS, as does operating margin rate guidance at all four sectors. Moving to consolidated guidance. Slide 9 provides a bridge to our updated guidance, reflecting the improvement in operations, as well as the effects of the divestiture on our overall outlook. We are raising our 2021 sales and transaction adjusted earnings per share guidance to reflect the strength of first-quarter results. We now expect 2021 sales will range between 35.3 and $35.7 billion, a 200 million increase to prior guidance. Keep in mind that our fourth quarter year-over-year revenue comparison will include headwinds of fewer working days and the $444 million equipment sale at AS in addition to the divestiture. Our updated guidance on corporate unallocated expenses is driven by the net gain on the IT services transaction and also reflects favorable deferred state tax benefits and other lower unallocated costs. Our operating margin rate guidance includes both the lower corporate unallocated expense and the benefit from the divestiture. You can see the estimated tax rate reflects the impact from the divestiture, and our underlying effective tax rate is unchanged. Our year-end weighted average diluted shares count guidance has been reduced to reflect the ASR. Slide 10 provides a bridge between our January guidance and today's transaction adjusted guidance. We are increasing our transaction adjusted earnings per share to a range of $24 to $24.50 from our prior guidance range of $23.15 to $23.65. Our higher guidance reflects strong segment performance, as well as lower corporate unallocated expenses, favorable pension trends and lower weighted average shares outstanding. Lastly, I want to take a moment to talk about cash. We continue to pursue a balanced capital deployment strategy that includes investing in the business, returning cash to shareholders through dividends and share repurchases and managing the balance sheet. In the first quarter, we delevered our balance sheet, obtained improved ratings from two credit rating agencies and executed the ASR program to further reduce our share count. The recently passed American Rescue Plan Act is expected to begin affecting our CAS pension recoveries in 2022. Asset returns and other actuarial assumptions will continue to influence these numbers. But all else being equal, the legislation would further reduce our CAS recoveries. I'd also note that we had already lowered our projected CAS pension cost to a relatively low level in our January outlook, primarily due to outstanding asset performance in 2020. I'd reiterate that we expect minimal cash pension contributions over the next several years. As Kathy mentioned, first-quarter operating cash flow increased more than $900 million from Q1 2020. This improvement largely reflects timing of collections and disbursements, and we have not changed our transaction-adjusted free cash flow or capital expenditure guidance for the year. It's worth mentioning that while the divestiture of the IT services business closed in Q1, federal and state cash taxes of approximately $800 million will be paid over the remainder of the year. In closing, we are very pleased with our first-quarter results as we continue to deliver for our customers, employees and shareholders. Our portfolio's shaping and continued investment in the business put us in a strong position to sustain our momentum in value creation and robust cash generation. I think we're ready for Q&A. Mariama, please inform the analysts how to enter the queue and ask questions.	compname reports q1 earnings per share $13.43. qtrly earnings per share $13.43; qtrly transaction-adjusted earnings per share $6.57. raises 2021 sales guidance to $35.3 billion to $35.7 billion and transaction-adjusted earnings per share guidance to $24.00 to $24.50. qtrly aeronautics systems sales $2.99 billion, up 5%. qtrly total sales $9.16 billion, up 6%. qtrly sales increased due to higher sales at space systems, mission systems and aeronautics systems. q1 net awards totaled $8.9 billion and backlog was $79.3 billion.
These risks and uncertainties may cause actual company results to differ materially. Today, we are very pleased to announce another strong quarter. I'll begin by recognizing our Northrop Grumman employees for their continued focus on operational excellence. Our results represents a successful execution of our strategy, the strength of our portfolio and the commitment of our team to deliver for our customers and shareholders. As the global threat environment continues to rapidly evolve and other nations gain more complex and sophisticated capabilities, our customers need innovative and affordable solutions to be delivered with increasing speed and agility. With the investments we've made in advanced technologies, combined with our talented workforce and adoption of digital transformation capabilities, Northrop Grumman is well-positioned to meet our customers' needs and continue to strengthen our position for the future. This quarter, we once again delivered strong growth and operating performance. Our sales increased by 3% to $9.2 billion. Adjusting for the effects of our first-quarter divestiture of the IT services business, organic sales increased 10%. While we do expect this growth rate to moderate in the second half of the year, we continue to have a robust pipeline of opportunities in 2021 and beyond. Additionally, program execution across the portfolio was exceptional, which drove our segment operating margins to exceed 12%. This follows on strong Q1 performance resulting in a year-to-date segment operating margin of 12.1%, and we continue to expect solid performance for the remainder of the year. Earnings per share increased 7% this quarter and transaction-adjusted earnings per share has increased 16% year to date. Transaction-adjusted free cash flow is also trending favorably and has increased 26% year to date. As a result, we ended the quarter with just under $4 billion in cash on the balance sheet. This provides us continued flexibility for capital deployment. We completed the $2-billion accelerated share repurchase in Q2 and continue to expect to repurchase over $3 billion for the year. Additionally, we increased our dividend by 8% in May. We are executing a balanced capital deployment strategy, which includes investing in the solutions our customers need and also returning cash to investors. Over the next couple of years, we continue to expect to return the majority of our free cash flow to shareholders through share repurchases and dividends. In terms of budget updates from Washington, the Biden administration issued its budget request for fiscal-year 2022 in May. And it reinforces the administration's statements around investing in capabilities to maintain U.S. national security advantages. The request aligns well with the investments we've made at Northrop Grumman as we've positioned our portfolio for the future. And while it's still relatively early in the budget process, we're pleased to see strong support for national security from the Congress, including a $25 billion increase to the president's budget request approved last week by the Senate Armed Services Committee. Both the House Appropriations Committee and SASC have voiced strong support for many of our programs, including B-21, GBSD, Triton and F-35, to name a few. We look forward to working with the Congress and the administration as they make progress on the fiscal-year 2022 budget. NASA was also well-supported in the budget, with a 7% year-over-year increase in proposed funding. NASA priorities include returning to the moon via the Artemis program, where we are a key supplier of critical technologies, including the Habitation and Logistics Outpost or HALO, and the solid rocket boosters for the Space Launch System, also known as SLS. This provides meaningful opportunity for the company, and it demonstrates the diverse nature of our space business. Turning to business highlights from the quarter. I'll share a few examples that helped to demonstrate the strength of our portfolio and our technology leadership across key markets. In partnership with the Air Force, the B-21 program remains on track, with two test aircraft in production today, and we continue to make solid progress toward first flight. This program leverages the confluence of Northrop Grumman's long history in aircraft development and advanced low observability capabilities. The Air Force recently published an artist rendering and a B-21 fact sheet that provides additional insights into the program. The fact sheet highlights that the B-21 is being designed with open systems architecture to reduce integration risk and enable future modernization efforts to allow for the aircraft to evolve as the threat environment changes. As we've discussed on many of these calls, Northrop Grumman is a leader in communications and networking solutions, providing the connective tissue for military platforms, sensors and systems that weren't designed to communicate with one another, passing information and data using secure, open systems similar to how we use the Internet and 5G in our day-to-day lives. Our systems played an important role in the Northern Edge 2021 joint exercise, which was held in May, and showcased how we enable warfighters to easily communicate and securely share actionable information regardless of platform. As part of the exercise, Northrop Grumman systems were validated on three separate platforms. Our Freedom Pod was the part of a demonstration with the Air National Guard and our Freedom Radios were a key part of two demonstrations centered on advanced fifth-generation communication. And as a reminder, the Freedom Radios equip both the F-35 and F-22. We are also enabling joint all-domain command and control through our Integrated Air and Missile Defense Battle Command System or IBCS. Army successfully engaged a cruise missile target in a highly contested electronic attack environment during the developmental flight test using Northrop Grumman's IBCS. This latest flight test integrated the widest variety of sensors to date, including a Marine Corps G/ATOR radar, which is our GaN-based expeditionary radar that entered full-rate production last year, as well as F-35 and other ground sensors and interceptors. This was the eighth successful flight test performed with the IBCS program. And the program is on track for a competitive down-select of full-rate production later this year. In addition, we are making great progress on the GBSD program. In the second quarter, the team officially closed out the EMD baseline review with our Air Force customer, and we completed the integrated baseline review. The IBR is a critical step in setting cost and scheduled baselines and is an important milestone for the program. And earlier this month, we were awarded a contract to continue our support of the Minuteman III ground subsystems until their successful transition to the GBSD system. So taking a step back, the examples that I just provided highlight our strong performance, technology leadership and broad portfolio and its tight connection to national security priority, from modernizing our strategic deterrents to breakthrough technologies that connect our forces. Based on the strong results and performance of our company year to date and our latest outlook for the remainder of the year, we are increasing our 2021 revenue, segment OM rate and transaction-adjusted earnings per share guidance. Additionally, after two years of book to bill over 1.3, we expect our book to bill for the full year to be close to one this year, with key booking opportunities in the second half of the year that include HALO, SLS, F-35 and several restricted programs, laying the foundation for continued growth. We are very proud of our ESG record and the high marks we've received in many environmental and in social rankings. We have built an organization with a robust governance structure, diverse and inclusive working environment, and an ongoing and evolving focus on responsible environment stewardship. In May, we published our most recent sustainability report. It provides transparency into the progress and actions we've taken in these areas and more. To help ensure we adhere to these priorities every day, key components of our ESG goals are reflected in nonfinancial metrics that are incorporated into the leadership team's annual incentive compensation. And just last week, we announced the appointment of a Chief Sustainability Officer, who will report to me and drive further enhancements to our ESG program. Our second-quarter results and enhanced 2021 outlook demonstrate that our strong fundamental trends continue. Over the long term, we are well-positioned to provide our customers innovative and affordable solutions to help address national security threats while driving profitable growth and value creation for our shareholders. My comments begin with second-quarter highlights on Slide 3. We delivered another quarter of excellent organic sales growth and outstanding segment operating margin rate and higher EPS. Our year-to-date transaction-adjusted free cash flow increased 26%, and we continue to return cash to shareholders through our buyback program and our quarterly dividend, which we increased by 8% in Q2. As a result of our outstanding first-half performance and enhanced outlook for the year, we're pleased to be raising our sales, segment operating margin rate and earnings per share guidance. Slide 4 provides a bridge between second-quarter 2020 and second-quarter 2021 sales. Normalizing for the IT services divestiture, which was a $585 million headwind in the second quarter of 2021, our organic sales increased 10% compared to last year. Working days were the same in both periods. Moving to Slide 5, which compares our earnings per share between Q2 of 2020 and Q2 2021, our earnings per share increased 7% to $6.42. Operational performance contributed $0.60 of growth and lower unallocated corporate costs driven by state tax changes added another $0.22. Our marketable securities performance was a modest earnings benefit in Q2. But compared to the even more favorable equity markets experienced in the same quarter last year, it represented a year-over-year headwind of $0.18. Lastly, we experienced a higher federal tax rate in the period due to a change in tax revenue recognition on certain contracts for years prior to the 2017 Tax Cuts and Jobs Act. Next, I'll begin a review of sector results on Slide 6. Aeronautics sales were roughly flat for the quarter and up 2% year to date. Sales in both periods were higher in Manned Aircraft, principally due to higher volume on restricted programs and E-2D, partially offset by lower production activity on A350 and lower volume in Autonomous Systems. At defense systems, sales decreased by 24% in the quarter and 21% year to date, and on an organic basis, sales were down roughly 3% in both periods. Lower organic sales were driven by the completion of our Lake City activities, which represented a headwind of $120 million in the quarter and $260 million year to date. This was partially offset by higher volume in both periods on GMLRS, as well as ramp-up on the Global Hawk Contractor Logistics Support program for the Republic of Korea. Mission systems sales were up 6% in the second quarter and 8% year to date. On an organic basis, MS delivered another double-digit sales increase in the quarter of almost 12%, and organic sales were higher in all four of its business units in both periods. Turning to space systems, sales continue to grow at a robust rate, rising 34% in the second quarter and 32% year to date. Sales in both of its business areas were higher in the quarter and year-to-date periods, reflecting continued ramp-up on GBSD and NGI, as well as higher volume on restricted programs, Artemis and Next Generation OPIR. Moving to segment operating income and margin rate on Slide 7. We had an outstanding operational quarter with segment margin rate at 12.2%. Aeronautics' Q2 operating income decreased 3% due to a benefit of $21 million recognized in the second quarter of 2020 from the resolution of a government accounting matter. Operating margin rate was consistent at 10.3% in Q2 and the year-to-date period. At defense systems, operating income decreased by 18% in the quarter and 15% year to date, primarily due to the impact of the IT services divestiture. Operating margin rate increased to 12.4% in the quarter and 11.8% year to date. The increase in operating margin rate was largely driven by improved business performance and business mix in battle management and missile systems programs. Operating income in Mission Systems rose 18% in the quarter and 15% year to date due to higher sales volume and improved performance. Operating margin rate increased to 15.8% in the quarter and benefited from the favorable resolution of certain cost accounting matters, as well as changes in business mix, as a result of the IT services divestiture. Year to date, operating margin rate increased to 15.5%. Space systems operating income rose 44% in the quarter and 40% year to date, and operating margin rate was 11% in both periods. Higher operating income is primarily a result of the higher sales volume, along with the timing of risk retirements contributing to higher net favorable earnings adjustments in both periods. Now turning to sector guidance on Slide 8. You'll note that we are now providing quantified ranges for sales and OM rates instead of the broader descriptions, such as low to mid or mid to high, given the improved visibility that we have as we pass the midpoint of this fiscal year. We are increasing the sales outlooks of our defense, mission systems and space sectors, given the strong volume they each produced in the first half and solid outlooks for second-half performance. We're slightly reducing sales guidance for aeronautics, reflecting the continued plateauing of several of our production programs after years of outsized growth. For operating margin rate, we're increasing our guidance at defense, MS and space, and the margin rate at AS remains unchanged. Moving to consolidated guidance on Slide 9. We're raising our 2021 outlook for several key metrics. For sales, we're increasing the midpoint of our guide by $500 million to a range of $35.8 billion to $36.2 billion. This translates to full-year organic growth of over 4% and over 5% excluding the 2020 equipment sale at AS. As you review our sales trends, keep in mind that the first half benefited from one month of the IT services business and had seven more working days than the second half will have. We expect the company to have higher organic sales per working day in the second half of the year than the first. We're also increasing both our segment operating margin rate and our overall operating margin rate ranges by 10 basis points to 11.6% to 11.8% and 15.5% to 15.7%, respectively. Keep in mind that the gain from the IT services divestiture contributed approximately 5 points of our overall operating margin benefit. We're proud of our profit performance in the first half and continue to expect strong results in the second half of the year. First-half net favorable EAC adjustments were particularly strong with lower rates driving Q1 outperformance and program risk retirements contributing to Q2 strength. For unallocated corporate expense, our updated guidance reflects a $30 million reduction associated with state tax changes. And we now foresee an effective federal tax rate in the high 17% range, excluding the effects of the divestiture, which is an increase from our prior guidance. We project a federal tax rate of approximately 22.5% on a GAAP basis. Finally, we're raising our earnings per share guidance, which I'll highlight on Slide 11. The increase in guidance is driven by $0.40 of segment operational improvement. Lower unallocated corporate costs almost fully offset the headwind from the higher federal tax rate, leading to an increase in our transaction-adjusted earnings per share guidance of $0.35 at the midpoint. Next, I'd like to take a moment to talk about cash. Since our call in January, we've raised the midpoint of our sales guide by $700 million. With those additional sales come additional working capital needs to fuel the growth. But in light of our outstanding first-half cash flow performance, we project that we can absorb that additional working capital in our existing transaction-adjusted free cash flow guidance of $3 billion to $3.3 billion. We believe this range reflects continued strength in cash conversion, balanced with prudent investments in key growth segments of our market. I also wanted to provide more information on the projected impact on our 2022 CAS pension recoveries from the American Rescue Plan Act, which was passed this spring. While asset returns and actuarial assumptions will continue to influence the final number, our current estimate is approximately $185 million of CAS recoveries in 2022, down $55 million from our January guide and down about $300 million from our expected 2021 level. We continue to expect minimal required pension contributions over the next several years. Regarding cash deployment, as Kathy mentioned, we completed our $2 billion accelerated share repurchase in the second quarter, retiring over six million shares at an average price of around $327 per share. And we continue to target over $3 billion of total buybacks in 2021. At the end of the second quarter, we had approximately $3.7 billion of remaining share repurchase authorization. In conclusion, we're very pleased to have delivered another quarter of rapid growth, outstanding program performance, strong cash flow and accretive cash deployment. And with that, Todd, I think we're ready to open up the call for Q&A. Nicole, can you remind everyone how to get into the queue?	northrop raises full-year forecast on space unit strength. qtrly earnings per share $6.42; qtrly transaction-adjusted earnings per share $6.42. qtrly total sales $9.15 billion, up 3%. raises 2021 sales guidance to $35.8 billion to $36.2 billion. sees 2021 mtm-adjusted diluted earnings per share $31.30 to $31.70; sees 2021 operating margin 15.5% to 15.7%.
These risks and uncertainties may cause actual company results to differ materially. On the call today are Kathy Warden, our chairman, CEO, and president; and Dave Keffer, our CFO. Kathy Warden -- Chairman. We delivered another quarter of strong results in an increasingly complex environment. In the last quarter, we've seen developments in the global fight against COVID-19 and macroeconomic changes, such as a tightening labor market, supply chain challenges, and growing inflation. But we've also seen evolving threats to our National Security, which has further eliminated the value of Northrop Grumman products and services. I am proud of how our team has demonstrated remarkable resiliency and adaptability during these dynamic times. Our company continues to deliver strong operating performance. As we announced earlier today, we had a segment operating margin rate of 11.9% in the third quarter, and year to date, an exceptional segment operating margin rate of 12%. In addition, earnings per share in the quarter were $6.63, an increase of 13% compared to last year. And our transaction-adjusted free cash generation continues to be strong, increasing 15% year to date. We ended the quarter with just over $4 billion in cash, providing significant flexibility in support of our capital deployment initiatives. With respect to the top line, our year-to-date organic growth was 8%. This robust growth reflects the alignment and strength of our broad portfolio to our customers' priorities and future needs. As expected, our organic growth rate slowed in the quarter from the rapid pace that we saw in the first half of the year. In addition to having fewer working days in the second half of the year, which we discussed on each of our last two calls, we are also seeing an impact on our sales from the broader economic environment due to COVID-19. During the third quarter, this included employee leave-taking at a higher level than planned, a tighter labor market, and certain supply chain challenges. We continue to focus on the safety and well-being of our employees, customers, and partners as we work to mitigate the impact of these factors. As you know, the president recently issued an executive order generally requiring employees to federal contractors to be fully vaccinated by early December. We have shared the details of this mandate with our U.S. workforce, and we are working to help them meet the requirements. We also increased our hiring plans for the fourth quarter to help mitigate the potential impact of any increased attrition. Based on the team's strong third-quarter performance and in consideration of macroeconomic factors as we see them today, we are increasing our guidance for segment OM and earnings per share for the year and narrowing our sales guidance to approximately $36 billion. Dave will provide more details on the quarter, our updated guide, as well as our initial outlook for 2022. Turning to budget updates from Washington. We're seeing strong bipartisan support for National Security broadly and Northrop Grumman programs specifically. We are pleased that an agreement was reached on the continuing resolution and debt ceiling that will fund the government through December 3. We are hopeful that Congress will finalize the fiscal year 2022 appropriations and avoid a protracted continuing resolution. With respect to the FY '22 defense budget overall, we see bipartisan support for increased defense spending, including adding funding above the president's budget request. We are hopeful that this additional funding will be supported in final appropriations. Over the past several weeks, senior customers, members of Congress, and administration officials have made increasingly public comments about strategic competition in the National Security environment and the need to counter and deter evolving threats. One clear and consistent message has been the need to invest in and more rapidly field advanced capabilities. Our company's portfolio and capabilities are strongly aligned to the five National Security priority areas, particularly in advanced weapons, strategic deterrence, mission systems, and space. And we're using digital technologies to develop and deploy capabilities faster and more efficiently than ever before across our entire portfolio. I'll share a few highlights to demonstrate how our performance today continues to position us for the future. With the emergence of more sophisticated air defense systems, the need for standoff capabilities and speed to target is critical for our customers. To address this requirement, Northrop Grumman developed AARGM-ER, a high-speed, long-range air-to-ground missile. And in the third quarter, after just 28 months in engineering, manufacturing, and development, we achieved a critical milestone, clearing the wafer production. In September, we received our first low-rate initial production award for the program. Also during the quarter, we, along with our industry partner, Raytheon, successfully tested the hypersonic air-breathing weapon concept known in HAWC. Northrop Grumman supplies the scramjet propulsion system for HAWC, allowing speeds of greater than Mach 5. AARGM-ER and HAWC are just two examples of how we're providing the higher speed and longer-range weapons needed to be relevant in today's threat environment. Another key area where we are supporting our customers is in the need and urgency to enhance our country's strategic deterrence capabilities, especially in light of recent disclosures of investments that other nations are making in modernizing their strategic capabilities. The triad is the foundation of the security strategy for the U.S. and its allies and has been an effective deterrent for decades, preserving peace and deterring aggression. As highlighted by recent customer and administration comments, modernizing the triad remains a high priority. Northrop Grumman is the prime on two of the three legs of the triad with the bomber and strategic missiles, and we're a significant supplier for submarines as well. For the bomber, the B-21 program continues to advance. As Air Force Secretary, Frank Kendall recently noted, there are now five units in various stages of production and the systems are, in his words, making good progress to real fielded capability. For strategic missiles, we continue to make solid progress on the EMD portion of the ground-based strategic deterrent program. We completed key milestones earlier this year, and we are tracking toward our first flight as planned. The GBSD program has ramped significantly this year, and we now expect that it will add just over $1 billion in incremental revenue to our 2021 results and another approximately $500 million of incremental revenue in 2022. For both B-21 and GBSD, we have applied digital transformation concept as a key enabler to reduce risk, increase productivity, shorten cycle time, and improve the system's ability to adapt to changing threats. In today's rapidly changing threat environment, our Mission Systems portfolio, including in communications and artificial intelligence, is making a critical contribution in the advancement of technology and capability needed to allow legacy platforms to be more capable and survivable, and therefore, more relevant toward addressing the increasingly sophisticated threats. To this end, during the third quarter, our next-generation electronic warfare system, which will equip domestic F-16, had its first test flight on a testbed aircraft at the Northern Lightning exercise. This system, in conjunction with our SABR radar, demonstrated full interoperability in a simulated contested electromagnetic spectrum environment. With the radio frequency spectrum becoming increasingly contested, this critical set of electronic warfare capabilities will allow the platform to remain survivable. We anticipate an EMD contract for next-generation electronic warfare in 2022 with an overall lifetime opportunity of up to $3 billion. And in Missile Defense, emerging threats from hypersonic missiles are creating new challenges for customers. We are helping to provide differentiated solutions to these challenges by applying our advanced technology and domain expertise. Earlier this year, we were awarded a contract to deliver a prototype satellite as part of MDA's hypersonic and ballistic tracking-based sensor, HBTSS, program. This program is designed to detect and track hypersonic vehicles which have a very different flight profile and signature than ballistic missiles. They required new sensing capabilities in order to detect and track them. In September, we conducted a successful HBTSS critical design review and are progressing toward a 2023 launch. In the space domain, Northrop Grumman is working with our customers on advanced capabilities to address a range of new and evolving threats. Many of these programs are classified. And consistent with increased demand in this area, we received $1.2 billion in restricted space awards in the third quarter. I've touched on several major contributions that we've made this quarter to National Security, all of which highlight our strong performance, technology leadership, and broad portfolio. I also want to share examples of our collaboration with partners to accelerate innovation and create discriminating technologies. As I've noted before, we are actively engaging in partnering with early stage technology and nontraditional defense companies. In the quarter, we closed an investment in Orbit Fab, a space logistics company whose goal is to put gas stations in space. Their vision fits well with our on-orbit satellite refueling and space logistics capabilities. We also continue to work with Deepwave Digital, an innovative company we invested in at the end of last year. Deepwave Digital provides a hardware and software solution, enabling very efficient AI-enhanced, software-defined radios for deep learning applications at the edge, which we believe will enhance our efforts in both autonomy and JADC2. These partnerships, as well as other venture investments, support our strategy to create solutions at speed for our customers' toughest national security challenges. I'll begin my comments with third-quarter highlights on Slide 3. We continued to generate strong operating results, delivering another quarter of solid organic sales growth, higher segment operating margin rate, and outstanding earnings per share and transaction-adjusted free cash flow. We continued to return cash to shareholders through our buyback program and quarterly dividend, returning over $800 million in the quarter. Slide 4 provides a bridge between third-quarter 2020 and third-quarter 2021 sales, excluding sales from the IT services divestiture, our organic growth was 3%. This rate was below our first-half growth due in part to the broader labor market and supply chain trends that Kathy outlined. Next, I'll review our earnings per share results on Slide 5. Compared to the third quarter of 2020, our earnings per share increased 13% to $6.63. Strong segment operational performance contributed about $0.14 of growth and lower corporate unallocated added another $0.55. This included a $60 million benefit from insurance settlements related to shareholder litigation involving the former Orbital ATK business prior to our acquisition. Corporate unallocated expense also decreased due to a change in deferred state income taxes, as well as lower intangible asset amortization and PP&E step-up depreciation. Pension costs contributed $0.17 of growth, driven by higher non-service FAS income. Our marketable securities performance represented a headwind of $0.17 compared to the third quarter of 2020, which benefited from particularly strong equity markets. Lastly, we experienced a slightly higher federal tax rate in the period due to lower benefits from foreign-derived intangible income. Turning to sector results on Slide 6. We saw some broad-based COVID-related impact. the most significant of which were in our Aeronautics sector. Aeronautics sales declined 6% for the quarter. Year to date, its sales are down 1%. As we've described in recent quarters, several programs in our AS portfolio are plateauing or entering a phase of their life cycle where you would not expect to see growth. This quarter, we experienced slightly lower volume across the portfolio, including restricted efforts, F-35, B-2 DMS, and Global Hawk programs. We expect this overall trend to continue at AS in 2022, which we'll discuss in more detail momentarily. At Defense Systems, sales decreased by 24% in the quarter and 22% year to date. On an organic basis, sales were down roughly 2% in the quarter and year-to-date periods driven by the completion of our activities on the Lake City small-caliber ammunition contract last year. Lake City represented a sales headwind of roughly $75 million in the quarter and $335 million year to date. This was partially offset by higher volume on several mission-readiness programs. Mission Systems sales were down 5% in the quarter and up 4% year to date. Organically, MS sales increased 1% in Q3, and year to date, they are up a robust 9%. As we've noted previously, the timing of material volume at MS has been weighted more toward the first half of 2021 than the second. Organic sales growth in the third quarter and year-to-date periods was broad-based across programs such as G/ATOR, JCREW, and various restricted efforts. And finally, Space Systems continued to deliver outstanding sales growth, increasing 22% in the third quarter and 28% year to date. Sales in both business areas were higher in the quarter and year-to-date periods reflecting continued ramp-up on GBSD and NGI, as well as higher volume on restricted programs and Artemis. Turning to segment operating income and margin rate on Slide 7. We delivered another quarter of excellent performance with segment operating margin rate at 11.9%. Aeronautics third-quarter operating income decreased to 10% due to lower sales volume and a $42 million unfavorable EAC adjustment on the F-35 program. The adjustment was driven by labor-related production inefficiencies, reflecting COVID-related impacts on the program. The AS operating margin rate decreased to 9.7% in Q3 as a result of this adjustment with year-to-date operating margin slightly ahead of last year at 10.1%. The Defense Systems operating income decreased by 19% in the quarter and 16% year to date largely due to the impact of the IT services divestiture. Operating margin rate increased to 12.4% in the quarter and 12% year to date, largely driven by improved performance and contract mix in Battle Management and Missile Systems, partially offset by lower net favorable EAC adjustments. At Mission Systems, operating income was relatively flat in the quarter and up 10% year to date. Third-quarter operating margin rate improved to 15.3% and year to date was 15.5%, reflecting strong program performance and changes in business mix as a result of the IT services divestiture. Space Systems operating income rose 29% in the quarter and 36% year to date, driven by higher sales volume. Operating margin rate was also higher at 10.7% in the quarter and 10.9% year to date, driven by higher net favorable EAC adjustments. Moving to sector guidance on Slide 8. Note that this outlook assumes a relatively consistent level of impact in Q4 with what we've been experiencing so far this year from the effects of COVID on the workforce and supply chain, and it does not include any potential financial impacts on the company related to the vaccine mandate. We have updated our 2021 sales estimates for each segment based on our year-to-date results and current expectations for Q4. For operating margin rate, we're increasing our guidance at Defense and Space, and the margin rates at AS and MS remain unchanged. Before we get to our consolidated guidance, I'd also like to take a moment to discuss some of the factors to consider in comparing our fourth-quarter revenue to last year on Slide 9. In Q4 of 2020, the IT services business contributed almost $600 million of sales, and the equipment sale at AS generated over $400 million. Q4 of 2021 also has four fewer working days than the same period in 2020, representing a headwind of about 6%. Adjusting for these three items, our Q4 2021 sales would grow at 3% to 4% based on our latest full-year guidance. Moving to Slide 10. Based on what we now see, we expect sales of approximately $36 billion. We're raising our 2021 outlook for segment and total operating margin and for EPS. Our segment operating margin rate guidance is 10 basis points higher at 11.7% to 11.9%, reflecting our continued strong performance. Our net FAS/CAS pension adjustment has increased $60 million for the full year as a result of the annual demographic update we performed in Q3. Other corporate unallocated costs are $70 million below our previous guidance, now at approximately $120 million for the year. As I mentioned, our corporate unallocated costs benefited from a $60 million insurance settlement in Q3, as well as additional benefits from state taxes. These updates translate into an increase of 50 basis points in our operating margin rate to a range of 16% to 16.2% in our updated guidance. Remember that the gain from the IT services divestiture in Q1 contributed approximately 5 percentage points of overall operating margin benefit for the full year. We continue to project the 2021 effective federal tax rate in the high 17% range, excluding the effects of the divestiture, which is consistent with our prior guidance. Lastly, we're raising our earnings per share guidance, which I'll cover on Slide 11. Segment performance is contributing about $0.15 of the increase with the benefits to corporate unallocated and pension contributing the remainder. In total, this represents an $0.80 improvement in our transaction-adjusted earnings per share guidance. With this latest increase, our 2021 earnings per share guidance is up by about $2 since our initial guidance in the beginning of the year. Before we move to 2022, I wanted to give you an update on our cash performance. Year to date, we've generated over $2.1 billion of transaction-adjusted free cash flow, up 15% compared to 2020, and we ended the quarter with over $4 billion in cash on the balance sheet. Keep in mind that we have a roughly $200 million payroll tax payment in Q4 from the Cares Act legislation with the second similar payment in 2022. Additionally, we expect to pay the balance of our transaction-related tax from the IT services divestiture in the fourth quarter. Our healthy cash position has enabled us to repurchase over $2.7 billion of stock so far this year, on track with our full-year target of $3 billion or more. As we look ahead to 2022, on Slide 12, our outlook is based on the same set of assumptions that we described for 2021 guidance regarding the COVID environment and vaccine mandate. It also assumes that the continuing resolution does not extend beyond 2021. And like our 2021 guidance, it assumes that we do not experience a breach of the debt ceiling. We expect Space to be our fastest-growing segment again in 2022, driven by GBSD, NGI, and several restricted efforts as they continue to ramp. Mission Systems and Defense Systems should also produce organic growth. Regarding Aeronautics Systems, after several years of strong growth, our latest 2021 sales guidance calls for a mid-single-digit decline, and we see that trend continuing in 2022. We've talked in recent quarters about the headwinds in our HALE portfolio. We're also projecting lower sales on JSTARS, F-18, as well as our restricted portfolio. Looking further to the future, it's an exciting decade for defense aerospace. Rapidly evolving threats are spurring a new wave of autonomous vehicle and sixth-generation fighter development. So, the opportunity set in AS remains solid, and we will continue to invest in the cutting-edge technologies that allow our customers to stay ahead of the threat environment. Altogether, we currently expect 2022 sales at the company level to reflect continued organic growth. Looking at segment margin, we expect the strong results we've demonstrated in 2021 to continue in 2022 with excellent program performance offsetting a portion of the 20 to 30 basis point benefit we generated from pension-related overhead rate changes in Q1 of 2021. While we project higher sales and strong segment operating margin, we expect transaction-adjusted earnings per share to be down next year as a result of several nonoperational headwinds. Lower CAS pension recoveries and higher corporate unallocated expenses are currently projected to create an earnings per share headwind next year of more than $2. For FAS pension, our outlook for 2022 will depend on our updated actuarial assumptions, including discount rates and plan asset returns, which we will determine at the end of the year. Earnings per share driven from sales growth, strong operating margin performance, and lower share count will help to offset these nonoperational items. Next, I'd like to spend a moment discussing cash. We expect relatively stable cash flow at the program level in 2022, but there are a few temporal items that should be factored into the year-over-year comparison of overall free cash flow. First is lower CAS pension recoveries. As you can see on Slide 13, our CAS recoveries are currently expected to be lower by $350 million next year. The second is cash taxes. Excluding the impact of the IT services transaction, we expect cash taxes to be modestly higher next year. In addition, as we've noted in the past, current tax law would require companies to amortize R&D costs over five years, starting in 2022, which would increase our cash taxes by around $1 billion next year and smaller amounts in subsequent years. There continues to be uncertainty in the tax environment with potential new legislation that could change the R&D amortization provision and other provisions. We will provide updates on each of these items on our January call. Taking all of these cash flow factors into consideration, we would expect to decline in 2022 transaction-adjusted free cash flow, followed by a double-digit growth CAGR through 2024, driven by strong operational performance. Regarding capital deployment, investing in the business through disciplined R&D and capital spending continues to be our priority. We expect capex to be roughly flat next year in absolute dollar terms. We believe these investments allow us to stay at the forefront of technology as we invest in our business. And as we've said, we continue to expect to return the majority of our 2022 free cash flow to shareholders through dividends and share repurchases. Kathy Warden -- Chairman. In summary, we have delivered excellent year-to-date results and operating performance, and we are pleased to be increasing our full-year earnings per share guidance for the third consecutive quarter. We are actively engaged with our supply chain and our employees as we work to mitigate broader COVID-related risks and continue to keep our programs on track. As shown by the many milestones in the quarter, we have highly relevant capabilities and programs that align well to National Security requirements and our customer funding priorities. So, as we look forward, 2022 is expected to deliver another year of organic sales growth and excellent performance, paving the way for longer-term margin expansion and free cash flow growth. We remain focused on protecting the safety and well-being of our employees, delivering the capabilities our customers need to protect National Security and sustain our planet, and delivering value to our shareholders.	compname reports q3 earnings per share $6.63. qtrly earnings per share $6.63; qtrly sales $8.72 billion versus $9.08 billion. sees 2021 sales about $36 billion; sees 2021 mtm-adjusted earnings per share $32.10 - $32.50. qtrly organic sales rose 3%. in 2021 continue to expect strong organic sales growth. q3 sales fell due to lower sales at defense systems and missions systems, and at aeronautics systems. tight labor market, elevated levels of employee leave, supply chain challenges affected q3 sales. qtrly defense systems sales fell 24% to $1.41 billion; qtrly mission systems sales fell 5% to $2.44 billion. qtrly aeronautics systems sales fell 6% to $2.73 billion; qtrly space systems sales rose 22% to $2.68 billion. for 2022, expect space to remain fastest growing segment; mission systems, defense systems also grow. for 2022, expect aeronautics systems to decline at rate similar to 2021. expect lower cas pension recoveries of about $350m impacts earnings in 2022.
But before we start, I'd just like to go through a couple of comments here. These risks and uncertainties may cause actual company results to differ materially. We delivered another year of solid operating performance in 2021 and positioned our business for continued growth in 2022. We are executing our strategy, which is to grow the business today and into the future, maintain excellent performance and reduce costs to deliver strong margin rate and deploy our capital to create value. We made significant progress in executing this strategy again in 2021. Our organic sales growth for the year was 3%. Our segment operating margin was an exceptionally strong 11.8%, which increased 40 basis points compared to 2020 with performance more than offsetting mix and COVID-related headwinds. We grew our transaction adjusted earnings per share by 8% and generated a $3.1 billion of transaction adjusted free cash flow. Regarding capital deployment, we returned a record $4.7 billion to shareholders through dividends and share repurchases, including a $500 million accelerated share repurchase that we announced in November of 2021. We strengthened our balance sheet, retiring over $2.2 billion of debt during the year and achieving an increased credit rating in the process. And we continue to invest in our business with over $1.4 billion in capital expenditures to create new technologies and support franchise programs. We also continue to add to our portfolio of franchise programs, with competitive wins on programs like the Integrated Battle Command System, or IBCS, as well as Hypersonic and Ballistic Tracking Space Sensor and Next Generation Interceptor. As we look forward to '22 and beyond, we expect our organic growth will continue as we win new business and convert the robust backlog we've built over the past several years into sales growth. And while we'll know more about the President's budget request in the coming weeks, we continue to believe that our portfolio is strongly aligned with the threat environment and the key investment priorities of our customers. Further, we expect strong margin performance, as well as double-digit free cash flow growth from 2022 through 2024. 2022 guidance reflects our confidence in our strategy, our broad portfolio and our ability to deliver continued growth and strong performance. As reported, the COVID pandemic continued to present challenges to labor availability, parts supply and shipping delays across the economy, particularly in the second half of last year. We have felt these effects and the challenges at both our supply chain and our own labor availability. We will continue to take proactive steps to address such COVID risks, both to our employees and our business. And looking forward, our current guidance reflect the factors we know today and our best estimate for the remainder of the year. Dave is going to provide more details on the quarter, the full year and our guidance in just a few minutes. But turning now to the budget environment. The federal government continues to operate under a continuing resolution that currently run through February 18. Negotiations on the fiscal year 2022 appropriations bills are continuing. And we remain optimistic that Congress will reach an agreement by the end of the first quarter. The National Defense Authorization Act contained a $25 billion increase to the defense budget that represents 5% growth compared to fiscal year 2021, which we expect to also be supported in the appropriations bill. In the NDAA, there is continued support for our major programs, and several of our programs received incremental funding above the President's budget request, including Triton, E-2D F-35, F-18 and G/ATR, among others. And finally, we expect the FY '23 President's budget to be delivered to Congress in March of this year, reflecting this administration's priorities in areas such as mission systems, space, missile defense, advanced weapons and deterrents. Focusing now on highlights in the quarter, one of our proudest moments was the launch of the Webb Space Telescope on December 25. Northrop Grumman is the prime contractor for NASA on Webb, and we're honored to have partnered with NASA to provide the world with this revolutionary technology. Webb will peer more than 13.5 billion years into the past when the first stars and galaxies were formed, ushering in an exciting new era of space observation and expanding our understanding of the universe. In addition to Webb, we're also supporting NASA's Artemis mission by producing the largest solid rocket motors ever built for the space launch vehicle system, which is being developed to send the first woman and next man to the moon. In the fourth quarter, the space sector received a $3.2 billion award to support Artemis missions IV through VIII. Another important milestone in the quarter was the competitively awarded IBCS in our Defense Systems sector. This program is a centerpiece of the U.S. Army's modernization strategy for air and missile defense and all-domain command and control. It's a prime example of our capabilities to integrate assets in the battle space regardless of source, service or domain. This is one of many examples of how we are helping our customers share data between systems and improve command and control in support of their JADC2 vision. In the area of missile defense, we had several milestones in the quarter, which position us to help our customers track and defend against hypersonic and ballistic missile threats. In the fourth quarter, we announced that HBTSS had passed its critical design review. These satellites are planned to be part of a multilayered network of spacecraft that will detect and track hypersonic missiles. Also in the quarter, we were selected by the Missile Defense Agency to design a glide phase interceptor for regional hypersonic missile defense. In our Mission Systems sector, we continue to see our customers prioritizing development of capabilities that will increase the effectiveness and survivability of legacy systems, as well as new technologies for next-generation systems. In the fourth quarter, MS received an accelerated award for F-16 SABR for approximately $200 million, and full year awards of approximately $700 million. We have now received total contract awards for near 1,000 radars for this program in support of the U.S. Air Force and National Guard, as well as several international customers. In addition, our network information systems business area within Mission Systems received approximately $1 billion in awards for advanced processing solutions. This portfolio delivers strategic microelectronics focused on high-performance computing and security, which helps our customers with connectivity and processing solutions. We anticipate additional awards in this segment of the portfolio for the next few years, and we expect it will be a significant growth driver for MS in 2022. The military aircraft market is undergoing a transition as our customers focus their investments in next-generation programs while divesting some legacy platforms. As we've discussed, certain programs in our portfolio at Aeronautics Systems are maturing and experiencing headwinds. But there are also a number of exciting new opportunities that are emerging. This includes next-generation manned aircraft, as well as new unmanned opportunities, which U.S. Air Force Secretary Kendall recently announced. In addition to pursuing these longer-term opportunities, we remain focused on executing our programs and delivering for our customers. Another important aspect of our company's future is our strategy for sustainability. We strongly believe that our environmental, social and governance programs play an important role in sustainable, profitable growth and in long-term value creation for our shareholders, customers and employees. Northrop Grumman is a leader in conservation activity with a 44% reduction in greenhouse gas emissions since 2010. In the fourth quarter, S&P released its Global Corporate Sustainability Assessment scores, and we ranked in the 96 percentile. We were included on the Dow Jones Sustainability Index North America for the sixth consecutive year, and we were included in the Dow Jones Sustainability World Index for the first time. Our ESG strategy also includes portfolio management actions. As we've discussed on earnings calls last year, we committed to transition out of the small aging and surveillance contracts that we have for cluster munitions, and that contract is complete. And while we continue to be an ammunitions supplier as both a prime and a merchant supplier, we have made the decision to transition our prime role in depleted-uranium ammunition to another provider, following one final single production year contract. We are currently working to establish our next set of sustainability goals and priorities, specifically as they relate to greenhouse gas emissions, water conservation and solid waste diversion with a stronger emphasis on renewable energy. Overall, we're making substantial progress in our ESG journey, and we look forward to sharing more in our upcoming sustainability and TCFD reports. And then I have a few additional comments before we move on to Q&A. 2021 was another strong year of performance for the company. Before going through the details of our results and guidance, I'd like to note a few items to keep in mind when comparing Q4 to the same period last year. As we previewed in prior quarters, the divested IT services business, the equipment sale at AS and four more working days in Q4 2020 represented over $1.6 billion of sales when compared to Q4 2021. With that said, sales per working day in 2021 were at their highest level in Q4. Moving to sector results. We continued to see certain COVID-related effects on our labor and supply chain in Q4, and these effects were most significant in our aeronautics sector. The Q4 decline in AS sales was partially driven by fewer working days and the 2020 equipment sale, and it also included a $93 million unfavorable EAC adjustment on F-35. Turning to Defense Systems. Sales declined in Q4 in 2021, primarily due to the IT services divestiture. Organic sales were down 9% in Q4 and 4% for the full year, driven by the completion of our contract at the Lake City ammunition plant, which generated almost $400 million of sales in 2020. Mission Systems organic sales were down 3% in the fourth quarter, primarily due to the reduction in working days and up 6% for the full year. Higher 2021 sales were driven by increased volume on G/ATR, GBSD, SABR, JCREW and restricted programs, among others. And lastly, Space Systems Q4 and full year organic sales rose by 6% and 24%, respectively. We continued to ramp significantly on franchise programs, including a $1.1 billion increase on GBSD in 2021. Growth was also driven by restricted space programs, as well as NGI and Artemis. Moving to segment operating income and margin rate. AS operating margin rate decreased to 8.4% in the quarter and 9.7% for the full year due to the unfavorable EAC adjustment on F-35. In our other three sectors, segment operating margin rates met or exceeded the high end of our prior 2021 guidance ranges. Defense Systems operating margin rate increased 90 basis points to 12.1% in the quarter and 80 basis points to 12% for the full year. Higher operating margin rate was largely due to improved performance, as well as recent contract completions. At Mission Systems, operating income and rate grew in both periods. As a result of higher EAC adjustments and business mix changes, operating margin rate grew to 15.9% in the fourth quarter and 15.6% for the full year. And at Space Systems, operating margin rate was 9.6% in the quarter and 10.6% for the full year. Favorable EAC adjustments from strong performance on commercial space programs helped offset mix pressures for the year. And keep in mind that space, along with AS and MS, benefited from the pension-related overhead benefits that we recognized in the first quarter of 2021. At the total company level, segment operating margin rate in the fourth quarter was the same as Q4 2020, even with the F-35 charge in 2021. And it increased 40 basis points for the full year to 11.8%. Our transaction adjusted earnings per share declined 9% from Q4 2020 to Q4 2021, primarily due to lower sales volume from the factors I described earlier. For the full year EPS, we exceeded the high end of the earnings per share guidance range we provided in October. Transaction-adjusted earnings per share grew 8% in 2021 due to strong segment performance and lower corporate unallocated costs. Lower corporate unallocated was driven by two items we've discussed in prior quarters: the $60 million benefit from an insurance settlement related to the former Orbital ATK business, and lower state taxes. Regarding our pension plans, asset performance was strong again in 2021 at nearly 11%, the third year in a row of double-digit asset returns. Our FAS discount rate increased 30 basis points to 2.98%. These factors resulted in a mark-to-market benefit of roughly $2.4 billion in 2021. In addition, our net pension funding status has improved by over $3 billion and on a PBO basis, is now over 93% funded. We continue to project minimal cash pension contributions over the next several years. Also summarized are our pension cost estimates for the years 2022 through 2024. CAS recoveries are projected to continue declining over the planning period. And while this causes an earnings per share headwind, particularly in 2022, it makes our rates more competitive and our products more affordable. Our CAS prepayment credit is approximately $1.7 billion as of January 1 of this year. Now turning to cash. We generated nearly $3.6 billion of operating cash flow and $3.1 billion of transaction-adjusted free cash flow in 2021, in line with our expectations. In the fourth quarter, we made our final federal and state tax payments associated with the IT services divestiture of almost $200 million. We also made our first payment of roughly $200 million of deferred payroll taxes from the CARES Act legislation. The remaining payment of the same amount will occur this December. Looking ahead to 2022, our sector guidance is shown on Slide 9. This outlook assumes that appropriations bills are passed by the end of Q1, and it assumes a relatively consistent level of impact from the effects of COVID that we experienced in 2021. At aeronautics, we expect sales in the mid- to high $10 billion range. As we noted last quarter, we're projecting headwinds in our HALE portfolio, as well as lower sales on JSTARS, F-18 and our restricted business. Sales on F-35 are expected to be slightly higher in 2021 due to the EAC adjustment we booked in Q4. We expect an AS margin rate of approximately 10%, which is up 30 basis points year over year. For Defense Systems, we expect sales to be in the high $5 billion range as this business returns to modest organic growth following the IT services divestiture and the completion of our Lake City contract. Operating margin rate is expected to remain very strong in the high 11% range. Mission Systems sales are projected to be in the mid-$10 billion range, up from $10.1 billion of organic sales in 2021, reflecting continued strength in demand for our products. Operating margin rate is expected in the low 15% range. Space Systems is expected to remain our fastest-growing business and to become our largest segment in 2022. Sales are projected in the mid-$11 billion range, up from -- up about $1 billion from 2021 with a margin rate in the low 10% range. Turning to Slide 10. Our total revenue guidance is $36.2 billion to $36.6 billion, representing a range of 2% to 3% organic growth, consistent with the rate we estimated in October 2021. This growth is enabled by our strong backlog, which stands at over $76 billion, and covers more than two years of annual sales. The 2021 book-to-bill of 0.9x was lower than our prior expectation due to the AS F-35 award shift to 2022. More importantly, our three-year trailing average book-to-bill is approximately 1.22, and remains the foundation of our current and future growth. As COVID-related headwinds that we experienced late in 2021 continue into early 2022, we anticipate that first quarter 2022 sales will be less than 25% of the full year. We have increased the segment operating margin rate outlook that we provided in October as we now expect a rate roughly consistent with 2021 in the range of 11.7% to 11.9%. This projection reflects our continued disciplined approach to cost management and our efforts to offset mix headwinds with strong program performance. Altogether, we expect transaction adjusted earnings per share to be between $24.50 and $25.10, based on approximately 155 million weighted shares outstanding. As shown on Slide 11, this includes roughly $2 of year-to-year earnings per share headwinds from lower net pension benefits driven by the reduction in CAS recoveries and higher corporate unallocated expense due to the one-time benefits in 2021. Earnings volume from sales growth strong operating margin performance and the lower share count will help to offset those nonoperational items. We project 2022 transaction-adjusted free cash flow of $2.5 billion to $2.8 billion, assuming the R&D tax amortization law is deferred or repealed. We continue to project about $1 billion of higher cash taxes should current tax law remain in effect. As I mentioned, our cash tax outlook includes the final payroll tax payment from the CARES Act of approximately $200 million. Capex is expected to remain roughly consistent with 2021 on an absolute dollar basis and slightly lower as a percentage of sales. Slide 12 provides our longer-term outlook on cash. The midpoint of our 2022 transaction-adjusted free cash flow guidance is $2.65 billion, and includes roughly $375 million of lower CAS recoveries than 2021. From there, we expect a double-digit free cash flow CAGR through 2024, driven by operational performance, lower capex and the absence of the payroll tax headwind. Our base case again assumes deferral of the R&D tax for all periods. Speaking of taxes, we're projecting an effective tax rate of approximately 17% going forward, roughly consistent with 2021, excluding the divestiture or mark-to-market pension effects. Also, we anticipate the resolution of an appeals process for certain open years of legacy OATK tax filings in 2022. Audit and appeals processes are underway, but in earlier stages for certain Northrop tax years. We refer you to our 10-K for additional details on the key items, both timing related and permanent in nature to be resolved in those processes. In closing, we're proud of our 2021 performance, and we're focused on continuing to execute well on our business and financial strategy in 2022. In summary, we have strong franchise programs that are well aligned to budget priorities. We are focused on capturing and investing in new growth opportunities while also executing to drive earnings and cash flow growth. We delivered a solid set of results in 2021, and we are well-positioned to continue growing and performing in 2022 and beyond. Our top priority for cash deployment remains shareholder return, including a competitive dividend and share repurchases. With that in mind, our board of directors recently approved an increase in our share repurchase authorization of $2 billion. And based on our outlook today, we plan on returning at least $1.5 billion to shareholders via share repurchase in 2022. We have extraordinary talent, and this includes our leadership team. As we announced in November, Blake Larson is retiring after a 40-year career with Northrop Grumman and its heritage companies. Blake has helped to position our space business for incredible growth and as important, a focus on performance and quality. We are grateful for his contributions to our company and our country. Tom brings strong experience in the space market. He was part of the space team, and I'm confident in his ability to lead this business. Natalia, back to you.	q4 transaction-adjusted net earnings include after-tax charge of $73 million, or $0.46 per share, on f-35 program at aeronautics systems largely driven by covid-19-related impacts. quarterly organic sales decreased 10%. guidance reflects continued growth in 2022 with organic sales up 2% - 3%. sees fy 2022 transaction-adjusted earnings per share $24.50 — $25.10.
They involve risks and uncertainty, and actual results may differ materially. Our comments also include non-GAAP measures. On a U.S. GAAP basis for the second quarter of 2021, NOV reported revenues of $1.42 billion and a net loss of $26 million. Later in the call, we will host a question-and-answer session. During the second quarter of 2021, NOV's consolidated revenue increased 8% sequentially, and EBITDA improved to $47 million, excluding the benefit arising from the cancellation of certain offshore rig projects. Operating leverage was strong at 50%, owing to cost reductions in prior periods, while price increases in certain product lines helped offset the inflation we are seeing in most product lines. Coming out of a pandemic, which bankrupted many of our customers and eviscerated our backlog, our financial results improved but remained below acceptable levels. Nevertheless, NOV's execution strengthened through a quarter of continuing supply chain challenges and COVID disruptions. We are pleased to see orders for both our Rig Technologies and Completion & Production Solutions segments rise significantly. Rig Technologies posted book-to-bill of 138% and on strength in orders for renewables. And Completion & Production Solutions book-to-bill ran 167% in the second quarter. Barring another round of COVID lockdowns, we expect the market to continue to strengthen, underpinned by broad economic growth, higher commodity prices and the continuing worldwide build-out of an offshore wind power tool kit. The company's portfolio of technologies developed over the past several years positioned extraordinarily well to capitalize both on the oilfield recovery underway as well as the enormous energy transition. The next five years look very, very interesting for us. Like global manufacturers across all industries, NOV experienced supply chain disruptions throughout the second quarter, and we expect these challenges to persist into 2022. Many steel mills that supply NOV bespoke metallurgies, along with petrochemical facilities and plants that supply NOV epoxy resins, thermoplastics and elastomers, are not fully up and running due to a combination of COVID, the February Texas freeze and in some cases, disruptions in their own supply chains. Furthermore, transportation bottlenecks around the world, port congestion and port closures and freight costs that have quadrupled are adversely impacting suppliers two and three levels down from us, driving up input costs and lengthening delivery times on everything from steel to computer chips. In certain instances, we've been placed on allocations. So we think we are better positioned than our smaller competitors. Our size and scale generally give us access to a broader range of suppliers and our teams are managing through these challenges better than our competitors. The U.S. market is also seeing a tightening labor pool, adding pressure to cost and efficiency. Our customers tell us that attracting hands back to their oilfield service operations is very challenging. Interestingly, this is prompting greater customer interest in some of the new automation products we are now introducing to the market, which reduce the need for field labor. But as we get back to growth in our factories, we are finding it challenging to attract workers as well. NOV is trying to stay ahead of the inflation threat brought on by labor and raw material constraints by passing along these costs as price increases. Our success has varied, depending largely on the level of excess lower-cost inventories remaining in our competitors' hands within these markets. Day by day, however, we know excess capacity within many categories of oilfield equipment and consumables, think bits, drilling motors, fluid ends, is approaching depletion, offering the first opportunities in many quarters to heal pricing and profitability as the North American marketplace continues to get more active and offshore and international markets start to recover. The marginal cost of returning idled oilfield equipment, much of which has been cannibalized and stripped of consumables during the downturn, grows rig by rig, frac spread by frac spread as the industry steadily goes back to work. COVID measures continue to impact operations around the world. Two of our large composite pipe plants in the Far East were shut down in late second quarter and remained closed until late last week. Operations in India, the Middle East, parts of Europe and Canada all experienced COVID disruptions of greater or lesser degrees. And generally, NOV did a better job of anticipating and managing through these obstacles in the second quarter. Our second quarter results are an instructive reminder of the cyclical behavior of our segments. Wellbore Technologies is most closely tied to drilling and is an early cycle beneficiary of rebounding drilling activity, having bottomed in the third quarter of last year. Its last two quarters have seen it put up double-digit top line growth at greater than 50% EBITDA leverage, benefiting from the outstanding execution of cost reductions through the downturn as well as selected price increases where possible. Our other segments are driven more by capital equipment purchases and are, therefore, later cycle and lag Wellbore Technologies by two to three quarters. We believe both Completion & Production Solutions and Rig Technologies bottomed in the first quarter of 2021, and both posted double-digit top line growth in the second quarter. Book-to-bill's above 100% for both in the second quarter also support our outlook. All three segments see more or less the same macro environment. North American activity continuing its measured recovery driven by stronger commodity pricing while governed by extreme capital discipline on the part of operators; two, national oil companies returning to work in fits and starts around the world with tenders being let for, hopefully, a broader resumption of activity in 2022, barring additional COVID drama; and three, cautious optimism in offshore markets with some limited project approvals flowing in the Gulf of Mexico, Brazil and Guyana, but many projects facing continuing delays and moving to the right. Overall, excluding the rig cancellation, NOV's consolidated North American revenues increased 22% in the second quarter, and international revenues increased 1%. Consolidated offshore revenues declined 5% sequentially in the quarter. Within Completion & Production Solutions, six of eight businesses posted sequential revenue growth. Every business unit, with the exception of our Intervention & Stimulation Equipment business, posted book-to-bill ratios above 100%. In addition to navigating supply chain issues, the segment made good progress on technical developments within its ideal e-frac offerings and its renewables portfolio, particularly in the carbon capture space. A little more than half of Rig Technologies' second quarter orders came from the offshore wind space, and the outlook for this area points to continued growth. Additionally, the tone from offshore drilling contractor customers is improving as they emerge from bankruptcy with stronger balance sheets. The 11% sequential improvement in spare parts bookings during the quarter, more inquiries around rig reactivations and more engineering work we are being asked to do around upgrading BOPs, automating pipe handling and adding Crown Mounted compensators gives us confidence that we are seeing more offshore drilling activity on the horizon. In the land rig space, our rig manufacturing JV facility in Saudi Arabia is nearing completion and work is currently underway on the first rigs. The NOV team continues its development of high-value solutions that support the energy transition, and I wanted to share a couple of updates. During the quarter, we advanced conversations with one of the largest solar EPC providers to develop a solar panel tracking system and the accompanying supply chain. We are also in advanced talks to sell our proprietary mobile tower crane that will enable the construction of significantly taller, more efficient onshore wind farms, which we hope will result in a purchase order soon. This crane underpins a clever new installation method that will facilitate the adoption of taller, lower-cost land towers that we are working with Keystone Tower Systems to manufacture at our facility in Pampa, Texas that we have described on previous calls. We successfully tested our new in-line chain tensioner that will be used to facilitate the offloading of floating wind turbines and entered into an agreement with Cerulean Winds to serve as the exclusive provider of floating and mooring systems for floating wind farms that will decarbonize oil and gas assets in the U.K. sector of the North Sea. Our NOV GustoMSC team has been working with a customer to design and deliver a proprietary system that automatically tilts and orients a sailing mast, improving efficiencies of sails on large vessels. The initial application of this system is for a large cruise ship, but can also be used on large cargo vessels. The wind propulsion technology will supplement conventional propulsion systems and is expected to reduce the ship's carbon footprint by 40% to 50%. There's also a lot happening in the geothermal market. Our ReedHycalog PDC cutter technology continues to drive improvements in economic returns for the geothermal industry. And Tuboscope's TK liner product line is becoming an indispensable piece of large geothermal projects internationally as evidenced by a contract award this quarter for approximately 60,000 feet of large diameter product. In fact, we are introducing several new products across many business units that are specifically designed for the geothermal market, which is now seeing strong surge in demand globally now. Our Process and Flow Technologies team has developed a concept design for a full-scale carbon capture module, utilizing our expertise in gas processing and treatment built over the last 40-plus years. And we are in discussions with two potential customers for FEED studies utilizing this technology in Europe now. The application of NOV's engineering and manufacturing expertise to the energy transition continues to unearth compelling paths to future growth. Turning back to our traditional oilfield markets, despite all the downsizing we've executed over the past several years, our sustained investments in R&D now provide NOV an outstanding portfolio of new products and technologies that position us well as we move into a recovering oil field market. Our NOVOS operating system is at work today on 74 drilling rigs with another 84 in backlog, enabling these land and offshore rigs to access 10 different optimization applications written by NOV and third parties. These include optimization apps that utilize high-speed data from the bottom of the hole, transmitted through NOV's IntelliServ wired drill pipe network, currently providing higher levels of efficiency and safety to several critical North Sea rigs and a rig in Saudi Arabia. NOVOS also provides the digital foundation for our new automated drilling and tripping robots that we are introducing later this year. Several customers came out to see our cost-effective industrial robots Dope and Trip over 25 stands per hour without any human hands touching the pipe or the controls. Offshore, we are seeing continued interest in reducing carbon emissions through our PowerBlade and Eco Boost products and subscribers to NOV's RIGSENTRY predictive analytics product, the oilfields first commercial product introduced back in 2016, continued to grow. We're continuing to develop our edge computing solutions through our Max platform, working closely with a handful of E&Ps to scope and develop the beta version. We're also bringing new directional drilling tools like our proprietary Agitator friction reduction tools, our SelectShift downhole adjustable bent sub, our Vector series of rotary steerable tools and market-leading drilling motors and MWD tools. NOV ReedHycalog leads the industry in bit and cutter technology, having lifted its market share materially through superior bit performance over the past several quarters. FlexConnect frac hoses and the digital enhancements we are developing around monitoring, controls and predictive analytics in this space. After several years of cost cutting, restructuring, pivoting and innovating, NOV has reset and transformed its business, utilizing new developments in everything from digital to composite materials, we've developed new high-value ways to lift the efficiency and safety of our customers' traditional oil and gas operations. We've developed ways to reduce their carbon impact, and we are winning over new customers who are building out new forms of low carbon energy. As the world continues to heal from the COVID-19 pandemic and the global economy tries to recapture some sense of normalcy, NOV is poised to benefit in both our traditional oil and gas businesses and our newer ventures in the renewables space. I'm enormously proud of NOV's dedicated, creative service-minded employees whose hard work through this downturn has enabled the bright future that lies ahead. While our global operational reach, our integrated network of manufacturing assets and our strong balance sheet and financial resources are all required to cultivate these opportunities, it's our fantastic team of employees who will make them hum. For the second quarter of 2021, NOV's consolidated revenue rose 13% sequentially to $1.42 billion, and EBITDA was $104 million or 7.3% of sales. Second quarter revenue included $74 million related to the final cash settlement and cost reimbursement from the cancellation of offshore project -- offshore rig projects. Excluding the settlement, revenue rose 8% sequentially to $1.34 billion and EBITDA was $47 million or 3.5% of sales. Consolidated U.S. revenue increased 27% sequentially, significantly outpacing the growth in U.S. drilling activity. International revenues, excluding the settlement, improved only 1% but we began to see international growth accelerate late in the second quarter. 50% incremental margins were the result of better absorption across our manufacturing base, better management of supply chain disruptions price improvements in certain areas and cost savings initiatives, which have nearly achieved our target for the year. Efforts to improve capital efficiencies across the organization helped drive $177 million in cash flow from operations. Capital expenditures totaled $49 million, resulting in $128 million of free cash flow. During the second quarter, we redeemed the remaining $183 million of our senior notes due in December 2022, and we ended the quarter with $1.6 billion of cash, $1.7 billion of gross debt and only $114 million of net debt. We expect working capital will continue to be a source of cash through the second half of the year. Moving on to segment results. Our Wellbore Technologies segment generated $463 million in revenue during the second quarter, an increase of $50 million or 12% sequentially. Revenue improved 14% in North America and 10% in international markets as the early stages of a global recovery began to expand beyond the Western Hemisphere. An improved cost structure, higher volumes and pricing improvements more than offset inflationary costs and drove 58% incremental margins, resulting in a $29 million increase in revenue to $63 million or 13.6% of sales. Our ReedHycalog drill bit business posted solid top line growth, led by a 25% sequential improvement in U.S. revenue, resulting from improving activity and market share gains. Outside North America, sales improved 10% sequentially with our NOC customers, signaling an intent to continue increasing activity over the next several quarters. Our downhole tools business reported a 13% sequential improvement in revenue, with most major regions realizing double-digit percentage growth. Improving adoption of our proprietary drilling tools that reduce trips, maximize hydraulic flow and reduce friction such as our SelectShift and our Agitator product lines continued in Q2. Notably, the unit also realized a sharp increase in demand for fishing tools and service equipment in many regions, indicative of what we believe is customers beginning to restock depleted and worn out equipment after years of underinvestment. Higher volumes, improved operational efficiencies and price improvements more than offset inflationary forces, allowing the business to deliver strong incremental margins during the quarter. Our Wellsite Services unit saw revenue growth in the mid-single digits as our solids control business benefited from widespread activity growth, partially offset by continued COVID-related disruptions. The disruptions included the suspension of a large project in Mozambique and the COVID-related shutdown of one of our well site manufacturing facilities in Malaysia, requiring us to incur additional charges to airfreight goods from our Conroe facility back to the Eastern Hemisphere. Wellsite Services will benefit from improving global drilling activity, but unlike pure service operations, we also expect the business to benefit from an inflection in capital equipment sales as customers put rigs back to work and need to replace cannibalized shale shakers and centrifuges or equipment that has been sitting in idle salt water environments. Demand for capital equipment began to show signs of life in the second quarter, with bookings improving 1.7 times off the very low mark realized in the first quarter of 2021. Our MD Totco business realized a double-digit sequential improvement in revenue with strong incremental margins. Revenue from surface sensor and data acquisition sales and rentals improved 20% due to higher drilling activity and market share gains. The business units evolve digital drilling optimization service, which utilizes our high-speed telemetry wired drill pipe posted a modest sequential decline in revenue due to the timing of crews and equipment transitioning to new projects after completing jobs as well as supply chain challenges affecting our ability to source certain high-speed data networking components. Demand for this service remains robust and the business was recently awarded a new three year optimization project for a major operator in the North Sea. Our Tuboscope pipe coating and inspection business posted an 11% sequential increase in revenue with strong incremental margins during the quarter, driven by a sharp increase in demand for our tubular coating services across all major market. We realized a disproportionate improvement in demand for our large-diameter TK liner products, which are high-performance glass-reinforced epoxy liners that provide corrosion protection for tubular goods. In addition to the demand from geothermal markets that Clay mentioned, we're also starting to see U.S. customers resume investments in large-scale production infrastructure. We received an order for 121,000 feet of 12-inch line pipe for a saltwater disposal system in the Haynesville as well as an order for 14,000 feet of 16-inch line pipe for a system in the Permian. Tuboscope's tubular inspection operations grew at a more modest rate than its coating business, but realized solid demand from steel mills and outside pipe processors as they ramp up operations. Our Grant Prideco drill pipe business posted revenue growth of 11% on higher sales of drill pipe and the delivery of the industry's first three million-pound 20,000 psi-rated landing string. Higher absorption and intense focus on cost controls and an improved sales mix drove very strong incremental margins. Demand from North America continued to outpace international and offshore markets in the second quarter, but we expect to see international tendering activity increase during the second half of the year. While we're encouraged by the improving outlook, stretched supply chains and lead times will limit the ability for new orders to improve revenue beyond the orders we currently have in our backlog. Additionally, we believe the significant increase in steel costs could slow tender awards, while customers acclimate to a new pricing environment. While the stage is being set for a strong recovery in 2022, we expect limited revenue growth for our drill pipe business in the second half of 2021. For our Wellbore Technologies segment, we expect accelerating activity in the Eastern Hemisphere and modest improvements in the Western Hemisphere to result in 6% to 10% sequential growth in the third quarter. We anticipate improved absorption rates and higher pricing will be partially offset by inflationary pressures, ongoing raw material shortages and a less favorable product mix in our drill pipe business, limiting incremental margins to the mid-20% range during the third quarter. Price increases in certain products, together with disciplined cost management, provide confidence in the segment's ability to achieve a mid-teen EBITDA margin by year-end. Our Completion & Production Solutions segment generated $497 million in revenue during the second quarter, an increase of $58 million or 13% sequentially. Lower margin sales, inflationary pressures and operational disruptions limited incremental margins to 14%, resulting in EBITDA of $4 million or 0.8% of sales. Orders improved 37% sequentially, totaling $462 million for a book-to-bill of 167%. All but one business unit achieved a book-to-bill of above 100% and the step change in order intake resulted in the segment achieving its highest booking quarter since 2019. Backlog for the segment at the end of the quarter was just north of $1 billion. Our Intervention & Stimulation Equipment business posted solid improvements in capital equipment and aftermarket sales, modest demand growth for pressure pumping equipment in the U.S. and improved deliveries of coiled tubing units into international markets boosted capital equipment sales. We're providing higher levels of coating activity for pressure pumpers who need to replace or upgrade existing fleets. The pickup in inquiries is reflective of tightening supplies, but competition remains fierce with the most difficult competition coming from idle equipment. While idle equipment limits sales and pricing, it also creates opportunities for our aftermarket business. During the second quarter, we achieved a notable sequential improvement in aftermarket sales as more customers look to put equipment back to work. In addition to a higher number of jobs, we're also seeing an increase in the average sales ticket. The amount of effort required to get equipment in working order along with the amount of cannibalization that is taking place tends to be strongly correlated to the amount of time equipment has sat against the fence line. We're encouraged by improving supply and demand dynamics as well as the growing opportunity to help customers improve operational efficiencies with our new technologically advanced product offerings, such as our ideal e-frac system QuickLatch, frac hose and our digital services. Field trials for our e-frac system have validated its ability to significantly reduce maintenance costs and increase pump volume nearly 4 times compared to conventional equipment while significantly reducing emissions. The system has successfully demonstrated its capabilities for several large independent operators and is currently in route to a job for a major IOC where it will utilize line power from the grid. Our Process and Flow Technologies business experienced a high single-digit decrease in revenue during the second quarter. A significant pickup in sales from the unit's production and midstream offerings, driven by North American customers restarting investments and production-related infrastructure, was more than offset by operational challenges in several large projects. Security issues in Mozambique led to an indefinite suspension of a large gas treatment project and delays in cost overruns due in part to COVID-related challenges adversely impacted two other projects. While some of these issues were outside of management's control, we're confident this business will deliver improved results in the back half of the year on better execution and a meaningfully improved backlog. Orders increased 2.6 times over the first quarter, and our pipeline of opportunities remains strong. Our subsea flexible pipe business posted a double-digit sequential increase in revenue, with strong incremental margins as the operation partially recovered from manufacturing challenges associated with a new product that we described in Q1. Delays in final customer acceptance slowed production during the quarter, but order intake grew 85% sequentially, both of which should allow the unit to post better results in the third quarter. Our Fiberglass business unit reported a 13% sequential increase in revenue with solid EBITDA flow-through despite a continuation of global supply chain and COVID-related difficulties. Supplies of epoxy resin and glass remained limited, and a spike in COVID cases in Malaysia led to the government-mandated shutdown of our manufacturing facility in the region. Through NOV's scale and nimble supply chain, we've been able to secure raw materials and shift manufacturing to plants in regions that are less affected by COVID outbreaks in order to meet customer needs. Supply chain challenges have also resulted in higher costs. We've seen certain raw material prices increase upwards of 40% and shipping costs increased fourfold compared to 24 months ago. To date, we've been successful in passing cost on to our customers, but the rapid rate of change is causing some customers to delay projects. We're also seeing deferrals of existing orders from our marine and offshore customers who are very reluctant to park their vessels for upgrades when they can capitalize on extraordinarily high shipping rates. Despite the difficult operating environment, our fiberglass business achieved its highest level of backlog in the last five quarters and we're finally beginning to see a pickup in demand for midstream customers in the U.S. For the third quarter of 2021, we anticipate revenue from our Completion & Production Solutions segment will improve between 5% to 10% sequentially, with incremental margins in the low 30% range. Our Rig Technologies segment generated revenues of $487 million in the second quarter, an increase of $56 million or 13% sequentially. Second quarter revenues included $74 million related to the final settlement from the cancellation of certain offshore rig projects. Excluding the impact of the settlement, revenues declined $18 million sequentially to $413 million as improving aftermarket sales and progress on land rig projects were more than offset by lower offshore rig equipment sales. Adjusted EBITDA, excluding $57 million from the settlement, improved $5 million to $18 million or 4.4% of sales due to a higher margin mix and improved operational efficiencies. Capital equipment orders for the segment more than doubled to $232 million, yielding a book-to-bill of 138%. As Clay mentioned, more than 50% of our Q2 orders related to wind installation vessel equipment where NOV's engineering designs and equipment continue to be the market standards. Orders received in Q2 position us well to achieve our stated target of a $200 million annual revenue run rate in our wind business by year-end. While awards have been robust during the past 12 months, we expect this momentum to continue and see the potential for our wind-related revenues to achieve a run rate of between $350 million and $400 million by the end of 2022. Encouragingly, capital equipment orders also improved sequentially and reflected three drivers at work in the drilling space. One is the desire to reduce environmental impact, which is driving sales of products such as our Eco Boost and our PowerBlade energy recovery systems. Two is the need to improve operational efficiencies via digital technologies and automation, which is driving demand for products such as our NOVOS automation and control systems. And three is the need to replace or upgrade capital equipment that has been stacked or inadequately maintained. Rigs that were stacked during the downturn will need to be reactivated, recertified, and in many cases, upgraded to meet customer demands for the latest and most efficient technologies. Typically, the first rigs to be reactivated to require the least amount of work, and the capital intensity of projects grows significantly as customers work deeper into their stacks. While land rigs do not suffer from the same rate of corrosion as offshore rigs, they do tend to suffer a great deal from cannibalization, which is becoming more apparent as our customers ask us to reinitiate maintenance refurbishment and reactivation services. A growing sense of optimism around improving activity, international land tenders and the potential need for incremental rigs in Brazil, Guyana, the North Sea and even West Africa is catalyzing discussions around reactivations and upgrades while improving balance sheets and cash flows will enable the investments. During the second quarter, our aftermarket sales improved 3% sequentially with spare part bookings growing 11%. While spare part orders remain lumpy, we anticipate aftermarket spending will move higher during the second half of the year as the industry continues its nascent recovery. Better orders and market sentiment give us greater confidence and an improving outlook for our Rig Technologies segment in 2022 and beyond. For the third quarter, we expect revenues for our Rig Technologies segment to remain in line with the second quarter, excluding the impact of the settlement with margins that are flat to down 200 basis points. And with that, we'll now open the call up to questions.	compname reports q2 2021 revenues of $1.42 bln. q2 2021 revenues of $1.42 billion, decrease of five percent compared to q2 of 2020.
They involve risks and uncertainty, and actual results may differ materially. Our comments also include non-GAAP measures. On a U.S. GAAP basis, for the third quarter of 2021, NOV reported revenues of $1.34 billion and a net loss of $69 million. Later in the call, we will host a question-and-answer session. For the third quarter ended September 30, 2021, NOV once again posted strong orders with consolidated book-to-bill of over 150%, reflective of steadily strengthening commodity prices and oilfield activity. However, NOV's reported consolidated revenue declined 5% sequentially, and EBITDA fell to $56 million during the third quarter. I'll start by reminding everyone that our second quarter financials included credits related to a project cancellation settlement within Rig Technologies, which contributed $74 million in revenue and $57 million in EBITDA. We excluded those credits from our discussion on our last call and excluding these credits again from the sequential comparison today, points to consolidated third quarter revenues that were essentially flat, down only $2 million sequentially and EBITDA that was up with EBITDA margins on this basis, rising from 3.5% to 4.2%. Through the quarter, we continued to face logistical and supply chain challenges, which our teams are managing pretty effectively day-to-day. Nevertheless, these weighed on certain results in certain areas, most notably in Southeast Asia. We recognized a $12 million charge stemming from a combination of COVID disruptions and execution challenges on a large offshore project within our Completion & Production Solutions segment, which I'll describe more fully in a moment. If we look beneath the surface, the trajectory of our business is somewhat more positive in our view than the headline numbers suggest, and our outlook for 2022 and beyond continues to strengthen. In fact, given: one, stronger oil and natural gas prices lately; two, the emergence of many of our key offshore drilling customers from bankruptcy; three, the significant reduction in costs that NOV has achieved through the past two years; four, our third quarter in a row of sequential double-digit top line growth and solid flow-throughs for our Wellbore Technology segment; and five, book-to-bill is in excess of 100% for the second quarter in a row for both the Completion & Production Solutions and Rig Technologies segments. I'm decidedly more positive about the outlook for the coming year. Nevertheless, global supply chain issues are making business challenging in the short run, which leads me back to the project for which we took charges. Our Completion & Production Solutions segment has been working on a large project in Southeast Asian shipyard that ran into COVID-related operational disruptions, specifically a combination of shipyard shutdowns, labor quarantines and shortages of critical components. Additionally, our subsuppliers in the region have faced similar disruptions, which also affect project execution. Our team is working closely with our customer to figure out how to get this vessel built in online as efficiently and as safely as possible, while recognizing the need to be resilient as challenges shift and change daily. Across the company, we are intently focused on executing effectively in the face of persistent supply chain challenges globally. Most COVID operational disruptions have been in Southeast Asia and continued to disproportionately affect the Completion & Production Solutions segment, owing to its large base of operations there. Similar to other industrial manufacturers that you read about in the financial press, we are facing inflation in labor, raw materials and components that we buy from subcontractors. But our teams have been diligent in pursuing alternate supplies, and we are generally able to offset most of the cost inflation with higher pricing to customers. Supplies of resin, epoxy and fiberglass integral to our composite pipe and Tuboscope tubular coating businesses remain critically low and, in some instances, have nearly doubled in cost. Lead times for forgings have extended out from six weeks to 18 weeks. And while prices for plate steel and coiled steel are now up more than 240% year-over-year, at least we appear to be seeing some stability in steel pricing as iron ore prices have declined. We are hopeful that the worst of the steel inflation is behind us. Outside of steel, epoxy, fiberglass and other raw materials, I'd say we have generally seen low double-digit cost increases on other finished or semifinished components that we buy. Semiconductor boards, chips, electric motors, gearboxes and other subassemblies remain in very tight supply. Freight has also been challenging. Spot container shipping rates from Asia to the U.S. are now five times what they were this time last year, 14 times what they were in 2019. Additionally, ocean freight reliability is down to 38% and about half of where it was historically, which has led to more use of expensive airfreight. It's more reliable than ocean freight, but it drives costs up. One NOV business unit went two months without steel deliveries because our European steel mill supplier could not secure a vessel into port without guaranteeing you a full load. In North America, trucks and drivers can be tough to secure and hotshot drivers are dropping book shipments to take higher-priced jobs, making even domestic land deliveries less reliable. Labor availability, particularly in the U.S., is very tight in certain areas, and we have stepped up recruiting and are redeploying some workers into new assignments. Our customers are also encountering these challenges. In fact, we are hearing of many instances of crew availability delaying planned equipment reactivations in West Texas and elsewhere. These challenges are affecting our customer behavior in other ways, too. NOV products like fuel handling pipes and tanks, pumps and mixers, etc, that go into large construction projects are facing headwinds in certain instances because our customers can't secure other complementary components or can't secure construction crew to install them. So they are delaying project launch and delaying orders to us. I want to stress. Thus far, NOV's team has done a good job covering inflationary cost pressures in the form of price increases. As market leader in many categories of equipment, we benefit from scale with our suppliers vis-a-vis our competition. And we have moved raw material across our manufacturing plants to maximize value. Some of our businesses are achieving price-driven margin expansion as they recover discounts given during the downturn of 2020. And while a few products with longer production cycles like drill pipe have struggled to stay up with raw material cost increases on orders taken in early 2021, resulting in some margin compression, most are at least able to hold margins through pricing, but all are intently focused on managing inflation risks that continue to mount. Our businesses are reducing costs. Completion & Production Solutions identified another $50 million of annual cost reductions, including shuttering another half dozen facilities over the next few quarters. While volumes and margins are clearly not where they need to be to generate sufficient returns, the organization's intent focused on downsizing over the past several years, together with higher orders and oil fleet activity on the horizon, give us confidence that we are moving in the right direction. We share the view expressed by others that the world is moving into a multiyear up-cycle in commodity prices. The combination of significant money supply growth, economies emerging out of pandemic lockdowns, under investment in oil and gas exploration and development over several years, higher cost of capital for E&Ps and flattening efficiency gains for North American shale producers will lead to tightening petroleum supply and demand in our view. In its current shape, the oilfield will struggle initially to respond to calls for increasing production. So far, incremental drilling activity has been cautious and measured. Our land drilling customers tell us that they find it very difficult to crew rigs, even though the rig count is still well below pre-pandemic levels and the green crews that they hire cost more and are less productive. The industry will have to pay more to get back the expertise that it has lost. The industry is also paying more for the capital employees. This is made possible by two things: the resourcefulness technology and efficiencies of the U.S. oil and gas industry as well as large, easily accessible pools of low-cost capital in the form of both equity and debt from Wall Street. However, poor returns on capital investments came into increased focus by 2019, and this, coupled with a widespread move to decarbonize investments by many capital providers, led to sharply higher cost of capital for the very capital-intensive oil and gas industry. Consequently, the U.S. operator base has necessarily embraced capital discipline as its new ethos. Going forward, it seems to reason that the U.S. unconventional market will be more challenged to fulfill its role as the world's quick cycle oil supplier, now that its constituents are more focused on returning capital to shareholders and reducing reinvestment rates. Further, we believe rising utilization of oilfield service assets, depletion of consumables and higher labor costs will drive up pricing by oilfield service providers. We're hearing stories from the field of drilling contractors not willing to reactivate incremental rigs unless they can secure contracts at higher day rates and a pressure pumper is not adding incremental crews unless they can achieve a certain degree of net pricing improvement, which is required to get pay back on incremental cost of equipment reactivation. Higher well construction costs made worse by overall diminishment of efficiency as green crews man incremental units going to work will impact returns on shale wells, which will reduce the industry's responsiveness to higher commodity prices in our view. As economies and demand recover, OPEC spare capacity trickles back into the market and oil supply demand gap becomes more evident. We think the industry response will be more broad-based than just U.S. shale ramping up activity. Much of the world's international offshore oilfield equipment has been stacked and neglected for some time and will require significant investment to bring it back to working order. One of the most interesting trends that we observed in the third quarter was a rising number of inquiries around potential offshore rig reactivations. Despite the level of contracted offshore rigs declining sequentially and I'll add a low level of actual offshore equipment orders for us, outside of the 20,000-psi pressure control equipment order for Transocean, we are being quietly asked to quote on several stacked rigs that are looking at coming back to the market. This is being driven by high rig tenders currently being floated by NOCs and others who are also looking at higher levels of activity onshore in certain international markets. So to sum up where the industry is now, E&P operators worldwide are enjoying newfound prosperity as their existing production commands higher prices, but they will certainly pay more for constructing new wellbores and bringing on more production in the near future. Oilfield service providers, which are NOV's primary customer base are just now starting to claw back discounts given last year while simultaneously facing higher labor and component costs and constraints. We see them raising their prices materially over, say, the next 18 months as prosperity trickles down to this level in the food chain. NOV's late cycle manufacturing businesses will follow suit as prosperity continues to trickle down. As a reminder, all three of our segments are engaged in manufacturing, which blossoms a bit later in the oilfield up cycles given the trickle down nature of our ecosystem. Rig Technologies has benefited strongly from its exposure to offshore wind development, which has helped offset some of the weakness that has seen in demand for traditional drilling equipment. Completion & Production Solutions has felt the brunt of the oilfield downturn, but it's recent additions to backlog point to a brighter future. And although Wellbore Technologies manufacture some capital equipment like drill pipe, it tends to behave more like a traditional oilfield service provider, and it is clearly recovering quickly. Throughout the downturn, NOV has continued to invest in technologies that improve efficiency, reduce labor and optimize operations. Whether it's through automated drilling processes, through its NOVOS operating system accompanied by our new drill floor robotics, delivering downhole data in real time through our wired drill pipe, reducing the emissions profile of a completion site with our Ideal eFrac fleet, NOV's oilfield product portfolio continues to evolve to enable our customers to achieve better operational performance. Concurrently, we are also developing offerings that will help our customers in their pursuit of a low-carbon future. Our offshore wind installation vessel business won two packages from Cadeler and remains on track to achieve revenue run rate of $400 million a year by Q4 of next year. In addition, we were awarded our first FEED study for a carbon capture system aboard an FPSO in Asia, utilizing our extensive gas processing expertise. And as our other efforts in onshore and offshore wind, solar, geothermal biogas and carbon capture utilization and storage continue, NOV is positioning itself as a leading technology provider to the energy transition just as it is to traditional oil and gas. On the whole, we are increasingly confident that NOV is approaching an inflection point with the hard work our team has put in over the past several years will bear fruit in a big way. Your hard work, creativity and dedication has set us up for success and the opportunities that are coming our way. NOV's consolidated revenue in the third quarter of 2021 was $1.34 billion, a 5% decrease compared to the second quarter. Adjusted EBITDA was $56 million or 4.2% of sales. Excluding the credits from the rig cancellation in the second quarter, revenues were essentially flat with cost reductions more than offsetting charges taken for our project in Southeast Asia. During the third quarter, we generated $105 million from cash flow from operations and $66 million of free cash flow. We ended Q3 with net debt of $36 million, comprised of long-term debt of $1.70 billion and cash and cash equivalents of $1.67 billion. Moving to segment results. Our Wellbore Technologies segment generated $507 million in revenue during the third quarter, an increase of $44 million or 10% sequentially. Revenue improved 6% in North America and 13% in international markets as the momentum of the global recovery continued to build in all major geographical regions. EBITDA improved $14 million to $77 million or 15.2% of sales as inflationary pressures and a less favorable mix limited incremental margins to 32%. Our ReedHycalog drill bit business posted another quarter of double-digit revenue growth, primarily driven by strong performance across the Western Hemisphere and Middle East. Our leading-edge cutter designs and bit technologies continue to drive revenue growth that exceeds the rate of improving global drilling activity. While this business faces many of the supply chain issues faced by all global manufacturing businesses, and at times has been forced to substitute higher cost materials to meet delivery schedules, management has been successful in raising prices to offset cost with minimal customer pushback as the efficiencies gained by ReedHycalog's technology more than justify higher pricing. Our downhole tools business realized a 5% improvement in revenue during the third quarter. Top line growth was constrained by shortages of key materials and therefore, did not fully reflect the demand we are seeing for our downhole technologies, which continue to enable record-setting drilling performance. Our Agitator system was recently used to help a customer establish a new rate of penetration benchmark in Colombia, delivering a field record rate of penetration of 201 feet per hour. Our SelectShift Downhole Adjustable Motor was used by a large operator in the Northeast U.S. during a 12-well drilling campaign and drove a 30% reduction in average drill times due to the tool's ability to change bend settings downhole saving trips out of the hole. Our WellSite Services business posted double-digit revenue growth, primarily driven by growing demand for solid control services and equipment sales in international markets. While the business unit saw improvements in all regions, the North Sea and Latin America were particularly strong and offshore job counts improved by 17% sequentially, despite the impact of hurricanes in the Gulf of Mexico during the quarter. Recent tendering activity points to continued improvement in the outlook for our Wellsite services business unit. Our M/D Totco business realized double-digit sequential revenue growth with strong incremental margins, higher global drilling activity levels drove demand for sales and rentals of our surface sensor data acquisition systems, and we saw a sizable pickup in revenue from our digital solutions. We were recently awarded an additional three year contract from a customer in the North Sea for our eVolve Digital Drilling Optimization Services, which leverage high-speed telemetry from our IntelliServ Wired Drill Pipe. We also secured several international contracts for our WellData Remote Drilling Monitor Solution, which allows operators to easily analyze well performance against offset wells, identify potential upcoming trouble spots and oversee drilling efficiency across all wells from any location. Looking forward, we anticipate our legacy data acquisition offering will continue to benefit from rising activity levels and market share gains, and we expect our digital offerings will continue to gain greater market adoption by operators looking to extract additional operational efficiencies to offset inflationary pressures. Our Tuboscope business experienced a mid-single-digit sequential increase in revenue, driven by improving demand for our coating and inspection services. While demand is strong and our backlog of inspection and coating projects has grown, revenue growth was hindered in the third quarter by operational disruptions related to Hurricanes Ida and Nicholas and a COVID outbreak at a key coating facility. Additionally, constrained supplies of raw materials limited our ability to capitalize on our backlog and resulted in higher costs as we were required to airfreight resin from Asia to the U.S. to meet certain customer delivery requirements. In the fourth quarter, we expect operational challenges to subside, aligning for the business unit to capitalize on its growing backlog and improved pricing to drive better results. Our Grant Prideco drill pipe business posted solid top line growth on higher volumes. EBITDA flow-through was restrained due to a less favorable sales mix and inflationary pressures. New orders remain solid with a notable improvement in demand for larger diameter premium pipe. U.S. operators are showing an increasing preference for 5.5-inch drill pipe, which unlike smaller diameter pipe sizes is in limited supply. Additionally, operators are specifying specific grades of drill pipe and recent offshore rig tenders driving additional demand for premium pipe. While fourth quarter results will be muted by ongoing supply chain challenges and cost inflation, recent orders, growing global drilling activity and improved pricing have us increasingly optimistic regarding 2022. For our Wellbore Technologies segment, improving global activity levels, partially offset by lingering supply chain challenges, should allow for sequential revenue growth between 3% to 6% in the fourth quarter. We expect improving absorption in our manufacturing facilities and better pricing to be partially offset by supply chain challenges and continued inflationary pressures, limiting incremental margins to around 20% in the fourth quarter. Our Completion & Production Solutions segment generated $478 million in revenue during the third quarter, a decrease of $19 million or 4% sequentially. EBITDA for the quarter was a loss of $5 million or 1% of sales. Orders during the third quarter were $384 million, yielding a book-to-bill of 144% with all but one business realizing a book-to-bill greater than 1. Backlog for the segment ended at approximately $100 million higher sequentially to end the quarter at $1.1 billion. A second consecutive quarter of strong order intake along with constructive ongoing customer dialogue, give us growing confidence in the sustainability of this higher level of orders as we head into 2022. Our Intervention & Stimulation Equipment business experienced a double-digit sequential decline in revenue on lower capital equipment sales. Impact to EBITDA was limited primarily due to an improved sales mix resulting from steady global aftermarket sales activity. New capital equipment orders remained light but improved sequentially. In North America, we're seeing higher quoting activity, particularly around dual fuel conversions, reactivations and rebuilds, with the average size of quotes increasing as the industry is now preparing to take its last mile of inventory off the fence line. We're also seeing more inquiries on bulk cementing and pumping equipment to support increasing drilling activity levels. Prospects for the international markets are equally, if not more, compelling. As one of our customers described on its conference call, lower spending by service companies in international markets for more than a half decade and improving activity is resulting in tightening supply of equipment. Although orders remain light, we're seeing growing inquiries for pressure control equipment in many regions around the world and greater inquiries around next-generation coiled tubing equipment, particularly for the Middle East and in the former Soviet bloc countries. Our Fiber Glass business unit saw relatively flat sequential results as improving demand across the businesses end markets was offset by continued supplier disruptions. Global supplies of key raw materials such as resin and glass remain extremely tight, a condition we expect to extend over the next few quarters. Additionally, while we are experiencing fewer direct effects of COVID, such as government-mandated lockdowns, we're now working through derivative effects in the form of ongoing logistical challenges and even power shortages, which are occasionally shutting down our operations in China. Despite these headwinds, the outlook for the business is strengthening, driven by increasing oil and gas activity in the Middle East, improving marine and offshore activity in Southeast Asia and continued strong demand for our fuel handling products. Our Process and Flow Technologies business realized a high single-digit sequential decrease in revenue. Clay described the significant operational challenges this business faced during the quarter. And while operational challenges will linger into the fourth quarter, we remain optimistic regarding the longer-term outlook for this business. We're seeing growing demand for chokes and pumps, for gas processing equipment and for FPSO process modules. And as Clay highlighted, we anticipate additional opportunities to showcase the carbon capture usage and storage skill set we've been cultivating within this business unit. Our subsea flexible pipe business realized a low double-digit percentage sequential increase in revenue with strong EBITDA flow-through due to solid execution and a better sales mix. Indicative of the improving outlook for offshore activity, orders improved sequentially, achieving their highest levels since 2019, resulting in a book-to-bill that exceeded 140% for the second straight quarter. Outlook for orders remain solid, and we expect to continue replenishing the business's backlog and move prices higher. For the fourth quarter of 2021, we anticipate our Completion & Production Solutions segment will continue to face COVID and supply chain challenges, but improved backlogs and growing aftermarket activity should allow for segment revenues to improve 10% to 15% with incremental margins in the mid-30% range. Our Rig Technologies segment generated revenues of $390 million in the third quarter, a decrease of $97 million or 20% sequentially. Excluding the $74 million in revenue recognized in the second quarter from the settlement of the offshore rig project cancellation, revenues declined $23 million sequentially, primarily due to the timing of certain projects nearing completion during the third quarter. Adjusting for the impact of the offshore rig project cancellation, EBITDA increased $7 million on an improved sales mix and cost savings. Orders for the segment increased to $300 million, yielding a book-to-bill of 190%. Once again, wind installation vessel equipment orders comprised over half of our bookings as we continue to establish ourselves as the most trusted provider of vessel designs, jacking systems and heavy lift equipment to the offshore wind industry. As Clay mentioned, we remain on track to achieve an annualized revenue run rate of $200 million by the end of this year and a run rate of approximately $400 million by the end of 2022. Additionally, we remain optimistic that the number of offshore wind installation vessel projects will continue to grow. Rig capital equipment orders improved for the second straight quarter, highlighted by an award for our third 20,000-psi BOP project. Last quarter, we noted a growing sense of optimism from our offshore driller customer base, which we believe continues to build. The global offshore rig count is trending higher and rig tendering activity is growing more active in Brazil, West Africa, the Middle East and Southeast Asia. One of our customers recently indicated that it expects to have the entirety of its fleet under contract by the end of 2021, a remarkable feat considering where the industry was just 12 months ago. With fleets of hot rigs approaching full utilization and operators unwilling to accept rigs that are not in near-perfect condition, a number of our customers have approached us about rig recertifications, upgrades and potential reactivation projects. Most of the upgrade conversions have centered around BOP equipment, automation and emissions reducing technology like our PowerBlade offering. We expect most near-term reactivations to be centered around rigs that are in relatively good shape and will only require modest overhauls. But as we get deeper into the stack, the scope of these rig reactivation projects will grow significantly and, in turn, so will the revenue opportunity for NOV. Demand for land drilling equipment remains low, but we are seeing positive developments in land markets. As the rig count recovers in the U.S., there is a clear preference for rigs that have leading-edge torque flow rate and pressure capabilities along with larger setbacks to efficiently handle larger diameter drill pipe. Operators are also demanding the latest control systems and automation capabilities with interest in our NOVOS and multi-machine controls growing stronger by the day. The domestic rig fleet is quickly approaching full utilization of rigs meeting the desired specifications and day rates are rising, leading to increasing inquiries for land rig upgrades that will bring currently idle rigs into this ultra-premium rig class. In our aftermarket business, we realized our third straight quarter of improved spare part bookings. And based on what we've seen to date, we expect this trend to continue into the fourth quarter. After more than a half a decade of rationed maintenance, spending is beginning to normalize as offshore drilling customers gain more confidence in their capital structures and business outlook. We also saw a 30% sequential increase in the number of quotations by our field engineering group, predominantly driven by the customers I described earlier, who would like help from our engineers in determining the requirements to reactivate their stacked rigs. Looking ahead, we find ourselves becoming increasingly optimistic around the prospect of improved financial results from our Rig Technologies segment in 2022, due to several specific segment tailwinds: one, improving maintenance spend from our contract drilling customer base; two, a growing pipeline of potential rig activation projects; three, ramping production from our rig manufacturing operations in Saudi; and four, an increasing rate of converting wind installation vessel backlog into revenue. Near term, our Rig Technologies segment must contend with the same headwinds currently faced by all global manufacturers, primarily supply chain and labor shortage issues, which will likely blunt incremental operating leverage. For the fourth quarter, we expect revenues for this segment to grow 8% to 12% with incremental margins in the mid-teens. With that, we'll now open the call to questions.	compname reports q3 revenues of $1.34 billion. nov - q3 2021 revenues of $1.34 billion, a decrease of 5 percent compared to the second quarter of 2021 and a decrease of 3 percent compared to q3 of 2020. nov - completion & production solutions generated revenues of $478 million in q3 2021, a decrease of 20 percent from the third quarter of 2020. for rig technologies new orders booked during quarter totaled $300 million. for completion & production solutions new orders booked during quarter totaled $384 million. rig technologies generated revenue of $390 million in q3, a decrease of 20% from q2 and a decrease of 13% from q3 2020. rising economic activity and higher backlogs continue to underpin our improving outlook for 2022.
They involve risks and uncertainty, and actual results may differ materially. Our comments also include non-GAAP measures. On a US GAAP basis, for the fourth quarter of 2020, NOV reported revenues of $1.33 billion and a net loss of $347 million. Later in the call, we will host a question-and-answer session. Please limit yourself to one question and one follow-up to permit more participation. The fourth quarter of 2020 was an extraordinarily difficult quarter for NOV. And unfortunately, we expect to continue to struggle through the next quarter too until the world gets past the wreckage of COVID. Consolidated revenue declined 4% sequentially and EBITDA fell to $17 million to 1.3% of sales in the fourth quarter. This performance was particularly disappointing in view of the massive cost-out efforts the Company enacted last year, indeed, throughout the last six years. The COVID lockdowns we faced off and on throughout 2020 continued to hinder our operations and those of our customers. Against weak demand for services, low and falling day rates and significantly reduced cash flows, our oilfield service customers have deferred maintenance, cannibalized equipment and drawn down stocks of consumables. Against weak and uncertain commodity prices, OPEC+ production cuts and lower cash flows, our E&P customers have cut rigs and slow rolled project approvals. The offshore rig count was down 37% from the fourth quarter of 2019 and the international rig count was down 40% year-over-year. Although North America drilling has been improving since bottoming in August, it is still down 58% compared to the prior year which, by the way, wasn't exactly a robust oil and gas market either. This continues to be a historically bad downturn in an industry that has a lot of experience weathering very, very tough times. Against this backdrop, our equipment orders have been scarce. While we were pleased to see Rig Technologies' reported book to bill above 1 in the fourth quarter, that is the only book to bill NOV saw above 100% throughout 2020. Outside of North America, momentum slowed through the fourth quarter with additional COVID lockdowns, continued project approval delays by customers and slowing activity in places like Russia, the Middle East and offshore. All three of our segments saw the majority of their revenue come from markets outside North America: 59% for Wellbore Technologies, 67% for Completion & Production Solutions, and 90% for Rig Technologies. All three rely on capital and consumable sales which, to varying degrees, tend to be later cycle businesses. While Wellbore Technologies tends to be a little more closely tied to real-time rig activity than the other two, it also relies on later cycle capital sales of drilling motors, fishing tools, MWD equipment, solids control equipment and other tools that are subject to destocking and restocking dynamics. Drill pipe is a capital investment by drilling contractors, and drill pipe sales by the Wellbore Technologies segment fell sharply in the fourth quarter at very high leverage. Our team continues to fight passionately and tirelessly to improve performance. We continue to cut costs. I'm proud that NOV was able to take out $700 million in fixed costs during 2020, but our poor fourth quarter results tell us that we must do more. As we enter 2021, we've identified another $75 million in annual cost reductions that we are executing on right now, and we expect the target to grow as we progress through the year. We continue to focus on cash flow. Fourth quarter cash flow from operations was $186 million and free cash flow was $133 million. For the year, NOV generated cash flow from operations of $926 million and reduced our net debt by almost $700 million. We completed the year with a very strong balance sheet, only $142 million in net debt, with our next major maturity not due until late 2009. Most importantly, we continued to invest in technology. Last quarter, I spoke to you about our organic R&D efforts, which are increasing operational efficiency, improving safety and reducing the environmental impact of our customers' oil and gas operations. We will be testing our Max digital platform with three E&P customers throughout 2021, all of whom are excited about its potential to drive improvements in their workflows. We will be testing our new low-cost rig floor robotics offering at our research rig later this quarter. We hope to have a commercial product available by year-end. Our new Ideal eFrac offering will be tested this quarter by a leading North American pressure pumper with one of their customers. They are seeing significant E&P interest in this technology's ability to reduce both costs and emissions. These are just three of dozens of new product and technology initiatives NOV has under way to support the critical work that our oil and gas customers do. We remain committed to developing and delivering solutions that provide the world with abundant reliable safe energy, the oil and gas, that powers the world's global food supply chain, that powers 100% of its air travel and that helps lift humanity out of poverty. NOV is proud to support this critical industry as we've done 159 years. Like you, though, we see powerful social, political and economic momentum driving the growth of renewable energy, which will one day enable the world to transition to a net zero carbon future. I believe that this is perhaps the greatest economic opportunity of this century. Capitalism will lead to the innovation required to reveal the most efficient solutions, and NOV intends to play a role. We want to show you how we're thinking about NOV's future in a world that is growing new sources of low carbon energy. First, we are experts in building large complex machinery with extreme precision that operates in harsh environments, and we do this at scale and remote parts of the world. NOV employs bright, dedicated and imaginative [Phonetic] scientists and engineers who are conversant in material sciences, metallurgy, power systems, robotics and a host of other fields. In short, we have a fantastic team with whom to prosecute the business opportunities that are emerging. So, I asked a few to do that. A few years ago, some of our best and brightest began to explore the renewables landscape to find opportunities where NOV can make money. That team has been steadily growing since, and I'm pleased with the ideas they are generating and the products that they are developing. First of all, let me offer some perspectives on the opportunities. Most renewables technologies are not new. You may be surprised to learn that robust serious technical economic discussions about transitioning to new forms of energy actually began more than 40 years ago, following the Iranian hostage crisis and the second big oil shock of the 1970s. The economic vulnerability of the West during the Cold War, exposed by the 10-fold increase in oil price throughout the 1970s, led to some serious hand wringing about diversifying away from oil, particularly foreign imports. Strikingly, the list of potential green energy sources from that era is essentially unchanged from today's list of candidates: wind, solar, geothermal, biomass, hydrogen and fusion. In the past, for decades, all have seen their respective technologies progress incrementally and some have seen significant industrialization. So why then haven't we transitioned to something different yet? The reason is that all are at best imperfect substitutes for the status quo, at least for now, in all categories except greenhouse gas emissions. Solar and wind face intermittency challenges, land use issues and not in my backyard political opposition. Hydrogen faces storage and transportation challenges from metallurgical hydrogen embrittlement. Biomass faces land use and efficiency challenges. Fusion continues to face technical challenges. And geothermal really only works in geologic hotspots with shallow magma. All face infrastructure hurdles. I bring these up only because we looked at these challenges and we see opportunities to develop solutions and thus competitive advantage. Our approach to renewables is to look at customer pain points like these and solve them. This is the framework that we are using to think about renewables opportunity. NOV can solve bottlenecks, reduce project capital investment, improve uptime, reduce O&M costs, enable customers to access better resources, and NOV can foster the unrestrained embrace of renewables by free capitalists [Phonetic] thereby positioning itself to profit from this remarkable business opportunity in facilitating the global transition. Our most advanced business opportunities lie in solutions that improve the economics of wind power generation. In a few moments, I'll take you through our portfolio in this area. Before I do, though, I want to note that we are pursuing other areas where we see potential to add value as well, including solar, carbon capture, geothermal, biomass and hydrogen. Most of these are very early stage and years away from contributing meaningfully to our financial results, but I'm nonetheless optimistic about the potential contributions that they may one day make. I'll add too that these have been almost entirely organic thus far, built through existing business and infrastructure that make up our core oil and gas equipment business today. It's too early to tell which technologies will predominate and some will fail. So we are engaging across several in a diversified portfolio approach. Most importantly, we are doing this to make money. Returns on capital are derived from competitive advantage. Therefore, our efforts are focused on creating competitive advantage in this space by cultivating renewable ideas with high growth potential that can be funded from our traditional oil and gas business, where we will also continue to press better products, services and technologies. That's the long-term plan. So, back to NOV's wind business. Today, our presence in the wind value chain, which stems from our roots in industrial lifting, marine vessel design and construction, is significant and growing. At ground level, the wind is impeded by topography and vegetation. At higher altitudes, wind tends to be more stable, more powerful and more consistent, a better quality resource that improves at higher and higher altitudes. Taller towers access this better resource, as well as provide more space for largest area swept by the blades. Swept area is proportional to accessible energy and it grows exponentially with blade length, increasing torque applied to the generator and the hub, which also must grow larger to facilitate the additional power production. Therefore, taller towers, longer blades, larger turbines and bigger generators deliver significantly better economics to wind farm owners overall, at least to a point. So not surprisingly, tower hub heights has steadily increased and contributed to the competitiveness of wind on a levelized cost and energy basis. Taller towers are also expanding the geographic regions where wind power works beyond the so-called wind belt of the Great Plains in the United States, for instance. More on that in a moment. The constraint that wind farm developers begin to run into is the fact that towers become exponentially more expensive to construct and transport with height. In 2019, NOV invested in Keystone Tower Systems, a start-up that has developed a patented tapered spiral welding process that enables the automated production of wind tower sections, which can significantly decrease production times and reduce cost by 50% or more. Additionally, the technology has the potential to be deployed for infield manufacturing operations, effectively eliminating many of the severe logistical limitations of transporting larger diameter tower sections over the road. Keystone is currently completing construction of its first commercial line within NOV's Pampa, Texas facility and has an order for 100 tower sections from a major wind turbine manufacturer. Upon completion, it will have the capacity to deliver hundreds of towers annually. Another challenge of the taller towers trend is developing cost-effective safe methods of tower erection. Current predominant construction methods using crawler cranes are quickly reaching their limits for safe and efficient use as wind towers increase in height and weight. NOV's system concept, which is built upon the intellectual property control systems and experience developed during the design of mobile desert and Arctic drilling rigs, utilizes a tower crane in conjunction with a unique mobility system to provide superior lifting characteristics to -- at taller heights to significantly improve the safety, reliability efficiency of tall wind tower installation techniques. Such methods are expected to also help reduce the ongoing operating and maintenance costs associated with these assets over their 20-plus year lives, further improving project economics for wind farm operators. The US wind belt runs from North Dakota, south to West Texas and is defined by the region of the country where the wind resource blows hardest and steadiest, allowing turbines to achieve the highest levels of utilization and electricity output. But this picture changes as towers grow taller and the region of economically viable wind resource grows. It is conceivable to us that the wind belt area could double or triple as NOV and Keystone technologies enable towers to grow taller, economically and consequently enable power production closer to prime power consumption markets, thereby lowering transmission costs and total capital investment. Frankly, we are excited about the growth potential here. However, all onshore wind farms require a lot of land and sometimes make their neighbors unhappy by spoiling the view, which leads us to offshore wind. Generally, offshore wind has several advantages over land: higher capacity factors due to generally steadier wind regimes, the ability to use larger turbines without facing the limitations of over-the-road transportation and an abundance of locations with less not in my backyard political opposition. This has led the Global Wind Energy Council to forecast 26% compound annual growth rate for the offshore wind space through this decade. Considering nearly 40% of the world's population, 2.5 billion people, live and consume power within 60 miles of the coast, this makes sense. However, similar to offshore oil and gas, offshore wind developments also carry increased complexity, higher execution risk and incremental costs that can challenge project economics. Again, we view these challenges as opportunities to draw upon NOV's unique offshore expertise and provide value to a burgeoning customer base. NOV has long been a leader in offshore wind construction vessels, on which we can sell as much as $80 million of equipment. In fact, the majority of the world's 30 gigawatts of installed offshore power generation capacity was put in place with NOV-designed vessels and NOV-supplied equipment. We are presently executing on the construction or upgrade of a half dozen wind turbine installation vessels and expect demand to continue due to the growing height of offshore towers for the same reasons that I explained moments ago. NOV's proprietary telescoping cranes, jacking systems and deck equipment are all contributing to lower installation costs and better economics for offshore wind farm developers. We landed a contract for the first Jones Act-compliant vessel in the fourth quarter. And we have several conversations under way with offshore construction firms for additional capacity globally. By year-end, I expect that our business in this area will have doubled to more than $200 million annually, and further growth prospects are excellent as the 9.6 gigawatts of offshore wind capacity to be installed in 2021 is forecast to more than double by 2025 to more than 21 gigawatts. In order to meet these projections, the world will need to build two to three dozen more installation vessels, capable of installing the new leading-edge 12-megawatt to 15-megawatt towers with 500-foot hub heights over the next decade or so, according to forecast from Clarksons. NOV is also pursuing opportunities in the floating offshore wind space, which will require the cranes, winches, mooring systems, cable-laid ballasting systems, chain connections and tensioners that we design and provide. NOV has developed a patent-pending tri-floater semi-submersible floating wind foundation, designed to require less steel than competing offerings that should allow for full quayside construction in turbine installation. We are engaged in a paid design study now utilizing this proprietary floating wind design for a customer in Asia. With revenue potential north of $25 million per vessel and dozens of vessels required to develop a single gigawatt project, NOV's total addressable market in this area is potentially in the billions. So, to summarize our wind initiatives, NOV is positioning itself as a value-added partner, capable of meaningfully reducing project execution risk and overall capital costs. We have a large and growing base of installed capacity in the fixed offshore wind installation vessel market, which we expect to exceed $200 million annually in revenue for us by year-end, along with an ongoing aftermarket opportunity. Our Keystone team secured an order for 100 towers based on its proprietary technology that we are constructing in our plant in Texas. And NOV's proprietary floating wind technology is under consideration by multiple prospective customers globally, potentially opening up a massive new market in countries lacking expansive shallow waters available for wind development. Suffice to say, I'm very optimistic about the opportunity set in the wind area. Returning to our traditional oil and gas business, despite the near-term challenges we face, I'm growing more optimistic about 2021. As COVID-19 vaccines proliferate, I expect lockdowns and economic disruptions to subside and a more normalized level of demand for oil and gas to return. Only then will we realize the true impact of the massive dismantlement that the petroleum industry has undergone: the lack of major project FIDs, the diminishment of quick-turn shale productive capacity, increased governmental restrictions on shale development, the lack of offshore exploration, the evaporation of capital for a highly capital-intensive industry, the effect of massive amounts of stimulus and explosive growth in money supplies on commodity prices. I don't recall a time in my professional career that saw more bullish fundamentals. It will be interesting, despite our most noble, aggressive, aspirational energy transition scenarios, petroleum remains critical to our way of life, from air travel to feeding mankind. The oil and gas industry will be called upon again to grow. So, there is light at the end of the COVID tunnel. The positive financial results reported by some of our larger customers this quarter serve as an early positive signal that conditions should improve over the course of the year for our later cycle oil and gas businesses. We expect the back half of 2021 to begin to see improved demand and activity for NOV, which may well begin to grow just a little more frantic in 2022 and beyond. In the meantime, NOV remains committed to supporting our customer base around the world wherever and whenever it needs us. Our recent product introductions are evidence of that commitment. To NOV employees that may be listening, please note that the dual challenges of supporting our oil and gas customers while advancing new and creative solutions to provide lower carbon sources of energy will continue to demand your very best. I am proud and grateful that you've never given anything less. Jose, Blake and I look forward to scaling new heights and new opportunities with you. NOV's consolidated revenue fell $57 million or 4% sequentially to $1.33 billion during the fourth quarter of 2020. Our shorter cycle businesses capitalized on improving drilling activity levels in the US to drive 4% revenue growth in North America, despite very light demand for capital equipment sales. International revenue declined 7%, reflecting the different trajectories of rig activity between the eastern and western hemispheres during the quarter. EBITDA for the fourth quarter was $17 million, or 1.3% of sales. Elevated decremental margins were the result of a less favorable product mix; customer order deferrals, which compounded manufacturing absorption challenges; and higher expenses associated with pension accounting, environmental accruals and workmen's compensation. While we exceeded our $700 million cost-out initiative target in the third quarter of 2020, our efforts to right-size and improve the efficiencies of the organization continued during the fourth quarter. As Clay mentioned, we've identified and are executing on $75 million in additional cost savings initiatives that we expect to complete by year-end 2021, and we expect our target will grow. During the fourth quarter, we generated $186 million in cash flow from operations and $133 million in free cash flow. We ended the year with approximately $1.69 billion in cash and $1.83 billion in gross debt, resulting in a net debt balance of only $142 million, down $676 million year-over-year. For the full year, cash flow from operations was $926 million and free cash flow totaled $700 million. The organization's focus on reducing costs, improving capital efficiency and optimizing cash flow allowed us to reduce net debt by 83% during 2020, further improving what was already a rock-solid balance sheet. For 2021, we expect to report capital expenditures of approximately $215 million with $82 million of that amount related to completing our rig manufacturing facility in Saudi Arabia. Factoring in the 30% that will be funded by our JV partner, net capex will total $190 million. Our Wellbore Technologies segment generated revenue of $373 million in the fourth quarter, an increase of $12 million or 3% sequentially. Despite the top line growth, EBITDA fell to $12 million or 3.2% of sales, primarily due to an unfavorable shift in product mix and COVID-19-induced shipping cost overruns and delays. As Clay highlighted, offerings from this segment are more short cycle than our other more capital equipment-oriented segments, but it is still a product business that is affected by the ongoing destocking of customer inventories. Nevertheless, we believe Wellbore Technologies hit a cyclical low during the third quarter of 2020, and we expect steady improvement for the segment as 2021 progresses. Our Grant Prideco drill pipe business realized a 24% sequential decline in revenue with very high decremental margins. Lower volumes, a significant decrease in proportion of higher-margin large-diameter pipe and extra costs associated with shipping delays in Asia more than offset the unit's cost reduction efforts, which included reducing its workforce by approximately 25% during the first week of the quarter. Orders improved 84% off the all-time low level realized in the third quarter but were less than half the level achieved in Q4 of 2019. While orders remain light, slightly higher volumes and a more favorable product mix should drive improved results during the first quarter,. Our Tuboscope pipe coating and inspection business realized a 7% sequential improvement in revenue, led by a 28% increase in our activity from the OCTG market. The revenue growth was partially offset by declines in higher-margin drill pipe coating and Thru-Kote sleeve sales, resulting in a decrease in EBITDA. We expect higher volumes from improving backlogs and cost controls to drive improved performance from Tuboscope in the first quarter. Our downhole tools business saw a 5% sequential increase in revenue, driven by the improving North American rig count, which was partially offset by lower activity in the eastern hemisphere. The business realized strong incremental margins from improved absorption and increasing adoption of our proprietary technologies that meaningfully improve operational efficiencies and lower costs for our customers. During the fourth quarter, we saw a significant increase in the number of runs completed by our SelectShift downhole adjustable motor, which now incorporates our latest ERT power section, allowing for up to 1,000 horsepower to be delivered to the drill bit, further enhancing the motor's ability to drill single run horizontal wells. We're also seeing greater customer adoption of our Agitator friction reduction tools in the international markets and in operations using rotary steerable systems. A major national oil company in the Middle East recently completed a 12.25 inch directional section using our Agitator tool, resulting in a 38% improvement in the rate of penetration relative to nearby offsets. Also, a US operator made our Agitator a standard component in their rotary steerable bottom hole assemblies after recognizing the clear performance improvements in curve and lateral sections within their wells in the Haynesville Shale. Our ReedHycalog drill bit business posted a modest sequential improvement in results with strong growth in North America that was partially offset by declines in international markets. While the international rig count continued to search for bottom during the fourth quarter and projects continued to push to the right, recent customer dialog has us more optimistic that tenders will advance during the first quarter, creating better prospects for our international operations as we advance through 2021. Our Wellsite Services business generated 17% sequential growth in revenue during the fourth quarter on the meaningful improvement of drilling activity levels across the western hemisphere. EBITDA flow-through was limited by declines in higher-margin work in the Middle East and offshore markets; price competition; and COVID-19-related logistical and supply chain challenges, which impacted personnel movement and deliveries of capital equipment. Despite these headwinds, we're seeing international tenders advance and increasing absorption of excess industry capacity, which we expect will drive improving market conditions in the second half of 2021. Lastly, our M/D Totco business realized high-teens revenue growth during the fourth quarter due to improving demand for the business unit's rig instrumentation and data acquisition systems and increasing adoption of M/D Totco's KAIZEN artificial intelligence drilling optimization application and eVolve closed-loop automated drilling systems. Based on dialog with our customers, we expect the pace of North American activity growth to moderate in the first quarter, then level off around mid-year. Activity in eastern hemisphere should stabilize but remain sluggish through the first half of the year, as operators finalize budgets and work to complete project tenders, which will set the stage for improved international activity in the second half. For the first quarter of 2021, we expect revenue in our Wellbore Technologies segment will increase in the upper single-digit percentage range. We also expect an improved mix in product sales and cost controls to result in EBITDA margins expanding approximately 200 basis points to 400 basis points. Our Completion & Production Solutions segment generated $546 million in revenue during the fourth quarter, a decrease of $55 million or 9% sequentially. On our last call, we mentioned that then-current customer conversations and early Q4 bookings gave us confidence that orders would likely improve from the low levels witnessed in the third quarter. While orders did improve 27% sequentially to $15 million, the resurgence of COVID-19 through the quarter reduced customer conviction, slowed order intake and led to the segment's fourth straight quarter with a book to bill below 1. Further deterioration of the segment's backlog created additional absorption challenges and a less favorable product mix, resulting in an EBITDA that declined $35 million to $28 million or 5.1% of sales. While we expect order intake to remain sluggish in the early part of 2021, customer conversations have resumed with improved pace and tone, giving us optimism for a much improved order outlook starting mid-2021. Our subsea flexible pipe business saw revenue decline of 11% sequentially with high decremental margins. Low utilization levels across the industry's manufacturing capacity have resulted in absorption challenges and pricing pressure. While we expect orders to remain light in the first quarter, we believe a number of significant project FIDs will move forward in the first half of 2021, creating opportunities for sizable bookings in the second half of the year. Our Process and Flow Technologies business experienced a 4% sequential revenue decline, primarily due to deterioration in the backlog of our APL turret loading offerings, which is facing similar challenges to what I just described in our subsea business. Our more land-oriented production and midstream operation saw small improvements in demand off of very low levels in North America, Argentina and the Middle East. While demand for our production and midstream offerings appears to have bottomed in Q3, some customers continue to work through excess stocks of inventory, which should run its course in the first half of 2021 and lead to a more constructive operating environment in the second half of the year. Or fiberglass systems business saw revenue decline approximately 19% sequentially due to customers that continue to defer deliveries for offshore scrubbers and limited demand from midstream infrastructure, which has depleted our backlog for large diameter, high pressure pipe. The unit realized outsized EBITDA decrementals due in part to ongoing COVID-19-related disruptions in the Southeast Asia and an increase in epoxy and glass prices from suppliers who were extracting better economics before agreeing to reopen plants that were shuttered in the early phase of the pandemic. We expect oilfield orders in North America to remain limited for much of 2021 but see projects in the Middle East that should advanced by mid-year, and we continue to see growing demand for our fuel handling offerings. As a result, we expect our fiberglass business will bottom in the first quarter and realize stronger demand in the second half of 2021. Or Intervention and Stimulation Equipment business realized a 9% sequential decline in the four quarter. An increase in deliveries of coiled tubing equipment in international markets was more than offset by limited demand for completion equipment in North America. While we anticipate that demand for new-build completions equipment in North America will remain limited over the next several quarters, we're beginning to see green shoots in our aftermarket-related offerings. In Q4, we realized our second quarter in a row of improving demand for replacement coiled tubing strings, and we are engaging in a steadily increasing number of conversations with customers looking to refurbish or upgrade pressure pumping equipment from Tier 2 to Tier 4 motors with dual fuel capabilities. We recently received an order from a customer to refurbish 35 pressure pumping units. Additionally, as Clay mentioned, we are seeing growing interest in our recently introduced Ideal eFrac fleet and for our FracMaxx articulating flowline and quick latch systems, which increase efficiencies and reduce costs of pressure pumping operations. Lastly, we remain encouraged by the future potential demand for our completion equipment in international markets as the use of multi-stage stimulation services continues to grow outside North America. For the first quarter of 2021, we anticipate revenue from our Completion & Production Solutions segment will decline 6% to 10% sequentially with decremental margins in the mid-30% range. Our Rig Technologies segment generated revenues of $437 million in the fourth quarter, a decrease of $12 million or 3% sequentially. Revenue from capital equipment sales declined 7%, partially offset by an increase in aftermarket services. EBITDA declined to $19 million or 4.3% of sales. Outsized decremental margins were the result of a less favorable sales mix from both capital equipment and aftermarket operations where sales of higher-margin spare parts declined and revenues from lower-margin service work increased. Additionally, the segment incurred extra expenses associated with the logistical challenges of moving 200 service technicians and associated equipment across numerous international borders during a second round of pandemic-related restrictions. Orders for the segment increased $133 million sequentially off the all-time low realized in the third quarter to $190 million, yielding a book to bill of 105%. Orders from the offshore wind market dominated the order book, which included an award for the design and jacking system for the first US-built Jones Act-compliant offshore wind turbine installation vessel and an order to upgrade existing -- an existing vessel to enable it to handle the heavier weights of the next generation of offshore wind turbines. Additionally, subsequent to quarter-end, we received another order for the design, jacking system and cranes for a Europe-based wind turbine installation vessel. As Clay highlighted, opportunity for our wind business is meaningful and the outlook is promising. While orders for rig equipment remains sluggish and capital availability remains constrained among our drilling contractor customers, they're still eager to upgrade the capabilities of their fleets. We continue to have discussions regarding new-build rigs with customers in the Middle East, Latin America and Asia. And in Q4, we received an order from a customer in the Middle East for two 1,000 horsepower land rigs, fully equipped with automated pipe handling systems, NOVOS drilling automation and our Maestro Power Management system. In North America, we do not see near-term opportunities for new-build rigs outside of niche applications. However, we continue to have active dialog with customers regarding upgrades to both hardware and digital solutions. We see strong interest in the rig floor robotics that we have under development, and we're seeing hold-outs that up until now have resisted upgrading to our NOVOS process automation platform come to us saying that their customers are demanding the capabilities that NOVOS provides. Similarly in the offshore space, we do not expect many new-builds, but we continue to see an increasing rate of adoption for our digital subscription solutions, including the NOVOS platform, condition monitoring, remote support and automation lifecycle management. More importantly, our offshore drilling contractor customers, several of whom are emerging from the restructuring process with cleaner balance sheets, are growing more optimistic that offshore activity is at or near a bottom. And we're actively working with them to prepare for reactivations and upgrades. While customer inquiries have increased since year-end and we are optimistic that offshore activity will improve in the second half of the year, for the first quarter of 2021, we expect results for Rig Technologies to be in line with the fourth quarter. With that, we'll now open the call up to questions.	national oilwell varco q4 2020 revenues of $1.33 billion. q4 2020 revenues of $1.33 billion, a decrease of four percent compared to q3 of 2020. completion & production solutions generated revenues of $546 million in q4 of 2020. qtrly new orders booked improved 27 percent sequentially to $215 million. new rig technologies orders booked during quarter totaled $190 million. as of december 31, 2020, company had total debt of $1.83 billion.
Joining me are Bill McDermott, our president and chief executive officer; and Gina Mastantuono, our chief financial officer. During today's call, we will review our first-quarter 2021 financial results and discuss our financial guidance for the second quarter of 2021 and full-year 2021. The guidance we will provide today is based on our assumptions as to the macroeconomic environment in which we will be operating. Those assumptions are based on the facts we know today. Many of these assumptions relate to matters that are beyond our control and changing rapidly, including but not limited to the time frames for and severity of social distancing and other mitigation requirements; the continued impacts of COVID-19 on customers' purchasing decisions; and the length of our sales cycle, particularly for customers in certain industries. We'd also like to point out that the company presents non-GAAP measures in addition to and not as a substitute for financial measures calculated in accordance with GAAP. All financial figures we will discuss today are non-GAAP, except for revenues, net income, remaining performance obligations or RPO, and current RPO or cRPO. A replay of today's call will also be posted on the website. I hope everyone remains healthy and safe and you and your loved ones are benefiting from broader vaccine availability. ServiceNow remains grateful to be in such a strong position to help support our families, communities, and customers. We started 2021 with another outstanding quarter, delivering a perfect balance of growth and profitability. Our team is executing, maintaining a swift pace toward our path to $10 billion in revenue and beyond. In Q1, we grew subscription revenue 30% year over year, exceeding the high end of our guidance. We delivered strong profitability with operating margin over 27%. And we increased free cash flow margin 7 points year over year to 46%. Our significant Q1 beat across the board represents the passion our culture has for innovating and our relentless focus on the customer. We are ideally positioned to deliver what our customers need. In the past year, the transformation of work has accelerated the adoption of digital products, services, and experiences. As a result, digital investments are at an all-time high and will total more than $7.8 trillion by 2024, according to IDC. ServiceNow is the strategic authority for digital transformation across the enterprise. We have expanded the boundaries from IT to employee, customer, and now creator workflows for citizen developers. The digital economy is firing on all cylinders and so are we. Our culture was born for this moment. Our team of 14,000 colleagues are exponential thinkers. This is how we continuously bring innovation to everything we do. In just the past 18 months, we have more than doubled the features and functionality of our platform for our customers. We're at the epicenter of the workflow revolution. Our purpose has never been more relevant. We are making the world of work, work better for people. We are helping our customers dream big and to build their digital bridge to the future. Xerox, for example, is working with ServiceNow to transform the services industry. Leveraging our field service management, their technicians will use machine learning to proactively solve customer problems. They're using virtual and augmented reality tools to resolve their customers' issues via desktop, mobile, and smart glass devices. In this bold new world, it's as if their agents are there in person. Digital transformation is about creating great employee and customer experiences. In an increasingly distributed, hybrid workforce, companies need to create frictionless experiences that make it easy for employees to get work done. This requires seamless cross-enterprise workflows linking systems, silos, departments, and processes. Only the Now Platform can do this with native integrations: the platform of platforms, the power of one, one data model, one architecture, one enterprise solution to workflow every business challenge. This is what ServiceNow delivers. We are the only ones doing what we do the way we do it. Strong demand for ServiceNow is evident in our results, high growth organically driven at mass scale while aggressively investing in future growth and delivering significant profitability, an amazing business model, and a true testament to the power of the Now Platform. Our teams keep innovating. We're proud that Quebec, our latest platform release, delivered 1,700 new customer capabilities; breakthrough innovations like predictive AI operations, AI search, and virtual agents that enhance every experience, to name a few. ServiceNow is helping customers move to the cloud and invent new business models. The past year has demonstrated that giving people the right productivity tools is critical to success, especially in distributed work environments. It's why organizations like Adobe, Deutsche Telekom, Logitech, City of Los Angeles, and Discover are using the Now Platform. Discover, in fact, is fully utilizing the Now Platform's ease of upgrade, participating in the early adopter program for our Quebec release. Now Discover is able to focus on timely availability and adoption of new functionality. The Now Platform is the gold standard for time to value. By the end of 2021, Forrester Research predicts that 75% of development shops will use low-code platforms. With Quebec, we are delivering new low-code tools that move app development beyond the borders of the engineering organization and into the hands of citizen developers, employees without software expertise who need to quickly create workflow applications. We're seeing strong response. The National Cancer Institute at the U.S. Department of Health and Human Services is a great example. NCI has established a digital service center around ServiceNow's low-code app engine platform. In just 10 days, NCI leveraged ServiceNow to build a new application for an online portal to collect and track specimens from COVID-19 patients. ServiceNow's low-code app is helping NCI staff support the global research community in understanding how genetic factors contribute to the severity of COVID-19 cases. We also introduced process and workforce optimization capabilities in our new enterprise SKUs. This brings even more intelligence to our customers, allowing them to be more agile. We're putting new AI capabilities in the hands of our customers so they can enhance productivity while spending more time on human creativity. With our recent acquisition of Intellibot, ServiceNow will have an unmatched intelligent workflow automation solution with RPA, AI, machine learning, and process mining native to the Now Platform. You'll hear more about this from our chief product and engineering officer, CJ Desai, at our upcoming investor day. Now, let's look more closely at Q1 performance highlights across our portfolio. Our better together solutions continue to drive more multiproduct deals. Our core IT workflows remain strong. ITSM was in 12 of our top 20 deals. Our AI and ML capabilities embedded with our pro SKU continue to resonate with customers. ITOM had a strong quarter and was in 13 of the top 20 deals. EMEA was especially strong. We're hitting a new gear with CEO engagement. We're seeing more demand across industries, including financial services, as EU banking regulations require companies to have full visibility into their assets while also managing risk. HSBC, for example, chose ServiceNow in a multiyear partnership as their workflow partner of choice to help them digitize at scale. Supporting HSBC's employees, ServiceNow will deliver the technologies needed to simplify their architectural landscape. This creates efficiencies, better controls, and compliance. Australia and New Zealand Banking Group also chose the ServiceNow platform to consolidate, simplify its IT systems and streamline operations to improve the employee experience. The Now Platform gives them the advantage of a fully integrated view of technology and risk. We continue to see strength in our customer workflows. Our investments in the telco vertical are gaining traction daily and it's materializing in wins across the globe. Lumen Technologies, a leading telecommunications company, is transforming its customer care and assurance function with ServiceNow customer workflows. They will use the Now Platform to deliver best-in-class customer experiences across their networking, cloud, and security solutions. Telia, a leading multinational telecommunications company, selected ServiceNow to transform service operations, connecting network operations, employees, and customers around the world. Creator workflows, our platform business, was in 19 of our top 20 deals. Three of our top 10 app engine wins came from APJ, where we are seeing increased awareness of ServiceNow and is continuing to drive demand. A large global manufacturing company in Japan is planning to use our app engine to automate manual processes, take out costs and risks associated with migrating on-premise applications to the cloud. This will be a movement in Japan. In the U.S., the Now Platform is at the heart of the city of Los Angeles' digital transformation, helping to provide reliable access to essential services for its 4 million citizens. The city is expanding its use of digital technology to provide immediate-access services, which enables citizens to get the assistance they deserve. Employee workflows were included in eight of our top 20 deals. Zalando is a leading online platform for fashion and lifestyle connecting customers, brands, and partners. As part of their HR transformation, they will implement a central employee services portal using ServiceNow's employee workflows. Zalando sees this as a critical component in supporting their growth and improving their employee experiences. Employee and workplace safety are top of mind for our customers. We are the only company with a complete suite of applications to meet these critical needs. Since the start of the pandemic, ServiceNow has been at the forefront of solving unprecedented challenges. We saw the need early and acted quickly, first, with our Emergency Response apps; then our Safe Workplace apps; and now with Vaccine Administration Management. We leverage the speed and agility of the Now Platform and the incredible talent of our product team to innovate fast, deliver market-leading solutions to support our customers, and help keep them safe. You see organizations are trapped in the last mile of vaccine management, as they lack the processes and infrastructure needed to vaccinate people quickly. This is the workflow challenge of our time. To address these challenges, organizations are using the Now Platform as their vaccine management command center. Our workflows are connecting organizations' existing technology infrastructure to help orchestrate the critical elements of the vaccine management process, including distributing, administering, and monitoring vaccines. The Minnesota Children's hospital implemented our Vaccine Administration Management in five days so they could stay focused on their No. 1 priority, caring for children. The hospital is using ServiceNow virtual assistant to answer questions and schedule patient vaccinations. They are leveraging inventory tracking and scheduling to ensure appointments, staffing levels, and vaccines are all in sync. Germany's largest state, North Rhine-Westphalia, is using ServiceNow to support vaccinations for millions of people. Within two hours of the portal going live, 120,000 people have registered and received an appointment. ServiceNow ended Q1 working with over 100 organizations and governments globally to help vaccinate people at scale. We are supporting the delivery and management of millions of vaccines globally. We will continue to do more. The workflow revolution is all about helping people. We are humbled to be helping so many people around the world manage this workflow challenge. In summary, we had a great start to the year with strong momentum. I'm so proud of what our team has accomplished over the past year and what they continue to achieve. From the beginning of this pandemic, we have focused on taking care of our people and taking care of our customers. That's why we're so grateful to be named to the Fortune 100 "best places to work" list for the first time. And we're proud to have increased our position on the Fortune's Best Workplaces in Technology list by more than 10 points. Our culture demonstrates time and again how we've powered through all weather conditions. Our engineering pride is unmatched, our innovation relentless and our customer focus tireless. We have a very, very robust pipeline substantially greater than anything we've seen before. We have all the learnings of digital customer relationship management. Our strong go-to-market organization is operating in high gear. Our customer services and partner ecosystem is accelerating time to value. Our business is ever resilient, our opportunities never greater. We continue to work with some of the world's greatest brands, including BMW, Bristol Myers Squibb, FIS, Subway, Standard & Poor's. We're honored to be their digital transformation partner. And we're also excited to highlight even more customers at our upcoming Knowledge21 experience in May, which will be our biggest customer event ever. And we look forward to seeing all of you at our upcoming investor day. This ServiceNow machine is firing on all cylinders. We're not slowing down. We are well on our way to $10 billion and beyond, and we are striving with all we have to be the defining enterprise software company of the 21st century. Gina, over to you. Q1 was a great start to the year. On the heels of a tremendous Q4, the team continued to execute well and delivered another strong quarter of outperformance. We exceeded the high end of our subscription revenue, subscription billings, and cRPO guidance; and those top-line beats carried through to a very robust operating margin and strong free cash flow. Q1 subscription revenues were $1.293 billion, representing 30% year-over-year growth inclusive of a 4-point tailwind from FX. Remaining performance obligations or RPO ended the quarter at approximately $8.8 billion, representing 34% year-over-year growth, putting us well on our way toward our $10 billion revenue target. Current RPO was approximately $4.4 billion, representing 33% year-over-year growth and a 100 basis points beat versus our guidance. Notably, we delivered that beat with 100 basis points less of an FX tailwind. Due to the weaker euro, currency contributed 4 points instead of our original outlook for a 5-point tailwind. Q1 subscription billings were $1.365 billion, representing 29% year-over-year growth and a $50 million beat versus the high end of our guidance. FX and duration were a 4-point tailwind year over year. As Bill mentioned, we saw particular strength in EMEA as investments made in 2020 are gaining traction. In Q1, the region closed one of its largest deals ever, helping to drive very strong year-over-year net new ACV growth. We're also seeing improving trends in APJ, where we landed two of the top three platform deals in the quarter. We continue to see the secular tailwinds driven by the intersection of digital transformation, cloud computing, and business model innovation. Every C-suite leader wants to create great experiences for their employees and their customers, and ServiceNow is delivering. The Now Platform offers the speed, flexibility, and innovation companies need. The sustained strength of our top-line growth is the result of consistent execution from across the organization as we address these opportunities, from our engineers who continue to drive leading-edge innovation, to the sales and customer success teams who partner with our customers to ensure we're delivering value and everyone else in between that help to deliver great experiences. It's been a tremendous team effort. Our renewal rates remained strong at 97%, as the Now Platform remains a mission-critical part of our customers' operations. We closed 37 deals greater than $1 million ACV in the quarter, including seven net new customers. Our focus on selling comprehensive solutions instead of point products continue to drive more multi-product deals as 17 of our top 20 deals included three or more products. We now have 1,146 customers paying us over $1 million in ACV, up 23% year over year. And the number of customers paying us $5 million or more in ACV grew over 50% year over year. Operating margin was 27%, up 300 basis points year over year, driven by our strong top-line outperformance and the timing of some spend that will shift into Q2. Our free cash flow margin was 46%, up 700 basis points year over year, driven by strong collections and lower T&E. Together, these results show the power of our business model and our ability to drive a balance of growth and profitability. Before I move to guidance, I want to give a brief update on the macro trends we're seeing in our business. The industries highly affected by COVID that we outlined early last year, which represent about 20% of our business, remained resilient in Q1. We closed several seven-figure deals in these verticals, and renewal rates were ahead of the company average. However, we did continue to see some headwinds in severely impacted industries such as airlines. Regardless of the industry, in an increasingly distributed and hybrid workforce, companies need to create consistent and frictionless experiences that make it easy for employees to get work done. Digital investments are at an all-time high and are expected to continue growing, as companies must reinvest themselves for the new economy. ServiceNow is the strategic authority in digital transformation, and we're committed to helping our customers succeed in that journey. These strong secular tailwinds, paired with the strength and agility of the Now Platform, positions us well for 2021 and beyond. Pipeline generation has remained robust globally even ahead of our Knowledge 2021 event, which is a big driver, particularly for the Americas. It is helping to drive the net new ACV acceleration in our business this year. Enterprises around the world are recognizing the strength of our one architecture model; and its ability to deliver great, scalable experiences with speed and efficiency. Now, let's turn to guidance. For Q2, we expect subscription revenues between $1.29 billion and $1.295 billion, representing 27% to 28% year-over-year growth, including a 300-basis-point FX tailwind. We expect cRPO growth of 30% year over year, including a 250-basis-point FX tailwind. We expect subscription billings between $1.25 billion and $1.255 billion, representing 23% year-over-year growth. Growth includes a net tailwind from FX and duration of 300 basis points. We expect an operating margin of 21.5%, which includes $15 million of sales and marketing spend that shifted out of Q1 and into Q2; and 202 million diluted weighted outstanding shares for the quarter. For the full-year 2021, we're raising our top-line growth guidance on a constant-currency basis. We are increasing the midpoint of our previous subscription revenue expectations by $32 million based on the strong trends we saw in Q1. However, a weaker euro resulted in a $59 million headwind to our growth. Taken together, we expect subscription revenues between $5.455 billion and $5.47 billion, representing 27% to 28% year-over-year growth. This includes a 200-basis-points FX tailwind. Similarly, we're increasing the midpoint of our previous subscription billings expectation by $50 million on a constant-currency basis. However, the weaker euro resulted in a $68 million headwind to our growth. Taken together, we expect subscription billings between $6.19 billion and $6.205 billion, representing 24% to 25% year-over-year growth. This includes a net tailwind from FX and duration of 150 basis points. In terms of quarterly seasonality, we're continuing to see a shift of Q2 and Q3 subscription billings into Q4. We now expect about 21% of our total subscription billings to be in Q3 and 37% to be in Q4. We continue to expect subscription gross margins of 85% and an operating margin of 23.5%. Finally, we expect free cash flow margin of 30% and 202 million diluted weighted outstanding shares for the year. In addition to making work, work better for people, we're also committed to making the world work better as well. This week, we unveiled our first-ever global impact report. At our investor day, I'm excited to be able to share ServiceNow's global impact strategy with you. In conclusion, ServiceNow is leading this "once in a generation" opportunity to make work, work better for people. We are focused, disciplined, and committed to helping our customers succeed. We have the platform businesses need, and we're the workflow standard for enterprise transformation. Customers are using the Now Platform to create new workflows for new value chains to improve experiences across siloed systems and functions to reduce friction in people's daily lives, and it's showing in our financial results. I'm very excited about the future in front of us. ServiceNow's greatest strength is its people, and you all continue to make us ServiceNow strong. Bill and I couldn't be prouder of this team. And with that, I'll open it up to Q&A.	servicenow - subscription revenues of $1,293 million in q1 2021, representing 30% year-over-year growth, 26% adjusted for constant currency.
Joining me are Bill McDermott, our president and chief executive officer; and Gina Mastantuono, our chief financial officer. During today's call, we will review our second quarter 2021 financial results and discuss our financial guidance for the third quarter of 2021 and full-year 2021. The guidance we will provide today is based on our assumptions as to the macroeconomic environment in which we will be operating. Those assumptions are based on the facts we know today. Many of these assumptions relate to matters that are beyond our control and changing rapidly, including, but not limited to, the time frames for and severity of social distancing and other mitigation requirements; the continued impact of COVID-19 on customers' purchasing decisions; and the length of our sales cycle, particularly for customers in certain industries. We'd also like to point out that the company presents non-GAAP measures in addition to and not as a substitute for financial measures calculated in accordance with GAAP. All financial figures we will discuss today are non-GAAP except for revenues; remaining performance obligations, or RPO; and current RPO, or CRPO. A replay of today's call will also be posted on the website. Our team delivered an outstanding quarter, significantly exceeding the high end of our guidance across all metrics. Subscription revenues were up 31%. Subscription billings were up 30%. Operating margin was 25%. And the number of deals greater than $1 million was 51, up 28% year over year. Free cash flow for the first half of the year was up 34% year over year. An incredible performance by our team, an exceptional first half and we have unstoppable momentum. And we reflected this in our strong full-year guidance raise across the board. Gina will review the details with you in a few moments. The global economy is recovering at the fastest pace in 80 years. The enterprise digital transformation market is expected to grow nearly three times faster than GDP in 2021. Business leaders worldwide are facing do-or-die moments. Business models have changed forever. The pandemic has accelerated the digital imperative. We are in a leading position to capitalize on this unprecedented tailwind. We are giving customers the innovative solutions they need to solve the greatest challenges of our time. The world's biggest challenges are ServiceNow's biggest opportunities: from vaccine management, to ESG, to the new world of hybrid work. Whatever the challenge, work flows with ServiceNow. We've created a new market, one that respects the billions and billions of dollars of investment that customers have put into their systems of record. We make those investments work for today's digital business demands. The Now Platform, the platform of platforms, delivers workflow automation with a consumer-grade user experience that inspires our customers, enabling siloed systems across an enterprise to work together, creating more efficient, more productive ways to get work done. ServiceNow is the control tower for digital transformation for every business, in every industry, serving every persona. The power of the Now Platform makes this possible with one data model, one architecture and one platform to workflow a better world. For example, a premium German auto manufacturer faces huge logistical challenges in maintaining on-target production. Every 30 million parts are processed daily and are dispatched to more than 4,000 supplier locations to production centers in Europe and Mexico. To manage the complexity, ServiceNow provides a single connected supply chain technology platform. ServiceNow analyzes 300,000 data points per month, optimizing the performance of each aspect of the value chain. This is just one example of the power of the Now Platform. I'd like to share an overview of our success across ServiceNow's portfolio. Let's begin with our IT workflows. We are the standard for optimizing all IT services and operations. Our core IT workflows remained very strong. ITSM was in 16 of our top 20 deals, with 14 deals over $1 million. ITOM was in 15 of our top 20 deals, with six deals over $1 million. Our AI-powered Service Operations is resonating big time with customers. We saw great wins with leading companies, including Travelers and Walgreens Boots Alliance and more. They're working with ServiceNow to support their digital transformation of their enterprises. And we're honored that Maritime and Port Authority of Singapore is working with ServiceNow to accelerate its digital transformation efforts as it looks to make Singapore a leading global port and international maritime center. MPA will leverage the Now Platform to drive automation and to improve productivity and employee experience. With Employee Workflows, we make work better by driving outstanding employee experiences that enhance productivity for employees anytime, anywhere while also developing company loyalty, which is particularly important in this environment. The Now Platform provides employees the system of action for key events, including onboarding, parental leave, moving and many more moments that matter for people. Employee Workflows were in 13 of our top 20 deals, with six deals over $1 million. Asahi, for example, is focused on expanding growth while reinforcing ESG initiatives that support sustainable value creation. They chose the Now Platform to improve the employee experience by providing a single point of contact for employees to improve productivity. They wanted service catalogs so they could standardize HR processes, and they wanted integrations to connect all their siloed workflows. With Customer Workflows, we're creating a new service paradigm by delivering connected experiences that redefine customer operations for greater speed, agility, transparency and convenience, all while working with existing systems. Customer Workflows were in 10 of our top 20 deals, with four deals over $1 million. We now have over 2,000 customers running customer service management. Deutsche Telekom is leveraging ServiceNow's telecommunication solution to streamline order management to become the leading B2B telco provider. The Now Platform will be at the heart of the order management process, enabling a 360-degree view of orders, inventory and infrastructure, creating a seamless, connected experience for DT's employees and customers. With Creator Workflows, we're accelerating software development across the entire enterprise by giving everyone the low-code tools to quickly create applications and beautiful experiences. IDC predicts that more than 500 million apps will be developed by 2023. This is equivalent to the total number of apps that were developed in the past 40 years. For example, Airbus built an innovative tracking application in less than three months using ServiceNow's low-code app engine. Now Airbus employees can scan barcodes of any piece of factory equipment to see the relevant information they need in real time. Manufacturing transportation incidents have dropped 20%. In Q2, Creator Workflows were in 18 of our top 20 deals. Nokia picked ServiceNow's Creator Workflows to develop custom apps in significantly less time at a fraction of the cost of alternative platforms. These examples show how the combined capabilities of the workflows on the Now Platform are better together. They deliver even more value than the sum of their parts. Our introduction of the Now Buying Program has helped customers realize those synergies more quickly by simplifying the buying process, providing greater usage flexibility, all while improving business impact. Continuing to build a strong client and alliance ecosystem, we established an enterprise agreement through the Now Buying Program with Deloitte who will take advantage of our full product suite to facilitate great experiences for their employees and clients while enhancing efficiencies and compliance management for the business. Also in our partner ecosystem, we recently announced our integration with Microsoft Windows 365. This will enable users to easily access cloud PCs directly through Microsoft Teams regardless of the employees' location in the hybrid work environment. In closing, I am incredibly proud of our team's passion for solving the world's greatest challenges. Our engineering team is second to none. Our go-to-market organization is the best in the business, and our purpose to make work better for people is resonating. It's been an honor to help turn vaccines into vaccinations for millions and millions of people. It's a privilege to help the world reopen and safely return to the workplace. We are engaging leaders on how we can solve society's biggest problems, improve the lives of people and help deliver better services to citizens everywhere. We are better than we were yesterday, not as good as we will be tomorrow. This is a special company with unbridled energy and unprecedented opportunity. We are well on our way to becoming the defining enterprise software company in the 21st century. Gina, over to you. Q2 was a tremendous quarter with strong leads across our top line and profitability guidance metrics. The team demonstrated exceptional execution, and we saw strong demand across all regions and workflows. Q2 subscription revenues were $1.33 billion, $35 million above the high end of our guidance range and growing 31% year over year, inclusive of a 450-basis-point tailwind from FX. Remaining performance obligations, or RPO, ended the quarter at approximately $9.5 billion, representing 35% year-over-year growth. Current RPO was approximately $4.7 billion, representing 34% year-over-year growth and a four-point beat versus our guidance. Currency was a 300 basis point tailwind year over year. Q2 subscription billings were $1.328 billion, representing 30% year-over-year growth and a $73 million beat versus the high end of our guidance. FX and duration were a 500-basis-points tailwind year over year. We saw growth across all our industry categories. Financial services and manufacturing were particularly strong across the globe driven by investments in business continuity. Industries impacted by COVID, including retail and hospitality, also showed signs of recovery with strong net new ACV growth in the quarter. The Now Platform remains a mission-critical part of our customers' operations, reflected by our strong 97% renewal rate. The stickiness of our customer base has served as a solid foundation for us to build upon with our land-and-expand growth strategy. This is evident with the continued growth in our average customer spend this quarter. As of the end of Q2, we had 1,201 customers paying us over $1 million in ACV, up 25% year over year. This included 62 customers paying us over $10 million in ACV. Overall, we closed 51 deals greater than $1 million net new ACV in the quarter. We're also seeing robust net new ACV growth from new customers, with the average deal size growing over 50% year over year. Going to market with a solution sales approach to deliver the full capabilities of the portfolio instead of selling point products continues to drive more multi-product deals. In Q2, 18 of our top 20 deals included three or more products. Operating margin was 25%, three points above our guidance, driven by the strong revenue beat, cost savings and some marketing spend that was pushed into the second half of the year. Our free cash flow margin was 19%. Together, these results show the power of our business model and our ability to drive a balance of growth and profitability. To navigate the post-COVID economy and the new era of work, businesses are investing in digital transformation to unlock new levels of innovation, agility and productivity. As you heard from Bill, the macro trends driving digital transformation are a significant opportunity for ServiceNow. Our Knowledge 2021 event in May included two amazing weeks of keynotes, panels and discussions that brought together experts and thought leaders of every industry across 141 countries to focus on these topics. This year, we released new solutions, including our manufacturing and healthcare industry products, and showcased the power and endless possibilities achievable through ServiceNow workflows. The response from customers has been fantastic. The pipeline generated per attending account was up 45% year over year. Together, the macro tailwinds and interest generated from Knowledge has accelerated pipeline growth for the second half of 2021. Furthermore, our coverage ratio today continues to remain ahead of a year ago. As a result, we are raising guidance for the full year. We are raising our subscription revenue outlook by $73 million at the midpoint to a range of $5.53 billion to $5.54 billion, representing 29% year-over-year growth, including 250 basis points of FX tailwind. We are raising our subscription billings outlook by $123 million at the midpoint to a range of $6.315 billion to $6.325 billion, representing 27% year-over-year growth. Excluding the early customer payments in 2020, our normalized subscription billings growth outlook for the year would be 31% at the midpoint. Growth includes the net tailwinds in FX and duration of 200 basis points. We continue to expect 2021 subscription gross margin at 85%, and we are raising our full-year 2021 operating margin from 23.5% to 24.5%. This reflects the increase in our top line growth, more efficient marketing spend and savings from some continued lower T&E expenses related to COVID. We are raising our full-year 2021 free cash flow margin by one point from 30% to 31%. I'd note that from a seasonality perspective, we're expecting 40% of our total free cash flow in Q4. And lastly, we expect diluted weighted average outstanding shares of 202 million. For Q3, we expect subscription revenues between $1.4 billion and $1.405 billion, representing 28% to 29% year-over-year growth, including the 150-basis-point FX tailwind. We expect CRPO growth of 30% year over year, including 150-basis-point FX tailwind. We expect subscription billings between $1.32 billion and $1.325 billion, representing 22% to 23% year-over-year growth. Growth includes a net tailwind from FX and duration of 50 basis points. As a reminder, looking at billings from a four-quarter rolling basis will help normalize the quarterly seasonality and changes in customer invoicing terms. On that basis, our Q3 subscription billings guidance would represent 31% year-over-year growth. We expect an operating margin of 23%. There's 202 million diluted weighted outstanding shares for the quarter. In conclusion, digital transformation is accelerating across the globe, and ServiceNow is at the epicenter of that opportunity. ServiceNow is the digital fabric that stitches together existing systems of record, collapsing silos to connect fragmented processes. We are the platform company for digital business, and we are well on our way to becoming a $15 billion revenue company. And with that, I'll open it up for Q&A.	subscription revenues of $1,330 million in q2 2021, representing 31% year-over-year growth, 27% adjusted for constant currency.
Joining me are Bill McDermott, our president and chief executive officer; and Gina Mastantuono, our chief financial officer. During today's call, we will review our fourth-quarter 2020 financial results and discuss our financial guidance for the first quarter of 2021 and full-year 2021. The guidance we will provide today is based on our assumptions as for the macroeconomic environment in which we will be operating. Those assumptions are based on the facts we know today. Many of these assumptions relate to matters that are beyond our control and changing rapidly including, but not limited to, the time frames for and severity of social distancing and other mitigation requirements, the continued impact of COVID-19 on customers' purchasing decisions, and the length of our sales cycle particularly for customers in certain industries. We'd also like to point out that the company presents non-GAAP measures in addition to, and not as a substitute, for financial measures calculated in accordance with GAAP. All financial figures we will discuss today are non-GAAP except for revenues, net income; remaining performance obligations or RPO, and current RPO or CRPO. A replay of today's call will also be posted on the website. Let me begin by extending my hope that you and your loved ones are healthy and safe. Needless to say, we delivered a market-leading 2020. We significantly beat expectations across the board, bringing great momentum into the new year. I could not be prouder of our team's execution. We delivered over 30% organic top line growth, 25% operating margins and $1.4 billion in free cash flow, just an outstanding performance and a testament to our ServiceNow strong culture. Throughout the year, we led with courage and conviction. We took care of our team, our customers and our communities. And most importantly, we led with ServiceNow's purpose to make the world of work better for people. We strive to see the world for our customer's eyes with empathy to address their needs. The workflow revolution is happening, and the pandemic is accelerating digital transformation. Every business needs speed, agility and resilience, and every C-suite leader wants to deliver great experiences for their employees and their customers. Businesses are changing the way they operate. They need to deliver fierce customer loyalty and deep employee engagement to win. It's all about people, empathy at mass scale as the business imperative of the 21st century. The secular tailwinds of digital transformation, cloud computing and business model innovation have all intersected at a perfect moment in time. A paradigm shift is happening worldwide. In 2020, for the first time in history, we saw digital transformation spending accelerate despite GDP declining globally. Digital investments are at an all-time high and are expected to continue growing. According to IDC, worldwide digital transformation investments will total more than $7.4 trillion by 2044. the digital economy is firing on all cylinders. ServiceNow is the platform company for digital business. The Now Platform, what I call the platform of platforms, offers the speed, flexibility and innovation companies need. Our simple low-code app development enables fast workflows to solve any business challenge, delivering consumer-grade digital experiences. And Now Platform enables easier and faster implementation, delivering unbeatable time to value and fast ROI. That's the beauty of the Now Platform: One platform, One data model and One architecture. We seamlessly integrated all of this and through our system. And that system integrates seamlessly with all systems of record that matter most to our customers. We deliver workflows through their preferred collaboration platform as well. We give our customers the freedom of choice to use their preferred tools and the unique ability to build apps at record speed. Hungry and nimble is a core ServiceNow value. It's proven now or never. We are grateful to be in such a strong position at such a pivotal moment, and we are hungry. We are eager to use our strengths to help our customers succeed, help make our community stronger and help create great experiences for people. We are seeing an extraordinary expansion of use cases in our business. Health care organizations are using ServiceNow to improve operations and service delivery, which means better outcomes for people. St. Jude Children's Hospital has been on a journey to accelerate progress toward finding cures and saving children. In 2020, COVID-19 created a significant headwind to that mission. With much of the hospital staff required to work from home, the need to digitize manual workflows became more important than ever. The hospital leveraged ServiceNow's low-code app engine and innovation to integrate disparate systems and build custom end-to-end workflows, ultimately allowing them to ensure seamless delivery of clinical services. Jude's Children's Hospital and everybody was moving toward their goal. We're also proud to be supporting NHS Scotland in their efforts to vaccinate 5.5 million citizens. NHS Scotland is using the Now Platform and our customer workflow to deploy a customized solution designed to meet their specific needs. Deployment took only six weeks, showing the agility of the Now Platform. ServiceNow is enabling a comprehensive solution for the schedule and reporting of vaccination for Scotland's most vulnerable citizens. Within 12 hours of rollout, NHS Scotland booked over 220,000 appointments. So as you can see, it's not just about business workflows. It's about real people, enterprise digital transformation with how every organization in every sector in every geo are adapting, growing, creating new business models and empowering their people to be productive in any environment and in condition. That's modern, agile, resilient business at work. And it's being powered by the Now Platform. Our unique platform and innovative product suite, our strong brand, high customer satisfaction and compelling value proposition are the differentiating factors and competitive advantages fueling our performance. Our Q4 results are testament. We dreamed big and delivered. We grew billings by more than 40% year over year organically. We delivered 89 deals greater than $1 million and now have close to 1,100 customers paying us over $1 million annually. Department of Veteran Affairs. Deal sizes overall keep getting larger. Our renewal rate remained best in class at 99%. Here are some key customer wins from Q4. We signed a multiyear and multi-product strategic deal with AT&T. They are transforming by focusing on broadband connectivity, 5G and software-based entertainment while relentlessly focusing on digital, consumer preferences and experiences. We're delighted to work with AT&T Communications in its transformation. ServiceNow's AI-powered platform and service operations product lines will provide AT&T accurate and real-time operational visibility into every layer of the network fabric and help deliver the best-in-class customer experience, better experiences for people enabled by ServiceNow. One of the U.K.'s big four banks is using multiple ServiceNow products, including our purpose-built new financial services operations product to help transform the way it operates and to deliver better customer experiences. The bank has seen a 70% efficiency and improvement of payment processing by integrating the Now Platform into its core banking systems. With ServiceNow, this bank implemented new automated processes in 60 workdays. In their words, employees moved from cut and paste, swivel chair manual processes to efficient, automated workflows. In one case, employees went from managing 10 requests an hour to 1,000 requests in three minutes on the Now Platform, better experiences for people. PayPal recently expanded their relationship with ServiceNow as a key partner for elements of their digital transformation. And we're proud to have expanded our relationship with Nike, who is using the Now Platform to create better customer and employee experiences. and USAA in financial services. And the list goes on and on. I hear so many ServiceNow success stories every day. Companies are onboarding thousands of people in a work from home environment, making them feel productive and part of the team from day one. Customers are going live on the new platform in days, not months, making a difference for people now, not next month or next year. More productive employees, happier customers, more efficient operations, there is not a CEO on the planet who doesn't want that. The Now Platform delivers. These examples show how technology is no longer supporting the business technology in the business. Our IT leadership in workflows gives us a uniquely strong foundation to be the leading platform for digital transformation across the enterprise. In Q4, IT workflow products remained strong. ITSM delivered 17 deals over $1 million. Our AI and machine learning capabilities embedded within our Pro SKU continue to resonate with our customers. ITSM Pro penetration is now over 20%. And the AI/ML capabilities of our Pro SKUs are automating processes to allow people to focus on the work that really matters. We saw a three-time increase in usage of our virtual agent technology in 2020. And our Element AI acquisition underscores our commitment to being the leader in AI-enabled workflows. Element AI's deep bench of world-class scientists and practitioners will accelerate our AI innovation on the Now Platform, delivering not only better capabilities for it, but for employee and customer experiences as well. ITOM was included in 16 of the top 20 deals and had 15 deals over $1 million. Risk had a very strong Q4, booking more wins than all of the prior year combined. Our ability to manage risk is really resonating with customers. ServiceNow is no longer viewed as back-end IT-oriented solution. We're now seen as a strategic partner that impacts the entire business. Customer workflows is our next $1 billion-plus market opportunity for ServiceNow, and Q4 showed strong momentum. Customer workflows were included in 11 of our top 20 deals, driving such wins as AT&T. Ten of our customer workflow deals were greater than $1 million. In this pandemic, the employee experience is more important than ever, and our employee workflows is seeing strong demand. In Q4, 11 of our top 20 deals included employee workflows. The pandemic is creating the greatest workflow challenge of our time, and ServiceNow is responding with agility speed and continuous innovation. We began last spring, as you'll remember, with our emergency response apps helping the state of Washington and many others respond to COVID. We fast followed that release with our Safe Workplace suite of apps that has demonstrated the power of the Now Platform and great employee workflows that we can deliver very quickly. In fact, more than 900 organizations now have downloaded the suite already. This week, we just launched the first in a suite of planned vaccine administration applications to deliver out-of-the-box functionality for our customers. Our comprehensive approach enables workflow solutions to the complex challenges of vaccine distribution, administration and monitoring. As we have done with Safe Workplace, we will be delivering continuous innovation with our vaccine administration management applications. I'm excited to announce that the state of North Carolina Department of Health and Human Services is already leveraging the ServiceNow platform to power its COVID vaccine management system to help quickly and efficiently vaccinate 10 million North Carolinians. President Biden has declared the distribution of COVID vaccines a top priority for his administration. This is one of the great workflow challenges of our time. As we are doing right now in Scotland, North Carolina and many other places, ServiceNow is ready to ensure vaccine distribution, administration and monitoring that it's simple, it's fast and it's effective. It will be so at the federal, state and local level. In summary, we had an outstanding close to 2020, and we are not slowing down. We are changing the world one workflow at a time, and our vision is really resonating. C-level executives realize that behind every great experience is a great workflow. Our company is hitting on all cylinders. In 2020, we grew our global workflows by 26%, hiring 3,000 people in 25 countries, with most hired and onboarded digitally. We are hiring incredible talent, including some of the greatest minds in the AI industry. Our culture is incredibly strong. Our employee engagement is at historic highs. So too is our employee retention. Our brand is strong. C-suite awareness increased in double digits. Our innovation pipeline is robust. We delivered 70% more features and innovations on the platform in 2020. Our partner ecosystem is expanding. IBM, Microsoft, Accenture, Deloitte, EY, KPMG and all the great partners in India, and many others have joined the workflow revolution with us. Together, we're bringing the innovation speed of a start up with the scale and reach of a rapidly growing $5 billion-plus pure-play SaaS company. And our RPO is nearly double that at $9 billion. We're the only born in the cloud software company to have reached this size with our large-scale M&A. And we have a clear path to achieve our $10 billion revenue target. We are also deeply committed to making the World of work work better for people to helping our customers succeed. We are deeply committed to making the world work better, too. Gina will share more about our focus on elevating our global impact. I'm incredibly proud of our just announced $100 million investment in an impact fund benefiting underserved communities. And we're deeply committed to being a leader in building a diverse, inclusive workforce in which everyone feels that they belong. Because diverse teams with an indomitable will to win create great companies. ServiceNow is such a company, and we are well on our way to becoming the defining enterprise software company of the 21st century. That's our dream, and we will pursue it tirelessly with courage, passion and conviction. Over to you, Gina. Happy New Year, everyone. I want to start off by echoing Bill's praise for all the employees of ServiceNow. It has been a year of unprecedented challenges, but the team has remained focused on executing and meeting the needs of our customers. I couldn't be more impressed with our resilience, which is a testament to our great culture here at ServiceNow. We exceeded the high end of our subscription revenues and subscription billings guidance, which carried through to strong free cash flow generation. Q4 subscription revenues were $1.184 billion, representing 32% year-over-year growth, inclusive of a three-point tailwind from FX. Q4 subscription billings were very strong at $1.828 billion, representing 41% year-over-year growth and $183 million beat versus the high end of our guidance. Adjusted growth was 38% year over year. The outperformance was driven by tremendous execution from our sales team, which resulted in significant net new ACV upside for the quarter as well as $80 million of billings pulled forward from 2021 due to early customer payments. We believe the high levels of early payments were onetime in nature as a result of customers having excess cash at the end of the year, given the incremental cost savings enterprises saw from COVID. Excluding these early payments, normalized Q4 billings would have grown 35% year over year, still well ahead of our guidance. Remaining performance obligations, or RPO, ended the quarter at approximately $8.9 billion, representing 35% year-over-year growth. And current RPO was approximately $4.4 billion, representing 33% year-over-year growth. FX was about a three-point tailwind. The traction we are seeing in our top line results reflect our focus on meeting the needs of our customers and their employees. As Bill noted, the workflow revolution is under way and is centered around the best experiences. And that's the Now Platform's super power, the ability to deliver workflows that create those great experiences for people. The Now Platform is playing a critical role in accelerating digital transformation. We're treating our customers as partners, listening and learning about their challenges so we can help solve them. We aren't selling point products. We're providing them with comprehensive solutions with measurable results and quick time to value. Better together, that's the power of our portfolio. It's this attention to our customers' needs that's driving our best-in-class renewal rate of 99%, demonstrating the stickiness of our business as the Now Platform remains a mission-critical part of our customers' operations. Our sales teams continued to win bigger deals in Q4, including our largest deal ever, which is three times the size of our previous largest deal. We closed 89 deals greater than $1 million in ACV in the quarter, with average deal sizes up 18% year over year. In 2020, we added nearly 700 net new customers, ending the year with almost 6,900 enterprises. The number of customers paying us $5 million or more in ACV grew over 40% in fiscal 2020. Customers are realizing the strategic value of combining ServiceNow IT workflows with everything from HR, CSM and our App Engine to deliver greater value across the enterprise. Our ability to land new logos and expand our existing relationships amid a pandemic further validate the strength of our platform and the value we're delivering to enterprise C-suite. Q4 operating margin was 22%, a 100-basis-point beat versus our guidance, driven by our strong top line outperformance. Year over year, our Q4 operating margin was consistent with last year as lower T&E expenses were offset by planned incremental R&D investments and marketing spend on pipeline generation. Our free cash flow margin was 45%, up 900 basis points year over year, driven by lower T&E spend and strong collection. For full year 2020, operating margin was 25%, up 300 basis points year over year. And free cash flow was 32%, up 400 basis points year over year. Together, these results show the power of our business model and our ability to drive a balance of growth and profitability. Before I move to guidance, I want to give a brief update on the macro trends we're seeing in the business. The highly affected industries we outlined early last year, which represented about 20% of our business, continue to see macro headwinds but remained resilient. Three of our top 20 deals in the quarter were from highly impacted industries, including retail, automotive and energy. We do expect headwinds in some severely impacted industries to persist in 2021. However, retention of existing customers remained very strong in Q4. Overall, we're entering 2021 with strong secular tailwinds created by a surge in demand for digital transformation. Our pipeline continues to look healthy, and our brand continues to resonate with enterprise leaders. ServiceNow is exceptionally well positioned to seize this opportunity. We have the unique platform and innovative product suite businesses need, the workflow standard for enterprise transformation. For transparency and clarity, I'd like to call out a few items. First, as I noted earlier, we saw $80 million in early payments from customers in Q4, which was an approximately 200-basis-point tailwind to full year subscription billings growth in 2020. These result in a more significant headwind of about 350 basis points for 2021 billings growth. To be clear, these early payments have no effect on the timing of revenue. We've also previously talked about how early renewals and success with very large customers were impacting billing cycles as they can add additional volatility to timing and duration. This makes billings a less reliable leading indicator of top line growth. Given this noise and to provide investors with even greater transparency, we're introducing quarterly CRPO guidance. We believe CRPO will provide better visibility and is a more consistent indicator of business performance, normalizing for timing and duration noise. We will continue to provide billings guidance throughout 2021 as a transition period. Second, the need to digitally transform has been accelerated by the current macro environment, creating a very large opportunity for ServiceNow. With the savings we are recognizing from our more efficient operating environment, we're continuing to invest in R&D and quota-bearing resources to drive innovation and pipeline to fuel our tremendous organic growth engine, ensuring that we maintain our market leadership and are well positioned to take advantage of the digital acceleration. These investments include those we were making in AI, such as the acquisition of Element AI. Similar to previous investments and successful growth initiatives like our Pro Skus or geographic expansion, we will be disciplined about our spend. Beyond our business investments, we will also be investing in people and communities. We've always been focused on diversity, inclusion and belonging. And as Bill noted, we recently announced our first ever $100 million investment in a racial equity fund to build equitable opportunity for Black communities. This investment is expected to earn a solid return while facilitating sustainable wealth creation through homeownership, entrepreneurship and neighborhood revitalization. Finally, COVID cases have been spiking in recent weeks, and some regions have reentered lockdown protocols. While we haven't seen any significant impact on our business, we will continue to monitor and be transparent in our disclosures throughout 2021. With that in mind, for Q1, we expect subscription revenues between $1.275 billion and $1.28 billion, representing 28% to 29% year-over-year growth, including a four-point FX tailwind. We expect subscription billings between $1.31 billion and $1.315 billion, representing 24% to 25% year-over-year growth. Excluding the early payments from customers in 2020, our Q1 normalized subscription billings growth outlook would be 32% year over year. Growth includes a net tailwind from FX and duration of four points. We expect CRPO growth of 32% year over year, including a five-point FX tailwind. We expect an operating margin of 25% and 202 million diluted weighted outstanding shares for the quarter. For the full-year 2021, we expect subscription revenues between $5.48 billion and $5.5 billion, representing 28% year-over-year growth, including a three-point FX tailwind. We expect subscription billings between $6.205 billion and $6.225 billion, representing 25% year-over-year growth. Excluding the early customer payments in 2020, our 2021 normalized subscription billings growth outlook would be 28% to 29% year-over-year growth. This growth reflects an acceleration in net new ACV in 2021, and it also includes a net tailwind from FX and duration of two points. We expect subscription gross margin of 85%, reflecting some federal and public sector customers moving to our newly launched Azure offering as well as increased support for customers impacted by new and evolving data residency requirements. We expect an operating margin of 23.5%, representing 150-basis-points expansion off of our pre-COVID 2020 run rate. I would note that this is also an incremental 50 basis points more than the 100 basis points of expansion we target each year. Finally, we expect free cash flow margin of 30% and 202 million diluted weighted outstanding shares for the year. In summary, in 2020 we delivered a combination of both strong top line growth and profitability, an incredible accomplishment in a COVID environment. Our outstanding results continue to demonstrate our strong product portfolio, our focus on building deep customer relationships and our commitment to enabling their digital transformation. We're delivering great experiences that drive powerful employee engagement, fierce customer loyalty and significant productivity gains. We are the platform company for digital business. I'm extremely proud of our team's performance and our unrelenting execution in a turbulent year. We're well on our way to becoming a $10 billion revenue company on the strength of incredible organic innovation. I'm excited about the opportunities ahead of us in 2021.	subscription revenues of $1,184 million in q4 2020, representing 32% year-over-year growth.
These statements involve a number of risks and uncertainties, including impacts from the COVID-19 pandemic and related governmental responses and their impact on the general economy, as well as other risks and uncertainties that are described in our filings with the SEC, including our most recent Form 10-K. Also, during the call, we will reference a number of non-GAAP financial measures. I also want to remind you that as a result of the sale of Fairbanks Morse in January 2020, the former Power Systems segment is accounted for as discontinued operations in our financial statements for the prior-year period. As previously announced, EnPro will host a virtual investor day on Thursday, May 27. Members of EnPro's executive management team, including Marvin and me, will provide an overview and update of the company's long-term vision, growth strategy, business segments, as well as operational and financial objectives. Registration information for this virtual event is available on the company's investor relations website. I really appreciate you joining us today and hope you and your families are safe and healthy. As we begin to turn the corner on the pandemic in the United States due to the vaccine rollout, we're mindful that everyone is not yet vaccinated, and the recovery is uneven throughout the rest of the world. There are still many places in the world, like India, where the virus is spreading rapidly, so we must remain vigilant regarding maintaining safety protocols, operating processes and new ways of working that protects our employees and fellow citizens. I am extremely proud of our team members who continue to exemplify EnPro's values of safety, excellence and respect for all people while delivering quality products and services to our customers. Now moving on to our first-quarter highlights. Overall, we experienced a faster than expected recovery in most of our end markets. We delivered extraordinary results, driven by improved demand, the benefits of increased exposure to higher-margin and faster growth businesses, which resulted from portfolio actions taken last year and cost savings initiatives driven by our Capability Center. Despite several countries returning to lockdown, February's severe weather in the southwestern U.S. and challenges with global logistics and ocean transport, we were still able to fortify our key materials while holding supply chain disruptions to a minimum. In our response to COVID-19, we enhanced the collaboration between supply chain, manufacturing and our commercial teams. This enhanced collaboration really helped us to respond quickly with price increases to offset higher material costs and increased customer engagement where necessary. We have fundamentally transformed the way we work and the benefits are showing up in our results. Our order trends are extremely strong. As a point of reference, March 2021 was the highest order intake month in the past three years. We continue to be encouraged by what we're seeing and hearing from our customers, particularly in the semiconductor, food and pharma, petrochemical, automotive and heavy-duty truck markets. In the first quarter, sales were down modestly on a year-over-year basis as a result of the 2020 divestitures. Despite the divestitures, orders were up over 10%. On an organic basis, our sales were up 5.5%. Our first-quarter adjusted EBITDA of $52 million increased 28% year over year, and adjusted EBITDA margin expanded 420 basis points to 18.6%. The strong performance was the result of actions taken to reshape our portfolio, improving end market trends and cost mitigation initiatives. All three business segments contributed to our adjusted EBITDA growth. A key contributor to our success is our clear and consistent strategy. We're focused on four areas. First, focusing on niche high-margin material science related businesses with strong cash flow. Second, investing in faster growth markets, including technology, while maintaining a strong aftermarket exposure. Third, leveraging the EnPro Capability Center to increase margins and cash flow return on investment. And fourth, maximizing long-term shareholder returns through a commitment to sustainability and disciplined capital allocation. While there were no transactions announced this quarter, the portfolio optimization work continues and the corporate development team is hard at work vetting a robust pipeline of opportunities that fit our portfolio strategy. As you know, we executed a number of successful portfolio-shaping actions over the last year and a half that have moved us into a higher growth and less cyclical business model. In February, in connection with the portfolio reshaping actions, we announced our resegmentation into three reporting segments. Sealing technologies, Advanced Surface Technologies and Engineered Materials. The resegmentation better aligns our technical and operational expertise, enables improvements in measuring and managing performance, facilitates improved decision-making and enhances transparency for investors. All three segments performed exceptionally well this quarter. I would like to take a moment to highlight our new segment, Advanced Surface Technologies, given the level of our recent investments there. The Advanced Surface Technologies segment, which includes Alluxa, LeanTeq and the Technetics Semiconductor businesses, posted 49% revenue growth, 137% adjusted EBITDA growth, and adjusted EBITDA margin expansion of over 1,000 basis points to 31.6%. These results were driven by a full quarter's contribution of Alluxa, accelerating revenue growth at LeanTeq and solid performance of Technetics Semiconductor, so a very, very strong quarter. Our cleaning, coatings and refurbishment businesses, consisting of LeanTeq and the Technetics Semiconductor business, have grown significantly year-over-year based on increasing demand for sub 10-nanometer semiconductor wafers. We remain very optimistic about the LeanTeq business and despite the impact of COVID-19, its sales and earnings remain on track with our expectations at the time of the transaction. We continue to add capacity in this business to meet increased demand. The build-out of the new LeanTeq facility in Taiwan for expansion of five and three-nanometer applications is expected to be qualified by the third quarter of the year and will support continued growth. We are also making great progress with customer acquisitions and qualifications at the U.S. site in Milpitas, California. Alluxa had a great start to the year with year-over-year sales growth across all of its markets during the first quarter. We anticipate continued strong demand for the remainder of the year. Our integration process is going very smoothly by leveraging our collective thin film technology IP and the EnPro Capability Center while being careful not to disrupt Alluxa's day-to-day business. We have made significant progress over the last two years, improving our financial results, reshaping our portfolio and positioning the company for long-term profitable growth. With the successful acquisitions of LeanTeq and The Aseptic Group and more recently, the acquisition of Alluxa, we have an excellent foundation to drive organic growth. We continue to maintain a disciplined approach to capital allocation and relentless focus on cash generation. We have a healthy balance sheet and an untapped revolver. Therefore, we are well positioned with the financial flexibility to make strategic investments in our existing businesses, as well as execute additional acquisitions that meet our M&A criteria. Before handing the call over to Milt for a more detailed overview of our financial results, I will share some additional color on EnPro's sustainability initiatives. We will be releasing our 2021 sustainability report in a few weeks, and I'm excited to give you a preview of the key highlights today. In the area of employee development and safety, we've created an environment where all employees can flourish in a culture where financial performance and human development are equal and inextricably linked. We strive to promote a safe environment, both physically and mentally. We're the only public company recognized by EHS today as America's safest company three separate times, and 2020 was the safest year in the history of our company as measured by medical treatment case rates. In the area of diversity and inclusion, we are deliberately diverse, which underscores our belief that a diverse workforce is critical to our success. The percentage of female promotions in the U.S. has increased 10% since January 2019. In the area of supporting our communities, we announced in December our $1 million funding of the EnPro Foundation focused on advancing education, equality, diversity and the preservation of human dignity. Regarding environmental responsibility and sustainability, we're committed to diligently exploring all opportunities to reduce our energy usage and to minimizing greenhouse gas emissions wherever feasible. We've also gone so far as divesting certain carbon-intensive lines of business such as Fairbanks Morse and selectively disengaging with market sectors that are highly carbon intensive. Currently, approximately 7% of our revenue comes from the oil and gas industry, and we anticipate this percentage to decrease over time as our strategic transformation continues. Many of our products, such as gaskets and seals, protect the environment by helping to contain and prevent the release of harmful substances. At EnPro, we're truly committed to sustainability as it is embedded throughout our entire global organization. We are confident that our sustainability initiatives will be a key contributor to our continued success as a company. Now I will hand the call over to Milt for a deeper dive into our financial results for the quarter. As Marvin mentioned, we had a really strong quarter. Positive momentum in the semiconductor, food and pharma, petrochemical, automotive and heavy-duty truck markets, as well as the contribution from the acquisition of Alluxa, mostly offset the reduction in sales due to last year's divestitures. As reported, sales of $279 million for the first quarter decreased 1.2% year over year. Excluding the impact of foreign exchange translation and sales from acquired and divested businesses, organic sales for the quarter grew 5.5% compared to the first quarter of 2020. Sequentially, excluding portfolio reshaping activities, sales were up 7.1%. Gross profit margin of 39.2% increased 550 basis points versus the prior-year period. The increase was driven by the benefit of divesting low margin businesses, the addition of Alluxa, sales growth at LeanTeq, as well as initiatives supported by the EnPro Capability Center, including supply chain and other companywide cost reduction programs. The year-over-year improvement in gross profit margin was achieved despite a $2.4 million amortization of acquisition-related inventory write-up in the first quarter of 2021. Adjusted EBITDA of $52 million increased 28.1% over the prior-year period as a result of organic sales growth, strategic acquisitions and cost reductions taken across the company. Adjusted EBITDA margin of 18.6% increased approximately 420 basis points compared to the first quarter of 2020. Corporate expenses of $11.6 million in the first quarter of 2021 increased by $3.2 million from last year. The increase was driven primarily by higher incentive compensation accruals. Adjusted diluted earnings per share of $1.37 increased 43% compared to the prior-year period. Amortization of acquisition-related intangible assets in the first quarter was $11.3 million compared to $9 million in the prior-year period. We anticipate amortization of acquisition-related intangibles will be between $44 million and $46 million in 2021. As a reminder, our estimated normalized tax rate used in determining adjusted earnings per share is 30%. Moving to the discussion of segment performance, Sealing Technologies, which includes Garlock, STEMCO and the Technetics sealing businesses, reported sales of $146.5 million in the first quarter. The year-over-year decrease of 15.6% was due to portfolio reshaping activities last year. Excluding the impact of foreign exchange translation and sales from divested businesses, sales increased 0.9% versus the prior-year period. During the quarter, we saw strong demand in the food and pharma, petrochemical, power generation, metals and mining, and heavy-duty truck markets, while weakness in aerospace markets continued. As you may recall, the Sealing Technologies segment reported exceptionally strong sales in the first quarter of last year as many distributors secured supply to mitigate pandemic related risks. We are pleased that our business has delivered even better results this year. For the first quarter, adjusted EBITDA increased 1.2% to $33.9 million and adjusted segment EBITDA margin expanded 380 basis points to 23.1%. The margin expansion was driven primarily by the divestitures of low-margin businesses last year, cost reduction initiatives, as well as pricing increases. Excluding the impact of foreign exchange translation and divestitures, adjusted segment EBITDA increased 6.1% compared to the prior-year period. Turning now to Advanced Surface Technologies, which includes Alluxa, LeanTeq and the Technetics Semiconductor businesses, first quarter sales of $54.7 million increased to 49%, driven primarily by strong demand in the semiconductor market and the acquisition of Alluxa. Excluding the impact of foreign exchange translation and the Alluxa acquisition, sales increased 22.6% versus the prior-year period. For the first quarter, adjusted segment EBITDA increased 137% to $17.3 million, and adjusted segment EBITDA margin expanded from 19.9% a year ago to 31.6%, driven primarily by the Alluxa contribution and growth in the LeanTeq business. The contribution from Alluxa was driven by strong sales and operating leverage. Excluding the impact of Alluxa and foreign exchange translation, adjusted segment EBITDA increased 57.5% compared to the prior-year period. In Engineered Materials, which consists of GGB and CPI, first quarter sales of $80.4 million increased 7.1% compared to the prior year, driven by stronger sales in general industrial, automotive and petrochemical markets, partially offset by weakness in the oil and gas and aerospace markets. Excluding the impact of foreign exchange translation and the divestiture of GGB's Bushing Block business, sales for the quarter increased 5.3%. For the first quarter compared to previous year, adjusted segment EBITDA increased 51.8% to $12.6 million, and adjusted segment EBITDA margin expanded 460 basis points to 15.7%. These increases were driven primarily by strong sales volume recovery, manufacturing cost reductions, and savings from headcount reductions and travel expenses. Excluding the impact of foreign exchange translation, adjusted EBITDA increased 39.3% compared to the prior-year period. Now let's turn to the balance sheet and cash flow. We ended the quarter with cash of $232 million and with full availability on our $400 million revolver, less $11 million in outstanding letters of credit. At the end of March, our net debt to adjusted EBITDA ratio was approximately 1.4 times, a sequential decline from the 1.6 times reported at the end of the fourth quarter. Our balance sheet remains in a healthy position, and we have ample financial flexibility to execute against our strategic growth initiatives. Free cash flow for the quarter was $14.1 million, up from negative $4.9 million in the prior year. This was driven primarily by higher operating profits and improvements in working capital management. During the first quarter, we paid a $0.27 per share quarterly dividend totaling $5.7 million, a 4% increase versus the prior year. Regarding capital allocation, we continue to prioritize investments in organic and inorganic growth. Moving now to 2021 guidance, taking into consideration all the factors that we know at this moment, including the ongoing global economic recovery from the COVID-19 pandemic which is stronger-than-anticipated a quarter ago, we are increasing 2021 adjusted EBITDA to be in the range of 190 million to $200 million, up from our previous guidance of $178 million to $188 million. The updated adjusted EBITDA range is based on sales growth of 7 to 12% over 2020 pro forma sales of $983 million, up from previous guidance range of 6 to 10% growth. We expect adjusted diluted earnings per share from continuing operations to be in the range of $4.74 to $5.08, up from the range of $4.32 to $4.66 provided last quarter. Our guidance assumes depreciation and amortization expense, excluding amortization of acquisition-related intangible assets, in the range of $33 million and $35 million and net interest expense of $15 million to $17 million, both unchanged from prior guidance. Given the stronger-than-expected first-quarter results and order patterns to date, we now anticipate a moderately stronger first half of the year relative to the second half. This is in contrast to a quarter ago when we expected a gradual strengthening as the year progressed. This quarter demonstrates the benefits of our clear and consistent strategy, the Capability Center and our portfolio reshaping initiatives. We expect this momentum to continue as we focus on driving commercial excellence and operational excellence throughout the company. I'm confident that our profitable growth strategy, experienced leadership team, increasingly diverse and dedicated workforce and strong financial position will lead to continued growth and long-term shareholder value. In closing, I'm extremely proud of our progress transforming EnPro into a leading industrial technology company, using material science to push boundaries in semiconductor, life sciences and other technology-enabled sectors.	enpro increases full-year guidance. q1 adjusted earnings per share $1.37. sees fy 2021 adjusted earnings per share $4.74 to $5.08 from continuing operations.
These statements involve a number of risks and uncertainties, including the impacts from the COVID-19 pandemic and related governmental responses and their impact on the general economy as well as other risks and uncertainties that are described in our filings with the SEC, including our most recent Form 10-K and Form 10-Q. The impact of any pending or potential labor disputes restructuring costs and costs subsequent to the end of the third quarter. The impact of foreign exchange rate changes subsequent to the end of the third quarter, impacts from further spread of COVID-19 and environmental and litigation charges. With the COVID-19 pandemic remaining top of mind for our colleagues and stakeholders around the world, we hope that you and your families remain safe and healthy. We certainly accomplished a lot this quarter. Our teams remain focused on our commercial and strategic objectives. These are exciting times for our company. In addition to our third quarter results, we are excited to announce today that we reached an agreement to acquire NxEdge, which will significantly expand our solutions offerings in the semiconductor industry. We will cover that news in a few minutes, but first, I'd like to touch briefly on our third quarter highlights. We delivered another strong quarter in Q3 with sales increasing approximately 16% organically and adjusted EBITDA margin expanding 250 basis points. As Milt will describe in greater detail shortly, performance in the Sealing Technologies and Advanced Surface Technology segments were the primary drivers of these results. Heightened collaboration among our supply chain, manufacturing, and commercial teams over the past year has been foundational to our strong year over year earnings growth. We have held supply chain disruptions to a minimum and successfully managed supply shortages, material cost increases, and pricing initiatives. The global supply chain pressures will likely continue for some time, and we will remain vigilant in working with our suppliers and delivering on customer needs. Results for the quarter and year to date also reflect the positive effect of our portfolio reshaping and growth initiatives. During the quarter, we announced additional moves that enhance an overall our overall portfolio of businesses. On September 3, we announced the divestiture of our Polymer Components business, continuing our efforts to optimize the Sealing Technologies segment. Following quarter close, we announced an agreement to sell our Compressor Products International business, marking another meaningful step in our company's evolution, which will significantly reduce our exposure to the oil and gas market. And today, the announcement of the agreement to acquire NxEdge is yet another significant step in our transformational journey. I will hand the call over to Milt for other highlights on the quarter, following which we will come back to today's announced acquisition. As Eric mentioned, we had another strong quarter, positive momentum across most major end markets, as well as the addition of Alluxa contributed to top line results, partially offset by the reduction in sales due to last year's divestitures and weakness in power generation, oil and gas, and automotive markets. As reported, sales of $283.1 million in the third quarter increased 5.5% year over year. As Eric noted, organic sales for the quarter increased about 16% compared to the third quarter of 2020. Gross profit margin of 38.7% increased 350 basis points versus the prior-year period. The increase was driven primarily by strong organic sales growth, increased pricing, the benefit of divesting lower-margin businesses and the addition of Alluxa, partially offset by increased raw material costs. Adjusted EBITDA of $51.5 million increased 22.3% over the prior-year period as a result of operating leverage on organic sales growth. The benefit of reshaping actions completed in 2020, including the addition of Alluxa and pricing initiatives, partially offset by increased raw material costs. Adjusted EBITDA margin of 18.2% expanded approximately 250 basis points compared to the third quarter of 2020. Corporate expenses of $11.6 million in the third quarter were essentially flat from a year ago. Adjusted diluted earnings per share of $1.40 increased 39% compared to the prior-year period. Amortization of acquisition-related intangible assets in the third quarter was $11.2 million compared to $9 million in the prior year, reflecting the addition of Alluxa. As a reminder, our estimated normalized tax rate used in determining adjusted earnings per share is 30%. Moving to the discussion of segment performance. Sealing Technologies sales of $146.9 million decreased 6.9% due to the impact of divestitures in 2020. Excluding the impact of foreign exchange translation and divested businesses, sales increased 15.7%, driven by strong demand in the petrochemical, heavy-duty truck, food and pharma, and general industrial markets, partially offset by tepid aerospace and power generation markets. For the third quarter, adjusted segment EBITDA increased 7.8% to $34.5 million, and adjusted segment EBITDA margin expanded 320 basis points to 23.5%. The margin expansion was driven primarily by operating leverage on volume growth, portfolio reshaping, and select pricing initiatives, partially offset by increased material costs and SG&A expenses. Excluding the impact of favorable foreign exchange translation and divestitures, adjusted segment EBITDA increased 26.5% compared to the prior-year period. Turning now to our Advanced Surface Technology segment. Third quarter sales of $64.3 million increased 44.2%, driven by continued strong demand in the semiconductor market and the addition of Alluxa. Excluding the impact of the foreign exchange translation and the Alluxa acquisition, sales increased 23.6% versus the prior-year period. For the third quarter, adjusted segment EBITDA increased 44.8% to $19.4 million and adjusted segment EBITDA margin of 30.2% was relatively flat compared to a year ago. Excluding the impact of Alluxa and foreign exchange translation, adjusted segment EBITDA increased 8.2%, reflecting transactional foreign exchange headwinds and start-up costs of the new facility in Taiwan to support strong lean tech growth. Just as a reminder, LeanTeq acquired in the fourth quarter of 2019, is a leading provider of highly differentiated cleaning, coating, and related solutions, supporting the most advanced technology nodes within the semiconductor industry. Sequentially, adjusted EBITDA margins improved 380 basis points in the quarter. More broadly across the entire AST segment, we expect sustained organic revenue growth and strong profitability over the long term. In Engineered Materials, third quarter sales of $73.8 million increased 9% compared to the prior year, driven primarily by sales in general industrial markets, partially offset by sales in power generation, oil and gas and automotive markets. Excluding the impact of foreign exchange translation and last year's divestiture of GGB's Bushing Block business, sales for the quarter increased 11%. Third quarter adjusted segment EBITDA increased 11.4% over the prior-year period to $8.8 million and adjusted segment EBITDA margin was relatively flat year over year. The year over year increase in EBITDA was partially the result of operating losses incurred in the prior year related to the divested Bushing Block business. Excluding the impact of foreign exchange translation and the impact of the Bushing Block divestiture, adjusted EBITDA was relatively flat compared to the prior-year period, reflecting material cost headwinds and higher SG&A that offset the benefit of higher volumes and pricing initiatives. Now turning to the balance sheet and cash flow. We ended the quarter with cash of $330 million and full availability of our $400 million revolver, less $12 million in outstanding letters of credit. At the end of September, our net debt to adjusted EBITDA was approximately 0.8 times, a sequential decline from the 1.1 times reported at the end of the second quarter. We'll talk momentarily about the anticipated impact of today's announced acquisitional leverage. Free cash flow for the first nine months of 2021 was $84 million, up from $37 million in the prior year, driven primarily by higher operating profits, offset by working capital investments supporting higher sales. And during the third quarter, we paid a $0.27 per share quarterly dividend. For the first nine months of the year, dividend payments totaled $16.8 million, a 3.7% increase versus the prior year. Before moving to guidance, I'd like to mention a few additional items, including events subsequent to quarter end. First, we increased our environmental reserve for the Passaic River site by $4.5 million in response to estimated remedial costs and ongoing settlement negotiations with the United States EPA, bringing our total reserve for this legacy environmental liabilities of $5.4 million at the end of the third quarter. These negotiations bring us one step closer to resolving this legacy liability. Second, subsequent to quarter end, we received a tax refund from the Internal Revenue Service for $26 million in conjunction with several years of audits proceeding in the 2017 completion of the ACRP process. And finally, as previously noted, we signed an agreement to sell CPI for a price of $195 million with estimated after-tax proceeds of approximately $175 million in conjunction with the sale, which is expected to close by the end of the first quarter of next year. Moving on to Slide 11 and our 2021 guidance. In light of the divestiture of our Polymer Components business, we are adjusting our sales guidance to be in the range of $1.085 to $1.12 billion and our 2021 adjusted EBITDA range to $202 million to $208 million. The only changes to prior guidance are a tightening of the range on the low end and exclusion of earnings from polymer components on the high end of the guidance. That was the business that we sold in September. We expected adjusted -- or we expect adjusted diluted earnings per share from continuing operations to be in the range of $5.35 to $5.55, and up slightly at the midpoint from the range of $5.16 to $5.50 provided last quarter. Our guidance assumes depreciation and amortization expense, excluding amortization of acquisition, acquisition-related intangible assets in the range of $28 million to $30 million and net interest expense of $13 million to $15 million. Now, I'll hand the call back to Eric to discuss the acquisition of NxEdge. NxEdge is an advanced manufacturing, cleaning, coating, and refurbishment business focused on the semiconductor value chain. This is an exciting acquisition of a highly complementary business that we believe will be transformative to our AST segment and deliver compelling strategic and financial benefits for EnPro and the customers we serve. It also marks a significant next step in our ongoing portfolio reshaping strategy. Before getting into more specifics on NxEdge, I'd like to remind everyone of our strategy as outlined during our May Investor Day and in subsequent communications. Since 2018, we have been executing on a transformative strategy to reshape our portfolio. These actions have strengthened profitability and enhanced growth through a focus on high-margin technology-related businesses, which possess stronger and more consistent cash flow, operating in faster growth markets. We are executing the strategy through divestitures of noncore businesses and product lines as well as strategic acquisitions of high growth, high-margin businesses that meet our M&A criteria. You have seen evidence of this strategy in the acquisitions of Aseptic, LeanTeq, and Alluxa and through a number of divestitures completed over the past three years. Based in Boise, Idaho, NxEdge serves the semiconductor supply chain from six main facilities located in Idaho and California. The company is expected to generate sales and EBITDA in 2021 of approximately $190 million and $70 million, respectively. We've long admired NxEdge and its management team and are very familiar with their business. With vertically integrated capabilities across the semiconductor value chain, including a robust aftermarket business, NxEdge will broaden our solutions portfolio. In addition, NxEdge will bring ASP more opportunities to earn process of record qualifications with key customers. NxEdge is highly complementary with EnPro's existing semiconductor business, and upon closing, will become part of our ASP segment. The combined business will have enhanced capabilities across the semiconductor value chain with significantly expanded customer relationships and new high-margin revenue streams. Beyond the compatibility of our businesses, we've been drawn from the start to NxEdge's experienced leadership and their talented employee base. Jackson Chao has been a driving force in building NxEdge into the highly profitable, high-growth company there is today, and we're excited for him to continue leading NxEdge as part of EnPro. We believe NxEdge's culture aligns closely with ours, including a shared focus on values of safety, excellence, and respect, which we believe will support a smooth transition and integration. We're excited by the prospect of combining complementary products, technical capabilities, customer bases and teams, making the combined company stronger and better positioned for long-term profitable growth while offering customers differentiated products and solutions. Turning to Slide 15. As we outlined at our investor day, we have put in place and adhere to our rigorous set of criteria for screening acquisitions, including thoughtful strategic filters and financial criteria. We are focused on businesses with growing addressable markets that benefit from secular growth trends. We look for businesses with recurring revenue streams as it relates to the organizational profile. Talent is critical, and we look for experienced management teams and engaged employees just as we found at Alluxa and LeanTeq. Finally, we look for EBITDA margins and cash flow return on investment greater than 20%. At NxEdge, we found a business that checks all of these boxes. The combination is expected to significantly enhance the scale and breadth of EnPro's offerings across the semiconductor value chain, at a time when the entire industry is being driven by powerful secular trends, some of which I will review on the following slides. From a services standpoint, NxEdge brings to EnPro highly complementary and differentiated capabilities across the semiconductor value chain from an advanced manufacturing through cleaning, coating, refurbishment, replacements, and new components. I want to highlight coatings, in particular, which, together with related proprietary material science is a linchpin of our overall semiconductor strategy. Advanced coatings are increasingly critical to the semiconductor production process, increasing production yields, especially for the advanced nodes. We believe that NxEdge's high-performance proprietary coatings materials will be a key differentiator for EnPro as a supplier in the semiconductor industry. NxEdge has long-term strong relationships with top-tier global IDMs and OEMs that will provide meaningful customer engagement and geographic diversification, while driving higher-margin growth, including an expanded aftermarket mix. As shown on Slide 16, the NxEdge combination with EnPro will expand our geographic footprint. With facilities in Idaho and California, we expect to add significant value to our global IDM customers who are expanding capacity in the United States and developing new domestic supply chains, reducing lead times, and expanding our product and service portfolio in the U.S. is timely. NxEdge's high degree of aftermarket exposure will increase recurring revenue mix, which remains a core component of our strategy. The combination of NxEdge with the existing AST businesses would result in aftermarket recurring revenue increasing from 35% to 44% of 2020 pro forma ASD sales. Moreover, NxEdge is focused on full life cycle management, vertically integrated model, and superior surface coating technology provides revenue visibility over a long-term horizon. We expect this combination to deliver long-term revenue growth, expand capabilities within AST and strengthen customer relationships. Turning to Slide 17. We expect AST will benefit from NxEdge's integrated design, build, and vertical integration strategy, which is a major advantage of reducing lead times and improving quality controlled traceability. With its vertical integration and broad scope of solutions, NxEdge has a unique capability to provide customers with improved supply chain efficiency while providing compelling products, cleaning, coding, and refurbishment solutions all along the semiconductor value chain. Further, AST will benefit from NxEdge's differentiated coating capabilities. NxEdge is a leader in advanced plasma spray coatings, while Technetics, Semi, and Alluxa offer high-density physical vapor definition light coatings. Combining these differentiated capabilities will enable the combined entity to serve a wide range of leading-edge semiconductor applications. Together, NxEdge and EnPro will touch many steps of the part life cycle from the initial design and engineered to recoating and reconditioning. NxEdge is a vertical integration strategy. For next-generation products, we will create a greater installed base for our cleaning, coating, and refurbishment capabilities globally, increasing process of record, stickiness and resulting in growing aftermarket opportunities through the life cycle. As the install base of advanced manufacturing equipment grows, our service annuity escalates. Further, as semiconductor production becomes more advanced, particularly at the sub 14-nanometer nodes, chamber components require more frequent maintenance. Looking at Slides 20 and 21. As most of you know well, consumer trends and increased computing power in the semiconductor industry are creating powerful secular tailwinds, including growth in data management, 5G networks, Internet of Things, and machine learning as well as the expansion of the use of semiconductors from consumer and auto electronics into numerous business sectors. Most semiconductor devices are manufactured on silicon wafers and annual wafer starts are a good indicator for predicting the volume level at which semiconductor fabs are running and the corresponding aftermarket opportunities that are generated to support the fabs. As the chart on Slide 20 shows, for the last two decades, wafer starts have been steadily growing. The demand for refurbished and after market components is directly tied to growth in ongoing capacity utilization and semiconductor fabs, which is driven by the growing demand for integrated circuits. NxEdge's aftermarket business directly correlates to wafer starts and makes us less sensitive to capital equipment cycles. With NxEdge, we will be able to expand AST's participation to other areas of the processing chambers. These in-chamber products go through regular preventative maintenance cycles to ensure the fab yields meet expectations. NxEdge's capabilities provide new components, replacement parts, and refurbishment of warn parts' relative equipment life cycle. Once combined, NxEdge and EnPro will be well positioned in the regions where semiconductor capacity expansions and capital spending is expected to accelerate. Capacity expansions planned in coming years around the world as depicted in Slide 21, show a consistent capital spending environment, which will favor the complementary nature of the combination with NxEdge and EnPro. In addition to adding more products inside the chamber, our combined positioning in the Americas and Taiwan positions us in regions where spending is expected to accelerate. This not only helps our OEM business but drives longer-term recurring revenue opportunities for replacement parts in cleaning, coating, and refurbishment services. Advanced semiconductor manufacturing is returning to the U.S. and domestic fabs and IDMs will create incremental step change revenue opportunities for capital equipment and subsequently drive demand for U.S.-based component manufacturers and cleaning, coating, and refurbishment service providers. TSMC, Intel, and Samsung have all announced major expansions in the U.S.-focused on leading-edge chip nodes sub-14 nanometer. NxEdge's capabilities and domestic locations will position our AST segment to capitalize on ongoing IDM expansion in semiconductor supply chain development domestically. Under the terms of the agreement announced today, EnPro will acquire NxEdge from Tribe Capital for $850 million in cash, subject to limited closing adjustments, including working capital. We expect to fund the purchase with a combination of cash, borrowings from our revolving credit facility and additional term loan debt provided by our bank group. The transaction is expected to close by the end of the year following regulatory approvals. As Eric mentioned, NxEdge expects to generate sales and adjusted EBITDA in 2021 of approximately $190 million and $70 million, respectively. Based on global semiconductor benchmarks, the announced expansion of wafer production in the U.S. and the capabilities of NxEdge, combined with those of our AST business, we anticipate NxEdge's annual revenue growth over the next five years, on average, to be in the high single digit, low double-digit range. At current interest rates, we expect NxEdge to contribute approximately $1.70 in adjusted diluted earnings per share in 2022, which represents approximately 30% above the midpoint of our 2021 guidance range. As Eric noted, NxEdge will continue to be led by current CEO, Jackson Chao, and will become part of our Advanced Service Technologies segment. The addition of NxEdge continues the migration of EnPro's end market exposure toward faster-growing markets, including semiconductor. As you can see on Slide 25, on a pro forma basis, including the impact of the announced NxEdge acquisition and the CPI divestiture, semi sales would represent about one-third of our total sales with noticeable drops since 2018 in heavy-duty trucking and oil and gas. Slide 26 provides multiyear trends for sales, adjusted EBITDA and adjusted EBITDA margin, which reflects the results of our performance and portfolio reshaping. 2019 and 2020 are as reported. 2021 is based on the midpoint of current guidance and 2021 pro forma shows the midpoint of guidance adjusted to reflect NxEdge, CPI, and polymer components as if those transactions occurred at the beginning of the year. Of note, 2021 pro forma adjusted EBITDA margins are 700 basis points above 2019 margins. And with 240 basis points of that improvement attributable to the impact of this year's completed and announced transactions. Looking at the balance sheet. Upon completion of the NxEdge acquisition, we anticipate net leverage of approximately 3.7 times adjusted EBITDA. Proceeds from the sale of CPI will lower our leverage ratio to about 3.3 times. Over time, through operating cash flow and possible further portfolio optimization, we expect to bring our leverage ratio back to a target of around two times. Now, I'll pass the call back to Eric for closing comments. The sustained benefits of our ongoing portfolio reshaping actions, and our intention to continue investing in growth opportunities. We expect this momentum to continue as we focus on driving commercial and operational excellence throughout the company. Our team also helped put us in a position to announce this exciting transaction with NxEdge. We're focused on completing the transaction before the end of the year and beginning the integration planning process, so we can hit the ground running upon close. We're very excited about welcoming everyone at NxEdge to the EnPro team and look forward to realizing the value of this combination. This is the right deal at the right time, with the right company, with the right leadership for EnPro in a growing market that expects to exceed $1 trillion by 2030. We're really excited about the combination. And with that, we'll open it up to the operator.	q3 adjusted earnings per share $1.40. q3 sales rose 5.5 percent to $283.1 million.
We are holding our call virtually and are dialed in from different locations. So we ask for your understanding, should we encounter any technical issues as we coordinate our responses during Q&A. These statements involve a number of risks and uncertainties, including impacts from the COVID-19 pandemic, and related governmental responses and their impact on the general economy, as well as other risks and uncertainties that are described in our filings with the SEC, including our most recent Form 10-K and 10-Q. Also, during the call, we will reference a number of non-GAAP financial measures. The impact of the foreign exchange rate changes subsequent to the end of the fourth quarter, impacts from further spread of COVID-19, and environmental, and litigation charges. I also want to remind you that as a result of the sale of Fairbanks Morse in January 2020, the former Power Systems segment is accounted for as discontinued operations in our financial statements, for both the current-year and prior-year periods. Also, as of this fourth quarter's financial results, the company is updating its reported adjusted earnings per share to exclude the after-tax effect of acquisition-related intangible amortization. Our new reporting segments are: Sealing Technologies, Advanced Surface Technologies, and Engineered Materials. Current and prior-year quarters and full-year financial metrics have been recast to reflect the new segment structure. Historical data for the new reporting structure is available at the investor relations section of EnPro's company website. We are pleased to announce that EnPro is planning to host a virtual Investor Day on Thursday, May 27. Marvin Riley, president, and chief executive officer; Milt Childress, executive vice president, and chief financial officer; and other members of EnPro's executive management team will provide an overview and update of the company's long-term vision, growth strategy, business segments, and operational and financial objectives. Registration information for this virtual event will be forthcoming, and we hope you will mark your calendars for what we believe will be an informative and exciting meeting on the direction of our company. I hope you and your families continue to remain safe and healthy. As vaccines become available, we're hopeful that the severe impacts of the global COVID-19 pandemic will begin to subside. Our organization continues to remain vigilant about enhancing safety protocols, updating operating processes, and adapting to new ways of working. Together, we are exemplifying EnPro's core values of safety, excellence, and respect for all people while continuing to excel at delivering quality products and services to our customers. We have remained steadfast in our commitment to these core values and to all of our team members, which have been demonstrated through our public stance against discrimination in social and justice. Human capital management, including diversity and inclusion, has enabled EnPro to achieve success. Developing our working-together-from-anywhere initiatives to enable our global workforce to collaborate in new ways, increasing the number of females and minorities on our senior leadership team to 35%, creating and filling a diversity, and inclusion leadership position to further strengthen our commitment to equality for everyone, and developing a platform for small groups to talk openly about biases, belief systems, and the importance of valuing different perspectives. Moving on to our fourth-quarter highlights. I'd like to discuss three key themes reflected in our results. First, I am pleased to report better-than-expected fourth-quarter results. Despite the continued challenges created by the pandemic and further lockdowns across much of Europe, our fourth-quarter adjusted EBITDA margin expanded 230 basis points to 17.4% with adjusted EBITDA of $48.1 million, an increase of 11% year over year. The strong performance was the result of actions taken to reshape our portfolio, including the acquisition of Alluxa and several strategic divestitures, as well as our quick and decisive cost mitigation initiatives in response to COVID. Second, we maintain a disciplined approach to capital allocation and a strong balance sheet as we drive long-term shareholder returns. With approximately $230 million of cash on the balance sheet at the end of the quarter, an untapped revolver, and our relentless focus on cash generation, we're well positioned to consider additional bolt-on acquisition opportunities. And third, we have made significant progress over the last 18 months, stabilizing our financial results and evolving our portfolio toward more profitable businesses in higher-growth markets to improve cash flow return on investment. With the successful acquisitions of LeanTeq and The Aseptic Group during 2019 and the most recent acquisition of Alluxa, we have a solid foundation for our organic and inorganic strategies to drive profitable growth. Turning to Slide 5. As we look back over the year, we have adjusted successfully to pandemic conditions and are now in the final stage of our COVID pandemic response plan. As a consequence of the pandemic, we fundamentally changed several aspects of our business. We developed a number of enhanced safety practices during the pandemic that we will continue to use even after the pandemic has subsided. We have established appropriate inventories of PPE, and a full loop system to test, trace and monitor employee health. We hold the safety of our team members to the highest standards, while they continue to deliver the exceptional level of service that EnPro customers expect. We are committed to maintaining the advantages of our working-together-from-anywhere initiative for salaried employees where it makes sense on a permanent basis. Our IT team has put new tools and cyber protocols in place to allow us to enhance connectivity, engage collaboratively, and work productively across our businesses and geographies. Our reimagined way of working has provided a new lens through which to think about how we can take advantage of the unique talents of colleagues across our global organization. The new way of working has allowed us to experiment, and as a result, has provided us with insight on how we might connect in a more meaningful way with our customers. Our supply chain team remains a notable strength as we have had no significant supply chain disruptions during the pandemic. We fortified our supply base in 2020 by establishing strategic secondary sources for critical raw material. We work with reliable suppliers in multiple geographic regions to mitigate a broad spectrum of risk and promote supply continuity. Our transportation agreements with multiple ocean, over the road, and small parcel carriers allow for flexibility in how we optimize inbound and outbound movement of goods. Our nimble response to the COVID pandemic and robust cost mitigation initiatives, together with our portfolio reshaping actions, enabled our company to achieve flat year-over-year adjusted EBITDA despite a nearly 11% decline in sales during 2020. This represents an adjusted EBITDA margin expansion of 170 basis points for the full year, a tremendous feat for the EnPro team amid 2020 macroeconomic challenges. Our strategy has remained clear and consistent. We're focused on four areas. First, reshaping our portfolio to accelerate growth in niche, high-margin material science-related businesses with strong cash flow. Second, maintaining our high aftermarket exposure, and increasing our exposure to faster growth businesses. Third, leveraging the EnPro Capability Center to increase margins and cash flow return on investment. And fourth, maximizing long-term shareholder returns through a commitment to disciplined capital allocation. Through the Capability Center, we leverage continuous improvement methods across the company to improve productivity, efficiency, pricing, and sales force effectiveness to drive increased margins and increased cash flow. Since its inception, the Capability Center has utilized industry best practices and a collaborative approach to problem-solving to drive improvement throughout our businesses. The Capability Center methods and tools are fully integrated in our company, serving both existing and newly acquired businesses, and reaching from the C-suite all the way to the shop floor. We look forward to talking more about the Capability Center at our upcoming Investor Day. We continued our actions to reshape our portfolio during the fourth quarter by closing the acquisition of Alluxa in late October, completing the sale of STEMCO's Air Springs business in November, and completing the sale of GGB's Bushing Block business at the beginning of December. The Air Springs and Bushing Block divestiture will allow us to refocus their respective businesses on higher-margin product lines. Specifically, the sale of STEMCO's Air Springs business marks the completion of our efforts to reduce our heavy-duty truck market exposure. Our remaining STEMCO heavy-duty truck business will now be focused on high-margin wheel, and sealing systems, and suspension components. With these actions, we anticipate our heavy-duty truck business annual sales will range from $125 million to $175 million, reducing the percentage of our total sales in trucking from the mid-20s to the mid-teens. The resegmentation aligns our technical and operational expertise, improves performance management decision-making, and enhances transparency for investors. Our new segments are. First, Sealing Technologies, which is comprised of Garlock, STEMCO, and the Technetics sealing businesses. These businesses are focused on safeguarding critical environment. Second, Advanced Surface Technologies, which is composed of Alluxa. And our semiconductor business, including LeanTeq. These businesses are focused on advancing precision, services, and solutions. And third, Engineered Materials, which is composed of GGB and CPI. These businesses are focused on enabling high-performance polymer applications. Let me now highlight the success of our recent acquisitions. The three acquisitions made within the last one and a half years are great examples of investments we're making to execute our profitable growth strategy. The Aseptic Group acquisition closed in July 2019, followed by LeanTeq, which closed in September of that year. And Alluxa, which closed in October 2020. These acquisitions expand our reach into the attractive semiconductor aftermarket, pharmaceutical, biopharmaceutical, and life sciences industry. All these companies have strong competitive positions in high-growth markets, excellent margins, robust cash flow, and serve markets with secular trends supporting long-term growth. These acquisitions also align with our capabilities and growth strategy due to their technical expertise, niche market leadership, mission-critical applications, and recurring revenue model. The Aseptic Group, which designs, manufactures and distributes, aseptic fluid transfer products to support manufacturing of next-generation biopharmaceuticals by the world's largest pharma companies, has performed well since joining EnPro and has been integrated into the Sealing Technologies segment. During this integration, our growth initiatives focused on geographic and product range expansion. By leveraging our resources in the Capability Center, we moved quickly to bring in talent increase warehouse capacity, and implement new supply chain policies to improve response time to our customers. This resulted in a 30% increase in backlog mainly driven by an increased order flow from heightened demand for clean room services. LeanTeq, which provides cleaning services for critical components, used in leading-edge semiconductor equipment, has been a very successful acquisition. Over the past year, the business has maintained its high-profit margins while increasing revenue approximately 40% driven by continued demand for advanced node semiconductor chip. To manage the tremendous growth we're experiencing, we are opening new capacity in a different facility in Taiwan that is specifically designed to increase our capabilities in five- and three-nanometer applications. We're also in the midst of increasing capacity utilization within LeanTeq's Milpitas, California facility to support next-generation wafer fab equipment development. And finally, Alluxa, which provides precision optical filters and thin-film coatings for the industrial technology, life sciences, and semiconductor markets. While we are still in the early stages of integrating this business, its potential contribution is every bit as promising as LeanTeq's. Our integration approach is very balanced, focusing on utilizing the EnPro Capability Center while being careful not to disrupt day-to-day business. Even in the early innings, the Capability Center has already identified ways to reduce logistics costs and is currently working to enhance the quality system at Alluxa. Our goal is to allow the experienced management teams at these successful businesses, the latitude to continue to run their operations effectively and efficiently while providing them with EnPro resources in the form of capital, talent, functional, and organizational support. With Alluxa, we anticipate a strong first quarter, given their order intake momentum and backlog heading into the year, which gives us great confidence in the initial stages of the acquisition. We have been very pleased with the overall performance of these acquisitions to date. And as we enter 2021, we're focused on capturing the full benefits of these acquisitions to drive further value creation for shareholders. In the fourth quarter, sales of $276 million decreased 3.7% year over year, reflecting weakness in oil and gas, general industrial, and aerospace markets. This was offset in part by positive momentum in the semiconductor, food, and pharma, automotive, power generation, and heavy-duty truck markets as well as the contribution from the acquisition of Alluxa. While demand increased in the heavy-duty truck market, revenues declined as a result of portfolio-reshaping actions. Excluding the impact of foreign exchange translation, and sales from acquired and divested businesses, sales for the quarter declined 1.6% compared to the fourth quarter of 2019. As Marvin indicated, our fourth-quarter performance was significantly better than our expectations at the time of last quarter's conference call. On a sequential basis, sales in the fourth quarter increased 2.9% over the third quarter in markets where we saw the greatest sequential sales improvement included general industrial, automotive, power generation, and food and pharma. Sequential sales also benefited from the Alluxa acquisition. Gross profit margin of 37.5% increased 330 basis points versus the prior-year period driven by the benefit of divesting low-margin businesses as well as initiatives supported by the EnPro Capability Center, including supply chain and other companywide cost reduction programs. The year-over-year improvement in gross profit margin was achieved despite a $3 million amortization of acquisition-related inventory write-up in the fourth quarter of 2020. Adjusted EBITDA of $48.1 million increased 11.1% over the prior-year period as a result of strategic acquisitions and previously announced cost reductions taken across the company in response to COVID. Adjusted EBITDA margin of 17.4% increased approximately 230 basis points compared to the fourth quarter of 2019. Corporate expenses for the quarter were $10.6 million, a decline of 2.8% compared to the prior-year period. Adjusted income from continuing operations attributable to EnPro Industries was $25.4 million, an increase of 27% compared to the fourth quarter of 2019. Adjusted diluted earnings per share of $1.24 increased 27.8% compared to the prior-year period. We believe presenting adjusted earnings per share in this manner better reflects core operating results and offers a more meaningful measure for comparison against prior periods. Amortization of acquisition-related intangible assets in the fourth quarter was $10.9 million compared to $11.1 million in the prior-year period. We have also updated our estimated normalized tax rate used in determining adjusted net income, and adjusted earnings per share to 30% from the previously used normalized rate of 33%. In the fourth quarter, we recognized environmental charges of $22 million, which led to our GAAP net loss in the fourth quarter. These charges were principally for reserve increases associated with estimated remediation costs for two legacy environmental matters where we do not have sufficient information to estimate certain remediation costs until the fourth quarter. The responsibility for these matters was contributed to EnPro at the time of the 2002 spinoff from Goodrich Corporation. One of these matters involves the eight uranium mines in Arizona operated by a corporate predecessor in the 1950s that have been closed for decades. The second matter involves the cleanup underneath the plant at the Water Valley, Mississippi site, owned by a third party, which is incremental to the remediation work at other areas at Water Valley ongoing for some time. We booked reserves to reflect our baseline estimate of the remediation costs for these sites based on information on potential remediation plans that developed in the quarter. government associated with the uranium mine remediation, which is included in other noncurrent assets. We now have established baseline reserves for all sites where we had known environmental remediation obligations. Adjustments to these reserves may be required in the future as remediation plans further develop or to reflect changes in estimated costs to implement these plans. We are not aware of any need to make any such adjustments at this time. Cash outlays for all environmental matters were $33.8 million in 2020. For 2021, we expect environmental cash payments to decline to approximately $13 million. Beyond 2021, we anticipate annual cash payments for the next four to five years to decline to low single digits, reflecting the significant progress we have made over the past two years in addressing and resolving our most significant legacy environmental liabilities. Let's take a look at segment performance. Sealing Technologies, which includes Garlock, STEMCO, and the Technetics sealing business, had sales of $154.7 million in the fourth quarter. The year-over-year decline of 11.3% was due to softer demand in general industrial and aerospace markets, offset in part by stronger performance in food and pharma and heavy-duty truck markets. The sales decline was impacted meaningfully by the divestiture of STEMCO's Air Springs manufacturing business in late November and the sale of STEMCO's motorwheel and cruising businesses during the third quarter. Excluding the impact of foreign exchange translation and sales from acquired and divested businesses, sales decreased 2.9% versus the prior-year period. On a sequential basis, sales in the fourth quarter decreased 2%. And excluding portfolio-reshaping activities, sales growth would have been in the high single digits. For the fourth quarter, adjusted segment EBITDA increased 5.4% to $34.9 million despite the decline in sales. And adjusted segment EBITDA margin expanded 360 basis points to 22.6%. Improved margin was driven primarily by production in operational cost reduction initiatives and by portfolio reshaping in the segment. Excluding the impact of foreign exchange translation, acquisitions and divestitures, adjusted segment EBITDA increased 10.6% compared to the prior-year period. Turning now to Advanced Surface Technologies, which includes Alluxa and our semiconductor business. Fourth-quarter sales of $49.9 million increased 27.3% driven primarily by the acquisition of Alluxa and continued strength in the balance of the segment. LeanTeq is showing strength as the five-nanometer platform is ramping quickly, and we are responding to demand with agility by expanding our capacity in Taiwan and the U.S. And in addition, demand for Alluxa's products remains robust with strong performance across its end markets and solid order intake and backlog heading into 2021. Excluding the impact of foreign exchange translation and sales from acquired businesses, sales increased 10.7% versus the prior-year period. On a sequential basis, fourth-quarter sales increased by approximately 12% from the third quarter driven by the acquisition of Alluxa at the end of October. For the fourth quarter, adjusted segment EBITDA increased 57.1% to $15.4 million, and adjusted segment EBITDA margin expanded 590 basis points to 30.9% driven primarily by the Alluxa acquisition and growth in the balance of the segment. Excluding the impact of acquisitions, divestitures, and foreign exchange translation, adjusted segment EBITDA increased 10.2% compared to the prior-year period. In Engineered Materials, which consists of GGB and CPI, fourth-quarter sales of $73.6 million decreased 2.5% compared to the prior year, primarily due to weakness in oil and gas, general industrial, and petrochemical markets, partially offset by strength in the automotive and power generation markets. Excluding the impact of foreign exchange translation, sales for the quarter decreased 5.6%. Sequentially, sales increased approximately 9% as we saw demand rebound in automotive and general industrial markets. For the fourth quarter, adjusted segment EBITDA decreased 2.6% and adjusted segment EBITDA margin of 15.5% was flat versus the prior-year period. This was driven primarily by sales declines partially offset by cost reduction initiatives that included decreases in head count and discretionary spending. Excluding the impact of foreign exchange translation, adjusted segment EBITDA decreased 7.7% compared to the prior-year period. Now let's turn to our financial position. Our balance sheet remains strong. We ended the quarter with cash of $230 million and had full availability of our $400 million revolver, plus $11 million in outstanding letters of credit. At the end of December, our net debt to adjusted EBITDA ratio was approximately 1.6 times. During the fourth quarter, we financed the Alluxa acquisition through a combination of $238 million of cash, and rollover equity from Alluxa executives equating to 7% of the acquisition price. When taking this transaction into account as well as divestitures and exits since December 31, 2019, our pro forma net debt to adjusted EBITDA leverage ratio would be comparable to the year-end reported level. Other than nominal amortization of our term loan, we have no debt coming due until 2024, subject to applicable reinvestment requirements related to the Fairbanks Morse and other divestitures. We have largely met these requirements as a result of the Alluxa acquisition. And in January, we obtained an amendment to waive that requirement under our credit facility. For our senior notes, we have until April 25 to satisfy any remaining outstanding reinvestment requirements, which can be satisfied, if needed, by paying down a portion of the term loan under the credit facility. 2020 free cash flow of $39.3 million was down from $109.2 million in the prior year, primarily driven by higher 2020 payments related to environmental settlements and a third-quarter legal settlement, both of which we discussed on our third-quarter earnings call as well as significantly higher year-over-year tax payments, resulting largely from the gain on the sale of Fairbanks Morse. Excluding environmental and legal settlements as well as tax payments in both years, free cash flow increased 12% from the prior year. During the fourth quarter, we paid a $0.26 per share quarterly dividend, totaling $5.5 million. Last week, our board of directors approved a 4% increase in the quarterly dividend from $0.26 per share to $0.27 per share. We continue to prioritize investments in organic and inorganic growth and have not made any repurchases under the two-year share repurchase authorization announced last quarter. Under this authorization, we may repurchase up to $50 million in shares, providing us with the flexibility to return capital to shareholders, subject to balance sheet and growth investment considerations. Now I want to provide a high-level look at the impact of our portfolio reshaping on sales, adjusted EBITDA, and adjusted EBITDA margins. Slide 14 provides results for 2020 as if acquisitions and divestitures completed in 2020 have closed effective January 1, 2020. As shown on the slide, on a full-year basis, our 2020 pro forma sales are $983 million or 8.5% lower than reported sales. 2020 pro forma adjusted EBITDA is $167.5 million or relatively flat with reported adjusted EBITDA, resulting in a net adjusted EBITDA margin increase of approximately 130 basis points to 17%. This information shows the trailing effect of portfolio changes, and we expect our strategic actions to enhance sales growth and margin improvement in the years ahead. Moving now to 2021 guidance. Taking into consideration all the factors that we know at this moment, including the ongoing global economic recovery from the COVID pandemic. We expect 2021 adjusted EBITDA to be in the range of $178 million to $188 million on sales growth of 6% to 10% over 2020 pro forma sales of $983 million. We expect adjusted diluted earnings per share from continuing operations to be in the range of $4.32 to $4.66. We currently anticipate slightly less than half of our full-year adjusted EBITDA and adjusted earnings per share guidance to be realized in the first half of 2021, with acceleration as the first half progresses. I'm extremely proud of the progress we've made during 2020 in transforming EnPro into a leading industrial technology company using material signs to push boundaries in semiconductor, life sciences, and other technology-enabled sectors. Our strategic achievements during 2020 has built a solid foundation for profitable growth in 2021 and beyond. Our teams have adapted remarkably well during the COVID-19 pandemic, and we are now positioned to capture growth as our markets recover. Our current order trends are strong, surpassing what we saw in January 2019. We're encouraged by what we're seeing and hearing from our customers, particularly in the semiconductor, heavy-duty truck, and automotive markets. We're expecting year-over-year improvement in most of the markets in geographies we serve. We continue to focus on driving operational excellence by leveraging the EnPro Capability Center to reduce cost, improve productivity and maintain high-quality control across all our businesses, including those recently acquired. EnPro's success will be determined by our inherent commitment to our profitable growth strategy, our experienced leadership team, our increasingly diverse and dedicated workforce our strong financial position, and our focus on driving long-term shareholder value. GBB provided metal polymer bushing and the suspension components for a drill spindle attached to a robotic arm that drills and breaks rock to collect samples for analysis. Technetics provided edge welded metal bellows that are a part of the sample collection system and function as vacuum and ducting for the system to support the goal of returning the cleanest sample possible from Mars. We are happy and proud to be suppliers to such a historic mission.	q4 adjusted earnings per share $1.24. q4 sales fell 3.7 percent to $276 million. sees fy 2021 adjusted earnings per share $4.32 to $4.66 from continuing operations.
Julie, and Paul will discuss recent activities and results as well as share thoughts on our strategy as we look ahead. In the third quarter, we continued our top-line growth momentum with net sales up 40% over last year. Adjusted earnings were $0.38 per share excluding $0.19 of unusual costs. In Q3 2020, the adjusted earnings per share were $0.55 and excluded $0.09 of unusual costs. With that, I'd like to turn things over to Julie. Before we begin to discuss third quarter results, let me start with employee safety. We continue to make solid progress on this core value of our business. At the end of the third quarter, we had reduced our injury rate by 40% since the start of the year, an all-time record for Neenah. While encouraged by these results, we remain vigilant in our efforts to achieve our target of zero incidents. Turning to business performance. Third quarter results were broadly in line with our expectations. Starting with the top-line, demand for our products was extremely strong and we delivered record sales of almost $270 million, up 40% from last year and up 22% excluding the Itasa acquisition. Additionally, Itasa continues to deliver strong performance with September being their third record revenue month since the acquisition. From a bottom line perspective, margins were challenged by a number of factors. First, as expected and mentioned in our last call, the primary factor was rapidly escalating input cost, which continue to increase throughout the quarter to a greater degree than originally anticipated. Compounding these cost increases were supply chain disruptions and shortages of certain chemicals, leading to operational disruptions and an unfavorable sales mix. Operating labor availability in the United States also impacted our business, driving manufacturing inefficiencies and higher cost. Lastly, we experienced unforeseen flood damage at our Pennsylvania facility related to Hurricane Ida, impacting results by approximately $0.06 per share. In the third quarter, the net impact of selling prices and raw material cost reduced operating margin by over 300 basis points and earnings per share by over $0.35 per share versus the prior year. To this point, input costs have continued to increase at a rate faster than the resulting benefits of our pricing actions. However, we expect to see further improvement and recovery in Q4 and 2022. We are clearly on a path to recover these input costs as Neenah has historically done. To address these challenges, we are taking a number of actions. First, multiple price increases have been implemented in all businesses as well as incremental energy and fuel surcharges. To address the impact of chemical availability, our R&D team has worked closely with customers to qualify alternate products to meet market needs. Over the last few months, we have reformulated over $200 million of annual sales, demonstrating the agility and material science know-how we have at Neenah and a key value we bring to our customers. Additionally, we streamlined our product portfolio to simplify operations and improve our cost position, including over a 30% reduction of grades in our Fine Paper and Packaging business. This unlocks capacity, improves our cost structure, and I'm sure will provide a premium level of service our customers expect from Neenah. We are also working to improve our operating labor challenges by implementing a broad range of initiatives to attract and retain top talent, including referral fees and additional incentives. So while it's clearly a challenging environment, I'm encouraged with our swift actions and execution to drive margin improvement into Q4 and 2022, while at the same time, working closely with our customers to meet their needs. Before we move on to financials, I want to take a moment to recognize Bill Cook, the Chair of our Board of Directors, who recently received the NACD Public Company Director of the Year award. This is quite an honor, and we are grateful to Bill for his guidance and service to Neenah. Under Bill's leadership, we have strengthened our corporate governance and increased our board diversity with 50% of our board identifying as women or under represented minorities. Let's dive right into our discussion of price and input costs for the third quarter. Our actions have resulted in price increases each month of the quarter as our initiatives take hold. The overall impact of that pricing acceleration for the third quarter was $8 million over 2020. We expect these pricing actions will gain momentum in the fourth quarter and into next year. In terms of input cost increases, during the third quarter, we saw input costs rise even higher than our expectations to about $17 million over the prior year, of which we were able to offset about half directly with our pricing initiatives. For the fourth quarter, we're expecting an input cost increase of over $20 million versus 2020. We expect to recover about two-thirds in the fourth quarter through our accelerated pricing initiatives. We're now expecting an over $40 million increase of input costs for the full year of 2021 versus last year. As we've said, we expect to fully offset the raw material cost increases through 2022 with our pricing actions. Julie mentioned the unfavorable mix. Overall, the mix effect for the quarter was an unfavorable $4.5 million. Contributing to the unfavorable mix were the supply constraints. Let me share some thoughts about what we're seeing in today's input markets. Fiber prices have peaked globally, and in some regions, have started to give back some of the gains, though Europe has yet to fall from the peak. And while the rate of decline in North America has slowed, it remains well above highs from previous cycles. Chemical input prices rose in the third quarter on strong demand. Supply is beginning to recover from natural disasters and unplanned outages, while pricing of some basic chemicals is starting to show signs of leveling off as we start the fourth quarter. A number of materials remain in tight supply, causing availability issues, and historically high prices have yet to curb demand. We expect this market turbulence will continue into 2022. Energy has risen dramatically through the third quarter and remains very volatile globally with the most significant impacts to our business being seen in Europe. And lastly, the challenging global shipping market continues as congestion at many ports adds cost pressures. U.S. transportation market remains tight with national spot rates recently reaching the highest level of the year. Diesel prices have been climbing, hitting their highest levels at the end of the third quarter. It looks like those transportation cost pressures and availability issues will also left into 2022. In regards to Appleton, the facility was closed at the end of the quarter. Recall, we expect this action to save us approximately $78 million a year beginning in the fourth quarter of 2021. Here's a quick review of the third quarter financial statements. Consolidated sales reached $268 million, up $77 million from last year's comparable quarter. Itasa accounted for $36 million of sales in the quarter. We saw very strong growth in a number of areas, including filtration, packaging and industrials. Adjusted earnings were $12.7 million compared to $15.9 million in last year's third quarter. The primary driver of the variance was the favorable pricing of $8 million, offset by input cost increases of $17 million, netting an unfavorable $9 million, whereas Julie mentioned, a 300 basis point impact on margins or about $0.35 a share. We were able to offset most of that gap through favorable volume and fixed cost absorption as well as the impact of the Itasa acquisition. Consistent with our discussion last quarter, we expect to see margins begin to improve from here as those pricing actions, robust volume and other efficiency initiatives begin to offset the input cost increases and availability issues. Technical product sales were $173 million, up 46% from 2020 and up 15% excluding Itasa. Adjusted earnings were $10.8 million, down from $13.3 million last year, reflecting the impact of raw material cost increases along with labor and raw material availability. Technical Products is bearing the brunt of the input cost increases and is most impacted by timing with filtration annual pricing taking effect January 1. Fine Paper and Packaging sales were $95 million, up 32% from last year's level and above our original expectations of recovery, reflecting the strength of the packaging and consumer business. Adjusted earnings were $6.6 million from the quarter, up from last year's $6 million with pricing offsetting about 75% of the input cost increases. We expect to fully offset the input increase with pricing initiatives during the fourth quarter in this segment. Turning to the balance sheet and cash flows. While year-to-date cash flow from operations of $40 million was down from the $80 million recorded for the first nine months of last year, the difference was primarily due to working capital, reflecting the strong top-line. Trailing 12-month adjusted EBITDA reached $122 million as of September 30 compared to the $101 million we recorded last calendar year as we see the benefits of our continued growth and the impact of the Itasa acquisition. As a result of the strong EBITDA growth and free cash flow, adjusted net leverage was 3.4 times at quarter end and is expected to drop a bit by year end, absent any other actions. Working capital from higher input costs will continue to moderate through the end of the year and availability issues will pressure mix and efficiencies. Year-to-date, capex was $19 million versus $12 million last year. We're expecting capex to end up in the low-to-mid $30 million range as safety, growth and cost reduction initiatives are implemented in Q4. In addition to returning cash to shareholders through our strong dividend, during the quarter, we bought back 71,000 for $3.4 million at an average price of $47.85 per share. Additionally, the board has authorized a $0.02 annual increase to the dividend beginning in the fourth quarter. Our dividend remains critically important and we're pleased to have raised the dividend every year for the last 11 years. SG&A was $26.1 million versus $19.1 million last year. Itasa accounted for about $4 million of the increase. The remainder was the result of cost reduction initiatives executed in 2020. While we typically expect our full year normalized tax rate to come in around the low-to-mid 20s as a percentage of pre-tax income, the 2021 full year rate is expected to be near 20% when considering the magnified benefit of research credits in the current year. Our effective income tax rate was 48% of pre-tax book income in the third quarter 2021 as compared to 23% in the third quarter of last year. This increase resulted primarily from the effects of non-recurring items relating to the closure of the Appleton facility. Looking forward, we had expected cost to stabilize in Q4. However, recent increases in energy, particularly in Europe, and stubbornly high chemical costs globally are now expected to continue through the fourth quarter with volatility and availability issues lingering into next year. As Julie mentioned, our teams are working to offset these input costs with additional pricing initiatives, surcharges and cost reduction actions. So for the fourth quarter, our seasonally weakest quarter, we now expect the impact of input cost to be over $20 million above last year, of which we expect to offset about two-thirds directly with our pricing initiatives. In spite of these pressures, because of the increased pricing recovery, we expect the third quarter margin to be the most challenged to the year and expect to see improvement in the fourth quarter. That being said, this is a very volatile year and things are changing quickly and unpredictably. No matter what, we'll continue with our actions to offset the cost and availability issues as we have done historically. To sum it all up, as the year stands now, we expect input costs for the full year to be up over $40 million, of which we'll have offset about half directly with pricing. We expect to offset the other half in 2022 as our pricing initiatives, particularly in filtration, take effect. In addition to addressing our actions driving the business today, I want to discuss how we are also focused on executing for the future. Core to our strategy is growth. And we continue to leverage our assets and technical capabilities, unique material science know-how and unmatched customer relationships to extend our presence in large growing markets. Our four growth platforms; filtration, specialty coatings, engineered materials and imaging & packaging, provide a strategic framework which guides our investment decisions, organizational focus and resource allocation, all are positively influenced by large macro trends such as increased emphasis on health and wellness and a growing preference for sustainable alternatives. Our products are used in a variety of categories with diverse end use applications, giving us multiple pathways to create value. As evidenced by our strong top-line, we are confidently are focused where Neenah has a right to win. As a reminder, we have set all-time records in filtration, packaging and release liners this year, three of our four targeted growth platforms. I'd like to highlight a few areas of momentum aligned with these growth platform. First, demand for our filtration products is very strong with top-line up year-to-date over 25% from 2020 and 20% from 2019 levels, continuing a trend of record-breaking performance. We are seeing strong demand across all end markets, especially in life science and industrial applications where sales are close to double pre-pandemic levels. As we continue to extend our high performance media for air, liquid, acoustic and thermal applications, we've introduced two new platforms; NeenahGuard and NeenahPure, which provide the highest level of filtration efficacy available in the market. Leveraging these platforms, we expect to continue to grow and diversify in attractive categories such as building HVAC, gas turbines, gaskets, process fluids and medical testing. Turning to our specialty coatings platform. We are focused on driving record growth in release liners. We are pleased with Itasa's performance and a strong Q3 in line with our investment thesis. Integration is progressing according to plan and synergy delivery is on track. Progress continues on our recently announced capital expansion for a new state of the art coater in our Mexico facility, expected to start-up in 2023. This investment will support our growth expectations for the business, which historically has been around 8% annually. Lastly, Itasa was awarded the EcoVadis 2021 Gold Medal for Sustainability, an achievement demonstrating our leadership commitment to sustainable manufacturing practices. In Engineered Materials, we continued our cadence of innovative product introductions, launching two new products this quarter that provide sustainable alternative. First, we recently launched a new recyclable paid product made with sustainable fibers. Unlike plastic-based tape, this product breaks down along with the box during the recycling process, making the product 100% recyclable and unique to the market. We also expanded our DISPERSA product line of sustainable labels, tags and pouches that disperse in water and are used in applications such as food rotation labels and reusable plastic containers. This product extension continues our approach to combine superior functionality and sustainability. Last but not least, we celebrated a record quarter in our packaging business, up almost 20% over pre-pandemic levels. Demanding customers appreciate the unique sustainable packaging solutions Neenah provides, including plastic replacement alternative for applications and our targeted verticals of beauty and cosmetics, alcohol, high end retail and electronics. Evidenced in these examples is solid progress in both M&A and innovation, two key enablers of our strategy. With M&A, we maintain a robust pipeline of targets. We also remain committed to maintaining a healthy balance sheet and strong cash flows. Innovation is a key part of our strategy. Taking a market back approach, we are leveraging the ideas and insight of our customers, employees and independent research to inform our efforts. We are encouraged by the depth of our pipeline and expect our pace of development to continue to increase over time. Lastly, the Neenah operating system is a consistent framework of principles, practices and tools, through which we will continue to drive meaningful and sustainable margin improvement. As a reminder, this global manufacturing initiative is based on lean principles and methodologies. Improvement will be gradual as we execute many specific measurable projects facility-by-facility. We are pleased with our progress and are on track with our plans. As these initiatives take hold, we expect to see both top and bottom line benefits and the merits of a more diversified mix of specialty products. In summary, we have focused efforts to drive significant value as we close out this year and launch into 2022, including net pricing actions, which we expect will offset the 2021 recovery shortfall of approximately $20 million; a full year of our Itasa acquisition valued at an additional $5 million of EBITDA in 2022; closure of our Appleton facility, which will generate over $6 million of incremental EBITDA next year; and focused organic investment, innovation and M&A efforts in our targeted growth platforms. And while we don't expect input costs to decrease dramatically in the near-term, we do expect them to begin to stabilize at current levels, and in some cases, retreat throughout 2022. Our goal is to grow the top-line by 5% and earnings by 10%, driving EBITDA margins in excess of 15%, while generating investment returns above our cost of capital. Despite the near-term input costs and supply chain pressures, our teams are leaning in to drive the business forward. I'm encouraged by our progress toward these goals and confident we have the right strategy and initiatives in place to deliver.	q3 sales rose 40 percent to $267.9 million. q3 adjusted earnings per share $0.38. q3 gaap earnings per share $0.19.
So hopefully many of you have had a chance to review that information. On the call today you'll be hearing from Julie Schertell, our Chief Executive Officer and Paul DeSantis, our Chief Financial Officer. Julie and Paul will discuss recent activities and financial results and comment on our outlook as we look ahead in 2021. We'll finish up with a recap of key strategies and initiatives under way to drive long-term value. Adjusted earnings of $0.87 per share in the fourth quarter equaled that of prior year. In 2020, GAAP earnings were adjusted to exclude $6 million of expense or $0.28 per share and included a non-cash impairment of a small overseas investment. 2019 fourth quarter adjusted results excluded a net gain of $1.2 million or $0.05 per share, mostly related to a post retirement plan settlement. Actual results could differ from these statements due to the risks outlined on our website and in our SEC filings. With that, I'll turn things over to Julie. The fourth quarter marked the end to an unprecedented and challenging year for everyone. While there was no escaping the impact of the pandemic, I'm pleased with the actions we took to prioritize the health and safety of our employees, maintain substantial liquidity, aggressively reduce cost and drive demand recovery. This was evidenced in our strong performance as we exited the year with both segments, again, delivering sequential improvement in quarterly revenues, operating income and margins. In the fourth quarter, adjusted operating income of $21 million and corresponding earnings per share of $0.87 both equaled the prior year. Performance was led by our Technical Products segment. With the combination of a strong market demand, new product launches and efficient manufacturing, technical product sales increased an impressive 11% versus 2019 and adjusted operating income of $18 million reached the highest quarterly level in recent history. Market demand in Fine Paper & Packaging, as expected, has a more extended recovery curve and we remain on track for this business to recover 90% of its pre-COVID quarterly run rate of $90 million this year. Before we talk about 2021 later in the call, I'd be remiss if I didn't note some of the key accomplishments our teams achieved in 2020. Most importantly, with new health and safety protocols put in place, we were able to protect our employees and avoid disruptions to our operations and to our customers. We began to implement a Neenah operating system at our two largest facilities. Utilizing Lean Principles, this system will improve safety, quality, customer delivery, and will reduce our cost structure with improved productivity and unlocked capacity. We aggressively reduced costs and working capital, resulting in free cash flow of $75 million, one of our highest years ever. We quickly developed and commercialized high performance media for face mask to support COVID relief efforts and meet our customer's needs. We published a corporate sustainability report, highlighting the meaningful progress made over the past five years in reducing our carbon footprint, building a more diverse and inclusive workplace, and maintaining sound governance practices. We successfully refinanced the senior notes that were due this year and replaced them with a more flexible term loan B, due in 2027. We reinvigorated our innovation efforts and launched number of new products that will generate incremental revenue for years to come. We maintained a disciplined and active M&A pipeline. We strengthened our executive leadership team combining new leaders that bring fresh perspectives with existing personnel who have deep experience and know how. And lastly, we updated our vision and strategy providing a clear direction and focus for our organization on key drivers that will add significant value and support expansion into our four targeted growth platforms. With increased capabilities of our team and strategies and catalysts now in place, we're clearly entering 2021 with momentum and positioning ourselves well for future profitable growth. I'll talk more about this later in the call, but will now turn things over to Paul to discuss fourth quarter financial results in more detail. As you heard, both business segments delivered another sequential quarter of improved sales, profits and margins. Versus the third quarter sales increased 8%; adjusted operating income was up by more than 30%; and adjusted earnings per share jumped almost 60%. These results were led by our Technical Products segment, which now makes up almost 65% of our total revenue. So let me start there. Sales of $137 million in the quarter were up from quarter three, and more impressively, grew 11% versus last year. The increase was driven primarily by volume growth and helped by currency translation as the stronger euro increased the top line by about $5 million. These favorable results were partially offset by lower pricing in a few categories such as backings that have price adjusters tied to raw material input costs. Our filtration business has continued to perform extremely well and fourth quarter revenues were up almost 30% to a record $66 million. Transportation, filtration media sales grew strongly in Europe and the U.S. and sales of industrial filters increased by more than 20%. Industrial filtration growth was led by gains in products used for evaporative cooling and other similar applications. Quarterly revenues also included about $4 million for face mask media, which we began selling in 2020. Outside of filtration, our Industrial Solutions business also performed well with almost 20% growth in backings, primarily due to increased tape revenue with new products introduced at some of our most strategic customers earlier in the year. Segment adjusted operating income of $18 million was up from $10 million in the fourth quarter of 2019 and operating margins also increased from 8% to 13% of sales. Higher income in 2020 resulted from increased sales and production volumes, lower input costs net of selling prices, reduced SG&A spending, and favorable currency translation. Turning to Fine Paper & Packaging, net sales of $70 million increase from the prior quarter and, as expected, due to COVID, were below sales in the fourth quarter of 2019. Volume was the largest reason for the shortfall with commercial print accounting for most of this due to reduced demand for print marketing and advertising. Consumer revenues fell impacted by timing of back-to-school sales while premium packaging revenues increased, led by growth in labels and folding board. Segment adjusted operating profit was just under $8 million, up 15% from the third quarter, but below prior year due to lower sales and production volumes and a less favorable mix. These impacts were partially offset by reduced SG&A spending and modest benefits from lower input costs, net of selling prices. As a reminder, we have a history of successfully managing costs and our asset footprint to generate attractive returns and good steady cash flows that we can invest in growth categories. The commercial print market, while in secular decline, makes up less than half of the segment sales and our consumer and premium packaging businesses with their stronger growth characteristics efficiently utilized the same asset base. With actions and plans under way, I am confident we're on the path to recover volume and restore a historical mid-teen operating margins. Next, I'll cover a few corporate items. Consolidated SG&A was $21.5 million, down almost $2 million from last year. In 2020, we carefully managed spending, and expenses like travel were severely curtailed. In 2021, with the resumption of more normalized spending, we expect quarterly SG&A of approximately $25 million with unallocated corporate costs of $5.5 million. Interest expense was $3.1 million in the quarter, up from $2.8 million in 2019. The increase was largely due to higher non-cash amortization expense related to refinancing our bonds, plus interest rate differentials on cash and debt as we build up a large cash balance in 2020. Our income tax rate in the fourth quarter was 15% compared to 19% in the prior year. This 2020 rate included the benefit from a provision of the CARES Act, which allowed us to increase the value of certain net operating losses and will generate a cash benefit in 2021. On an ongoing annual basis, we expect our tax rate to be approximately 22%. With $37 million of cash on hand and no borrowings against our revolver, year-end liquidity was over $175 million and remains in excellent shape. Cash generated from operations in the fourth quarter was $13 million, and while down from the fourth quarter of 2019, it decreased for the right reasons. In 2019, cash flows benefited from a drop in receivables as year-end sales tapered off due to typical seasonality. This was not the case in the fourth quarter of 2020 as customer demand was still rebounding from the impacts of COVID earlier in the year. In addition, as noted in our last call, we accelerated $6 million of retirement plan cash contributions into 2020. In 2021, we expect to return to a more traditional level of cash flow with increased working capital as we grow sales while maintaining our efficiencies. Fourth quarter capital spending was $7 million. This included a project to increase coating capabilities at one of our plants to support growth in release liners. For the full year, capital spending was only $19 million as we cut or deferred non-critical items. In 2021, we expect to resume more normal spending to around $35 million. I'll end with a few additional comments on our near-term outlook. Demand for both business segments should continue to recover with general economic activity. While we won't be back to Q1 2020 pre-COVID levels by the first quarter due to the slower recovery in Fine Paper and less of a seasonal bounce back in Technical Products, we expect to continue delivering modest sequential quarterly gains. The second half of the year should reflect more normal seasonal patterns and will include costs for our annual maintenance downs in the third and fourth quarters. With the weaker U.S. dollar, recovering global economies and short-term volatility in supply and demand factors, input prices for fibers, chemicals, and transportation costs have all begun to rise off of Q4 lows. Since many of our fiber contracts have a one quarter lag to market, we'd expect to see the majority of the impact from fiber increases starting in the second quarter. Our teams are aggressively working to mitigate these higher input costs with pricing and other actions. We're confident that over time our pricing will successfully offset cost headwinds, though sometimes this may not happen in the same calendar year. Input costs in 2021 could be more than $20 million higher than in 2020. However, for the full year, we currently expect volume growth and benefits from our cost and pricing actions to offset this. One positive outcome of the weaker U.S. dollar is translation of our European operating results. With the euro currently over $1.20, it's more than $0.05 above the 2020 average. Each $0.05 is worth about $10 million to annually of sales and a little less than $2 million of operating income or $0.10 per share. Finally, I'd note that in 2021, our publishing business will be managed as part of Fine Paper & Packaging. The change enables us to realize SG&A efficiencies since Fine Paper & Packaging has a similar path to market and customer overlap. Publishing is a relatively small category with sales of less than $30 million and mid-single digit operating margins. So, if you're building 2021 models, this business should be reclassed from Technical Products into Fine Paper & Packaging. I'll wrap up as I've started, by saying our businesses delivered another quarter of improving revenues, profits and margins led by Technical Products and outstanding filtration performance. While the economic environment still has its challenges, demand is recovering in both segments, and Neenah remains on a strong financial footing. And as always, we remain committed to the financial principles we've been known for; maintaining a prudent balance sheet, disciplined capital deployment, and returning cash to shareholders through an attractive dividend. Our recent results are demonstrating the success of our strategies and ultimately will make Neenah a faster growing, more profitable company. Each of our businesses is on track or ahead of the top line recovery expectations we've communicated. Technical Products exceeded pre-COVID levels in the most recent quarter, and Fine Paper & Packaging is tracking with its targeted pace of recovery. Going forward, we'll drive profitable organic growth as we build on three core competencies; manufacturing excellence, customer intimacy, and a robust innovation process. The Neenah operating system will deliver meaningful value and help us further excel, operationally, to support employees and customers with improved safety, quality, delivery and cost, and unlock latent capacity. Customer intimacy has always been an ingredient of our success. In Technical Products, our R&D teams work closely with customers to meet their demanding performance and qualification requirements. In Fine Paper & Packaging, our design team collaborates with customers to develop premium products and sustainable solutions that support their brand equity and image. Our work with customers often includes joint development efforts that draw on our innovation abilities and technical expertise. I mentioned earlier how we continue to strengthen our teams and capabilities. This includes the recent hire of an experienced Global Head of our innovation process reporting directly to me. With this change, we've realigned our R&D teams to leverage their knowledge and skills across Neenah. This will allow us to unlock even greater value with existing and new customers and expand into new markets. While excited about the future, I'm also pleased with what our teams have done over the past year. In Technical Products, in addition to successfully commercializing high performance face mask media, we've launched a high efficiency filter media for heavy duty trucks, created new filtration offerings for growing needs like evaporative cooling, provided a unique dissolving label, and extended our digital transfer technology to new end-use applications. In Fine Paper & Packaging, we've launched new planners, journals, and teacher tools for the retail channel and initiated a number of new products that provide a sustainable and desirable alternative to plastic. As I've mentioned, our focus is on expanding in our four growth platforms; filtration, specialty coatings, custom engineered materials and premium packaging. Each of these platforms are growing, profitable and defensible and align with our manufacturing technologies, our paths to market and material science know how. In addition, they benefit from macro trends like a desire for cleaner air, personal health, and environmentally friendly solutions. These platform significantly increase our addressable market and will allow us to unlock synergies as we gain scale. We plan to grow in these platforms organically and through M&A. Our M&A pipeline has remained active and focused on a robust set of targets that are a strategic fit and meet our required returns. As a result of our strong balance sheet, we're in great shape to act on attractive opportunities that arise. Let me talk next about our initiatives under way to increase margins. Our businesses have returned to double-digit margins in both segments and technical products ended the year with some of their best margins in recent history. Further improvement will occur as we grow in our targeted markets supported by innovation efforts that result in higher value and margin accretive new products and offerings. The Neenah Operating System will also be an important contributor with incremental value creation of over $20 million annually when fully implemented. In our two pilot facilities, employees have embrace this new process, identifying projects and enthusiastically tackling opportunities. I could not be more encouraged by the level of engagement, pride, and results we're achieving. Neenah has always had a strong culture of continuous cost improvement and I believe that momentum we're seeing is contagious. And our initiatives and success will accelerate as we implement the system in other facilities. Through the combination of these efforts, we will increase our organic growth rate with both business segments delivering mid-teen operating margins. However, this wouldn't be possible without the right people doing the right things the right way. I'm fond of saying "Culture eats strategy for breakfast". And we're fortunate at Neenah to have a culture that always makes safety the top priority, is results oriented with a strong bias for speed, and is collaborative and inclusive. We've emerged from a challenging year with a strong financial position, clear roadmap to accelerate top line growth and specific catalyst to increase margins. You're seeing the results of our strategies and actions and I'm excited about our future.	qtrly adjusted e.p.s. of $0.87.
Daphne, I believe you were referring to maybe a different earnings call. Actual results may differ materially. We undertake no obligation to update these statements as a result of future events, except as required by law. In addition, we will refer to both GAAP and non-GAAP financial measures. Over the past few months, we have discussed in detail the unprecedented nature of winter storm Uri. The impact it had on the entire energy system, the steps that we took to prepare our Texas platform and the support we provided to our customers and communities. Today, and with the benefit of additional information, we are providing more clarity on the financial impact to our company, the steps we're taking to mitigate this onetime event and reinstating 2021 financial guidance. We continue to work closely with legislators, regulators and all market participants to introduce comprehensive solutions across the entire energy system to address issues and shortcomings that were appearing during the storm. NRG remains committed to helping our customers and communities recover from the devastating winter storm and to bring solutions that ensure an event like this never happens again. We also want to provide you an update on the progress made in advancing our customer-centric strategy by reorganizing around the customer and strengthening our platform. I want to start on Slide four. We have now processed 100% of the information received from the mid-April 55-day resettlement and issued all expected invoices to our customers. The updated financial impact from winter Storm Uri, net of our mitigation efforts, is expected to be a net loss of $500 million to $700 million. In order to provide you with more transparency to better understand and make your own judgment on how our platform perform, I am going to break down the components of the gross financial impact into two categories: controllable and uncontrollable. On the controllable side, throughout the event, we maintained a balanced position while absorbing very high natural gas prices, operational issues at our plants and protecting our residential retail customers from high electricity prices. In total, our platform was positive $17 million with estimated bad debt, primarily from C&I customers accounting for $109 million. Moving to the three uncontrollable items. First, the recently acquired Direct Energy portfolio had a heat recall option with a counterparty that did not perform, resulting in a $393 million gross loss. Following the event, we reexamined the entire hedge book from Direct and determined that this was an isolated issue. We're currently engaging discussions with the counterparty and if satisfactory result is not reached, we plan to vigorously pursue recovery through all avenues. Next, we are recognizing a $95 million gross loss due to ERCOT default allocations. These losses comprised of a $83 million cash short pay, plus $12 million NPV of the remaining $102 million on to ERCOT over the next 96 years. As a reminder, ERCOT realized defaults of $3 billion, primarily from through regulated co-ops, Brazos and Rayburn. The state legislature appreciates the impact of the co-op defaults in the broader market and is considering securitization as a way to soften the impact to customers and other market participants. Finally, we are recognizing a $395 million loss due to ERCOT's management of the grid, particularly during the last 32 hours, when ERCOT kept the market clearing price at the cap, despite having more than 10 gigawatts in reserves. Our platform was balanced during this time, but nonetheless, we were uplifted these extraordinary charges. To help put this in context for you, over no time in history has this charge exceeded $5 million. The state legislature is considering also securitization for these charges, given they are the result of unforeseen and unhedgeable actions by ERCOT. We are focused on supporting the PUCT and ERCOT in the implementation of policies and procedures to ensure the market functions properly in the future. In total, we expect our estimated gross financial losses to be reduced by $275 million to $475 million through bad debt mitigation, recovery of Direct Energy hedged nonperformance, ERCOT default and uplift securitizations and onetime savings, resulting in a net loss of $500 million to $700 million. We have a high level of confidence in the net range and see manageable risks around the 180-day settlements and further bad debt escalations. Now I want to take some time and discuss the solutions we're focused on -- in Texas. We believe they will improve grid reliability, strengthen our market, and more importantly, avoid a systemic failure of the energy system in the future. Since the storm, we have actively engaged in discussions with legislative members and propose various changes to make Texas more resilient. While there are many proposals in the Texas legislator right now, including many of which we are working actively on. I want to focus here on three concepts that the legislature has made a priority, and I believe are critical to ensure what happened in February never happens again. Hardening of the system, improving communication and market design changes. Beginning with system hardening. Weatherization of assets is key to improve the overall reliability of the grid. NRG has a strong and comprehensive winterization program that begins with lessons learned from prior winter seasons and ends with our annual declaration of completion of the winter weatherization preparations to ERCOT and the PUCT by November 30. The implementation of formal winterization rules and force through penalties and audits is something we support. With that said, one of the biggest lessons learned from this storm is how interactive and interconnected the electric and natural gas sectors are, and our focus is not just on hardening the power generation side of the equation. Instead, we believe the entire system, including natural gas, needs to be hardened as they say from wellhead to lightbulb. Next, I want to talk about communications. During the storm, the lack of communication between all market participants and stakeholders was unacceptable. Formal coordination between the Public Utility Commission, ERCOT, the Railroad Commission and key stakeholders will greatly improve the amount of information available as well as informed decision-making during future events. In addition, improving the dialogue between TV used during load-shed events and retailers will greatly improve the amount of information available to customers. Improved communication coupled with a statewide emergency alert system will ensure all Texas can stay informed about the status of the grid during times of emergency. Finally, regarding market design changes, our focus is on improving reliability through competitive solutions in the energy and reserve markets, not through reregulated generation solutions with guaranteed profits or a one-size-fits-all capacity procurement. For residential customers, banning index wholesale products, as we already do as a company, is a solution that will protect residential customers from being exposed to the volatile swings in the market. Addressing these three key areas will significantly enhance grid stability, and we look forward to continuing to engage with the Texas legislature in the coming weeks. Now moving to our regular business highlights on Slide six. We have excluded the impact of winter storm Uri from all our numbers as we have done previously from onetime events. Our intention is to provide transparency to the investment community regarding the recurring earnings power of our business, particularly given this was the first quarter of our ownership of Direct Energy. And separating what we believe to be nonrecurring impacts of the combined business as a result of Uri. NRG delivered $567 million of adjusted EBITDA in the first quarter, excluding onetime financial impacts from the storm. This is a 62% increase from the same period last year, primarily driven by the acquisition of Direct Energy. Notably, the addition of Direct Energy's East electric and natural gas businesses helps flatten our quarterly earnings and free cash flow seasonality. As I mentioned before, we are reinstating our previous financial guidance of $2.4 billion to $2.6 billion for 2021, excluding Uri. Just to remind everyone, on March 17, we temporarily suspended the 2021 guidance to reflect the significant uncertainty of Uri. While some uncertainty remains, we believe we have received enough data to provide a range of outcomes. Beyond Uri, we continue to advance our Direct Energy integration plan. Following the close in early January, we immediately began the integration process, achieving $51 million of our 2021 synergy target. We remain very confident in our ability to achieve both the 2021 and full plan targets. As part of the Direct Energy integration, and to further simplify our business operations, today we're announcing the designation of Houston at the sole location of our corporate headquarters. Texas is already home to our largest customer and employee base. It's a great place to do business, and Houston continues to be at the forefront of energy and technology with one of the most diverse workforces in the country. We will continue to maintain regional offices in the markets that we serve, as we expand our business outside of Texas. We're also making good progress in executing our customer-centric strategy. In January, we closed on the Direct Energy transaction, forming the leading North American integrated energy and home services company, serving a network of six million customers. In March, we announced the agreement to sell a 4.8 gigawatt portfolio of noncore fossil assets which helps simplify and decarbonize our portfolio. And since the last earnings call, we increased our ERCOT renewable purchase power agreements by nearly 400 megawatts now totaling approximately 2.2 gigawatts. Last on our credit metrics. Despite the impact of winter storm Uri, we expect to be at 3 times leverage by the end of 2021 after paying down $385 million of debt from cash available for allocation. We're working with the credit agencies to review the impact of winter storm Uri on the timing of achieving investment-grade ratings. An extension in timeline could give us an opportunity to achieve our metrics either through debt reduction and/or EBITDA growth. I will be providing more details on capital allocation and our full strategic outlook during our Spring Investor Day. Now turning to Slide seven for our summer outlook. First, from a high level, we're expecting neutral-to-favorable summer weather and continued economic recovery to result in a year-on-year load growth. Despite this low growth, we're expecting reserve margins to be robust, resulting in stable-to-lower power prices. Just to remind everyone, high load, low price is good for our business. As you can see on the upper left-hand chart, NOAA is predicting a slightly harder than normal summer within the Eastern Texas markets. We expect this outlook to trend toward normal with a positive bias as we near summer. Moving to the bottom left-hand side of the slide. COVID-related electric demand continues to recover across markets with ERCOT demonstrating resilience. As a reminder, COVID stay-at-home impact on load is most pronounced during the shoulder season and less in the summer. From a market perspective, we see 2021 as a recovery year across all our markets. In ERCOT, we expect a return to normal 2% annual load growth with residential usage in ERCOT remaining slightly elevated as stay-at-home trends remain, while C&I usage improves throughout the year, returning to pre-pandemic levels by the end of the year. In the East, we see similar trends, although we believe C&I recovery to be pre-pandemic levels could take an additional 12 to 18 months given stronger stay-at-home trends. Now as it relates to NRG, we continue to see strong residential load across all markets, and we expect to be a relative winner given our multi-brand and multichannel platform. In ERCOT, we're seeing lower attrition rates, and incremental growth opportunities through our multichannel approach and flight to quality following Uri. In the East, we're also realizing lower attrition. But given the less favorable regulatory framework, we depend more on face-to-face sales to win customers. For planning purposes, we are assuming normal customer growth in ERCOT and a slight contraction in the East as it more closely tracks the economic reopenings. On retail supply cost, we see a little risk of sustained high prices this summer, given robust summer reserve margins across all our core markets. While it is still early, we're eager for the earlier evolution and implementation of the Biden infrastructure plan. As we believe it will amplify the electrification of the economy through smart technology and cleaner energy choices. So with this positive backdrop, we continue to make good progress in executing our customer-centric strategy, as you can see on Slide eight. On the Direct Energy integration, this transaction presented a step change for us as we move closer to the customer by significantly expanding our customer network and home services. During the first quarter, we achieved $51 million or 38% of our 2021 synergy target. We remain very confident in our ability to achieve both the 2021 and full plan targets, and we plan to update this scorecard quarterly in order to provide transparency and keep you informed of our progress. We are on track to close on the 4.8 gigawatt asset sale in the fourth quarter. This is a good transaction for us as it further streamlines our business and address terminal value and earnings concerns that otherwise would have masked our retail growth. Our portfolio repositioning and optimization is a continuous process. We are committed to our business model, and we'll continue to provide updates on our progress. Finally, we are preparing for our Investor Day. We continue to target late spring, and given the flexibility afforded by the virtual format, we will announce the event two or three weeks prior to best manage around the Texas resolution. So with that, I will pass it to Gaetan for the financial review. On the upper left side of the slide, we have shown our quarterly results and reinstated guidance after excluding the onetime impact of winter storm Uri, which we are showing separately on the right. As mentioned by Mauricio, we believe that this better reflects the recurring earnings power of our business following the acquisition of Direct Energy, and it is consistent with our established practice of excluding extraordinary events. For the quarter, NRG delivered $567 million in adjusted EBITDA or $218 million higher than the first quarter of last year, excluding $967 million impact from winter storm Uri. This increase is driven by the acquisition of Direct Energy, which generates approximately 2/3 of its EBITDA during the winter months, given the seasonal shape of East electric and natural gas load. This seasonality will help flatten NRG's future earnings profile throughout the year. Specific to Direct Energy, we are on track to realize $500 million of adjusted EBITDA in 2021. We are also on track to achieve $135 million of synergies for 2021 as well with $51 million realized in the first quarter, and a goal of at least $300 million annual run rate by 2023. Turning now your attention to the table on the right, the total anticipated growth impact from winter storm Uri is now $975 million. The increase since our last communication is primarily driven by the 55-day resettlement information from ERCOT, which affected our uplift cost and load estimates and added some incremental results for counterparty credit risk, all of which were partially offset by discounting the ERCOT default charges. We continue to pursue various offselling solution estimated to be in the range of $275 million to $475 million. This would reduce the economic impact to a net amount of $500 million to $700 million. From a cash standpoint, based on $150 million of estimated bill credits owed to large commercial and industrial customers in 2022, the total negative cash impact in 2021 is expected to be approximately $150 million lower at $350 million to $550 million, including the effect of the offsets previously mentioned. Finally, we are reinstating our 2021 guidance at the original ranges of $2.4 to $2.6 billion for our adjusted EBITDA and $144 billion to $164 billion for our free cash flow before growth. Changes on this slide from last quarter are indicated in blue. Starting from the left, on the third column, the net capital required for the Direct Energy acquisition was reduced by $38 million based on the latest estimate of the post-closing working capital adjustment. Moving on to the next column. The estimated winter storm Uri capital allocation impact is $825 million, net of anticipated customer bill credit outstanding at the end of the year, and would be at $450 million after deducting the midpoint of our estimated mitigation efforts of $375 million. This has reduced our original deleveraging plan in 2021. However, we remain committed to maintaining a strong balance sheet and improving our credit metrics over time. Absent any mitigation offset recoveries, which are shown in the far right of the chart, the company will still pay down debt by $385 million in 2021 and continue to delever over time to meet its credit profile goals. Importantly, this does not include any deleveraging associated with the sale of our East and West assets, which is still slated to close later this year. Moving on to Slide 12. I will start on the left with our 2021 credit metrics. After adjusting our corporate debt balance for the reduction from our 2021 capital allocation and minimum cash, our 2021 net debt balance will be approximately $7.8 billion. This, when based on the midpoint of our adjusted EBITDA, implies a ratio of just under 3 times to adjusted EBITDA at the end of the year. This notably excludes the onetime impact of winter Storm Uri, which we also expect to be excluded by the rating agencies. On the topic of raining, we continue to work with the agencies to review winter Storm Uri's impact on the time line and the requirements to achieve investment grade. We remain committed to strong credit metrics and continue to operate under the assumption that investment-grade ratings will be awarded shortly after achieving the targeted metrics. But we're not controlling this process. And we realized that given the circumstances, it could take the agencies much longer than previously anticipated to be comfortable granting us an IG rating. I would note that if the timeline is extended, it could also give us an opportunity to achieve our metrics either through debt reduction and/or EBITDA growth. Turning to the right side of the slide. We also wanted to update you on our latest liquidity position, which are -- which had $4.1 billion as of a few days ago, remains very strong and sufficient to continue supporting our business even during a period of stress. In conclusion, we are reinstating our EBITDA and free cash flow before growth to the original guidance provided in the last earnings call, excluding the impact of winter Storm Uri. While the storm has impacted our capital allocation plan, we have maintained a strong liquidity position before, during and after the event, what our core business continues to perform as otherwise expected. With this, I will hand it back to Mauricio. I want to provide a few closing thoughts on Slide 14. I recognize that winter Storm Uri has impacted investor confidence in ERCOT's market design and the durability of our cash flow. But I want to be clear. Given the steps being discussed in the Texas legislature and the actions by market participants, I don't believe an event like this can happen again. The systemic failure was the result of a lack of winter stress planning, which was then amplified by poor electric and natural gas coordination and protocols to orderly restore the energy system and communicate with customers. Energy is a key pillar to Texas outsized growth and all stakeholders are focused on addressing winter reliability swiftly and comprehensively. ERCOT's winter planning parameters will be enhanced. Grid coordination will be improved and protocols for a large-scale emergency will be established. Now finally, today, following our extensive CFO search, I am pleased to announce that Alberto Fornaro will join our team as Executive Vice President and Chief Financial Officer, effective June 1. Alberto is a seasoned finance expert who brings over 30 years of experience and a unique combination of consumer, technology, manufacturing and risk management experience. Alberto joins us from Coupang, the world's fifth largest e-commerce platform, where he served as Group Chief Financial Officer and Senior Advisor. Before that, he served as CFO for public and private companies, including International Game Technology, a leading gaming company; Doosan, compact and heavy construction equipment company; and Technogym, the world's second largest manufacturer of fitness equipment. I believe Alberto's expertise is the ideal fit to enhance our decisive move closer to the customer. I also want to take a moment to recognize Gaetan Frotte for stepping in as interim CFO and leading the finance organization during this challenging time. Gaetan is a very important and valuable member of our leadership team.	nrg energy inc - winter storm uri expected net cash impact of $500 to $700 million over time . nrg energy inc - reinstating 2021 adjusted ebitda and fcfbg guidance. nrg energy inc - during quarter ended march 31, winter storm uri's financial impact was a loss of $967 million. nrg energy - currently planning to begin returning certain employees to offices through phased approach expected to be completed by end of summer.
I remain extremely proud of the resilience of our entire organization as we've navigated through the combination of the oil and gas industry dislocation, as well as the prolonged COVID-related headwinds that continue to impact our business. Adding to these market headwinds, the third quarter is also impacted by the most active hurricane season in the last decade, causing repeated work stoppages in the Gulf of Mexico. In the face of these challenging conditions, we remain focused on executing our strategic playbook by pulling the required levers to maintain positive free cash flow and paying down debt while adjusting our infrastructure to address the new market realities in our U.S. Fluids business. Free cash flow generation and debt reduction remain our highest priorities and I am extremely pleased with our performance on this front. During the third quarter, we generated $15 million of cash from operations and reduced our total debt balance by $34 million as we continue to harvest working capital and repatriate excess cash from our foreign subsidiaries. Benefiting from the strong cash generation over the past two quarters, we reduced our total outstanding debt by $65 million since the start of the year. Touching on the specifics of the segment results, Fluids Systems posted third quarter 2020 revenues of $68 million, reflecting a 9% sequential decline. In contrast to a 35% reduction in U.S. rig count, revenues from U.S. land has steadily improved as we progressed through the quarter, increasing 8% sequentially to $30 million. This improvement was driven by our expanding market share and a recovery in customer activity, specifically drilling more wells with fewer rigs. As we touched on last quarter, our market share in U.S. land has meaningfully expanded in recent months and I'm pleased to highlight that our share has remained above [Phonetic] 20% mark, throughout the third quarter, achieving a record level for Newpark. In the Gulf of Mexico, the quarter is impacted by the repeated weather-related disruptions which led to revenues declining by nearly 50% to $7 million. Internationally, activities in key markets within the Middle East and North Africa were negatively impacted by greater travel and operational restrictions, imposed by local governments in response to a surge in COVID outbreaks in the third quarter. This led to a 12% sequential reduction in our international Fluids revenues. Also, as we announced previously, in response to the significant change in the U.S. oil and gas market, we've been working over the past two quarters to reposition our chemical blending facility located in Conroe, Texas to serve more stable markets. As an update, I'm pleased to announce that we completed the installation of our first semi-automated packaging line late in the quarter, which allowed us to begin scaling up production of industrial cleaning products as we target leading cleaning product companies. With a partial quarter of production, we generated nearly $3 million of revenue from the cleaning products in the third quarter. We remain encouraged by our progress in this area, but more work is required to better understand the industrial cleaning products market, including our position in that value chain. In the Mats segment, despite the continuing impact of COVID across the United States and the United Kingdom, revenues improved 5% sequentially in the third quarter to $29 million. The improvement benefited from a late quarter surge in demand from the utility sector along the Gulf Coast where we are supporting electrical infrastructure, damaged by the recent hurricanes. We anticipate that the hurricane-related demand will provide a positive impact to Q4 results as work continues repairing damaged utility infrastructure. While the market conditions were extremely challenging in the third quarter, I'm pleased to note that we feel that both of our business segments had bottomed out and the worst is now behind us. As we look forward to the fourth quarter, we are anticipating improvement in operating results across both segments. And with that, I will hand the call over to Greg to discuss in more detail the financials for the third quarter. I'll begin by covering the specifics of the segment and consolidated financial results for the quarter before providing an update on our near-term outlook. In the Fluids Systems segment, as Paul touched on, revenues from U.S. land increased 8% sequentially to $30 million in third quarter despite the 35% reduction in average rig count, reflecting our expanding market share as well as a rebound in customer spending per rig. The Northeast and Rockies reflected the most notable areas of sequential improvement. Our Gulf of Mexico business had an extremely challenging quarter due to the repeated hurricane shutdowns leading to nearly 50% reduction in revenues to $7 million in the third quarter. Industrial cleaning product revenues contributed nearly $3 million in the third quarter, more than tripling the prior quarter. In Canada, revenues declined 36% to $2 million in the third quarter with the sequential comparison negatively impacted by the timing of customer projects. Outside of North America, as Paul touched on, COVID continued to have a negative impact on customer activity, most notably in the EMEA region were ongoing restrictions on movement of personnel and products within a number of countries have resulted in significant activity disruptions and project delays. Although the Middle East held up well in the second quarter, we've seen a more notable COVID impact during the third quarter. Total international revenues declined 12% sequentially to $25 million with operations in the Middle East contributing the majority of the decline. With the COVID-driven impacts, total revenues from the Middle East pulled back 27% to $9 million in the third quarter. On a year-over-year basis, our Fluids Systems revenues declined 56% compared to Q3 of 2019. North American land revenues declined by $64 million or 66%, modestly favorable to the 71% decline in rig count while Gulf of Mexico revenues declined $2 million or 25% year-over-year as our expanding market share was more than offset by the impact of the 2020 hurricane season. International revenues also declined $21 million or 45% year-over-year with declines seen across substantially all markets. Despite realizing a meaningful impact from our cost actions, the third quarter operating loss was impacted by the $7 million sequential decline in revenues, cost inefficiencies driven by the unplanned activity interruptions in the Gulf of Mexico and EMEA region, the start-up of cleaning products packaging as well as ongoing efforts to drawdown excess inventories. Turning to the Mats business, total segment revenues increased 5% sequentially to $29 million in the third quarter, driven by improvement in rental and services as well as product sales. As Paul mentioned, rental and service revenues increased 3% sequentially as the late third quarter surge in demand from the utility sector along the Gulf Coast, was largely offset by a $2 million reduction from E&P markets. Product sales improved 14% to $6 million for the quarter. Although we are seeing continued strengthening in quoting and customer planning activity in the utility and industrial market, several scheduled utility infrastructure projects in Q3 were delayed due to the prolonged COVID-related restrictions in many states. Further, it's worth noting that as a result of the utility industry's mutual assistance program, the hurricane response caused many utility service providers to redirect their efforts to support the emergency Gulf Coast repairs, causing delays in projects that would have otherwise moved ahead. From an end market perspective, $20 million of our third quarter revenues is derived from the energy infrastructure and industrial markets, representing roughly 70% of our total segment revenue. Compared to the third quarter of last year, Mats segment revenues declined $22 million or 43%, largely reflecting a $12 million decline in E&P, rental and service and $9 million decline in direct sales. Our UK operation has been a particular bright spot year-over-year, delivering more than 20% growth in revenues over 2019. Mats segment operating income declined $1 million sequentially to essentially breakeven, generating EBITDA of $5 million in the third quarter. The third quarter operating results were impacted by the mix of rental and service revenues along with elevated unabsorbed fixed cost in our manufacturing facility and cost to mobilize our assets and resources to respond to the hurricane work. As noted in last quarter's call, we pulled back production within our manufacturing facility in the third quarter as part of our inventory and cash management strategy. Total corporate office expenses were $6.6 million in the third quarter, relatively in line with the second quarter. On a year-over-year basis, corporate office expenses declined $3 million, primarily driven by a $1.5 million reduction in personnel costs, as well as lower M&A and strategic planning costs. SG&A costs were $21 million in the third quarter, down slightly from the second quarter. On a year-over-year basis, SG&A costs declined $7 million, largely reflecting lower personnel expense, strategic planning costs, and legal and professional spending. As Paul discussed, we made meaningful progress in our debt reduction efforts. As a result of the reduced debt balance, interest expense declined 17% to $2.4 million in the third quarter, roughly half of which reflects non-cash amortization of facility fees and discounts. As of the end of the third quarter, the weighted average cash borrowing rate on our outstanding debt was approximately 3%. The third quarter benefit from income taxes was $4.8 million, which reflects a 17% effective rate for the third quarter and 15% rate for the first nine months of 2020. This compares to a net loss of $0.29 per share in the second quarter, which included $0.09 of charges and a net loss of $0.02 per share in the third quarter of last year. For the third quarter, cash provided by operating activities was $15 million which included a $29 million net reduction in working capital. The continued monetization of working capital benefited from a strong reduction in both inventories and receivables, particularly in the U.S. Investing activities again had a minimal impact in the quarter, illustrating the flexibility of our capital-light business model. It's worth noting that the majority of our capital expenditures support our industrial end market activities, including the deployment of mats into the rental fleet to support the increased demand from the utility sector. Our cash balance declined $20 million in the third quarter, reflecting our ongoing efforts to repatriate excess cash from our foreign subsidiaries, which combined with our free cash flow generation was used to pay down our U.S. asset-based loan facility by $34 million in the quarter. With the benefit of the debt repayments, our total debt balance declined to $102 million, while our cash balance ended the third quarter at $24 million, resulting in a total debt-to-capital ratio of 17% and a net debt-to-capital ratio of 14%. Our primary debt components include the remaining $67 million of convertible notes due December of next year and $30 million outstanding on our U.S. asset-based bank facility, which runs through 2024. Substantially, all of our $24 million of cash on hand resides in our international subsidiaries. Now turning to our near-term outlook. In Fluids, with hurricane season coming to an end and North American land markets continuing to gradually improve, we expect to see a meaningful improvement in fourth quarter operating results. The largest change is anticipated within the Gulf of Mexico, where we expect Q4 revenues will return to roughly Q2 levels. In U.S. land, we're seeing continuing improvement in customer activity with October revenues coming in roughly 5% ahead of the Q3 run rate. We also expect Canada will rebound as the overall market activity levels improved in the seasonally stronger Q4. In addition, we expect our cleaning products revenues will roughly double Q3 levels, benefiting from a full quarter of production. Looking outside of North America, although a second wave of COVID is currently hitting parts of Europe, the Middle East and North Africa, we currently expect our Q4 revenues will return to roughly Q2 levels, benefiting from increased customer activity in North Africa, and Eastern Europe, as well as an increase in stimulation chemical sales into the Middle East. From a margin perspective, we anticipate the impact of the stronger revenues combined with the ongoing cost rationalization efforts should drive the Fluids business close to EBITDA breakeven in the fourth quarter and a return to positive EBITDA generation in the first quarter of 2021. In the Mats segment, with the benefit of the hurricane-driven demand in the U.S. utility sector to start the fourth quarter, ongoing strength from our UK business along with the pickup in customer bidding and planning activity, we expect Q4 rental and service revenues to improve by roughly 10% from Q3. Further, although visibility to the timing of Mats sales is always a challenge to predict, it's worth noting that several US utility companies have continued to publicly reconfirm their commitment to their capital plans. Consequently, we believe we will see an uptick in year-end demand for product sales, potentially doubling the Q3 results. Combining the RS with the product sale expectation, this sets up for Q4 to be the strongest revenue quarter of the year for the Mats business. From a margin perspective, the extent of the year-end product sale demand will likely determine whether the Mats business can return to double-digit operating margin in the fourth quarter. Corporate office spending should remain near the Q3 level in [Technical Issues] and we expect the effective tax rate for the remainder of the year to remain relatively in line with the year-to-date 2020 rate. With regards to cash flows, we have made solid progress in monetizing working capital over the past two quarters and see additional opportunities ahead with over $200 million of net working capital remaining on our books. More specifically, international receivables and global inventories remain well above historical levels. So we expect further reductions in excess working capital will continue to provide a tailwind to cash generation in the coming quarters. Inventories will likely take several quarters to optimize depending on customer activity. Meanwhile, reflective of our capital-light model, we expect limited net capital investments for the foreseeable future with capital deployment largely targeting industrial end market diversification efforts that provide a clear line of sight to cash flow and EBITDA generation. As illustrated by our actions over the past two quarters, we are taking prudent steps to maintain positive cash flow with a particular focus on the remaining $67 million convertible note maturity at the end of next year. We expect that our cash on hand, cash generated from operations and the available capacity under our U.S. asset-based loan facility will provide sufficient liquidity to support our ongoing operations and satisfy our convertible note maturity. As we noted in the past, it remains our intention to fund the maturity without accessing public capital markets. As part of our capital structure management, we are evaluating additional sources of liquidity available to further enhance our capital structure. Specifically, we maintain meaningful U.S. real estate as well as assets within our European operation that can be used to create additional liquidity through secured financings or alternative arrangements. It's also worth noting that with our 30-day average share price recently falling below the NYSE's $1 listing requirement, we expect to receive notification from the NYSE regarding this non-compliance. While we intend to evaluate the various options that are available to regain compliance with the NYSE requirement, our primary focus remains on driving operational improvement and consistent free cash flow generation as we continue to reshape the Company. 2020 has certainly been a challenging year that I do not think any of us could have predicted. The combination of a global pandemic, volatile oil and gas prices and the historic hurricane season, certainly challenged our businesses, but we are optimistic that the worst is now behind us. We also recognize that more work is required to streamline fluid to the new market realities of the oil and gas industry, while at the same time positioning the Company to take advantage of [Technical Issues] opportunities in the energy infrastructure and industrial cleaning product markets. So, I'd like to close by summarizing the actions taken as part of the strategic playbook we laid out earlier this year to navigate through these difficult times and position the Company for profitable growth and improved returns on invested capital. First, our focus on employee safety, our most important core value has not wavered in these exceptionally challenging times. We are pleased with our improved 2020 safety performance as well as the limited number of COVID cases within our global employee base. Second, we are aggressively managing our balance sheet by harvesting cash from working capital while leveraging our capital-light business model. Since the beginning of the year, we've generated $36 million in free cash flow and reduced our outstanding debt by $65 million, a reduction of nearly 40%. Third, we have been successful on diversifying our revenue streams away from the volatile oil and gas markets, particularly U.S. land, which we believe will ultimately lead to improved stability and cash flows and higher returns on invested capital. In our Mats business [Technical Issues] 70% of our revenues from energy infrastructure and other industrial markets, which we believe provide significant growth opportunities as the energy transition gains traction. In Fluids, we also believe that continued expansion of our international business, predominantly in the Eastern Hemisphere will provide future stability as it has in prior cycles. Over the last 12 months, we've secured several new contracts in the EMEA region that should add incremental revenue once the COVID headwinds ultimately subside. And as I touched on earlier, we've now successfully repositioned our Conroe, Texas oilfield chemicals blending site to an industrial and consumer cleaning products facility, providing a path forward to further diversification outside of the oil and gas markets. And fourth, we've taken aggressive actions to rightsize our Fluids business, particularly in the U.S. and as we touched on last quarter's call, we have now reduced our Fluids Systems EBITDA breakeven point to roughly $350 million of annualized revenue. But more opportunity exists to further optimize our footprint, driving efficiencies in our operations, while also harvesting additional working capital from the balance sheet, most notably inventory. These efforts will not be completed within a quarter or two. Rather, it will be a continuing process as the market evolves over the coming year. Furthermore, I'd like to note that as we reduce our net capital deployed in Fluids, we remain very selective in future investments in the U.S. oilfield sector. This should enable the Fluids business to more efficiently navigate market volatility and deliver stronger cash flow generation and improved returns on invested capital through future industry cycles. In closing, I'd like to take a moment to speak about ESG, something that's long been part of our DNA at Newpark and a subject that is becoming of increasing importance around the world. Over the past decade, we've prided ourselves on offering products that help our customers across all industries, improve the sustainability of their operations. For examples of this, you need to look no further than our flagship products, including our fully [Indecipherable] DURA-BASE matting system which has been in the market for over 20 years and competes primarily with old-growth timber mats or our evolution water-based drilling fluid system launched in 2010, which provides customers with a number of environmental benefits over traditional diesel fuel-based products. Through these product offerings and our larger ESG program, we continue to reduce our environmental impact while helping our customers reach their environmental goal. For more information regarding the benefits of our environmentally focused product offerings and other facets of our ESG program, we encourage you to visit our website and select sustainability from the landing page.	reduces debt by $34 million in quarter.
A full transcript and download will be posted after the call. It is now my pleasure to introduce Norfolk Southern's Chairman, President and CEO, Jim Squires. Building upon our momentum to start the year, our team delivered another record-setting quarter, as dramatic improvement in both revenue and volume up 34% and 25% respectively outpaced an 11% growth in expense and while the year-over-year improvement is aided by easier comps from last year's economic shut down, our performance in the quarter also improved sequentially in a number of ways as shown on slide 4. Our results includes second quarter records for net income and earnings per share and all-time records for operating income and operating ratio, which was 58.3% this quarter. We accomplished a lot this quarter and I am most pleased with our PSR progress during the past several months, we continued to get more productive face our challenges head-on and seize the opportunities we are creating. In the second quarter, we saw the benefits of a structurally lower operating cost base coupled with an operation that successfully absorbed increased volumes in the network. Turning to the operating metrics on Slide 6 you can clearly see the operating leverage generated in the quarter. Leverage that flow directly to the bottom line. Our operating discipline enabled us to handle a 25% year-over-year volume increase with 8% fewer people in our workforce and a 1% decrease in active locomotives. This success shows our improvements in train size reflecting our goal of absorbing more business into our existing operating network wherever possible and further driving productivity. These gains were achieved in part by the increased deployment of distributed power and more blending of previously separate traffic types on the same train. We will continue to unlock train size increases through targeted siding extensions on key routes where train length is currently limited. Terminal capacity enhancements, which we've achieved through more efficient operating practices will also be a key factor in absorbing and processing growth on these larger trains. Increased train size promotes better fuel efficiency and our progress this quarter reflects our commitment to closing the fuel efficiency gap with our peers. On Slide 7, you can see in the second quarter, we showed sequential improvement in terminal dwell and train velocity after we got through the severe winter weather in the first quarter. However, our progress was uneven and we lost ground in June in part due to several discrete but geographically impactful operating disruptions. We aren't satisfied with our service levels and we are working extremely hard to seize the opportunity PSR presents to recover faster from disruptions. As the graph show, we resumed our improvement in July. We are committed to continuing to improve service levels and running a faster railroad, not just because a faster railroad is a lower cost railroad, but also because speed generates capacity for us to take on additional traffic within our existing train network. I'll move to Slide 8; during the quarter we strive to deliver a consistent service product even with significant volume changes by focusing on the consistency and productivity of our yard and local operations. We are teaching and equipping our field managers to better measure the work our yard and local crews do and answer some important questions; does the number of assignments working match the car volumes flowing through a terminal or territory? Are we getting full value out of each resource in our yards? What's the right balance of over time cost? Where are there further automation or process opportunities to help us reduce support costs, including clerical staff and chemical [Phonetic] presence. We are implementing technology to provide better and more timely data to answer these questions, which helps us reduce direct operating cost and improved service consistency. In several locations, we've renewed our focus on more efficient remote control operations, which have been facilitated by the changing nature of the work over the last year. Local operations scheduled and properly sized to volumes, enable us to be more predictable to our customers and move cars quickly. Having a higher balance of crews assigned to road train service, while creating capacity within the terminal through process enhancements makes us nimble in responding to market changes and reducing our fixed costs. Local service is at the core of our service product and these changes are designed to improve that product. So far, we have reduced the cost-per-yard in local crude 7% versus last year and expect additional progress as the year continues. In a moment, Mark will discuss the benefits of reduced head count and employee activity levels in constraining overall compensation expense as we absorb volume. Our focus on yard and local productivity has played a pivotal role in driving these benefits. We pursue targeted initiatives such as these with an eye toward the next generation of modern railroading, which we are bringing to life today. We continue to empower our workforce to the delivery of mobility solutions and have distributed 8,000 smartphones to our T&E employees to facilitate improved reporting and to streamline the process of keeping trains moving. In the third quarter, we will begin rolling out a next generation local train reporting application to improve our visibility and customer service for the first and last mile. We are also in the final months of deployment of our current phase of the mobile track authority application that facilitates more efficient coordination between engineering and dispatching functions for right of way maintenance activities. We are at a very exciting time for our company and industry, in which we have ample opportunities to drive customer and shareholder value through both operational improvements and technology, a powerful formula. Earlier, I mentioned the role the mechanical team has played in our PSR success so I thought it would be useful to explain their crucial role on Slide 9; PSR railroads Norfolk Southern included end up needing fewer locomotives. What our mechanical department has done is to take that initial Annie [Phonetic] and use it strategically to call the worst performing units and to make our locomotive fleet more homogeneous. Those changes unlock repair productivity. Think about the benefits of repairing newer and fewer locomotives, which drove down the number of units out of service for repair. That started a virtuous cycle of improved reliability with 175% improvement in the days between unscheduled events to a shop versus pre-PSR levels, meaning that when units do go into the shop our craftsman can spend more time on preventive maintenance instead of triaging issues. This cycle repeats itself and ultimately supports the efficient movement of trains and serving our customers. Fewer, more reliable units also require fewer resources. So, we need fewer servicing facilities and have fewer people maintaining locomotives. This is just an example -- a big example of Norfolk Southern's PSR transformation. These changes are purposely aligned with our overall fleet strategy including investments in our fewer but better units through our DC to AC conversion, energy management solutions and predictive analytic tools for maintenance planning and failure prevention. When taken as a whole, the benefits of this strategy flow through our materials, fuel and compensation expense lines while ensuring we have a robust fleet capable of supporting profitable growth. You can see on Slide 11 that we are approaching pre-pandemic revenue levels; however, the composition of our business has changed dramatically due to the secular trends in the overall economy that were accelerated by the pandemic. Norfolk Southern is positioned at the forefront of these shifts due to the unique advantages of our powerful consumer oriented franchise and the diverse industrial markets we serve. The progress we have delivered amid dynamic business conditions underscores the value we provide to the markets we serve. Norfolk Southern's network directly connects to the majority of consumption and manufacturing in the United States and is a vital resource for maintaining the flow of goods to support the economy. We are building on the inherent value of our network by working to provide our customers with the digital logistics solutions they need to compete and grow in an evolving market. The sustainability advantages of the Norfolk Southern franchise deliver a competitive advantage, provide customers with solutions to their carbon offset goals and are an accelerant to growth. In the second quarter of 2021, we successfully capitalized on opportunities by leveraging productivity enhancements and collaborating with our customers. As a result, second quarter revenue in our non-energy markets exceeded pre-pandemic levels by 4%. Growth this quarter was driven by consumer facing and industrial segments, which helped to offset sustained headwinds in our energy markets. Revenue in our energy related markets returned to just over two-thirds of pre-pandemic levels in the second quarter of 2021. Our market position enabled a quick recovery and consumer and industrial markets almost fully offsetting the 50% decline in our energy revenue, despite the sharp decrease in this historically profitable segment, we reduced operating ratio, levering the strength of our unique franchise to target segments of the $800 billion truck and logistics markets with a sharp focus on productivity. Turning to Slide 12, our quarterly volume and revenue improved significantly from pandemic lows in all three business units, reflecting our ability to capitalize and build on the momentum of improving economic conditions. Total revenue for the quarter was $2.8 billion, up 34% year-over-year on 25% volume improvement. Rising fuel prices and price gains drove a 7% improvement in revenue per unit, led by our intermodal franchise, which delivered record-breaking revenue per unit and revenue per unit less fuel. Sequentially, volume and revenue improvement in all three business units over the first quarter, in line with the accelerating economic recovery. Beginning with our merchandise segment, both volume and revenue improved 25% versus the second quarter of 2020 driven primarily by recovery from COVID-19 related shutdowns in the prior period. While automotive continued to face headwinds associated with the semiconductor chip shortage, shipments in the second quarter were up 122% year-over-year against easy comps associated with near complete shutdown of vehicle production in the second quarter of last year. Our steel franchise also delivered strong growth this quarter, up 67% as record level steel prices and elevated demand fuel production activity. Combined gains in automotive and steel volume represented roughly 63% of total merchandise growth for the quarter. Revenue per unit was flat, while revenue per unit, excluding fuel declined slightly driven by mix headwinds in chemicals and automotive. Turning to intermodal, our powerful franchise delivered record-breaking revenue, revenue per unit and revenue per unit less fuel for the quarter. The second quarter of 2021 marks the 18th consecutive quarter of year-over-year growth in revenue per unit, excluding fuel for our intermodal franchise. Strong consumer demand and tightness in the trucking sector drove growth for our domestic service product. Domestic shipments were up 17% year-over-year in the second quarter and up 4% from the same period in 2019. International shipments were also strong in the second quarter improving 26% year-over-year on sustained high import demand but were down 3% from the same period in 2019. Revenue per unit gains were driven by increased statutory [Phonetic] revenue, higher fuel surcharge revenue and price gains. Approximately 50% of the revenue per unit gain was driven by higher container storage time on terminal due to supply chain recovery challenges. Lastly, our coal segment experienced some bright spots in the second quarter due to higher demand levels driven by global economic recovery and weather events. Coal shipments improved 55% year-over-year with strength in both the export and utility markets. Revenue per unit decreased slightly due primarily to negative mix experienced in our export markets where growth was driven by strength in the lower RPU export thermal market. Moving to our outlook on Slide 13. We expect the current economic momentum to continue through the end of the year and are raising our guidance for full-year revenue growth to approximately 12% year-over-year. The overall economy continues to surprise to the upside with forecast for 2021 GDP growth now at around 7% and approximately 5% for 2022. Industrial production is forecasted to increase 6% in 2021 and north of 3% in 2022. Increased manufacturing coupled with record low retail inventories, high savings rates and increased energy consumption, all set the stage for continued growth in the second half of the year. Merchandise growth will be led by strength in steel markets as low business inventory to sales ratios and sustained demand for durable goods drives manufacturing activity in the second half. We are well positioned to capture opportunities associated with current strength in the steel markets as our network serves more integrated steel mills than any other railroad in North America. Merchandise energy markets will benefit from increased travel and commuting activities as businesses continue to reopen and virus restrictions are lifted. Pulp board and plastics volumes are also expected to increase as personal consumption drives demand for packaging. Merchandise gains will be partially offset by a year-over-year decline in automotive shipments in the third quarter, due to planned production downtime associated with the semiconductor shortage. Demand for international trade to support recovering global economies is expected to lead second half growth in our intermodal franchise. Domestic intermodal demand will continue to improve as well with consumer spending and e-commerce forecasts strengthening through the end of the year and ongoing capacity constraints in the trucking sector, driving more opportunity for highway to rail conversions. Our coal franchise will continue to capitalize on near-term opportunities to support global energy demand and steel production. Volume in the second half of 2021 is expected to improve year-over-year, driven by export markets benefiting from high seaborne coal prices making US coals more competitive in the global market. Demand for domestic met to support growing steel production activity is also likely to produce year-over-year growth. Gains in these markets will be partially offset by expected year-over-year declines in utility volume as this market deals of unit retirements, coal supply and planned maintenance outages. Volatility is an ever-present risk in the coal market, so we are closely monitoring geopolitical trade tensions and coal production, both of which have a potential to influence results. Overall, we expect economic conditions to be favorable for Norfolk Southern growth through the end of 2021. We are confident in our ability to leverage the strengths of our unique franchise and continue to drive revenue and margin growth. On Slide 15, you see the reconciliation of our Q2 reported operating ratio and earnings per share versus 2020. The operating ratio of 58.3% represents a 1240 basis point improvement. We had $67 million of property gains in the quarter, of which there was one major transaction that closed at the end of the quarter and resulted in a $55 million gain. We view this single transaction is incremental to our normal yearly operating property gain guidance of $30 million to $40 million and it alone represents 100 basis points of the operating ratio improvement this quarter. Earnings per share at $3.28 was $1.75 higher than prior year, aside from the $0.17 goodness from the property gain there was a state tax law change that resulted in a favorable adjustment to our deferred taxes of $0.09. Moving to Slide 16, Alan walked you through the drivers of the 34% increase in revenues, including the 25% growth in volumes. At the same time, we contained growth in operating expenses to 11% as we harvested additional benefits from workforce and asset productivity. The volume growth coupled with the productivity drove strong incremental margins again this quarter resulting in an operating ratio that was a record low 58.3% improving 1240 basis points year-over-year and 320 basis points sequentially versus Q1, including the 200 basis point tailwind from the major property gained. Our operating income at $1.167 billion in the quarter is another record, up $557 million or 91% year-over-year and we generated free cash flow of $1.47 billion through 6 months also a record, and that represents an increase of $447 million or 44% versus the same 6 months last year. Moving now to a drill down of operating expense performance on Slide 17, you will see that operating expenses increased $157 million or 11% and fuel was the biggest driver of the increase with price driving expenses up $83 million. Usage increased due to higher volumes, which was partially offset by another quarter of fuel efficiency gains, a 4% improvement in the quarter. The increase in purchase services and rents has driven by volumes, although we managed to keep the increase in these categories, well below the volume growth rates. Comp and Ben is up 6% with savings from headcount being down 8% year-over-year, offsetting increases in pay rates and over time. Higher incentive compensation in the quarter was $39 million reflecting the improved outlook for the year and lower accrual rates of last year. The big item in the materials and other column is the favorable compare on gains from property sales, in Q2 and that was $67 million in the quarter versus only $2 million last year. Turning to Slide 18, you will see that other income net of $35 million is $14 million or 29% unfavorable year-over-year due primarily to lower net returns on our company owned life insurance investments. Our effective tax rate in the quarter was only 21%, lower than we typically model and that was primarily from the benefit associated with the state tax law change. Net income increased by 109%, while earnings per share grew 114% supported by the nearly 3.4 million shares we repurchased in the quarter. Wrapping up now with our free cash flow on Slide 19, and as I mentioned free cash flow was a record for the 6 months of 2021 at $1.47 billion buoyed by very strong operating cash generation and relatively modest property additions of $627 million thus far in the year and that translates to a free cash flow conversion of 99% through 6 months although, we still expect property additions to ramp up in the balance of the year and hit our $1.6 billion guidance number. When we spoke last quarter, I took the opportunity to share our company's long-standing commitment to sustainability; along those lines I'm excited to report two brand new milestones in our journey. Earlier this quarter, we became the first North American Class 1 railroad to issue a green bond, launching 500 million in green bonds to fund sustainable investments to reduce our carbon emissions and partner with customers to do the same. As outlined in our Green Financing Framework, potential projects range from improving locomotive fuel efficiency to fostering truck to rail conversions, powering company operations with clean energy to increasing the use of energy efficient buildings and technology and supporting reforestation projects that restore natural landscapes and offset carbon emissions. In addition to our green bonds, we achieved another significant milestone earlier this month with the approval of our science-based target. Our commitment to reduce emissions intensity by 42% in the next 15 years. These two steps are a critical part of our shared commitment to sustainability with our investors, customers, partners and communities underscoring our resolve to be an even bigger part of the solution. Before we open the call to Q&A, I'll take a moment to provide our updated outlook based on the current economic environment. As Alan mentioned, we are even more confident about growth for the balance of this year and we now expect revenue to be up approximately 12% year-over-year. Strength in our consumer oriented and manufacturing markets will drive the majority of the growth and the near-term upside in coal markets will provide more of a lift this year than previously expected though the market remains challenged in the long term. We are also succeeding in driving productivity into our operations and as a result we got onto our 60% run rate here in the second quarter. We expect to maintain this OR level for the balance of the year, which translates to at least 400 basis points of OR improvement for the full year versus our adjusted 2020 result, and we'll build upon this momentum for more improvements in 2022 and long-term sustained value for our shareholders and customers.	compname reports q2 earnings per share of $3.28. q2 earnings per share $3.28. qtrly railway operating revenues of $2.8 billion increased 34%. qtrly railway operating ratio was 58.3%, an all-time record.
Along those lines, recall two adjustments during 2020, including a non-cash charge in the first quarter of 2020 related to the sale of 703 locomotives for $385 million and a $99 million impairment charge in the third quarter of 2020 related to an equity method investment. We will speak to full-year comparisons, excluding those charges from 2020. A full transcript and downloads will be posted after the call. It is now my pleasure to introduce Norfolk Southern's chairman and CEO, Jim Squires. I'm pleased to be joined by Alan Shaw, president; Cindy Sanborn, chief operating officer; Ed Elkins, chief marketing officer; and Mark George, chief financial officer. 2021 serves as the pinnacle of the plan and is marked by the achievement of our 60% full year operating ratio and record productivity levels across our operation. Through a multiyear effort, we delivered on our commitments, overcoming significant headwinds associated with first freight recession and then a global pandemic over the course of our plan. In the past three years, we've produced industry-leading total shareholder return. We've grown earnings per share by 27%, reduced our operating ratio by 530 basis points and returned nearly $10 billion back to our shareholders in the form of share repurchases and dividends. We met and exceeded our goals, albeit with a very different formula than originally anticipated given the volume headwinds, demonstrating our ability to adapt and innovate and our dedication to deliver upon our commitments. I'm so proud to be a part of this team and humbled to service its leader. We're poised to build upon our momentum and write a new record book. The company is in rock solid position, and we have the right team to guide our next chapter of success. It's my pleasure now to turn the discussion over to Alan for a detailed look at the fourth quarter and full year results. As Jim noted, 2021 represents a combination of our multiyear plan, and I'm pleased to share with you the progress we made in the fourth quarter. As you see from our results on Slide 5. Revenue growth of 11% outpaced our expense increase of 8%, producing an 18% improvement in earnings per share and a fourth-quarter record operating ratio of 60.4%. For the full year, revenues improved 14%, which more than offset the 6% increase in operating expenses. We delivered the hallmark 60% operating ratio for the full year, an improvement of 430 basis points over the adjusted full year 2020 results and our sixth consecutive year of improvement. We are excited to share more details of our results, and you'll hear from both Cindy and Ed about work to iterate on the next phase of our Thoroughbred operating plan that will serve as the framework for our continued progress on service, productivity, and growth. I'll first turn to Cindy for a review of our operations. During the fourth quarter, headwinds from the tight labor market created acute operational challenges across several parts of our network. While working to overcome the workforce planning hurdles, we remain focused on leveraging productivity initiatives to move freight for our customers. These efforts did bear fruit, but our service quality was significantly below where we needed it to be. I'm going to discuss with you today the strategic approach we are taking to change this. Turning to Slide 7. Pronounced changes in business mix were evidenced by the unit volume decline of 4% while GTMs were up 1%. Productivity gains were key to handling volumes in the quarter as the transportation workforce contracted by 8%. The reduction in crew starts of 4%, growth in train weight of 10%, and growth in train length of 8% were critical elements of this productivity formula as well. Where active locomotive count increased by 5% as the network slowed, we kept focus on efficiently deploying those locomotives on the larger trains, which helped drive the 3% improvement in fuel efficiency. As I mentioned a few moments ago, you can see the degradation of network fluidity on Slide 8. We regained a modest amount of ground over the holidays and as we're entering the first quarter, our improvements have been sporadic as COVID-related absences have more than doubled from where they were in December. Let me be clear, our top priority is to drive the service improvements our customers expect and need and we will get there. We are working very hard to leverage and increased hiring pipeline as well as productivity initiatives to drive our performance. Next, I'll provide more details on the hiring process on Slide 9. We've made significant progress in ramping up resources to improve the pace of hiring while pursuing productivity. And as shown on the slide, we are pulling five key levers to do so, including: number one, incorporating additional recruiting and training resources to increase hiring. Employees from across the company have volunteered to provide support in our principal training facility and it's all hands-on deck; number two, streamlining the hiring and onboarding process. We've trimmed weeks from the process of first identifying a candidate to have them on board; three, increasing trainee pay and offering incentives such as signing, retention, and referral bonuses; four, lengthening and combining trains. We've made solid progress in this regard; and finally, five, we're using a variety of techniques to optimize our existing crews, including realigning crew districts and making crew bases more fungible. Our people are getting creative and rising to the challenge, and resource additions are bearing fruit as we've onboarded over 3x more conductor trainees in January than any month in 2021. These trainees will promote throughout the second quarter, which is when we expect to start improving train and engine service staffing levels. We do expect to see some relief in critical crew bases during Q1 as trainees that started in 2021 became promoted, though we are still experiencing high levels of attrition in those same areas. On average, we expect the number of certified train and engine employees in 2022 to approximate that of 2021 and are expecting GTMs per employee to increase. So when looking at the year as a whole, our plan is to leverage productivity gains to absorb volume growth while getting the workforce rebalanced to drive improvements in service quality. Let's unpack the productivity discussion a little more on Slide 10. We've improved average train weight and length 21% and 20%, respectively, since mid-2019 when TOP21 was launched. This has been a key to our success and will continue to be so going forward. Larger trains reduce labor intensity, improve locomotive productivity, improve fuel efficiency and provide our customers with a platform for growth. We have efforts in the pipeline to continue this trend: first, on the infrastructure front, in 2021, we launched work on 9 siding extensions, one of which was quickly completed and in service by the fourth quarter. Most of the others will be completed throughout 2022; second, our very capital efficient and high-performing DC to AC locomotive modernization program is ongoing. As a reminder, this is a dual-purpose program to rebuild engines at the end of their life while converting them to the latest and greatest technology. In 2021, we improved our fleet composition to nearly 60% AC power and 65% of our road fleet is capable of distributed power. Both of these aid with running larger trains; lastly, our operating plan and growth initiatives must be well aligned to add capacity to existing trains, which brings me to Slide 11. In 2022, we have already kicked off the next generation of our PSR-based operating plan, which we are calling TOP SPG. While you may be familiar with an SS legacy of Thoroughbred Operating Plans, or TOP, the next-generation SPG represents a new era of service, productivity, and growth, three equally important facets of our new operating plan. We are embarking on this next era because we have significant improvements that need to be made in each of these areas, service, productivity, and growth to reach our full potential. We are taking a ground-up approach to the development of the plan in order to explore what is possible when we remove historical constraints and take a fresh look at our business. We are leveraging lessons learned from the first three years of PSR operations under TOP21 and using a rich data set to execute in a customer-centric collaborative process. We look forward to keeping you updated as this initiative unfolds throughout the year. Now beginning on Slide 13. I will highlight our results for the fourth quarter. Total revenue improved 11% year over year to $2.9 billion as strong demand and favorable price conditions more than offset the 4% volume decline in the fourth quarter. Volume was impacted by the continuation of the extraordinary global supply chain disruptions and slower network velocity. Pricing and strength across all markets contributed to the 15% increase in revenue per unit, and we reached record revenue per unit less fuel across all of our markets. This demonstrates our ongoing commitment to execute our yield-up strategy and drive value for both our customers and our shareholders. Within merchandise, volume growth in the fourth quarter was led by our chemicals franchise as rising economic activity drove demand for chemical products, particularly for crude oil and natural gas liquids. Gains in our metals business also contributed to growth with volume in these markets up 6% year over year on sustained high demand from the strengthening manufacturing sector. Partially offsetting merchandise growth was a decline in automotive shipments, which were down 9% year over year due to slower velocity coupled with strong comps in the fourth quarter of 2020 when the industry was boosted by pent-up demand. Merchandise revenue per unit increased 6% year over year, driving total revenue growth of 8% to $1.7 billion for the quarter. Revenue per unit less fuel for this market reached a record level in the fourth quarter. We've demonstrated year-over-year growth in this metric for 26 of the last 27 quarters, which further demonstrates our ability to drive sustainable revenue growth. Our intermodal franchise continued to face pressure from supply chain volatility, resulting in a volume decline of 7% year over year. Strong consumer demand and elevated imports stress these supply chains and exceeded drayage capacity and equipment availability. This negatively affected both our domestic and our international markets. But despite these headwinds, we achieved record intermodal revenue in the quarter, up 14% year over year, and that was driven by increased fuel revenue, storage revenue, and price gains. Revenue per unit less fuel grew for the 20th consecutive quarter. Now turning to coal. Revenue increased 21% year over year in the fourth quarter, which was driven by price gains and higher demand in a tightly supplied market. Coal revenue per unit reached near-record levels and increased 16% year over year. Our export markets continue to benefit from high seaborne coal prices, which increased the competitiveness of U.S. coals in the global market. Shipments of domestic met and coke were particularly strong this quarter on higher demand to support steel production. Full year 2021 revenue grew 14% to $11.1 billion on 5% volume growth. All of our markets posted gains, reflecting strong demand for our product coming out of the pandemic, tempered by supply chain pressures experienced throughout the year. Revenue growth was strongest in our merchandise franchise, where all lines of business, but particularly metals and construction, benefited from higher demand and favorable price conditions associated with the economic recovery. Intermodal growth was driven by elevated consumer activity and tight truck capacity. Total revenue increased on higher seaborne coal prices and growth in steel production activity. We reached record levels of both revenue per unit and revenue per unit less fuel. Both metrics were up year over year due to price gains, storage charges, and higher fuel revenue in the case of total revenue per unit. And as markets have evolved, we've leveraged favorable conditions to drive improvement for our bottom line. Now let's look ahead to our outlook for 2022 on Slide 15. We're optimistic that our business will continue to grow despite the ongoing uncertainty in the economy. We're increasingly confident that supply chain conditions, including rail network velocity will improve as the year progresses. Overall, the demand environment for our service is strong. We're committed to working with our customers and channel partners to develop sustainable solutions to maximize our opportunities ahead. We remain focused on our ability to deliver value for our customers and leverage market conditions throughout 2022. As Cindy explained, both our hiring plan and the development and implementation of TOP SPG will deliver increased fluidity, efficiency, and network capacity as the year progresses and our volume pattern will follow that same sequential improvement trend. This will allow our customers to provide additional value to their customers for their product and build a strong platform for future growth. Market conditions for our merchandise franchise are expected to be favorable with several customers announcing expansions in the new year that will create opportunities. In addition, industrial production is projected to grow 4% in 2022, which will drive demand for most of our markets, particularly for our steel markets. Residential construction spending is forecasted to grow more than 6% this year, following the sharp increase in 2021, supporting continued gains in several of our industrial markets. U.S. light vehicle production is expected to reach 10.3 million units this year, which is approaching pre-pandemic levels of 2019. This recovery will have a positive impact on both our automotive and our metals volumes in 2022. Demand for our intermodal market is expected to remain favorable despite continued headwinds associated with supply chain congestion impacting our ability to capture new opportunities. These headwinds are expected to ease in the second half of the year, creating a more favorable environment for growth. And furthermore, a robust consumer economy, elongated inventory replenishment cycles, and a tight truck market support our growth plan. Durable goods consumption is expected to improve 3% and that's on top of the near-record 19% growth in 2021. This also bodes well for our intermodal franchise. Our outlook for coal is more guarded as some of the drivers of 2021 growth show signs of easing in 2022 despite some potential opportunities in the near term. Seaborne prices remain high. However, they have begun to decline, leading subdued optimism going into the new year. Expected increases in global production will likely contribute to downward pressure on these seaborne coal prices and lower the demand for export coal. In the utility markets, while there's been strength associated with higher natural gas prices, that upside will be determined by coal supply as production levels remain high. The pandemic has pushed manufacturers to redesign their supply chains in favor of certainty of supply and locating inventory closer to customers. Our best-in-class industrial development team is at the forefront of these efforts, and they launched an innovative solution to drive value for our customers and support development in the communities that we serve. NSites is a comprehensive search tool for rail-served industrial sites and transload facilities on our network. It allows users to create customized search parameters to quickly identify industrial sites that meet their unique needs. And more importantly, this portal makes it easier to do business with NS and helps our customers make informed long-term investment decisions that will promote economic activity and create jobs. We're excited to provide this product to our customers and help them expand their business on Norfolk Southern. Overall, we are grateful for our strong customer partnerships, and we look forward to growing our business in 2022 with a continued emphasis on improving our service and driving value for our customers and for our shareholders. Starting with Slide 18. As Ed noted, revenue was up 11% despite a 4% volume decline. This more than offset an 8% increase in operating expense, which led to 140 basis points of operating ratio improvement to a fourth-quarter record of 60.4%. Improvements in RPU, coupled with strong productivity led to a record Q4 operating income with growth of 15% or $145 million. And we set another record for free cash flow, up 30% or $642 million for the full year. Moving to a drill-down of operating expenses on Slide 19. While operating expense grew $134 million or 8%, it is up less than 3% or $44 million, apart from fuel cost increases. The $90 million headwind for fuel is driven almost entirely by price. You'll see purchase services and rents of $46 million with the majority of the year-over-year increase driven by the same drivers we talked about on the Q3 call, higher expenses associated with Conrail, higher technology spend associated with our technology strategy, higher drayage expense associated with more hourly drivers used to alleviate terminal congestion primarily in Chicago, and we continue to see inflationary pressure on lift expenses going forward as it relates to contractor labor availability. Moving on to compensation and benefits. It is up 2%, but you'll note the $33 million in savings from 6% lower headcount and that more than offset increases in pay rates and overtime. Meanwhile, incentive compensation comparisons in the quarter are a headwind of $24 million. Materials claims and other expenses were all down year over year. Turning now to Slide 20. Taking a look at the rest of the P&L below op income, you will see that other income of $21 million is unfavorable year over year by $22 million, due in part to lower net returns from company-owned life insurance, but also fewer gains on the dispositions of nonoperating properties. Our effective tax rate in the quarter was in our expected range at 23% and similar to last year. Net income increased 13%, while earnings per share grew by 18%, supported by 3.3 million shares we repurchased in the quarter. Turning to full-year highlights on Slide 21. As a reminder, these highlights are compared to adjusted results for 2020, which excludes both the noncash charge for locomotive rationalization in 1Q and the impairment charge in 3Q. Increased demand across all markets and strong results through yield-up resulted in 14% year-over-year revenue improvement. Expenses increased at less than half that rate, up 6% compared to 2020 as we continued our operational transformation while responding to market changes. We produced record operating income of over $4.4 billion, up 28% or $961 million versus the adjusted 2020 results. That is 430 basis points of year-over-year improvement in line with the guidance we provided. Rounding out the results, net income increased 27%, while diluted earnings per share increased 31%, augmented by our strong share repurchase program, enabled a record-free cash flow that we will wrap with on Slide 22. Free cash flow is a record $2.8 billion for 2021, up 30% year over year and we reported a strong 93% free cash flow conversion for the year. Property additions were about $100 million lower than our $1.6 billion guidance due to timing issues related to the continued supply chain disruptions. This shortfall in 2021 will carry over into 2022. The sharply higher profitability in the company in '21 allowed for an over $2 billion increase in shareholder distributions for the year. We had two dividend increases in 2021 and more than doubled our share repurchase spend. And I'll point out, we just increased our dividend again by $0.15 or 14% rolled in 2022. Turning to Slide 24. I will wrap up with our 2022 expectations. As you heard from Ed, based on our assessment of economic indicators, we expect markets related to manufacturing and consumer activity to drive growth. We expect total revenue to deliver upper single-digit growth with merchandise and intermodal both increasing solidly and coal, resuming its long-term secular decline. We will develop and leverage our new TOP SPG operating plan to accelerate our service recovery and drive additional efficiency into the organization in support of Norfolk Southern's and our customers' growth. You'll hear a lot more about TOP SPG at our upcoming second quarter Investor Day. From an operating ratio perspective, we expect the first half of this year to look similar to the back half of 2021, with robust demand and service improvement driving stronger performance in the second half of this year. With this positive momentum in revenue, productivity, and efficiency and based on our current expense projections, we expect to achieve greater than 50 basis points of OR improvement in 2022 and we won't stop there. In addition, we expect a dividend payout ratio range of 35% to 40% and capital expenditures in the range of $1.8 billion to $1.9 billion. We anticipate using remaining cash flow and financial leverage to repurchase shares. As you've heard from Cindy, Ed, and Mark, we are optimistic about service, productivity, and growth in the year ahead, and we'll advance productivity initiatives to attract business to Norfolk Southern more profitably than ever. We are committed to further efficiency improvements to create long-term sustained value for our customers and shareholders. We'll now open the line for Q&A.	qtrly railway operating revenues of $2.85 billion increased 11%, or $279 million, compared with fourth-quarter 2020. qtrly railway operating ratio was 60.4%.
We appreciate you joining us this evening. Let me begin by outlining our plan for this evening's call. First, Paul will provide an update on our business and operations including how the extraordinary efforts of our corporate employees in our business model has benefited our clients and our worksite employees and their families during the COVID-19 pandemic. He will also discuss the impact of both COVID-19 restrictions and the resulting stimulus packages on our business to date and the potential impact going forward. This discussion will include the range of possible outcomes on the key metrics and drivers of our business. I will then briefly discuss our first quarter financial results, provide an update on our balance sheet and liquidity and provide our guidance for Q2 in our updated guidance for the full-year 2020. We will then end the call with a question-and-answer session. In addition, some of our discussion may include non-GAAP financial measures. Before I discuss our results and outlook for Insperity, I'd like to say our hearts go out to all those who have lost loved ones and are suffering the most from this sudden and unexpected health crisis. Our thoughts and prayers are also with those feeling the severe economic effects that have ensued as this crisis continues to run its course. Insperity is able to see firsthand the impact of this health and economic calamity on the small- and medium-sized businesses we serve. Our mission to help them succeed so communities prosper has never been more critical to these clients, their employees and families. So I'll begin today's call with some brief comments about our solid first quarter results, highlighting two important outcomes which preceded the COVID-19 outbreak. I'll follow with a discussion of our quick and effective response to the health and economic crisis since mid-March, including detailed metrics reflecting the effects on our client base. I'll finish my comments today describing the economic climate and considerations over the balance of the year that form the basis for our updated guidance we are providing today. First quarter sales were 122% of budget, representing a 25% increase over the same period last year. These results were driven by a 13% increase in trained Business Performance Advisors and a 10% improvement in sales efficiency. Both core and mid-market sales were substantially over budget. Mid-market sales were particularly impressive throughout the period, core sales exceeded forecast for the full quarter despite a fall-off in March to 83% of budget as the pandemic escalated. As a reminder worksite employees sold, generally become paid worksite employees and flow into revenues over the following few months. The other important development evident in the first quarter results is the improvement in our benefit plan as the elevated number of large claims we experienced last year continue to decline toward historical levels and our benefits allocations continue to outpace our expectations. This combination means we came out of Q1 with our health plan in good shape as Doug will describe further in a few minutes. I'd like to provide some detail regarding our initial response in March as the COVID-19 health crisis emerged and quickly became an economic calamity. Our decisive response proved to be critically important for our clients, their employees and families. We believe our rapid and pivotal reaction to the pandemic, combined with the quality of our client base has caused Insperity to experience a relatively less severe impact in layoffs and ultimately in paid worksite employees than would have otherwise occurred. The best empirical evidence is our paid worksite employee decline in April, which was only 3.3% lower than March. Allow me to provide some context for this with a bit of a chronology. In mid-March as cancellation of public events were announced it became evident that this COVID-19 pandemic wsa escalating and morphing into a significant economic disruption. We probably transitioned to work from home environment in order to protect our own employees and their families. Our experience over the years with hurricanes and other disasters proved beneficial as we were totally prepared to work remotely on a broad basis with 93% of our employees working at home and only 7% of employees with the need to be at the workplace to accomplish their responsibilities. Our workload with clients was increasing dramatically at this point. The initial efforts revolved around policy changes, helping clients transition to working from home employee communication and regulatory changes. The response to this health and economic emergency required prompt, thoughtful and well executed HR Solutions, which is right up our alley. As the gravity of this situation set and it became apparent our small- and mid-sized business clients would be facing a firestorm and would need immediately help evaluating alternatives to make operational changes. These options, including reducing or furloughing staff, lowering pay rates and adjusting benefit plans to name a few. We immediately began tracking these operational changes daily through new reporting, which has been invaluable and providing a clear picture of how clients reacted to this crisis. This reporting is also been vital to inform our forecasting of future scenarios. Our daily reporting for March 9th forward provides real-time information on how our clients have responded to the pandemic in adjusting staffing levels. Since that time, we have been watching daily changes in layoffs -- temporary layoffs or furloughs and rehires directly associated with the economic disruption. We've also observed trends and more routine voluntary and involuntary employee terminations and hiring within the client base. On Monday, March 16, we decided to form the Insperity business continuity support team to address escalated complex client request. Within days this team comprised of professionals from human resources, finance, regulatory and other disciplines was fully functional, helping clients quickly and effectively make operational changes and obtain critical resources to navigate through the current health and economic crisis. Due to our ongoing government affairs efforts, Insperity was on the ground involved in Washington as the Senate and the administration were addressing the needs of small businesses, devising and drafting the CARES Act. Our government affairs team was closely monitoring the CARES Act and provided valuable real-time feedback to us as the Paycheck Protection Program was developed. Our involved in at this level, allowed us to be ahead of the curve, which enabled us to meet our goal of helping our clients be in a position to apply for paycheck protection loans when the program was launched on April 3. One key element in this effort was providing the reports required with the loan application to substantiate and validate the eligible loan amount. The CARES Act was signed into law by the President on Friday, March 27. And on Sunday, the 29th, I was reviewing the first version of these complicated reports. Two days later, these reports became available on Insperity Premier and by Friday, the first day the banks began accepting applications, over 67% of Insperity clients had to run the necessary reports to submit their applications. Last week, we conducted a client survey to obtain important feedback on business owner sentiment and on their outlook for the near-term and the balance of the year. In this survey also released today, we also included questions regarding applications and funding of these loans, because of the direct effect on temporary layoffs and expected rate hires. According to our survey, approximately 80% of our clients applied for a loan under the Paycheck Protection Program. We are very pleased for our clients when survey results indicated 59% of these applicants receive their PPP funding in the first round before funds ran out on April 16. This compares very favorably against the National Federation of Independent Business survey, which reported 20% of respondents had received their funding. It appears our goal to help our clients obtain these funds to sustain their employees and businesses was very successful. Our daily tracking data also aligns with our survey results. Since March 9, through the end of April, 25% of our clients have reported layoffs totaling approximately 22,000 employees or about 9% of the total worksite employee base. 35% of these layoffs were processed as permanent layoffs. In 65% as furloughs or temporary layoffs expecting to be rehired in the coming months. Approximately 15,000 of these layoffs were reported before the end of March with the remaining 7,000 in April as layoffs moderated. Over the same period, we've already seen approximately 2,200 employees or 10% of the total rehired, which we believe is somewhat due to our early success with clients in the Paycheck Protection Program. Keep in mind these terminated employees typically get a final paycheck after the reported layoff and rehires get paid on the next pay date. So there is a lag in the paid worksite employee impact from both types of these reported changes. You also have to factor in paid worksite employees pluses and minuses from termitating clients, new clients, voluntary and involuntary terminations and regular hiring in the base. With all these factors in and finalized at the end of April, the result was the 3.3% reduction in paid worksite employees for the one -- that I mentioned earlier. We expect similar -- a similar reduction in May based upon a comparable analysis as the balance of layoffs and furloughs from April come out of the paid worksite employee count. During this period, we also converted our entire sales team of Business Performance Advisors to the sell from home. It's been amazing to watch this valiant effort to keep sales moving through virtual discovery and closing costs. While sales activity has decreased significantly, those that are going through the process seem to be more qualified and appear to have a greater sense of urgency. Another aspect of our business that we watch very closely was client terminations in bad debts from financial defaults. We're very pleased to say at this time, we've not seen a material increase in these key metrics, although it stands to reason that these issues could increase if the recovery is weak or delayed. Now at this point, I'd like to address the economic climate and considerations we've worked through driving the range of our expectations implied within the guidance we're providing today. The impact of this ongoing pandemic on Insperity will be driven largely by the staffing levels maintained by our small business client base since we earn our fees on a per worksite employee per month basis. Over the balance of the year, we expect staffing levels in our client base to be primarily driven in the near term by the effectiveness of the Paycheck Protection Program combined with how successful and widespread the restart of the economy turns out to be. The second significant effect we expect will come from a change in the pattern of our direct cost due to healthcare and to a lesser extent workers' compensation trends. We expect an unusual pattern within our direct cost, which we believe will begin with lower cost near term, while many employees are working from home deferring elective procedures and using telemedicine. When they -- we then expect potentially higher than normal cost once employees are back at work catch up on elective procedures and have possible worsen chronic conditions from a period of lack of care or treatment. Our outlook determining the range of our guidance is based upon a range of economic conditions that does not include a V-shaped recovery in our high case nor does it include a second wave of COVID-19 causing a second shut down in the low case. So the high end of our range is appropriately conservative, assuming a slow but steady improvement in the economy as States reopen and activity resumes over several months. We also assume the Paycheck Protection Program has a positive effect on rehiring our furloughed employees however, at a level reflecting the uncertainty our clients are facing. In this case, we assume about 65% of the furloughed employees would be rehired over the next couple of months in time for clients to include them in their calculation for loan forgiveness of their PPP loan. Even though this is the high case, we are assuming 35% of furloughed employees did not return within that period as Business Leader stretch out their funds allowing time for the economic activity to increase. New client sales considered within the high end of our guidance, assumes sales at 80% of our original budget over the balance of the year. This includes lower sales in Q2 and Q3, and improving to more normalized levels in the fourth quarter. Client terminations are assumed to be slightly elevated over the balance of this year, even in this high-case scenario. We have included an approximately 15% increase in worksite employee attrition from client terminations over our original budget. Now in our low-case scenario, we are assuming an economic environment where government mandated shutdowns continue longer, reopening proves more difficult and it takes longer for demand to resume. In this environment, we assume layoffs persist through the second quarter and are only marginally offset by rehires related to the Paycheck Protection Program. This case assumes clients most affected by the pandemic, stretch out their PPP funds and don't rehire most of the furloughed staff and eventually convert a high number of these employees into permanent layoffs. At the low end of our range, we also assume this slower recovery leads to delayed decisions on new sales and efficiency is lower throughout the balance of the year. In this case sales results are assumed to be approximately 60% of our original budget over the last three quarters in the year. The low end of our range also anticipates a 20% higher level of worksite employee attrition due to client terminations above our original budget. Full-year retention is expected to be 80% in this scenario. Both scenarios include a higher gross profit per worksite employees in our original budget due to the outperformance in the first quarter, combined with the pattern of direct cost we expect due to COVID-19. We expect direct cost could be materially lower in the short term, but it is unclear how these costs will rebound or what unexpected cost may arise thereafter. Therefore, these scenarios represent more of a shift of cost from the second into the thid and four quarters, and only a relatively small reduction in total cost over the balance of the year. Our operating plan for the balance of the year, anticipate a continued elevated level of services needed by our clients, managing through a safe return to work plan or responding to whatever this situation deals up next. At this point, our plan is to maintain our current corporate staff level to handle the increased workload. We also intend to continue to add to our Business Performance Advisor team over the balance of the year, however, allowing the growth rate to moderate to high-single digits. So we believe, we've whether this unprecedented storm well, primarily due to our quality client base, made up of the best small- to medium-size businesses in America and an amazing team of employees at Insperity. Now before I pass the call on to Doug, I would like to tell a quick story that explains why I'm so passionate about small business owners and the role they play in a recovery like the one we need right now. All four of my grandparents emigrated to the United States during the early 1900s from Romania. Their families pulled their funds together to send each of them to the land of opportunity which was not uncommon at that time. They arrived with little or no money, spoke very little English, but had the dream for better life and the work ethic to go with it. One of my grandfather's was only 16 years old when he arrived in 1909. He was very entrepreneurial, and told me about many business he started from a grocery store with the hair salon up above to a great farm in Pennsylvania. But my favorite story about him, I only learned at is funeral. When an elderly woman, I did not know grab my arm to tell me about my grandfather's heroism during the depression. It appears my grandfather played a major role in his community keeping people alive with his grocery store, extending credit to hungry families and working with his suppliers to stretch every dollar. She said, mine was one of those families. When I watch our clients today, I'm reminded that the entrepreneurial spirit is alive and well. Our client survey routinely ask our clients major concerns. It was no surprise to see the top concern in this survey were sustaining their business through this economic slowdown, but right behind that was employee well-being, next was returning to work safely followed by employee engagement, sustaining relationships and culture. Strikingly, quite a bit further down the list was meeting terms for loan forgiveness. We are here at Insperity to support these incredible people that play such an important role in our communities and our nation as a whole. If our recovery from this pandemic and its after-effects is dependent on these small- and medium-sized business owners and it is my money's on them and we will be here helping every step of the way. At this time, I'd like to pass the call on to Doug. Now let's discuss some of the details of our first quarter results. We reported Q1 adjusted earnings per share of $1.70 at the high end of our forecasted range. Adjusted EBITDA totaled $101 million for the quarter. Average paid worksite employees increased by 5.5% over Q1 of 2019 to just over 238,000. This quarters growth reflected a higher-than-expected level of worksite employees paid from new sales coming off of the successful extension of our fall sales campaign. However, our Q1 growth was dampened by lower-than-expected net gains in our client base. Gross profit increased by 3.2% over the first quarter of 2019. And as you may recall from our earlier discussions, the year-over-year comparison was impacted by our favorable benefit cost trend in Q1 of the prior year. However, we effectively managed overall gross profit for Q1 of this year above budgeted levels as a results from both our benefits and workers compensation programs were favorable. As for large healthcare claim activity, we continue to see a decline in the number of claims over $100,000 since the initial spike in the second quarter of 2019, although it's still slightly elevated from a historical perspective. Also our Q1 claim trend associated with normal smaller healthcare claims came in near targeted levels. Now an outlier in Q1 was a shift in the timing of approximately $4 million of pharmacy costs into the quarter. As you may be aware, as a result of the COVID-19 stay-at-home orders, many benefit plan participants across the country accelerated their pharmacy refills with many extending the refill period from 30 to 90 days. The impact of the -- the impact of insurance companies relaxing their normal requirements around this area, ultimately impacting the cost of all planed sponsors. iI the health plan like ours, this essentially accelerated what would have been Q2 and Q3 pharmacy costs into Q1. Other than this factor, we do not believe our Q1 benefit costs were impacted by COVID-19 due to its occurrence late in the quarter. So all things combine the good news is that benefit costs for Q1 of 2020 came in favorable when compared to our budget in spite of the additional $4 million of pharmacy costs. Now on the pricing side, our benefit allocations were also favorable. So in conclusion, we exited the quarter ahead of plan in our benefits area. Our first quarter adjusted operating expenses increased 5.3% over Q1 of 2019 below budgeted levels. It's important to note that we continue to invest in our growth as we increased our trained BPA count by 13% over Q1 of 2019. And in a few minutes, I'll provide more detail behind our current thoughts on our operating plan in light of the current business environment. Finally, our Q1 effective tax rate came in at expected 27%, which was significantly higher than the 12% rate in Q1 of 2019 due to a lower tax benefit associated with the vesting of long-term incentive stock awards in Q1 of this year. Now let's discuss our cash flow and liquidity. During the quarter, we repurchased a total of 878,000 shares at a cost of $61 million. These repurchases included those shares bought in the open market and under our corporate 10b5-1 plan in mid-February and early March and shares repurchased in connection with tax withholdings upon the vesting of employee restricted shares. We also paid $16 million in cash dividends under our regular dividend program and invested $16 million in capital expenditures. While we continue to have a strong balance sheet and liquidity position in the latter part of the quarter, we drew down $100 million from our credit facility to provide further flexibility in this uncertain business environment. So we ended the quarter with $167 million of adjusted cash and $130 million available under our $500 million credit facility. Now as far as our guidance for the remainder of 2020, let's begin by putting it into context. As you know, events continue to unfold almost daily, there remains a high level of uncertainty on the short-term and long-term impact of the pandemic on the economy in the small business community. As a result, this guidance will reflect a wider range of possibilities the net provided in the past. And based on the details that Paul just shared on our expected worksite employee levels, we are now forecasting a 1% to 5% decrease in the average number of paid worksite employees for the Q2 stand-alone quarter and a 1% to 6% decrease for the full-year 2020 as compared to the 2019 periods. For the full-year 2020, we are forecasting adjusted EBITDA in a range of $215 million to $250 million, which is flat to down 14% from 2019. As for adjusted EPS, we are forecasting a range of $3.19 to $3.86. And this assumes an effective tax rate of 28% in 2020 as compared to a rate of 20% in 2019. Now the quarterly earnings pattern is expected to be different this year due to the factors surrounding the COVID-19 pandemic. The second quarter is expected to be positively impacted because we believe the stay-at-home order will result in lower healthcare utilization, including the delay or cancellation of elective procedures and a lower level of office and emergency room visits. However, over the latter half of 2020, as stay-at-home orders are relaxed, costs may be elevated to include the restoration of some of the deferred elective care, costs associated with participants with chronic conditions that miss treatments, COVID-related testing and treatment costs and a potential increase in COBRA participation. As for our workers' compensation area, we also expect to see a similar quarterly pattern, although, at a much smaller level that will develop over a longer period of time. As for our operating costs, our guidance reflects the following actions based upon our current expectations of the impact of COVID-19 pandemic and related economic recovery. We intend to continue to grow the number of Business Performance Advisors as we position ourselves to both muscle through this challenging time and position ourselves for the long term. We have currently decided to postpone the opening of two sales offices into 2021, which will now result in the opening of five sales offices in 2020. Marketing costs have been reduced for the reduction and cancellation of promotional events, including the Insperity Invitational. In addition to the cancellation of travel due to the stay-at-home orders, we have replaced a significant portion of our in-person training with online meetings. And at this point with the exception of Business Performance Advisors, we intend to hold our corporate headcount flat as increased service demands offset any reductions that would have been commensurate with the lower worksite employee level. Now as for our Q2 earnings guidance, we are forecasting adjusted EBITDA range of $65 million to $79 million, a 15% to 39% increase over Q2 of 2019 and adjusted earnings per share in a range of $1 to $1.29, an increase of 23% to 55%.	compname posts quarterly adjusted earnings per share of $1.70. q1 adjusted earnings per share $1.70. q1 diluted earnings per share and adjusted earnings per share of $1.58 and $1.70, respectively. sees q2 adjusted earnings per share $1.02-$1.29. sees fy adjusted earnings per share $3.19-$3.86. ended quarter with $167 million of adjusted cash and $130 million available under $500 million credit facility.
We appreciate you joining us. Let me begin outlining our plan for this evening's call. First, I'm going to discuss the details behind our first quarter 2021 financial results. Paul will then comment on the key drivers behind our Q1 results and our plan for the remainder of the year. I will return to provide our financial guidance for the second quarter and an update to the full year guidance. We will then end the call with a question-and-answer session. In addition, some of our discussion may include non-GAAP financial measures. Now let's discuss our first quarter results. We achieved $1.82 in adjusted earnings per share, a 7% increase over Q1 of 2020. Adjusted EBITDA increased 3% to $104 million. These results reflect the average number of paid worksite employees in line with our expectation, pricing above targeted levels, upside in each of our direct cost programs and ongoing management of our operating costs. As for our growth metrics, as expected, the average number of paid worksite employees in Q1 of 2021 declined by 2% compared to Q1 of 2020 and included the loss of one large enterprise account that we referred to in our previous earnings call. Excluding this account, paid worksite employees would have been relatively flat sequentially from Q4 of 2020 to Q1 of this year. It's also important to note that during the challenges of the pandemic over the past year, we've increased the number of clients by 8%. This was however offset by a reduction in the average size of our clients due to pandemic-related layoffs. Now, as most of you are aware, the year-end transition from 2020 to 2021 in which we enroll new clients from our fall sales campaign and renew approximately 45% of our existing clients is important to our 2021 starting point and, therefore, our full year growth expectations. We are pleased to report a successful year-end transition. Worksite employees paid from new client sales were in line with our budget and we're 93% of Q1 of 2020, a period prior to the onset of the pandemic. First quarter client attrition also came in on budget, including the loss of the large enterprise account. Excluding this one account, attrition totaled 9%, an improvement over Q1 of 2020's attrition of 11%. As for the third component of our growth, the strength of our clients in the gradually improving operating environment helped drive net hiring by our existing clients above budgeted levels. Now let's move on to gross profit, which increased by 7% over Q1 of 2020 on the 2% decline in worksite employees. This increase included higher than expected contributions from each of the three primary direct cost programs as a result of both solid pricing and lower costs. On the pricing side, we exceeded our targets on both the HR service fee component and each component of our direct cost pricing allocations. As for the cost side beginning with benefits, we continue to see a gradual return to normal levels of healthcare utilization coming off of the earlier stages of the pandemic. However, when combined with COVID-related vaccine, testing and treatment costs, overall cost came in slightly below our expectations. Our workers' compensation program continues to perform well, due primarily to our client selection and ongoing management of safety practices and claims. When combined with some favorable impact from the reduction of claims due to the work-from-home status of many of our clients' employees, Q1 workers' compensation costs also came in below budget. As for the payroll tax area, you may recall that at the time of our previous earnings call in which we first provided 2021 guidance, we had not yet received all state unemployment tax rates. This was not typical as the delay was due to various states still determining how pandemic-related unemployment would impact their 2021 employment rates. During Q1, we received our tax rates from most states and collectively these rates came in below our projections. This resulted in a higher than expected contribution to gross profit in the quarter. In addition, the Q1 upside resulted from lower on -- Q1 upside resulting from the lower SUTA rates during the quarter, we received a $6 million federal payroll tax refund related to the prior year. This also contributed to higher gross profit. Now, as for operating expenses, we continue to balance managing costs relative to the ongoing pandemic, while also investing in our current and long-term growth plans. We continue to grow our sales force at targeted levels with a 7% increase in the average number of trained business performance advisors. We also increased our marketing spend related to lead generation activity and incurred costs related to our sales force implementation. We upheld other corporate headcount relatively flat and managed other areas, including travel related costs and historically low levels as the economy and growth recovers from the pandemic. In total, operating expenses increased 13% over Q1 of 2020, however were flat when excluding performance-based compensation. Now, our financial position and liquidity remained strong as we continued with our investment in our growth and provide returns to our shareholders. During the quarter, we repurchased 340,000 shares of stock at a cost of $30 million, paid out $15 million in cash dividends and invested $12 million in capital expenditures. We ended Q1 with $197 million of adjusted cash and $370 million of debt. Today, I'll start with some comments on our strong first quarter results and the momentum driving our outperformance leading us to raise our forecast for the year. I'll follow with our view of the small and medium-sized business marketplace, including recent trends in hiring and business owner sentiment we're seeing in our client base. I'll finish my comments with how we believe we are on a solid path for a return to double-digit growth and profitability. We're pleased with our strong first quarter results and the excellent execution driving many key metrics in the business from sales and retention to pricing and direct cost. In addition, hiring momentum within the client base has accelerated and appears that small and medium size business community is primed for growth. This quarter, our paid worksite employees from prior bookings reflected our solid fall campaign sales and came in at 93% at the same period in 2020, which was largely pre-pandemic. As a reminder, sales booked in a given quarter generally become paid worksite employees in the subsequent quarter as new clients and their worksite employees are enrolled, paid and then flow into revenues. Our sales team is off to an impressive start to the year achieving 102% of our budgeted bookings in this quarter. The number of trained business performance advisors was up 7% and this team increased discovery calls by 16% and business profiles by 21%. The number of new clients sold also increased 16% over the same period last year, which is notable since most of Q1 last year was pre-pandemic. However, the average number of worksite employees per client was down, reflecting the pandemic-related downsizing that's occurred over the last year and also a light quarter for our mid-market sales. First quarter booked sales in mid-market were below budget, largely due to a strong fourth quarter that exhausted the pipeline. However, the pipeline is rebuilding rapidly with a 27% increase in leads and a 13% increase in proposal opportunities over last year. Some of these have already converted to sold accounts, but it was too late for them to be in the first quarter. So I'm particularly encouraged by recent activity and the strong workforce optimization sales pipeline across the board. And we're also seeing an increase in activity related to WX, our workforce acceleration traditional employment solution initiative. Over the last year, as we responded to the challenges of the pandemic, WX took somewhat of a backseat to our flagship workforce optimization co-employment offering due to our focus on transitioning to remote selling. We took this opportunity in the fourth quarter to tweak the product and pricing and tested these changes in specific markets. We reintroduced WX to the entire BPA team during our virtual sales convention early this year and impressive results followed. WX proposals increased 90% over the same period last year and book sales more than doubled in both the number of accounts and employees sold. Our WX initiative is an important long-term plan to increase sales efficiency, providing a traditional employment HR bundle alternative at a lower price point is designed to capitalize on the investment we've already made in our team of more than 650 BPAs across the country that are calling on more than 40,000 small businesses each year. WX is an HR solution with excellent technology and a unique level of service intended to offer a starting point in improving the HR function for a company that's not quite ready for our comprehensive workforce optimization service. Our goal over time is to convert some portion of the nine out of 10 prospects that we do not sell WO into WX clients and ultimately upgrade them to WO, increasing our sales efficiency. We expect to build upon this new momentum and continue our progress over the balance of the year. Our workforce optimization client retention was also a highlight this quarter, improving by 15% over last year, excluding the large client loss discussed last quarter. The strong underlying trends in this metric across our segments during the year end transition and through the first quarter add to our confidence in our growth plans. Our performance in the gross profit area has been excellent throughout the pandemic despite the many moving parts and changing dynamics. The typical mix change in accounts that occurs from Q4 to Q1 during our heavy sales and renewal campaign added to our strong pricing performance, which has been a theme throughout this period. The clients that left in this quarter were lower priced and contributed less to gross profit on average than the balance of our book of business, resulting in a slightly more favorable gross profit outlook. We are in a good position to meet our objective of managing price and cost to earn an appropriate management fee for administering our direct cost programs and taking some risk, although there is still some continuing uncertainty around benefits and unemployment cost. So, our first quarter established a strong start to the new year and we believe the underlying trends point toward growth acceleration and higher expectations for profitability for the full year. Another reason for our confidence is in the momentum in client hiring driving a recent uptick in the average number of worksite employees per client. As we entered the new year, our average size client was down approximately 8% in the number of worksite employees after trimming back during the pandemic. We are now seeing a measurable recovery in this metric and a high degree of optimism from our small business client base. Our client survey released today reflected small and medium-sized company owners and CEOs with a high rate of optimism and focused on driving growth in the near-term. When asked how optimistic you are with the outlook for your business this year, 86% were very or somewhat optimistic compared to 48% late last year and 72% in late 2019. Further, 81% of those surveyed expect organizational performance to be better than last year and 53% expect to add employees and 35% expect to increase compensation. Only 3% expect to reduce staff and only 1% expect to decrease compensation. This optimism and these expectations were not the result of coming off a bad year. In fact, when asked about last year's results, 71% said they were better or as expected and only 10% said their results were worse than expected, which we believe reflects the quality of our client base and the success of our strategy to target the best, small and mid-sized businesses. We also asked about top concerns and found driving growth to be the number one issue with external uncertainty around the economy, pandemic or political issues falling to second. It's also telling that the top three HR issues on their minds were maintaining or building a strong culture, recruiting and retaining talent and employee wellbeing. We also monitor many HR data points that demonstrate whether clients are acting on or are justified in their optimism, including actual hiring, compensation changes, over time and commissions we pay on behalf of clients giving us some insight into recent client sales trends. Most notable this quarter was commission up over 11% from the same period last year, a double-digit increase for the second consecutive quarter. We generally see when commissions are up over 6% from the prior year, hiring and compensation increases subsequently trend upwards. Nothing brings out optimism in business owners more than strong sales momentum. Anecdotally, I can also further validate the client/owner sentiment for many opportunities I had recently interacting directly with our clients. The theme of these interactions was somewhat surprised and relieved with strong performance last year, optimism about 2021 and gratitude for how Insperity supported them through the pandemic. One of the many interesting outcomes from the intense period of HR needs from our clients last year was their discovery of the breadth and depth of our services and the level of care from our dedicated employees that has been there all along. The results of this increase in awareness and understanding of how we can help their businesses succeed has been a continuation of an elevated level of service interactions directly with owners and top leaders in our client companies and the heightened appreciation for our services. We are capitalizing on this with an emphasis on referrals and new advertising and marketing messages to drive sales. So as we look ahead to the balance of this year and into next, considering our strong start to this year and trends we have seen so far, we believe we are on a solid path to return to double-digit growth and profitability. Current trends in sales retention and hiring in the client base, combined with the comparison to Q2 2020 shutdown-related layoffs, has us on track to move from minus 2% year-over-year growth in the first quarter to 5% to 6% growth in the second quarter. Our guidance for the full year implies the back half of 2021 growth rates in the high single-digits, which positions us to return to double-digit growth in 2022 with an effective fall campaign. On a final note, during the first quarter, we announced the retirement of Jay Mincks, our Executive Vice President of Sales and Marketing, after an inspiring 31-year career with Insperity. Jay played a pivotal role in the growth and development of Insperity and his deep commitment to the success of the sales organization and the company will leave a tremendous legacy. On behalf of the Board of Directors, I want to extend our deep appreciation to Jay for his dedication and contributions to the success of Insperity over these many years, and we wish him the very best in his well-earned retirement. At this point, I'd like to pass the call back to Doug. And let me provide our guidance for the second quarter and an update for the full year 2021. Based upon the details that Paul just shared, including our successful start to the year and some improvement in the overall level of uncertainty, we have raised and narrowed our range of growth and earning expectations for 2021. We are now forecasting 4% to 6% worksite employee growth for the full year, an improvement over our initial guidance of 2% to 6% growth. This increase is based upon a higher starting point going into Q2, the recent improvement in hiring trends and continuing momentum in sales and client retention. We are forecasting Q2 paid worksite employee growth of 5% to 6% over Q2 of 2020, a period which was significantly impacted by the onset of the pandemic. We now expect 2021 gross profit to be considerably higher than our initial budget based upon our Q1 outperformance and the recent positive trends in both pricing and direct costs, although there continues to be some uncertainty as we come out of the pandemic. Our forecast in these areas includes a slight improvement in our workers' compensation cost trend, lower unemployment tax costs upon the receipt of lower than estimated rates in Q1 and the benefit cost trend consistent with our initial budget. Our operating costs continue to reflect our 2021 plan of balancing our growth initiatives with the ongoing management of costs as our growth accelerates. So when taking into account these factors, we are forecasting adjusted EBITDA in a range of $250 million to $280 million, up from our initial guidance of $225 million to $275 million. As for full year 2021 adjusted EPS, we are now forecasting a range of $3.83 to $4.40, up from our previous guidance of $3.27 to $4.20. As for Q2, we are forecasting adjusted EBITDA in a range of $44 million to $49 million and adjusted earnings per share from $0.60 to $0.70. As a reminder, our historical earnings pattern generally results in the decline from Q1 to Q2. As Q1 results are typically higher than subsequent quarters as we are in a higher level of payroll tax surplus prior to employees reaching their taxable wage limits and benefit costs are lower in Q1 and step up over the remainder of the year as deductibles are met. Additionally, the Q2 year-over-year comparison is impacted by the onset of the pandemic in Q2 of 2020 and its favorable impact in our benefit plan in the prior year's period.	compname posts q1 adjusted earnings per share $1.82. q1 adjusted earnings per share $1.82. sees q2 adjusted earnings per share $0.60-$0.70. sees fy 2021 adjusted earnings per share $3.83-$4.40.
We appreciate you joining us. Let me begin by outlining our plan for this evening's call. First, I'm going to discuss the details behind our second quarter 2020 financial results, which were strong considering the current economic environment brought upon by the pandemic. Paul will then comment on the key drivers behind our Q2 results and our outlook for the remainder of the year. I'll return to provide our financial guidance for the third quarter and an update to the full-year 2020 guidance. We will then end the call with a question and answer session. In addition, some of our discussion may include non-GAAP financial measures. Now let's discuss our second quarter results, in which we achieved a $1.54 in adjusted EPS, an 86% increase over Q2 of 2019, and adjusted EBITDA of $92 million, an increase of 62%. Average paid worksite employees declined by just 1.8% from Q2 of 2019 compared to our forecast of 1% to 5% decline that took into account the impact of the COVID-19 pandemic on our clients and prospects. All three drivers including worksite employees paid from new sales, client retention and net losses in our client base from layoffs and hiring were better than expected. Worksite employees paid from new client sales were approximately 20% above forecasted levels, driven by 15% increase in trained Business Performance Advisors and success in our mid-market segment. Client retention held up at our historical high level of just over 99% during Q2. This points to the financial strength and actions taken by our clients during the pandemic and our quick and effective response to assist our clients with our premium level of HR services. Net losses in our client base in Q2 were lower than expected as the level of worksite employees laid off, returning to work from furlough and general hiring were all favorable. This was particularly the case in the month of June. In a few minutes, Paul will share the details on the actions we've taken recently to assist our clients and provide thoughts around more recent trends in our updated 2020 worksite employee outlook. So let's move on to gross profit, which increased by 27% over Q2 of 2019. These results included lower-than-forecasted benefits and workers' compensation costs partially offset by our decision to provide comprehensive service fee credits to our clients. Lower benefit costs were primarily due to lower utilization, especially lower levels of elective healthcare procedures, some of which is expected to be offset in subsequent quarters with the resumption of deferred care and future COVID-19 costs. Lower workers' compensation costs were primarily a result of the effective management of claims incurred in prior periods and largely unrelated to the pandemic. Due to the structure of our workers' compensation program, any reduction in the number and severity of workers' compensation claims associated with the work from home status of many of our clients and employees would likely impact our cost in later periods as these claims develop over time. During the quarter, we proactively engaged with our vendors in successfully negotiating savings to support our clients through this difficult period. As a result, we provided a comprehensive service fee credit to our clients based upon their worksite employee levels at June 30. These credits totaled approximately $12 million and were accrued in the second quarter. Also, under the CARES Act and Family First Act, clients were able to take advantage of payroll tax deferrals and credits offered through government stimulus packages. These deferrals and credits totaled approximately $45 million during Q2 and were reported as both a reduction to revenue and direct costs. So in total, these two items reduced Q2 reported revenues by approximately $57 million and gross profit by approximately $12 million. Second quarter operating expenses increased by 9% and included continued investments in our growth, including costs associated with the increase in the number of Business Performance Advisors. Other corporate employee headcount has remained level over the first half of this year, even though HR demands have increased with the pandemic and its impact on the economy and a number of HR issues, including diversity and inclusion. Second quarter compensation costs included an acceleration in the timing of a portion of our corporate employees' annual incentive compensation to reward them in a period of increased service demands. Additionally, Q2 operating costs included an increased paid time off accrual associated with higher-than-normal unused vacation hours during the pandemic. These expenditures were partially offset by cost savings in other areas, including travel, training and business promotion costs. Our effective tax rate in Q2 came in at 27%, and we expect a similar rate over both the latter half of this year and for the full-year 2020. Our strong financial position and liquidity continued to improve over the first half of 2020 in the face of the challenges and dynamics of the pandemic. Adjusted cash totaled $269 million at June 30, up from $108 million at December 31, 2019, while borrowings totaled $370 million at the end of Q2, up from $270 million at December 31, 2019. Over the first half of this year, we have repurchased 879,000 shares of stock at a cost of $61 million, paid $31 million in cash dividends and invested $39 million in capital expenditures. Today, I'll begin with a discussion of our efforts over the recent quarter to support our small and medium-sized business clients throughout the historic disruption arising from the pandemic. Secondly, I'll cover our view of the dynamics driving our expectations over the balance of the year for growth and profitability. And I'll finish my remarks with some thoughts about the long-term effect on demand for Insperity services, which represents a silver lining in the cloud of COVID-19. This quarter was an eye opener in many ways, including highlighting the absolute necessity and the tangible value of a sophisticated HR function for small to medium-sized businesses. The unexpected events that played out over the course of the quarter cast a spotlight on the HR department, which, of course, is what Insperity is to our clients. The sequence of events beginning with the health crisis evolved into economic disruption and the transformation to working from home, followed by the emotionally charged dynamic of prolonged stay-at-home orders and political and social unrest. When you add in federal, state and local legislative and regulatory responses, with new obligations and opportunities for businesses, you have a monumental challenge and opportunity for an HR services provider to demonstrate value to clients. Insperity Workforce Optimization has long been the most comprehensive business service offered in the marketplace and our competitive distinction is the breadth and the depth of our services and the level of care of our service providers. Our clients were relying on us to help them work through decisions that directly affected the livelihood of their businesses, employees and families. Our service teams continue to serve our clients and worksite employees with genuine care and excellence in an unprecedented time of need and constant change. In more than 30 years, I've never seen a quarter where clients experienced more of what we are designed to offer in such a compressed time period. The effort put forth was exceptional and could have only been delivered by the combination of an amazing team and an incredible culture like we have at Insperity. The workload across the company escalated substantially with call volumes and length doubled, service interactions tripled and a long list of other services spiking. HR solutions were required for the myriad issues businesses were facing, including layoffs and staffing strategies, PPP loan application forgiveness and reporting, work from home, return to work, FICA deferral, and diversity and inclusion, just to name a few. Allow me to say we could not be prouder of our staff across the board the way they stepped up and delivered on our mission to help businesses succeed so communities prosper through a very challenging period. Now in addition to passing this service stress test with flying colors, we also were able to see our business model perform well under the pressure of these unprecedented events. We were pleased with the dynamics across the business from sales and retention to pricing, direct cost and operating expenses. On our last call, we indicated our objective in new account sales operating in this virtual selling environment would be to fall within a range of 60% to 80% of our original 2020 pre-COVID sales budget. As you may recall, the sales budget is the internal metric we use to monitor and track performance in our sales organization. Our entire sales organization, both core and mid-market performed remarkably well, achieving total booked sales above 70% of our original 2020 pre-COVID sales budget and in the higher end of our own revised targeted range. As a reminder, once the sales booked, our service teams worked to onboard those clients and actually generate revenue as paid worksite employees. In this environment, client retention may also be a concern due to an increase in the business failure rate in the marketplace at large. As Doug mentioned, our client retention has remained solid, reflecting the strong client base we have, and demonstrating the benefit of our strategy of targeting the best small and mid-sized businesses onto our premium services platform. Another stress test during a period like this was around pricing of our services on both new and renewing accounts. It is certainly another credit to our staff and further validation of the value of our services that our standard pricing on our book of business did not reflect unusual pricing pressure in this environment. We were also very responsive to the immediate financial needs of our clients in providing a COVID-19 related service fee credit. During the quarter, we worked with vendors and negotiated $12 million in fee reductions to pass along to clients. We felt it was important to act quickly in this regard and get the funds to clients as soon as possible, and clients will begin seeing this credit on invoices starting this week. Another area to evaluate during this unusual time was the matching of price and cost on our primary direct cost items, including payroll taxes, workers' compensation and employee benefits. As I mentioned, pricing has remained on track. And although our quarterly direct cost pattern has changed, we anticipate a strong year overall at the gross profit line. So we have navigated the disruption and the immediate aftermath of the pandemic and related events of Q2 successfully, and our business model demonstrated substantial resiliency. Now in order to determine our expectation for the balance of the year, we need to zero in on the most recent behavior of our clients, particularly in layoffs and new or rehires in the base and consider the economic outlook for small business. Now in the second quarter, layoffs due to COVID drove a 6% reduction in paid worksite employees from March, reaching a low point at the end of May. Now since then, we've recovered approximately 40% of this reduction, primarily due to the return to work of just over 50% of furloughed employees. At the same time, approximately 17% of furloughed or temporarily laid off employees have been reclassified to permanent layoffs, so the number of potential rehires has been reduced by two-thirds. At this point, the rate of both layoffs and furloughed employees returning to work have moderated considerably. So determining what happens in the near term and that change in employment in our client base is somewhat of a toss-up. On one hand, it seems the small to medium-sized business community is adapting and dealing well with the new realities they're facing. We believe our client base has been particularly impressive in this regard. However, the continuing spread of the virus and the corresponding economic uncertainty may temper the rebound we have seen recently. Also, in our experience, there is sometimes a pause or hesitancy in decision-making with the uncertainty of an upcoming election, which may weigh in over the second half of the year. We do expect new account sales to ramp up over the last half of the year. However, most of the booked sales in Q4 typically do not become paid worksite employees until Q1 of the following year. These sales would contribute to growth in 2021, but not contribute significantly to this year's results. With this backdrop, our guidance [Phonetic] for growth is somewhat conservative over the balance of the year. Although the pandemic-driven circumstances make us appropriately cautious about the near term, recent events have made us even more bullish about the long-term prospects for Insperity. Our outlook for profitability over the last half of the year also has an appropriate measure of conservatism built in. The wildcard here is in our direct costs, and particularly our health plan where some portion of lower cost experienced in Q2 is expected to shift to Q3 and Q4. This creates an unusual quarterly pattern to our profitability for 2020 shifting more of the profits to the first half than usual. With this in mind, I believe it's very important for investors to look at the range of expectations for the full-year 2020 in context of the pandemic and focus on how we are positioned for 2021. Our full year guidance for 2020 implies a range of minus 1% to minus 3% unit growth in paid worksite employees. We expect a range of adjusted EBITDA growth that straddles to the level we achieved last year at minus 6% to plus 2%. So the big picture for the full-year 2020 is layoffs due to COVID and the economic shutdown, are expected to be partially offset by higher gross profit per worksite employee and lower operating expenses than our original budget. So while we're continuing to focus on meeting the intense need of our client base in the current environment, we are also looking to the longer term and the straightest path to regaining our growth momentum in 2021 as COVID-19 moves further into the rearview mirror. We believe we are very well positioned for growth as we look ahead to next year. The front of our growth engine is the number of trained Business Performance Advisors, which is currently at the highest level in our history. We have deliberately continued to invest in this team throughout this economic disruption due to the likelihood of a quicker and stronger growth surge once the uncertainty diminishes. We also believe we have an opportunity to hone our marketing message, utilizing the recent positive client experiences, and we intend to increase our marketing spend in the fall to drive leads and test this new messaging. In many ways, the unexpected and unusual developments of the last quarter validated the need for our services and the distinct advantage we provide to improve the success equation for small and medium-sized companies. Even though the pandemic has been quite a challenge, over the long term, we believe this experience will serve to increase demand within the small to medium-sized business community for Insperity services in the years ahead. At this time, I'd like to pass the call back to Doug. Now let me provide our guidance for the third quarter and an update to the full-year 2020. With the first half of the year behind us, we have more visibility as to the impact of the pandemic on our business and have seen signs of gradual improvement as businesses have started to reopen and employees have gradually returned to work. However, a high level of uncertainty associated with the pandemic, its impact on the economy and any further government stimulus packages continues to exist. The current political environment and upcoming election adds another element of uncertainty. Our guidance intends to take this into account and continues to reflect a wider range of possibilities than that provided in the past. Based upon the details that Paul just shared on our expected worksite employee levels, we are now forecasting a 1% to 3% decrease in the average number of paid worksite employees for the full-year 2020. This is a substantial improvement over our previous guidance of a 1% to 6% decrease and reflects the more favorable starting point for the second half of the year. The low end of this guidance assumes a persistent level of pandemic cases, continued economic disruption and ultimately, a recurrence of layoffs in our client base, exceeding both new hires and furloughed employees returning to work. The high end of our paid worksite employee guidance assumes a gradual improvement in conditions associated with the pandemic and its impact on the economy, and therefore, a nominal level of growth in our client base through both furloughed employees returning to work and general hiring. For the full-year 2020, we are raising our earnings guidance and now forecasting adjusted EBITDA of $235 million to $255 million, ranging from a decrease of 6% to an increase of 2% when compared to 2019. This compares to our previous guidance, which ranged from a decrease of 14% to flat with 2019. A component of this revised guidance is a further shift in the expected timing of healthcare utilization during the pandemic. As I mentioned a moment ago, the level of Q2 benefit cost savings largely tied to lower utilization and fewer non-essential procedures came in significantly better than our previous expectations. We expect that a portion of these non-essential procedures were deferred and some will shift into the latter half of the year, including costs associated with participants with chronic conditions that miss treatments. We also continue to expect ongoing COVID-related testing and treatment costs. As for our operating costs, we expect continued cost savings in various areas while operating in the current pandemic environment. As we are ahead of plan on the growth in Business Performance Advisors, we intend to grow BPAs modestly over the remainder of 2020, while we intend to continue to hold our other corporate headcount flat. We are forecasting for an increase in marketing costs associated with the upcoming 2020 fall sales campaign as we promote our premier HR services in this period of increasing demand. Finally, our updated earnings guidance assumes a reduction of approximately $3 million in net interest income from our previous guidance due to the recent decline in interest rates. As for the full year 2020 adjusted EPS, we are now forecasting a range of $3.67 to $4.04, up from our previous guidance of $3.19 to $3.86. Now as for Q3, we are forecasting average paid worksite employees in a range of 227,500 to 230,000, which is a small sequential increase over Q2. We are forecasting adjusted EBITDA in a range of $29 million to $38 million and adjusted earnings per share in a range of $0.37 to $0.54.	compname posts q2 adjusted earnings per share of $1.54. q2 adjusted earnings per share $1.54. q2 revenue $993.4 million versus refinitiv ibes estimate of $1 billion. sees q3 adjusted earnings per share $0.37 - $0.54, fy adjusted earnings per share $3.67 - $4.04.
We appreciate you joining us. Let me begin by outlining our plan for this evening's call. First, I'm going to discuss the details behind our second quarter 2021 financial results. Paul will then comment on the key drivers behind our Q2 results and our plan for the remainder of the year. I will return to provide our financial guidance for the third quarter and an update to the full year guidance. We will then end the call with a question-and-answer session. In addition, some of our discussion may include non-GAAP financial measures. Now let's discuss our second quarter results. We achieved $0.91 and adjusted earnings per share and $60 million of adjusted EBITDA with our growth rebounding ahead of plan from the pandemic lows a year ago. As for our growth metric, the average number of paid worksite employees increased by 7% over Q2 of 2020 above the high end of our forecasted range of 5% to 6%, and this was a sequential increase of 4.3% over Q1 of 2021. Both worksite employees paid from new client sales and net gains from hiring in our client base exceeded our targets and second quarter client retention came in at our historical high levels of 99%. Now along with worksite employee growth, our revenue per worksite employee, which included a 6% increase in pricing and the non-recurrence of the 2020 FICA deferral and customer service fee credits exceeded our expectations. Our workers' compensation program also continued to produce favorable results. In spite of these three factors, we experienced a decline in gross profit of 9% from Q2 of 2020 related to the dynamics associated with the pandemic. First, during Q2 of 2020, with the onset of the pandemic, we experienced unusually low utilization in our health plan, and therefore lower benefit costs. Over the first half of this year, we have seen an increase in healthcare utilization, including elective care that was previously deferred and COVID-19 related vaccination, testing and treatment costs along with changes in claim payment patterns by our carrier associated with these claims. Second area of gross profit unemployment taxes has been favorable relative to our expectations coming into 2021. We prudently budgeted for an increase in state unemployment tax rates coming off of the high 2020 unemployment levels. Ultimately, many states elected not to raise their rates at anticipated levels including Texas, whose rate we received during Q2. Also, we experienced a change in client mix that had a favorable impact on our SUTA cost. So, the gross profit contribution from our payroll tax area has exceeded our budget through the first half of 2021. Moving forward into the second half of this year, we have appropriately lowered our pricing to allow our clients and prospects to benefit from our lower SUTA costs while still targeting our initial budgeted spread between price and cost. We will closely monitor SUTA rates as we enter 2022 to determine the need for any further pricing adjustments. Now, another positive outcome in the payroll tax area during Q2 was the receipt of $11 million of federal payroll tax refunds related to prior years. As for our Q2 operating expenses, we continue to balance managing costs relative to the ongoing pandemic while also investing in our current and long-term growth plans. We have increased our marketing spend related to lead generation activity and have incurred costs related to our sales force implementation. Other corporate employee head count has remained relatively flat in the first half of 2021. We have reinstituted travel for certain employees in events, however, these costs along with other G&A costs continue to be managed at historically low levels as the economy in our growth recovers from the pandemic. Our financial position and liquidity remains strong as we continue investment in our growth and provide returns to our shareholders. During the quarter, we repurchased 98,000 shares of stock at a cost of $9 million, raised our dividend rate by 12.5% paying out $17 million in cash dividends and invested $9 million in capital expenditures. We ended Q2 with $213 million of adjusted cash and $370 million of debt. Let me begin by providing some color around our strong second quarter and first half results and the solid execution driving our growth acceleration. I'll follow these comments with the discussion of priorities for the balance of this year and I'll finish with some thoughts about the exciting market opportunity we see ahead for Insperity, the PEO industry and the overall HR services sector. We've had an excellent first half of 2021 in the face of considerable uncertainty from the ongoing effects of the pandemic. Our priority as we entered this year was to accelerate our growth momentum and return to double-digit growth in paid worksite employees as soon as possible while managing through the uncertainty. As the year began, we were optimistic we would achieve this growth rate by year end or early 2022, despite the loss of our largest client, which represented just under 3% of our worksite employee base. Our confidence was based upon our solid sales momentum, underlying client retention improvement and steady hiring in the client base. Our guidance provided today indicates we now expect to return to double-digit unit growth in the third quarter, well ahead of schedule building off our strong recent trends in all three of our growth drivers. Outperformance in paid worksite employees from previous booked sales combined with stronger than expected hiring within the client base and historically high client retention to produce a rapid acceleration in our unit growth; in fact, paid worksite employees were up 9% in four months by the end of June over our low point of the year in February. New sales in the second quarter met our targets with booked sales for new clients and worksite employees up 39% and 30% respectively over last year. This positions us well to fuel third quarter growth since booked sales from a given quarter typically become paid worksite employees in the following quarter. Another highlight from our sales organization this quarter was booked sales for our traditional employment solution, Workforce Acceleration, which achieved 94% of forecast. We are beginning to see decent traction with this offering with gross profit contribution in Q2 from this offering increasing significantly over the same period last year. Although the numbers are still small relative to other contributors to gross profit, we believe this trend bodes well for the future, since the potential for this offering is substantial. Our client retention in the second quarter continued at historically high levels as our client service interactions have continued at rates dramatically above pre-pandemic levels. We would have expected the level of service interactions to recede to historically normal levels by now, but it appears more of our client base has discovered the depth of our service teams expertise and the capability of a sophisticated HR function to help their businesses succeed. The most significant driver to our rapid growth acceleration in the first half of the year was growth in our client base above our expectations. We budgeted this metric at the low end of our historical range for this year and it appears we are more likely to end up near the high end, even with some potential cooling off in hiring over the balance of the year. We expect continued hiring within the client base over the back half of the year, but the labor market is showing some stress level around availability of candidates that could dampen the rate. The competition for qualified candidates is quite pronounced leading to wage inflation, signing bonuses and an increase in employee turnover to pursue better opportunities. We saw some of these effects in our own data this year with average wages and bonuses up 7% and 44% respectively. The tightening labor markets also the result of a significant increase in retirements and career decisions reflecting personal reprioritization coming out of the pandemic. This dynamic represents a considerable opportunity for Insperity since one of the major advantages of our workforce optimization offering is the immediate capability to compete for employees against much larger firms. Once again, a sophisticated HR functions needed to respond to address these marketplace changes to gain a competitive advantage. The second quarter and first half of this year also reflected the expected volatility in two of our direct cost areas, most affected by the pandemic, specifically unemployment taxes and healthcare costs. There are simply many moving parts in these two areas that will take some time to sell out as the pandemic wanes. So, we will continue to set wider ranges than normal for our expectations in these areas. So, we have delivered solid profitability year-to-date and we have a good plan for the balance of the year. To continue to set the stage for long-term growth and profitability, out plan includes strategic investments in sales and service capacity. We expect to begin ramping up the number of Business Performance Advisors at a rate of approximately 10 per month and go into 2022 at around 700 BPAs across country. We are reinstituting our fall campaign kick off in early September with simultaneous events held across the country and linked together remotely. We also have budgeted an increase of several million dollars in radio and digital marketing spend extending campaigns that have been successful generating qualified leads. We are also continuing our investment to implement sales force and are on schedule for our target rollout to the sales organization next spring. And most importantly, we intend to invest to add service team capacity for the growth we are experiencing and expect to continue in the months ahead. We believe a successful fall selling and retention campaign will build upon our recent success and increase the likelihood of double-digit growth into 2022. Insperity has a tremendous market opportunity in the years ahead. Demand in recognition of the value of our services has never been higher. The PEO industry has reached a stage of more rapid adoption and the total addressable market is large. My optimism for the long-term future is rooted in a different dynamic than I've seen in the 35 years building our company and industry. At the core of this optimism is the recognition of the importance of the HR function and the need for consultative HR support to achieve business objectives. I've mentioned throughout the pandemic the increase in the number and average length of time of interactions with our client owners and C-level management. Another element and maybe the most significant change to note is the topics being discussed at this level, including corporate culture, diversity and inclusion, employee communication and emotional support and talent acquisition and retention. It is apparent that developing and implementing an ongoing people strategy is front and center in the minds of business owners and the C-suite. This reality highlights the value of the PEO option for small and mid-sized firms in general and even more so the distinct competitive advantage of Insperity's premium service offering. So, we believe it's time to pull gas on the fire and prepare for the growth potential in the years ahead. We are in a great position to ride the wave of the recognized value of a sophisticated HR function on top of a second wave of the growing awareness of the PEO solution on top of a third wave of the value Insperity can deliver with our superior service model. We intend to continue to capitalize on this expanding market opportunity by investing in innovative ways designed to drive awareness and adoption of Insperity's best of class offerings. We believe this will allow us to continue to deliver on our mission of helping businesses succeed, so communities prosper and provide exceptional returns to our shareholders. At this point, I'd like to pass the call back to Doug. Now let me provide our guidance for the third quarter and an update for the full year 2021. We are now forecasting 5.5% to 6.5% worksite employee growth for the full year, an improvement over our previous guidance of 4% to 6% growth. This increase is based upon our outperformance during the first half of the year leading to a higher starting point going into Q3, continuing momentum in sales and client retention and some continued hiring by our clients. We are forecasting Q3 paid worksite employee growth of 9.5% to 10.5% over Q3 of 2020, so it's coming off the 7% year-over-year growth in the prior quarter. As we approach our annual fall sales campaign, we have taken a portion of the upside in earnings created during the first half of this year and invested it in initiatives designed to build upon our strong sales momentum. These initiatives include the continued hiring of Business Performance Advisors, increased investment in advertising and reinstituting our corporate sales and client retention fall campaign event. Also, as I mentioned a few minutes ago, as a result of the 2021 SUTA rates coming in lower than anticipated. We have taken the opportunity to pay savings to our renewing clients and prospects through lower SUTA pricing allocations over the latter half of 2021 to further support our sales and retention goals. Now, there does seem to be continued uncertainties around the pandemic and its impact on our direct cost programs, particularly in our benefits area where COVID-related costs, potential deferred care, higher acuity and the Delta variant are potential factors. Therefore, we continue to take the approach of adopting a wider than usual range around our earnings expectations. When considering this factor and the investment of a portion of the earnings upside for the first half of the year, we are now forecasting adjusted EBITDA in a range of $258 million to $288 million. This is up from our previous guidance of $250 million to $280 million. As for full year 2021, adjusted EPS, we are now forecasting a range of $4 to $4.59 up from our previous guidance of $3.83 to $4.40. As for Q3, we are forecasting adjusted EBITDA in a range of $52 million to $62 million and adjusted earnings per share from $0.74 to $0.93.	q2 adjusted earnings per share $0.91. sees q3 adjusted earnings per share $0.74 to $0.93. sees fy adjusted earnings per share $4.00 to $4.59.
We appreciate you joining us. Let me begin by outlining our plan for this evenings call. First, I'm going to discuss the details behind our third quarter 2021 financial results. Paul will then comment on the key drivers behind our Q3 results and our plan over the remainder of the year. I'll return to provide our financial guidance for the fourth quarter and some high-level thoughts on 2022. We will then end the call with a question and answer session. In addition, some of our discussion may include non-GAAP financial measures. Now let's discuss our third quarter results. We achieved $0.89 in adjusted earnings per share and $60 million of adjusted EBITDA above the midpoint of our forecasted ranges and driven by the quick rebound to double-digit worksite employee growth from the pandemic lows experienced in the prior year. As per our growth metric, the average number of paid worksite employees increased by 11% over Q3 of 2020, above the high end of our forecasted range of 9.5% to 10.5%. This was a sequential increase of 6% over Q2 of 2021. The accelerated worksite employee growth was driven by net gains from hiring in our client base exceeding our targets, worksite employees paid from new sales and third quarter client retention of 99%. In a few minutes, Paul will provide an update on our recent sales activity, including some early insight into our fall campaign sales efforts. Now along with worksite employee growth, our revenue per worksite employee, which reflected a 4% increase in pricing and the non-recurrence of the 2020 FICA deferral also exceeded our expectations. In addition to the strong pricing, our workers' compensation program and payroll tax areas produced favorable Q3 results. Our benefits program continues to reflect the dynamics associated with the pandemic. This includes the increase in healthcare utilization over the course of this year, including elective care that was previously deferred, COVID-19 related vaccination, testing and treatment costs, and slower claims payment processing by our carrier associated with these clients. These factors have obviously impacted the gross profit in earnings comparisons when compared to the third quarter of 2020. Q3 cash operating expenses increased 9% over the prior year, slightly below forecasted levels. We continue to invest in our growth plans, including an increase in marketing spend in Q3 as we headed into our fall selling season and incremental costs related to our sales force implementation. We have reinstituted travel for certain employees and events; however, these costs along with other G&A costs continue to be managed at historically low levels. Our financial position and liquidity remain solid, as we continued investment in our growth, while providing strong return to our shareholders. During the quarter, we repurchased 106,000 shares of stock at a cost of $11 million, bringing our year-to-date repurchases up to 544,000 shares at a cost of $50 million. Additionally over the course of the first three quarters of this year, we have paid out $50 million in cash dividends and invested $24 million in capital expenditures. We ended Q3 with $228 million of adjusted cash and $370 million of debt. I plan to cover three topics to provide insight to investors into the tremendous opportunity ahead for Insperity. First, I'll highlight the drivers of our recent results which point to strong demand for our services and excellent execution of our strategy. Second, I'll explain how the recent trends and our expectations for Q4 set up potential for growth acceleration and a strong 2022. And last, I'll emphasize the macro picture I believe may drive high levels of adoption of our services for the longer term. Our recent growth acceleration to 11% in paid worksite employees over last year was caused by our three primary drivers hitting on all cylinders, namely new client sales, client retention and net gain and employment within our client base. Our clients continue to add worksite employees in this quarter at a strong pace despite the tight labor market, one of the many advantages of being an Insperity client is gaining a competitive advantage in hiring new employees. Insperity provides a combination of big company benefits and HR support with compensation analysis and the recruiting effort critical in a competitive labor market. Our services appear to be helping our clients attract and retain employees, which adds value to our client companies and contributes to our growth. In addition to the strong net gain in employment in the client base, we saw an 18% improvement in paid worksite employees from sales of new accounts and a 16% improvement in fewer employees lost from client attrition over the same period last year. Now in our business model, two of the most important metrics driving our growth potential are sales efficiency and client retention. Booked sales of new accounts in the third quarter was excellent with approximately the same number of business performance advisors as last year selling 20% more clients and 30% more worksite employees than in the same period in 2020. This level of sales by the same number of BPAs demonstrates a significant increase in sales efficiency over last year. Several factors are contributing to an increase in sales efficiency including remote selling and technology improvements, more marketing leads and some success with our fast track program focused on early sales wins for new BPAs. However, the most significant factor in increasing sales efficiency is the maturing of our sales force. This was a significant factor in our decision at the start of the year to hold total BPA count steady for at least the first half of the year. A simple way to understand the impact of the maturity of the BPA team is to look at the number and percentage of trained BPAs with less than 18 months experience, 18 to 36 months experience, and those with greater than 36 months experience. Generally, the group in the middle with 18 to 36 months experience has approximately the average sales efficiency. The mature group significantly higher than that number and the new BPAs are significantly lower than the average. Now, we've been growing the number of trained BPAs at an average rate of approximately 13% per year from 2016 through 2020, resulting in an increase in the total trained BPAs by 80%. Over much of that period, the number of BPAs with over three years experience increased slowly, but the number of new BPAs increased at a rate that kept the average sales efficiency relatively constant other than the pandemic effects. The growth in the number of BPAs with greater than three years' experience has increased dramatically now that we are over five years from the beginning of the ramp up. This significant increase in the number of BPAs with greater than 36 months experience and the corresponding increase in overall sales efficiency, creates a new opportunity for us. In the past, we focused on growing at higher rates by continuing to grow the BPA team over 10% each year. However, the increased tenure of our BPAs gives us the opportunity to pursue our target of double-digit growth in worksite employees without increasing the total number of BPAs at double-digit levels. This is a perfect time for this opportunity when the labor market is tight and we want to continue to be selective in adding new BPAs to the team. Based upon our recent success in the tight labor market, we're reassessing the ramp up timing for a total BPA growth for the balance of this year and 2022. Another highlight from the recent quarter was continuing to increase workforce acceleration sales. Year-to-date sales of this offering have more than doubled compared to the same period in 2020. Mid-market sales are also an important part of our story. We started this year refilling the pipeline after a successful Q4 sales period last year. So sales were lower during the first half, but the pipelines back in line and we believe momentum is in the right direction for a strong finish this year. Our client retention has been continuing at historically high levels in Q3 and throughout the year with the only exception being the loss of our largest client ever back in January. The departure of that 6800 employee client in January is somewhat masking the excellent client retention for this year. Now, since we have no clients of even half that size, we have no similar event on the horizon. So continuing these underlying improved client retention rates strongly supports our growth expectations. On the service side of the business, we're continuing to see deeper levels of service interaction with clients since the pandemic started. There is a heightened need for HR support on issues from return to work, vaccination policies and practices, diversity and inclusion, the tight labor market and maintaining and developing the desired corporate culture. The expertise of our highly qualified and dedicated staff is a great competitive advantages of -- advantage that our clients are experiencing. We believe the number of quality impactful interactions has been a driver of improved client retention. Now, as we look ahead to the fourth quarter and year-end transition, we're in a solid position. As a reminder, we have our strongest selling period every year in the fourth quarter due to prospects wanting to make a change at year-end. Since the number of new accounts, is the highest every year at this time, we have the highest number of client renewals every December through February. So every year, we have a fall selling and retention campaign from September through December. This year we're off to a great start, including a kick off in September, bringing the company together in a unique way. We held local meetings across the country at Topgolf and connected virtually to deliver the message of our plan for this year. Activity in both sales and the renewal side of the campaign are on track. However, the ultimate success is only determined when we see the full results of the campaign after year-end. Now we're in a unique position this year for our starting point in paid worksite employees and the likelihood of significant double-digit growth to start 2022. Our strong selling and retention momentum, combined with year-over-year comparison in January to last year's large client loss, means the growth rate could be exceptional. The early picture for 2022 includes this strong possibility of double-digit growth combined with the expectation of some normalization of pandemic driven costs, including benefits, unemployment taxes and some operating expenses. Our business model in normal years of double-digit worksite employee growth include some leverage at the gross profit and operating expense lines, driving adjusted EBITDA up substantially. We would expect this to occur in 2022 as well, however, may be masked somewhat by the pandemic and other one-time gross profit contributions when comparing to the prior couple of years. The strength of the underlying growth plan, combined with the strong demand for our services, provides a clear and compelling macro picture. We believe we're in the early stages of a rapid growth period for our services, driven by a potentially higher adoption rate for PEO services. Several factors including post COVID validation of the need for a sophisticated HR function, changes in workplace and employee expectations and the difficulty these factors have on small and medium-sized businesses are driving prospects our way. We also believe we're well positioned to capitalize on this opportunity with the most comprehensive service in the marketplace, a proven business model and a highly dedicated team of focused professionals. At this point, I'd like to pass the call back to Doug. Now let me provide our guidance for the fourth quarter and an update for the full year 2021. We are forecasting Q4 average paid worksite employee growth of 11% to 12% over Q4 of 2020, a slight acceleration from the double-digit growth rate achieved in Q3. When combined with our outperformance in the three previous quarters, we are now forecasting full year worksite employee growth of about 7% above our previous guidance of 5.5% to 6.5%. We are forecasting a 19% to 48% increase in Q4 adjusted EBITDA to a range of $45 million to $56 million and a 24% to 65% increase in adjusted earnings per share to a range of $0.61 to $0.81. The midpoint of these ranges is consistent with our prior forecast as we have largely assumed an offset of the higher worksite employee levels, with a range of outcomes in our benefits program where some uncertainty related to the pandemic remains. And when combining our Q4 earnings outlook with our outperformance over the previous three quarters, we now expect full year 2021 adjusted earnings per share to be in a range of $4.25 to $4.46 and adjusted EBITDA of $271 million to $282 million. Now, we typically do not provide formal guidance for the upcoming year at this time. We will consider any further developments in the macro environment and the outcome of our year-end selling and renewal season when finalized in our 2022 budget and providing guidance in our next earnings call. However, I will share some thoughts when it comes to framing next year. As for worksite employee growth, our starting point to 2022 is dependent upon the outcome of our year-end transition of sold and renewing accounts and sets the table for our full-year growth. As Paul just mentioned, we are positioned well to see an acceleration of our worksite employee growth into Q1. Growth over the remainder of the year would be dependent upon continuing our sales momentum as we capitalize on the favorable market opportunity, keeping client retention at recent levels and continued net hiring in our client base, although possibly at a lower level than 2021 given the tight labor market. Our gross profit will be driven by the worksite employee growth and the effective pricing and management of our direct cost programs. As you're probably aware the pandemic over the past couple of years has created an elevated level of gross profit and some moving pieces in this area. While some uncertainty remains related to the pandemic, we currently expect 2022 to return to more normalized levels. For example, during the first half of 2021, we earned a higher than forecasted level of gross profit contribution from our payroll tax area, as most states did not increase their 2021 SUTA rates at the expected level assumed in our pricing. Over the last half of 2021, we appropriately adjusted our pricing in this area and were generally expected to continue to target a similar gross profit contribution per worksite employee in 2022. Also as a reminder, 2021 gross profit included payroll tax refunds related to prior periods, which will obviously not recur in 2022. As for our benefits program, the pandemic has caused considerable noise and uncertainty over the past couple of years. The general view is the expectation for COVID costs to moderate and healthcare utilization return to more normalized levels, however, still with an elevated level of uncertainty continuing into next year. Therefore, we would continue to expect a wider range -- wider than normal range of potential outcomes. We will continue our strategy of matching price and cost trends over the long term and not overreact to short-term variables. As for our operating costs, while we have not yet finalized our budget, there are few things to keep in mind as we move into 2022. First of all, considering our recent growth acceleration, we would generally expect leverage in our operating costs. As for some specific areas of spend, our corporate personnel costs will likely include growth in BPAs and service personnel. Our ability to reach targeted hiring levels in these areas will be dependent upon effective recruiting and retention of employees given the tight labor market. This factor is also expected to impact our corporate personnel costs as we manage compensation levels in a period of changing market dynamics. Additionally, we expect to return to more face-to-face sales and service meetings, which would likely impact our travel costs. And as you are aware, we will continue to incur costs related to our ongoing implementation of salesforce. So, in conclusion, we are working toward a successful 2021 year end and a strong start to 2022 and look forward to providing you with more details of our 2022 plan during next quarter's call.	q3 adjusted earnings per share $0.89. q3 revenue rose 20 percent to $1.2 billion. sees q4 adjusted eps$0.61 - $0.81. average number of worksite employees paid per month in q3 2021 increased 11% to 257,560 wsees.
My comments today will address three areas of interest for Insperity's stockholders. First, I will discuss our strong Q4 and full year 2020 results, highlighting our success throughout the pandemic. Second, I will address our year-end transition into 2021 and the trends driving our game plan for this year. I'll finish my remarks with comments about the longer-term and our efforts to begin a new five-year run of unit and earnings growth for Insperity. Our financial results for 2020 were quite impressive, with less than a 1% decline in worksite employees and a year-over-year increase of 15% in adjusted EBITDA, especially in light of the significant challenges faced throughout the year. Ultimately, the financial impact of shutdown-related layoffs in our client base was more than offset by lower direct costs due to behavioral changes in response to the pandemic. These results continue to demonstrate the resiliency of our small business client base, the value of our HR services and the strength of our business model in client selection and risk management. The highlight for the year was the way our Insperity employees immediately responded to challenges and delivered vital support to clients, worksite employees and their families. The dedicated service and personal touch from our people, caring for clients dramatically reinforced our tag line, HR that makes a difference. Another highlight was our success transitioning to remote selling and increasing our capabilities throughout the year. For both the full year and the fourth quarter, we achieved 81% of our pre-COVID budget in booked sales. We believe this is excellent, considering how the budget increases each quarter throughout the year, especially in Q4 where we typically budget over 35% of our annual book to sales. Another exceptional point in looking back at 2020 is the pricing strength that continued throughout the year. This is particularly important in keeping up with long-term trends and direct costs going forward. It's also important to point out we were able to continue our technology development road maps for future improvements, while also completing many projects made necessary by legislative and regulatory changes. Overall, I'm very pleased with our accomplishments in 2020 and the agility we displayed as an organization. These efforts position the company for a successful year-end transition going into 2021 and a solid plan for the new year. Our year-end transition refers to the seasonal churn in our client base between the large number of new accounts added from the fall selling campaign and client attrition in January and February from the concentration of renewals that occur at this time of year. This is especially important, since the transition sets the starting point in paid worksite employees for the new year in our recurring revenue business model. The bottom line to this year-end transition is we had an excellent year in paid worksite employees from fall campaign bookings and retention of all accounts in all segments, with one notable exception that I'll discuss in a minute. The paid worksite employees added in January from previously booked new accounts was down only 6% from 2020, which is excellent considering last year was pre-COVID. When you add an account scheduled for first payroll in February, we expect to be down only 2% in worksite employees from new accounts for the full year-end transition period compared to last year. Our year-end retention was equally impressive under these conditions, as paid worksite employees subtracted from terminating accounts was even with last year among our smallest accounts, and improved by double digits in our core, emerging growth and mid-market segments. This validates the value we delivered last year and bodes very well for our growth going forward. The one exception in this year-end transition is the unexpected loss of our largest account we've ever had in our Enterprise segment that paid 6,800 worksite employees in December. We expected this account to renew for 2021. However, we were notified in mid-November, they were taking the HR function back in-house. This account was a U.S. subsidiary of a large international firm that started with us with only 60 employees six years ago. We served this company very well and delivered the platform that supported their exceptional growth from an average of 240 employees in 2015 to 4,800 in 2020. This account is actually a great success story for Insperity, which we expect to use in future marketing efforts. We also learned a tremendous amount we can leverage in the future regarding serving fast-growing enterprise customers. Also, it's important to note the gross profit contribution per worksite employee in our pricing model goes down as the account size goes up. So even though this account represented about 2% of our worksite employees in 2020, it represented only 1% of our gross profit contribution. This account grew into a one of a kind for us as our remaining enterprise accounts represent less than 3% of our worksite employee base, with no account exceeding 2,000 employees today. So our growth plan for 2021 includes a lower starting point in paid worksite employees for Q1, followed by growth acceleration over the balance of the year, driven by the current trends in sales retention and growth in our client base. We expect to build on the sales momentum from the fall campaign in our recent virtual sales convention. We are beginning this year with some very positive underlying trends in our sales effort as we extend best practices and remote selling across the Business Performance Advisor team. First, even though the number of proposals for our flagship workforce optimization solution in the fourth quarter was down 13% from the same period in the prior year, the number of accounts sold was up 2% due to a 17% improvement in our closing rate. Secondly, as we enter the new year, we reset our BPAs into the perform -- into performance tiers that they achieved through their production in the prior year. We build the overall budget for the new year off these individual production levels to set expectations for the year ahead. Over the past year, we had significant movement up through the tiers, demonstrating the success of our long-term plan of growing and training the BPA sales team. This has been occurring to some degree in recent years. However, the impact is expected to be larger this year, as fewer of these BPAs with improving performance are flowing into management roles. As a result, we expect the sales efficiency gain this year just from the higher percentage of BPAs that are in the higher tiers. This maturity of our sales organization allows for sales growth and momentum without hiring as many new BPAs. We also are continuing to hold most of our meetings with prospects remotely through Zoom meetings. We expect as the pandemic moderates, our sales opportunities will increase and mixing in face-to-face meetings may have a positive effect on sales efficiency. Relative to our outlook for our two other growth drivers, we expect to continue to drive high levels of client retention over the balance of the year. However, the full year number will be weighed down by the large account that recently terminated. We expect growth in the client base to be on par with the underlying trends we experienced in the last half of last year in the new hires and regular terminations. This analysis excludes COVID-related furloughs and those employees that later returned to work. This level of growth in the client base implied for 2021 would be an improvement from last year, however, still the lowest we've experienced in recent prior years. Our plan for profitability for this year factors in some pressure at the gross profit line from normalization of healthcare claims, an uptick in unemployment cost and following our normal practice and estimating workers' compensation expense, where we start the year with a conservative estimate, and hopefully, we'll earn some upside from our efforts in safety and claims settlement over the course of the year. We are comfortable that our strong pricing over the last 18 months or so has effectively met our targets for matching price and cost in these programs. We expect to earn an appropriate fee within our historical range for managing these programs. Our priorities for our operating plan for 2021 are focused on initiatives needed to regain our growth momentum, post-COVID. Our goal is to lay the groundwork over the balance of this year for consistent predictable double-digit unit and earnings growth, like we experienced from 2015 to 2019. We expect to continue to invest in growing the BPA team. However, mostly in the last half of the year as we benefit from the tier movement in the first half. We are continuing to refine our marketing efforts to targeted prospects to drive lead generation of accounts more likely to be a good fit for Insperity. We made good progress on this front, increasing our digital spend in the fourth quarter and increasing the percentage of booked accounts coming from our marketing programs to 55%. We expect to continue to invest in technology development to support our client base and implement Salesforce to improve our already best-in-class sales and service results. Salesforce is a significant and important investment for the company, which we believe will provide an enhanced platform to support our continuous improvement and service excellence standards. Ultimately, we expect to capture more data and more information more easily, providing the opportunity to leverage and optimize the use of our data to the benefit of our clients. Applying the Salesforce analytics and AI against our data on a consolidated platform will give us the best view we've ever had across all products, prospects and customers. One final observation important to note is the step-up in interactions with our clients, initially caused by the pandemic. Our total inquiries per week from our clients more than doubled last April and has not receded to previous levels. I believe this new level of ongoing interaction and support of our clients is one of the primary reasons for the double-digit improvement in retention we are experiencing across most of our client segments. Our clients are relying more heavily on our services and experiencing HR that makes a difference from our unique premium service model. In addition, we are beginning this year with 8% more clients than we had a year ago, while our average account size is down by about 1.5 worksite employees, largely due to the pandemic. In our view, it's evident demand for our service is substantial, and the small business community is positioned for a rebound. In summary, I believe we're in an excellent position for 2021 to set the stage for growth acceleration this year and for sustained growth in the long term. This reminds me of 2014 when we were putting the finishing touches on our refined sales motion with our BPAs and improving our mid-market sales and service models to improve retention. Those refinements led to a strong five-year run beginning in 2015, nearly doubling the size of the company, tripling the adjusted EBITDA and increasing the valuation of the company fivefold. I'm certainly not promising a repeat of those impressive results or guiding to those growth levels. However, I do believe we are in a position to take our learnings and improvements from this challenging past year and set up another impressive run of unit and earnings growth for Insperity. At this point, I'd like to pass the call back to Doug. Douglas S. Sharp -- Senior Vice President. Now let's discuss the details behind our fourth quarter results. We reported Q4 adjusted earnings per share of $0.49 and adjusted EBITDA of $38 million. These results reflect outperformance in the level of paid worksite employees compared to our expectations in the continued uncertain and challenging business environment. Upside in our direct cost programs brought about by the structure and the ongoing management of these programs and some dynamics related to the pandemic and continued management of our operating costs. As for our growth, we continued the sequential increase in paid worksite employees since the low point in May of 2020, when the impact of the pandemic caused many of our clients to furlough or permanently lay off their employees. Our recovery in the level of paid worksite employees since this period was driven by the return to work of many of these employees and effective selling and client retention. Q4 average paid worksite employees increased 3% sequentially over the Q3 period, coming off the 2% sequential increase in Q3 over Q2. During Q4, all three growth drivers exceeded our expectations. Gross profit increased by 3.5% over Q4 of 2019, despite 1.8% fewer paid worksite employees due to improved pricing and the higher-than-expected contributions from our benefit and workers' compensation programs. During Q4, total benefit costs returned closer to pre-pandemic levels as lower healthcare utilization was largely offset by COVID-19 testing and treatment costs. However, previously deferred care costs did not materialize at the forecasted level. Our workers' compensation program continued to perform well due to ongoing management of safety practices and claims, and to a lesser degree, a favorable net impact from the reduction of workers' compensation claims associated with the work-from-home status of many of our clients' employees. Now turning to operating expenses. We continue to manage costs commensurate with the current operating environment, while also investing in our long-term growth plan. Operating expenses, excluding stock-based compensation and depreciation and amortization, increased just 5% over Q4 of 2019. Fourth quarter operating expenses included costs associated with a 9% increase in the average number of trained Business Performance Advisors and the opening of six new sales offices throughout 2020. We held other corporate employee head count flat over the past year due in a large part to the effort and the effectiveness of our staff in the face of increased HR service demands from within our client base. Cost savings continue to be realized in other areas of the business, both through effective management and because of pandemic-related cancellations or shutdowns. These areas include G&A costs such as travel and training and costs associated with certain sales and marketing events. The Q4 year-over-year increase in total operating expenses of 19% was impacted by increased stock-based compensation costs. This increase was driven primarily by our outperformance and the level of paid worksite employees and earnings in the face of the significant challenges brought about by the pandemic. Now turning to our full year 2020 operating results, adjusted EBITDA increased 15% over 2019, $289 million, and adjusted earnings per share increased 12% to $4.64. The average number of paid worksite employees for the full year 2020 declined by less than 1% in a very challenging environment. Worksite employees paid from new sales declined by only 1.5% from 2019, largely on the success of our remote selling. Client retention averaged 82% due to the resiliency of our clients and our quick and effective response to assist our clients with our premium level of HR services. These same factors contributed to our clients' ability to return a significant amount of their initially furloughed staff to a full-time status and clients in certain industries adding to their employee base over the course of the year. Gross profit increased 10% over 2019 as improved pricing and the favorable impact of our benefit and workers' compensation programs more than offset the slight decline in paid worksite employees and the comprehensive service fee credits provided to our clients during Q2. Lower healthcare utilization brought about by the pandemic resulted in 2020 benefit cost per covered employee being relatively flat compared to 2019. This compares to our original pre-pandemic 2020 budget, which anticipated a cost increase of approximately 3%. Now as you may recall, we were targeting benefit pricing increases slightly above the 2020 budgeted cost trend to address increased costs associated with 2019's elevated large claim activity. We ended 2020 slightly exceeding these pricing targets. Now operating expenses, excluding stock-based comp and depreciation and amortization, increased by just 5.5% in 2020 over 2019 as growth, product and technology investments were partially offset by cost savings in the other areas that I mentioned a few minutes ago. Total operating expenses increased 12% over 2019 and included the increase in stock-based comp tied to our outperformance. Our execution, combined with the dynamics of the pandemic, produced strong cash flow over the course of 2020. We ended the year with a solid balance sheet, while continuing to invest in the business and providing strong return to our shareholders. We invested $98 million in capital expenditures during the year to support our recent and future growth, and returned $161 million to shareholders through our dividend and share repurchase programs. We repurchased a total of 1.4 million shares during 2020 at a cost of $99 million; increased our dividend rate by 33% in February; and paid out a total of $62 million in dividends. We ended the year with $212 million of adjusted cash and $130 million available under our $500 million credit facility. Now let me provide our 2021 guidance, which incorporates wider-than-usual growth in earnings ranges, given the ongoing uncertainty in the macro environment. As for our growth metric, we are forecasting a 2% to 6% increase in the average number of paid worksite employees for the full year 2021. We expect to begin this year with a 1.5% to 2.5% decline in Q1 when compared to the pre-pandemic 2020 period. The sequential decline from Q4 of 2020 includes the loss of the large account, which Paul just mentioned. Now subsequent to Q1, our growth is expected to be driven by the recent growth and tenure in the number of trained Business Performance Advisors, continuing solid core client retention and modest net hiring in our client base, brought about by a gradual improvement in the business environment. Our range of forecasted growth is largely dictated by the timing and degree of such an improvement in its impact on the three drivers of our growth. As for our gross profit area, you may recall that our key metric is gross profit per worksite employee per month, which takes into account our co-employment service fee pricing, the pricing and cost management of our direct cost programs, including benefits, workers' compensation and payroll taxes; along with contributions from our traditional employment and other products. It may be helpful to begin our discussion with the review of recent history to gain some perspective on how we are currently reviewing 2021. This metric averaged $261 in 2017, $272 in 2018, $259 in 2019 and $287 in 2020. Now let's take a few minutes to break down some of the details as we look at our expectations for 2021. Our co-employment service fee pricing is expected -- is impacted by new and renewal pricing and any changes in client mix. This pricing remains strong throughout 2020 and throughout the recent sales and renewal period. And we combined with our pricing targets over the range of 2021 and a favorable client mix impact from the loss of the larger lower-priced account, we expect our overall service fee pricing to improve over 2020. Also, you may recall that comprehensive service fee credits were provided to our clients in Q2 of 2020, which is lower than the prior year's overall service fee. We expect a more normal overall benefit cost trend in 2021 when taking into account the expected increase in healthcare utilization over the course of the year and our best estimate of COVID vaccination and treatment costs. When you consider the flat cost trend in 2020, this would equate to an expected 2021 cost increase of 6% to 7%. This includes an outsized Q2 year-over-year increase given the extraordinary low claims in Q2 of 2020. Now if you take a step back to 2019, this equates to annualized cost trends of approximately 3% from 2019 through 2021. Since we have taken a steady approach to pricing over the last two years, we believe we have effectively matched our pricing with this two-year cost trend. However, this is still -- there is still a considerable amount of uncertainty around benefit utilization and COVID case count treatment and vaccines. This uncertainty contributes to a wide normal range in our earnings guidance. As for our workers' compensation cost area, we have experienced improving cost trends over recent years from ongoing management of client selection, safety and claims. Similar to prior years, we intend to budget 2021 conservatively and allow for these factors to possibly drive additional cost benefit throughout the year. As for the payroll tax area, we're projecting an increase in state unemployment tax rates as a result of the pandemic impact on unemployment. Many states have issued rules to exclude COVID-related unemployment claims from the employer's 2021 SUTA rate. However, as we sit here today, the majority of these states have not yet finalized their rates. Accordingly, in an effort to estimate our 2021 rates, we have communicated with certain larger states to verify their intentions and perform detailed analysis and modeling. We have incorporated these estimated rates in our outlook, and we expect this area to have a $1 reduction in gross profit per worksite employee per month for the full year 2021 and a $5 reduction in Q1 2021 due to the seasonality of our unemployment taxes. So as for the bottom line, when you combine each of these factors, we are budgeting gross profit per worksite employee at a level closer to 2018 than into the high point of 2020 or the low point of 2019. Now as I mentioned earlier, in addition to the upside in the gross profit area in 2020, we also managed operating costs significantly below our 2020 budget. Our overall 2021 operating plan balances maintaining certain costs at 2020 levels, with investing in targeted initiatives important to our long-term growth. With the growth in the number of BPAs throughout 2020 and their increased tenure, we intend to manage the growth in a number of hired BPAs to about 4% in 2021. We intend to manage other corporate head count to a 2% increase. We are budgeting for a return in 2021 of a portion of marketing and business promotion costs which were not incurred in 2020 due to the pandemic shutdown. We have also increased our lead generation budget. As for our G&A costs, we experienced significant savings during 2020, particularly in the area of travel and training. We plan to continue to manage these costs at this lower level and will assess the opportunity and need for any increased activity as pandemic conditions improve. Now as Paul just mentioned, an important initiative this year is the purchase and implementation of Salesforce. Our 2021 budget includes the product and estimated implementation cost associated with this effort. During the implementation phase, we will experience some duplication and cost while still using our current sales and service software. However, after implementation, any incremental costs over and above our current software solutions are expected to be minimal. As for 2021, we are budgeting for approximately $6 million in incremental costs related to the Salesforce initiative. So in considering all these factors, we are budgeting for a 4% increase in cash operating costs in 2021 over 2020. As for our noncash items, we have budgeted for a decrease in stock-based compensation when compared to 2020, due to the performance-based feature of our stock awards and a setting of new targets for the 2021 year. We have budgeted for a $10 million increase in depreciation and amortization over 2020, associated with software development costs related to the recent improvements in our payroll and HCM system, which were previously capitalized and the recent expansion of our corporate facility. So in conclusion, we are forecasting improved worksite employee growth of 2% to 6%, combined with lower gross profit per worksite employee and a slight increase in cash operating costs per worksite employee. Given the continued uncertainty in the macro business environment, we believe it's prudent to forecast a wider than typical range of $225 million to $275 million in adjusted EBITDA. As for adjusted EPS, we are forecasting full year 2021 in a range of $3.27 to $4.20. This assumes an estimated tax rate of 26.5%, generally consistent with our 2020 rate and the increase in depreciation and amortization that I just discussed. We are forecasting Q1 adjusted EBITDA in a range of $84 million to $103 million and adjusted earnings per share from $1.37 to $1.72. As for our quarterly earnings pattern, keep in mind that our Q1 earnings results are typically higher than subsequent quarters. In particular, we typically earn a higher level of payroll tax surplus prior to worksite employees reaching their taxable wage limits, and benefit costs are lower in Q1 and step up over the remainder of the year as deductibles are met.	q4 adjusted earnings per share $0.49. sees q1 adjusted earnings per share $1.37-$1.72. sees 2021 adjusted earnings per share $3.27 - $4.20.
Joining me on the call today are the members of Nucor's executive team including Jim Frias, our Chief Financial Officer; Dave Sumoski, Chief Operating Officer; Al Behr, responsible for Plate and Structural Products; Doug Jellison, responsible for Raw Materials and Logistics; Greg Murphy, responsible for Business Services and our General Counsel; Dan Needham, responsible for Bar and Rebar Fabrication Products; Rex Query, responsible for Sheet and Tubular Products; MaryEmily Slate, responsible for our Enterprise Commercial Strategy; and Chad Utermark, responsible for Engineered Bar and Fabricated Construction Products. With demand for steel remaining strong in most of our facilities operating at peak performance, we have not lost focus on our goal of becoming the world's safest steel company. We continue to perform well on the safety front as we look to make 2021 our safest year ever besting our record set just last year. I encourage all of our teammates to maintain their focus on safety, so we can achieve the most important goal that we have set for our company. Consistent with last month's guidance, Nucor posted record quarterly earnings in the second quarter. Our earnings of $5.04 per share surpassed our previous earnings per share record set last quarter, our first half earnings of $8.13 per share exceeds our full year earnings per share record of $7.42 set in 2018. All three operating segments are continuing to generate robust profits due to strong demand, higher average selling prices and excellent execution across Nucor. In our Steel mills segment, we saw the greatest improvement in profitability from our sheet and plate mills. The performance of our steel products group also improved compared to the first quarter. Jim will provide more details about our performance of this quarter and our outlook for the third quarter in a few minutes. This level of performance is the result of years of work strategically growing and positioning our company to thrive in market conditions like we are experiencing today. My congratulations to the entire Nucor team. There are several fundamental drivers of the strong market conditions Nucor is benefiting from today, the most important of these is robust demand. Virtually all the steel end-use markets that we monitor are growing. Some of this growth may simply be catch-up from the pandemic-induced economic lull we experienced here in the U.S., but we think it goes beyond a temporary rebound. One sign of this is the increasing confidence about next year that we sense from our customers ranging from automotive, trucking, heavy and ag equipment, and across the construction sector. There are noteworthy new drivers for growth in steel demand. Warehouses for e-commerce, renewable energy projects, and an increase in U.S. manufacturing investment focused on greater supply chain resiliency are all creating new market opportunities for Nucor. Very strong housing and automotive markets are also creating incremental steel demand, not to mention activity by State DOTs whose infrastructure investment spending has held up better than expected. We are fortunate that several of our strategic growth investments have come online during this period, and our results reflect better than expected contributions from Nucor steel mills in Sedalia, Frostproof, Kankakee, Marion, Gallatin's new galvanizing line and Hickman's new cold mill. Our strategy continues to be, grow the core, expand beyond, and live our culture. We are continuing to make targeted investments in acquisitions to grow our share in attractive markets, and increase our long-term earnings power. We are complementing our investment strategy with a sharpened commercial focus that is enabling us to leverage our broad portfolio and deliver increased value to our customers with more integrated solutions. Acquisition announcements we made in the second quarter are focused on the expand beyond part of our mission statement. Our pending acquisition of Cornerstone Building Brands' insulated metal panels business, IMP for short, is squarely aimed at some of the fastest growing markets I've mentioned. For example, distribution center investments driven by evolving consumer preferences regarding e-commerce in grocery delivery as well as the expansion of data centers and server farms, which all require temperature-controlled environments. Cornerstone's IMP business is a market leader and innovator in the growing IMP product category. IMP products are gaining market share as companies and institutions continue to focus on environmental performance and energy efficiency. The superior insulating performance of IMP products reduces energy usage and overall operations-related greenhouse gas emissions. Additionally, IMP products are easier to install with lower maintenance cost versus other wall and roofing solutions. Cornerstone's IMP business is an excellent fit with Nucor Buildings Group and we are confident that we can help the team there take performance to an even higher level. We also announced, earlier this week, our agreement to acquire Hannibal Industries, one of the largest steel pallet rack manufacturers in the U.S. Hannibal provides racking solutions to warehouse serving the e-commerce, industrial, food storage and retail segments. Adding Hannibal to Nucor creates a new growth platform that broadens our offering to the distribution center market including beams, joist, deck, metal buildings, and of course, insulated metal panels. As an employee-owned company, we are optimistic that Hannibal Industries will be a great fit with the Nucor culture. Also, on the expand beyond front, we continue to build out our own growth platform in industrial gases enabling lower-cost supply to our steel mills while also creating additional streams of revenue with sales to third parties. The team that joined Nucor with our acquisition of Universal Industrial Gases in 2019 continues to do a great job executing these initiatives. We have an operating air separation unit at Nucor Hertford and are actively selling liquid gases on the open market. We will continue to have more ASUs supporting our other mills up and running in the coming months. As one of the cleanest steel producers on the planet, Nucor will continue to take our environmental leadership position even farther. Our new greenhouse gas reduction commitment will take our carbon intensity down to 77% below today's world average. Our commitment is to reduce our Scope 1 and 2 greenhouse gas emissions intensity by a combined 35%. This commitment will be measured against the 2015 baseline, the year the Paris Climate Agreement was signed. At our current greenhouse gas intensity, Nucor's already achieved the steel sector benchmark established in the Paris agreement. Our performance today is what many of our competitors around the globe are aspiring to achieve by 2030, '40, '50 and beyond. And compared to many of our integrated competitors, our starting point is already better than their near and intermediate goals. And now we're going to get even better. We are a leader today in sustainable steel production and our commitment to further reduce our emissions intensity will keep us a leader as we move forward. We urge Congress to make good on the recent Bipartisan Framework reached in the Senate and come together to pass a significant infrastructure funding bill. We strongly believe that modernizing our infrastructure will boost our nation's economic competitiveness, not to mention making us all safer. Federal infrastructure spending plans currently under consideration are expected to increase U.S. steel demand by as much as 5 million tons per year for every $100 billion of new investment. Nucor is incredibly well positioned to provide steel for infrastructure projects across U.S. We are encouraged that the President and members from both parties continue to focus on this issue, and we are hopeful that they can come together to form a bipartisan solution. Again, it is gratifying to see how years of hard work and planning are paying off in this incredibly strong steel market. We're excited about the expanded capabilities we can offer our customers because of our capital investments and acquisitions we have made in recent years. To the entire Nucor team, congratulations on an excellent first half of 2021. Let's continue to execute and make this our safest and most profitable year. Now, Jim Frias will provide more details about our performance in the second quarter. Second quarter earnings of $5.04 per diluted share exceeded our guidance range. Better than expected results for the month of June were achieved across a broad group of businesses, including our beam mills, bar mills, sheet mills, rebar fabrication, tubular products and joist and deck. Nucor's diverse portfolio of products and capabilities is consistently a powerful driver of value creation for Nucor shareholders and customers. Recently completed capital projects made significant and above budget earnings contributions in the first half of this year. These projects are the rolling mill modernization at our Ohio rebar mill, the hot band galvanizing line at our Kentucky Sheet Mill, the specialty cold rolling mill at our Arkansas sheet mill, the rebar micro mills in Missouri and Florida and the merchant bar rolling mill at our Illinois bar mill. These targeted investments are enabling Nucor to earning a growing and profitable share of the markets we serve. The Hickman, Arkansas specialty cold mill is an excellent example of Nucor's growth strategy. There are no other carbon steel mills in North America that match our new range of capabilities. In the second quarter, the Hickman specialty cold mill ran at 118% of rated capacity, more than double its originally projected production ramp timeline. Since beginning operations in mid-2019, this project's life-to-date profitability also substantially exceeds its initial forecast, and the Hickman team is looking ahead to further expanding long-term earnings power as it begins the work of commissioning its third-generation flexible galvanizing line equipment. The state-of-the-art capabilities of these new assets will position Nucor to further grow our automotive footprint. We will provide our automotive customers the greenest, most advanced high strength steels in the industry. These deals will provide our customers the ultimate solution that satisfies their needs long into the future. Our success bringing strategic projects like this online reflects the Nucor team's commitment to being effective stewards of our shareholders' valuable capital. Our growth investments are targeted at defined market objectives and opportunities to generate attractive returns with reduced volatility through the economic cycle. Financial strength continues to be a critical underpinning to Nucor's ability to grow long-term earnings power. At the close of the second quarter, our cash, short-term investments, and restricted cash holdings totaled $3.2 billion. Compared with the end of the first quarter position, our second quarter cash position increased by about $226 million. That increase is after funding share repurchases of $614 million, cash dividends of $123 million, capital expenditures of $389 million and a working capital expansion on the inventory receivables and payables line items totaling about $945 million. Nucor's liquidity also includes our undrawn $1.5 billion unsecured revolving credit facility, which does not mature until April of 2023. Total long-term debt including the current portion was approximately $5.3 billion at quarter-end. Gross debt as a percent of total capital was approximately 30%, while net debt was 12% of total capital and remains well below our targeted range of 18% to 23%. We remain materially under leveraged on this basis, but we anticipate that this will change somewhat as we deploy capital to acquire Cornerstone's IMP business and Hannibal Industries. We're excited to be moving forward with these new growth platforms. We expect that these businesses, along with the numerous internal growth projects we have been executing on, will materially add to Nucor's earnings and cash flow generation in the years ahead. Cash provided by operating activities for the first half of 2021 was $1.9 billion. Nucor's free cash flow or cash provided by operations minus capital spending was $1.2 billion. Nucor's financial strength and robust through-the-cycle cash flow allows for a consistent balanced approach to capital allocation. We now estimate total year capital spending of approximately $1.8 billion. Each of our three most significant capital projects, the expansion and modernization of the Gallatin, Kentucky sheet mill, the Generation 3 flexible galvanizing line at the Hickman, Arkansas sheet mill, and the greenfield Brandenburg, Kentucky plate mill remain on schedule. At Brandenburg, the timing of some equipment deliveries has been delayed but overall, the project remains on schedule for a late 2022 commissioning. During the second quarter, we continue to see attractive value in our shares repurchasing 6.765 million shares at an average cost of approximately $91 per share. Over the first half of this year, Nucor share repurchases totaled more than 12 million shares at an average cost of about $75 per share. Shares outstanding have been reduced by approximately 3% from the year-end 2020 level. For the first half of 2021, total cash returned to shareholders through dividends, and share repurchases totaled just under $1.2 billion representing approximately 47% of net earnings for the period. As we have said previously, we intend to return a minimum of 40% of our net income to Nucor shareholders. We are rewarding shareholders with substantial cash returns while continuing to invest for future profitable growth and maintaining a strong balance sheet. Turning to the outlook for the third quarter of 2021. We are encouraged by a number of positive factors impacting our markets. As Leon mentioned, we see improving or stable market conditions for the vast majority of the end-use markets served by Nucor. In fact, order backlogs at most of our businesses suggest strength well into 2022. Further supporting our optimistic outlook, inventories throughout supply chain remain lean. We expect earnings in the third quarter of 2021 to again set a new record. Compared to the second quarter, we expect earnings growth at all three of our segments, most notably our Steel mills segment. Additionally, with our expectation of a strong fourth quarter, we believe second half of 2021 earnings will exceed first half of 2021 earnings. Nucor's record results highlight the success of our 27,000 team members building a stronger and more profitable Nucor. Our teams' 2021 performance is simply outstanding. We remain excited by the opportunities ahead for our company. We have great determination to deliver increasing long-term value for our shareholders. Living our culture means driving sustainable performance.	qtrly net earnings of $5.04 per diluted share. expect earnings in q3 of 2021 to be highest quarterly earnings in nucor history. primary drivers for expected increase in earnings in q3 of 2021 are improved pricing and margins in steel mills segment. expect increased profitability across steel mills segment, with largest increase at sheet mills in q3. steel products segment and raw materials segment are expected to have increased earnings in q3 of 2021 compared to q2 of 2021.
Nucor continues to deliver strong results in our safety performance as we work toward our goal of becoming the world's safest steel company. Our performance in 2021 is slightly ahead of last year, which was the safest year in Nucor's history. Our team is committed to identifying and eliminating those risks, which could lead to injury. Our most important value is the safety, health and well being of our entire Nucor family. During the third quarter, we once again achieved record results. With earnings per share of $7.28, our third quarter performance surpasses our previous record of $5.04 set in the second quarter of this year and nearly matches our full year earnings record of $7.42 that we set back in 2018. I'd like to congratulate the entire Nucor team for delivering the phenomenal results we have seen so far this year, while staying focused on our safety goals. I'm incredibly proud of our team and what we are accomplishing together. Since our founding 56 years ago, sustainability has been at the core of Nucor's business model. More than ever before, we see opportunities to advance our continued success by partnering with customers to help them meet their own growth and sustainability objectives. Our recent launch of Econiq, which is a new line of net zero carbon emission seal products, gives our customers confidence and the trust that the products that they're purchasing from Nucor will not only help them meet their sustainability goals, but provide a differentiated value proposition for them for the future. Our use of recycled scrap-based EAF technology enables us to operate at 70% below the current GHG intensity for the global steel industry. Econiq steel will further advance our leadership position by applying credits from 100% renewable electricity and high-quality carbon offsets to negate any remaining Scope one or two emissions from our steelmaking process. We are delighted that General Motors will be the first customer for Econiq. With our first shipment slated for early 2022, Econiq is going to be a key piece of GM's vision of a net zero emission future, as GM continues to work toward reducing carbon emissions throughout their supply chain and through electrification of their model lineups, and we also look forward to deploying Econiq more broadly to help customers from across numerous other steel-consuming end markets meet their goals and develop more sustainable products. And while I'm on the topic of sustainability, our new Corporate Sustainability Report can be found on nucor.com, along with our first TCFD aligned report and updated SASB aligned report from our steel mills segment. We hope you will find all this information informative and useful. The third quarter was a very eventful one for Nucor strategically as we announced or closed on several investments that will help us continue to advance our company's mission to grow the core, expand beyond and live our culture. We announced our plan to build a state-of-the-art sheet mill in the Midwest on September 20. With three million tons of annual capacity, this mill will be located to serve the country's largest steel consuming regions, the Midwest and the Northeast. These are regions where Nucor is currently underrepresented. With coil width of up to 84 inches, a tandem cold mill and initially two galvanizing lines, the new sheet mill will position Nucor to grow its market share in value-added products from automotive, appliance, HVAC, heavy equipment, agricultural, transportation and construction applications. The mill's product mix will be approximately 2/3 cold rolled and galv. The U.S. steel market is undergoing a structural transformation driven by the dual imperatives of economic efficiency and sustainability. Our mill will be state-of-the-art and have a significantly lower carbon footprint than nearby competitors. With our financial strength and multi-decade track record of innovation and execution, Nucor is uniquely positioned to continue leading this acceleration steel market transformation. Our investment in this greenfield sheet mill represents a continuation of Nucor's balanced approach to capital allocation, investing in projects and acquisitions expected to generate returns that substantially exceed our cost of capital, while also continuing to return at least 40% of our net income to stockholders through a combination of dividends and share repurchases. Also we recently announced our plans to expand out West. We will build a new melt shop at one of our existing bar mills in the Western United States. This facility will have the capacity of 600,000 tons annually. Adding melt capacity positions Nucor to build on our market leadership position in the region, which is experiencing both population growth and the infrastructure investment that typically accompanies it. Our bar mill group is where our steelmaking started over 50 years ago, and it continues to generate very attractive returns on capital. In addition to prudently investing to grow our core steel businesses, we are executing on our opportunities to expand beyond. During the quarter, we acquired Cornerstone's insulated metal panels business as well as Hannibal Industries, a steel racking manufacturer. We are now able to offer a broad range of insulated metal panel products and racking solutions. Each of these businesses is aimed squarely at serving fast-growing markets such as warehouses and data centers. Our strategic investments will continue to be aimed at positioning Nucor to serve attractive growing end use markets as the economy evolves to rely more on renewable power and Internet-based services. As you can see, we are adding capabilities to increase our presence in attractive markets and extend our company's long record of growth and value creation. Nucor is positioned to provide the sustainable steel and steel products needed to build the 21st century green economy. A key requirement of that economy is modern, resilient and sustainable infrastructure. Republicans and Democrats agree that the bipartisan infrastructure bill is urgently needed, and we hope Congress can find a path forward to get this bill passed in order to ensure the safety of our citizens, the health of our economy and future opportunities for American workers. We cannot afford to have Congress miss this opportunity. You all should be very proud of the safety and financial results achieved in the first nine months of the year. We can only benefit from these strong market conditions if our facilities are running safely, responsibly and reliably. Nucor will continue to invest in our future and provide our customers a differentiated value proposition, while offering the most diverse set of capabilities of any steelmaker. And as we approach the end of the year, let's continue to make 2021 our safest and most profitable year in Nucor's history. Now Jim Frias will provide more details about our performance in the third quarter. We are proud to report our third quarter of 2021 earnings of $7.28 per diluted share, establishing a new quarterly earnings record. This quarter's results also compare favorably with year-ago third quarter earnings of $0.63 per diluted share. We are benefiting from strong demand and profitability across Nucor's diverse portfolio of products and capabilities. Nucor's product breadth continues to be a powerful driver of value creation for both Nucor customers and shareholders. Due to higher-than-expected inventory profit eliminations, third quarter earnings were slightly below our guidance range of $7.30 to $7.40 per diluted share. Year-to-date earnings of $15.34 per diluted share are more than double 2018's record annual earnings of $7.42 per diluted share. We are extremely proud of our team's strong performance during the current up cycle and through all the pandemic-related challenges we have experienced this year and last. Our confidence in Nucor's competitive positioning has never been greater, as we look to execute on further opportunities in the months and years ahead. Our results reflect strong returns from consistent reinvestment in our operations over the years and outstanding execution by our team by significant organic growth investment projects, representing approximately $1 billion in aggregate capital investment, completed start-up and full product commissioning over the 2019 to 2020 period. The rolling mill and modernization at our Marion, Ohio rebar mill, the hot band galvanizing line at our Kentucky sheet mill, the specialty cold rolling mill at our Arkansas sheet mill, the rebar micro mill in Missouri and the rebar micro mill in Florida, each of these projects are delivering life-to-date profitability well above their original projections. During this past quarter, these projects together generated EBITDA exceeding $180 million. The two completed sheet mill capability expansion projects merit additional comments. Just two years after beginning operations in September of 2019, the Gallatin, Kentucky hot band galvanizing lines cumulative EBITDA exceeds the project's $200 million investment. At 72 inches wide, this line is the widest hot rolling galvanizing line in North America and is uniquely positioned to serve value-added markets, such as automotive, solar tubing, grain storage, culverts and cooling towers. The facility ran at 112% of design capacity in the third quarter of 2021. Next, the Hickman, Arkansas specialty cold mill continues to be another great success story. After beginning operations in mid-2019, the specialty cold mill's cumulative EBITDA already exceeds half of the project's capital investment. This facility also ran at 112% of rated capacity in the third quarter of 2021. Further, our specialty cold mill team is still very early in the process of developing unique product capabilities and applications, leveraging Hickman's flexible cold rolling mill to produce the high-strength, lightweight products that are increasingly demanded by OEM customers. As most of you are aware, two more major capital projects also totaling approximately $1 billion are on schedule to begin start-up during the fourth quarter. These investments will expand further Nucor's product capabilities into the sheet market. They are the expansion and modernization of the Gallatin sheet mill's hot band production capability and the Generation three flexible galvanizing line at the Hickman sheet mill. Gallatin would begin a 25-day production outage on November 23 for final equipment installation. After the outage, start-up and commissioning will commence. At Hickman, commissioning of the flexible galvanizing line is underway, with prime production expected in December. Looking into 2022, our team constructing the $1.7 billion Brandenburg, Kentucky state-of-the-art plate mill is on track for start-up late next year. Project-to-date capital spending totaled about $570 million. Located in the middle of the largest U.S. plate-consuming region and able to produce 97% of plate products consumed domestically, this mill positions Nucor to support domestic production of wind towers, while securing a market leadership position in plate. Turning to cash flow and the balance sheet. Cash provided by operating activities for the first nine months of 2021 was approximately $3.6 billion. Nucor's free cash flow, or cash provided by operations minus capital spending of $1.2 billion, was about $2.4 billion. For full year 2021, we now estimate capital spending of approximately $1.7 billion. At the close of the third quarter, our cash, short-term investments and restricted cash holdings totaled $2.3 billion. This is a decline of about $900 million from the second quarter level. During the third quarter, Nucor funded significant uses of cash totaling approximately $3.6 billion, including acquisitions of $1.3 billion, capital spending of $505 million, share repurchases of $858 million and cash dividends of $120 million and a net working capital expansion on inventory, receivables, payables and accruals totaling $766 million. These uses were funded primarily from Nucor's ongoing strong cash generated from operations. The cash and short-term investments drawdown, plus the receipt of $197 million from the issuance of green bonds tied to the Brandenburg project. At the close of the third quarter, total long-term debt, including current portion, was approximately $5.6 billion. Gross debt as a percentage of total capital was approximately 29%, while net debt was about 17% of total capital. Financial strength continues to be a critical underpinning of Nucor's ability to grow long-term earnings power and provide attractive cash returns to shareholders. We remain committed to returning capital through cash dividends and share repurchases a minimum of 40% of our net income over time. For the first nine months of 2021, cash returned to shareholders totaled $2.1 billion. That represents approximately 47% of Nucor's net income for this period. The year-to-date capital returns consisted of dividends of $367 million and almost $1.8 billion of share repurchases. During the third quarter, we repurchased 8.2 million shares at an average cost of approximately $105 per share. Year-to-date repurchases totaled 20.35 million shares at an average cost of just over $87 per share. Over the first nine months of 2021, Nucor's shares outstanding have decreased by about 5.5%. As we approach year-end, Nucor's Board will consider a dividend increase for 2022. We have paid and increased our regular quarterly dividend every year since dividends were instituted in 1973. We expect the Board's deliberations will consider both the effects of our recent repurchases and the sustainable earnings power we see in our businesses. Since the end of 2017, Nucor's capital allocation framework has helped us achieve significant value creation for our investors. Issued and outstanding shares have been reduced by more than 10%, moving from 318 million shares at the end of 2017 to approximately 286 million shares at the end of the third quarter. Over that same period, we have grown our steel bar production capacity by about 13% to 9.6 million tons. We have also added about one million tons of value-added processing capability to our sheet business. Additionally, our steel products capacity has also grown by more than one million tons. Today, we have significant projects under construction that will grow our sheet and plate capacity to more than four million and one million tons, respectively, further increasing our earnings power for decades to come. We are having a remarkable year in 2021, but it should not be missed that Nucor's ability to generate higher earnings per share is continuing to grow. Turning to the outlook for the fourth quarter of 2021. We are encouraged by ongoing robust demand conditions in most of the end markets served by Nucor. In fact, order backlogs at most of our businesses suggest strength well into 2022. At the same time, customer inventories remain relatively lean. Logistical challenges throughout the economy continue to represent a risk factor. However, the moderating influence this is having on current demand may prolong the duration of this favorable economic cycle. We believe earnings in the fourth quarter of 2021 are likely to be at or near the record level achieved in the third quarter. Compared to third quarter, we expect earnings growth at our steel mills and steel products segments. The raw materials segment's performance will be challenged by margin pressures in our DRI business. We are encouraged by our first nine months of 2021 performance, and we see great opportunities in our future. We are committed to delivering increasing long-term value for our shareholders. Living our culture means driving performance.	average scrap and scrap substitute cost per gross ton used in q3 of 2021 was $511, a 84% increase. expect profitability of steel mills segment to improve in q4 of 2021 as compared to q3 of 2021. expect continued strong results for q4 of 2021, potentially exceeding net earnings record set in q3 of 2021. q3 earnings per share $7.28. demand remains robust across most end-use markets, a trend we expect will continue well into 2022. backlogs in our steel mills and steel products segments remain elevated compared to historical levels. raw materials segment's earnings in q4 of 2021 are expected to decrease compared to q3 of 2021.
These statements involve risks and uncertainties, and actual results may differ materially from those discussed or anticipated. Also during the call, certain financial numbers may be discussed that differ from comparable numbers obtained in our financial statements. We believe these non-GAAP financial numbers assist in comparing period-to-period results in a more consistent manner. nuskin.com for any required reconciliation of non-GAAP numbers. And with that, I'll turn the time over to Ritch. We really appreciate that you join us today. I'm so pleased with our progress in becoming a customer-obsessed, socially enabled business that has generated record results in this first quarter. Our strategy has positioned us well for success amid powerful macro trends and associated shifts in consumer behaviors. I want to recognize our amazing and talented sales leaders and dedicated and loyal employees who are responsible for the great results we are reporting today. We made critical enhancements to our business as we implemented our strategy over the past few years. For example, we refined the cadence of our product launches. We increased our focus on attracting and retaining customers. We aligned our sales compensation structure to enable social commerce. And we invested in manufacturing companies to secure our supply chain. These and other strategic enhancements helped us drive 31% revenue growth and 153% earnings-per-share growth in the first quarter. As a result, we're reporting the best first quarter in Nu Skin's history for both revenue and earnings per share. And we are raising our guidance for the year. As Ryan and I continue to work closely together on developing and leading the execution of this strategy, the transition of leadership responsibilities is progressing well. I am so confident that the business is in great hands. This is the right team to build on the existing foundation and drive continued growth and success in the future. I would like to highlight progress on a few of our key initiatives. First, we continue to build upon our 37-year history of developing world-class beauty and wellness products that help people look and feel their best. For example, as people look for ways to enjoy a spa-like experience at home, our beauty devices, including ageLOC LumiSpa and Boost, continue to grow in popularity. In fact, Euromonitor recently named Nu Skin the world's #1 beauty device systems brand for the fourth consecutive year. As consumers become increasingly mindful of what goes into the products they use, we extended our product philosophy with Nutricentials Bioadaptives that feature clean formulas and sustainable packaging. Next, even as the world moves toward a new normal, our social commerce strategy is here to stay. We recognize the trend of consumers moving to digital platforms long before COVID-19, which accelerated this transition. Our triple-digit growth in the West is a result of our brand affiliates embracing our social commerce model. We're reaching a larger and younger demographic, and the business continues to gain momentum, with 34% customer growth and 22% and sales leader growth in the first quarter. I'm encouraged also by our improving geographic balance, which Ryan will speak to in more detail in a moment. I would like to highlight the growth in our manufacturing segment, which achieved record results and reported 69% revenue growth. We continue to lean into our sustainability efforts with ongoing initiatives to reduce the environmental impact of our business operations, provide more ecofriendly packaging and strengthen our commitment to responsible sourcing, including our investments in controlled environment agriculture. Given our first quarter performance, increasing sales leader interest in our planned new product introductions and strong customer and sales leader growth, we are raising our 2021 guidance. The midpoint of our adjusted guidance points to growth of about 10% for revenue and 15% for earnings per share. We are confident in our strategy, and we're optimistic about our future. I've loved partnering with Ritch over the past few years as we've refined our vision to become the world's leading innovative beauty and wellness company powered by our dynamic affiliate opportunity platform. This vision builds on our foundational product philosophy and the strength of our person-to-person business model, infusing digital, social and mobile capabilities that are shaping us into a leading social commerce company. Our ultimate aspiration is to become the world's leading beauty and wellness platform. We are witnessing seismic global shifts in consumer behaviors. From digital, social and mobile connections to the expansion of the gig economy, our world is changing rapidly. Traditional advertising, retail and e-commerce are being disrupted by influencer marketing and social commerce like never before, a trend that has accelerated significantly over the last year. These trends, combined with our strategic investments over the past years to build greater digital capabilities, have positioned us well to realize today's opportunities and accelerate our own pace of change. This strategy has resulted in strong customer and sales leader growth and record first quarter results in both revenue and EPS. Before I go into more detail about the quarter, I want to run through the three key components of our strategy to grow: our innovative products, our unique affiliate channel and our powerful platform. First, regarding innovative products, we've refined our cadence of bringing innovative beauty and wellness products to market. We play in the fastest growing product categories in beauty and wellness, including beauty devices. This category is nearly $7 billion and is projected to grow more than 20% annually between now and 2030. As Ritch mentioned, this is the fourth consecutive year Euromonitor has ranked Nu Skin as the world's #1 beauty device systems brand. This further validates our scientific rigor as a unique strength and competitive advantage in the beauty industry. Our next step to expand our dominant position will be to add connectivity to our devices as part of our Empower Me personalization strategy that we introduced to all of you at Investor Day. The way people engage with beauty and wellness has changed as shopping behaviors and personalized product experiences have become increasingly digital. For us, this shift has resulted in more than 90% of our revenue coming from online transactions, with approximately half our revenue coming from recurring customer subscription and loyalty programs. I'm excited about the recent product launches of ageLOC Boost and Nutricentials Bioadaptives, which generated more than $35 million for the quarter in a limited number of markets. We'll continue to strengthen our industry-leading position with our robust product pipeline in 2021 and beyond. Later this year, we'll introduce two new products through our proven global launch process, leveraging our robust R&D capabilities in both beauty and wellness. First, we'll introduce a unique beauty-from-within product line, beginning with Beauty Focus Collagen+ with our proprietary formula aimed at disrupting the burgeoning $50 billion beauty supplement market. This product is clinically proven to help improve skin health and complement other Nu Skin products, including our LumiSpa beauty system. Second, we'll introduce our next major Pharmanex innovation, ageLOC Meta, a metabolic health supplement. A recent study of U.S. adults indicated that 88% are metabolically unhealthy. And this product helps us address this acute wellness dilemma. Additionally, we plan to begin introducing connected devices in early 2022 and beyond. Connected devices will further personalize and enhance the customer experience while providing additional insight into consumers' needs. These powerful beauty device systems and innovative products, combined with our global subscription and loyalty programs, create a unique opportunity for us that increase customer acquisition and lifetime value as we continue to meet the needs of beauty and wellness customers. Next, our flexible and powerful affiliate channel is evolving to support social commerce business. In essence, we're taking the best of our face-to-face person-to-person model, including a passionate sales force, personal touch, trusted product recommendations and a connected community. And we're evolving it into a digital-first affiliate marketing engine that's powered by our socially enabled global sales force. In many ways, our historically unique style of influencer and affiliate marketing is now the approach that many companies and brands around the world are trying to replicate. This approach has always been at the core of our business and is now being amplified by our social commerce strategy. Our first quarter results throughout the West and parts of the East are further evidence that social commerce is an emerging model that will transform the beauty and wellness industry. Third, our powerful affiliate opportunity platform connects consumers with people or -- sorry, people who are seeking innovative beauty and wellness products with brand affiliates who help them navigate their personal journey. And it all happens within a digital ecosystem that enables our affiliates to attract, connect, transact and service consumers in nearly 50 markets. In our opportunity platform, affiliates and leaders can effectively serve their customers' personal needs by accessing hundreds of beauty and wellness products. We continue to introduce new digital and social tools to make running a powerful and personalized social commerce business more simple and effective These tools include Vera, our personal product recommendation tool that is currently being rolled out around the globe; MySite, our personal product storefronts available in most of our markets; WeShop, China's personal storefront model to be introduced in the second half of this year; and digital training tools to expand the reach and capability of our brand affiliates. So when combined, our flexible Velocity sales compensation program, our global footprint of nearly 50 markets, our best-in-class manufacturing capabilities and our significant digital transformation, all come together with an unmatched products to empower our affiliates to build their own socially enabled beauty and wellness businesses. Across Nu Skin, we're focused on driving consumer growth and loyalty and creating entrepreneurial opportunities for brand affiliates as we expand social commerce around the globe. I've known Connie for years as an industry colleague. She's an amazing business leader with a long track record of successfully guiding global organizations. She'll lead our global markets and customer experience office as we further expand social commerce. I look forward to introducing you to Connie in future calls. Turning now to our global markets. We continue to take steps to improve our geographic revenue balance. This will create more sustainable growth moving forward and make us less susceptible to individual market fluctuations and geopolitical issues. Beginning with the Americas/Pacific, our accelerated performance continues to be driven by the expanding adoption of social commerce. This region posted first quarter constant currency revenue growth of 97% with growth in every market. This region is now roughly the size of our Mainland China business and on pace to become our largest business unit. Customers and sales leaders both grew significantly, demonstrating sustainable growth across all key metrics as they prepare to launch Beauty Focus Collagen+ and ageLOC Boost in the second half. Europe, Middle East and Africa also posted significant constant currency revenue growth of 98% year-over-year as leaders embrace social commerce throughout the region. The U.K., Germany, France and Poland led the way as we partnered with sales leaders for the launch of Nutricentials Bioadaptives and on effective product promotions. EMEA achieved the highest growth in customers and sales leaders of any region, providing momentum as we move into Q2 and beyond. Mainland China grew 1% in local currency this quarter with customers up 16%. We continue to invest in new social commerce technologies in this market, including our own WeShop initiative in partnership with Tencent, which begins to roll out in the second half of this year. This will further reduce our dependency on in-person meetings, which we believe will better enable our sales leaders to adopt social commerce within China's own robust digital ecosystem. Hong Kong and Taiwan recorded a 3% constant currency decline, with Taiwan's growth being offset by continued macro challenges in Hong Kong. South Korea remained even with the prior year's quarter, with sales led by our TR90 weight management system and the introduction of ageLOC Boost. Customers declined 12% due to promotional activities last year, while sales leaders grew by 7% in the quarter. South Korea is focused now on adopting social commerce throughout the market. Southeast Asia's constant currency revenue declined 5%, impacted by lingering effects of COVID in certain markets. But we anticipate increased social commerce adoption across the region, which will generate renewed growth in time. I'd also like to highlight Japan's 11% growth in local currency during the quarter. Our business there is starting to capture gear as new and younger consumers discover our beauty and wellness products, including our recent ageLOC Boost and Nutricentials Bioadaptive launches. We've raised guidance for the year based upon the optimism we're seeing in our aggregate global business. So let me wrap up by saying that our future looks brighter today than it ever has. We are fully leaning into our mission to empower people to improve lives and our vision to become the world's leading innovative beauty and wellness company that's powered by our dynamic affiliate opportunity platform. Our strategy, investments and commitment to operational excellence are aligned to this goal and will drive even greater value for our customers, affiliates, employees and shareholders throughout the remainder of 2021 and beyond. And with that, I'll turn the time over to Mark to go over financial results for the quarter and to update guidance. I'll provide some additional color regarding our financial results, give Q2 guidance and update our full year 2021 outlook. First quarter revenue and earnings per share came in above the top end of our prior guidance. Q1 revenue increased 31% to $677 million, with a positive foreign currency impact of 5.7%. Earnings per share for the quarter increased 153% to $0.91. Gross margin for the quarter improved sequentially 80 basis points to 74.8% due to product mix and easing of air freight charges versus the past few quarters. Gross margin was 75.7% in the prior year quarter. Nu Skin Q1 gross margins were 77.8% against 78.1% in the prior year. Our gross margin continues to be impacted by growth in our West markets and our manufacturing segment. However, this growth benefits us by lowering our overall tax rate. Speaking of our Manufacturing segment, a primary purpose of those acquisitions was to secure our supply chain. One of the most significant challenges of COVID-19 has been widespread supply chain disruptions. The agility and flexibility of our supply chain has allowed us to maintain our product launch schedule and, for the most part, keep our key products in stock. Selling expense as a percent of revenue was 40.4% compared to 39.8% in the prior year. For the Nu Skin business, it was 43.4% compared to 42%. As a reminder, selling expenses fluctuate quarter-to-quarter and often increase during strong revenue growth as more of our sales leaders qualify for incentives. General and administrative expense as a percent of revenue was 25.1% compared to 28.9% year-over-year. We continue to leverage our infrastructure to support revenue growth and improve operating margin, accelerating earnings growth. I am very pleased with our operating margin for the quarter, which improved to 9.3% compared to 7.1% in the prior year quarter. This is another strong step toward our stated goal of 13% operating margin. The other income expense line reflects a $1.6 million gain compared to a $6.2 million expense in the prior year. The improvement was driven by foreign currency, reduced interest expense and investment income. Consistent with expectations and first quarter historical trends, cash from operations was an outflow of $18.9 million. We paid $19.3 million in dividends and continued our focus on generating shareholder value by repurchasing $50.4 million of our stock with $275.4 million remaining in authorization. Over the past five quarters, we have repurchased more than six million shares. Our tax rate for the quarter was 26.5%, benefited by increased profits in the West, as I mentioned earlier. Due to our strong first quarter results, strengthening trends and robust 2021 planned product introductions, we are increasing the top end of our annual revenue guidance by approximately $60 million and our earnings per share by $0.20. Our 2021 annual revenue guidance is now $2.8 billion to $2.87 billion, with earnings per share of $4.05 to $4.30. This guidance assumes a positive foreign currency impact of 3% to 4% and a tax rate of 26% to 32%. Our second quarter revenue guidance is $680 million to $705 million, assuming a positive foreign currency impact of approximately 5%. Q2 earnings per share guidance is $0.97 and to $1.07 and assumes a tax rate of 27% to 30%.	qtrly earnings per share $0.91. sees q2 2021 revenue $680 to $705 million. sees q2 2021 earnings per share $0.97 to $1.07. sees 2021 revenue $2.80 to $2.87 billion. sees 2021 earnings per share $4.05 to $4.30.
These statements involve risks and uncertainties, and actual results may differ materially from those discussed or anticipated. Also, during the call, certain financial numbers may be discussed that differ from comparable numbers obtained in our financial statements. We believe these non-GAAP financial numbers assist in comparing period-to-period results in a more consistent manner. nuskin.com for any required reconciliation of non-GAAP numbers. And with that, I'll turn the time over to Ritch. We really do appreciate you joining us today. As many of you may know, this will be my last earnings call as CEO of Nu Skin before transitioning leadership to Ryan on September 1. We truly have an amazing Nu Skin team around the globe, and the future continues to get brighter for growth and prosperity of this business. I'm excited about all that we've accomplished, but I'm even more positive about the future, and these are some of the reasons for my optimism. First, we've taken deliberate actions to evolve into a more customer-obsessed enterprise that delivers world-class beauty and wellness products through a socially enabled affiliate platform. We've also positioned our business to leverage powerful macro trends and shifts in consumer behaviors. For example, we focused our product development on beauty device systems, and we have now been recognized by Euromonitor as the world's number one brand for beauty device systems for four consecutive years. We formed key partnerships with Amazon Web Services and Alibaba and have revamped our tech strategy by moving our infrastructure to the cloud. While this transition has greatly expanded our load capabilities and increased our ability to scale, I am most encouraged by the new tools and digital experiences that we plan to introduce, which will delight our customers and empower our affiliates. We've modified our incentive structure to speed payments and increased flexibility to our affiliates and attract a younger demographic. We purchased manufacturing assets to increase our speed and agility in bringing beauty and wellness products to market and securing our supply chain. We established aggressive sustainability goals around people, product and planet with a focus on building a better tomorrow for our world. This foundation will continue to drive growth and profitability going forward. In the second quarter, we generated very strong results, which highlight our corporate focus on improving our geographic balance and operating margin. We reported revenue growth of 15% with the western segment accounting for approximately 40% of our revenue. We also improved our operating margin by 260 basis points to 12.1%, which contributed to our reported 42% earnings-per-share growth. Through all my years at Nu Skin, I can truly say that we are better positioned for the future than we have ever been. The transition of management has been going very well. Ryan and I have worked hand in hand over the past several years in building the strategy of the company and executing our growth plans, and I am confident that he and our team will accelerate our growth into the future. Let me now turn the time to Ryan to report on the business and give more detail around our second quarter results. For the past nearly five years, we've been working together tirelessly to drive Nu Skin's transformation into an even more customer-obsessed global and digital-first company. And I'm really extremely proud of the progress that we're making. Before we describe the quarter in more detail, I'd like to discuss how we'll accelerate our vision to becoming the world's leading innovative beauty and wellness company that's powered by our dynamic affiliate opportunity platform. We're all familiar with the emerging macro trends that are shaping the broader consumer marketplace, including product personalization and every brand's desire to know their customers on a more intimate level; digital, social and mobile connectivity of the direct-to-consumer experience; and the disruption of retail and e-commerce with social media and influencers to what is now being called social commerce. As we look to the future, we're aligning our vision and strategy to take advantage of these emerging market forces and reposition Nu Skin as a disruptive beauty and wellness leader through three key transformational moves. First, building on our heritage of developing innovative products and leveraging our leading position in beauty device systems, we will be introducing connected device systems as we personalize our product offerings and deepen our relationships with more than 1.4 million registered customers. Second, we will continue to transform our business by leveraging the power of social commerce and our unique person-to-person affiliate marketing channel to build brand awareness and acquire customers at greater scale via social media platforms in a deeper and more personal manner than traditional retail or e-commerce. And third, we will enable all of this through our enhanced digital ecosystem that improves our ability to attract, connect and nurture customers, which currently makes up more than 90% of Nu Skin's revenue. Together, these three transformational moves will enable us to accelerate our vision to becoming the world's leading innovative beauty and wellness company. So let me dive a little deeper into our strategy, beginning with our innovative beauty and wellness products. We continue to focus on expanding our leadership position in beauty device systems with the launch of ageLOC Boost in several markets in the first half and the remainder of our markets in the second half. These beauty device systems now make up approximately 30% of the company's total revenue. Additionally, we're pleased with the first half results of Nutricentials Bioadaptives, our customizable skincare line that's targeted toward millennial and Gen Z emerging skincare enthusiasts. For the remainder of the year, we will introduce two new product innovations. First, we'll leverage our unique inside/outside R&D capabilities to develop our first beauty-from-within solution, beauty Focus Collagen+, which will be launched in several markets throughout the second half. This proprietary formula is our entry into the rapidly expanding $40 billion beauty supplement market. Second, we will be introducing in several of our markets our next significant Pharmanex product innovation, ageLOC Meta, a supplement that supports metabolic health and help shift the body's biochemistry toward a healthier mode. Looking ahead into 2022, we will expand our device system leadership position by introducing next-generation connected devices, which will further enhance the company's ability to provide consumers with more personalized product experiences to meet their needs. The second part of our strategy, our dynamic affiliate opportunity platform, is how we take these products to market in order to acquire and serve our customers. Virtually every consumer brand today is looking to build lasting relationships directly with their customers, though they struggle to do so due to the constraints with their retail partners. At Nu Skin, we are leveraging our global team of micro influencers in nearly 50 markets who utilize the power of their personal brand and relationships to provide authentic product recommendations and personalized customer engagement via social media. This form of social commerce is now enabling us to expand our target market and reach new customer segments at greater scale, evidenced by the acceleration of our business over the past year. Overall, we have a growing number of affiliates adopting social commerce in the West, and we are actively proliferating this model in key markets throughout the East. Grand View Research is projecting social commerce to grow from an estimated $474 billion in 2020 to $3.3 trillion by 2028 with Asia currently accounting for 68% of the total social commerce revenue. We believe Nu Skin is ideally positioned to take advantage of this growth opportunity as our social commerce business model evolves in those markets. We continue to expand our digital ecosystem by incorporating new digital tools to empower our affiliates to make this shift, including Vera, our personal product recommendation app, which is currently in beta form and will be migrated to a new consumer experience app later this year; MySite, our most popular affiliate tool, which will be migrated into a more robust affiliate app with enhanced social commerce functionality; and our WeShop Tencent-powered social commerce tool set that will be introduced in China beginning in the second half. Our dynamic affiliate opportunity platform is enabling us to accelerate our shift to a social commerce business model through the coming quarters. So turning to our global markets. We have been able to sustain growth in the West over the past year. Despite ongoing COVID-related disruptions in certain markets, our trends are improving in our Eastern markets as we expand our product offering and social commerce business. Our customers remained relatively flat due to the surge in the prior year while sales leaders grew 15% related to new product introductions and enhanced new leader qualification programs. In the Americas Pacific region, the successful launch of Nutricentials Bioadaptives has helped sustain the gains we achieved during the past year. We achieved strong revenue and leader growth due to promotional product cadencing and leadership alignment. The year-over-year moderate customer decline in the region is primarily due to a slowdown in Argentina related to inflationary challenges. As I mentioned earlier, we look forward to the Collagen+ and Boost launches in the U.S. in the second half of the year along with the digital tool enhancements that we'll begin to roll out in Q4. Moving on to EMEA. ageLOC Boost exceeded our expectations during the product preview in Q2, and we expect the excitement to continue into consumer launches in the second half of the year. Social commerce continued to propel our business in the first half, though we are seeing some leveling in the summer months as personal travel increases over the prior year. With new product launches and strong product promotions kicking into gear, we remain optimistic about the future of EMEA and our business there. This was a busy quarter for us in Mainland China where the launches of Boost and Nutricentials contributed to the ongoing stabilization of this market. We are strongly focused on growing this region, and we were excited to hold trainings in July with more than 10,000 sales leaders in preparation for social commerce and the rollout of our enhanced digital tool set, including WeShop personal storefronts. We're also preparing for the introduction of Meta and Collagen+ in the second half. In Hong Kong and Taiwan, we remained stable with solid sales of Boost and Nutricentials Bioadaptives. We are focused on advancing social commerce training in these markets as well and expect to benefit from the introduction of ageLOC Meta in Q4. Turning to Japan, a successful promotion of our ageLOC products, including devices, contributed to the fifth consecutive quarter of local currency growth. Our business continues to perform well as we focus on engaging and training leaders on social commerce platforms ahead of our Meta previews in the quarters to come. In Korea, a strong promotion of our TR90 weight management system in the quarter led to solid 6% growth in local currency. Social commerce trainings continue in the region as well with Meta preview scheduled for the fourth quarter. And finally, Southeast Asia. This market has been perhaps most impacted by COVID with deepening lockdowns in various markets. That said, we saw revenue and sales leader growth in the region, led by Indonesia, offset by continued challenges in Vietnam and Thailand that contributed to our customer decline. We look forward to the introduction of Meta in the half. So wrapping up, we continue to transform our business to become the world's leading innovative beauty and wellness company powered by our dynamic affiliate opportunity platform. Our vision is on point to take advantage of the most significant beauty and wellness trends in the market. And our social commerce go-to-market strategy is aligned to enable us to reach even more consumers through the power of our micro influencer affiliates. We will continue to invest in our business to drive growth through innovation while improving our operational efficiencies to generate shareholder value in the near and long term. I'm excited about what lies ahead for us at Nu Skin as we lean aggressively into this vision. And with that, I'll turn the time over to Mark. I'll provide a financial overview and then give Q3 and 2021 guidance. For additional details, please visit the Investor Relations section on our website. For the second quarter, revenue increased 15% to $704.1 million. Quarterly revenue was positively impacted 6% due to favorable foreign currency. Earnings per share improved 42% to $1.15 and benefited nicely by improved gross margin and overall cost containment. Gross margin for the quarter improved 80 basis points to 75.6% due to product mix, product cost focus and supply chain efficiencies. Gross margin for the core Nu Skin business was 78.3% compared to 77.6% in the prior year. Moving on to selling expense, which, as a percent of revenue, was 39.5% compared to 40.6% in the prior year. For the Nu Skin business, selling expense was 42.4% compared to 43.3%. As a reminder, selling expenses often fluctuate quarter-to-quarter, plus or minus 1%. General and administrative expenses as a percent of revenue were 24% compared to 24.7% year-over-year as we continue to carefully manage expenses and gain leverage as we grow revenue. I am very pleased with our operating margin improvements during the quarter, which improved 260 basis points to 12.1% compared to 9.5% in the prior year quarter. This is another strong step toward our stated goal of a 13% operating margin. The other income expense line reflects a $4 million expense compared to a $1.6 million gain in the prior year. The change was largely the result of fluctuating foreign currencies along with a loss on an asset disposal. Cash from operations was $20 million for the quarter as we continued our strategic investment in inventory to meet customer demand for our new products, shipped more product via ocean to reduce freight charges and built some protection from global supply chain constriction in this period of uncertainty. We believe this elevated inventory level will decrease over the next few quarters. We paid $19 million in dividends and repurchased $10 million of our stock with $265.4 million remaining in authorization. Our tax rate for the quarter was 27.1% compared to 29.8%. Our tax rate continues to be benefited by increased profits in the West, specifically the U.S. Our manufacturing partners had another strong quarter, growing 27% with steady momentum heading into the back half of the year. These entities continue to benefit our core business by strengthening our supply chain and bringing U.S. profit that helps our overall tax rate. Our annual revenue guidance is $2.81 billion to $2.87 billion. And based on ongoing efficiencies we are driving in the business, we are now raising our annual earnings per share guidance by $0.20 to a range of $4.30 to $4.50. This guidance assumes a positive foreign currency impact of 3% to 4% and a tax rate of 25% to 29%. While our Q3 is historically slightly softer seasonally than Q2 due to summer vacations in many markets, our prior year quarter included product launch revenue and we saw less impact from travel last year. Our third quarter revenue guidance is $700 million to $730 million, assuming a positive foreign currency impact of approximately 2% to 3%. Q3 earnings per share guidance is $1.10 to $1.20 and assumes a tax rate of 25% to 29%.	compname reports 42% earnings per share growth in q2. compname reports 42 percent earnings per share growth and 15 percent revenue growth in the second quarter. q2 earnings per share $1.15. q2 revenue $704.1 million versus refinitiv ibes estimate of $702.4 million. sees 2021 revenue $2.81 billion to $2.87 billion; +9 to 11%. sees 2021 earnings per share $4.30 to $4.50; +18 to 24%.
They are based on management's assumptions, which may or may not occur. In addition, some of our comments today, reference non-GAAP adjusted measures. We expect to file our 10-Q later today. As mentioned, this teleconference is being recorded and will be available on our website following the call. Please note these calls are designed for the financial community. Like all you, we continue to navigate these unusual times. In addition to COVID in September. Oregon dealt with wildfires. Our gas system was resilient minimally impacted, but as with any event, we took proactive steps to ensure the safety of our customers and coordinated closely with fire commanders. Moving to a few economic updates. It is important to remember where we stood in February before the pandemic started. At that time we had a fundamentally sound sustainable growing economy with record -- record low unemployment, both nationally and in our service territories. As discussed in previous earnings calls COVID impacts affected the Northwest like the rest of the country, but we've seen some economic improvement in recent months. For example, Oregon's unemployment rate was 8% in September essentially matching the national rate. That's down from a 14.9% high in April. Job growth in Oregon bounce back to positive territory in the second quarter of this year and is sustained an upward climb through September. In the Portland metro region, year-to-date closed home sales were up 3.1% from 2019 with stronger year-over-year price growth of about 10%. New single-family permits issued this year are closed to where we were in 2019. That's much better than what was generally expected this spring. As a result, we have connected over 13,800 meters during the last 12 months ended September 30th and that's 300 more meters than we added at this time last year. Our overall customer growth rate is 1.9% for the 12 months ended September and reflects a lower level of customer disconnecting from our system during the pandemic. As we resume normal disconnection practices we will likely see this growth rate decrease a little bit. Despite the positive trends, we know these are difficult times for some customers. That's why we voluntarily suspended normal collection processes and disconnections in March. Since the pandemic began, we've been working with the commission, staff, and stakeholders in all of our states to determine the best way to return to more normal operating practices. The last couple of months commissions in all of our states have finalized their timelines that allow utilities to resume normal operations. Additionally, the Oregon, Texas, and Idaho commissions have approved deferral applications. On the regulatory front, an order was issued in our Oregon general rate case in October approving our previously disclosed all-party settlement. The order includes the $45.1 million increase in our revenues requirement based on a 50/50 cap structure, a return of equity of 9.4% and a cost of capital is just under 7%. In addition, the order reflects an average rate base of $1.44 billion or an increase of $242 million compared to the last rate case. Somebody on the phone needs to mute, please. New rates took effect on November 1st and were largely offset by reduced gas costs from our PGA filing. In Oregon, the combined effect of the rate case and annual purchase gas adjustment resulted in a $2 increase to a residential customers monthly bill. Overall gas bills continue to remain low, Northwest Natural customers are paying about 30% or excuse me 40% less today for their bills than they did 15 years ago. In addition, in June we passed back a record of $17 million in storage bill credits to Oregon gas customers. I'm proud to report that continuing our legacy of service customers ranked Northwest Natural second in the West among large utilities in the 2020 J.D Power Residential Customer Satisfaction Study. These results are a testament to our customer-centric culture and especially gratifying to see customers recognized our employees and company during this challenging year. Our annual dividend amount is now $1.92 per share. We're proud to be one of the only three companies on the New York Stock Exchange with this long record. I will begin by discussing the financial impacts of COVID-19 and the highlights of the third quarter and year-to-date results and conclude with guidance for 2020. As David noted, the Oregon Commission recently approved a COVID-19 term sheet that outlines the types of revenues and costs that may be recovered. These include PPE, bad debt expense. financing costs associated with additional liquidity and certain lost revenues. Direct expense reduction, such as lower travel and meals and entertainment are to be netted against the deferral. Prudency review and recovery of the deferral accounts will be determined at a future proceeding. While our business model is resilient we are experiencing some financial impacts related to the pandemic. Through September 30th, we have incurred an estimated $7 million of incremental cost and lower revenue. In the third quarter, we recognized a $3.1 million regulatory asset for Oregon costs incurred to date. Utilities are also allowed to recover late fee revenue that has not been charged to customers since the suspension of normal collection processes. However, this revenue will be recognized in the future period when we began to recover the foregone fees through rates. At the end of September, this revenue totaled approximately $1 million. In summary of the $7 million of total financial impact as of September 30th, we expect to recover $4.4 million through rates under these orders with $3.1 million deferred in the third quarter. In addition to these deferrals in order to further mitigate the financial effects of the pandemic, we initiated temporary cost-savings measures which provided approximately $2 million of savings for the third quarter and year-to-date. Switching now to our detailed financial results. I'll describe earnings drivers on an after-tax basis using the statutory tax rate of 26.5%. The return of excess deferred income taxes to our Oregon customers resulted in an effective tax rate of 22.3%. Also note that year-to-date earnings per share comparisons were impacted by the issuance of 1.4 million shares in June 2019 as we raised equity to fund investment in our gas utility. As a reminder, Northwest Natural's earnings are seasonal with a majority of revenues generated in the first and fourth quarters during the winter heating season. For the quarter, we reported a net loss from continuing operations of $18.7 million or $0.61 per share compared to a net loss of $18.5 million or $0.61 per share for the same period in 2019. The gas utility posted a decline of $0.08 per share related to higher depreciation and general tax expense, partially offset by the recognition of the regulatory deferral asset for COVID-19 which I discussed earlier. This decline in the gas utility was offset by an increased contribution from our water business as we acquired assets in Washington and Texas and lower expenses at the holding company. In the gas distribution segment, utility margin declined $300,000 as the benefit of customer growth and higher rates in Washington was slightly more than offset by a decrease in revenues from late charges and reconnection fees and slightly lower usage from the industrial and large customer use -- large commercial customers that are not decoupled. Utility O&M increased $700,000 in the quarter as we incurred higher compensation and non-payroll expenses, partially offset by the cost savings measures and deferral of expenses related to COVID-19. Depreciation expense and general taxes increased $2.4 million related to ongoing investment in our system. Finally, interest expense for the quarter decreased $1.2 million as we deferred interest incurred to increased cash balances in March. For the first nine months of 2020, we reported net income from continuing operations of $24.5 million or $0.80 per share compared to net income of $27 million or $0.91 per share for the same period last year. Last year's results included a regulatory disallowance of $0.22 per share related to an Oregon Commission order. Excluding that disallowance on an adjusted non-GAAP basis, earnings per share from continuing operations was $1.13 per share for 2019. The $0.33 per share decline is largely due to year-over-year growth in expenses and the effects of COVID. In the gas distribution segment, utility margin declined $100,000. Higher customer rates in Washington, customer growth, and revenues from the North Mist expansion project contributed an additional $10.4 million. This was offset by lower entitlement and curtailment fees related to pipeline constraints in 2019 and warmer weather in the first quarter of 2020 compared to the prior year, which collectively reduced margin by $4.8 million. Utility margin also declined $1.1 million due to lower revenue from late and reconnection fees as we suspended normal collection processes. The remaining $5.2 million decline in utility margin is a result of the March 2019 Oregon order related to tax reform and pension expense. With the exception of the first quarter pension disallowance, this order has no impact on net income, as offsetting adjustments were recognized through expenses and income taxes, as I'll describe. Utility O&M and other expenses declined $6.4 million during the first nine months of 2020. This decrease is associated with the Oregon order, which resulted in $14 million of additional expense in the first quarter of last year as previously discussed. This was offset by a $6.4 million increase in underlying O&M related to higher compensation costs, contractor and professional service as well as moving costs for our new headquarters and operation center. This was partially offset by cost savings measures as I described earlier. Over the last several years we have invested in our gas system at historically high levels and we placed the North Mist gas storage facility into service. As a result, depreciation expense and general taxes increased $7.3 million. Finally, utility segment tax expense in 2019 included a $5.9 million benefit related to the implementation of the March order, with no significant resulting effect on net income. Net income from our other businesses increased $900,000 from higher earnings from our water and wastewater utilities and lower expenses at our holding company, partially offset by lower asset management revenues. A few notes on cash flow, for the first nine months of 2020, the company generated $149 million in operating cash flow. We invested $227 million into the business with $193 million of primarily gas utility, capital expenditures, and $38 million for water acquisitions. We continue to expect capital expenditures this year to be in the range of $240 million to $280 million. Our balance sheet remains strong with ample liquidity. Now regarding the ongoing financial effects of COVID-19. In summary, our third quarter results are in line with our expectations and we have clarity regarding the recovery of cost in Oregon and late fee revenues. Going into the heating season, 96% of our commercial and industrial customers are current with their bills. Nonetheless, we know that some categories of commercial customers have been negatively impacted and we continue to closely monitor usage levels and commercial customer losses. We will also continue to pursue the cost savings measures under way to mitigate these circumstances. Today, we reaffirm guidance for continuing operations in the range of $2.25 per share to $2.45 per share and guided toward the lower end of the range, due to the potential implications from COVID-19. The guidance also assumes continued customer growth, average weather conditions, and no significant changes in prevailing regulatory policies, mechanisms or outcomes or significant laws, legislation, or regulation. Finally, this guidance excludes any gain related to the sale of Gill Ranch and associated operating results. These items are reported in discontinued operations. While the year has helped many challenges we persevered and accomplished many important things in terms of customer service, safety, and mitigating the pandemic effects. At the same time, we're also advancing key long-term objectives, that includes aggressively pursuing a renewable future and a carbon-neutral vision for our gas utility by 2050. Today with no cast iron or bare steel, we have one of the tightest systems in the country. We use that tight system to deliver more energy in Oregon than any other utility each year. In fact, the existing gas system has provided nearly twice as much energy on a peak heating day as the electric system, and yet the use of natural gas in our customers' homes and businesses accounts for just 6% of Oregon's greenhouse gas emissions annually. That's a very efficient delivery of a lot of energy, but we know we can do better, which is why we established a voluntary carbon savings goal of 30% by 2035 for emissions from our own operations and our sales customers' usage. Two years in I'm pleased to report, we're on track to meet or exceed this goal. In 2019, we achieved 21% of the savings needed to meet this goal. That's equivalent to removing over 60,000 cars from the road. So far savings from -- have come from three main areas. First, energy efficiency is the fastest and cheapest way to reduce emissions and a long-standing priority for Northwest Natural. Back in 2002, we were one of the first gas utilities in the country to obtain a decoupling mechanism, which supports the energy efficiency move. Second, our carbon offset program also plays a vital role and was a strong contributor to the savings. In 2007, Northwest Natural was the first stand-alone gas facility in the country to offer customers a voluntary program that allows them to offset some or all of their carbon emissions from natural gas use. And finally, we have also harvested carbon savings from implementing emission screening tools for our gas purchases. We believe we are the first gas utility to use EPA data to calculate the relative emissions intensity of gas producers, producer operations, and we use that information to prioritize purchases from the most responsible producers. Now several years into our carbon goal, we see more ambitious savings are possible. We understand more about RNG and hydrogen today and now have and we now have policy support with the groundbreaking Senate Bill 98 in Oregon. We also have the advantage of seasonal storage with one of the only storage facilities in the Pacific Northwest. Conventional natural gas storage is very valuable in our area, and it can be used for renewable molecules in the future. In fact, at 20 billion cubic feet, our Mist underground storage facility is equivalent to about six million-megawatt hours of electricity storage. That's about a $2 trillion battery at today's prices and many times larger than the biggest lithium battery in the world. What we had --what we and the industry need, however, now is continued policy support to help get these renewable solutions to scale. And we're certainly not alone in our thinking about the future role of the gas system, how to leverage all of its advantages in new ways. We're having these discussions with peers here in the United States and there is a much bigger focus on RNG and hydrogen coming out of Europe and Canada as well. I'm excited about the recent steps Northwest Natural has already taken. We have several viable contracts, we're pursuing, as a result of the RFP we issued in July for renewable natural gas. In October, we signed an MOU to explore the development of a renewable hydrogen facility. The collaborative includes the electric utility in our region and a Bonneville and the Bonneville environmental foundation. Another long-term objective is growing our water and wastewater utility businesses. Although our acquisition pace is slow due to the pandemic, we continue to see good growth and investments in our existing platform. We continue making contacts in the industry and are working hard to expand our footprint. I remain excited about the investment potential for this business. Now that this work is easy and there are no shortcuts, but each year we set goals, we make strides and we move closer to achieving our vision.	northwest natural holding q3 loss per share $0.61 from continuing operations. q3 loss per share $0.61 from continuing operations. northwest natural - reaffirmed 2020 gaap earnings guidance from continuing operations in range of $2.25 to $2.45 per share and guided toward lower end of range.
I'll now discuss the financial results. We reported revenue of $267 million during the first quarter of 2022, which represents an increase of 16%, compared to $230.1 million during the first quarter of 2021. The increase was largely attributable to volume increases in our Fenestration segment, combined with higher prices related to the pass-through of raw material cost inflation. More specifically, we realized net sales growth of 14.5% in our North American fenestration segment, 15.5% in our North American cabinet components segment, and 18.6% in our European fenestration segment, excluding the foreign exchange impact. We reported net income of $11.2 million or $0.34 per diluted share for the three months ended January 31st, 2022, compared to $7.9 million or $0.24 per diluted share during the three months ended January 31st, 2021. On an adjusted basis, net income increased by 25.9% to $11.3 million or $0.34 per diluted share during the first quarter of 2022, compared to $9 million or $0.27 per diluted share during the first quarter of 2021. The adjustments being made to earnings per share are for restructuring charges, loss on the sale of a plant, foreign currency transaction impacts, and transaction and advisory fees. On an adjusted basis, EBITDA for the quarter was essentially flat year over year at $24.4 million, compared to $24.3 million during the same period of last year. The increase in earnings for the three months ended January 31st, 2022, was attributable to continued strong demand, operational efficiency gains, and increased pricing. However, the decrease in margin percentage was driven by inflationary pressures and time lags on material index pricing mechanisms. Moving on to cash flow and the balance sheet. Cash used for operating activities was $21.7 million for the quarter, compared to $3.4 million for the same period of last year. Due to the typical seasonality in our business, free cash flow was negative in the first quarter of this year. In addition, the value of our inventory increased further due to inflationary pressures, which had a negative impact on working capital. As a reminder, we usually generate most of our cash in the second half of each year. Our balance sheet continues to be strong. Our liquidity position is solid, and our leverage ratio of net debt to last 12 months adjusted EBITDA was at 0.4 times as of January 31st, 2022. We will remain focused on generating cash, paying down debt, and opportunistically repurchasing stock as the year progresses. However, based on improvements in labor performance, the expected continuation of our pass-through pricing strategy, conversations with our customers, and the latest macro data, we're now comfortable providing the following guidance for fiscal 2022. Net sales of $1.13 billion to $1.15 billion, adjusted EBITDA of $135 million to $140 million; depreciation of approximately $31 million, amortization of approximately $15 million; SG&A of $115 million to $120 million, interest expense of $2 million to $2.5 million, tax rate of 28%, capex of $30 million to $35 million; and free cash flow of $55 million to $60 million. While we do expect some level of volume growth in our Fenestration segments for the remainder of the year, note that our current expectation is that revenue growth for the remainder of the year should be driven more by price, as opposed to volume, and we expect margin expansion to be second-half weighted. From a cadence perspective for Q2, we expect net sales to be up mid to high single digits year-over-year in each segment. However, due to inflation and the time lag associated with passing on price increases for most of our raw materials, we believe it will be a challenge to realize margin expansion in any segment in Q2. Looking ahead into the second half of the year, on a consolidated basis, we currently expect mid-single-digit net sales growth year over year in Q3 and Q4. In addition, due to easier comps and the expected benefit from our pricing strategy, coupled with some volume growth in our fenestration segments, we expect to realize some margin expansion in Q3 and Q4. Joe's guidance was key during our transition into a pure-play building products company several years ago, and more recently, his mentorship and support proved invaluable, as I transitioned into the CEO role. I will now discuss results for the quarter and then conclude with a discussion on the macro environment and guidance. Demand was healthy across all product lines during the first quarter of 2022. Volume growth in our fenestration segments and higher prices in all segments, mostly related to the pass-through of raw material cost inflation resulted in revenue growth of 16% year over year. On a consolidated basis, we estimate that revenue growth for the quarter was weighted approximately 10% due to an increase in volume and approximately 90% due to an increase in price. The first quarter began with continued supply chain challenges and significant labor disruption caused by COVID absenteeism driven by the omicron variant. However, these issues started to subside toward the end of the quarter. The rate of raw material cost inflation remains a challenge, as we typically see a 30 to 90-day time lag in passing these increases through to our customers. Looking at the individual segments, I will start with the North American fenestration. This segment generated revenue of $146.6 million in Q1, which was $18.5 million or 14.5% higher than prior year Q1. Strong demand in our IG spacer and screen product lines, volume growth in vinyl fencing components, and price increases across all product lines were the main drivers of the growth. We estimate that revenue growth in this segment was weighted approximately 45% due to an increase in volume and approximately 55% due to an increase in price. Adjusted EBITDA of $16.3 million in this segment was essentially flat versus prior year Q1. The improved pricing, volume-related efficiency gains, and productivity-related improvements were more than offset by inflationary pressures on raw materials, which caused margin erosion of approximately 170 basis points for the quarter. However, our current expectation is for margin expansion in this segment later in the year, assuming that the rate of inflation subsides. Our European fenestration segment generated revenue of $58.9 million in the first quarter, which was $9.8 million or 20% higher than prior year. Excluding foreign exchange impact, this would equate to an increase of 18.6%. We estimate that revenue growth in this segment was weighted approximately 20% due to an increase in volume and approximately 80% due to an increase in price. Strong demand in both IG spacers and vinyl extrusions combined with material-related price increases accounted for the strong performance year over year. These favorable volume-related impacts and pricing actions were more than offset by inflationary pressure on raw material costs and by inefficiencies caused by the COVID-related absenteeism early in the quarter. As such, adjusted EBITDA came in at $10.4 million for the quarter, which was $300,000 less than prior year and yielded margin compression of approximately 420 basis points. Similar to our expectations for other segments, we do anticipate that margins will improve, as the year progresses, again, assuming that the rate of inflation subsides. Our North American cabinet components segment reported net sales of $62.4 million in Q1, which was $8.4 million or 15.5% higher than prior year. Volumes decreased in this segment year over year, mainly as a result of customers' decisions to reduce overtime hours worked in their plants. Increases in hardwood index pricing as well as discretionary pricing actions offset the volume and resulted in revenue growth year over year. Adjusted EBITDA was $2 million for the quarter, which was $1.2 million less than prior year and resulted in margin compression of approximately 280 basis points. Improvements in lumber yield and labor efficiency were more than offset by a significant increase in hardwood lumber costs during the quarter. Weather-related challenges in the Appalachian wood region, as well as increases in maple demand, were the main drivers of the increases in lumber costs. As a reminder, we have material index pricing mechanisms in place, but they typically have a 90-day lag, and we will require a period of flat or declining wood pricing before we're able to catch up on our margin performance in this segment. As we look forward through the remainder of the year, we feel good about the demand environment across all of our product lines. In North America, the housing market remains strong, and our customers continue to have high levels of backlog, which we anticipate will slowly dwindle throughout the year. The rate of inflation and the potential for further interest rate hikes could impact demand at some point in the future, but we do not expect this to occur in the near term due to the high backlog levels. In Continental Europe and the U.K., the demand environment remains healthy, although consumer confidence could ultimately be impacted if inflation continues to ramp and energy costs continue to increase. From a Quanex perspective, we have seen enough improvements in our supply chain and stabilization in our labor force to say that the main challenge we now face is the rate of inflation and the ability to pass through price in an expedited manner. As Scott mentioned earlier, we have enough data points and adequate visibility into our customers' backlog to give us confidence in providing full year guidance. Again, we expect to generate revenue of $1.13 billion to $1.15 billion and adjusted EBITDA of $135 million to $140 million. If we execute to plan and are able to post results within these ranges, it will mark the third straight year of record performance for the Quanex team. Moving on to a more recent tragic subject, which is the Russian invasion of Ukraine. It is difficult to see these events unfold in real time and watch what you believe to be unfathomable turn into reality. We have employees and business partners with personal ties to Ukraine and our hearts are with them, their families, and all the Ukrainian people being affected by this pointless and horrific war. At this point, it is too early for anyone to accurately predict or estimate the impact that this war will have on the European or global economies or what supply chain disruptions or other impacts this may have on our industry. We anticipate there will be challenges, especially if the situation worsens substantially. However, at this point, it is much too early to predict or forecast those impacts. Nonetheless, our team has managed through COVID and numerous global supply chain challenges over the past two years, and we are very confident in our ability to navigate this event as well. And with that, operator, we are now ready to take questions.	compname posts quarterly earnings per share of $0.34. q1 sales rose 16 percent to $267 million. qtrly earnings per share $0.34. qtrly adjusted earnings per share $0.34. sees net sales of $1.13 billion to $1.15 billion for 2022.
I'll now discuss the financial results. We generated revenue of $187.5 million during the second quarter of 2020 compared to $218.2 million during the second quarter of 2019. The decrease was primarily attributable to softer demand in April related to the COVID-19 pandemic. Volume began to decline in late March, which is also when our two manufacturing facilities in the UK were shut down completely to comply with government orders. We've reported net income of $5.5 million or $0.17 per diluted share for the three months ended April 30, 2020 compared to a net loss of $24 million or $0.73 per diluted share during the three months ended April 30, 2019. The net loss in the second quarter of 2019 was mainly due to a $30 million non-cash goodwill impairment in our North American Cabinet Components segment. On an adjusted basis, net income was $6.4 million or $0.19 per diluted share during the second quarter of 2020 compared to $6.3 million or $0.19 per diluted share during the second quarter of 2019. The adjustments being made to earnings per share are for restructuring charges, impairment charges, certain executive severance charges, accelerated D&A, foreign currency transaction impacts, and transaction and advisory fees. Adjusted earnings were essentially flat, with lower SG&A offsetting volume declines related to the pandemic. On an adjusted basis, EBITDA for the quarter was $21.8 million compared to $23.4 million during the same period of last year. Moving on to cash flow and the balance sheet, cash provided by operating activities was $2.5 million for the six months ended April 30, 2020 compared to $143,000 for the six months ended April 30, 2019. Year-to-date, as of April 30, free cash flow was slightly lower than last year, mainly due to the negative impact the pandemic had on working capital during the second quarter, as it was hard to adjust the inventories quickly due to the speed at which it hit. However, we expect an improvement in working capital in the second half of the year and have reduced our capital expenditure program. We now plan to spend between $20 million and $25 million this year and currently expect to generate $30 million to $35 million in free cash flow in the second half of the year. As previously disclosed, we drew down our revolver by $50 million during the second quarter as a precautionary measure. We have subsequently repaid the $50 million and do not expect to have to draw on our revolver again for the rest of the year. However, we may use our Swingline as necessary in the normal course of business. Our balance sheet is strong, we have ample liquidity, and our leverage ratio of net debt to last 12 months adjusted EBITDA remained unchanged at 1.4 times as of April 30, 2020. We will continue to focus on generating cash and paying down debt in the second half of the year, which should offset the decrease in forecasted EBITDA enough to keep our leverage ratio around 1.4 times for the remainder of the year. Because of our strong liquidity position and confidence in the second half, we do not foresee a change to our current dividend policy. As a group, they accepted the challenges of being an essential business and maintain production so that we could provide uninterrupted service and products to our customers. They did this in an environment where the rules and regulations seem to change daily. In addition, we witnessed countless examples of our employees giving their time, talents and resources to help others in their communities. Similar to our first quarter, the second quarter started strong and our results were trending better than projections. However, the COVID-19 pandemic and related regulations began to impact our business toward the end of March. As such, our focus shifted to the following priorities: first, the health, safety and welfare of our employees; second, supporting our customers; and third, liquidity and cash flow management. Companywide, we have a very robust enterprise risk management process that evaluates various risk scenarios and prepares action plans to mitigate those risks. One such risk was a global pandemic, and when COVID-19 hit, we were able to react quickly as we already had a plan in place. I will now discuss results from each of our operating segments. I'll start with the North American Fenestration segment. Each of our plants in this segment was deemed an essential business and operated throughout the entire quarter. Revenue declined 5.9% from prior year Q2, but we were seeing revenue growth prior to the impact from the pandemic. In fact, revenue was trending 3.1% above prior-year levels for the first five months of our fiscal year. However, revenue in April declined by approximately 25% year-over-year due to the impact from COVID-19. As we have stated in the past, our cost structure is highly [Phonetic] variable in nature. And as such, when our volumes dropped, we acted quickly with furloughs, reduced work hours and reductions in discretionary spending, which enabled us to protect our margins. In addition, SG&A reductions, lower medical expenses and lower incentive accruals, all favorably impacted results, and we were able to realize a margin expansion of approximately 100 basis points in this segment during the quarter. Revenue in our European Fenestration segment decreased by 27.2% from prior year to $29.2 million, excluding foreign exchange impact. Similar to our North American Fenestration segment, revenue was trending 2.4% above prior year levels for the first five months of our fiscal year. However, largely due to the fact that the UK was shut down completely, revenue in April was down approximately 85% year-over-year. As Scott mentioned in his comments, our UK manufacturing facilities were mandated to close on March 25 and just recently restarted operations. Our German manufacturing facility remained operational but on reduced shifts and work hours. Our North American Cabinet Components segment generated revenue of $50.7 million during the quarter, which was 19.4% less than prior year. This volume drop was driven by COVID-19 related impacts and the previously announced loss of one customer, who exited cabinet manufacturing in late 2019. Revenue in April decreased by approximately 37% year-over-year. After adjusting for the lost customer, revenue was down 14.6% for the quarter and 34% in April. The decrease in revenue in this segment was intensified due to the fact that some of our customers are located in states where cabinet manufacturing was not deemed essential. As a result, they were forced to close for some period. While each of our cabinet component plants was deemed essential and continued to operate throughout the quarter, the rapid pace of the customer closures in other states made it challenging to manage our fixed cost, while balancing the needs and delivery requirements of our operating customers. We aggressively managed our variable cost structure by quickly implementing temporary furloughs and shortened work weeks, but the closure of some customers nevertheless had a negative impact on the segment's EBITDA and margins. EBITDA was also impacted by a $1.8 million accrual for writing off a portion of the inventory associated with Chinese-sourced product for the customer that exited the cabinet business. Absent this write-off, we would have realized margin expansion in this segment as well. As I mentioned earlier, managing liquidity and focusing on cash flow has been a top priority. As such, we are actively managing the line items that we can control. We are proactively working with our suppliers on extended terms and payments. We are also making progress in adjusting our inventory levels to match volumes, though this process does take some time, given the rapid drop in shipments. Capex has been reduced in an effort to optimize cash flow. However, because of our strong liquidity position, we will continue to spend capital on safety-related projects and growth-related strategic projects such as the vinyl extrusion technology upgrade project that we have in Kent, Washington. We continue to be confident in our ability to generate cash and manage working capital during the second half of this year. These moves, combined with the normal seasonality of our business, should allow us to generate $30 million to $35 million of free cash flow for the full year, basically all of which will be generated in the second half. Like most other companies, we withdrew our guidance for 2020 as soon as the negative impacts from the pandemic started to become apparent. As mentioned, results for the first five months of our fiscal year through March were solid. Revenue fell quickly though in April. But we were prepared and we took the appropriate actions to minimize the impact to our business and margins. We are beginning to see signs of recovery and optimism across the building products industry. We currently anticipate Q3 revenue will be down by 20% to 25% year-over-year in North America and adjusted EBITDA margin will be down 350 basis points to 400 basis points. For the third quarter in Europe, we currently expect revenue to decrease by 40% to 45% year-over-year with adjusted EBITDA margin contracting by 550 basis points to 600 basis points. This forecast assumes a slow recovery in Europe, no second wave of COVID-19 and no further shutdowns or restrictions on our facilities. While we have very little visibility into our fourth quarter, we anticipate volumes will improve over Q3 but will not recover to prior-year levels. We will provide an updated view on the full year when we report third quarter earnings in early September, but we are very encouraged by what we are seeing and hearing from our customers. In summary, although we expect negative impacts from the COVID-19 pandemic to continue throughout this year, we are optimistic that we are seeing signs of a recovery. We will stay focused on managing all items under our control with a continued emphasis on generating cash and maintaining a strong balance sheet. With that being said, operator, we are now ready to take questions.	quanex building products - decrease in net sales during q2 of 2020 was primarily attributable to softer demand in april related to covid-19 pandemic. qtrly net sales $187.5 million versus $218.2 million. quanex building products q2 earnings per share $0.17. q2 earnings per share $0.17. qtrly adjusted earnings per share $0.19.
I'll now discuss the financial results. We generated net sales of $270.4 million during the second quarter of 2021, which represents an increase of 44.2%, compared to $187.5 million during the second quarter of 2020. The grows of -- the growth was mainly the result of increased demand for our products across all product lines, coupled with increased pricing, mostly related to raw material cost inflation. More specifically, we posted net sales growth of four -- of 34.6% in our North American fenestration segment, 25.5% in our North American cabinet components segment, and 92.1% in our European fenestration segment, excluding the foreign exchange impact. As a reminder, both of our manufacturing facilities in the U.K. were shut down late March of 2020 and did not resume operations until mid to late May last year. In an effort to provide a more realistic comp, on a consolidated basis, we posted revenue growth of 20.6% in the first half of 2021 compared to the first half of 2019 prior to COVID. We reported net income of $14.6 million, or $0.43 per diluted share, for the three months ended April 30, 2021, compared to $5.5 million, or $0.17 per diluted share, for the three months ended April 30, 2020. The increase in net income was mostly due to higher volumes and improved operating leverage. However, this improvement was somewhat offset by a $13 million increase in SG&A during the quarter, $9.7 million of which was related to the valuation of our stock-based comp awards, and $3.1 million of which was due to higher and more normalized medical claims. On an adjusted basis, EBITDA for the quarter increased by 47.7% to $32.2 million, compared to $21.8 million during the same period of last year. The improved profitability was again largely due to increased operating leverage from higher volumes. From a margin standpoint, this increase represents adjusted EBITDA margin expansion of approximately 30 basis points on a consolidated basis. However, we did realize significant adjusted EBITDA margin expansion in our North American and European fenestrations segments. Margins were pressured in our North American cabinet components segment, primarily due to hardwood cost inflation. Moving on to cash flow and the balance sheet. Cash provided by operating activities was $32.4 million for the three months ended April 30, 2021, compared to $6.1 million for the three months ended April 30, 2020. Free cash flow came in at $27.8 million for the quarter, compared to essentially zero free cash flow in Q2 of last year. Year to date, as of April 30, 2021, cash provided by operating activities was $29 million, compared to $2.5 million for the same period of last year. And free cash flow year to date as of April 30, 2021, was $19.2 million, compared to a negative $12.8 million during the same period of 2020. Our strong free cash flow generation during the quarter enabled us to repay $25 million in bank debt and repurchased approximately 2 million of our stock. Our balance sheet is strong. Our liquidity position continues to improve, and our leverage ratio of net debt to last 12 months adjusted EBITDA improved to 0.3 times as of April 30, 2021. We will remain focused on managing working capital and generating cash as the year progresses. Based on our strong first-half results and ongoing conversations with our customers, we are raising our expectations for the year again and now expect approximately 20% sales growth in our North American fenestration segment, approximately 15% sales growth in our North American cabinet components segment, and approximately 40% sales growth in our European fenestration segment. We're now comfortable providing the following full-year 2021 guidance for modeling purposes. Net sales of $1.04 billion to $1.06 billion. Adjusted EBITDA of $125 million to $130 million. Depreciation of approximately $33 million. Amortization of approximately $14 million. SG&A of approximately $115 million. Note, this is higher than previously expected due to an increase in stock-based comp expense and more normalized medical costs. Interest expense of $2.5 million to $3 million. Tax rate of approximately 27%. Capex of $30 million to $35 million. And free cash flow of $60 million to $65 million. If you adjust for the expected increase in SG&A, the implied incremental adjusted EBITDA margin is in the low 20% range. The takeaway here is that we have been successful at passing through price, and we are realizing operating leverage through increased volume. As previously mentioned, we expect the typical seasonality in our business to be less pronounced this year. So we feel it would be helpful to provide some direction on a quarterly basis for the remainder of the year. From a cadence perspective for Q3 and on a consolidated basis, we expect net sales to be up by 28% to 30% year over year. However, it will be challenging to realize adjusted EBITDA margin due to a decent comp, coupled with inflationary pressures. Looking ahead to Q4, we will have a very tough comp. We do expect net sales growth of approximately 10% year over year during the quarter on a consolidated basis. But we do not expect to realize margin expansion. To summarize, on a consolidated basis for the full year, we now expect to generate net sales growth of approximately 23% year over year to the midpoint of guidance while maintaining adjusted EBITDA margin in the low 12% range. We are pleased to report another quarter of solid results as demand for our products remains strong and exceeded our expectations. Operational performance was excellent across all segments. Similar to most others in the building products space, we are facing inflationary pressures and labor shortages. However, we continue to stay focused on operational excellence projects and other initiatives that improve our return on invested capital and our ability to generate cash flow. We have had success in these areas and believe this focus will continue to generate value for our shareholders. Prior to discussing the detail by segment, I'm going to provide some color on the ever-changing macroeconomic conditions of the markets in which we serve. In the North American residential housing market, both new construction and repair and remodel remain strong. Demand for windows and doors remains solid. And according to many of our OEM customers, lead times to their consumers are being extended while backlogs continue to increase. Specific to cabinet components, we believe that the semi-custom segment, which is the main segment we serve, again outperformed the stock segment. As we mentioned in our last call, there was a significant shift in market share away from the semi-custom segment to the stock segment over the previous few years. So the recent KCMA data is encouraging in that it shows the semi-custom segment continuing to outpace the start -- stock segment. Demand for the products we manufacture in the U.K. and Germany also remains strong. Although markets are slowly beginning to reopen in the U.K. and Europe, continued travel restrictions, coupled with an underbuilt housing market bodes well for demand in our markets. One area that we continue to watch is a potential shortage in the supply of glass in the U.K. and Europe. Further demand pressures and supply issues with this commodity could provide headwinds for our products in the second half of the year. As was the case in our Q1 call, we remain optimistic on macroeconomic conditions in all the markets we serve. However, we face challenges in the form of inflation and labor shortages. With respect to inflation, I think it is accurate to say that we are seeing pressures in every raw material and freight category. The most significant pressures are in the PVC resin, chemical feedstocks, and hardwood lumber species for cabinet components. As a reminder, for the most part, we have contractual pass-throughs for the major raw materials we use in North America. But there is often a contractual lag that can generally be anywhere from 30 to 90 days. With a rapid rate of inflation today, these time lags are applying short-term margin pressures. We do not have these contractual pass-throughs in Europe and the U.K., so our ability to pass on any increases through price becomes more important. And for the most part, we continue to be successful in that regard. In all regions, our customer base is passing along increases to the end consumer and the entire supply chain is following in kind. We're not on an index, we have been successful at keeping inflation neutral so far. As also discussed on the Q1 call, labor shortages have also been a challenge for most U.S. manufacturing companies, and Quanex is no exception. This continued into Q2 and is ongoing. We are hopeful that some of the recent government decisions to roll back unemployment benefits in certain states will have a favorable impact on this front. But at this time, it's just too early to tell and margins are being pressured by overtime utilization rates. I'll now go ahead and provide my comments on performance by segment for our fiscal second quarter. Our North American fenestration segment generated revenue of $146.1 million in Q2, which was approximately 35% higher than prior-year Q2 and compares favorably to Ducker windows shipment growth of 10.8% for the calendar quarter ending March 31, 2021. Prior-year COVID impact, combined with strong demand across all product lines, share gains in our screens business, and increased capacity utilization on our vinyl extrusion assets all contributed to the above-market performance. Adjusted EBITDA of $20.6 million in the segment was approximately 54.1% higher than prior-year Q2. Nonrecurring COVID impact, volume-related operating leverage, the implementation of annual pricing adjustments, operational improvements, and lower SG&A all contributed to the improved performance year over year. For the first six months, this segment had revenue of $274.3 million and adjusted EBITDA of $36.9 million, which represents growth of 25.2% and 67.9%, respectively. This also represents adjusted EBITDA margin expansion of approximately 340 basis points. Our European fenestration segment generated revenue of $61.7 million in the second quarter, which is $32.5 million or approximately 111% higher than the prior year. Excluding foreign exchange impact, this would equate to an increase of approximately 92%. Strong demand for our products continues in both vinyl extrusions and spacers as the repair and remodel markets in the U.K. and continental Europe remain strong. Adjusted EBITDA of $12.9 million for the quarter was $10 million better than the prior year, but it is important to remember that our U.K. plants were shut down for part of the prior-year comp period. Also contributing to the strong results were volume-related operating leverage and pricing actions, which helped offset inflationary pressures. On a year-to-date basis, revenue of $110.7 million and an adjusted EBITDA of $23.6 million resulted in margin expansion of approximately 840 basis points as compared to the first half of last year. Our North American cabinet components segment reported net sales of $63.6 million in Q2, which was $12.9 million or approximately 26% better than prior year. Note that this growth rate was slightly higher when compared to the latest KCMA data for the semi-custom segment which came in at 24.2% growth over the same period. Favorable comps due to the COVID impact in Q2 of last year, higher index pricing, and higher order demand all contributed to solid revenue growth in the quarter. Adjusted EBITDA was $3 million in this segment, which was 21.6% higher than prior year. Although we are being impacted by the timing lag of our index pricing mechanisms on the hardwood, operating leverage from higher volume and incremental pricing on certain products all contributed to holding adjusted EBITDA margin relatively flat versus prior-year Q2. In fact, the rapid increase in hardwood prices has impacted adjusted EBITDA by $1.7 million year to date. And if we adjust for this inflation, we would have realized approximately 180 basis points of margin expansion in this segment. On a year-to-date basis, operational improvements and volume-related leverage gains have helped offset the timing-related material impacts and resulted in margin expansion of approximately 150 basis points. Unallocated corporate and other costs were $4.3 million for the quarter, which is $7.2 million higher than the prior year. As Scott mentioned earlier, the primary drivers of this increase were stock-based compensation expense, operating incentive accruals, and more normalized medical expenses as our employees and their families have started to feel more comfortable going back to their doctors. As I mentioned earlier, our priority has been meeting customer demand, furthering our operational excellence programs, optimizing our cash flow, and improving return on invested capital across all segments of our business. Despite inflationary headwinds, we continue to make progress in these areas and this work has strengthened our balance sheet by enabling us to further pay down debt during the quarter, while still repurchasing approximately $2 million in treasury stock. Going forward, our capital deployment strategy will remain intact as we execute on our path to being debt-free. We will opportunistically evaluate stock repurchases and continue to invest in projects that grow revenue and improve our ROIC. In addition, the board recently approved the capacity expansion project of our spacer plant in Germany and we're also currently evaluating additional capacity projects in our screens and cabinet component business in North America. Note that due to the extended lead times of equipment, we don't expect to realize any benefits from these projects until next year at the earliest. In summary, our outlook on demand for our products remains strong for the remainder of the year. We are executing on our plan and performing well from an operational standpoint. With these points in mind, on a consolidated basis, we're confident in our ability to deliver revenue growth in the low-20% range this year, while maintaining adjusted EBITDA margin in the low-12% range despite the increasing inflationary pressures. And with that, operator, we are now ready to take questions.	compname posts quarterly earnings per share $0.43. qtrly net sales $270.4 million versus $187.5 million. qtrly earnings per share $0.43. qtrly adjusted earnings per share $0.43. sees fiscal 2021 consolidated net sales of about $1.04 billion to $1.06 billion. expects to generate about $125 million to $130 million in adjusted ebitda in fiscal 2021.