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During the past year, Nick has helped advance our Investor Relations focus including adding Olga to the team. I've enjoyed working with Nick and I look forward to continuing to enhance our external communications under Julie's leadership. We reported very strong results for the first quarter of fiscal 2021 with continued momentum across our professional and residential businesses. Double-digit growth in this dynamic environment is a testament to our focus on innovation, operational execution, and the perseverance of our team and channel partners. To share highlights of the quarter, net sales were up 14% year-over-year and up 11% organically. Professional segment net sales were up 9%, a continuation of the growth trend for this segment. Higher shipments of landscape contractor zero-turn riding mowers led the growth along with incremental sales from Venture Products. Residential segment net sales were up 31%, setting another record. We saw broad-based demand across our segment with snow equipment driving significant growth due to favorable weather and enhanced mass retail placement. Momentum also continued for our all-season Flex-Force 60-volt lithium ion products and demand remained strong for walk power mowers. The introduction of our innovative new products coupled with effective marketing and expanded mass retail channels has further strengthened our brand during this recent period of heightened residential growth. From a segment earnings perspective, Professional segment grew 14% and Residential increased 49%. We generated strong free cash flow in the quarter, which allowed us to pay down $90 million in debt and resume share repurchases. We also continued to make investments in key technology areas like alternative power, smart connected and autonomous to drive sustained long-term growth. Notably, we recently acquired TURFLYNX and Left Hand Robotics, both of which are technology accelerators. Finally, we believe the critical path forward and emerging from the pandemic involves worldwide vaccinations. We have developed specific plans for each of our sites to take full advantage of vaccination opportunities. In addition, we launched our new [Indecipherable] campaign to provide education and encourage employees to get vaccinated against COVID-19 as soon as they are able. As we prepare for the broader distribution of vaccines, our team has remained diligent in navigating the continued pandemic environment. They're keeping health and safety in the forefront while meeting surging demand from our retailers and end customers. Three underlying elements stand out this quarter as we delivered favorable results in a dynamic environment. The first is the strength of our Residential segment. Coming off a record setting year, the team delivered another record quarter. These results were driven by expanded distribution and new products complemented by stay-at-home trends and favorable weather. The second element is the productivity story in our business. We continue to drive productivity and synergy benefits enterprisewide. This has helped to mitigate factors such as inflation and COVID-related manufacturing inefficiencies. The third element is our unwavering commitment to innovation. The success of new products across our businesses in the first quarter highlights the strong return on innovation investments. For example, battery-powered products now represent a growing and important part of our business. This commitment to innovation reflects our dedication to constantly provide new solutions for customers' ever evolving needs regardless of the market environments or macro economy. Our enterprise strategic priorities of accelerating profitable growth, driving productivity and operational excellence, and empowering people productivity and operational excellence, and empowering people guided our strong execution in the quarter. I'm optimistic about our momentum as we head further into 2021 given our continued investments in technology and new products, excellent relationships with our channel partners, strong financial position, and effective operational and capital deployment capabilities. We reported a very strong first quarter as our professional businesses continue to recover in a meaningful way and we continued to capitalize on robust residential demand. We grew net sales by 13.7% to $873 million. Reported earnings per share was $1.02 and adjusted earnings per share was $0.85 per diluted share. This compares with reported earnings per share of $0.65 and adjusted earnings per share of $0.64 for the comparable quarter last year. Now to the segment results, Professional segment net sales for the quarter were up 9.3% to $650.2 million. This increase was primarily due to higher shipments of landscape contractor zero-turn riding mowers and incremental sales from the Venture Products acquisition, partially offset by decreased sales of underground construction equipment to oil-and-gas markets and the timing of international shipments of golf and grounds equipment. Professional segment earnings for the quarter were up 14% to $116.8 million. When expressed as a percent of net sales, segment earnings increased 80 basis points to 18%. This increase was primarily due to sales volume leverage, productivity, synergy initiatives and net price realization, partially offset by manufacturing cost pressures and product mix. Residential segment net sales for the quarter were up 31.3% to $217.7 million. The increase was primarily due to strong retail demand for snow products driven by favorable weather and expanded mass retail placement, Flex-Force battery-powered products and shipments of walk power mowers ahead of the key selling season. Residential segment earnings for the quarter were up 48.9% to a record $32.1 million. This reflects a 170 basis point year-over-year increase to 14.7% when expressed as a percent of net sales. The same drivers that offsets that effective Professional segment earnings also affected Residential segment earnings. Turning to our operating results. We reported gross margin for the quarter of 36.1%, a decrease of 140 basis points from the prior year. Adjusted gross margin was also 36.1%, down to 150 basis points. The decreases in gross margin and adjusted gross margin were primarily due to manufacturing costs pressures and product mix partially offset by productivity, synergy initiatives and net price realization. SG&A expense as a percent of net sales decreased 570 basis points to 19.9% for the quarter. This decrease was primarily due to sales volume leverage, a favorable onetime legal settlement and lower indirect marketing expenses. Operating earnings as a percent of net sales for the quarter increased 430 basis points to 16.2%. Adjusted operating earnings as a percent of net sales increased 210 basis points to 14.2%. Interest expense of $7.5 million was down approximately $600,000 compared with a year ago, driven by lower interest rates. The reported effective tax rate was 18.1% for the first quarter and adjusted effective tax rate was 21.5%. Turning to the balance sheet and cash flow, at the end of the quarter, our liquidity was just over $1 billion. This included cash and cash equivalents of $433 million and full availability under our $600 million revolving credit facility. We have no significant debt maturities until April of 2022. Accounts receivable totaled $306.9 million, down 4.5% from a year ago due to channel mix and the timing of other and receivables. Inventory was down 8.6% from a year ago to $675.3 million. This decrease was due to lower inventory in certain Professional segment businesses, as well as the result of increased demand for our products. Accounts payable increased 4.7% to $364.4 million from a year ago. This was due to increased purchases of component inventories, as well as incremental payables from the Venture Products acquisition. First quarter free cash flow was $84.5 million with a reported net earnings conversion ratio of 76%. This positive performance was primarily the result of higher earnings, the favorable onetime legal settlement, and lower working capital mainly due to reduced inventories as compared with the first quarter of last year. Our disciplined capital allocation strategy includes investing in organic and M&A growth opportunities, maintaining an effective capital structure, and returning cash to shareholders. Our capital priorities remain the same and include reinvesting in our businesses to support sustainable long-term growth both organically and through acquisitions, returning cash to shareholders through dividends and share repurchases, and repaying debt to maintain our leverage goals. During the first quarter we paid down $90 million in debt and returned $59.8 million to shareholders, $28.7 million in regular dividends and $31.4 million in share repurchases. We are reaffirming our full year fiscal 2021 guidance. Additionally, we are actively managing a dynamic supply chain and cost inflation environment. I'll share the guidance highlights and Rick cover the macro trends and key factors we'll be watching throughout the remainder of the year. For fiscal 2021 we continue to expect net sales growth in the range of 6% to 8%. This includes four months of incremental sales from the Venture Products acquisition. We expect continued recovery in Professional segment end markets. The strongest growth in the Professional segment will be in the second quarter and third quarters as well as comparable periods last year were most impacted by the pandemic. We expect full year Residential segment net sales growth to be in the low to mid-single-digits, following an exceptionally strong fiscal 2020 and first quarter 2021. We anticipate strong retail demand to continue throughout the year. Given the comparisons of record setting performance last year, and potential supply chain constraints, we expect year-over-year Residential segment net sales growth to moderate for the remainder of the year. Looking at overall profitability, we expect moderate improvement in fiscal 2021, adjusted operating earnings as a percent of net sales compared with fiscal 2020. This assumes continued productivity and synergy benefits, net price realization and lower COVID-related manufacturing inefficiencies, partially offset by potential supply chain constraints and an expected inflationary environment. In the Professional segment, we expect earnings as a percent of net sales to improve versus fiscal 2020, due to better volume leverage. In the Residential segment, we expect earnings as a percent of net sales to be similar to fiscal 2020. We expect full year adjusted earnings per share in the range of $3.35 to $3.45 per diluted share. This estimate includes the effects of recently announced acquisitions. It excludes the benefit of the excess tax deduction for share-based compensation and the favorable onetime legal settlement. Based on current visibility, we anticipate adjusted earnings per share to be higher in the first half of fiscal 2021 versus the prior-year period. For the second half of fiscal 2021, we expect adjusted earnings per share to be comparable with the same period of fiscal 2020. Looking to the rest of the year, we're excited about the robust near-term demand environment as we continue to execute on our long-term strategic priorities and invest in innovation to capitalize on future growth opportunities. Looking ahead, we'll be watching several macro trends to provide us with additional insights into the remainder of the year. These include the ongoing effects of COVID-19 including its impact on manufacturing efficiencies and potential global supply chain disruptions, weather patterns, including the timing of spring in northern climates, and global economic recovery factors driving general consumer and business confidence, as well as the related commodity and inflationary effects. From an end market perspective, demand trends are positive and we're well-positioned for further growth. Recent strong retail demand has reduced field inventory and many of our channel partners are seeking to replenish given the improved outlook. We're watching a number of key market drivers for our residential and certain professional businesses continuing customer interest in home investments for landscape contractors, improved business confidence leading to the resumption of capital investments, along with catch-up purchases of prior deferrals. For golf, a strong start to the season in northern markets, an increase in international course reopenings and the expected return of travel and resort golf all leading to another great year for leading to another great year for rounds played. For grounds equipment, increased spending on outdoor space maintenance and improvement projects by municipal and other tax-supported entities. For Underground, increased funding for 5G and broadband build-out and critical-need infrastructure rehab and replacement. For rental and specialty construction, continued upgrades and replacement of fleets by independent rental companies and national accounts. And for snow and ice management, channel response to lower end-of-season inventory levels as a result of recent snow events. We continue to be excited about our innovative suite of products that are well-positioned to capitalize on these market opportunities, and these products directly address customer trends. For the focus on home improvement, a complete line of residential products from walk and Z mowers to irrigation and lighting solutions including the zero-emission all-season Flex-Force 60-volt lithium-ion suite of products; additionally, our professional line of maintenance and renovation products. For the growing interest in professional battery electric solutions, the Greensmaster eTriFlex and hybrid riding Greensmowers; the Toro e-Dingo compact utility loader and the expanding line of lithium-ion workman GTX utility vehicles. For increased productivity solutions, the Toro Dingo TXL 2000 and Ditch Witch SK 3000 stand on skid steers; Toro Exmark and Ventrac high-capacity mowers, a new line of Ditch Witch horizontal directional drills, the BOSS DRAG PRO rear-mounted truck plow and BOSS and Ventrac sidewalk snow and ice management equipment. It's because of our deep commitment to innovation, strong customer relationships, exceptional sales and service through our channel partners and stellar product lineup that we are seeing significant momentum across our businesses with world-class partners. Two exciting examples in golf are our new partnerships with PGA Frisco and Pebble Beach Resorts. We're honored that every 2021 major championship tournament will be played on a course serviced by Toro-branded turf equipment. And we are the official Ryder Cup turf equipment and irrigation provider for the remainder of the decade. In closing, we are optimistic as we head into our peak selling season. While the environment remains dynamic as we manage through COVID-related manufacturing and supply chain challenges, we have a number of factors working in our favor, a diverse portfolio of businesses and strong customer relationships, productivity initiatives to drive increased profitability and operational excellence, continued investments in innovative products and emerging technologies, and as always our team is the key to the Toro Company's continued success.	compname reports q1 earnings per share $1.02. q1 adjusted earnings per share $0.85. q1 earnings per share $1.02. q1 sales $873 million versus refinitiv ibes estimate of $848.9 million. sees fy sales up 6 to 8 percent. sees fy fiscal 2021 adjusted earnings per share in range of $3.35 to $3.45 per diluted share.
We begin in fiscal 2022 by delivering solid first quarter results in what remains a very dynamic operating environment. We achieved 6.8% top-line net sales growth for the quarter over a strong first quarter comparison last year. Our team's intensely managed the supply chain and our manufacturing operations, working to achieve the best possible outcomes. We actively manage production in partnership with our suppliers and aligned our manufacturing schedules based on material availability. The supply chain challenges, along with the surge of the Omicron variant impacted our volume and mix within the quarter. However, as the quarter progressed, we did start to see some improvements in manufacturing efficiencies. We do expect the current supply chain dynamics to resolve over time and are beginning to see some signs of improvement. On our last earnings call, we communicated profitability expectations for Q1 in reference to sequential improvements over Q4 of last year. As a reminder, in Q1 of last year, we experienced an acceleration of demand without the current magnitude of inflationary pressures and product availability constraints. With that in mind, we performed in line with our expectations by delivering sequential improvement in gross margin this quarter over Q4 of last year. Our team executed well operationally achieving productivity benefits and increased net price realization. Importantly, demand for our innovative products has remained robust across our businesses. We have strengthened our market leadership by remaining steadfast in our commitment to serving our customers well. I now like to highlight some key advances in two major areas of strategic priority. First, we continue to bring our technology advancements to market to accelerate profitable growth over the long term. We introduced new products in each of our key technology areas of battery-electric, smart, connected, and autonomous solutions. Starting with batteries, we have a growing suite of electric products for both residential and professional customers. These products are carefully designed to meet the promise of our brands by offering superior performance and durability supported by an extensive customer care network. The latest edition is our new all-electric Ultra Buggy for material handling in our special construction business, which was unveiled at the world of the concrete show in January. The Ultra Buggy delivers eight hours of continuous run time by leveraging the same hyper cell battery system as our Revolution series commercial-grade mowers. Along with our e-Dingo compact utility loader, the Ultra Buggy also provides a zero-emission solution for indoor construction and renovation applications. Speaking of the Revolution series, initial reservations for these new battery-powered commercial-grade stand-on and zero-turn riding mowers have exceeded our expectations. The revolution product line brings together the best of both worlds with the productivity, durability, and expansion to support network to customers expect from us, along with the next-generation benefits of zero emissions, noise reduction, and all-day runtime on a single charge. Moving to smart solutions, we just launched our new Workman UTX line of commercial-grade utility vehicles. These all-season vehicles have a broad range of applications across our markets and feature a proprietary ground speed governing system. This patented system allows for the perfect amounts of power for any job, no matter the desired speed. This feature also enables lower fuel consumption and noise levels. The UTX line was designed with versatility and durability in mind. It offers 2,000 pounds of towing capacity, 25% more cargo capacity than the competition, and leverages our broad product offerings with an integrated BOSS snowplow amount. Another advancement in smart solutions that drive productivity and help with skilled labor challenges is our new ProCore 648s. This machine is the gold standard for the green generation. It features an innovative electronic drive control, which can maintain more consistent hole spacing on sloping terrain and allows for increased speed on turnarounds. This machine can also minimize turf disruption, reducing the need to make manual repairs. In the area of autonomous, we have showcased several prototypes over the past few years and have invested in technology-accelerating acquisitions. We intend to be a market leader in providing autonomous solutions, as evidenced by the introduction of our first autonomous fairway mower at the recent GCSAA golf industry show. This product addresses the issue of labor shortages for our golf course customers while enabling increased productivity and more consistent results. As technology evolves, we intend to leverage our battery, smart connected, and autonomous product offerings across our broad portfolio. We are excited about the positive reactions to our new and innovative applications as we further advance our technology leadership. The second strategic area I'd like to highlight is our effective capital allocation. We continue to prudently deploy capital this quarter with the acquisition of the Intimidator Group in January. This acquisition positions us to be an even stronger player in the large and rapidly growing zero trends mower market enhancing customer reach and geographic strength. We're excited about the addition of a complementary line of Spartan mowers, which are known for their exceptional performance, features, durability, and distinctive styling. The acquisition also provides us with a larger footprint to further leverage our technology investments as well as procurement and manufacturing efficiencies. We are confident the combined efforts of our teams will enhance our long-term growth by providing unparalleled products, technologies, and services to our customers. We made great strides in advancing key strategic areas this quarter, our entire organization continued to demonstrate creativity, perseverance, and sound judgment as we navigated the challenges and opportunities in the current global environment. As a result, we continue to build our business for sustainable and profitable long-term growth and drove value for all stakeholders. As Rick said, we delivered solid results in the first quarter and drove sequential gross margin improvement over Q4 of last year in what continues to be an extremely dynamic operating environment. We grew overall consolidated net sales to $932.7 million, an increase of 6.8% compared to the first quarter of last year. Reported and adjusted earnings per share were about $0.66 per diluted share, down from $1.02 and $0.85, respectively in the first quarter a year ago. Professional segment net sales for the quarter were up 3.5% to $672.9 million. This increase was driven by net price realization partially offset by lower volume in certain key product categories, due to product availability constraints. Professional segment earnings for the first quarter were $93.3 million and one expressed as a percent of net sales 13.9%. This was down from 18% in the first quarter last year. The year-over-year decrease was primarily due to higher material, freight, and manufacturing costs, partially offset by net price realization. Residential segment net sales for the first quarter were $255.4 million, up 17.3% over last year. The growth was primarily driven by increased net price realization and higher shipments of our zero-turn riding and walk power mowers. Residential segment earnings for the quarter were $31.8 million, and when expressed as a percent of net sales 12.4%. This was down from 14.7% in the first quarter last year. The year-over-year decrease was primarily driven by higher material and freight costs partially offset by increased net price realization and productivity improvements. Turning to our operating results. We reported a gross margin of 32.2% for the quarter, compared to 36.1% in the same period last year. The year-over-year decrease was primarily due to higher material and freight costs, partially offset by an increased net price realization. As expected, we did see a sequential improvement compared to the fourth quarter of fiscal 2021. We intend to restore and improve margins over the long term and continue to adjust pricing to market conditions and drive productivity and synergy benefits. SG&A expense as a percent of net sales for the quarter was 22.4%, compared to 19.9% in the same period last year. This increase was primarily driven by the favorable impact of a one-time legal settlement in the prior year that did not reoccur, as well as increased investment in research, engineering, and marketing. Operating earnings as a percent of net sales for the first quarter were 9.8%, compared to 16.2% in the same period last year. Adjusted operating earnings as a percent of net sales for the quarter were 9.9%, compared to 14.2% in the same period a year ago. Interest expense for the quarter was $7 million down slightly from the same period last year. This was due to lower average debt levels and decreased interest rates. The reported adjusted effective tax rates for the first quarter were 20.2% and 20.9%, respectively, compared to 18.1% and 21.5% in the same period a year ago. Turning to our balance sheet and cash flows. Accounts receivable were $366 million, up 19% from a year ago, primarily driven by higher sales and customer mix. Inventory was $832 million, up 23% compared to last year. This increase was due to higher work in process and parts. Accounts payable increased 30% from last year to $474 million. This was primarily driven by higher purchase activity and inflation. Free cash flow in the quarter was a $102 million use of cash. This was driven by additional working capital needs to support higher material and service parts levels, given the current supply chain environment. We continue to follow a disciplined approach to capital allocation demonstrated by our actions in the quarter and fueled by our strong balance sheet. Our priorities remain the same and include making strategic investments in our business to support long-term growth, both organically and through acquisitions, returning cash to shareholders through dividends, and share repurchases, and maintaining a levered school to support financial flexibility. These priorities are highlighted by our actions including our plan to deploy $150 million to $175 million in capital expenditures this year to fund capacity, productivity, and new product investments. In our acquisition of Intimidator Group in January, our return of $106 million to shareholders this quarter was 75 million in share repurchases and 31 million in regular dividends. Our gross leverage to EBITDA target remains the same in the range of 1 to 2 times. We are benefiting from strong demand momentum across our diverse portfolio of businesses. In the current global operating environment, our biggest challenge remains meeting this heightened demand. Based on our current visibility, the progress we are making on margin recovery, and the recent acquisition of Intimidator Group, we are updating our full year fiscal 2022 guidance. This guidance also considers the current geopolitical events which continue to develop. We will monitor the situation very closely and take appropriate actions. We now expect net sales growth in the range of 12% to 14%, which reflects the partial year addition of the Intimidator Group, pro-rata over the remaining three quarters. Along with the continued expectation for 8% to 10% growth for the remainder of our business. The acquired business is reported under the professional segment, and as a result, we expect professional net sales growth at the upper end of the 12% to 14% range for the full year. For the second quarter, we anticipate total company as well as professional and residential segment net sales growth to be moderately below our full year expectations. We continue to expect our quarterly sales cadence to be driven more by our ability to produce than historical demand patterns. This is expected to result in less seasonal variation than typical between the quarters this year. Looking at profitability for the full year, we now expect similar overall adjusted operating earnings as a percent of net sales compared to fiscal 2021 for the total company. And in the professional and residential segments. This reflects the operational improvements we are realizing as well as our acquisition. With the addition of Intimidator at a lower initial gross margin relative to our company average, we now expect gross margin in Q2 to be similar to Q1 but improve in the second half of the year compared to the first half of the year. For the full year, we expect the gross margin to be similar to slightly below fiscal 2021 driven by the acquisition. In light of the recent geopolitical events, we are holding our full year-adjusted diluted earnings per share guidance in the range of $3.90 to $4.10. Our adjusted diluted earnings per share guidance excludes the benefit of the excess tax deduction for stock compensation, as well as one-time acquisition-related costs. For the second quarter, we expect our adjusted diluted earnings per share to approach the record results we achieved in Q2 of fiscal 2021. Additionally, for the full year with the acquisition included, we now expect interest expense to be about $35 million. Depreciation and amortization to be about $120 million and free cash flow conversion in the range of 80% to 90% of reported net earnings. We continue to estimate an adjusted effective tax rate of about 21%. We remain well-positioned to capitalize on this period of profitable growth as we continue to execute on our long-term strategic priorities. Our entire team remains sharply focused on serving our customers as we are committed to building our business for long-term sustainability and profitability. The foundation for our future success is our world-class innovation capabilities and enterprisewide operational excellence. The combination of which we believe will drive sales momentum and margin expansion going forward and create value for all stakeholders. As we head into the remainder of fiscal 2022 demand remains strong across the markets we serve, the ongoing replacement cycles for our products provide a steady foundation and we are keeping an eye on the following areas, consumer and business confidence, together with inflation, geopolitical developments, and COVID-19 variants, customer prioritization of investments to maintain and improve outdoor environments, regulations, on reduced emissions, and customer preference for sustainable products, the continuation of strong momentum in golf markets and government support and funding of infrastructure projects, including the $1 trillion US infrastructure legislation. Our innovative products and best-in-class distribution networks position us well to capitalize on current and future demand trends in the growing markets we serve. I would now like, sure, a few comments on our golf market. We continue to see courses in their healthiest financial positions in years. Around the world, golf participation engagement remains on the rise. In the Us golf rounds played were up 5.5% in 2021. On top of a 13.9% increase in 2020. We're also seeing an improvement in supply and demand balance and even saw an increase in the number of municipal and private courses in the US during 2021. As the market leader in turf and irrigation solutions and the only provider of both, we have distinct competitive advantages in the space. This was evident last month at the GCSAA golf industry show in San Diego. The traffic in our booth reflected strong interest in our array of innovative new products. It was a great experience to be at the show again after the pandemic-driven hiatus spend time with so many of our customers. Not far from the golf show was Super Bowl 56 SoFi Stadium in Inglewood, California. Our teams and equipment have a long and storied history of helping Super Bowl groundskeepers maintain pristine field conditions, and this year was no exception. Before and after the game, our Workman GTX and UTX vehicles were used to help the SOFi grounds crew move field preparation materials. In addition, our GTX vehicles and real master products were instrumental in preparing the Bengals UCLA practice fields. Our commitment to innovation has served us well. Our strength in this area, combined with our deep customer relationships, effective capital deployment, superior distribution, and customer care networks has driven consistent financial performance. We believe these strengths will continue to generate tremendous value and position us to deliver compelling growth and shareholder returns for the long term. As always, our extended team is the key to the Toro Company's long-term success.	compname reports q1 adjusted earnings per share of $0.66. q1 earnings per share $0.66. q1 sales rose 6.8 percent to $932.7 million. q1 adjusted earnings per share $0.66. now expects fiscal 2022 total net sales growth in range of 12% to 14%. company is holding its fiscal 2022 adjusted earnings per share guidance in range of $3.90 to $4.10 per diluted share.
The Toro Company delivered very strong results for the second quarter of fiscal 2021, driven by robust broad-based demand across our Professional and Residential segments. Our team continued to execute well in this dynamic environment, managing the supply chain challenges affecting our industry and the global economy and working together with our channel partners to serve customers and fulfill retail demand. As a result, net sales for the second quarter were up 24% year-over-year. Professional segment net sales increased 25%, continuing the growth trend for this segment and setting a new record. The increase was primarily driven by a strong demand for golf, landscape contractor, irrigation and rental and specialty construction products. Our lineup of innovative products combined with increasing business confidence in the economic recovery helped fuel exceptional demand. Residential segment net sales for the second quarter were up 20% year-over-year, setting another record. This growth was led by a strong demand for zero-turn riding mowers and our all-season Flex-Force 60-volt home solutions products. In addition, enhanced retail placement boosted sales of our snow equipment and late-season snowstorms helped clear the channel. The introduction of innovative new Residential products coupled with the refreshed marketing and expanded mass retail distribution continue to strengthen our brand and drive growth for this segment. We also set records for earnings in both segments this quarter, as we drove productivity and operational synergies enterprise wide. Professional earnings were up 57%, and Residential earnings grew 24%. Reflecting on the outstanding results this quarter, we note three prevailing themes. First, demand has been exceptionally strong. We see this continuing for the foreseeable future, albeit with year-over-year growth rate comparisons that will ultimately stabilize off a higher base. This demand is driven by improving consumer and business confidence coupled with public and private investment priorities and current lifestyle trends. We expect to capitalize on these drivers with our commitment to new product development, best-in-class distribution channel, and a strong balance sheet that provides the financial flexibility to invest in the future. Second, along with the exceptionally strong demand, we've seen escalating supply chain and inflation challenges. These challenges are not unique to The Toro Company and are having a global impact. Our teams have worked effectively to keep up with increased demand while navigating the current supply chain environment. We've also focused on mitigating material, freight and wage inflationary pressures through productivity and synergy initiatives, disciplined expense control and market-aligned pricing actions. We'll continue to prioritize important investments to support growth. Third, we're leveraging our strong balance sheet to position the Company for future growth. As we continue to generate strong free cash flow, we are allocating capital to best drive value for all stakeholders. This year, we've made strategic investments in technology accelerators through the acquisitions of TURFLYNX and Left Hand Robotics. These teams have immediately helped us advance our innovation roadmap. At the same time, we've continued to invest organically in key technologies, including alternative power, smart connected and autonomous. As an example, our expanding line of Flex-Force 60-volt products will soon include a battery-powered two-stage snow thrower, which is ready to launch and is generating a lot of excitement in the field. Our healthy cash flow also allows us to return capital to shareholders, while maintaining ample liquidity. Year-to-date, we've paid down $100 million of debt, invested $107 million in share repurchases, and paid out $57 million in dividends. While we work to capitalize on this period of great growth, we remain committed to our employees and channel partners, and continued to diligently manage and mitigate COVID-related risks. We're keeping the health and safety of our team in the forefront, while executing operationally to get the right products to the right places at the right. Through the SoWeCan [Phonetic] campaign we're incenting our employees to get vaccinated. Looking ahead, we remain focused on our enterprise strategic priorities of accelerating profitable growth, driving productivity and operational excellence, and empowering people. We will continue to execute against these priorities to position the Company for long-term sustainable growth. I'll discuss our outlook further following Renee's more detailed review of our financial results. Our record second quarter was driven by robust demand across our Professional and Residential segments, coupled with strong operating performance. We grew net sales by 23.6% to $1.15 billion. Reported earnings per share was $1.31 per diluted share, up from $0.91 last year. Adjusted earnings per share was $1.29 per diluted share, up from $0.92 in the prior year. Moving to our segment results for the quarter. Professional segment net sales were up 25.3% to $828.4 million. This increase was primarily due to strong demand for golf, landscape contractor, irrigation, and rental and specialty construction products, slightly offset by lower sales of underground construction equipment driven by supply chain disruptions that impacted product availability, and continued softness in oil and gas market. Professional segment earnings were up 57.3% to $167.1 million; and when expressed as a percent of net sales, increased 410 basis points to 20.2%. This increase was primarily due to productivity improvements, including COVID-related manufacturing inefficiencies in the second quarter of last year that did not repeat, net price realization and volume leverage, partially offset by higher commodity costs. Residential segment net sales were up 20.2% to $315 million. This increase was primarily driven by strong retail demand for zero-turn riding mowers due to new and enhanced products, higher sales of Flex-Force battery electric products mainly driven by successful new product introductions, and higher shipments of snow equipment as a result of late-season storms and expanded retail placements. Residential segment earnings were up 23.9% to $46 million; and when expressed as a percent of net sales, up 40 basis points to 14.6%. The increase was primarily driven by productivity improvements, including COVID-related manufacturing inefficiencies in the second quarter of last year that did not repeat, net price realization and product mix, partially offset by higher commodity costs. Turning to our operating results for the second quarter. We reported gross margin of 35.1%, an increase of 210 basis points from the prior year. Adjusted gross margin was 35.1%, up 170 basis points. These increases were primarily due to productivity improvements, net price realization and favorable mix, partially offset by higher commodity costs. SG&A expense as a percent of net sales decreased 10 basis points to 19.4%. This favorable performance was primarily driven by volume leverage and lower indirect marketing expenses, partially offset by higher incentives due to improved performance and the reinstatement of certain costs that had been part of the Company's fiscal 2020 pandemic-driven expense reductions. Operating earnings as a percent of net sales increased 220 basis points to 15.7%. And adjusted operating earnings as a percent of net sales increased 170 basis points, also to 15.7%. Interest expense was down $1.5 million to $7.1 million, driven by reduced debt and lower interest rates. The reported effective tax rate was 19.8%, and the adjusted effective tax rate was 20.9%. Now, turning to the balance sheet and cash flow. At the end of the second quarter, our liquidity remained consistent at $1.1 billion. This included cash and cash equivalents of $500 million and full availability under our $600 million revolving credit facility. We have no significant debt maturities until April of 2022. Accounts receivable totaled $391.2 million, down 2.3% from a year ago, primarily driven by channel mix. Inventory was down 12% from a year ago to $628.8 million, primarily as a result of increased demand. Accounts payable increased 28.8% from last year to $421.7 million. This was primarily due to increased purchases of components, as well as more normalized expenses. Year-to-date free cash flow was $292.4 million, with the conversion ratio of 115%. This positive performance was largely the result of higher earnings and lower working capital, driven by higher payables and reduced inventory levels. Our disciplined capital allocation strategy fueled by our strong balance sheet includes investing in organic and M&A growth opportunities, maintaining an effective capital structure and returning cash to shareholders. Our capital priorities remain the same, and include: reinvesting in our businesses to support sustainable long-term growth, both organically and through acquisitions; returning cash to shareholders through dividends and share repurchases; and maintaining our leverage goals to support financial flexibility. At the midpoint of the fiscal year, demand momentum is strong, and our leadership position in the markets we serve is solid. Like many other companies, we are continually adjusting through these dynamic times. The economy is experiencing a surge in demand, while suppliers struggling to keep pace. In the long run, we expect the positives from the heightened demand trends across our markets to endure and outweigh the near-term pressures. While we continue to drive productivity and synergies and take appropriate market-based pricing actions, our operating margins in the second half of our fiscal year will be pressured. This is driven by the escalation in supply chain challenges, as well as material, freight and wage inflation, which we expect will result in manufacturing inefficiencies and higher input costs relative to our prior guidance. With that backdrop, we are updating our full year fiscal 2021 guidance. We now expect net sales growth in the range of 12% to 15%, up from 6% to 8% previously. We expect Professional and Residential segments net sales growth rates to be similar to the overall Company, with Residential trending slightly ahead of Professional. This is due to the strong demand we continue to see across our businesses. Looking at overall profitability, we continue to expect adjusted operating earnings as a percent of net sales for the full year to be slightly higher than fiscal 2020. This reflects a strong performance in the first half coupled with a more challenging supply chain and inflationary environment in the second half. Given our strong balance sheet and future growth expectation, we are increasing our estimated capital expenditures for the year to $130 million, up from $115 million. This aligns with our priorities of investing in key technology areas and ensuring we have the capacity to meet future growth. Based on current visibility, we now expect full year adjusted earnings per share in the range of $3.45 to $3.55 per diluted share. This increase reflects the robust demand environment, while also taking into account the near-term supply chain and inflationary pressures. We anticipate the impact of these pressures to be the most pronounced in the third quarter before our mitigating actions are more fully realized. We expect adjusted earnings per share per diluted share in the fourth quarter to be similar to fiscal 2020 against a very strong Q4 of last year. Looking to the rest of the fiscal year, we remain excited about the broad-based demand for our product. We are well positioned as we continue to execute on our long-term strategic priorities and invest in innovation to capitalize on future growth opportunities. As we look ahead to the remainder of the year, we're watching a number of key drivers in our end markets: for Residential and certain Professional businesses, continuing consumer interest in home investments; for landscape contractors, capital investments, including catch up purchases of prior deferrals, driven by improved business confidence; for golf, continued strong momentum, in general, the reopening of international courses and the return of resort golf; for grounds equipment, the prioritization of outdoor space maintenance and improvement by municipal and other tax-supported entities; for underground, increased government support and funding for infrastructure spending, this includes broadband build out, alternative energy investments and critical need infrastructure rehab and replacement; for rental and specialty construction, strong demand by both professional contractors and homeowners; for snow and ice management, channel demand, given lower end of season inventory levels. In short, these end market drivers should continue to support robust demand. Our biggest challenge for the remainder of the year will be our ability to produce at the desired rate, given the supply chain constraints we are facing. We believe the constraints will improve as key commodity availability normalizes, global vaccination rates improve, COVID restrictions ease, and logistical capacity finds a balance. We anticipate demand will remain strong even after supply chain constraints ease. At that point, we expect to be in a position to rebuild field inventory levels across our channels. Our operations team remains committed to doing everything possible to meet the increased production demands. With our team's dedication, our innovative suite of products, and our market leadership, as well as our consistently strong cash flow to support growth investments, we are well positioned to capitalize on this demand opportunity. We're also well positioned to capitalize on the electrification trends, given our expertise and leadership across our markets. We are committed to developing electric products that offer both power and durability with no compromise on performance. For example, in March, our 60-volt Personal Pace Recycler Mower was named Editor's Choice by Popular Mechanics in its evaluation of electric lawn mowers; build quality and cut quality were cited as the two reasons. Toro mowers have received more Editor's Choice awards than any other brand. In addition to the Residential Flex-Force line, we have an increasing number of Professional battery-powered products, including our all-electric Greens Mowers and lithium-ion Workman utility vehicle. Sustainability is fundamental to our enterprise strategic priorities, and our focus on alternative power, smart connected and autonomous technologies is embedded as part of our sustainability into our strategy. It's the right thing to do and provides the opportunity for our Company to create value for all stakeholders while helping our customers achieve their sustainability goals. A recent win highlights this focus. One of our European channel partners, Jean Heybroek of Reesink group, was awarded a four-year preferred supplier agreement and fleet management partnership with the City of Amsterdam. The city has an objective of zero emissions by 2030, and we are excited to partner with them in achieving this goal. Another example is our new 20-year partnership with the National Links Trust in Washington, DC. Their mission is to protect and promote accessible and affordable municipal golf courses to positively impact communities. We are honored to support this mission together with our distributor Turf Equipment and Supply Company, as well as our longtime partner Troon, the world's largest golf management company. Involvement in this project exemplifies who The Toro Company is, a team focused on long-term carrying relationships, our communities and the environment. In closing, we are optimistic as we begin the second half of our fiscal year. We believe our updated guidance appropriately reflects the risks we face in the current operating environment, while also accounting for the robust demand we expect. We have strong momentum across our businesses and are positioned to capitalize on future growth drivers.	compname posts q2 earnings per share $1.31. q2 adjusted earnings per share $1.29. q2 earnings per share $1.31. q2 sales $1.15 billion versus refinitiv ibes estimate of $1.13 billion. sees full-year fiscal 2021 adjusted earnings per share in range of $3.45 to $3.55.
Our third quarter was a strong and dynamic one given the circumstances. Since COVID-19 began to spread across the globe, the macroeconomic environment went from robust growth to recession almost overnight. Now, we are seeing more positive economic and market trends, but the rates of the recovery and the status of the virus remain highly variable. In short, the environment in which we conduct business remains uncertain. For the third quarter, we were pleased to have achieved top line growth on the strength of our residential segment as favorable weather, our new product lineup and stay-at-home trends drove robust demand in the mass and dealer channels. Incremental sales from our successful Venture Products acquisition also contributed to third quarter growth. I'm deeply grateful for the extraordinary efforts and the commitments of our team during these challenging times. The health and safety of our people remains our top priority, as we support and deliver value to our customers. Our talented global team of more than 9,000 remained resilient and solution-oriented. Among other things, we modified production lines and workflow to accommodate social distancing in manufacturing, continued to work effectively, while adhering to local safety guidelines, developed methods to move production and inventories to meet customer requirements and managed the demands of home, child care and personal wellness. Our teams did all of this, while delivering a solid quarter of financial results. Turning to the demand environment during the quarter. In May, as the residential segment remained strong, we saw an improvement in our professional segment, and those trends continued throughout the quarter and into the month of August. As customers gained more confidence, demand started to return. The market continues to be dynamic given the variability of the economic recovery and the status of the virus around the world. We are fully prepared to respond to potential market changes. Our long-standing ability to adapt to different business environments was evident in the quarter, and our team is well positioned to continue to succeed even in challenging market conditions. Looking at the results for the quarter, our residential segment continued to excel with 38% year-over-year net sales growth and strong margins. The movement outdoors we have seen during the past several months contributed to record sales of zero-turn mowers, which doubled in the quarter. We also saw strong contributions from walk power mower sales. Professional segment net sales for the quarter declined 8% year-over-year, which was better than expected. Sales included incremental revenue from the Venture Products acquisition. We are encouraged by improved demand for our professional segment products, particularly in the landscape contractor, rental, specialty construction and irrigation markets. We're seeing demand driven by greater business confidence and increased home investments. Improved retail demand within the quarter reduced field inventory, which is in good shape and more than prior year, setting us up well for pre-season shipments. With robust performance in our residential segment and improved demand in our professional segment, we demonstrated the strength of our diverse portfolio of businesses and our ability to be agile, while focusing on customer needs. This positions us to drive growth forward as our end markets normalize. There are two additional highlights in the quarter that I would like to recognize. First, we launched our Sustainability Endures platform, which furthers and enhances our long-standing dedication to make a positive global impact socially, environmentally and financially. And second, we were named Innovative Partner of the Year by the Tractor Supply Company. This reflects our commitment to innovation as well as the effectiveness of our partnership to deliver great products during these difficult times. The successes we experienced this quarter were due to the dedication of our team, our innovative product lineup, strong demand through mass and dealer channels and the contribution from our first full quarter of the Venture Products acquisition. We are enthusiastic about our future given our balanced and flexible business model that allows us to adapt quickly to change, enduring values that focus on the success of customers, innovative new products aligned to customer trends, a strong financial position and the proven ability of our people to adapt and perform successfully in these dynamic times. During the third quarter, we once again demonstrated the ability of our adaptable business model and resilient culture to manage near-term headwinds and position us for long-term growth. We continued to capitalize on our strong balance sheet to invest in growth, while executing well operationally. We remain flexible in order to drive financial results, while keeping our people safe and delivering on our brand promise to our customers. In this environment, we grew third quarter net sales by 0.3% to $841 million. Reported and adjusted earnings per share was $0.82 for the quarter, compared to reported earnings per share of $0.56 and adjusted earnings per share of $0.83 last year. For the first nine months, net sales increased by 0.6% to $2.54 billion. Diluted earnings per share was $2.37, compared to $2.18 in the first nine months of fiscal 2019. Year-to-date adjusted diluted earnings per share was $2.38, compared to $2.52 a year ago. Before I review segment results, I'll cover liquidity. At the end of the third quarter, our liquidity was $992 million. This included cash and cash equivalents of $394 million and availability under our revolving credit facility of $598 million. We have no significant debt maturities until April of 2022. We are in a strong position today and in the event of an extended period of macroeconomic uncertainty. Now, to the segment results, residential segment net sales for the third quarter were up 38.3% to $205 million, mainly driven by strong retail demand for zero-turn riding and walk power mowers, and our expanded mass channel. Year-to-date fiscal 2020 net sales increased 20.4% compared to the same period of fiscal 2019. Residential segment operating earnings for the quarter were up 76.7% to $28.5 million. This reflects a 300 basis point year-over-year increase to 13.9% when expressed as a percent of net sales. This improvement was largely driven by productivity and synergy initiatives, and SG&A expense reduction and leverage on higher sales volume. This was partially offset by COVID-related manufacturing inefficiencies and unfavorable product mix. Year-to-date, residential segment operating earnings increased 70.2% to $87.2 million. On a percent of sales basis, segment operating earnings increased 400 basis points to 13.8%. For the third quarter, professional segment net sales decreased 7.9% to $623.6 million. This was due to reduced channel demand as a result of COVID-19-related impact. This included fewer shipments of golf and grounds equipment, reduced sales of rental, specialty and underground construction equipment, and fewer shipments of landscape contractor zero-turn riding mowers. This was partially offset by incremental Venture Products sales. For the year-to-date period, professional segment net sales increased 1.3% compared to the same period of fiscal 2019. Professional segment operating earnings for the third quarter were up 39.3% to $113.7 million, and when expressed as a percentage of net sales, increased 610 basis points to 18.2%. This increase was primarily due to lower non-recurring acquisition-related expenses versus the prior year period, favorable net price realization and decreased commodity costs. This increase was partially offset by unfavorable product mix and COVID-related manufacturing inefficiencies. Year-to-date professional segment operating earnings increased 0.8% compared to the same period in the prior fiscal year. When expressed as a percentage of net sales, operating earnings remained constant, 17.2% year-over-year for both fiscal periods. Moving to our operating results. We reported gross margin for the third quarter of 35%, an increase of 330 basis points over the prior year period. Excluding acquisition-related costs, adjusted gross margin decreased 70 basis points to 35.2%. The decrease in adjusted gross margin was primarily driven by COVID-19-related manufacturing inefficiencies, unfavorable mix due to the higher sales of residential products, and an increased inventory reserve in one of our professional businesses. This was partially offset by favorable net price realization in the professional segment and productivity and synergy initiatives. For the first nine months, reported gross margin was 35%, up 160 basis points compared with 33.4% in the prior year period. Adjusted gross margin was 35.2%, compared with 35.3% in the first nine months of fiscal 2019. SG&A expense, as a percent of sales, decreased 170 basis points to 21.2% for the quarter, primarily due to lower travel and meeting expenses, acquisition-related charges and employee salaries. For the first nine months of fiscal 2020, SG&A expense, as a percent of sales, was 21.9%, up 20 basis points from the prior year period. Operating earnings, as a percent of net sales, increased 500 basis points to 13.8% for the third quarter. Adjusted operating earnings, as a percent of net sales, increased 50 basis points to 13.9%. For the first nine months of fiscal 2020, operating earnings, as a percent of net sales, were 13.1%, compared with 11.7% a year ago. Adjusted operating earnings, as a percent of net sales, for the first nine months were 13.4%, compared with 14.2% a year ago. Interest expense decreased $700,000 for the third quarter compared to a year ago, due to lower interest rates. Interest expense increased $4.7 million for the year-to-date period compared to a year ago. This was due to increased borrowings as a result of our professional segment acquisitions. For the full year, we continue to expect interest expense of about $33 million. The effective tax rate was 19.8% for the third quarter, and adjusted effective tax rate was 20.9%. For the first nine months of fiscal 2020, the effective tax rate was 19.2% and the adjusted effective tax rate was 20.6%. For the full year, we continue to expect an adjusted effective tax rate of about 20.5%. Turning to the balance sheet and cash flow. Accounts receivable totaled $294.7 million, down 5.6% from a year ago. Inventory was up by 5.7% to $656.2 million, and accounts payable decreased 11.8% to $268.7 million. Year-to-date free cash flow was $259.3 million with the net income conversion of 100.7%. This positive performance was due to the increase in net earnings, favorable net working capital change and reduced capital expenditures. Our disciplined capital allocation strategy includes investing in organic and M&A growth opportunities, maintaining an effective capital structure and returning cash to shareholders. Our sharp focus on near-term liquidity has reaffirmed our capital allocation priorities for the year. These include prioritizing debt repayment to maintain our leverage target, curtailing share repurchases and considering strategically compelling acquisition. We increased our cash dividend for the third quarter of fiscal 2020 by 11.1% to $0.25 per share as compared to the prior year period. Based on our current outlook and strong financial position, we expect to maintain our dividend. As Rick discussed, there remains uncertainty as a result of COVID-19-related factors. We withdrew our guidance in March, and we will not be providing a specific full-year guidance on [Technical Issues]. Similar to past practice, we will provide full year fiscal 2021 guidance on our fourth quarter call, if we have sufficient visibility and confidence to do so. However, based on current visibility and with an understanding of the uncertain nature of the economic environment, we would like to provide you with our current thinking about the fourth quarter. We anticipate continued year-over-year growth in the residential market. Professional market should benefit from the gradual return to more normal buying patterns as customers' confidence in the economy increases. These positive trends will likely be somewhat offset by remaining COVID-19 headwinds, such as budget constraints, the effect of social distancing restrictions and regional variations in economic recovery. As you know, precision is difficult in this environment, but if these assumptions hold through, we anticipate that fiscal 2020 fourth quarter net sales will be higher than that of the prior year quarter. Adjusted earnings per share will be similar to that of the fiscal 2019 fourth quarter. We expect net other income to be lower in the fourth quarter of fiscal 2020 than in the prior year period, as a result of a favorable pension and post-retirement plan benefit in fiscal 2019 that will not be repeated. We continue to expect total net other income for fiscal 2020 to be about $13 million. We continue to expect depreciation and amortization for fiscal 2020 of about $95 million and capital expenditures of about $80 million. We anticipate that fiscal 2020 free cash flow conversion rate to be similar to fiscal 2019. We plan to build inventory in the fourth quarter to mitigate any potential supply chain and manufacturing constraints, due to social distancing restrictions. In summary, we executed well in the third fiscal quarter in a challenging environment as our team demonstrated their resiliency, commitment and determination. We are in a strong financial position and continue to invest in technology and innovation to drive long-term growth. As a result, we are confident in our ability to navigate through any near-term challenges and capitalize on growth opportunities. We're optimistic about our future. Our diverse portfolio of businesses and strong customer relationships position us to drive growth as our end markets normalize. Our productivity initiatives continue to enable operational improvements, and our focus on innovative products and our recent acquisitions are aligned with changing global market dynamics. We had several new products introduced during the year that demonstrate our ability to innovate and satisfy our customers' evolving needs. For example, the new chainsaw and power shovel that are part of the Toro 60-volt lithium-ion Flex-Force platform, the e-Dingo compact utility loader, electric and hybrid greensmowers, the Ditch Witch JT24 horizontal directional drill and SK3000 stand-on skid steer and Aqua-Traxx Azul drip tape. Our recent acquisitions also continued to deliver with both Charles Machine Works and Venture Products aligned with key market trends, such as 5G and broadband build-out, infrastructure improvements and product versatility for our professional and homeowners with acreage customers. We are encouraged by the continued strong residential demand and the improvements in our professional markets. As we look forward, we'll be watching a number of macro trends, such as the trajectory and duration of COVID-related impacts, including social distancing restrictions and global supply chain disruptions, global economic recovery factors driving general consumer and business confidence and commodity trends, and weather patterns for the fall and winter seasons. More specifically, we're tracking certain key factors for individual markets as we end the year and look ahead to fiscal 2021: for the residential segment and certain professional segment businesses, continued customer interest and home investments driven by stay-at-home trends; for golf, continued strength in rounds played, coupled with improved food and beverage revenue; for grounds equipment, the help of municipal and other tax supported budgets constrained by COVID-related factors; for landscape contractors, business confidence and favorable mowing conditions; for underground, 5G and broadband buildout, critical need infrastructure rehab and replacement and increased oil and gas projects; for rental and specialty construction, homeowner-related projects and the resumption of construction activity; and for snow and ice management, the timing of the winter season and continued demand within our new product categories. In closing, we are enthusiastic about our future given our new product pipeline and the proven ability of our people to drive growth and productivity in these dynamic times.	q3 adjusted earnings per share $0.82. q3 earnings per share $0.82. q3 sales $841 million versus refinitiv ibes estimate of $772.6 million. not reinstating financial guidance at this time. for q4, continued year-over-year growth in residential market is expected at a more moderate level. sees 2020 fourth-quarter adjusted earnings per share to be similar to that of fiscal 2019 q4, on higher net sales.
The Toro Company delivered record third quarter results. We continue to benefit from robust demand in both our Professional and Residential segments and our operations team went above and beyond to execute even as global supply chain challenges affected availability. Our employees together with our channel partners, kept a sharp focus on serving the needs of our customers. As a result, total net sales for the third quarter were up 16% year-over-year. Professional segment net sales increased 15%, marking the second quarter in a row of double-digit growth for this segment. We saw continued strength in landscape contractor and golf markets worldwide. Higher pre-season shipments of BOSS snow and ice management products, and strong demand for our rental and specialty construction equipment and Ventrac products. Our lineup of innovative products, combined with strong business confidence fueled robust demand. Residential segment net sales were up 23% and that comparison is on top of a 38% growth rate in the third quarter of last year. Growth in the quarter was driven by strong retail demand for our zero-turn and walk power mowers. Customers also continued to respond favorably to our all-season Flex-Force 60-volt product lineup, which offers power and durability with no compromise on performance. The recent actions we've taken to introduce innovative new products, refresh marketing, and expand mass retail distribution continue to strengthen the Toro brand and drive positive results. As noted last quarter, we expected supply chain constraints and inflationary pressures to escalate at a rate faster than could be fully offset in the near term, through pricing and other mitigating actions. Despite these challenges, both segments delivered solid earnings growth in the third quarter, Professional earnings up 7.6% and Residential earnings up 10.5%. I'll now touch on some of the key themes for the quarter. First is the robust and broad-based demand, we continue to see across our markets worldwide. This has been driven by consumer and business confidence as well as customer investment priorities focused on outdoor environments. We continue to capitalize on these drivers with our commitment to investing in new product development, our best-in-class distribution, and our talented teams. Second, the continued escalation of global supply chain and inflationary challenges. This included component availability constraints as well as material freight and wage related cost headwinds. Our operations team took extraordinary steps to enable us to source and produce as effectively as possible in this incredibly dynamic environment. We also continue to execute on our productivity and synergy initiatives, demonstrated disciplined expense control and implemented market align pricing actions. Regardless of how long these pressures persist, we remain focused on managing the factors within our control. Third, in line with general economic trends we saw an increasingly challenging labor market, including wage pressures and workforce availability limitations in some of our manufacturing location. Across the enterprise, we have talented and dedicated teams committed to serving our customers. We're focused on having workforce and other resources in place to put ourselves in the best position to meet demand and deliver our products to the right places at the right time. Our innovative product portfolio, outstanding team, and deep relationships with our channel partners and end customers set us apart and position us well for the long term growth. We have the financial capacity to invest in the future and we continue to allocate capital to best drive value for all stakeholders. This fiscal year, we've made strategic investments in key technologies, both organically and through acquisitions to advance our priority areas of alternative power, smart, connected, and autonomous. Our healthy cash flow also has allowed us to return capital to shareholders while maintaining ample liquidity. Looking ahead, we will continue to execute against our enterprise strategic priorities of accelerating profitable growth, driving productivity, and operational excellence and empowering people. I'll discuss our outlook further following Renee's more detailed review of our financial results. As Rick said, our record results for the third quarter were driven by robust demand in both our professional and residential segments. Against the backdrop of increasing supply chain, inflation and labor pressures. We grew net sales for the quarter by 16.2% to $976.8 million. Reported earnings per share was $0.89 per diluted share, up from $0.82 last year and adjusted earnings per share was $0.92 per diluted share, up 12.2% from $0.82 in the prior year. Both of our segments delivered record top and bottom line third quarter results. Professional segment net sales were up 15.2% to $718.5 million. This increase was driven by broad-based demand in landscape contractor, golf, snow and ice management, rental and specialty construction, and Ventrac products. This was slightly offset by lower sales of underground construction equipment due to supply chain disruptions that impacted product availability. Professional segment earnings for the third quarter were up 7.6% to $122.3 million. And when expressed as a percent of net sales, decreased 120 basis points to 17%. This decrease was largely due to higher material and freight cost, partially offset by net price realization and productivity improvements. Residential segment net sales for the third quarter were up 23% to $252.1 million. This increase was primarily driven by strong retail demand for zero-turn and walk power mowers. Residential segment earnings for the quarter were up 10.5% to $31.5 million and when expressed as a percent of net sales, down 140 basis points to 12.5%. This decrease was primarily driven by the same factors as in the Professional segment. Turning to our operating results for the quarter. We reported gross margin of 33.9%, a decrease of 110 basis points compared to the same period in the prior year. Adjusted gross margin was 33.9%, down 130 basis points on a comparative basis. These decreases were largely due to the same factors that affected Professional and Residential earnings. SG&A expense as a percent of net sales for the quarter increased 20 basis points to 21.4%. This increase was primarily driven by more normalized spending compared to the third quarter of last year and a legal settlement in the third quarter this year. Operating earnings as a percent of net sales for the third quarter decreased 130 basis points to 12.5%. Adjusted operating earnings as a percent of net sales decreased 80 basis points to 13.1%. Interest expense was down $1.3 million for the quarter to $7 million, driven by lower debt levels and decreased interest rate. The reported effective tax rate for the third quarter was 18% and the adjusted effective tax rate was 19.3%. Turning to the balance sheet and cash flow. Accounts receivable totaled $301.2 million, down 2.2% from a year ago, primarily driven by channel mix. Inventory was essentially flat to last year at $665.6 million. However, finished goods were significantly lower, driven by strong retail demand while working process was higher. This was a reflection of the supply chain variability and our efforts to procure higher levels of key components when available. Accounts payable increased 53% from last year to $411.4 million. This was primarily due to the timing of purchases as well as more normalized spending compared to last year. Year-to-date free cash flow was $429 million with the conversion ratio of 123%. This positive performance was largely the result of higher earnings and lower working capital, primarily driven by higher payables. At the end of the quarter, our liquidity remained at $1.1 million. This included cash and cash equivalents of $535 million and full availability under our $600 million revolving credit facility. Our cash balances are elevated from pre-pandemic levels, largely driven by our desire to ensure adequate liquidity at the onset of pandemic. And our cash was further strengthened by the accelerated demand we're experiencing along with the related working capital impacts. Over the past nine months, we deployed the majority of cash generated year-to-date, including the funding of our Turflynx and Left Hand Robotics acquisition, an increase in our regular dividend with $85 million paid out so far this year, the resumption of share repurchases with $177 million through the third quarter and $100 million in debt pay down. We also increased our capital expenditure budget reflecting our commitment to invest in key technologies and ensure we have the capacity to meet future demand. We remain disciplined in our capital allocation strategy fueled by our strong balance sheet. Our priorities have not changed and include reinvesting in our businesses to support sustainable long-term growth both organically and through acquisition, returning cash to shareholders through dividends and share repurchases and maintaining our leverage goals to support financial flexibility. As we enter the final quarter of our fiscal year, we're benefiting from strong demand momentum and our leadership position in the markets we serve. At the same time customer demand continues to outpace supply and production. We're not immune to the challenges facing companies worldwide and we remain focused on serving our customers, winning in our markets and managing the factors within our control. We previously indicated that operational headwinds would be most pronounced in the third quarter. As a result of collective work of our team to fulfill additional demand, we were able to deliver a stronger third quarter than we had anticipated. This resulted in lower finished goods heading into the fourth quarter. We remain focused on procuring materials, components and other resources to accelerate the pace of production in the face of supply chain, inflation, and labor pressures. With this backdrop, we are updating our full year fiscal 2021 guidance. We now expect net sales growth of about 17%, up from 12% to 15% previously. We anticipate the Professional segment growth rate will be similar to the company average, with the Residential segment exceeding the company growth rate. Looking at profitability, we now expect overall adjusted operating earnings as a percent of net sales for the full year to be similar to fiscal 2020. We expect professional segment operating margins to be similar to last year. And we expect Residential margins to be down compared to last year, but still well above historical levels. This reflects our volume leverage and strong operational performance year-to-date offset by increasing supply chain, inflation, and labor pressures. We continue to take actions to counteract these market dynamics. Based on current visibility, we now expect full-year adjusted earnings per share in the range of $3.53 to $3.57 per diluted share, up from our previous range of $3.45 to $3.55. This higher earnings per share guidance reflects our strong year-to-date performance, the robust demand environment, and continued solid business execution while also taking into account the headwinds previously discussed. All in, we remain well positioned to capitalize on this period of profitable growth as we continue to execute on our strategic long-term priorities. The guidance Renee just discussed reflects continuing strong demand across our end markets as well as our current operational outlook. Looking at global key demand drivers for the remainder of the fiscal year and into fiscal 2022, we are watching consumer and business confidence levels along with developments related to COVID-19, customer prioritization of investments to maintain and improve outdoor environments, a continuation of strong momentum in golf and government support and funding of infrastructure investments. These end market factors should continue to drive strong demand in the fourth quarter and into next year. Our biggest challenge remains our ability to produce, to meet retail demand across all of our markets given the current operating environment. We believe constraints will begin to ease as we see improvements in key material and component availability, logistic channels and other COVID related factors. Our operations team remains committed to doing everything reasonably possible to meet increased production requirements and grow market share in this challenging environment. When operating constraints begin to ease, we expect to be in a better position to build field inventory from our current historically low levels. We remain focused on driving productivity and synergies prudently managing expenses and implementing market based pricing actions as appropriate. We are well positioned to capitalize on long-term growth opportunities with our strong cash flow, market leadership, investments in innovation and trusted relationships. A few recent examples that highlight our commitment to innovation and relationships include for the second year in a row, a Partner of the Year Award from Tractor Supply Company, this time as omnichannel partner. From Green Industry Pros, the selection of three of our products for their 2021 Editor's Choice Award citing innovation and utility has factors. The three products include the Exmark 96-inch Lazer Z Diesel, the Toro Z Master 4000, and Z-Spray LTS spreader sprayer. In August, two of our rental and specialty construction offerings received Editor's Choice Award from Rental magazine, including the Ditch Witch SK3000 full size stand-on skid steer, which offers the most power in its class and the Toro Swivel Mud Buggy with superior traction and maneuverability. And finally, the International Sustainable Irrigation Expo recently recognized our Aqua-Traxx Azul micro-irrigation solution as new products of the year. In addition to awards, our innovative products have been showcased at recent marquee events. Earlier this summer, our Perrot Irrigation Systems helps keep the playing fields in top condition at many of the Euro Cup Championship sites. In July, our irrigation and turf equipment supported Paul Larsen and his team at Royal St George's Golf Club as their expert work was on full display at the Open Championship. And more recently, our turf and irrigation solutions helped Tokyo's Japan National Stadium and Kasumigaseki Country Club maintain pristine conditions for this summer's high-profile events. Our mission to deliver superior innovation and customer care is deeply rooted in our purpose of helping our customers enrich the beauty, productivity and sustainability of the land. This long-standing focus on sustainability extends to our communities where we have a strong legacy of giving back. A few recent examples highlight this legacy. First, close to our worldwide headquarters, we partnered with Better Futures, an organization that works to transform the lives of men post incarceration and supports Minnesota's environment. Our donations of equipment and training resources helped further the organization's mission. Second, on a national level, we've partnered with the American Rental Association Foundation on a new community impact project. This initiative is improving communities across the US by rebuilding green spaces. These are just a couple of examples of the many ways our company employees are giving back and promoting sustainability, supporting our customers, and communities as an important part of our culture and core to who we are as a company. In closing, we are optimistic as we finished fiscal 2021 and head into 2022 while also acknowledging the continuing dynamic environment. We believe our updated guidance appropriately reflects both the risks and the opportunities we face. We have strong fundamentals and momentum across our businesses and are well positioned to capitalize on future growth.	compname reports q3 adjusted earnings per share of $0.92. q3 adjusted earnings per share $0.92. q3 earnings per share $0.89. raises full-year fiscal 2021 net sales and *adjusted diluted earnings per share guidance. sees fy 2021 adjusted earnings per share in range of $3.53 to $3.57 per diluted share. expects fy 2021 net sales growth of about 17%, up from a range of 12% to 15% previously.
We are pleased to report robust results for fiscal 2020, highlighted by professional segment growth, primarily from incremental contribution from Charles Machine Works and Venture Products, a record performance from our Residential segment. We owe our successful performance to our team, which demonstrated perseverance and ingenuity in this challenging year. We navigated COVID-induced manufacturing inefficiencies, including social distancing and workforce fluctuations. At the same time, we provided innovative solutions to meet demand from our retailers and customers. Our employees managed these changes admirably, while working in significantly modified production environments or at home, as they balanced personal challenges resulting from the pandemic. I am beyond proud of our team and will remember this year as one that highlighted the way we lived our values, while caring for one another and serving our customers with determination. And to our channel partners, as essential businesses, you served our customers with dedication and passion. Together, we persevered to maintain and gain market share in key product categories with existing and new customers. Execution in this challenging year continued to be guided by our enterprise strategic priorities of accelerating profitable growth, driving productivity and operational excellence, and empowering people. In addition, we enhanced our commitment to the well-being of our employees, service to our customers and support for our community. Ultimately, staying true to our values enabled us to deliver for our stakeholders. For fiscal 2020, highlights include record growth in the Residential segment, successful introduction of new battery-powered products for residential and professional applications, increased investments in research and development in key technology areas, strong free cash flow; the continued return of value to shareholders via dividends and the launch of our Sustainability Endures Platform that documents our progress, aligned with long-held values and objectives, and profiles our continued efforts to address environmental, social and governance priorities. I'll now provide some commentary regarding key results by segment for the full year and fourth quarter, and Renee will go into more detail. For fiscal 2020, Professional segment net sales were up 3% year over year and earnings were up 12%. Residential sales were up 24%, and earnings were up 75%. For the fourth quarter, Professional segment net sales were up 10% versus the same prior year period, and earnings were up 70%. Residential net sales were up 39% and earnings were up 90%. I'll now provide some insight into the demand environment for the quarter. In the Residential segment, we experienced a continuation of trends seen throughout much of fiscal 2020. Stay-at-home directives and the expansion and strength of our channel were key contributors to high demand for walk power mowers and zero-turn riding mowers. Innovative features, refreshed brand presence, and extended season sales provided additional momentum. In the Professional segment, we drove growth with increased demand for our landscape contractor, snow and ice management, golf irrigation, rental and specialty construction, and ag irrigation products. Strong product offerings, favorable weather and stay-at-home trends drove retail demand throughout the quarter and provided momentum going into fiscal 2021. The Toro Company is sustainably strong. The pandemic year of 2020 proved that by focusing on our enterprise strategic priorities and living our enduring values, we are able to deliver strong results. Our performance this year was only possible because of the resilience and flexibility of our team, the manner in which our operations and businesses resourcefully responded to customer demands, and the dedication of our channel partners. As a result, I'm optimistic about our momentum going into the new fiscal year. During the fourth quarter, we continued to build on our sales momentum in both the Residential and Professional segments, while executing well operationally and investing in innovation to position The Toro Company for long-term growth. We did sell in a challenging and unpredictable environment. We grew fourth quarter net sales by 14.5% to $841 million. Reported earnings per share was $0.66 and adjusted earnings per share was $0.64 per diluted share. This compares with reported earnings per share of $0.35 and adjusted earnings per share of $0.48 per diluted share for the comparable quarter of last year. For the full year, net sales increased 7.7% to $3.38 billion. Reported earnings per share was $3.03 per diluted share, up from $2.53 last year. Full year adjusted earnings per share was $3.02 per diluted share, up from $3 a year ago. Now, to the segment results. Residential segment net sales for the fourth quarter were up 38.5% to $187.9 million, mainly driven by strong retail demand for walk power and zero-turn riding mowers. Full year fiscal 2020 net sales for the Residential segment increased 24.1% to $820.7 million. The increase was mainly driven by incremental shipments of zero-turn riding and walk power mowers as a result of our expanded mass channel, as well as strong retail demand for these products due to new and enhanced product features, favorable weather and stay-at-home trends. Residential segment earnings for the quarter were up 90.2% to a record $26.4 million. This reflects a 390-basis point year-over-year increase to 14.1% when expressed as a percentage of net sales. This improvement was largely driven by productivity and synergy initiatives and SG&A expense reduction and leverage on higher sales volume. For the year, Residential segment earnings increased 74.5% to a record $113.7 million. On a percent of net sales basis, segment earnings increased 390 basis points to 13.8%. This was a record setting year for the Residential segment and the team deserves well-earned recognition. Professional segment net sales for the fourth quarter were up 9.5% to $644 million. This increase was primarily due to growth in shipments of landscape contractor, zero-turn riding mowers and snow and ice management equipment, annual pricing adjustments and lower floor plan costs, as well as incremental sales from the Venture Products acquisition. For the full year, Professional segment net sales increased 3.3% to $2.52 billion. Professional segment earnings for the fourth quarter were up 70.2% to $104.2 million, and when expressed as a percent of net sales, increased 580 basis points to 15.2%. This increase was primarily due to annual pricing adjustments and lower floor plan costs, lower acquisition-related charges, and benefits from productivity and synergy initiatives. This was partially offset by product mix. For the full year, Professional segment earnings increased 12% compared to fiscal 2019. When expressed as a percent of net sales, segment earnings increased 130 basis points to 15.9% from last year. Turning to our operating results. We reported gross margin for the fourth quarter of 35.7%, an increase of 230 basis points over the prior year period. Adjusted gross margin was 35.7%, up 120 basis points over the prior year. The increases in gross margin and adjusted gross margins were primarily due to the benefits from productivity and synergy initiatives and net price realizations, mainly within the Professional segment. This was partially offset by product mix. Reported gross margin was positively affected by lower acquisition-related charges compared with the prior year period. For the full year, reported gross margin was 35.2%, up 180 basis points compared with 33.4% in fiscal 2019. Adjusted gross margin was 35.4%, up from 35.1% in fiscal 2019. SG&A expense as a percent of net sales decreased 290 basis points to 24.6% for the quarter. This decrease was primarily due to restructuring costs in the prior year period that did not repeat, and cost reduction measures, including decreased salaries and indirect marketing expense. This was partially offset by increased warranty costs in certain Professional segment businesses. For the full year, SG&A expense as a percent of net sales was 22.6%, down 40 basis points from fiscal 2019. Operating earnings as a percent of net sales for the fourth quarter increased 520 basis point to 11.1%. Adjusted operating earnings as a percent of net sales increased 270 basis points to 11.1%. For fiscal 2020, operating earnings as a percent of net sales were 12.6%, up 220 basis points compared with 10.4% last year. Adjusted operating earnings as a percent of net sales for the full year were 12.8% compared with 12.9% a year ago. Interest expense of $8 million for the fourth quarter was flat compared with a year ago. Interest expense for the full year was $33.2 million, up $4.3 million over last year, driven by increased borrowings as a result of our Professional segment acquisitions. The reported effective tax rate was 18.5% for the fourth quarter, and the adjusted effective tax rate was 21.9%. For the full year, the reported effective tax rate was 19% and the adjusted effective tax rate was 20.9%. Turning to the balance sheet and cash flow. At the end of the year, our liquidity was $1.1 billion. This included cash and cash equivalents of $480 million and full availability under our $600 million revolving credit facility. We have no significant debt maturities until April of 2022. Accounts receivable totaled $261.1 million, down 2.8% from a year ago. Inventory was flat with a year ago at $652.4 million. We have plans to build inventory in the fourth quarter to partially mitigate potential supply chain and manufacturing constraints. Instead, the additional production allowed us to fulfill stronger than expected retail demand and satisfy customer needs. Accounts payable increased 14% to $364 million from a year ago. Full year free cash flow was $461.3 million with a reported net earnings conversion ratio of 140%. This positive performance was primarily due to favorable net working capital, the increase in reported net earnings and reduced capital expenditures. Given our strong cash generation in fiscal 2020, we have already paid down $50 million of debt in November. We also expect to resume share repurchases in fiscal 2021. In fiscal 2020, our disciplined capital allocation strategy continued to include investing in organic and M&A growth opportunities, maintaining an effective capital structure and returning cash to shareholders. We also focus on near-term liquidity. For fiscal 2021, our capital priorities remain the same and include reinvesting in our businesses to support sustainable long-term growth -- both organically and through acquisitions -- returning cash to shareholders through dividends and share repurchases and repaying debt to maintain our leverage goals. In addition to the $50 million debt pay down in November, we also recently increased our quarterly cash dividend by 5%. We are providing full-year fiscal 2021 guidance at this time based on current visibility. Note that there continues to be considerable uncertainty given the potential effects of COVID-19. This includes potential effects on demand levels and timings, our supply chain and the broader economy. I will share the guidance highlights and Rick will cover the macro trends and key factors that we will be watching throughout the fiscal year. For fiscal 2021, we expect net sales growth in the range of 6% to 8%. This includes four months of incremental sales from the Venture Products acquisition. We expect continued recovery in Professional segment end market. The strongest growth will be in the second and third quarter, as those comparable periods last year were most impacted by the pandemic. We expect Residential segment end markets to return to low single-digit growth, following an exceptionally strong fiscal 2020. We anticipate a stronger first half than second, given our fiscal 2020 performance. Looking at profitability, we expect moderate improvement in fiscal 2021 adjusted operating earnings as a percent of net sales compared with fiscal 2020. This assumes continued productivity and synergy benefits and lower COVID-related manufacturing inefficiencies. We expect these benefits to be partially offset by material, wage and freight inflation as well as the reinstatement of salaries, incentive and discretionary employee-related costs that were reduced or eliminated in fiscal 2020. In the Professional segment, we expect earnings as a percent of net sales to improve versus fiscal 2020 due to better volume leverage. In the Residential segment, we expect earnings as a percent of net sales to be similar to fiscal 2020 on comparable volumes. We expect full year adjusted earnings per share in the range of $3.35 to $3.45 per diluted share. This adjusted earnings per share estimate excludes the benefit of the excess tax deduction for share-based compensation. Based on current visibility, we anticipate adjusted earnings per share to be higher in the first half of fiscal 2020 versus the year ago period. The majority of the increase will be in the second quarter. For the second half of fiscal 2021, we expect adjusted earnings per share to be comparable with the same period of fiscal 2020. We expect depreciation and amortization for fiscal 2021 of about $95 million. We anticipate capital expenditures of about $115 million, as we continue to invest in projects that support our enterprise strategic priorities. We anticipate fiscal 2021 free cash flow conversion in the range of 90% to 100% of reported net earnings. In fiscal '21, we'll continue to execute and adapt to changing environments as we maintain a balance of focusing on the short-term while never losing sight of our long-term strategic priorities. We look forward to capitalizing on many exciting growth opportunities in fiscal '21 and beyond. Looking ahead, we'll be watching a number of macro trends, such as the trajectory and duration of COVID-related impacts, including potential global supply chain disruptions and continuing social distancing restrictions impacting production, global economic recovery factors driving general consumer and business confidence and commodity trends and weather patterns for the winter and spring season. As these trends evolve, we are well positioned for growth within our specific market categories and are closely watching a number of key drivers. For our Residential and certain Professional businesses, customer interest in home investments; for landscape contractors, improvement in business confidence; for snow and ice management, demand within our new and refreshed product categories; for golf, the anticipation of another strong year for rounds played and the return of food and beverage and event revenue; for grounds equipment, the budgets of municipal and other tax supported entities and their impact on capital equipment purchases; for underground, the funding of 5G and broadband build out and critical need infrastructure rehab and replacement; and for rental and specialty construction, the resumption of fleet upgrades and replacements. We have a strong and innovative portfolio of products to address these market opportunities. Some recently introduced products that will continue to drive our business, include TITAN, Z Master, and TimeCutter zero-turn riding mowers for homeowners and contractors; the Flex-Force 60-volt lithium-ion suite of products, including our walk power mower, snow thrower, hedge trimmer, chainsaw and power shovel; the BOSS Snowrator and Ventrac Sidewalk Snow Vehicle; the Greensmaster eTriFlex all electric and hybrid riding Greensmowers; the Ditch Witch JT24 Horizontal Directional Drill; the Toro e-Dingo electric and Dingo TXL 2000 stand-on skid steers, and the Ditch Witch SK3000 stand-on skid steer. The enthusiastic customer response to these products demonstrates the success of our innovation efforts and we will continue to focus on key technologies like, alternative power, smart connected and autonomous products. Lastly, we have concluded our three-year Vision 2020 employee initiative. For fiscal 2021, we have implemented a new one-year employee initiative. Our stretch enterprisewide performance goals include net sales of $3.7 billion and adjusted operating earnings of at least $485 million. In closing, for fiscal 2021 and beyond, we believe our diverse portfolio of businesses and strong customer relationships, position us to grow. Our productivity and synergy initiatives will drive profitability and fund investments. Our investments in innovative products and emerging technologies will enable us to meet the evolving needs of our customers and, more than ever, our team is the key to The Toro Company's continued success.	q4 adjusted earnings per share $0.64. q4 earnings per share $0.66. q4 sales $841 million versus refinitiv ibes estimate of $772.1 million. sees fy 2021 sales up 6 to 8 percent. sees fy 2021 adjusted earnings per share $3.35 to $3.45.
I'd like to start by first recognizing all the TETRA and CSI Compressco employees and management teams for delivering another solid quarter in a very challenging environment. Despite the sequential 36% decline in US onshore rig count, two hurricane storms that came through the Gulf of Mexico and the continued overhang from COVID-19, our team's focus on execution of our strategies resulted in positive EBITDA for each of our segments and sequential improved EBITDA margins. I could not be more pleased with the way our management team and employees have responded to the most challenging eight months our industry has likely ever faced. On a consolidated basis, we achieved $30 million of adjusted EBITDA in the third quarter with the related margin improving 150 basis points sequentially as a result of our focus on cost management and maximizing the value of our latest technology. Compared to the third quarter of last year, we've reduced our cost by $345 million on an annualized basis or 41% as it impacts EBITDA. This compares to an annualized decline of revenue of $373 million, reducing cost by $0.92 for every $1 decline in revenue. Our positive EBITDA in the past two quarters is reflective of the successful strategy we've executed and the diversity of our business with a short cycle North America market, longer cycle deepwater and offshore segments and the steady consistent industrial chemicals market. TETRA only generated $7.7 million of free cash flow from continuing operations in the quarter and ended the quarter with $59 million of cash at the TETRA level. Year-to-date September, we've generated $43.5 million of TETRA-only cash from continued operations, an improvement of $66.6 million from last year. And products third-quarter revenue decreased 27% sequentially, reflecting the seasonal second-quarter peak from our industrial European business and also due to project delays in the Gulf of Mexico as we experienced two major hurricanes in the third quarter. Despite the lower revenue and sudden impact from the hurricanes, we achieved higher adjusted EBITDA margins by 110 basis points sequentially. The third-quarter adjusted EBITDA margin of 26.8% was also 310 basis points better than a year ago. International sales for completion fluids, excluding the industrial business, increased sequentially by 84%, led by some large sales for some major national oil companies in the Middle East. Delivery for these customers is continuing into the fourth quarter. Our industrial chemicals business continues to perform well and made up approximately 36% of the total revenue for this segment. In the third quarter, we secured three new calcium chloride road maintenance contracts to add to already industry-leading portfolio in this industrial subsector. Water and flowback third-quarter adjusted EBITDA remained positive despite revenue decreasing sequentially 13%. We continue to see price erosion in the early part of the third quarter, but believe that in most of the basins, pricing has now stabilized as activity has improved in September, again in October. During the quarter, we added a third recycling project with a super major operator in the Permian Basin. But similar to our other recycle projects, we expect this project to operate for an extended period of time. Based on our market knowledge and with this award, we believe, on a daily basis, we are cycling more produced water for frac reuse than any other service provider in the Permian Basin. Integrated projects increased from 16 with 14 different customers at the end of the second quarter to 17 with 10 different customers at the end of the third quarter. In September, 63% of our water management work was associated with integrated projects with multiple services provided by our BlueLinx automation system. We expect this trend to continue with more integrated projects as North America activity recovers. For the quarter, our TETRA SandStorm Advanced Cyclone Technology achieved maximum utilization while being continuously introduced to new customers. Our SandStorm technology was able to achieve 99.4% sand filtration. We far exceeded the current solution the customer was using, with zero wash downstream and at a peak flow rate of 40 million standard cubic feet per day. As a result of this successful trial, which also showcased our SandStorm works equally well in high-pressure gas wells as it does in liquid plays, we are now working with this customer to replace our competitor's sand separation equipment. Providing some perspective on the fourth quarter, we've seen a recovery in number of active frac crews and well completion activity. Our September and October revenue was meaningfully better than July and August. As we previously stated during our earnings call, our objective remains to keep the segment EBITDA-positive, while leveraging automation and deploying new technology, along with best-in-class services. Based on what we know today, we are cautiously optimistic that the third quarter was the bottom of activity in this segment. Our compression business continues to perform well despite the decline in North America activity. Excluding new equipment sales, which we have now exited, revenue decreased 1% sequentially to $72 million. Third-quarter adjusted EBITDA of $22.9 million was down $3.4 million from the second quarter. Adjusted EBITDA margins improved 170 basis points sequentially. Compression services revenue decreased 5% sequentially, and gross margins decreased 200 basis points to 52.9%. Utilization declined from 82.1% in the second quarter to 80.3% in the third quarter. We believe that our strategy to invest in high horsepower equipment will allow us to maintain utilization above the low point of 75.2% that was seen during the last downturn. In the third quarter, horsepower was on standby decreased from a peak of 20% back in May to approximately 8% at the end of September as our key customers started bringing production and units back online. As natural gas pricing outlook improves, we believe that production enhancement strategies on existing wells will become a greater priority for producers as they look to maximize cash flow. We should see the benefit of this focus as compression is a low operating cost solution, which allows producers to increase liquids and gas production when integrated with our artificial lift strategies. This allows the use of big data to improve performance, reliability and predictive maintenance of our compressors. We're excited to be the only oilfield service company to have partnered with Houston's Rice University D2K program as a partnership specifically designed to analyze big data and develop machine learning modules that enhance our current predictive maintenance programs. We've completed 25% of the hardware upgrade rollouts and expect to be fully deployed by the end of 2021. Aftermarket services revenue declined 12% from the second quarter, while gross margins improved 200 basis points sequentially. We expect aftermarket services to gain momentum in '21 -- 2021 as customers catch up on different maintenance -- deferred maintenance from 2020. We're pleased to announce that we've secured a master services agreement with a large midstream provider for the provision of parts and services, representing an immediate revenue-generating opportunities to expand into 2021 and beyond. In closing, I will mention that using all safety protocols, I and our management teams have been traveling again to visit our field locations and meet with our customers, getting direct feedback from our customers and getting in front of our field leaders is critical for our continued understanding of the rapidly changing environment. Overall, we had another solid quarter, where margins improved, EBITDA was positive, we generated free cash flow and improved our liquidity. Despite the uncertainty remaining in the market, we feel that our strategies, technologies and industry diversity will allow us to stay EBITDA profitable and come through this in a very strong position. Brady mentioned that we generated $43.5 million of free cash flow year to date on a TETRA-only basis, which is an improvement of $67 million from the same time a year ago. This was achieved despite the incurrence of severance and other restructuring related costs. TETRA-only adjusted EBITDA was $7 million in the third quarter. TETRA-only capital expenditures in the third quarter were $1.6 million. Many of the service companies are generating free cash flow this year from monetizing working capital. And as business rebounds, working capital will increase and consume cash. We believe that a true metric for measuring the performance of the oilfield services sector during difficult times is to measure their ability to generate free cash flow during the bottom of the cycle as earnings decline and without the benefit of monetizing working capital. In every quarter this year, TETRA, without CSI Compressco, has generated positive free cash flow without the benefit of monetizing working capital. Essentially, every quarter this year, cash earnings, debt -- growth in capital expenditures, less interest expense and the certain tax payments has been positive. Of the $43.5 million of free cash flow that we generated so far this year, $11.4 million is year-to-date earnings less capex, less interest expense and less taxes. The other $32 million has been from monetizing working capital, and monetizing receivables in this environment is not easy given the financial struggles by many of our customers. Our ability to generate $11 million in free cash flow this year without the benefit of working capital talks to the aggressive cost management we have implemented, the benefit of deploying technology to the US onshore market, and a very flexible, vertically integrated business model on the fluids side. In the third quarter, we were slightly over $0.5 million positive free cash flow without the benefit of monetizing working capital. For the full year of 2020, we expect TETRA-only capital expenditures to be between 9 and $12.5 million, slightly lower than the prior guidance. We will continue to monitor and adjust our capital spending based on market conditions. We expect total capital expenditures to be mainly for maintenance capital, and to accelerate the introduction of our new technologies such as SandStorm and our monitoring BlueLinx technologies. TETRA-only liquidity ended the third quarter improved approximately $22 million in the same period a year ago, positioning us to be able to continue to manage through this downturn as activity begins to slowly recover. TETRA-only liquidity is defined as unrestricted cash on hand plus availability under our revolving credit facility. TETRA-only net debt at the end of September was $148 million with cash on hand of $59 million. Our $221 million term loan is not due until August 2025, and our $100 million asset-based revolver does not mature until September 2023. The only significant maintenance covenant we have to comply with is a onetime interest coverage ratio on the term loan. At the end of September, our interest coverage was three and a half times. Annual interest expense on this term loan is approximately 15.5 to $17 million. And as always, I'd like to again remind everyone that TETRA's and CSI Compressco's debt are distinct and separate. There are no cross-defaults, no cross-guarantees on the debt between TETRA and CSI Compressco. Now, let me spend a couple of minutes on CSI Compressco. CSI Compressco's cash on hand at the end of September was $16.7 million, up from $2.4 million at the beginning of the year. At the end of September, there were no amounts outstanding on the revolver compared to $2.6 million that was outstanding at the beginning of the year. The reduction in the outstanding amount of revolver plus the increasing cash represents almost a $17 million improvement from the beginning of the year despite very challenging market conditions. And this is how CSI Compressco paid almost $5 million of legal and advisor fees to complete the debt swap in June of this year, which resulted in a net reduction of $9 million and pushed $215 million of maturities into 2025 and 2026. CSI Compressco sold our Midland fabrication facility and related real estate and have targeted the sale of $13 million in compressor assets in the second half of this year. They are pruning the fleet by selling older, idle smaller units to generate cash to either reduce debt, invest in technology that we believe will generate higher operating margins or invest in larger commercial units. Their objective is to generate between $15 million and $25 million of free cash flow by early in the third quarter of 2021 to partially pay down the maturing $81 million of unsecured notes and to refinance the remaining amount. For the full-year 2020, CSI Compressco expects capital expenditures of between 6 and $7 million, and maintenance capital expenditures of between 20 and $21 million. Like TETRA, CSI Compressco continues to invest in technology to drive greater margins and enhance returns. And this year, they expect to spend between 5 and $6 million. Other than the $81 million of unsecured notes that are due August of 2022 for CSI Compressco, the $555 million of first and second lien bonds are not due until 2025 and 2026. CSI Compressco's net leverage ratio at the end of September was 5.4 times. This compares to over seven times during the prior downturn. And as I've mentioned before, CSI Compressco does not have any maintenance covenants that they need to comply with. And also, as mentioned earlier, CSI Compressco does not have any amounts drawn on the revolver. CSI Compressco generated $14 million of free cash flow in the quarter. And year-to-date, free cash flow is $24.7 million. Distributable cash flow was $10.5 million in the third quarter, which increased by 25% as they benefited from the sale of used assets. Through September, distributable cash flow was $27 million. On an annualized basis, distributable cash flow will be $36.5 million or approximately $0.77 per common unit. This compares to CSI Compressco's unit price at the close of business last week of $0.85, which is not a bad cash flow yield. TETRA and CSI Compressco continued to perform well given the macro environment. If all our segments remain EBITDA positive, both TETRA and CSI Compressco are generating free cash flow even without the benefit of monetizing working capital. And other than $81 million of unsecured debt that is due August of 2022 for CSI Compressco, there are no near-term maturities. Additionally, both TETRA and CSI Compressco have already filed their 10-Qs with the SEC.	q3 revenue fell 21 percent to $153 million. tetra technologies - q3 activity continued to decline from impacts of covid-19 while hurricanes in gulf of mexico added to this challenging environment.
Actual results may differ materially from such statements. Please note that any reference to net sales today is being made on a constant-currency basis, which reflects the application of the current period foreign exchange rates to any prior period results enabling comparisons, excluding the impact of foreign exchange rate fluctuations. This is our sixth quarter of consistent successful execution against our three-year turnaround plan. We're now at the midway point and are building a solid foundation for sustained growth and expansion. Let me summarize our strategy for those of you who are new to the Tupperware turnaround story. Our strategy includes fixing our core direct selling business while building an omnichannel consumer product company. We're doing that by creating sub-brands that will enable us to strategically merchandise and price our products to minimize channel content. The idea is to increase consumer access to our iconic products wherever they choose to buy. 2020 was a year of stabilization. This year, 2021 is the foundation year where we continue to fix our core business and build the foundation to invest in the omnichannel opportunity. We'll talk more about this opportunity today. Next year, 2022, will be the year of expansion where we really begin to enter new channels and product categories. And in 2023 and beyond, we will accelerate those efforts for long-term sustained growth. During the quarter, we executed on several high-priority strategic initiatives that will improve our capital structure and position us well for the future. We will get into more detail on each of these later in the call, but at a high level, include, progressing on divesting our noncore assets, including our beauty businesses and excess property holdings, enabling us to focus more time and resources on growing our core Tupperware brands and utilizing the recently authorized share repurchase facility to buy back 1 million shares during the third quarter, accelerating returns to shareholders. These actions support our turnaround plan and are important components that will enable us to grow, expand and ultimately achieve our long-term strategic goals. As a result, our net sales of $377 million reflects our core Tupperware business, which declined 13%, primarily reflecting difficult comparisons from 2020, along with COVID-related market closures in 2021 and disruption in our US and Canada business due to the implementation of a new technology platform. From an earnings standpoint, our adjusted earnings per share of $1.19 reflects our improved cost structure and new tax strategy that Sandra will describe later on the call. And during the quarter, we knew we were up against tough year-over-year comps. Remember, we grew 21% in Q3 of 2020, yet our team executed well. The prior year period benefited from an increase in demand from shift in consumer behavior as most of us were under lockdown and adjusting to working, learning, and eating from home. Now that several markets have begun to open up mostly the US and Europe, we've seen a reversal of that trend as consumers are excited to get out and go places again and shopping at more traditional retail channels. And we believe this trend will continue. While some of the markets have begun to open up, others have gone into strict or mandatory lockdown in response to COVID resurgence in many regions, especially in Asia Pacific and Latin America. This has had a significant impact on recurring efforts and overall productivity given the restrictions of personal gatherings and opportunities to directly connect with the brand. That said, we believe these headwinds are transitory in nature and will begin to normalize in the near to medium term. As I will talk about later, we are working to reconnect with our sales force and give them tools and support they need to be successful in any market environment. And because these headwinds had the most impact on our direct selling business in the third quarter, we believe that our strategy to diversify into multiple channels as we roll our business is being directly validated. We believe that our turnaround will not produce linear results as evidenced by the third quarter but that over time, both top and bottom line will improve as we implement our growth plans. Now that we are six quarters into our third year turnaround plan, this midway point feels like an appropriate time to summarize the progress we have made over the last 18 months. In short, the company was in a very different place in April of 2020. Quite frankly, the business was not doing well, and we needed to make major changes to keep this iconic brand afloat. The solution was to execute a full turnaround of entire business. We did this by rightsizing our cost structure, delivering $192 million in savings in 2020. We've created a global business services group to generate operational efficiencies, centralizing and optimizing many of our back-office functions with a mandate to improve service and reduce costs, refinancing our debt and improving liquidity. In fact, our leverage ratio is a third of previous levels. On capital structure, we made significant progress. After selling our Avroy Shlain Beauty business earlier this year, we're working diligently to sell our remaining beauty business and excess land on holdings. Lastly, we repurchased shares of our common stock. And I should mention that this was the first time we bought back shares since 2018, reflecting our belief in a positive outlook of our share appreciation as we execute our turnaround plan, and restructuring the company from systems and processes to strategy and personnel. We've made detailed investments to improve sales force productivity. We implemented a new sales force system in the US during the second quarter. Given that the legacy system was customized to the needs of our sales force for the last 20 years, the new technology solution caused disruption to our sales force in the past few months. We've begun working closely with our sales force over the past several weeks and believe once fixed, the technology will be enabler for our sales force to grow their business. We've increased our use of data to make better and smarter business decisions. We've begun using more data-driven approach designed to identify best practices, improve our marketing communication, upgrade our business intelligence to make better decisions and ensure competitive service and costs. We're also using data-driven approach to segment how we look at our sales force and customers to personalize the experience they have with Tupperware. That means providing differentiated support, service and incentives to all of our sales force, our customers, ensuring we are adding value as a result, improving retention. To that end, we've introduced preferred customer loyalty programs in some of our biggest markets such as Mexico and plan to roll out additional markets including the US soon. We've continued to innovate and expand product lines, soon-be, sub-brands, and product categories beyond the kitchen. This strategy will enable us not only to compete on price more effectively, but also to segregate which products are sold through which channels, helping us minimize channel conflict. One of our first sub-brands is called Tupperware Essentials. And we've recently begun testing consumers' response in Europe through selected retailers. We're also continuing the work of expanding our product line beyond the kitchen. Finally, we recently received a recognition from fast company for our product innovation and specifically for our Echo-plus to go coffee cup, which is made of our revolutionary Ecoplasmaterial and our solution for eliminating single-use coffee cups. We're also working to improve our service level. Service means serving both our sales force and the end consumer better, giving our sales force the tools they need to be successful and ensuring the end customer has a good experience. So service is much more than just delivery of customer service. It is the entire customer and sales force journey. This effort is a true cultural shift for our company, but one that is necessary to compete in an omnichannel business. In hindsight, that's a lot. We're not even close to the same company that we were 18 months ago, and we're proud of the progress we've made. Lastly, we have to recognize that the pandemic induced an inability to gather people and connecting person has been less than ideal. For six quarters, the entire time, the new leadership team has been in place, we have not been able to meet face to face with our sales leaders around the world. And we think that that has a cumulative effect. Now with vaccination rates increasing in many regions, the executive team finally has the opportunity to get back to meeting sales leaders in person. We also intend to resume incentive trips and events that were put on hold in the past 18 months due to travel restrictions. This was a portion of our total cost savings we said we anticipate coming back when we return to more normal activity. Next on business expansion, which is essentially channel expansion and includes B2B loyalty programs selling to retailers and studios and selling through an important move. We continue to make good progress. For the year-to-date period through September, business expansion represented 21% of total sales, which is an increase compared to where we were in Quarter 2. Also, last quarter, we mentioned that we were looking to enter into the UK. So I'm excited to announce that we just signed an agreement with a large UK distributor who distributes products of international brands in many of the major retailers in the UK. The UK market is sizable and represents a large opportunity for us. And we think this approach will enable us to gain faster traction in this key market. Expanding into new channels is a key component of our strategic plan that will enable us to meaningfully increase the consumer aspect of Tupperware product. It also reduces the reliance of single channel and therefore, is expected to minimize the volatility of our performance during any given period. Next on our ESG efforts. During the fourth quarter, we launched a power project with TerraCycle Loop in Canada where we will be providing sandwich keepers for five Tim Hortons locations. A customer can opt to pay a small premium basically a deposit for the sandwich keeper. And if they return it to Tim Hortons when they're done, they will receive their deposit back. Loop then cleans and returns it to the restaurant for future use. We were recognized in the Fast Company's first annual list of brands that matter, which honors spreads to do more than just selling products or provide services. Brands achieving relevance through cultural impact, social engagement, and authentic communication of their mission and ideas. It is especially gratifying to be recognized for our purpose and it is indicative of the progress we're making to chart a new path for this iconic brand. Lastly, we will soon be publishing our new sustainability report, which include clear ESG goals and targets intended to further demonstrate and realize our commitment to our purpose. Looking ahead, it is our goal to be a very different and even stronger company 18 months from now. Our near-term priorities continue to be strengthening our direct selling business through structural service improvement, detail and property investment, use of data to optimize practices and expanding into new channels and product categories. We're running a long-term strategic plan. Our path won't necessarily be linear. And therefore, investors should naturally expect near term ebbs and inflows. But longer term, we're confident we will achieve our goals given the power of our brand, coupled with our improved liquidity and capital structure. I will now turn the time over to Sandra, our CFO and COO, to provide a full report on the quarter. It was indeed a significant quarter for the company and continuing to establish the foundation while investing in the business to prepare for the next six quarters of our turnaround plan. Before I begin the detailed financial discussion for the quarter, I want to address a reporting change that will be evident in the release of our 10-Q. Because we've either sold or are actively working to sell several of our beauty brands, the necessary criteria have been met to classify these businesses as held-for-sale assets and discontinued operations as of the third quarter of 2021 and have also been restated as such in the prior-year period. We believe this is also very aligned with our strategy to focus on the performance of our core business. Details of the results from discontinued operations will be presented separately in our financial statement footnotes found in our Form 10-Q. I will note that we did record an approximate $148 million noncash loss within discontinued operations, primarily driven by accumulated currency translations, which is standard GAAP accounting practice. Now I will discuss the results of continuing operations in the quarter. Net sales of $377 million in the quarter represents a decrease of 13% compared to last year. The year-over-year decline was driven by lockdowns caused by the persisting pandemic, disruptions caused by the implementation of a new independent sales force solution in the US and lower productivity caused by higher levels of vacationing, especially in Europe. We believe many of these headwinds are transitory in nature. But nevertheless, we have reprioritized certain initiatives to ensure we're providing full support to our sales force across the globe. In the quarter, total business expansion or nondirect selling business, which includes B2B, importers, EU markets, and other business expansion efforts represented 24% of total sales. For the year-to-date period, total business expansion was 21% of total sales, up 100 basis points compared to the same year-to-date period through June. B2B partnership sales in the quarter were $16 million or 4% of total sales. Historically, our annual B2B sales have been between $30 million to $35 million. And for this fiscal year, our goal is to reach $50 million. Year-to-date through September, we've already achieved $35 million. Our B2B relationship with portfolio of new programs of major retailers, while at the same time, increasing our brand awareness. I'll reiterate that expanding into new channels represents a significant growth opportunity for Tupperware. Turning now to sales performance by regions. In Asia Pacific, sales decreased by 15%. The slowdown in China was driven by COVID lockdowns related to resurgence challenges, ineffective and low vaccination rates as well as by studio closings and a slower pace of new openings. I should note that we recently made an important leadership change in this market. We believe China continues to hold significant potential for the Tupperware brand long term. Other areas within the region were down 12% in the quarter, severely impacted by COVID, including by mandatory or strict lockdowns in Malaysia, Indonesia, and the Philippines, which significantly impacted sales efforts, particularly as digital adoption is low in many of these regions. We think there is a significant opportunity to improve performance within the region as we focus on increasing digital adoption. In Europe, sales decreased by 20%. Excluding B2B, sales decreased by 17%, mainly due to the timing of a B2B deal in Italy in the prior year that was not repeated this year. European developed markets were significantly impacted by elevated levels of summer vacationing, which is customary in Europe and likely exasperated this year, given a full year of travel restrictions. We also eliminated certain unprofitable promotions this year to continue to improve the profitability of the region. European emerging markets were impacted by COVID lockdown and civil unrest, resulting in lower productivity and recruitment, which are a natural side effect of such challenging conditions. In North America, sales decreased by 15% in the quarter, while US and Canada decreased by 20%. The decrease in the US and Canada were driven primarily by disruption caused by the implementation of our new sales force solutions. We are taking actions to address change management challenges related to the salesforce system including talking with the vendor and working to migrate personal sales force ordering sites to a more consumer-friendly solution. As Miguel previously mentioned, we've also begun to take action to reconnect with our sales leaders face to face to understand how to serve them and our end customers better. Those efforts are yielding valuable insight that will help us to improve. Sales in Mexico decreased by 6%, driven by a significant sales force reduction stemming from service issues during the second quarter as well as lower-than-expected recruitment due to primarily COVID restrictions. We already have a campaign underway to recruit and reengage the sales force in this region. In South America, sales increased by 9%. Sales in Brazil were flat, which we view as positive given its cumulative recruitment issues due to COVID. We attribute the relative strength to significant recruiting efforts and the simplification of our onboarding and training processes. Argentina was a bright spot this quarter, which we attribute to the rollout of digital training platforms and expansion of e-commerce on a national level. Overall, we are pleased with our sales performance despite challenging market conditions and of our ability to continue executing against our strategic initiatives and delivering tangible results. Moving now to profit. Gross profit in the third quarter was $248 million or 65.8% of net sales, a decrease of approximately 300 basis points compared to last year. This was driven primarily by 240 basis points related to higher resin and manufacturing costs and 60 basis points related to country mix. As we mentioned last quarter, we had anticipated higher resin costs, but we're optimistic that the favorability in manufacturing would continue to help offset it. However, this was not the case in the third quarter due to lower volumes and higher inventory. As we look forward to 2022, we will look for opportunities to reduce cost, increase efficiencies and opportunistically raise prices where appropriate. I should also note that we intentionally built up inventory levels during the first half of 2021 in order to improve service and meet increasing demand. However, with the higher inventory levels and lower demand in the quarter, we will be focused on sell-through of inventory and taking downtime where needed in the future. We do believe that our ability to manufacture locally continues to be an advantage during the pandemic. SG&A as a percentage of sales in the third quarter was 50.6% versus 48.5% last year, an increase of 210 basis points, primarily reflecting higher logistics costs and the investments we plan to make in the second half of the year. In regard to logistics costs, we have been working to minimize the impact through efforts to improve contract pricing and sourcing, optimize container utilization, and strategically planned shipments. I'll note that carrier costs remained elevated, FedEx surcharges are still in effect and we're seeing a shift in our business model in the US where we're increasingly shipping direct to the end consumer versus using the sales force for fulfillment and distribution. We do recoup a majority of this cost as we charge for shipping, which is reflected in revenue. As we continue to shift to a more omnichannel approach, we expect this trend to continue. Therefore, we're working to improve efficiencies in fulfillment, packaging and shipping. Adjusted operating profit in the third quarter was $52 million, and as a percentage of sales, it was 14%. Despite softer-than-expected sales, our operating margin remained in the mid-teens, reflecting the renewed focus on tighter cost controls and a more disciplined approach to investments. Now to adjusted EBITDA, which is an important metric and an indicator of progress toward rightsizing our cost structure and evolving our capital structure. Adjusted EBITDA for the third quarter was $69 million versus $100 million in the prior year. Trailing 12-month adjusted EBITDA through September was $328 million. Our operating tax rate was a negative 20.4% versus the same quarter in 2020 of 28.3%. This quarter's tax rate benefited from an election we made when filing the 2020 tax return in October to change our capitalization policy, which allows us to utilize previously valued tax credits in the third quarter that would have otherwise expired and which resulted in the release of valuation allowances. While nonrecurring in nature, this valuation allowance release is part of our strategic tax initiative that we were executing as part of our turnaround plan to help us effectively utilize our existing tax assets and achieve our overall tax rate of below 30%. Now to earnings per share. Adjusted earnings per share of $1.19 for Q3 versus $1.12 last year is better by $0.07 per share. The favorable tax item just discussed contributed $0.52 of the variance and was offset by $0.41 due to lower volumes, higher resin costs and incremental investments, and $0.05 of higher inventory reserves. We also bought back shares in the quarter, which Miguel mentioned, and I will discuss more in a minute, that contributed $0.01 per share. Year to date, operating cash flow net of investing was a negative $7 million, compared to $108 million last year. As we've mentioned before, higher cash flow last year was driven by aggressive cost-saving actions, including COVID-specific actions like furloughs and significant lower spending on inventory and higher payables in order to preserve cash. This year, we've invested in inventory in order to improve service levels given the current landscape of the global supply chain issues while also reverting to a more normalized level of capital spending. As I mentioned earlier, the investment in inventory was to improve service while mitigating global supply chain conditions. I should note that our full year free cash flow target may be less than $200 million and is largely dependent on the timing of cash proceeds from the sale of our noncore assets. Moving on to the balance sheet. We ended the quarter with a healthy cash balance of $124 million, which compares to $134 million last year. And we ended the quarter with a total debt balance of $678 million. Our debt to adjusted EBITDA ratio for debt covenant purposes was $2.28 million versus 3.72% last year and well below the required covenant of 3.75%. We will look to favorable market conditions to present opportunities to further improve our capital structure. As Miguel and I also mentioned, we utilized our newly approved share repurchase facility. Of the $250 million that was recently authorized by our board, we repurchased 1 million shares of common stock during the third quarter at an acquisition cost of $25 million. This was the maximum we could do within our credit facility covenants. With each quarter of the turnaround behind us, our optimism increases regarding our future growth trajectory. And going forward, we'll continue to be opportunistic regarding repurchasing shares, seeking to deploy capital as effectively and efficiently as possible. Although we focused on the continuing operations for the third quarter, net sales from discontinued operations were $45 million or 11% of total net sales and adjusted earnings per share, excluding the cumulative translation adjustments from discontinued operations was $0.03 or 3% of our total adjusted earnings per share. For the year-to-date period through September, net sales from discontinued operations were $140 million or 10% of total net sales and adjusted earnings per share, excluding the CTA from discontinued operations was $0.11 or 4% of total adjusted earnings per share. As we continue to make progress and get further along in our turnaround plan, we want to be sure to share some of our strategies and early successes that are driving our long-term plan. To that end, we are planning to host an Investor Day during the first half of 2022, during which we will provide a more comprehensive view into the business, strategy, and tangible examples of the progress against our strategic initiatives and turnaround efforts as well as provide a longer-term framework and outlook. Look for more details in the coming months. We continue to make progress on stabilizing our core business while increasing investments in our business expansion efforts and executing on several strategic initiatives that strengthened our capital structure and have positioned us well for future growth. All components of our turnaround plan and indicative of progress. Looking ahead to the remainder of 2021, we'll continue to build on our foundation and invest in initiatives that will improve the business and drive penetration into new channels. We believe our consistent execution will result in a stronger more resilient, competitive, and durable company long term. With that, let's take some questions.	compname reports q3 adjusted non-gaap earnings per share $1.19. q3 adjusted non-gaap earnings per share $1.19. tupperware brands qtrly net sales down 11% to $376.9 mln. tupperware brands corp - qtrly net sales were $376.9 million, a decrease of 11% year over year. tupperware brands corp - qtrly adjusted diluted earnings per share (non-gaap) was $1.19. tupperware brands corp - qtrly net sales in asia pacific were $112.9 million, a decrease of 13%.
Titan definitely had a good quarter as our results exceeded expectations as we posted our strongest third quarter for revenue and profitability since 2013. We had adjusted EBITDA of $35.1 million this quarter on sales that were up 48% to $450 million. This quarter's adjusted EBITDA has been exceeded only twice in any quarter since 2014, and one of those occurred just last period when we posted $37 million of adjusted EBITDA. We are now expecting to see our full year adjusted EBITDA coming in above $130 million, which is our highest annual total since 2013. Our global team has been working very hard to produce these results and increase production levels to meet growing customer demand as we continue to drive forward to grow our production capabilities further in coming quarters. So looking at our segments, Titan, again, this quarter experienced strong sales growth in each of our segments, with agriculture leading the way with a 60% increase compared to last year. Our order books continue to strengthen, especially on the ag side, where commodity prices remained at good levels with corn above $5, soybean above $12 and cotton at record highs, thus ensuring another year of farmer incomes, strong farmer incomes for 2022. Yes, I realize that commodity prices have dipped from their peak levels earlier this year. And farmer sentiment has dipped as well. But let's not get caught in the trees and miss the abundant forest around us. Farmer incomes are still at high levels again this year. There is pent-up demand sitting on order decks. There is an aged large ag fleet. There's historically low inventory levels at all our dealers, whether it's small ag, large ag or an aftermarket dealer and also throw into that equation that current sales levels in large ag are still well below historical average. And do not forget that large ag is Titan's long-term sweet spot. We believe this all adds up to a good tailwind for business that we see continuing throughout 2022. So moving from Ag over to Earthmoving and Construction. We have seen demand continue to be above our expectations that we had at the start of the year with sales growth of this quarter of 36% on a year-over-year basis. Our EMC segment continues to look increasingly promising as we round the corner to next year just like Ag, our order books are strong, but we also see those infrastructure investments coming into place -- coming into many places. And as we've stated before, we are a global business in our EMC segment and a large part of our business from that segment does come from our undercarriage division, ITM. ITM is a business that has a good global footprint. It has a strong OEM and aftermarket channel for distribution. And then we have a market-leading and almost unique; I think, I'm pretty sure it's unique. I'm going to use that word today. A foundry in Spain, and I mean unique for our undercarriage type operations, where we have our own foundry in Spain, that enables us to customize cast products that meet the specific needs of our customers. Again, just a strong business for us and a large part of where we get our EMC growth and performance from. David will spend some more time today talking about our financial results, but I do want to offer a couple of thoughts. First, while our business operates in many different global geographies and produces three primary products, wheel, tires and undercarriage, which end up touching various end markets. We, again, this quarter, saw growth and improved financial performance in all of our business units; so good, solid, consistent growth. Second, we have and continue to operate with a disciplined mindset to control our costs in SG&A and within our overall operational structure, and you see that reflected in our results. Next, we have invested our capex wisely and strategically in recent years to continue driving our innovative products into the marketplace and to increase capacity in our core businesses where the market needs it. We've also made the necessary investments into safety, environmental and maintenance, and we will continue to ensure that happens in the future. My point with all that is, while Titan has reduced our capex over the prior few years to ensure we protect our balance sheet, we have invested properly into our company and have not underinvested in recent years. Lastly, we will continue to make the investments, incur the expenses into expanding our production capabilities and increasing our headcount in areas to meet demand. We are not simply going to sell our existing production capacity into the market, but rather take advantage of this existing opportunity to get more of our market-leading products into the hands of our customers. So let me conclude by saying something that we all know. I mean, this is without a doubt, one of our most dynamic business environments, all of us in business have faced. Titan, in addition to our solid operation results again this quarter and really for all of 2021 for that matter, Titan has strengthened our financial position this year by refinancing our $400 million bonds. We've also, this year, further improved our liquidity with our recently announced ABL extension and upsizing. We believe that Titan is in a position of strength within our industries with our global production footprint that is second to none in our business and our plants that are well suited geographically, excuse me -- for our customers. We also have an expansive and innovative product portfolio with an arsenal of highly engineered tooling. These attributes enable us to deliver a strong value proposition to our customers. And as a result, for Titan to continue to benefit from the current trends that are in today's markets. With that being said, our order books are strong, as we've seen really in years. There are continuing positive signs in our end markets, which puts Titan in a good position, as I stated earlier, to post adjusted 2021 adjusted EBITDA of over $130 million. And on top of that, we see a path to further growth for next year. Again, Titan is in a good position at this time to capitalize on our reinvigorated strength, which makes me think about a comment this week that I heard from our Audit Committee Chair, who happens to be a leader in the private equity space. The comment he made during our meeting this week was that Titan has reported strong results throughout 2021. We have fortified our balance sheet this year. And has all this positive going on, yet our stock is trading at only around 6.5 times current year adjusted EBITDA. He's a pretty smart guy, by the way. So with that, let's jump into the financials. I appreciate everyone joining us today. Well, the third quarter was just another significant step in the right direction for the company, and we were able to deliver a very strong result and build on the momentum that we've started more than a year ago. Our global management team has managed this concurrent environment very well, and we believe we have solid plans in place to continue to do that moving forward. Well, let's start with some highlights for the quarter, and then I'll get into more details. Sales grew at a very nice clip at 48% this quarter. Again, a very, very strong results for our Q3. Our growth was led by the Ag segment with a 60% increase from Q3 last year. And at the same time, the EMC segment was also very strong at a growth of 37%, and our growth in the consumer segment was nothing to sneeze at, with an increase of 32%. Our gross profit increased by 93% in the quarter, and our margin improved to 13.4% compared to only 10.3% last year. Adjusted EBITDA for the quarter was $35 million, representing the strongest third quarter performance since 2013 that bears repeating. On a trailing 12-month basis, our adjusted EBITDA stands at $116 million as of this quarter, and we expect Q4 performance to be strong, improving that run rate to over $130 million for fiscal 2021. Our cash position remained stable again this quarter at $95 million despite some growth in working capital. We continue to do a very good job managing our inventory levels as well. With our improvement in profitability and our strong management of the balance sheet, our debt -- our net debt leverage as of the end of Q3 stands at 3.3 times our trailing 12-month adjusted EBITDA. This is obviously a dramatic improvement from a year ago. Now let's get into the more detail for the Q3 performance. Again, our sales levels for the third quarter were strong, and we saw another sequential increase of 2.5%, notwithstanding the normal seasonal variation from holidays and plant maintenance that reduces our production days. Sales increased relative to last year by $146 million and $104 million or 30% from the third quarter of 2019, a more normal third quarter period. Volume was up over 25% with all of our business units, except Australia, seeing significant double-digit percentage growth year-over-year. Gross profit for Q3 was $60 million versus only $31 million in adjusted gross profit in the third quarter of last year. Our gross profit margin in the third quarter, again, was very strong at 13.4%. We believe our visibility is solid in terms of being able to know where our costs are and where we continue to see challenges that we -- in supply, and we intend to manage it in a very strong way, just as we've proven over and over again, and our track record is strong. Now on to segment performance. Our Ag segment net sales were $244 million, an increase of $91 million or 60% from third quarter last year, which makes it the strongest quarter for the segment in the last eight years, beating last quarter sales by 5.5%, reflecting strength in North America and Latin America. Volume in the segment was up 30% -- 36% just like Q2. Again, this quarter, the principal driver of the volume increases related to the OE sales across the business, while aftermarket sales remained very solid. Every one of our business units saw increases year-over-year in the Ag segment, and our order decks reflects strength across the globe for the ag demand for the foreseeable future. Our agricultural segment gross profit in the third quarter was $33 million, up from only $16 million last year, representing a 105% improvement. Our gross margins in Ag were 13.6%, which is another significant improvement from the margin produced last year of 10.6%. This is reflective of the increased volume and of the effect on efficiencies across our plants, along with continued strong cost control actions we have taken over the last couple of years. These are timing -- there are timing impacts related to pricing actions and alignment with our costs as they flow through production, as we know. Again, we've done a great job at this, a very effective job getting in front of these increases. And I expect that we can remain in very strong territory overall on our margins in the segment and as a whole. Our Earthmoving and Construction segment experienced another strong quarter as well. Overall net sales for the EMC segment grew by $45 million or 37% from last year as well. The third quarter is traditionally the lowest as we experienced normal summer slowdowns with holidays across Europe and our customer schedules. This year was no different, and we saw a small sequential drop from Q2. This is not a statement on the overall demand in the sector, just the normal seasonal cycle that we have. All of the major geographies experienced year-over-year growth during the quarter with the largest growth coming from ITM, our undercarriage business, which grew 38% from third quarter last year. ITM's primary growth came from Latin America and Europe. Gross profit within our Earthmoving and Construction segment for the third quarter was $21 million, which represents an improvement of $9 million or 71% from gross profit last year. Gross profit margin in the EMC segment was 12.7% versus only 10.1% last year, a very healthy increase. Again, the largest driver of our increased profitability came from the increase in sales in ITM, while growth occurred across all of our businesses and geographies across the globe year-over-year. The Consumer segment's Q3 net sales were up 32% or nine million compared to last year. The volume was up very nicely in the quarter, and currency was also a positive tailwind. As we discussed, our primary priorities -- production priorities have been with our Ag and the EMC segments and our customers, but we did see healthy increases related to our Latin American utility truck tire business and increased mixed stock rubber sales in the U.S. The segment's gross profit for the third quarter was 5.8%, a very healthy improvement from last year as well. Gross margins were at 15%, which was an improvement from 9.5% last year, reflecting some positive mix and pricing improvements with our products. This is the best margin performance in this segment since Q2 2018. Our SG&A and R&D expenses for the third quarter were $34.6 million, down about $0.5 million sequentially from the second quarter. Most importantly, SG&A and R&D expense was 7.7% of third quarter sales, a very nice improvement from a year ago. Third quarter SG&A and R&D increased from the prior year by about four million. As a reminder, we've taken strong spending control measures over the last few years. This year's expenses included some variable spending and compensation levels, reflecting the increase in sales and our profitability during the period. During the third quarter, we recorded tax expense of $5.3 million, somewhat higher than in the quarter than originally expected, but reflective of increased profitability in certain high tax jurisdictions for Titan, including Latin America, Turkey, Germany and parts of Asia. Obviously, this is higher than what we stated in our guidance earlier in the year. And again, this is entirely due to increased profitability expected for the full year. I now expect taxes on the income to be about approximately $15 million for the year. And again, this approximates our expected cash tax payments for the year as well. Now let's move over to cash flow. Our overall cash balances remained solid in the quarter at $95 million. Again, this is despite the sequential growth in sales and necessary continued investments in inventory to support and sustain our sales levels moving forward. Our operating cash flow for the quarter was positive at $15 million, and we generated positive free cash flow of over $5 million in the quarter. With strong growth in sales throughout 2021, we remain in slightly negative territory on cash flow overall. But when you look at all of our key metrics, including cash conversion cycle and working capital, as a percent of sales, we've made healthy improvements from a year ago through focus and control. During the third quarter, inventory grew by approximately $28 million sequentially from Q2. Much like the rest of the year, almost half of this increase came on higher raw material costs and the other coming from volume, mix and other currency changes. As a percentage of the most recent quarterly sales, inventory stands at 20.7%. This compares favorably to 23% -- over 23% from a year ago at this time. Again, this is, again, a very strong focus across the business from our management team. Our overall DSOs in the business improved sequentially from Q2 by two days and now stands at 53 days compared to 55 in Q2 and 58 from this very time last year. I continue to believe that we will maintain and improve our cash flow and working capital metrics as we head toward year-end. Traditionally, this is the time of the year where we build cash, particularly in the back half of Q4. We will not likely get back to breakeven free cash flow for the full year. I do expect Q4 to be in positive territory like Q3, which brings us much closer to that goal. And our teams are very focused on driving a strong balance between production efficiency and working capital management. capex for the quarter was up sequentially at $9.6 million as expected. We have been making strategic decisions as to the investments to increase capacity, reduce costs and improve plant efficiency, along with putting tooling in place to drive production related to new product innovations. As of the first nine months, we -- capex stands at $24 million. Based on our latest forecast, I expect full year 2021 capital investments of around $35 million at the low end of the previous estimate for the year. As Paul discussed earlier, we are targeted and measured in the investments we're making in the business for the long term. As we disclosed last Thursday, we took another positive step for the business in renewing our domestic ABL credit line. The credit facility was increased to $125 million and is extended until October of 2026. It still has the option to expand by another $50 million through -- in an accordion provision. The amended agreement is substantially similar to the previous agreement, while we attained improved terms surrounding pricing and other enhancements to improve the availability within the borrowing base. I'm very pleased to be able to get this in place for the next five years and to provide stability for our liquidity on top of our healthy cash position across the globe. Our overall debt level at quarter end decreased by five million from June. All of the decrease came on paydowns on the international borrowings. Our borrowings on the ABL stands at $30 million, roughly in line with last quarter. I continue to expect there won't be any significant cash requirements related to debt in the near term, and it remains substantially at our discretion to pay down. Overall, net debt decreased in the quarter about -- to $387 million, down $4 million from last quarter. Again, I expect to trim that number over time as cash flow increases, and we are able to pay down on the revolving credit loans. I stated it earlier, but it bears repeating that our debt leverage at the end of September based on 12 -- trailing 12 months adjusted EBITDA has decreased to 3.3 times, which is right in the target range that we have been discussing. Our balance sheet is in solid position now, which allows us much more flexibility to manage the business for growth. Now let me wrap up with a few thoughts on the remainder of the year and some concluding remarks. As everyone should know, the fourth quarter of our year brings with it a number of normal disruptions due to holidays and year-end maintenance in order to be prepared for the first quarter, which is expected to be strong. Our fourth quarter performance is expected to be at a continued high level and steady with what we've been experiencing so far in 2021 in terms of customer demand. We've come a long way in the last year with the business. And because of the effective decisions we made during tougher times and our ability to improve our liquidity, our situation has normalized and strengthened. Even in the dynamic environment that we are in, we continue to fight hard every day, and it is making a difference in the trajectory for our business performance. The future is bright for us. And we are, as a leadership team, remain highly focused on managing the opportunities in front of us. That's our story for now.	compname reports strongest third quarter results since 2013 with net sales up 48 percent yoy. full-year adjusted ebitda is estimated to finish over $130 million.
We're only at March 4th and this year is already looking like a completely different story, compared to 2020. Late in the fourth quarter, we started to see demands trend in a positive direction, and that's really evidenced in our Q4 results that exceeded expectations. And 2021 has really kept on roll and as we've seen, the U.S. farmers' sentiment and farmers' capital investment index levels spiked to all time highs already. The $25 billion of government payments late in 2020 certainly helped move these indexes in a favorable manner combined with of course strong commodity prices with corn hovering around $550 and soybeans up above $14. Another significant positive indicator for 2021 is the low levels of inventory that exists in most channels, especially in the dealer networks. Therefore our market uptick at the retail level should get that additional boost from inventory replenishment. It's definitely great to see ag moving in a positive direction in 2021 and it seems that the market upturn shared [Phonetic] some pretty good legs on it as well. Looking back a year ago, I don't think there is many people who thought that coronavirus would turn into a global pandemic that impacted really every country, in every facet of society. I do want to take a second and reiterate our Titan team did an excellent job working hard to continually safely operating our businesses during the pandemic and our 2020 performance positively reflects those efforts of our team around the world. It also demonstrates the strength and resiliency of our people and our products. During times like that, those items really show, and again, it's our people and our products that make Titan unique in our industries. However, I think it's important to go a step further with those comments to give credit for how well Titan remained focused on our imperative that we really had at the beginning of the year to improve our financial position. It was clear, we didn't enter the pandemic in a position that allowed us much room for error. Our 2020 results clearly illustrate that Titan has strengthened our financial position and we were able to make those improvements while dealing with the onslaught of the challenges from the pandemic. I think the success of that is seen in our 2023 bonds, which have been trading around par at recent months. It also gives us an opportunity to explore the potential of a refinancing. Now let's take a step back and look at the fourth quarter. We finished the year with a significant turnaround, especially in ag as demand for many of our customers continued to strengthen as the quarter progressed. During the quarter, our adjusted gross margin of 11.8% was the strongest margin achieved over the previous ten quarters. Also, our adjusted EBITDA over $17 million was our highest since the first quarter of 2019. A lot of these gains and financial performance, our continuing efforts and focus to improve our financial position, resulted in a strengthening cash position along with net debt. We delivered our sixth consecutive quarter with positive operating and free cash flow and reached levels of cash and net debt that haven't been achieved since the end of 2017. Now as we look deeper into the business going forward, the positive trends in ag that we saw in late 2020 especially in North and South America have only increased during the first couple of months of 2021. In North America, the growth in small ag, in our small ag customer base continues at a rapid pace as we've seen our customers increase orders to address the need to restock inventory on top of their already expected growth this year. Large ag is historically a strength of Titans, as our plants and tooling are well equipped to handle the volume and complexity of SKUs related to that business. The size are forming [Phonetic] that suggest large ag is beginning to move in a favorable direction as well. The challenge for us, which is similar to many manufacturers these days is that coming off the lower production levels of the pandemic, the surge in demand has created a high degree of volatility for our customer base and for Titan as well. We are dealing with the constraints in labor as we are hiring rapidly, we're dealing with raw material issues pretty much all over the map, and we're dealing with logistical challenges that pertain to shipping containers and trucking that have sprung up as of late. Titan has, and I will make this clear, Titan has a long history of being flexible to adjust to market volatility. And we have the robust production capabilities, that can meet the needs of our customers. In order to do that, we are hiring aggressively at all of our ag and wheel and tire plants in the U.S., along with South America, and we will continue to do that throughout this year. However, there is a training curve to onboarding people into our operations. Therefore, we need to hire systematically during the ramp-up process to mitigate our training liability as our positions do require a vigorous training program. The flexibility and scalability in Titan's production base is a core strength, and we do expect to earn a good return on providing this to our customers during the times that we are in and currently entering deeper into. Anyone who has seen our plants, especially our real -- our tooling for our real business would understand what I'm saying. We are currently in discussions with major OEMs on long-term supply agreements that would be a win-win for both sides in today's changing world. So now turning over to South America, we've seen the market really jump to life in Q4 and then really proceed to keep on running into 2021. Since we acquired Titan Brazil in 2010, we've consistently invested in large radio ag and OTR capacity that at the time of the acquisition was really only a small part of the portfolio. We see the rewards from those investments through the years as we've significantly grown our output in both those areas along with expanding our market share. The reality is that this rapid increase in orders coming off the back of the pandemic means that we do have to allocate our production across our customer base. We will continue to invest in capacity and we are investing in capacity, I should say in 2021, and we'll do that through both hiring, but as capital investments as well as we do believe the favorable volume trends that we are seeing will continue. Now looking over at earthmoving and construction. The full year 2020 results show a drop in sales, driven by the pandemic, but I do want to state that we finished the year with fourth quarter sales really moving in a positive direction, and we continue to see those trends in the first quarter as sales in our undercarriage business have exceeded budget by over double-digits. This is really good to see early in 2021 as our thoughts were more for growth that come later in the second half of the year when the pandemic effects on this sector start to fade away and you start to see infrastructure and development spending kick into gear. So these early gains in construction, mining for undercarriage really only point to an even stronger year as it progresses. Now coming back to Ag, over the past five to six years, we've been in a softer Ag market that has put pressure on our pricing and margins. Now, when I say pricing, I'm looking at it from three angles. First, recovering your raw material cost; second, recovering other production related costs; and then third, pricing leverage. We do have some raw material agreements with key OEMs that automatically modify pricing based upon raw materials. However, I don't think I have found anyone that can recall a time when we've see steel go from $445 a ton to $1,200 in such a short duration and then also be in short supply as well. So the challenge for us is that our raw material agreements don't always protect us in these rapidly changing moments, and we will work to ensure we get raw material cost recovery throughout 2021. Our agreements in North and South America -- excuse me, in North America and Europe typically only pertain to raw material fluctuations. So the next piece of our pricing strategy focuses on the recovery of other production costs related to over time shipping energy, etc. Again, we believe this market provides us an opportunity to tack [Phonetic] pricing beyond just raw materials to address areas of production that are also facing cost increases. The third piece of pricing that we look at is related to leverage as demand improves. We certainly feel that Titan produces valuable products and with strong production capabilities that are quite unique in our space, and we believe as the market continues to progressively improve, we should see an opportunity to approach pricing with more leverage than we've seen in recent years. Now looking at the market again, the market is really moving in a positive direction. There is no doubt about that, but it has shifted quickly in such a short time period that it is difficult to provide a reasonable full year 2021 forecast for sales and EBITDA like we've done in prior years. Based on our strong finish in the fourth quarter and what we're seeing already in 2021, we are targeting good growth in sales, EBITDA, along with margin expansion. We intend, and we will remain diligently focused on protecting our balance sheet and realize that cash is going to be needed to fund inventory. As noted in the pricing discussion that I referenced, the market landscape gives us opportunity to do things differently than we have in prior years, and we intend to set production schedules using payment terms as a criteria, therefore we'll be looking for customers to adjust their payment terms. And most importantly, support our customers throughout the pandemic and now beyond. These efforts have enabled Titan to be in a really good position for 2021 as the markets are moving in a very positive direction. I appreciate all of those who are participating in the call and those that are following Titan's progress. Well, my whole plans are changing in flash. While we're still very much in an uncertain times and while the pandemic and other global volatility and economic uncertainty continues, Titan's world is changing rapidly. Our response to the crisis last year was critical as we now head into the recovery of that [Indecipherable]. I'll focus most of my discussion today on the fourth quarter performance, but what is important and what we accomplished in the quarter and for the year, puts us in a stronger position as we manage 2021 and beyond. First, our cash position was [Phonetic] $117 million for the year, up $51 million from last year-end and we accomplished this through strong operating cash flow in Q4 and for the full year, along with our efforts to secure liquidity through non-core asset sales and related transaction. Operating cash flow for the fourth quarter was $10 million, which pushed full-year operating cash flow to $57 million. As anticipated, we completed further transactions in non-core -- of non-core assets of $16 million in Q4 and for the full year, it's up $53 million. Second, related to the cash improvement, our net debt position at the end of the year was $347 million, down from $366 million at the end of last quarter and $433 million at the end of last year. As we stated in the release, we haven't seen this level since 2017. Third, we took another important step forward last week with the extension of our domestic ABL facility. This facility now has [Indecipherable] for two more years and are now closer to maturity on our overall debt structure. So there are several other takeaways from our P&L performance for the fourth quarter that I want to pay attention to. And normally our fourth quarter is traditionally or seasonally a low quarter, but this year was not normal. We had quarter-over-quarter and sequential sales growth in both Ag and EMC. Second, we also continued our strong adjusted gross margin trend with 11.8% for the quarter, best margin performance, we've seen in ten quarters. Before I head into this normal review of sales, gross profit and SG&A, I want to get into some of the non-operating items that occurred in the fourth quarter. During Q4, we recorded impairments related to two sets [Phonetic] of long-term asset categories for a portion of our smaller operations. First, we broke down certain equipment to fair value related to our entire recycling operations in Canada and this resulted in a charge of $11.2 million. Secondly, we wrote off intangible assets related to our customer relationships from our acquisition of the Australian operation many years ago and it resulted in a charge of $6 million. Both of these resulted from recent trends and market conditions, triggering a review of our fair value of our long-term assets, specifically into these businesses. In October, we sold our facility in Brownsville, Texas garnering net proceeds of approximately $11 million and a gain on sale of $4.9 million. And finally, in November we received further recovery related to an insurance claim from the fire in our Canadian Tire recycling operation from 2017 of $3.6 million. From here forward, I will review the results of the fourth quarter and for the full year excluding these items, and the other unusual and non-operational transaction that occurred during the year. Net sales for the fourth quarter were up over 8% from Q4 2019 representing a nice turnaround in a year where we saw an overall decrease in sales of 13%. As the fourth quarter progressed, the stronger operations became -- particularly as our OE customers began increasing production and demand for our product. What is even more impressive is on a constant currency basis, total sales was up nearly 15% from Q4 last year or $45 million. The negative currency impact was approximately $19 million or 6% with most of the impact coming in Latin America and Russia, as we saw throughout 2020. Our overall sales volume on a consolidated basis was up over 20% from last year and price and mix in the fourth quarter was down about 6%, mostly reflecting lower raw material costs and related material pricing mechanisms with our OE customers. Consolidated net sales in the agriculture segment improved by 15% in the fourth quarter, with growth coming from all parts of the world. On a constant currency basis, agricultural sales were -- would have been up 25% in Q4, led by North America, Latin America and Europe. For the full year, the agricultural segment experienced growth on a constant currency basis of 4% on the healthy turnaround in the second half of the year. These trends are accelerating as we progress into 2021. The EMC segment saw a nice turnaround in the quarter, in what was a soft year for the market. During Q4, the EMC segment showed growth of 4.5% on a reported basis and on a constant currency basis, it grew by over 6%. The largest driver of the rebound came from ITM, our undercarriage business as construction markets in Asia and parts of Europe began to wake up from the effects of the pandemic. To say that we're seeing a recovery in the global construction markets may be premature, but our order decks for the businesses are stronger than they were three, six and even nine months ago across the global business. Our overall North American sales were up over 6% relative to last year, all of this growth coming from agriculture, while the EMC segment was down slightly reflecting a slower recovery. Our aftermarket tire sales in North America in Q4 were up relative to the prior year and for the full year was slightly better than full year 2019 levels. Our Latin America operations have seen a sharp turn upward in the market in recent months. Our aftermarket business was resilient throughout the pandemic but our [Indecipherable] sales rebounded sharply in Q4. Reported sales for Latin America in Q4 were up almost 16% while on a constant currency basis, sales would have increased by over 41%. Our gross margin performance in the segment continue to be important driver overall, I should say for our financial improvement and our stability in 2020. Adjusted gross profit for the fourth quarter was $38 million versus $18 million in the fourth quarter of 2019, representing a 110% improvement. Our adjusted gross profit margin in the fourth quarter was 11.8% versus only 6% last year. And this performance was the best of any quarters since Q2 2018. We continue to manage our factory overhead costs aggressively during the fourth quarter as sales have trended more strongly, we have necessarily calibrated our labor force to meet rising demand. While it has been more challenging given certain marketplace constraints and the surge of demand that we've seen in recent months. We have plans in place to grow our production levels up to meet with what we see from our customer forecast and our current order deck. It is important to note that in recent months, raw materials have risen sharply across all market sectors from the more favorable cost that we saw in 2020, and as Paul indicated earlier, we're putting through corresponding price increases to customers to reflect these increases along with other rising costs including labor and shipping costs. We are responding to the significant forces in the market that are moving very rapidly and we're working carefully to calibrate all our actions. Now, let's go through segment performance. Our agricultural segment net sales were up $21.5 million or 15.3% from Q4 2019. Currency translation was significant in the fourth quarter and affected sales by 9.4%, particularly in Latin America and to a lesser extent the Russia. Volume in this segment was up 32% while we had a decline in pricing of 7.6%, relating primarily to lower raw material costs. Our aftermarket sales have continued to be strong, while the big driver was the turnaround in OE sales during the Q4, particularly late in the period. Overall Ag sales in North America were up 16%, our Russia ag sales were up somewhat [Phonetic] from a year ago, and on a constant currency basis. And our European Ag sales were up almost 30% from Q4 2019. Reported Ag sales in Latin America were up 22% from last year, and while on a constant currency basis they were up 47%. Once again, the rate [Indecipherable] distorts the real contribution of our Latin American business, again the Ag markets have shown resilience in throughout 2020 through the challenging times earlier in the year and now we're in totally different volume with solid tailwinds across the markets. The agricultural segment's adjusted gross profit for the fourth quarter was $21 million, up from $9.2 million years ago -- a year ago, representing a 127% increase. The gross profit margins in Q4 were 13% for Ag, which was a significant improvement from the margin we saw in Q4 2019 of 6.6%. This was the strongest margin quarter since Q3 of 2018 for our Ag segment. We discussed it last quarter as well, but we have seen improvements in plant efficiencies from our strong internal actions along with raw material cost and [Indecipherable] improvement, a key component of this improvement came from our North America wheel operations as we continue to improve performance after significant headwinds that existed in 2019 surrounding raw material and inventory management. The trends have been increasingly stronger throughout 2020 as the new management team's actions and operational strategy began to take hold. Similar to Q3 2020 performance, each of our geographic businesses experienced expansion of gross profit and margins in the fourth quarter compared to the prior year. Our Earthmoving and Construction segment rebounded in the fourth quarter after seeing the most impact earlier in the year from the economic downturns and the construction market volatility. Overall, the EMC segment experienced an increase in net sales in Q4 of $6 million or 4.5% from last year, and on currency -- constant currency basis, net sales was an increase by 6.3% versus a year ago. Which meant that currency was only a minor impact of 1.8% for the quarter. Volume was up in the EMC segment by a 11% while the impact of price and mix was negative at 4.6%. North America experienced a small decline in Q4, reflecting a slower market recovery than other parts of the world. ITM's undercarriage business saw an increase in EMC sales by almost 12% from the fourth quarter of last year. Now, on a constant currency basis, the increase was almost 14%. Again, global construction markets are only beginning to wake up, and while the order backs are steadily improving, we believe that there will be a stronger recovery in the latter part of 2021 and beyond. Adjusted gross profit within the EMC segment for the fourth quarter was $14 million representing an improvement of $6.9 million or 109% from Q4 2019. The entirety of the TTRC impairment of $11.2 million was recorded in this segment in the fourth quarter. The adjusted gross profit margin in the EMC segment was 10.4% versus 5.2% of last year. And this was the best quarterly performance in over a year. Again, the largest driver of the increased profitability came on the increase in sales in the ITM undercarriage business, while there were also increases seen in Australia and Latin America. Consumer segments, Q4 sales were down 7.7% from last year. The negative impact from currency translation was 13%. So volume increased by 8% and price and mix was down by almost 3%. The rebound in the business in the fourth quarter, primarily related to the Latin America utility truck segment as the markets began to fall out after the pandemic effects. This recent rebound is expected to continue in 2021. The segments gross profit for the fourth quarter was $3.2 million, a healthy improvement from Q4 2019 and gross margins were 11.5%, which was an improvement from 7.6% in the fourth quarter of last year, reflecting improved production efficiencies from the increased volume. Selling, General and Administrative and R&D expenses for the fourth quarter were $39.3 million, but this includes $6 million in impairment charges related to the Australian customer relationships I described earlier. Excluding this, we spent about $33 million in the quarter, which was a bit higher than our Q3 level. Costs related to investments improving our supply chain and logistics processes totaled approximately $1.3 million in the quarter. We will have approximately the same amount of investment in Q1 '21 and we anticipate that this will drive savings in future quarters on a sustainable basis, well in excess of these investments. For the full year, excluding the unusual charges in 2020 of $11 million, our SG&A and R&D costs were $129 million coming in below the low end of our range of expectation about $130 million to $135 million. Foreign currency revaluation was less of a factor on the results in Q4 and a $1.3 million loss in fourth -- but for the full year, the total negative impact from foreign exchange revaluation totaled $11 million compared to a gain of $4 million in 2019. We recorded tax expenses in the quarter of $4.6 million on a pre-tax loss of $14.9 million during the fourth quarter. For the full year, tax expense was $6.9 million on a pre-tax loss of $58 million. There were additional tax expenses recorded in Q4 related to the growth in income from our foreign operations during the latter part of the year. Now let's talk of Q4 and fiscal 2020 cash flow. I realize that I'm beating the cash flow drum a lot lately but it was one of the most paramount actions to take at Titan during 2020 and we achieved the targets we set out at the beginning and perhaps a bit more. Again cash improved another $18.5 million in Q4 versus Q3 and for the year it improved by almost $51 million. This has put us much in a more stabilized position to manage the business, particularly as the markets recover as we've only begun to see in Q4. Cash levels were the strongest since early 2018 coming from stronger operating cash flow and cash generated from non-core operations and related transaction as I stated earlier. We generated approximately $57 million in operating cash flow for the full year of 2020, a strong improvement over 2019, and again this came from our focus on working capital management. Obviously, it was important to manage our inventories in a year of declining sales. With the Company back to strong operating cash flow and those non-core transactions, we generated $89 million of free cash flow for 2020. I continue to have confidence in our ability to manage cash levels from focus on working capital in 2021, and that will come from improved, continued improvements in our inventory management across the business. We have strong focus with our operating teams to manage inventory very closely, and we collectively know that there is a balance between managing lack of long-term visibility of our customer demand -- and our customer demand. Very healthy increases in sales are expected in 2021, and I do expect inventories to rise, but at a healthy ratio in sales. We continue to improve our forecasting processes to manage demand within our production systems and expect to get better, even as we progressed through 2021. Capital expenditures for the fourth quarter were $8.3 million, which was more in line with our quarterly historical levels for capital spending. As normal, we put through maintenance spending and other investments to foster efficient operations. For the full year of 2020, we've spent nearly $22 million on capex, again reflecting the needs to control our investments in amid the pandemic. This compares to $36 million spent in 2019. We anticipate spending to increase in 2021 to roughly $35 million to $40 million, but we will carefully calibrate these investments to work closely with our cash flow from operations through the year. I want to stress the fact that while we trimmed our investments, we in no way cut the necessary investments to keep us in front of the innovations to maintain and increase our market leadership. We are in a strong position with our capital program in -- for 2021 to do this as well. Our overall debt level at the end of the year was in a stable position relative to the end of the third quarter and while for the year debt declined by $35 million from the end of 2019. As of the end of the year, there were no borrowings on the domestic ABL credit line because of the continued, because of the strong operating cash flow and results from the non-core asset sales during the first nine months of the year. Short-term debt at the end of the December was $31 million, which is down over $30 million since last year end. This decline is primarily due to repayments of our normal maturities of loan arrangements in certain of our foreign operations, primarily Russia and Europe. A portion of this decline also relates to extending loans on favorable terms in Latin America, in response to liquidity initiatives during the pandemic, earlier in the year. The vast majority of our current maturities at the end of 2020 relate to foreign credit facilities and term loans, which will likely get rolled over and extended as needed in the coming year. Just to restate, we took an important step last week to further secure our liquidity in the future with the extension of our domestic ABL facility. The maturity is now February of 2023. We have the flexibility to manage our U.S. and our corporate operations after freeing up borrowing capacity of the domestic credit facility and increasing our cash reserves to a certain extent in Q4. At the end of December, the borrowing capacity, when you take away the letters of credit and adjusting for the borrowing base calculations of AR and inventory was at $51 million on the ABL line. We also anticipate some letters of credits to expire in the first half of the year which could free up an additional $8 million to $13 million in capacity and we also anticipate additional capacity coming on as our borrowing base grows with the business activity. 2020 was a repositioning year for Titan and it was critical to take the swift and decisive actions in the midst of the pandemic as the world has turned back on our improved and stabilized liquidity position enables us to have the flexibility to manage our business. We are staying focused on managing our working capital this year as well. The real job is ahead of us as we managed growth in the business. We have to keep a relentless focus on what has gotten us here. Last thing I want to discuss relates to our bonds. The confidence in our Titan's financial position has improved and our markets have gotten better. We are now in a stronger position to review our options for refinancing in a more reasonable fashion. In the days ahead, we'll be actively reviewing the opportunities there in front of us for potential refinancing. And that concludes my remarks today.	in q1 2021, increased prices to offset rising raw material costs. expect 2021 capital expenditures to be in range from $35 million to $40 million.
I'm excited to join the Two Harbors' team and look forward to working with all of you. We urge you to review this information in conjunction with today's call. These statements are based on the current beliefs and expectations of management and actual results may be materially different because of a variety of risks and other factors. Paulenier brings with her more than a decade of financial services and Investor Relations experience, and we are very excited to have her here with us. Mary will give more details on our financial results, and Matt will discuss our portfolio composition, activity and risk profile. Turning to Slide 3. We are very pleased with our fourth-quarter performance and book value of $7.63, which represents a 5.8% quarterly return on book value. The results were driven primarily by continued outperformance of lower coupon TBAs, some improvement in specified pool pay-ups and some marginal tightening in MSR spreads. We have spent a significant amount of resources over the years building out our MSR acquisition and oversight platform, and we reaped some benefits this quarter as we added over $40 billion of unpaid principal balance of MSR through both our flow sale channel and bulk purchases. Finally, as a reflection of all of these trends and with the confidence in our forward outlook, we also raised the common stock dividend this quarter by 21% to $0.17 per share. We have also been very focused on our liability structure. Subsequent to quarter end, we issued $287 million of a new convertible note maturing in 2026 and whose proceeds were primarily used to refinance the existing convertible note that is maturing in January 2022. We felt it was important to execute this exchange sooner rather than later as it provides uncertainty for us of our capital structure for the intermediate future without having this maturity looming for the next year. Additionally, we wanted to have as many potential opportunities as possible to execute, and this window was available and so we were pleased to access it. With the certainty provided by the exchange and maturity extension of the convertible notes, we also felt it was the right time to call our Series D and E preferred stock. As a consequence of the events of the first quarter, our ratio of preferred stock to total equity had increased from 20% to about 32%. While we have stated that we felt this amount was manageable, we did recognize that this was not only high compared to our peers, but more importantly, it is not what we would write down on a blank piece of paper for our capital structure. During 2020, we built up a very sizable liquidity position to protect us against further market stress. As time has passed and as the markets have stabilized, we have come to recognize this amount of available liquidity as overly conservative. Furthermore, the primary measure by which we manage our portfolio is potential loss to stockholder equity and not nominal leverage, and we have stated many times that we are comfortable with our portfolio risk profile. Further deploying all of this excess liquidity into our target assets would increase our risk to uncomfortable levels. Those two ideas together led us to the conclusion that we had a certain amount of capital that was essentially fallow and that its best use was to call the Series D and E preferred stock. After the call was completed on March 15, our new ratio of preferred stock to total equity will be about 26%, which we think is appropriate for our Agency plus MSR portfolio. The convertible note exchange and the call of the preferred stock will result in a mix of common, preferred and unsecured debt that is rightsized for our portfolio composition and risk appetite for the foreseeable future. It is also accretive to earnings, as Mary will discuss in a few moments. We continue to see good momentum in our MSR purchase program, which has helped to offset the impact of high prepayment speeds we have been seeing. Purchases in our MSR flow program grew by over 136% year over year, reflecting the strength of the platform and relationships we've built to source and manage the asset. On the RMBS side, there are still several tailwinds, the most important of which are very low funding rates and continued Fed involvement which they have indicated will persist for some time. However, spreads on RMBS are at very tight levels, as Matt will discuss later, and we think some caution is warranted. While unsure of the timing of any potential spread widening, we believe that in an environment with uncertainty in the direction of RMBS spreads is one where our portfolio with its lower exposure to those spreads because of the MSR offset is especially attractive. Turning now to some comments about the full-year performance. Results for 2020 as a whole were disappointing to be sure as book value declined to $7.63 from $14.54, a result of the market volatility and dislocation induced by the pandemic. The decisive and proactive actions we took in the first quarter to sell our non-Agency portfolio, derisked the balance sheet and generated a strong liquidity position. We took control of our own destiny, and we met every single market call during the period. Apart from portfolio returns, 2020 has been a transformational year for Two Harbors as we transitioned to self-management. Our stakeholders continue to benefit from the collective investment, risk management, governance and operations expertise from those who have been supporting the company for many years. At the same time, we have the opportunity to deliver additional value through significant annual cost savings and enhanced returns on any future capital growth. Importantly, the internalized management structure enhances transparency and further aligns our goals with that and our stakeholders. In many ways, we think of our newly internalized company as Two Harbors 2.0, and we are really excited for 2021 and the years ahead. We generated comprehensive income of $113.5 million or $0.41 per common share, representing an annualized return on average common equity of 22.1%. As Bill mentioned, our book value rose to $7.63 from $7.37 per share on September 30, resulting in a total economic return of 5.8%. Book value growth was driven by favorable MSR pricing due to marginal tightening in MSR spreads, TBA dollar roll specialness and lower expenses due to transition to self-management. Moving on to Slide 5. Core earnings increased to $0.30 per share from $0.28 in Q3. Interest income decreased this quarter from $89.7 million to $72.5 million due to lower average balances and coupons as well as higher Agency amortization due to prepayments. This decrease was partially offset by lower interest expense of $22.6 million, reflecting lower borrowing rates and average balances. Gain on other derivatives increased from $32.9 million to $43.5 million due to higher TBA dollar roll income on higher average balances and continued roll specialness. Roll specialness contributed $0.06 to core earnings versus $0.04 in Q3. Expenses declined by $6.2 million, primarily due to transition to self-management and lower servicing costs. Turning to Slide 6. Our portfolio yield in the quarter was 2.26%, and our net spread decreased two basis points to 1.76%. Portfolio yield decreased by 16 basis points from 2.42% to 2.26%, primarily due to higher Agency RMBS prepayments. Our cost of funds decreased 14 basis points from 0.64% to 0.50%, driven primarily by favorable repo rolls. This quarter, we are providing additional disclosure to reflect the impact of net TBA dollar roll income in our portfolio yield. Inclusive of this impact, the annualized net spread for the aggregate portfolio was 1.96% with the benefit of 36 basis points in cost of funds. I'd like to reiterate that since our RMBS position continues to reflect some accounting yields from the higher rate environment in which they were purchased, both core earnings and portfolio yields are anticipated to exceed our expected economic returns in the coming quarters. We expect our asset yields to decline over time to market rates and the net portfolio spread should converge to market levels that are more consistent with our return expectations. Slide 7 highlights our strong liquidity and capital position with ample liquidity with $1.4 billion in unrestricted cash as well as $215 million in unused committed capacity on our MSR asset financing facilities. Late in the third quarter, we also added a $200 million servicing advanced facility to provide committed capacity in the event of increased forbearances or defaults. As a reminder, forbearance rates have been to date benign and lower than expected. Our economic debt to equity at quarter end declined to 6.8 times from 7.7 times at September 30, as we decreased risk late in the quarter. And our quarterly average economic debt to equity was 7.5 times in Q4 compared to 7.6 times in the third quarter. On Slide 8, we have outlined the pro forma impact of the liability and capital actions we have taken post-quarter end. As Bill mentioned, the issuance of new convertible debt in February provided certainty around the maturity and refinancing of our existing convertible debt, which matures in January of next year. With that certainty in hand and our plans to optimize the financing of our MSR asset over the coming year, we elected to redeem $275 million of preferred stock, effectively reducing our cost of capital as well as our preferred ratio to 26%. Taken together, these actions are expected to deliver an annual net benefit to earnings of approximately $0.04 per share beginning in 2022, from the reduction in preferred dividends, offset by costs associated with the convertible debt and incremental MSR financing. As a final note, we have included information on REIT taxable income and the tax characterization of our dividend distributions on appendix Slide 27. For additional information, regarding the distributions and the tax treatment, please reference the dividend information found in the investor relations section of our website. Turning to Slide 9, let's review our quarterly portfolio activity and composition. As previously noted, the fourth-quarter economic performance was primarily driven by a general spread tightening in MBS as the Federal Reserve continued its balance sheet expansion, having purchased almost 1.5 trillion MBS during Q4 so far. Not surprisingly, the strongest move was seen in the current coupon mortgages that have been the Fed's focus with a more modest but positive performance in higher coupons. With interest rates modestly better steepening, but generally stable, we also saw some modest improvement in MSR spreads. As Mary noted, we did decrease risk somewhat during the quarter, reflected by lower economic debt to equity of 6.8 times. This is in part from sales and paydowns in our specified pool portfolio, where valuations in some stories and coupons have become less attractive. In addition, after having increased our position size in TBA 2s to $7 billion, a significant spread tightening and resulting valuations in the quarter led us to reduce that exposure. On net, we took our overall notional TBA exposure down by $1 billion to end the quarter at $5.2 billion. Another factor behind the decision to reduce our exposure was that the Fed began to focus its purchase activity in forward months, which aligns more closely with origination sales and has the effect of decreasing roll specialness. The result has been that roll specialness in the 2% coupon has decreased significantly between mid-December and the end of January. We continue to have good success in sourcing substantial volumes of new servicing through our flow channel at attractive levels and have largely been able to maintain the size of our portfolio in this fast prepay environment. Additionally, we opportunistically added almost $200 million market value of interest-only securities, or IO, during the quarter. The market is seeing very strong demand from banks for structured mortgage-backed securities near to par dollar price, which can only be created today by stripping IO off of premium securities. That demand has led the spreads on the strip down security that are tighter than that on the underlying securities. We consider those spreads quite aggressive with some structures actually having negative option adjusted spreads, which means that the result in IO that we retain is very attractive. Additionally, these positions provide portfolio benefits that are similar to MSR when paired with RMBS in reducing mortgage spread exposure even further. In the lower left-hand chart, you can see that specified pool performance was mixed with a 3%, 3.5% and 4% coupon specified outperforming TBA, but flat or underperforming in both lower and higher coupons. While we don't own any specified pools in the 2% coupon, as I mentioned earlier, we do own TBA, which outperformed by more than one point during the quarter, supported by strong Fed demand and attractive roll dynamics. Today, with regards to specified pools, we remain positioned largely in loan balance and geography stories. In the lower right-hand chart, we show a comparison of generic speeds to our specified portfolio speeds by coupon. The slower prepayment speeds of specified compared to generic highlights the reason that specified pools command a significant price premium over TBA. Moving to Slide 11. You can see that our MSR portfolio was valued at $1.6 billion as of December 31, based on $186 billion of UPB and with a gross coupon of 3.7%. That translates into a price of about $0.86 or right around a 3.2 multiple on our existing portfolio. The balances from the end of 2019 are also shown here, and I would highlight two things: first, our UPB is up modestly in a fast prepay environment, which is a testament to our ability to source new MSR investment; second, the weighted average coupon fell from 4.1% to 3.7%, consistent again with what you would expect in a refi environment. As we reinvest into new production collateral, it will benefit our portfolio prepayment speeds should rates stabilize. We settled $23 billion UPB of new MSR through our flow program during the quarter, which represents record volume for us as we experienced our biggest three months ever. Activity in the bulk market continues to increase as well, and we continue to find valuation situational with some packages trading at precrisis yields, while some are clearing at wider spreads. We had some success in the bulk market and settled on $20.4 billion UPB in four separate transactions. Low pricing during the quarter was fairly constant at a three multiple. In the lower right-hand chart, we compare our servicing prepayment speeds in blue versus generic collateral in gray. Currently, a majority of the underlying loans in our servicing portfolio have some form of seasoning or prepayment protection, which is why our speeds are somewhat slower than the implied TBA speeds. Nevertheless, we do have expectations for speeds to remain high going forward. Primary mortgage rates have continued to grind lower with 30-year rates generally below 3% in national surveys, even with the spread between primary and secondary rates at wide levels. The longer the interest rates stay at these levels, the greater our expectation that primary mortgage rates will decrease further. As a result, unless interest rates sell off and provide prepayment relief, these faster prepayment speeds will certainly continue to impact returns. Over the next two slides, we display our effective coupon positioning and risk profile. In the chart on the top of Slide 12, we show the combined exposures of Agency P&I bonds and MSR at year end compared to our positioning at the end of Q3, as indicated by the diamond bullets. The main change in our effective positioning was a decrease in the 2.5% and 4% coupons, a result of the specified pool activity I mentioned earlier. The lower left-hand chart shows our common book value exposure to 25 basis point spread widening or tightening, and it indicates that book value would decrease by only 2.7% in an instantaneous 25 basis point spread winding. I would note that we are combining the effect of structured IO with MSR regulation today, which we have not done in prior periods due to smaller position sizes. In aggregate, this 2.7% exposure is lower than in recent quarters due to the reduction in specified pools and TBA positioning. Moving to Slide 13. Here, we see our interest rate and curve exposure, both are low and in line with our historical positioning. I would call it again that the Agency plus MSR portfolio provides significant interest rate offsets, which you can see by comparing the gray bars to the blue bars in both charts. Let's look at some data that highlights the attractiveness of the Agency plus MSR portfolio construction. As we've discussed, Q4 has impacted mortgage spreads significantly, which today are at the tight end of the range. To illustrate, let's go over the first chart. What we have here is 10 years of daily option adjusted spread data on the JPMorgan mortgage index with the x-axis being the OAS. It's important to also point out that this data includes previous periods of quantitative deep when the federal reserve were also active buyers of mortgages. The scatter plot shows the change in OAS spread over a one-year time horizon for any given starting spread. Dots that are above the x-axis indicate that spreads were wider one year later from where they began, and dots below the x-axis indicate that spreads were tighter one year later. You can see a clear pattern, which is quite intuitive that when spreads are tight, they tend to widen. And when spreads are wide, they tend to retrace tighter. Mortgage spreads typically mean reverting. As of January 4, the OAS was 16 basis points and as highlighted by the vertical blue line. This data shows that it's quite common for spreads to widen 20 or 30 basis points in the year that follows. In fact, in the past 10 years, there are exactly 0 instances when spreads were unchanged, let alone tighter one year later. The lower chart quantifies our preference for the Agency plus MSR portfolio construction. Again, the x-axis is the starting OAS, same as the other chart. The y-axis in this case shows the expected returns on the same one-year time horizon, using the average of the one-year spread change data as just described. In particular, we assume that the spread change occurs immediately and the portfolio earns a higher yield for the next one year. We have plotted an Agency-Only portfolio, which represents Agency MBS hedge swaps, which is the light blue line. The Agency plus MSR portfolio is represented by the black line. You can see that at the OAS level of 16 basis points, historically, we've observed spreads move around 20 basis points wider over the next year. And in that case, the one-year return would be expected to be negative around down 1% in the Agency-Only example. But because of the mortgage spread widening protection embedded into the Agency plus MSR construction, the expected return for the paired strategy is much better and gets you into the mid-high single digits. The flat slope of the Agency plus MSR line relative to the Agency-Only portfolio is what we mean when we talk about our stable expected return and book value profile and it's particularly powerful in tight mortgage spread environments like today. We're not saying spreads are necessarily going to widen, and they're certainly strong supporting technical factors, but valuations are rich and history suggests limited further upside. Finally, I'd like to take a look at our outlook for Two Harbors and our return expectations on Slide 15. After the significant spread tightening we've seen in the last two quarters, we see gross returns for specified RMBS paired with swaps as being less attractive than they were, see them to be in the range of mid- to high single digits depending on coupon and story. Current coupon TBA returns are enhanced by roll specialness, which is likely to continue for the near future albeit at less attractive levels. New investments in flow MSR paired with RMBS today can also drive returns in the high single digits to low teens. And if you assume roll specialness on the RMBS component can be higher. We continue to focus on our strong partnerships with MSR sellers and internal platform, which gives us the ability to source significant volumes, especially in today's prepaid environment. To conclude, we feel very good about our Agency plus MSR portfolio and the forward outlook. As Mary highlighted, our capital and liquidity position remains very strong, and we took steps subsequent to quarter end to further optimize our capital structure with the benefits accruing over time to our common shareholders. And as Matt said, new investments in specified pools are less compelling today with spreads near the tight end of the long-term ranges, and we have reduced risk and leverage somewhat given the environment. However, as we discussed, we still see returns for our strategy to be supportive of current dividend levels, and this tight spread environment is one where our Agency plus MSR strategy is especially attractive.	two harbors investment corp - qtrly reported core earnings of $82.0 million, or $0.30 per weighted average basic common share. two harbors investment corp - qtrly reported book value of $7.63 per common share.
Before we begin, I'd like to mention we will be discussing future estimates and expectations during our call today. On the call today, we have Scott Donnelly, Textron's chairman and CEO; and Frank Connor, our chief financial officer. Revenues in the quarter were $3 billion, up from $2.7 billion in last year's third quarter. During this year's third quarter, we reported income from continuing operations of $0.82 per share. Adjusted income from continuing operations, a non-GAAP measure, was $0.85 per share for the third quarter of 2021, compared to $0.53 per share in the third quarter of 2020. Segment profit in the quarter was $279 million, up $90 million from the third quarter of 2020. Manufacturing cash flow before pension contributions totaled $271 million in the quarter and $851 million year-to-date. We continue to execute well across the company in the quarter. At Aviation, we continue to see a solid recovery in the general aviation market with strong commercial demand, increased deliveries in Citation jets and commercial turboprops and higher aftermarket volume. We delivered 49 jets, up from 25 last year and 35 commercial turboprops, up from 21 in last year's third quarter. Order activity in the quarter remained very strong, resulting in backlog growth of $721 million bringing us to $3.5 billion at the quarter end. Also in the third quarter, the Beechcraft King Air 360 and 260 achieved EASA certification and began to deliver customers throughout the region. Continuing with our product strategy of upgrading existing models at NBAA, we recently announced the Citation M2 Gen2 and the XLS Gen2 product upgrades. Also on the new product front, such as SkyCourier is continuing to progress through certification with over 1,600 hours of flight test activity and the Beechcraft Denali successfully completed its initial ground engine runs powered by GE's new Catalyst engine. The Bell revenues were down 3% in the quarter, largely on lower military revenues. On the commercial side of Bell, we delivered 33 helicopters down from 41 in last year's third quarter. Moving to future vertical lift. In September, Bell submitted its proposal for the FARA program, a downselecting award is expected in the second quarter of 2022. On FARA, Bell is about 60% of the way through its build of the 360 Invictus prototype remains on schedule. Also in the quarter, Bell inducted the first U.S. Air Force CV-22 for its nacelle improvement modifications. We saw another strong quarter of execution with operating margins at 15.1%, up 190 basis points from last year's third quarter. ATAC continued to expand its fleet of certified F1 aircraft with two additional aircraft entering service in the quarter bringing the total fleet to 19 aircrafts at the end of the quarter. The fleet continues to support higher customer demand for adversary air services, driving higher revenues in the quarter. At Air Systems, the team booked $25 million in new orders in the quarter, including both fee-for-service activities, as well as new hardware. Moving to Industrial, overall revenues were lower in the quarter as we continue to experience manufacturing disruptions related to supply chain challenges. In Kautex, we again saw order disruptions related to the global auto OEM supply chain shortages, which have directly impacted production scheduling and resulting in intermittent line shutdowns of manufacturing efficiencies. At Specialized Vehicles, we saw continued strong demand in our end markets with higher pricing, which offset production disruptions from part shortages. To wrap up, Textron delivered a solid quarter with increased aviation backlog, improved manufacturing margins and continued strong cash generation while working to minimize the impact of supply chain disruptions. Let's review how each of the segments contributed, starting with Textron Aviation. Revenues at Textron Aviation of $1.2 billion were up $386 million from a year ago, largely due to higher Citation jet volume of $290 million, aftermarket volume of $62 million and commercial turboprop volume of $48 million. Segment profit was $98 million in the third quarter, up $127 million from a year ago, largely due to the higher volume and mix of $96 million and favorable pricing net of inflation of $22 million. Backlog in the segment ended the quarter at $3.5 billion. Revenues were $769 million, down $24 million from last year, largely reflecting lower military revenues. Segment profit of $105 million was down $14 million primarily due to lower military revenues. Backlog in the segment ended the quarter at $4.1 billion. At Textron Systems, revenues were $299 million, down $3 million from last year's third quarter due to lower volume of $39 million at Air Systems, which primarily reflected the impact from the U.S. Army's withdrawal from Afghanistan on its fee-for-service contracts, partially offset by higher volume, primarily at ATAC and Electronic Systems. Segment profit of $45 million was up $5 million to a favorable impact from performance and other. Backlog in the segment ended the quarter at $2.2 billion. Industrial revenues were $730 million, down $102 million from last year, reflecting lower volume and mix of $156 million primarily at Fuel Systems and Functional Components, reflecting order disruptions related to the global OEM supply shortages, partially offset by favorable impact of $44 million from pricing, largely at Specialized Vehicles. Segment profit of $23 million was down $35 million from the third quarter of 2020, primarily due to the lower volume and mix described above, partially offset by higher pricing net of inflation at Specialized Vehicles. Finance segment revenues of $11 million -- were $11 million and profit was $8 million. Moving below segment profit. Corporate expenses were $23 million and interest expense was $28 million. With respect to our 2020 restructuring plan, we recorded pre-tax charges of $10 million on the special charges line. Our manufacturing cash flow before pension contributions was $271 million in the quarter and $851 million year-to-date, as compared to $129 million for the corresponding nine-month period in 2020. Year-to-date, our cash generation reflects improved working capital management, which includes more linearity in quarterly aircraft deliveries and higher customer deposits in Aviation from an increased backlog. In the quarter, we repurchased approximately 4.2 million shares, returning $299 million in cash to shareholders. We're raising our expected full year guidance for adjusted earnings per share to a range of $3.20 to $3.30 per share. This includes revised tax guidance at effective rate of 15.5% for the full year. We're also raising our outlook for manufacturing cash flow before pension contributions to a range of $1 billion to $1.1 billion, up $200 million from our prior outlook, with planned pension contributions of $50 million.	compname reports q3 adjusted earnings per share $0.85 from continuing operations. q3 adjusted non-gaap earnings per share $0.85 from continuing operations. q3 earnings per share $0.82 from continuing operations. textron aviation backlog at end of q3 was $3.5 billion. bell backlog at end of q3 was $4.1 billion.
First, I'd like for Brian to give the safe harbor statement. Next, I will have some preliminary comments on our quarter results, and then Brian will review the details. I'll end with some additional comments, and then we'll take questions. During the course of this conference call, management may make statements that provide information other than historical information and may include projections concerning the company's future prospects, revenues, expenses and profits. We'd refer you to our Form 10-K and other SEC filings for more information on those risks. Please note that all growth comparisons we make on the call today will relate to the corresponding period of last year, unless we specify otherwise. Our first quarter results exceeded our expectations, providing an exceptional start to 2021. Recurring revenues, which comprised 75% of our first quarter revenues, were strong, led by a 25% growth in subscription revenues. However, software licenses and services revenues continue to be pressured by longer sales cycles and delays in projects as clients deal with the ongoing effects of the pandemic. A favorable revenue mix with strong subscription growth, coupled with cost efficiencies, drove a 270 basis point expansion of our non-GAAP operating margin to 26.8%. Cash flow continued to be very robust as cash from operations grew 26% and free cash flow grew almost 34%. We're pleased to see signs of growing activity in our public sector markets and expect that federal stimulus under the American Rescue Plan Act will have a positive impact on government technology spending going forward. Bookings in the first quarter were solid at approximately $247 million, but were down 22.8% against a very challenging comparison with the first quarter of 2020. Our largest deal in the quarter was a SaaS arrangement for our Munis ERP solution with the City of Fresno, California valued at approximately $10 million. Other significant SaaS contracts included ERP deals with Hall County, Georgia and Fort Smith, Arkansas and Odyssey Courts deal with Val Verde County, Texas. Our largest on-premises contracts include an ExecuTime time contract with the U.S. Virgin Islands, public safety and Brazos citations contracts with Montgomery County, New York and Cicero, Illinois and an EnerGov contract with the Commonwealth of the Bahamas. So far this year, we've been busy on the M&A front. On March 31, we completed two tuck-in acquisitions, DataSpec and ReadySub, for a total purchase price of $12 million in cash. DataSpec is a market-leading provider of software for the electronic management of veterans claims. DataSpec's web-based Software-as-a-Service system called VetraSpec allows for secure electronic claims submission to the Federal Department of Veterans Affairs and reporting capabilities in addition to scheduling, calendaring and payments. DataSpec offers county, state and national versions of VetraSpec, with state solutions making a majority of its implementations. The solution allows state departments to execute and analyze reports on the entire state, individual offices, regions and districts and individual users. ReadySub is a cloud-based platform that delivers comprehensive absence and substitute teacher management solutions, serving approximately 1,000 school districts across the United States, with only approximately 20 of which overlapping with Tyler's 2,000 school district clients. The solution helps districts with the labor-intensive and demanding task of filling both planned and unplanned staff absences with the most highly qualified substitute resources. With continuous pressure due to substitute teacher shortages, exacerbated by the COVID-19 pandemic, districts can more easily retain a pool of qualified substitutes and automate the searching and filing of needed substitute spots. Additionally, ReadySub can integrate districts' payroll processes, eliminating duplicate work and streamlining related payroll tasks. Most importantly, last week, we completed the $2.3 billion cash acquisition of NIC, a leading digital government solutions and payments company that serves more than 7,100 federal, state and local government agencies across the nation. NIC delivers user-friendly digital services that make it easier and more efficient for citizens and businesses to interact with government, providing valuable conveniences like applying for unemployment insurance, submitting business filings, renewing licenses, accessing information and making secure payments without visiting a government office. In addition, NIC has extensive experience and expertise and scale in the government payments area, processing more than $24 billion in payments on behalf of citizens and governments last year, which will accelerate Tyler's strategic payments initiative. With the addition of NIC's highly complementary industry-leading digital government solutions and payment services to Tyler's broad client base and multiple sales channels, the combined company will be well equipped to address the tremendous demand at the federal, state and local levels for innovative platform services. Together, Tyler and NIC will connect data and processes across disparate systems and deliver essential products and services to all public sector stakeholders. NIC had revenues of $460.5 million and net income of $68.6 million in 2020. NIC's core first quarter revenues, excluding the TourHealth and COVID initiatives that are expected to wind down after the second quarter, grew more than 10% over last year. In addition, NIC's operating income, again excluding the TourHealth and COVID initiatives as well as acquisition costs, rose more than 20%. Now I'd like for Brian to provide more detail on the results for the quarter. Yesterday, Tyler Technologies reported its results for the first quarter ended March 31, 2021. Both GAAP and non-GAAP revenues for the quarter were $294.8 million, up 6.6% on a GAAP basis and 6.5% on a non-GAAP basis. As you may recall, we were off to a very strong start in the first two months of 2020 before the COVID-19 pandemic began to significantly affect our business in March. So we're generally pleased with our growth this quarter against that comparison. Software license revenues declined 20.3%, reflecting both extended sales cycles and a high mix of subscription deals at 66% of new software contract value. Software services revenue declined 8.6% as a result of the continued impact of the COVID-19 pandemic, and our shift to remote delivery of most services resulted in a decline in billable travel revenue. On the positive side, subscription revenues rose 25.4%. We added 84 new subscription-based arrangements and converted 39 existing on-premises clients, representing approximately $52 million in total contract value. In Q1 of last year, we added 131 new subscription-based arrangements and had 19 on-premises conversions, representing approximately $98 million in total contract value. Subscription contract value comprised approximately 66% of total new software contract value signed this quarter, compared to 73% in Q1 of last year. The value weighted average term of new SaaS contracts this quarter was 4.0 years, compared to 5.9 years last year. Revenues from e-filing and online payments, which are included in subscriptions, were $26.9 million, up 22.4%. That amount includes e-filing revenue of $15.6 million, up 4.8%, and e-payments revenue of $11.3 million, up 59.3%. For the first quarter, our annualized non-GAAP total recurring revenue, or ARR, was approximately $886 million, up 12.9%. Non-GAAP ARR for SaaS arrangements for Q1 was approximately $302 million, up 26.3%. Transaction-based ARR was approximately $108 million, up 22.4%, and non-GAAP maintenance ARR was approximately $476 million, up 4.1%. Our backlog at the end of the quarter was $1.55 billion, up 3%. As Lynn noted, our bookings in the quarter were solid at $247 million. However, this was down 22.8% compared to a difficult comparison to Q1 of last year. Last year's first quarter bookings included several large contracts, including two significant follow-on SaaS deals with the North Carolina courts, with a combined contract value of approximately $38 million. For the trailing 12 months, bookings were approximately $1.2 billion, down 13.3%, although they do not include the majority of the $98 million extension of our Texas e-filing contract signed in Q4 of 2020 because of certain termination provisions in that contract. If the Texas e-filing renewal was fully included, trailing 12-month bookings would have been down only 6.4%. The prior trailing 12-month bookings also included four significant SaaS deals with the North Carolina courts, with a combined contract value of approximately $123 million. The bookings growth rate in Q1 was also affected by a shorter average term for new subscription contracts. Our subscription -- software subscription booking in the first quarter added $10.2 million in new annual recurring revenue. Cash flow was once again very strong in the first quarter as cash from operations increased 26.4% to $71.7 million and free cash flow grew 33.9% to $61.7 million, representing an all-time high for first quarter free cash flow. We financed the NIC acquisition with a mixture of debt at very attractive rates that gives us a flexible capital structure. In March, we completed a $600 million offering of 0.25% convertible senior notes due 2026. The notes are convertible into Tyler common stock at a conversion price of $493.44, which represents a 30% premium over our closing price on March 4. On April 21, concurrent with the closing of the NIC acquisition, we entered into a new $1.4 billion senior unsecured credit facility with a group of eight banks. The facility includes a $300 million term note due in 2024 and a $600 million term note due in 2026, both of which can be prepaid without penalty. The facility also includes a new five-year $500 million revolving credit agreement that replaces our prior $400 million revolver. The combination of the convertible debt, term notes and revolver provide us with a great deal of flexibility. Our balance sheet remains very strong and its pro forma net leverage at the NIC closing was approximately 3.2 times trailing 12-month adjusted EBITDA. And we expect to end the year with net leverage under 2.5 times. The current blended interest rate on the $1.75 billion of debt we have outstanding today is 1.1%. We remain on track to achieve or exceed the annual revenue and earnings per share guidance that we communicated in February for Tyler, excluding the impact of the NIC acquisition. As Lynn mentioned, NIC also had a very strong first quarter results that exceeded their plans. We expect the NIC acquisition will be accretive to our non-GAAP earnings and EBITDA as well as to our recurring revenue mix and free cash flow per share in 2021. Because of antitrust restrictions, we took a conservative approach to our integration and strategic planning for NIC prior to closing the transaction last week. We are currently working closely with NIC's leadership to evaluate strategic growth opportunities that take advantage of the combined strength of the two businesses and determine the impact on our 2021 plan. We expect to complete the fine-tuning of our joint operating and financial plans for the remainder of the year and issue 2021 guidance for the combined company during the second quarter. Our team of professionals, including our new NIC team members, executed at a high level in the first quarter, driving results that surpassed expectations for both Tyler and NIC and provided a great start to 2021. Exiting 2020, our financial position was stronger than ever, allowing us to continue to pursue strategic acquisitions, including NIC, the largest acquisition in our history with a purchase price of $2.3 billion in cash. We've also been able to continue to invest in and, in some cases, accelerate all of our long-term strategic initiatives, in particular, our shift to a cloud-first approach. As a result, our competitive position has also continued to strengthen. We believe we will continue to see an acceleration of the public sector's move to the cloud, and we are in a great position to support that move. I'm happy to say that we are on track with the strategic investments in optimizing our products for the cloud that we discussed on our fourth quarter call. This quarter, we saw early indicators that our market is beginning to recover as some delayed procurement processes are moving forward and RFP activity is growing from the levels of the second half of 2020. We also expect that the $350 billion of aid to state and local governments under the American Rescue Plan Act will provide a significant measure of relief to budget pressures faced by many of our clients and prospects and have a positive impact on recovery of our markets. One topic I've not discussed on these calls before pertains to our efforts regarding environmental and social initiatives. Tyler's culture guides our commitment to being a responsible partner in the communities where we live, work and serve our clients. This year marks the 50th anniversary of the Tyler Foundation, which since its creation has provided millions of dollars to charities and causes that positively impact our communities. Our culture is also the foundation for our belief in the importance of providing an inclusive and diverse workplace. We are proud to have been included in the Forbes America's Best Employers for Diversity List for the past two consecutive years. The pause in normal office occupancy and business travel due to the pandemic provided an opportunity for us to evaluate our environmental impact across our major office locations and identify opportunities to make our practices more consistent and effective. Last year, we formed an environmental task force to strengthen our sustainability efforts across our office locations and the communities we impact. We achieved a significant milestone last year by responding to Tyler's first invitation to the Dow Jones Sustainability Index survey. More than 3,500 of the world's largest publicly listed companies provide detailed data and background to this global survey for evaluation by its independent sustainability ranking body. Completing the survey was an important opportunity for Tyler to uncover opportunities to strengthen our core responsibility strategy. We recently published our second annual corporate responsibility report, which is available on our website. This report represents a significant expansion of our reporting on our ESG efforts, and we look forward to continuing our journey and sharing our progress in this area. Finally, this week, we are virtually hosting more than 5,000 clients at Connect 2021, our annual user conference with a theme called Virtually Possible. Team members from across Tyler are providing nearly 700 hours of valuable content for our clients using our advanced virtual event platform. We are excited to be able to connect with so many clients at our virtual event, and we look forward to connecting with them in person at Connect 2022. With that, we'd like to open up the line for Q&A.	q1 revenue rose 6.6 percent to $294.8 million.
First, I'd like for Brian to give the safe harbor statement. Next, I'll have some comments on our quarter and then Brian will review the details of our results. I'll end with some additional comments, and then we'll take questions. We would refer you to our Form 10-K and other SEC filings for more information on those risks. Please note that all growth comparisons we make on the call today will relate to the corresponding period of last year unless we specify otherwise. Our third quarter results were exceptionally strong, building on the momentum we established in the first half of the year. This was our first full quarter including NIC's results, and it was our best quarter ever by most financial measures. We achieved new quarterly highs in revenues, non-GAAP EPS, free cash flow, adjusted EBITDA, bookings and backlog. Total revenues grew 60.9% with organic growth of 7.6%. As a result of the surge in the Delta variant, NIC's COVID-19-related revenues from TourHealth and pandemic unemployment initiatives were significantly above plan at $43.3 million. We had expected those revenues, which have relatively low margins to wind down in the second half of the year, but we now expect they will continue into the first half of 2022. NIC's core revenues grew 5% in the quarter. Recurring revenues comprised over 80% of our quarterly revenues for the first time and were led by 183% growth in subscription revenues. Excluding NIC revenues, subscription revenue growth was robust at 23.9%, reflecting our accelerating shift to the cloud. We have now achieved greater than 20% subscription revenue growth in 55 of the last 63 quarters. Software licenses and services revenues grew 13.9% or 2% excluding NIC. As expected, our margins compressed compared to last year's third quarter. Some expenses like trade shows and employee health claims as well as lower margin revenues like billable travel that declined in 2020 due to COVID pandemic have begun to return this year. Margins were also impacted by the inclusion of NIC and particularly, by the continuation of their lower-margin COVID initiative revenue. As a result, our non-GAAP operating margin declined 330 basis points to 25.3%. Excluding NIC's COVID initiative revenues and related costs, our non-GAAP operating margin was 26.8%. Bookings reached a record high in the third quarter at approximately $601 million, more than double last year's third quarter. Excluding NIC, bookings grew 51.9%, with the biggest contributor being the $63 million renewal of our fixed fee e-filing arrangement with the state of Illinois. We're very pleased to report early success this quarter with joint sales efforts between NIC and Tyler Solutions teams. We signed agreements with the Virginia Department of Housing and Community Development valued at approximately $24 million to provide a digital and call center solution for tenant, landlord and third-party filing of rent relief program claims. We'll also provide administrative dashboards from our Socrata Data & Insight solutions as well as payment processing capabilities. Our largest software deal in the quarter also came from NIC with $6.1 million SaaS contract with the West Virginia Division of Motor Vehicles for digital titling. This new digital vehicle titling and registration management system will go beyond modernization and revolutionize how the DMV manages vehicles and interacts with businesses and citizens. In addition to the streamlining of nearly every vehicle-related process in place today, many legacy paper processes will be fully replaced with secure digital solutions. The solution utilizes technology to govern and secure the vehicle ownership process, adding security, reducing fraud and providing the flexibility that other state DMV's operations are lacking. The arrangement, which leverages our state master agreement has an initial term of five years. In addition to the SaaS fees, the agreement will generate estimated transaction revenue of more than $3 million per year. I'd like to also highlight a few more significant deals signed this quarter. We signed appraisal services contracts with the Delaware Counties in New Castle and Kent. In addition, New Castle County selected our iasWorld appraisal solution under a SaaS arrangement. The deals have a combined value of approximately $19 million. Coupled with the appraisal services contract signed last quarter was Sussex County, Tyler will now be performing a property reassessment for the entire state. Also for our iasWorld Property Tax and Appraisal solution, we signed SaaS arrangements with the regional municipality of Wood Buffalo in Alberta, Canada, valued at approximately $3.1 million. Franklin County, Ohio, valued at approximately $3.5 million and Summit County, Ohio, which also includes our Data & Insights Solutions, valued at approximately $2.9 million. Other major SaaS deals included a $4.5 million contract with Arlington Heights, Illinois for our ERP civic services and payment solutions and a $3.4 million contract with Bayer County, Texas for our Odyssey, SoftCode and Supervision Justice solutions. Our largest perpetual license contract for the quarter was a $5.4 million contract to provide our MicroPact and entellitrak solution to manage COVID vaccination at stations for the U.S. Department of Justice. We also signed a $2.5 million on-premises license contract with the Commonwealth of the Northern Mariana islands for our Munis ERP and Enterprise Asset Management, ExecuTime and Socrata solutions. We also signed several significant contract renewals with existing clients, including extensions of NIC's state enterprise agreements with the states of Utah and Oklahoma, and a five year renewal of our e-filing arrangement with the state of Illinois, which was expanded to include applications from our Socrata Data and Insights platform. On last quarter's call, we reported that NIC had been selected as one of two vendors to provide the Internal Revenue Service with a digital payment processing solution that would allow taxpayers to securely pay their federal taxes, and that revenue under that contract was expected to begin in January of 2022. Following the award, three entities filed protest with the GAO. Prior to any ruling on the protest by the GAO, the IRS notified the GAO that it was canceling the two awards, including the award to NIC. While the IRS has not formally terminated NIC's contract, it has issued a stop work order under the contract. The IRS indicated that it will either amend the current solicitation, allowing all bidders to modify their previous submissions and then reevaluate the proposals or terminate the existing solicitation and start the process over with a new procurement in the coming months. The IRS has not yet stated which of these options it will select and we have no information regarding the potential timing of either option. Given these recent developments, we do not expect to recognize any revenue under the IRS award in 2022. While the specific concerns raised in the protests have not been made public and are not known by Tyler, the decision to cancel the award to NIC was not related to NIC's performance under the contract, its ability to successfully perform under the contract or any allegations of misconduct or improper behavior by NIC. On the M&A front, we completed the acquisitions of VendEngine and Arx during the third quarter. VendEngine is one of the fastest-growing technology companies in North America, operating in more than 230 counties and 32 states. Its leading cloud-based platform provides a comprehensive suite of applications focused on the corrections market, including deposit technologies for commissary, ordering and warehouse management and various informational electronic communications, security, accounting and financial trust management components. Arx is a cloud-based software platform, which creates accessible technology to enable a modern day police force that is fully transparent, accountable and a trusted resource to the community it serves. The acquisition of Arx allows Tyler to offer a full suite of public safety solutions, including Arx Alert and Arx Community, designed to maximize efficiency and safety for law enforcement officers while increasing transparency and trust building with communities. VendEngine and Arx have combined ARR of approximately $17.5 million and their additions further strengthen Tyler's Justice and Public Safety suites. Now I'd like for Brian to provide more details on the results of the quarter. Yesterday, Tyler Technologies reported its results for the third quarter ended September 30, 2021. GAAP revenues for the quarter were $459.9 million, up 60.9%. Non-GAAP revenues were $460.6 million, up 61.1%. On an organic basis, GAAP and non-GAAP revenues grew 7.6% and 7.5%, respectively. Software license revenues rose 13.7%. Subscription revenues rose 183.3%. Excluding the contribution from NIC, subscription revenues were still very strong, growing 23.9%. We added 144 new subscription-based arrangements and converted 67 existing on-premises clients, representing approximately $84 million in total contract value. In Q3 of last year, we added 114 new subscription-based arrangements and had 46 on-premises conversions, representing approximately $56 million in total contract value. Subscription contract value comprised approximately 74% of total new software contract value signed this quarter compared to 47% in Q3 of last year, reflecting our ongoing shift to a cloud-first approach to sales. The value weighted average term of new SaaS contracts this quarter was 3.4 years compared to 4.3 years last year. Transaction-based revenues, which include NIC portal, payment processing and e-filing revenues and are included in subscriptions, were $171.2 million, up more than sixfold from last year. E-filing revenues reached a new high of $17.4 million, up 15%. Excluding NIC, Tyler's transaction-based revenues grew 24.3%. For the third quarter, our annualized non-GAAP total recurring revenue, or ARR, was approximately $1.5 billion, up 79.2%. Non-GAAP ARR for SaaS software arrangements for Q3 was approximately $330 million, up 24.7%. Transaction-based ARR was approximately $685 million, up 639%. And non-GAAP maintenance ARR was flat at approximately $471 million. Our backlog at the end of the quarter was $1.77 billion, up 14.3%. Because the vast majority of NIC's revenues are transaction-based, their backlog at quarter end was only $27 million. Excluding the addition of NIC, Tyler's backlog grew 12.6%. As Lynn noted, our bookings in the quarter were very robust at $601 million, up 105.7% and includes the transaction-based revenues of NIC. On an organic basis, bookings were strong at approximately $444 million, up 51.9% fueled by the renewal of the State of Illinois fixed e-filling filing arrangement of approximately $63 million and the addition of the two Delaware appraisal deals totaling $19 million. For the trailing 12 months, bookings were approximately $1.6 billion, up 31.3%. And on an organic basis, were approximately $1.4 billion, up 10.8%. Our software subscription bookings in the third quarter added $19 million in new annual recurring revenue. Cash from operations and free cash flow were both record highs for the third quarter at $205.4 million and $192.8 million, respectively. Our balance sheet remains very strong. During the quarter, we repaid the outstanding balance of $65 million on our revolver and paid down $57.5 million on our term loans for a total debt reduction of $122.5 million. We ended the quarter with total outstanding debt of $1.428 billion and cash and investments of $348.4 million, and net leverage of approximately 2.3 times trailing pro forma EBITDA. We expect the net leverage to be approximately two times by year-end. We have raised our revenue and earnings per share guidance for the full year 2021 to reflect our strong year-to-date performance and our expectations for the fourth quarter. We expect 2021 total GAAP revenues will be between $1.577 billion and $1.597 billion, and non-GAAP total revenues will be between $1.580 billion and $1.6 billion. We expect total revenues will include approximately $72 million of COVID-related revenues from NIC's TourHealth and pandemic unemployment services that are expected to wind down in the first half of 2022. We expect 2021 GAAP diluted earnings per share will be between $3.55 and $3.63 and may vary significantly due to the impact of stock incentive awards on the GAAP effective tax rate. We expect 2021 non-GAAP diluted earnings per share will be between $6.94 and $7.02. I'm extremely pleased with our third quarter results, both from Tyler's core operations and from NIC in its first full quarter as part of Tyler. When we spoke to investors in June, we discussed four priorities around the NIC acquisition for 2021. First, don't mess up the business; second, achieve our 2021 plans for both businesses; third, retain NIC staff and establish a long-term leadership team; and fourth, identify and launch joint strategic initiatives and get our sales teams aligned. I'm happy to say we are executing on all of those objectives. Both businesses are executing at a high level and are exceeding our 2021 plans. The NIC team under the leadership of Elizabeth Proudfit is enthusiastic about the combination and the opportunities ahead with Tyler. And we've hit the ground running, with teams actively working on integration and go-to-market strategies. We're showcasing Tyler products to NIC's entire state general manager team, and NIC's general managers are providing detailed reviews of the NIC State Enterprise contracts and relationships for Tyler's team. We've also established a payments technology integration plan and are in the process of finalizing the joint Tyler NIC payments organization. We've already had some early success in joint opportunities, such as our contract with the Colorado Department of Regulatory Agencies that includes NIC payment processing, Tyler's entellitrak regulatory solutions and our Socrata Data & Insights platform, as well as the recent NIC contract with Virginia for a solution for the rent relief program, which also includes Tyler Socrata applications. We have a current pipeline of more than 40 qualified sell-through opportunities with NIC's state enterprise market across multiple Tyler solutions and have identified Tyler sales opportunities leveraging NIC State Enterprise contracts, to speed up the time from award to contract. We're also beginning to build our combined payments pipeline with early sales in Florida and Louisiana. We continue to see positive trends in public sector market activity. Indicators such as proposals, sales demonstrations and pipelines are all up significantly from 2020 and are generally at or, in some cases, above pre-COVID levels. Our competitiveness remains strong as reflected by high win rates across our major applications. While not yet a significant factor, we're starting to see purchasing activity that is identified as being funded through the federal stimulus under the CARES Act and American Rescue Plan. We expect that the $350 billion of aid to state and local governments and $167 billion of aid to schools under the American Rescue Plan Act will provide a significant measure of relief to budget pressures faced by many of our clients and prospects and potentially provide a tailwind over the next two to three years. A survey by the National Association of CIOs indicated that most state CIOs expect that remote work will continue and the need for digital services will increase. CIOs said they plan to modernize legacy systems in the next two years with human services and public welfare, labor and employment and health services noted as priorities. Tyler is well positioned to help public sector leaders address those needs. We also remain on track with our R&D projects around our cloud initiative and with our progress toward hosting new SaaS implementations and on-premises conversions in AWS. Our cloud operations team is engaged in 2022 planning with a focus on continued product optimization, data center migration and operations maturity. Kevin is a seasoned IT leader with experience managing technology infrastructures for corporations, statewide judicial courts, statewide executive government agencies and U.S. military organizations, most recently serving as CIO for the Idaho Judicial branch. Kevin will work closely with our former CIO, Matt Bieri, until Matt's retirement early next year. I'd also like to express our deep appreciation to Matt for his tremendous leadership of our IT and hosting organization over the last 11 years and wish him the best in his retirement. With that, we'd like to open up the line for Q&A.	q3 revenue rose 61.1 percent to $460.6 million. sees fy non-gaap earnings per share $6.94 to $7.02. sees fy gaap earnings per share $3.55 to $3.63. sees fy revenue $1.577 billion to $1.597 billion. qtrly total backlog was $1.77 billion, up 14.3% from $1.55 billion at september 30, 2020.
Yesterday after the close of market, we announced that we have entered into a settlement with the U.S. Securities and Exchange Commission, resolving a previously announced investigation related to disclosure and the impact of certain pull-forward sales for the third quarter of 2015 through the fourth quarter of 2016. This settlement is to our disclosures and does not include any allegations from the SEC that sales during these periods did not comply with GAAP. It is important to note that the ongoing uncertainty related to COVID-19 and its potential impacts on the global retail environment could continue to impact our business results moving forward. You may also hear us refer to amounts under U.S. GAAP. And with that, may the fourth be with you. With the continued disciplined execution of our strategic playbook, we're happy with our results, which marks a better-than-expected start to our year. As with many companies, our year-over-year comparisons are affected by the significant COVID impacts we experienced in 2020. Putting these dynamics aside for a moment, and perhaps what we're most encouraged to see at this early point in our year, is that on a two-year stack, that is skipping over 2020, we're running a better, higher quality, and more profitable business. This is even more evident because of the strategies we've employed over the past couple of years, including significantly reduced sales to the off-priced channel, proactive supply constraints against demand signals to days of exiting undifferentiated distribution, and certainly, on an annual basis, the absence of MyFitnessPal, which we sold at the end of last year. By staying focused on athletic performance, operational excellence, and connecting even more deeply with our consumers, these efforts are beginning to drive more consistent results, particularly in North America, our largest and most challenged business over the past couple of years. At the highest level, we are executing well strategically, operationally, and financially. Given these and other factors, including market dynamics, and continued strong momentum in fitness and wellness, we have meaningfully updated our outlook for the year with revenue now expected to grow at a high-teen percentage rate, bringing our business essentially back in line with our results in 2019. As our transformation continues to translate into improved momentum for Under Armour, there are no changes to the strategies we outlined earlier this year: strengthening the brand, continuous operating model improvement, elevating a direct-to-consumer-focused approach and staying disciplined about returning greater profitability and value to shareholders. Using this construct, I'll take a few minutes to highlight some of the progress we're making in these areas, starting with brand strength. From a marketing and consumer engagement perspective, our global campaign, The Only Way is Through, is delivering a singular Under Armour voice with focused performers. In 2021, we are evolving these efforts to bring the ecosystem of how we engage and inspire athletes across both physical and digital experiences into even better alignment. These factors, driven by more robust data-driven decisions, a constant consumer insights feedback loop, and our meaningfully improved outlook, gives us confidence that this is an opportune time to amplify the momentum even more greatly in the second half of this year. As such, we plan to make additional investments to support our marketing efforts to help drive awareness and increase conversion. These accelerated investments will primarily focus on North America and critical countries like China and Germany, where we are still significantly underpenetrated from a brand awareness perspective. As a premium athletic performance brand, the products that Under Armour delivers to the marketplace must meet and exceed the consumers' high expectation of performance, fit and style unfailingly to make them better. So whether it's bringing newness and excitement to women with our crossback and Infinity bras and no slip waste band leggings, to the next generation of RUSH and Iso-Chill apparel for all athletes, our go-to-market process, storytelling, and operational excellence are helping to drive more robust consumer demand. Taking a moment to talk about our run category. We continue to be quite pleased with the success of our Under Armour HOVR franchise as it's broadened our appeal and preference among runners by offering multiple price points and seasonal newness to inspire loyalty. During the first quarter, we saw strength in HOVR Sonic, Machina, and Infinite. We also successfully launched our most pinnacle running footwear ever with the UA Flow Velociti Wind. Priced at $160, this product is delivering well against our expectations. It's also pushing performance with data from our MapMyRun digital app, telling us that runners wearing these shoes are, on average, going further and faster than any other UA running shoe. So while still early, very exciting to see. Switching gears to our second area of focus, which is continuous operating model improvement. With the critical mass of our transformation now behind us, and appropriately rebased cost structure and optionality that scaled smartly with future growth, we believe we are firmly on a path to returning to double-digit operating margin over the long term. This, of course, is not a one-and-done strategy, there is no finish line. Yet instead an ever-present focus on getting better, better process, more optimal structure, more efficient systems and vigilance around our decision-making. By region, channel or product, we are constantly challenging ourselves to leverage our foundational horsepower by being more precise and return-based on the investment choices we make as a global company to advance our strategic and financial goals. Looking at our business by region. Let's review how some of this is playing out. I'll start with North America, which by many accounts, I believe to be in the healthiest position it's been in, in quite a few years from both a brand and financial perspective. High-quality revenue driven by a sharp focus around tight inventory management, proactive demand constraints, improving segmentation, and servicing our customers well puts us in the sweet spot of our strategy to return to brand-right premium growth. To support this confidence and recall in my earlier two-year stack example, we see our full-price wholesale business in North America in 2021 being meaningfully here than the same business in 2019. Keep in mind, this is despite several headwinds in the comp set, including proactive demand constraints, exiting undifferentiated retail, a significant reduction in sales to the off-price channel and overall promotional activities. So we've taken, in total, an encouraging sign as to the future of our business. The other side of this equation is our great consumer business in North America, where we remain committed to reducing our promotional activity and driving improved store and digital productivity. And while traffic challenges persist in our physical stores, the business is performing about plan, and we expect it to deliver solid growth in 2021. Shifting next to Asia Pacific. While short-term pandemic-driven impacts continue to present traffic challenges and higher promotional activities across the region, we remain confident in our ability to navigate these dynamics to emerge a stronger brand. Opportunistically, given an accelerated shift to online purchase behaviors, investments into CRM and digital activations remain center stage in our playbook to driving better brand affinity in the long term. From a direct-to-consumer perspective, we remain appropriately cautious concerning the right balance of return on those investments relative to the environment and staying premium. Next up is EMEA. And even though ongoing impacts from COVID-19 and related restrictions are tempering our near-term growth expectations a bit, there's no change to our expectations for this crucial market. With stronger-than-expected bookings coming in for the fourth quarter, we remain encouraged by our strategies to tightly manage inventory while investing in brand awareness and consideration. The reception to new products, combined with the strength of our go-to-market, is enabling us to build strong demand among key wholesale and distributor partners. And within our direct-to-consumer business, while stores are a bit more challenged due to pandemic restrictions, like last year, our e-commerce business continues to serve as a healthy offset to drive growth. And finally, our Latin America region. As discussed on our last call, we have begun transitioning our business in certain countries to a strategic distributor model. While we expect this change to negatively impact our revenue in 2021, over the long term, we believe it will help drive greater profitability and provide a better opportunity to increase brand awareness and affinity across this region. Now moving to our third priority, elevating a direct consumer-focused approach. Consumer shopping preferences continues to blur the lines between physical and digital, demanding that brands create unique personalized experiences that integrate seamlessly into their lives. For Under Armour, we believe building out the capabilities to execute a powerful omnichannel strategy will enable us to create more connected shopping experiences across all consumer touch points. From an owned store perspective, our first-quarter results, led by improved traffic trends and higher average order values, along with high gross margins due to reduced promotional activity, are encouraging signs for how we're thinking about our long-term opportunity in retail. In the near term, however, even amid optimism from recent trends, we'll continue to keep an appropriate level of conservatism into mix. Globally, our e-commerce business was up 69% in the first quarter, representing approximately 45% of our total direct-to-consumer business and included solid growth across all regions with better-than-expected conversion. Given the outside strength of e-commerce in 2020 and the continued shift to online due to the pandemic, we are hyper-focused on better understanding the consumer journey and building greater digital capabilities to unlock even deeper connections with athletes. And ultimately, while it's left to be seen about how sticky last year's e-commerce results are against this year's performance, we're confident that making additional investments in our sites, teams and processes to support our long-term growth expectations is money well spent. Bringing all these strategies together leads us to our last focus, maintaining our discipline around profitability to drive sustainable shareholder value over the long term. With our expectation of revenue being up at a high-teen rate for the full year, I am pleased with our progress and our expectation to deliver an adjusted operating margin in line with 2019. This is a nice step up toward a double-digit rate over the long term. So to wrap up, I'm pleased with the progress we are making. Our transformational strategy to architect a global operating model capable of driving sustainable and profitable growth is on track. With a solid start to the year, this is about continuing to execute the play with patience and allowing the processes, tools, and structure we've built to drive improved capabilities across Under Armour and then further enable our ability to compete for premium brand-right growth. And with that, I'll hand it over to Dave. Today's results are strong evidence that our transformed operating model can efficiently serve strong demand for the Under Armour brand against the continued backdrop of uncertainty due to the COVID-19 pandemic. With an outstanding start to the year, let's dive right in with our first-quarter results. Revenue was up 35% to $1.3 billion compared to the prior year. This was better than expected due to higher demand across our wholesale and DTC businesses. From a channel perspective, our wholesale revenue was up 35%. Keep in mind, approximately two-thirds of this growth was due to a Q4 '20 to Q1 '21 shift related to COVID-19 impacts connected to customer order flow and changes in supply chain timing, as noted on our last call. In addition, most of our Q1 wholesale over-delivery was due to stronger sell-through and higher demand from our North American customers. Our direct-to-consumer business increased 54%, led by a 69% growth in e-commerce and 44% growth in our owned and operated retail stores. Our DTC results were better-than-expected, primarily due to higher average order values in retail and higher e-commerce conversion rates. Our licensing business was up 9%, driven primarily by North America. By product type, apparel revenue was up 35%, driven by our train and run categories. Footwear was up 47%, driven by our run and team sports categories. And the accessories business was up 73%, with most of the growth being driven by sports masks. From a regional and segment perspective, first-quarter revenue in North America was up 32%, driven by growth in our wholesale business, which was driven in part by Q4 to Q1 COVID-19-impacted order shifts. Additionally, we saw strength in our North American DTC business with Factory House and e-commerce leading the way for growth. In EMEA, revenue was up 41%, driven by growth in wholesale, led by our distributor business, including the Q4 to Q1 COVID-19-impacted order shift as well as strength in e-commerce. It's important to note that EMEA continues to face significant impacts due to COVID with about one-third of our owned and partner mono-branded doors closed at the end of the quarter. Revenue in Asia Pacific was up 120%, with balanced growth across all channels, including our wholesale business, which partly benefited from Q4 to Q1 COVID-19-impacted order shifts. As a reminder, stores in APAC were closed through most of Q1 2020, so we are comping a more significant COVID-19 impact here than in our other regions. In Latin America, revenue was down 9%, driven primarily by lower wholesale results, partially offset by growth in e-commerce. First-quarter gross margin was significantly better-than-expected, with a 370 basis point improvement to 50%, driven by approximately 270 basis points of pricing improvements due to lower promotional activity within our DTC channel, along with lower promotions and markdowns within our wholesale business. In addition, we experienced 130 basis points of supply chain benefits, including improved inventory levels resulting in lower reserves and product costing improvements. And finally, we realized 50 basis points of favorable channel mix due to a lower mix of off-price sales and a higher mix of DTC. Offsetting these improvements was about 140 basis points of negative gross margin impact related to the absence of MyFitnessPal, a factor we expect to impact us throughout this year. Overall, versus our previous outlook for first-quarter gross margin, we saw tighter inventories driven by stronger-than-expected demand and lower promotions, which resulted in a reduced requirement for inventory reserves, along with more favorable pricing. SG&A expenses were down 7% to $515 million, primarily due to lower legal and marketing costs versus the prior year. Relative to our 2020 restructuring plan, we recorded $7 million of charges in the first quarter, an amount less than we had anticipated due to slower-than-expected execution. Including Q1, we've now realized $480 million of pre-tax restructuring and related charges. As detailed last September, this plan contemplates total charges ranging from $550 million to $600 million. It's important to note that all remaining charges are related to initiatives that we determined in 2020, meaning we are not adding anything new in 2021. We expect to incur approximately $35 million to $40 million of charges in the second quarter as we work toward completing this program in the second half of 2021. Moving on, our first-quarter operating income was $107 million. Excluding restructuring and impairment charges, adjusted operating income was $114 million. After tax, we realized net income of $78 million or $0.17 of diluted earnings per share during the quarter. Excluding restructuring charges and the noncash amortization of debt discount on our senior convertible notes, our adjusted net income was $75 million or $0.16 of adjusted diluted earnings per share. And finally, inventory at the end of the first quarter was down 9% to $852 million, a clear indicator of the improvements we have made to drive a more efficient operating model. Now moving on to our updated 2021 outlook. While recent consumer trends continue to be more positive than we anticipated, we remain cautious with respect to the demand and the overall marketplace due to the COVID-19 pandemic. Therefore, as today's outlook is predicated on our business continuing under the same general macros we've seen most recently, with no significant shutdowns as well as moderate improvements within the greater retail landscape as the year progresses. And with that said, let's start at the top with revenue, which we expect to be up at a high-teen percentage rate for the full year. This reflects a high-teen percentage increase in North America and a low 30s percentage rate increase in our international business. And while we see improvements just across our regions, more robust demand in North America is driving most of the gain relative to our last outlook. From a channel perspective, our Q4 bookings have come in better within about the wholesale business than our initial expectations. As discussed, we are focused on managing our inventory tightly, including constraining supply to meet demand and exiting undifferentiated retail, particularly in North America. In DTC business, we also expect to see stronger results drive through the remainder of the year with retail store growth far outpacing that of e-commerce, given that business is up against the difficult comps in 2020. For gross margin, on a GAAP basis, we expect the full year rate to be up approximately 50 basis points against the 2020 adjusted gross margin of 48.6% with benefits from pricing and supply chain efficiency partially offset by the sale of MyFitnessPal, which carried a high gross margin rate. The gross margin improvement related to previous outlook is due to improving benefits within pricing, partially offset by changes in channel mix and increased freight expense related to port congestion and logistical costs, which remains a rapidly evolving situation. From an SG&A perspective, as we stated on our last call, We believe we have appropriately rebased our cost structure to scale for future growth. The improved discipline and processes we employ help ensure we stay return-based with the optionality to invest in critical areas like marketing in our DTC and international businesses. As Patrik laid out, we intend to take advantage of some of our improved outlook in the second half of this year with incremental investments, particularly in marketing, to continue driving the underlying momentum we're seeing. In this respect, we expect SG&A to be up at a rate that is approximately one-half that of our revenue growth. In addition to these incremental marketing investments, the other significant part of the overall increase in SG&A relative to our prior outlook is higher incentive compensation when compared to a year that saw significant reductions against target levels. When combined, these marketing investments and planned higher incentive compensation represent about three-fourth of the increase in our year-over-year SG&A dollars, meaning without them the underlying SG&A is panned up slightly at about 2% to 3% in absolute dollars, which is consistent with the initial outlook we provided earlier this year. That said, remaining discipline about controlling costs and ensuring the right balance between growth, productivity, and profitability is our top priority. After these factors, we now expect operating income to reach approximately $105 million to $115 million this year or about $230 million to $240 million on an adjusted basis. Translated to rate, we expect to deliver an operating margin of approximately 2% for an adjusted operating margin of approximately 4.5% in 2021. All of this takes us to a diluted loss per share of approximately $0.02 to $0.04, or excluding restructuring impacts, about $0.28 to $0.30 of adjusted diluted earnings per share. To sum it up, we believe we have appropriately updated our outlook to reflect the improvements we see across the business. And to reiterate some of the comments we made on our last call, headwinds should be taken into consideration for our full year outlook, particularly in the second half, including the absence of MyFitnessPal, continued supply and demand constraints, the exit of undifferentiated retail, which starts in the back half of this year; changes to our Latin American operating model, and lower expected sales of our sports masks. For a little more color on the quarterly flow, we expect our second quarter revenue to be up approximately 70% as we lap last year's significantly shuttered retail world, with the highest regional growth seen in North America and Latin America. Next, we expect Q2 gross margin to be down about 120 to 140 basis points primarily due to the following negative impacts: channel mix, with e-commerce being a considerably lower portion of the overall business when compared to last year; and within the wholesale channel, we expect a higher percentage of off-price sales versus the last year's second quarter when off-price was predominantly closed. Additionally, the absence of MyFitnessPal will negatively impact the quarter. And finally, we anticipate increased freight expense from a supply chain perspective relative to the prior year as we work through ongoing logistics and transportation challenges. These negative factors are expected to be partially offset by an improvement in pricing due to lower planned promotional and discounting activities, along with some tailwinds from changes in foreign currency. Bringing this to the bottom line, we expect second quarter adjusted operating income to be approximately $40 million to $45 million or about $0.04 to $0.06 of adjusted diluted earnings per share. To close out, with an incredibly focused strategy led by a talented, passionate team and improved operations from our multiyear transformation, we believe Under Armour is well positioned to deliver on our expectations for 2021 and beyond.	compname reports q1 earnings per share $0.17. sees fy loss per share about $0.02 to $0.04. q1 adjusted earnings per share $0.16. q1 earnings per share $0.17. q1 revenue rose 35 percent to $1.3 billion. qtrly north america revenue increased 32 percent. expects to realize approximately $35 million to $40 million in charges related to restructuring plan in q2. given continued uncertainty related to covid-19, there could be potential material impacts on its full-year business results in 2021. 2021 revenue is now expected to be up at a high-teen percentage rate. expects to realize about $35 million to $40 million in charges related to restructuring plan in q2. 2021 adjusted diluted earnings per share is expected to be in range of $0.28 to $0.30.
It's important to note that the ongoing uncertainty related to COVID-19 and its potential effects on the global retail environment could continue to impact our business results moving forward. You may also hear us refer to amounts under U.S. GAAP. But before I hand it over to Patrik, I'd like to take a moment to recognize Carrie Gillard and the fact that this is her last earnings call with Under Armour. As an eight and a half-year veteran of this iconic brand and my partner in Investor Relations for the past four and a half years, it's been a heck of a journey, to say the least. On behalf of the entire executive team, your determination, work ethic, and expertise has been truly appreciated, and you will be missed. We can't wait to see all the great things you'll accomplish in your next adventure. At the halfway point of 2021, our better-than-expected results continue to validate that our multiyear transformation is working, with a stronger top and bottom line performance relative to our previous outlook. Perhaps more importantly, we're also driving higher-quality growth, margin expansion, and greater profitability against our pre-pandemic 2019 results. In fact, diluted earnings per share through the first six months of 2021 are greater than the full-year 2019. So all in, a great first half. Reflecting on the past 18 months amid a historically challenging environment due to the COVID-19 pandemic, I am incredibly proud of Under Armour's global team and the way we've worked to hold ourselves accountable to our strategic playbook. By continuing to sharpen our focus, the operating model and financial discipline we have ingrained within our culture serve as a constant check and balance to deliver premium products and experiences to our consumers and customers. And by driving higher-quality revenue through a constant lens of operational excellence and applying what we've learned, consistently refining and orienting toward brand-right profitable growth, means we are better positioned today to drive greater returns to our shareholders than we were before the pandemic started. And yet, with sustained uncertainty related to COVID, which, as of late, is trending unfavorably in key sourcing countries in Southeast Asia, the resiliency we've earned over the last year and a half will continue to serve as an asset while we navigate the second half of 2021. In this respect, we're focused on the things we can control, staying grounded in our four strategic pillars: strengthening the Under Armour brand, improving our operating model, amplifying a DTC-focused approach, and increasing our capacity to return greater profitability across the company. Starting with strengthening our brand and the proactive decision we've made to reinvest some of this year's upside into additional marketing efforts. This flexibility is empowering us to amplify our middle to top-of-funnel activations geared at increasing awareness, attraction, and consideration for the Under Armour brand. As we work to connect with new athletes and inspire existing ones, we are centered on our brand attributes, resilience, hard work, heart, and edge. In the second half, this will come to light more holistically as we illustrate the journey to compete through the process of training, setting goals, struggling, and ultimately realizing the results. Through a team sports lens supported by consistent messaging via The Only Way Is Through, our third-quarter activations highlight the importance of mental strength, an often-overlooked aspect of training, and its relationship to unlocking an athlete's full potential. Certainly, coming out of a long stretch of COVID restrictions and as team sports hopefully open up more broadly this fall, we believe this is a timely effort to draw consumers into the psyche that is uniquely Under Armour as we work to make them better. So starting this month, via social media, TV, and streaming, be on the lookout for Chase Young, Trent Alexander-Arnold, Ty Harris, and NICKMERCS, among others, helping to highlight mental training and the role it plays in achieving one's personal performance goals. As we say at Under Armour, if you train your mind, you train your game. So while there's still more work to be done to unlock our full marketing potential, I am pleased with the progress we're making in aligning our go-to-market with focused performers and the evolving needs of our key retail partners around the world. Not to mention the incremental marketing investments we're making in 2021 are really geared at setting us up for more strong lead in 2022, as awareness and consideration should lead to increased conversion as we strengthen our connectivity. In product, our strategy remains firmly rooted in an athletes' journey to sport, leading with insights and data to provide solutions they didn't know they needed and now can't imagine living without. With quite a few product highlights during the quarter, I'd start by recognizing the incredible milestone that our partners at Virgin Galactic achieved a few weeks ago with their commercial flight into space. To play a part in pushing the boundaries of what is possible, we are excited to see what the future holds as new barriers get broken, inspiring all of us to strive for more. In Apparel, second-quarter highlights included strong sell-through of our Iso-Chill running products, featuring a UA innovation that keeps you cooler in hot conditions. We also saw strong sell-through in men's unstoppable bottoms and women's leggings, including meridian and our no-slip waistband technology. We'll also continue to build on this momentum as well with meaningful increases in our infinity and cross-back products. And we also saw solid results in tops, featuring our RUSH technology. And finally, Project Rock apparel continued to build on its strong momentum as well, with an excellent response to new drops. In Footwear, Flow Velociti performed well in all regions, as did HOVR Phantom and Machina 2, including significant growth against last year's already strong performance. Our Charged Pursuit 2 and Assert 9 footwear offerings also posted substantial numbers, demonstrating continued success in our segmentation strategy to bring premium innovations across all price points. In Curry, we saw success on and off court with our Curry Flow 8 signature shoe as well as retro styles that we pre-released in APAC, all good signs of momentum as we work toward the launch of the Curry 9 late this year. And finally, the Project Rock 3 shoe, which combines UA HOVR and TriBase technologies for a highly comfortable and stable training platform, was also a standout. Switching gears to our next area of focus, which is continuous operating model improvement. Our second-quarter results demonstrate once again that our ability to service increased demand with efficient, effective execution is getting better. Creating product at the right price and getting it to the right place at the right time is at the core of how we'll win. To empower this, the adage holds, "Success is doing the common things uncommonly well". Simple perhaps, but precisely at the core of our strategic playbook, and what we're obsessing on a day-to-day basis. Turning to our regions. We believe it's most helpful to compare our results to 2019 since last year's second quarter was an incredibly unique period, and we believe this two-year stack better represents some of the progress we're making in the overall performance of our business. Starting with North America. I'd underscore how happy we are with improving our ability to drive higher-quality revenue through sharper segmentation, tighter inventory management, and delivering consistent service to our customers. Versus 2019, North American revenue was up 11% in the second quarter and about 3% for the first half of the year. Now in context, it's important to keep in mind that these comparable periods have some key differences, including a significant increase in our direct-to-consumer business, offset by considerably lower sales to the off-price channel, lower overall promotional and markdown activities and supply constraints engineered to put us in a more advantaged position in the marketplace. All of this, of course, is geared to continuing to lift the Under Armour brand to a more premium level in our largest market. And to that point, as evidenced by our gross margin results, this strategy is working. From a channel perspective, we feel good about the pace we're earning backspace with our key North American wholesale partners, driving full-price revenue and showing up both digitally and physically in a more comprehensive way than ever before. Revenue from our owned and operated stores is up meaningfully in the quarter versus the same period in 2019 and includes improved quality and composition of sales. For the full year, we expect our North American business to be up at a low 20s percentage rate compared to 2020. Versus 2019, North America will be close to the same revenue, which, taking into consideration the factors I mentioned, less off-price, lower discounts and promotions, and tighter supply constraints, along with our exit of undifferentiated retail, which starts in Q3, leaves me confident that we're setting ourselves up for improving brand-right profitable growth in 2022 and beyond. Turning to our international business. We expect revenue to be up at a mid-30s percentage rate versus 2020 or up at a high 20s percentage rates on a two-year stack. In our Asia Pacific region, we remain laser-focused on ensuring our brand remains firmly positioned in athletic performance while staying agile in a quickly evolving marketplace. With second-quarter revenue up 25% versus 2019 or up 35% for the first half on a two-year stack, our results gives us confidence that the additional investments we're making into marketing, CRM, digital activations, and store expansions are working to drive greater brand affinity amid a highly competitive backdrop. Next up is EMEA, a region that is also seeing pockets of COVID resurgence, but also delivered strong growth for Under Armour. Second-quarter revenue was up 43% over 2019 and up 44% for the first six months on a two-year stack. Within DTC, we recently upgraded our eCommerce site platform to improve our capabilities and functionality as we focus on driving more seamless shopping experiences for our consumers. EMEA wholesale growth was balanced across our full-price and distributor businesses. Looking at the rest of the year, we remain confident that our strategies to drive greater reach and connection to our consumers are working well. And finally, our Latin America region, where second-quarter revenue was up 17% over 2019 or is up 7% for the first six months on a two-year stack. As discussed on our last call, we have begun transitioning our business in certain countries to a strategic distributor model, which we expect to impact revenue more negatively in the back half of this year. So still working through this transition as we rearchitect this business for improved consistency and, we believe, better profitability. Switching to our third pillar, which is our focus on elevating our DTC business. With a 33% increase in revenue for the second quarter and a 32% increase for the first half versus 2019, we're pleased to see the results of our multifaceted strategies come to fruition. In conjunction with consumer behavioral shifts throughout the pandemic and an even greater appetite for product and brand experiences that are personalized, unique, and premium, we are advancing how we show up in stores and online to meet their needs. All of this, of course, starts with our retail and distribution teammates who are at the backbone of our business, playing an essential role in how we serve focused performers. Ensuring that they feel valued and appreciated, we increased our minimum pay rate to $15 per hour in our U.S. business as part of a larger effort that includes professional learning and development opportunities and additional incentive plans. In combination, these actions will allow us to drive better connectivity across the consumer journey. From an owned store perspective, we experienced improved traffic trends and higher average selling prices in the quarter, driving better productivity and more normalized promotions. Longer term, we remain focused on building the capabilities necessary to become a best-in-class retailer by creating incredible experiences in our full-priced brand house stores and better leveraging our factory house locations to drive greater overall profit. In our e-commerce business, revenue was down 18% in the quarter, a result that we anticipated being the most challenging of the year considering the shift to online in 2020 following the retail lockdown. That said, given the work we did to exit the highly promotional elements that this business experienced in 2019, along with the investments we've made in our platforms and teams over the last 18 months, and we're very encouraged by a 53% second-quarter increase versus 2019 or a 55% increase for the first six months on a two-year stack. Throw in that we expect our eCommerce business to be up at a high single-digit rate in 2021, and that puts our growth up nearly 50% on a two-year stack. So to wrap it up, I'll end with our last area of focus, driving profitability to increase shareholder value over the long term. Based on our updated full-year outlook, which includes revenue being up at a low to mid-single-digit rate versus 2019, and our adjusted earnings per share being up meaningfully, our strategy to return to profitable brand-right growth is working. With a high quality and composition of revenue, including significantly reduced off-price sales and less promotions and discounting, we're driving more productive dollars through our P&L, dollars that are contributing nicely to margin improvements and greater EPS, demonstrating the results of our transformation and the stronger foundation we have built over the past couple of years. And with that, I'll hand it over to Dave. At the halfway point of 2021, our second-quarter results demonstrate that the strategies we've been executing against, and the foundation we've worked hard to reset to increase Under Armour's capacity to return sustainable profitable growth to shareholders, are working. Our operational execution has never wavered against an incredibly challenging and dynamic global market, punctuated by COVID over the last year and a half. Our attention to Under Armour's focused performers and delivering best-in-class innovations and premium experiences have never been sharper. And all of this has come together to target full-year top line, bottom line, and working capital performance at better than pre-pandemic levels. In the second quarter, revenue was up 91% to 1.4 billion compared to the prior year. Versus our previous outlook, this overdrive was primarily due to higher demand across our wholesale and factory house businesses. And of course, in general, our second-quarter results were up against last year's significantly restricted retail environment due to the peak of COVID-impacted store closures. From a channel perspective, our wholesale revenue was up 157%, driven by broad-based growth, as we lap the most significant impact from the retail door closures in the prior year. Additionally, most of our Q2 wholesale overdrive was due to stronger sell-through and higher demand in North America. Our direct-to-consumer business increased 52%, led by 234% growth in our owned and operated retail stores, partially offset by an 18% decline in e-commerce, which faced a difficult comp as it was the primary business driver of last year's second quarter. Our licensing revenues were up 276%, driven by increases in our North American partner business. By product type, Apparel revenue was up 105%, driven by strength in our train, golf, and run categories. Footwear was up 85%, driven by our run and team sports categories. And our accessories business was up 99%, driven by hats, bags, and sports masks. From a regional and segment perspective, second-quarter revenue in North America was up 101%. In wholesale, we continue to drive lower markdowns with tighter inventory, enabling fuller-priced sell-through. Within DTC, we saw strength in our owned and operated stores given the easier comparison to the prior year when most of our locations were closed for the quarter. This was partially offset by a decline in our e-commerce business, which, conversely, was up against a particularly tough comparison to last year. In EMEA, revenue was up 133%, driven by growth in wholesale and DTC, with significant strength across our wholesale and distributor partners. Revenue in Asia Pacific was up 56%, with balanced growth across all channels. And in Latin America, revenue was up 317%, driven primarily by lapping the store closures in the prior year. As we move into the back half of the year, we expect the transition of certain countries to distributor models to negatively impact top-line performance, particularly in the fourth quarter. Second-quarter gross margin came in better than expected, improving 20 basis points to 49.5%, driven by 570 basis points of pricing improvements due to lower promotional activity within our DTC channel, along with lower promotions and markdowns within our wholesale business, which was significantly impacted by the pandemic in the prior year, and 100 basis points of benefit due to changes in foreign currency. Offsetting these improvements was a 460 basis point negative impact from channel mix, primarily driven by a lower mix of e-commerce and a larger mix of wholesale, including a higher percentage of off-price sales than last year when this channel was essentially closed for most of the quarter. Additionally, we realized 170 basis points of negative gross margin impact related to the absence of MyFitnessPal, which will remain a headwind throughout 2021. And finally, a 10 basis point negative impact within supply chain as our continued benefits and product costs were more than offset by higher freight and logistics costs due to developing COVID-related supply chain pressures. Overall, versus our previous outlook for second-quarter gross margin, we experienced lower-than-planned promotions enabled through higher demand, along with driving more favorable pricing. SG&A expenses were up 14% to 545 million, primarily due to higher marketing costs and expenses tied to store operations, given most retail locations were closed throughout the second quarter of 2020. Relative to our 2020 restructuring plan, we recorded 3 million of charges in the second quarter, an amount less than we had anticipated due to the timing of specific executions such as the realization of lease and contract terminations. Throughout the plan thus far, we've realized 483 million of pre-tax restructuring and related charges. As detailed last September, this plan contemplates total charges ranging from 550 to 600 million. It's important to note that all remaining charges are related to initiatives outlined in 2020, meaning nothing new has been added in 2021. For the quarter -- for the third quarter, we expect to realize approximately 40 to 50 million in charges related to this plan. Our second-quarter operating income was 121 million. Excluding restructuring and impairment charges, adjusted operating income was 124 million. After tax, we realized a net income of 59 million or $0.13 of diluted earnings per share during the quarter. Excluding restructuring charges, loss on extinguishment of 250 million in principal amount of senior convertible notes, and the non-cash amortization of debt discount on our senior convertible notes, our adjusted net income was 110 million or $0.24 of adjusted diluted earnings per share. In this respect, we are proud to report that in the first half of 2021, we have already surpassed our full-year 2019 diluted earnings per share. So in a great position to finish out 2021 with strength against pre-pandemic levels. Inventory at the end of the second quarter was down 26% to 881 million as we continue to drive improvements throughout our operating model, along with experiencing some inbound shipping delays due to COVID-related supply chain pressures. Our cash and cash equivalents were 1.3 billion at the end of the quarter, and we had no borrowings under our 1.1 billion revolving credit facility. With respect to debt, during the second quarter, we entered into exchange agreements with certain convertible bondholders for 250 million in principal amount of our outstanding convertible notes and terminated certain related capped call transactions. We utilized net 247 million in cash, issued 11 million shares of our Class C stock, and recorded a related loss of approximately 35 million, which is captured in other income and expenses. Post this transaction, 250 million of our convertible bonds remain outstanding. Next, let's move on to our updated 2021 outlook, where, based on better-than-expected performance in our second quarter, we flowed through the upside for a meaningful increase for our full year. That said, although recent consumer trends continued to track positively, we remain cautious with demand and the overall marketplace due to both the COVID-19 pandemic and developing manufacturing and logistics challenges in key sourcing countries in Southeast Asia. Accordingly, today's outlook is subject to our business continuing under the same general macros we've seen most recently, with no significant shutdowns of manufacturing partners or retail or logistics disruptions, along with continuing improvements within the global retail landscape as we progress through the second half of 2021. That said, let's start at the top with revenue, which we now expect to be up at a low 20s percentage rate for the full year. This reflects a low 20s percentage increase in North America and a mid-30s percentage increase in our international business. For gross margin, on a GAAP basis, we expect the full-year rate to be up 50 to 70 basis points against our 2020 adjusted gross margin of 48.6%, with benefits from pricing and benefits from changes in foreign currency being partially offset by the sale of MyFitnessPal, which carried a high gross margin rate, along with higher expected freight expenses. The gross margin improvement relative to our previous outlook is due to improving benefits within pricing, partially offset by increased freight expense related to port congestion and logistics costs, which remains a rapidly evolving situation. Versus 2020, we expect a high single-digit rate increase in SG&A, a rate that is less than half that of our revenue growth. As laid out previously, it's important to remember that specific to 2021, we are taking advantage of our improved outlook and proactively making incremental investments, particularly in marketing, to build even deeper connections with our consumers. Additionally, the other significant part of the overall increase in SG&A is higher incentive compensation, which is up against 2020 when we realized significant reductions against target levels. All in, of this expected high single-digit rate increase in SG&A in 2021, on an absolute dollar basis, about one-half of this is related to incremental marketing, one-third related to higher incentive compensation, and the balance related to our other underlying SG&A. On a two-year stack, the most significant drivers of SG&A dollar growth are the incremental marketing investments and higher incentive compensation we expect in 2021. Beyond these items, our underlying SG&A is planned to be up only slightly against 2019's base. As we look ahead, remaining disciplined around SG&A and striking the right balance between growth, productivity, and profitability is our top priority. With that, we now expect operating income to reach 215 to 225 million this year or 340 to 350 million on an adjusted basis. Translated to rate, we expect to deliver an operating margin of approximately 4% or an adjusted operating margin just north of 6% in 2021. All of this takes us to an expected diluted earnings per share of 14 to $0.16 or, excluding restructuring charges, the loss on early extinguishment of convertible senior notes and noncash amortization of debt discount on these convertible senior notes, we expect adjusted diluted earnings per share of 50 to $0.52 in 2021. In summary, our full-year outlook reflects the combination of the overdrive we've realized in the first half of 2021, along with improvements across our business, positioning us to deliver growth and stronger profitability relative to 2019. Next, before giving more color on how we're thinking about the balance of the year, I'll highlight some headwinds that impact us more directly in the second half of 2021, including lower expected sales of our sports masks, supply and demand constraints, the absence of MyFitnessPal, lower expected sales to the off-price channel, changes to our Latin American operating model, and the exit of undifferentiated retail, which began in the third quarter. Looking at quarterly flow, we expect third-quarter revenue to be up at a low single-digit rate and the fourth quarter to be relatively flat to finish out the year. Next, we expect third-quarter gross margin to be up 130 to 150 basis points due to pricing benefits and channel mix as we anticipate lower promotional activity and lower sales to the off-price channel. These benefits will be partially offset by the absence of MyFitnessPal, higher expected freight costs, and changes in product mix driven by lower sales of sports masks. For the fourth quarter, we expect gross margin to be down due to negative impacts from the absence of MyFitnessPal, channel mix driven by lower licensing revenue, and product mix driven by a higher percentage of footwear and lower sales of sports masks. Bringing this to the bottom line, we expect third-quarter adjusted operating income to be 95 to 105 million or 13 to $0.15 of adjusted diluted earnings per share. So to close out, operational excellence, flexibility, a strong balance sheet, and consistent financial management, when combined, form a model that's allowed us to transcend pandemic challenges proficiently. Looking at the next six months and the set up all these accomplishments provide for us going into 2022, we believe Under Armour is well-positioned to deliver on our next chapter of profitable growth.	compname posts q2 adjusted earnings per share $0.24. sees fy adjusted earnings per share $0.50 to $0.52. sees fy earnings per share $0.14 to $0.16. q2 adjusted earnings per share $0.24. q2 earnings per share $0.13. q2 revenue $1.4 billion versus refinitiv ibes estimate of $1.21 billion. fy 2021 revenue is expected to be up at a low twenties percentage rate compared to previous expectation. expects to recognize approximately $40 million to $50 million in charges related to restructuring plan in q3.
It's important to note that the ongoing uncertainty related to COVID-19 and its potential effects on the global retail environment could continue to impact our business results moving forward. You may also hear us refer to amounts under U.S. GAAP. In the third quarter, higher-than-expected demand for the Under Armour brand and outstanding execution from our global team allowed us to drive strong top and bottom-line results. Everything we do at Under Armour is based on driving sustainable long-term growth while at the same time, ensuring we're setting a solid foundation to deliver near-term value to our shareholders. This is the balance you should expect from us and is the commitment we work toward every day. We strike this balance by leveraging our strategic playbook across key elements of our business, including a consumer-centric strategy to drive deep, authentic and emotional connections with focused performers, innovative products and experiences that advantage and inspire an athlete's journey, a constant focus on operational excellence to ensure we manage the marketplace efficiently and steady financial discipline to create meaningful levers to drive greater profitability. These strengths were evident in our third quarter results with revenue up 8%, gross margin up 310 basis points to a record 51% and solid adjusted earnings per share performance at $0.31. In this spirit, as we work to close out 2021, I feel good about the progress we've made, the resiliency we've earned and the potential we have to do even better in the future. Demand for our product and consideration for our brand is growing. That gives me confidence that despite potential impact from near-term headwinds, the long-term opportunities before us and our ability to compete and win in an ever-changing global landscape are stronger than ever. Of course, it all starts with brand, so with that, let's get into some third quarter highlights, starting with the incremental investments we're making in marketing and how they're translating to improving brand affinity from our focus on consumer awareness, attraction and consideration. As part of our holistic journey to compete strategy, which centers on goal setting, training and what it takes to earn results, we use the team sports lens to focus on the importance of mental strength as an unlock to realize one's full potential. Through uniquely Under Armour execution by our social media, TV, retail and digital activations, the only way is through and train your mine train your game showed up as one global brand and voice across categories, channels and our marketing funnel. Coming off this effort, we've now shifted gears into fourth quarter activation, which is centered on cold weather training. Knowing athletes sometimes see cold as their kryptonite, our human performance research lab is helping equip them and reshape this type of training as an asset to take their performance to new levels. Validated by the experiences of our most elite athletes, we're inspiring and educating focused performers for the winter ahead with powerful storytelling, workout routines, product reviews and premium retail capsules, our ecosystem is well set to inspire and capitalize on growing demand. Given the third quarter bridge summer and fall, we realized success on both sides of the temperature spectrum, including solid sell-through of our Iso-Chill apparel products, which cool you and fleece, which saw strength in men's and youth as athletes gear up for the cooler months ahead. There's also continued momentum in men's unstoppable bottoms and women's leggings, including Meridian and our No-Slip Waistband technology. And finally, the Project Rock collection and tops featuring Rush also built on their year-to-date momentum, so consistency in some of our best sellers. In footwear, our core running products, including Pursuit, Aurora and Assert saw strength in all regions globally. Additionally, Project Rock footwear performed well and we had success in our slides business. Regionally, a few of the highlights included the Curry HOVR Splash and Mega Clone in APAC, HOVR Strt and Bandit Trail in EMEA and Flow Velociti SE and cleated footwear in the Americas, driven by better-than-expected back-to-school demand as team sports returned. Let's turn next to our regions, starting with North America, where revenue was up 8% to $1 billion, indicative of improving brand health in our largest market, we had stronger-than-expected back-to-school and direct-to-consumer demand. In fact, North America drove the majority of the third quarter overdelivery for the company, so encouraging to see continued progress here. Compared to 2019, North American revenue was up 2% in the third quarter. It is important, however, to revisit some key differences in these comparable periods, 2021 North America versus 2019, including a significant increase in our direct-to-consumer business, substantially lower off-price sales, reduced promotional and markdown activities, proactive supply constraints and undifferentiated wholesale exits. So all in, meaningfully higher quality and more productive dollars going through our P&L now than just two years ago. Turning to our international business. Revenue in our Asia Pacific region was up 19%, driven primarily by wholesale growth. Given some of the recent market trends, particularly in China, where traffic continues to struggle, our consumer insights data tells us that our brand health is holding steady in an otherwise dynamic environment. We attribute this to the investments we're making into marketing, CRM and store expansions, including opening our 1,000th store in the region. Versus 2019, third quarter APAC revenue was up 37%, so solid progress on a two year stack. Next up is EMEA, where revenue was up 15%, driven by wholesale, which saw continued momentum from our distributor partnerships and a solid direct-to-consumer performance. In our two most prominent countries in this region, the U.K. and Germany, we remain focused on brand development, building long-term relationships with our key wholesale partners and strengthening our direct-to-consumer team and retail capabilities. EMEA wholesale growth was balanced across our full price and distributor businesses. Versus 2019, third quarter revenue in EMEA was up 50%. And finally, our Latin America region was up 27%, driven by strength in our full-price wholesale and distributor businesses. Versus 2019, third quarter revenue in Latin America was up 8%. As previously detailed, we are transitioning certain countries in this region to a strategic distributor model, of which most of this change takes place in the fourth quarter. Accordingly, we expect top-line pressure in Latin America as we finish out 2021. Another highlight is the performance of our direct-to-consumer business, which was up 12%. And although traffic trends were somewhat mixed in our own stores and mirrored various COVID restrictions around the world, we continued to see improvements in average selling prices and productivity. Due to higher-than-expected demand during the quarter, we further reduced promotions and realized higher price sell-through, which, of course, you see in our gross margin results. Versus 2019, direct-to-consumer was up 31% for the third quarter. So in summary, we're pleased with our third quarter performance and our ability to close up Under Armour's and split adjusted earnings per share here in our history. In the near term, however, we remain both confident and cautious with several fluid headwinds continuing to impact nearly every sector, it's important to remember that Under Armour is battle-tested and mission proven. I am incredibly proud of our global team and how we work to maintain balance and trajectory regardless of what has thrown our way. We continue to get sharper, smarter and more efficient. Across our business, by channel, product or region, there remains one constant. We obsess the intersection of Under Armour serving focused performers, industry-leading innovations, premium experiences, heart-led but data-driven, we empower those who strive for more. And with that, I'll hand it over to Dave. With three quarters of the year behind us, our strong third quarter results demonstrate our ability to execute quickly to meet the needs of our consumers and customers, all while driving toward record revenue and earnings in 2021. So let's dive right into our results. Compared to the prior year, revenue was up 8% to $1.5 billion. Versus our previous outlook, this overdrive was primarily due to higher demand across our full-price wholesale and factory house businesses in North America. Patrik covered our regional performance earlier, so now let's click down into our channel results on a global basis. Third quarter wholesale revenue was up 10%, driven by higher-than-expected demand in our full-price business, particularly in North American wholesale, which was tempered by a reduction in sales to the off-price channel as we continue to work to elevate our brand positioning. Our direct-to-consumer business increased 12%, led by 21% growth in our owned and operated retail stores, partially offset by a 4% decline in e-commerce, which faced a difficult comparison to last year's third quarter. But I would also note that when compared to the third quarter of 2019, our e-commerce business was up over 50%. And licensing revenue was up 24%, driven by improving strength within our North American partner businesses. By product type, apparel revenue was up 14% with strength across all categories, particularly in train and golf. Footwear was up 10%, driven primarily by strength in running. And our accessories business was down 13% due to lower sales of our sports masks compared to last year's third quarter. Relative to gross margin, our third quarter improved 310 basis points over last year, landing at 51%. This expansion was driven by 400 basis points of pricing improvements due primarily to lower promotional activity within our DTC channel, along with lower promotions and markdowns within our wholesale business and 120 basis points of benefit due to channel mix, primarily related to lower mix of off-price sales versus last year's third quarter. Partially offsetting these improvements was about 100 basis points of negative impact related to the absence of MyFitnessPal and 90 basis points of negative impacts from higher freight and logistics costs due to COVID-related supply chain pressures. Versus our previous expectation, our higher-than-expected Q3 gross margin improvement was primarily due to lower than-planned promotional activity within our DTC business and more favorable pricing related to sales to our off-price partners. SG&A expenses were up 8% to $599 million due to increased marketing investments, incentive compensation and nonsalaried workforce wages. Relative to our 2020 restructuring plan, we recorded $17 million of charges in the third quarter. So we now expect to recognize total planned charges ranging from $525 million to $575 million. Thus far, we've realized $500 million of pre-tax restructuring and related charges. As a reminder, all remaining charges are related to initiatives outlined in 2020, meaning nothing new has been added in 2021. We expect to recognize any remaining charges related to this plan by the first calendar quarter of 2022. Our third quarter operating income was $172 million. Excluding restructuring and impairment charges, adjusted operating income was $189 million. After tax, we realized a net income of $113 million or $0.24 of diluted earnings per share during the quarter. Excluding restructuring charges, loss on extinguishment of $169 million in principal amount of senior convertible notes and the noncash amortization of debt discount on our senior convertible notes. Our adjusted net income was $145 million or $0.31 of adjusted diluted earnings per share. In this respect, we are excited to report that the $0.71 of adjusted diluted earnings per share that we've realized year-to-date has surpassed our highest previous full year split adjusted earnings, thus solid traction and excellent progress. Inventory was down 21% to $838 million, driven by improvements in our operating model and inbound shipping delays due to COVID-related supply chain pressures. Our cash and cash equivalents were $1.3 billion at the end of the quarter and we had no borrowings under our $1.1 billion revolving credit facility. With respect to debt, during the third quarter, we entered into exchange agreements with certain convertible bondholders for $169 million in principal amount of our outstanding convertible notes and terminated certain related cap call transactions. We utilized net $168 million in cash, issued 7.7 million shares of our Class C stock and recorded a related loss of approximately $24 million, which is captured in other income and expenses. Following this transaction and our actions in the second quarter, $81 million of convertible notes remain outstanding. Now moving on to the balance of the year. Factoring in the current supply chain challenges emanating from Southeast Asia and logistics challenges being experienced worldwide, we're staying appropriately cautious in the near term. However, it is important to note that today's revised outlook assumes no additional shutdowns of manufacturing partners or further retail sector disruptions as we close out 2021. Now, turning to our updated 2021 outlook. Let's start with revenue, which we now expect to be up approximately 25% for the full year. This reflects a high 20s percentage rate increase in North America and a mid-30s increase in our international business. From a channel perspective, wholesale is expected to be up at a mid-30s rate and our DTC business up at a mid-20s rate with e-commerce up at a low single-digit rate for the full year against 2020. Concerning our top-line expectation for the fourth quarter, the same significant headwinds from our last call remain in play. In addition to the developing COVID-related supply chain issues currently facing the sector. Turning to gross margin. On a GAAP basis, we expect the full year rate to be up approximately 130 basis points against our 2020 adjusted gross margin of 48.6%, with benefits from pricing and changes in foreign currency being partially offset by higher expected freight expenses and the sale of MyFitnessPal, which carried a high gross margin rate. The gross margin improvement relative to our previous outlook is primarily due to pricing benefits, partially offset by increased freight expenses related to supply chain challenges, which we continue to monitor. Versus 2020, we now expect that full year SG&A will be up 6% to 7%. As laid out previously, specific to 2021, we have taken advantage of our improved results and proactively made incremental investments, particularly in marketing, to build even deeper connections with our consumers. We also expect higher incentive compensation, which is up against 2020 when we had significant reductions against target levels as well as higher nonsalaried wages. With that, we now expect operating income to reach approximately $425 million this year or $475 million on an adjusted basis. Translated to rate, we expect to deliver an operating margin of just under 8% or an adjusted operating margin of approximately 8.5% in 2021. All of this takes us to an expected diluted earnings per share of approximately $0.55 or adjusted diluted earnings per share of approximately $0.74 in 2021, with an average weighted diluted share count of approximately 468 million shares. And finally, from a balance sheet perspective, we expect to end the year with inventory relatively flat against 2020's year-end and we expect to close the year with approximately $1.5 billion in cash and cash equivalents. Looking forward, a reminder that we are changing our fiscal reporting year in 2022. Mechanically, the first calendar quarter will serve as a transition period until we begin our new fiscal year 2023 and on April 1. That said, there are supply chain pressures that are challenging the industry in the near term. And while we believe the impact to our P&L in 2021 are expected to be relatively minimal, we are taking precautions to navigate some of the volatility and anticipated business disruptions in the first half of 2022, including the work we began in the second quarter of 2021 to adjust orders and shipping with our factory partners and logistics suppliers, working with wholesale customers to narrow and edit our spring, summer 2022 order book and assessing various mitigation offsets for inflationary pressures, including elevated logistics costs and higher wages. Given that the situation is still fluid, it is difficult to estimate the full extent of potential effects on our business at this point. However, on what we know, based on what we know today, we are forecasting material impacts to the first half of 2022. And therefore, with respect to the first calendar quarter, we expect revenue to be up at a low single-digit rate. Concerning a longer-term view, as of this week, nearly all factories that Under Armour does business with, including those in Vietnam are open. So definitely encouraging news. Of course, full capacity will take some time to ramp back up and this is only one part of the equation. Over the next several quarters, we expect longer-than-usual transit times as backlogs and congestion find balance. So this may create some variability in our results. That said, the proactive strategies we're employing, greater operational agility and overall demand for the Under Armour brand give us confidence in our ability to navigate effectively through the coming environment. With that, I'd like to close today's call by returning to Patrik's opening thought and the balance we are committed to striking between driving sustainable long-term growth while delivering near-term value to our shareholders. All global companies operate in a constantly changing environment. And over the past few years, through our transformation and the pandemic, Under Armour has demonstrated its ability to effectively manage our business under a range of conditions. Lastly, as we look to close out the strongest top and bottom-line performance in our history, the work we've done to rearchitect our strategy, operations and financial discipline sets us up well to leverage this balance and thus create improved value for our shareholders over the long term.	sees fy adjusted earnings per share about $0.74. sees fy earnings per share about $0.55. sees fy revenue up about 25 percent. q3 revenue rose 8 percent to $1.5 billion. qtrly gross margin increased 310 basis points to 51.0 percent. sees fy2021 revenue to be up about 25% versus previous expectation of a low-twenties percentage increase. sees fy2021 operating income to reach about $425 million versus previous range of $215 million to $225 million. inventory was down 21 percent to $838 million at quarter-end. under armour - sees fy2021 gross margin to increase about 130 basis points. qtrly revenue was up 8 percent to $1.5 billion. q3 earnings per share $0.24. q3 adjusted earnings per share $0.31.
It's important to note that due to ongoing uncertainty related to COVID-19 with respect to the duration and extent of the virus' immediate and long-term impact on the global retail environment, we continue to expect the possibility of material impacts on our business results. Accordingly, future results could differ meaningfully from historical practices and results or current descriptions, estimates and suggestions. Before we start, I'd be remiss not to point out what a fantastic past weekend this was for sport and for Under Armour. From Stephen Curry scoring 57 points, the eighth time he scored more than 50 in a game, to Chase Yarn winning the NFL Defensive Rookie of the year and Joel Embiid putting up 33 to keep the 76ers in first place to Jordan Spieth posting a career-best 10 birdies in a round, there was no shortage of UA highlights this weekend. Oh, and of course, there's one more highlight or better yet, make that the seventh as a No. 7 for the gold quarterback, Tom Brady, as he had led the Tampa Bay Buccaneers for their second-ever Super Bowl victory. With Tom, it's quite easy to run out of ways to describe yet again another incredible accomplishment he's added to his unparalleled career. In his 10 years as an Under Armour athlete, Tom has exemplified what perseverance, hard work and leadership can do in pursuit of excellence. Now turning back to our results. As I reflect on my first year as CEO amid a global pandemic that has tested all of us, I'd start by underscoring just how incredibly proud I am of our team's resilience and their ability to execute at an incredibly high level against our long-term strategy. We've made significant progress on our way to becoming a stronger brand and a better run company during the past year from managing through a three-month global retail shutdown and relaunching our North American e-commerce platform to executing a comprehensive restructuring effort and divesting the MyFitnessPal platform, our mantra, the only way is through, turned out to be even more foretelling than perhaps we had intended it to be. Despite an incredible amount of uncertainty in 2020, we stayed the course by harnessing the strength of our rearchitected go-to-market engine to deliver performance-based products and experiences along with targeted data-driven storytelling, Under Armour showed up stronger and more holistically as a brand than in years past. From an operations perspective, increasingly more effective supply and demand planning, along with our best-in-class distribution network, enabled us to quickly adapt to the needs of our customers and consumers with greater precision and efficiency, getting the right product to the right place at the right time. As we closed out 2020, our efforts over the past couple of years to pursue a clearly defined target consumer, rebase our cost structure and fundamentally change the way we work is beginning to yield results, empowered by a clear identity of who we are, a leading athletic performance brand, our foundation is solid, our discipline tested and proven and the opportunity before us is robust. As I look ahead, I'm energized by our transformation. I'm confident that our operating model is strengthening our ability to drive sustainable returns to our shareholders over the long term, yet we remain confronted with uncertainty due to the COVID-19 pandemic. As a result, some parts of our business have fundamentally changed, including new ways of working and interacting with our consumers, customers and teammates. How these changes ultimately play out over the next few years remains to be seen. Still, I'm confident that we are significantly better equipped to navigate through the changes, given our improved levels of agility and optionality. The last year has also brought about meaningful changes in consumer behavior and related marketplace demand impacts. In this respect, we remain focused on controlling what we can while staying prudent. This means being patient and measured in how we manage our business and conscious about where we are within our journey while maintaining the same level of discipline that got us here. To this effect, we will continue to constrain demand in 2021, a decision that, as discussed in previous calls, may impact our ability to drive top line volume in the near term. However, whether through proactive wholesale door-reduction efforts in North America or ordering slightly less product against future demand based on the brand and margin benefits that we realized in 2020, we are confident that this focus will help elevate our premium positioning with consumers and, therefore, driving better profitability. Carrying forward into 2021, there are four areas of focus that we laid out on our last call. First is continuing to strengthen the brand through increased engagement and consideration with the focused performer. Second is continuous improvement within our operating model to drive even greater efficiency across all end-to-end processes. Third is elevating a D2C-focused approach to deepen and amplify our most intimate connection with Under Armour's consumers. And finally, as we get back to profitable growth in 2021, making sure our discipline stays aligned with driving shareholder value over the long term. Starting with brand strength and engagement. About a year ago, we launched a powerful global Under Armour voice to drive increased consideration with our target consumer, the focused performer, empowered by enhanced tools and real-time metrics as consumer behavior shifted toward e-commerce, as well as working out from home, including a large shift toward running, we too altered course. From the only way is through to through this together and other variations along the way, we refocused our efforts more surgically to drive greater returns at an exceedingly dynamic environment. And while these efforts, of course, take time to manifest into sea change, exiting a year like 2020 with increased consideration, conversion and higher selling prices in many parts of our business gives us greater confidence in our strategy and execution for the year ahead. Successful storytelling, of course, needs to partner with great products. In 2020, we stuck to our playbook and leaned heavier into brand and product marketing to support successful introductions like our Project Rock collection, Meridian Pant, Infinity Bra, UA SPORTSMASK and in footwear, the HOVR Machina, Phantom 2 and the Breakthru. One highlight we're especially encouraged by is the continued momentum in our women's business, specifically bras and bottoms and broad-based interest across our run category, led by our innovation-driven HOVR franchise. Another highlight is the launch of the Curry brand in December. As a purpose-led collaboration powered by Under Armour, we're excited to partner with Stephen to deliver performance products that, along with focused partnerships, will help fund youth sports in under-resourced communities through equitable access and safe places to play. As a pinnacle expression of this effort, we launched the Curry 8 basketball shoe, the first product to feature UA Flow. As the second footwear cushioning technology released under our reengineered go-to-market, Flow's proprietary nonrubber outsole has manifested into our most obedient and highest traction footwear yet. Up next, UA Flow is set to launch in one of our largest long-term growth opportunities: running. Building on the success and momentum of HOVR, the UA Flow running platform will help us accomplish two things. As an innovation, we believe this product's performance attributes, including its unique traction, ride and energy return structure, will help drive even more significant consideration and authenticity with core runners. And second, as our most pinnacle running footwear offering, it will broaden our ability to segment and help differentiate our assortment, thereby creating opportunities for shelf space expansion within running specialty and key wholesale accounts. Switching gears to our second area of focus is our operating model evolution. Throughout 2020, we work to rebase our cost structure to ensure we are positioned from a strategic, operational and financial perspective with an appropriate foundation and agility to scale with future growth. And within our comprehensive restructuring plan, we believe our central purpose continues to put us in a position to return to double-digit operating margin over the long term. In this spirit, we've been asked many times if we've reached an optimal cost structure for Under Armour or where our general breakeven ratio lies. At 2.2 billion of SG&A in 2020, our cost structure is not meant to support the 4.5 billion revenue that we realized last year, but instead, a larger top line business where we can begin to leverage some of the foundational investments necessary for our growth expectations. Therefore, our breakeven is somewhere around the 4.7 billion mark. With our cost structure now appropriately rebased, it's important to understand a few elements of how we're thinking about SG&A expenses and investments moving forward. When considering our restructuring efforts and how they've impacted or will continue to affect our overall cost structure, it's essential to remember that most of these efforts have been related to future cost avoidance versus current cost reductions. That said, we had realized underlying SG&A benefits in certain areas. However, it's not as simple as cutting cost to gain leverage. As we mentioned early within our restructuring efforts, our main objective was to unburden ourselves of decisions and commitments made when we expected to be a much larger company than we are now. Within those scenarios, there was also an expected level of productivity that was never realized. As a business in pursuit of brand-right growth, we will continue to invest in driving that growth. And for us specifically, that means marketing, IT and elevating our international and D2C footprints. More simply put, while the absolute SG&A dollars may not change much in the near term, I'd underscore that productivity and return on the investments that we are making are appropriately greater than just a few years ago. And should market factors impact our growth track in the near term, we're now also capable of flexing and managing our costs with greater discipline and optionality to maintain a more consistent profitability trajectory. These factors, along with improved visibility and tighter alignment of our demand and supply planning functions, have afforded us greater flexibility with our customers and our ability to service higher-than-planned demand. This is especially evident in our year-end inventory position, which was at the same level that we ended 2019. In 2021, we plan to manage this even more tightly, helping us drive fuller price selling across all distribution points while keeping an eye on increasing our productivity and therefore, turns. Moving to our third priority, elevating a D2C-focused approach, and the pandemic has certainly magnified and accelerated digital adoption rates worldwide. With e-commerce up 40% in 2020 and representing nearly half of our total D2C business for the full year, we are hyper-focused on better understanding the consumer journey and building greater personalization capabilities to unlock even deeper connections with athletes. In our retail stores, we are working to evolve concepts to drive more profitable formats, particularly for our full-price brand house locations. Our factory house business is about driving greater productivity in store, reducing our promotional levels and leveraging the fleet to clear through excess product. While this foundational work continues to help us in our journey to be a best-in-class retailer, with the acceleration of e-commerce and tightening of wholesale, this truly becomes an omnichannel conversation. Whether it's drop ship, endless aisle or RFID, we believe executing a powerful omnichannel strategy will enable us to create a more seamless and connected shopping experience across all consumer touch points. And finally, being in a position, both strategically and operationally, to pursue this channel-agnostic approach is something that we believe will serve as a key unlock to strengthening our brand ecosystem wherever and whenever consumers choose to engage Under Armour. Bringing all these strategies together leads us to our last priority, maintaining our discipline around profitability to drive sustainable shareholder value over the long term. From operating model refinements, our innovation pipeline and brand-elevating strategies to our tighter inventory management and a rebased cost structure, it's well understood across the enterprise what we must do as we work to deliver greater leverage and sustainable profitable growth over the long term. So to wrap up, I am proud of what Under Armour has accomplished in the last year, particularly our ability to efficiently navigate an incredible amount of marketplace variability while continuing to advance our transformation. Building on this demonstrated proficiency, as we move into 2021 amid uncertainty that has carried over from last year, I am confident about our ability to meet near-term challenges, accomplish our goals, and balance them with our long-term objectives. And with that, I'll hand it over to Dave. In the fourth quarter and for the full year, we delivered stronger-than-expected results, a performance to be proud of, especially during a global business environment that faced significant macro and micro challenges. Over the past few years, the work we've accomplished created the space and optionality necessary to work through these challenging conditions. From industry-leading product innovations to connecting consumers through fantastic brand stories and improved shopping experiences to deliver decisions to ensure liquidity, along with executing the divestiture of MyFitnessPal, I'm pleased with the way we closed out 2020. With that said, let's dive into our fourth-quarter results starting with revenue, which was down 3% to 1.4 billion compared to the prior year. This was better than we had expected due to higher-than-anticipated demand across our wholesale and DTC businesses. From a channel perspective, our wholesale revenue was down 12%. Keep in mind, about 130 million in orders shifted out of the fourth quarter into the first quarter of 2021 due to timing impacts from COVID-19 related to customer order flow and changes in supply chain timing that we discussed on our last call. Relative to our plan, we experienced stronger sell-through and higher demand from our customers. Our direct-to-consumer business increased 11% driven by 25% growth in our e-commerce business. Relative to our plan, we experienced better-than-expected traffic trends in our retail business. Our licensing business was down 12% driven primarily by lapping one-time settlements in the prior year with two of our North American partners and lower minimum royalty payments. This result was better than expected driven primarily by our Japanese partner. By product type, apparel revenue was down 4% driven by declines in our train and team sports categories. Footwear was down 7% mainly driven by declines in our team sports category. And finally, our accessories business was up 32%, with all of the growth being driven by SPORTSMASK. From a regional and segment perspective, fourth-quarter revenue in North America was down 6%, negatively impacted by the COVID-19 timing impacts, I previously mentioned, as well as reduced off-price sales. These headwinds were partially offset by strength in e-commerce within our DTC business in the quarter. In EMEA, revenue was down 11%, also negatively impacted by COVID-19 timing impacts, partially offset by solid growth within our DTC business, primarily due to e-commerce. Revenue in Asia Pacific was up 26% driven by growth across all channels, partially offset by timing impacts from COVID-19. In Latin America, revenue was up 2% driven by DTC growth, which included strength in our e-commerce business, partially offset by impacts from COVID-19. And finally, our Connected Fitness business was down 5% due to the sale of the MyFitnessPal platform in the quarter, which was completed in mid-December. It is important to note that following this sale, we will no longer be reporting the Connected Fitness segment. Starting with the first quarter of 2021, the remaining MapMy business will be consolidated within our Corporate Other segment. Fourth-quarter gross margin increased 210 basis points to 49.4%, including a 12 million impact related to restructuring efforts. Excluding restructuring charges, adjusted gross margin increased 300 basis points to 50.3% driven by approximately 150 basis points of positive channel mix benefiting from lower year-over-year distributor and off-price sales, which carry a lower gross margin and a heavier mix toward DTC, which included strong e-commerce growth. Additional year-over-year increases included 90 basis points of supply chain benefits primarily driven by product costing improvements and 30 basis points of positive regional mix driven by APAC growth in the quarter. Relative to our previous expectations for gross margin in the fourth quarter, our results were significantly better than expected as we experienced higher-than-anticipated demand, which allowed us to sell in and sell through with considerably less discounting and markdowns than we had initially anticipated. SG&A expense decreased 4% to $586 million due to our restructuring efforts and tighter spend management. In the fourth quarter, we recorded 52 million of restructuring charges and certain impairments related to long-lived assets. As a reminder, we expect to incur total estimated pre-tax restructuring and related charges under this plan in the range of 550 to 600 million. For the full year, we realized 473 million in restructuring and related impairment charges and 141 million from impairments of long-lived assets and goodwill. We expect to complete our restructuring charges within the first half of 2021 with most of the remaining charges coming in the first quarter. Our fourth-quarter operating income was 56 million. Excluding restructuring and impairment charges, adjusted operating income was 120 million. After tax, we realized net income of 184 million or $0.40 of diluted earnings per share during the quarter. Excluding restructuring charges, as well as the noncash amortization of debt discount on our senior convertible notes and the gain in deal-related costs associated with the sale of MyFitnessPal, our adjusted net income was 55 million or $0.12 of adjusted diluted earnings per share for the quarter. From a balance sheet perspective, I am pleased to report we ended the fourth quarter with 1.5 billion in cash and cash equivalents, inclusive of 199 million related to the sale of MyFitnessPal. We also had no borrowings outstanding under our 1.1 billion revolver. And finally, inventory for the fourth quarter was 896 million, relatively unchanged compared to the prior year. Concerning our 2021 outlook, while recent consumer trends have been more positive than we anticipated, we remain cautious in planning our business given the continued uncertainties with respect to demand and the overall marketplace due to the COVID-19 pandemic. Therefore, the outlook we are providing today is predicated on our business continuing in the near term with the same general macros that we've seen most recently followed by moderate improvements within the greater retail landscape as the year progresses, meaning we're assuming no major retail or other business shutdowns or other new significant adverse economic impacts due to COVID-19. That said, I will provide some high-level color on how we are thinking about our business for 2021. Relative to revenue, we expect a high single-digit rate increase for the full year compared to 2020, reflecting a high single-digit increase in North America and a high-teens growth rate in our international business. Looking at 2021, some of the things included within our outlook that we anticipate will serve as revenue headwinds include the following. First would be the absence of MyFitnessPal. Second, to Patrick's earlier point about maintaining our current supply and demand planning and inventory management discipline, we plan to constrain orders against expected demand. Third, as previously discussed, we will begin to exit certain undifferentiated wholesale distribution, primarily in North America, starting in the back half of 2021 with a plan to close about 2,000 to 3,000 wholesale partner doors, thereby expecting to win closer to 10,000 doors by the end of 2022. And finally, we're making several changes to our operating model in Latin America, including shifting certain countries to strategic distributorship models, which will negatively impact revenue but should help improve operating margins. From a channel perspective, within wholesale, it's important to keep in mind that we are just now finalizing our third-quarter bookings and have only recently started to take orders for the fourth quarter. Therefore, we have limited visibility into the back half of the year. And as Patrik mentioned, we will look to manage our inventory tightly, and in some instances, constrain demand continue to return to more premium revenue growth. All of this means we are taking a prudent approach to forecasting and managing our business this year. From a DTC perspective, we expect retail to outpace e-commerce's growth as our digital business is up against strong comps from 2020. For gross margin on a GAAP basis, we expect the full-year rate to be up slightly against our 2020 adjusted gross margin of 48.6%, with benefits from pricing and supply chain efficiency being largely offset by the sale of MyFitnessPal, which was a high gross margin business. From an SG&A perspective, as Patrik detailed, we believe we have appropriately rebased our cost structure. And we believe the improved discipline and processes we currently have in place have instilled a more return-based approach to our investments that should drive greater prioritization into the areas that deliver the highest return and support our long-term growth opportunities. However, critical areas like DTC, international and marketing will require us to continue investments to support our growth expectations. Therefore, we are planning on slight SG&A growth for the year. With all of that considered, we expect reported operating income to reach approximately 5 to 25 million and adjusted operating income to be approximately 130 to 150 million, which will take us to a reported diluted loss per share of about $0.18 to $0.20 or adjusted diluted earnings per share in the range of $0.12 to $0.14. Now to provide a little bit more color on the first quarter of 2021. We are currently planning for first-quarter revenue to be up approximately 20%. This expectation includes about 130 million of orders that shifted out of the fourth quarter of 2020 into the first quarter of 2021 due to timing impacts from COVID-19 related to customer order flow and changes in supply chain timing that we discussed earlier. Next, we expect gross margin to be up about 180 to 200 basis points compared to the prior year driven primarily by pricing benefits related to lower promotions, primarily in DTC compared to the prior year, and continued supply chain benefits related to product costing improvements. We expect these benefits will be partially offset by the absence of MyFitnessPal. Bringing this to the bottom line, we expect a first quarter operating loss of approximately 55 to 70 million. Excluding planned restructuring impacts, we expect adjusted operating income to be approximately 30 to 35 million. Excluding restructuring, we expect about $0.03 of adjusted diluted earnings per share. This will become effective on April 1st, 2022. Based on our revenue being more heavily weighted in the second half of the calendar year, we believe this change, namely putting those two quarters in the middle of our new fiscal year, will provide us with greater visibility and subsequent forecast accuracy as it relates to strategic business decisions and providing our initial annual outlook. Mechanically, nothing changes this year for fiscal 2021. Next year, in 2022, we will have a three-month or one quarter transition period that runs January 1st through March 31st, which we'd expect to report in May like our current first-quarter cadence. Following that transition period, our fiscal 2023 will begin April 1st, 2022, and run through March 31st, 2023. Accordingly, there will be no full-year fiscal 2022 reporting. In closing, we have made great progress against our transformational journey, which afforded us increased agility and flexibility to navigate through what was undoubtedly an unprecedented year. We've reengineered our go-to-market, optimized our product and innovation engines and focused on our well-defined target consumer. Additionally, the continued actions we took this year to protect and strengthen our balance sheet, drove significant improvements in our ability to generate cash and protect liquidity. Moving forward, our approach remains appropriately cautious, given the high level of uncertainty related to COVID-19. That said, we will maintain our disciplined approach in executing our strategies and continue to put Under Armour in the best position possible to achieve sustainable, profitable growth over the long term.	compname posts q4 earnings per share $0.40. q4 revenue $1.4 billion versus refinitiv ibes estimate of $1.26 billion. q4 adjusted earnings per share $0.12. q4 earnings per share $0.40. qtrly wholesale revenue decreased 12 percent to $662 million and direct-to-consumer revenue increased 11 percent to $655 million. qtrly gross margin increased 210 basis points to 49.4 percent compared to prior year. quarter-end inventory was relatively flat at $896 million. sees 2021 diluted loss per share is expected to be about $0.18 to $0.20.2021 revenue is expected to be up at a high-single-digit percentage rate. sees 2021 adjusted diluted earnings per share in range of $0.12 to $0.14. experienced significant ecommerce growth around world during q4 and full-year 2020.
It is important to note that the ongoing uncertainty related to COVID-19 and its potential effects on the global retail environment could continue to impact our business results going forward. You may also hear us refer to amounts under U.S. GAAP. At the beginning of last year, we were confronted with significant uncertainty about our business due to impacts from the COVID-19 pandemic. With dynamic changes in purchase behavior and marketplace demand, we faced several obstacles as we worked through what we believe to be a recovery year following a difficult 2020. At that point, it would have been easy to stay conservative and adopt a wait-and-see strategy, yet the tremendous progress we made following our multiyear transformation, including healthier demand for the Under Armour brand, and the passion that this team shows up with every day meant going on offense was the only path for 2021. And because we stayed on offense, Under Armour delivered a record year of financial results, a year that exemplifies the power of our long-term strategic plan and our ability to stay hyperfocused on execution while leveraging our core strengths to position us more strongly for our next chapter of growth. Throughout 2021, we worked methodically to expand our brand's awareness and engagement, ensuring we showed up more consistently, louder and with a sharper point of view about the distinct role we play in an athlete's journey to compete. We underscored our commitment to performance by delivering some of the most innovative products that we've ever produced. We forged deeper and more productive relationships with our key wholesale partners. We saw significant progress in our largest long-term growth drivers, our international, direct-to-consumer, women's and footwear businesses. And we're stronger financially than we've ever been. In this respect, looking at some of our highlights. While our year-over-year comparisons benefited from the significant COVID-19 impacts we experienced in 2020, we are equally pleased with our performance over the past two years. For the full year 2021, revenue was up 27% to reach $5.7 billion, which is a record. Versus 2019, revenue is up 8%. So solid progress from before the pandemic, and the result driven by several strategies that have lifted the quality and composition of our sales compared to a few years ago. Wholesale revenue increased 36% to $3.2 billion in 2021. On a two-year basis, wholesale is up 3%. As detailed in previous calls, this performance has been tempered by the strategic decisions we've made to improve brand health by reducing our sales to the off-price channel and exiting approximately 2,500 undifferentiated retail doors in North America, an effort which is now concluded. Our direct-to-consumer business was up 26% to $2.3 billion in 2021. Versus 2019, direct-to-consumer is up 29%, with strong momentum in our owned and operated stores and our e-commerce business. Following a 40% increase in 2020, our e-commerce business was up 4% in 2021, equating to 45% growth on a two-year stack. This result gives us confidence that this business is well-positioned following a prolonged period of elevated promotional activities. 2021 gross margin was up 210 basis points to a record 50.3%. Versus 2019, gross margin is up 340 basis points, so excellent progress over two years, driven by benefits from pricing and a more favorable channel mix being offset by supply chain headwinds related to COVID-19 and the absence of MyFitnessPal, which we sold at the end of 2020. Rounding out the P&L. Our full year operating income reached $486 million, net income was $360 million, and our diluted earnings per share was $0.77, all three of which are records. We also realized strong balance sheet and cash flow performances with inventory down 9% to an absolute dollar value that is only slightly higher than in 2015 when we were a $4 billion business. And finally, one more record having ended the year with $1.7 billion in cash. All in, what an incredible period for Under Armour. Having operated for nearly two years amid a global pandemic, I am proud of the progress we've made, the resilience we've shown and the potential we have to do even better in the future. By staying focused on our key strategies, we are competing and executing at progressively higher levels, helping us unlock value and returns for our shareholders. Driving us forward at the heart of why we exist is our purpose. We empower those who strive for more. For Under Armour, everything is about the journey. From an awful workout when you want to quit but don't, to pushing through that last rep and adding one more, to earning that PR because you put in the work, Under Armour makes you better. We do this by delivering innovative products, experiences and styles influenced by athlete insight and real-world data. Innovations wrapped in our engineering to empower the journey to sport through training, competition and recovery, 2021 was an exceptional year for Under Armour products. There are too many to list, but a few standouts on the apparel side include RUSH, Iso-Chill, Rival Fleece, Crossback, Infinity, Unstoppable and Meridian, all names that delivered a 33% increase in revenue we achieved. On the footwear side, franchises like HOVR Sonic, Machina and Infinite; UA Flow Velociti Wind; Charged Pursuit, Assert, Aurora; Curry; and Project Rock contributed nicely to 35% growth, validating one of our largest long-term growth opportunities. 2021 was also an exceptional year in Under Armour's progress to connect our brand even more deeply with consumers. From the optionality we created in our P&L, we were able to make incremental marketing investments, which we expect to fuel even stronger brand momentum in the years ahead. At the center of these efforts, product, experience and inspiration fits The Only Way is Through. More than a mantra, it's become an ethos, synonymous with the hard work necessary to power the journey, and it's always a journey. From an initial product drawing to shopping bag to the closet, we obsess athletes and those who strive for more. However, being purpose-led means that it's about more than just shirts and shoes. And sport is so much more than just a game. It teaches us to push past our limits, to be collaborators, to be leaders. It increases confidence, reduces stress and improves mental health. Yet many young athletes face barriers that prevent them from starting their journey to sport. With a lack of fields and courts, gaps in coaching, shrinking leagues and the shortage of gear to play, train and compete with, we recognize that not everyone has access to sport. Addressing this opportunity, a few weeks ago, we announced the long-term commitment of our resources, focus and energy to break down these barriers. As we lay the foundation for our Access to Sport initiative, we are excited to share more in the years ahead as we build opportunities for millions of youth to engage in sport by 2030, ensuring that the next generations of focused performers are inspired even more holistically than those before them. Now back to our business. And the last two years have proven to be one of the most dynamic yet opportunistic times in Under Armour's history. Managing the marketplace prudently through our constant focus on operational excellence to ensure we're keeping the brand healthy and moving forward, we are delighted with our results. That said, let's look at how our regions performed in 2021, starting with North America, where revenue was up 29% to $3.8 billion or up 4% since 2019. In our largest market, we continue to focus on three fundamentals. First is becoming a better retailer by creating more compelling in-store experiences and delivering best-in-class service across our fleet. Additionally, this means continuing to build on the momentum we've seen in our e-commerce business. Realizing we'd likely see traffic declines compared to the abnormality that was 2020, we stayed focused on quality by investing in high-return vehicles like targeted PLAs and improved product wayfinding to improve our online shopping experience, and it's working. In 2021, while we did experience a year-over-year traffic decline, it was more than offset by meaningful increase in conversion and therefore, solid revenue growth. Second, with the critical mass of undifferentiated wholesale door exits behind us, we are encouraged by the productivity KPIs we're seeing across this channel in North America. A more premium position driven by outstanding inventory management and promotional discipline is translating nicely to additional shelf space opportunities with our largest strategic partners, higher AURs and significantly better turns. And that last point turns, which is really about execution, is a core element that gives me confidence that we're in an excellent position to adapt to however the environment may develop over the short term. Third, we are continuing to drive performance by investing more smartly in marketing, which shows up in improved brand affinity scores around awareness, consideration and conversion. Gaining better productivity from how and where we spend has always been the goal. By delivering higher quality traffic through strategic paid media and targeted email activations, our ability to connect more meaningfully across key moments and multiple platforms has never been greater. Turning to our international business. Revenue in EMEA was up 41%, driven by nearly 50% growth in our wholesale business and continued momentum in direct-to-consumer. We are encouraged by the quality of business results delivered in 2021. Our efforts to position Under Armour as premium performance, healthier wholesale relationships and improved retail capabilities continue to validate the power of our playbook. Our two-year performance is strong as well, with revenue in EMEA up 36% versus 2019. Next up is Asia Pacific, where revenue was up 32% in 2021, driven by nearly 50% growth in our wholesale business and a strong increase in direct-to-consumer sales. Clearly, the story here is about a more challenging environment that has developed in China as of late as evidenced by a 6% decline in our fourth quarter APAC revenue. The recent market trends in China are impacting our business. However, our focus in China remains the same: staying premium; continuing to invest in digital innovation, including working to deliver much improved end-to-end consumer engagement platform; and ensuring that store expansions are done at an appropriate pace in the dynamic market conditions. Versus 2019, revenue in Asia Pacific was up 31%, so strong growth on a two-year basis. And finally, revenue in our Latin America region in 2021 was up 18%, driven by strength in our full-price wholesale and distributor businesses. As a reminder, we have transitioned certain countries in this region to a strategic distributor model, a decision we believe will begin to optimize this region's ability to grow and contribute more profitably in the years to come. Versus 2019, revenue in Latin America is about flat on a two-year basis. So in closing, we remain both confident and cautious in this operating environment. And while current macro factors are having material impact on our business, we have no intentions of sitting idle. Innovation, consumer connectivity and inspiring those to strive for more are not tactics at Under Armour. They are a way of life. Moving forward, we believe that the things we can control will continue to serve us as strengths, just as they did in fiscal 2021. Regardless of the short-term environment, we are running a stronger, better company, one that is increasingly more capable of delivering sustainable, profitable growth and value creation for our shareholders over the long term. I am pleased with where Under Armour is sitting, incredibly proud of this team. And in my nearly five years here, I have never been more excited about our future. And with that, I'll hand it over to Dave. Since the beginning of COVID-19 pandemic, our intent has been to deliver appropriate financial performance while protecting the Under Armour brand and positioning ourselves for sustainable, profitable growth over the long term. Leveraging the strength of a data-driven, consumer-centric strategy and a constant focus on operational excellence, we believe we can emerge from this unprecedented time as a stronger, more profitable company. Despite the high level of uncertainty, we committed to staying agile to minimize downside risk while executing against our playbook to help us capitalize on upside opportunities as they arose. In 2021, we did just this. That isn't to say that uncertainty is over. We remain vigilant about the dynamic environment we are operating in, including ongoing supply chain headwinds, rising wages and inflationary input cost pressures that continue to permeate the marketplace. Yet we remain confident in our ability to deliver against our plan by staying focused on our business strategies and remaining nimble as we implement them. Our fourth quarter results reinforce that confidence. Compared to the prior year, revenue was up 9% to $1.5 billion. As a reminder, we expected several headwinds in the quarter, including lower sales of SPORTSMASKs, lower sales to the off-price channel, the absence of MyFitnessPal and proactive supply constraints, among others. Versus our previous expectation, our revenue overdrive was primarily due to higher demand across our full-price wholesale and direct-to-consumer businesses, particularly in North America, coupled with better-than-expected supply chain execution during this challenging environment. From a channel perspective, fourth quarter wholesale revenue was up 16%, driven by strong performance in our full-price business, partially offset by lower year-over-year sales to the off-price channel. Our direct-to-consumer business increased 10%, led by 14% growth in our owned and operated retail stores and 4% growth in our e-commerce business. In addition, our e-commerce business is up more than 30% on a two-year basis. And licensing revenue was down 33%, driven primarily by the recognition timing of minimum royalty payments. By product type, apparel revenue was up 18%, with strength in our training and outdoor businesses. Footwear was up 17%, driven primarily by our running and training categories. And our accessories business was down 27% due to planned lower sales of our SPORTSMASKs compared to last year's fourth quarter. From a regional and segment perspective, fourth quarter revenue in North America was up 15% to $1.1 billion, driven by premium growth in our full-price wholesale and direct-to-consumer businesses. So excellent barometers to improving brand strength and consumer demand in our largest region. Compared to 2019, North American revenue was up 8% in the fourth quarter, driven by higher quality revenue than two years ago. In our international business, EMEA revenue was up 24%, driven primarily by strength in our wholesale business. Compared to the fourth quarter of 2019, revenue in EMEA was up 11%. Next up is APAC, where the business was down 6% in the quarter, driven by softer demand in our wholesale business, which more than offset DTC growth. Compared to 2019, total APAC revenue was up 19%. And finally, in line with expectations, Latin America revenue was down 22% due to the change in our business model as we moved certain countries to distributors, an effort which is now completed. Versus the fourth quarter of 2019, Latin America was down 20%. Related to gross margin, our fourth quarter improved 130 basis points to 50.7%. This expansion was driven by 350 basis points of pricing improvements due primarily to lower promotional activity within our DTC business, favorable pricing related to sales to the off-price channel and lower promotions and markdowns across our wholesale business. And 90 basis points of benefit related to lower restructuring charges. These improvements were partially offset by 190 basis points of COVID-related supply chain impacts, driven by higher freight costs, which meaningfully offset product cost benefits during the quarter; 80 basis points related to the absence of MyFitnessPal; and 50 basis points of unfavorable product mix, related primarily to lower SPORTSMASK sales, which carry a higher gross margin. Versus our previous expectation, our fourth quarter gross margin overdelivery was primarily due to favorable pricing developments from lower-than-planned promotional activity within our DTC business, more favorable pricing related to sales to the off-price channel and lower-than-planned promotions and markdowns within our wholesale business. SG&A expenses were up 15% to $676 million, primarily due to increased marketing investments, incentive compensation and nonsalaried workforce wages. Related to our 2020 restructuring plan, we recorded $14 million of charges in the fourth quarter. So we now expect to recognize total planned charges ranging from $525 million to $550 million. Thus far, we've realized $514 million of pre-tax restructuring and related charges. We expect to recognize any remaining charges related to this plan by the end of the first quarter of our fiscal year 2023. Moving on, our fourth quarter operating income was $86 million. Excluding restructuring and impairment charges, adjusted operating income was $100 million. After tax, we realized a net income of $110 million or $0.23 of diluted earnings per share during the quarter. Excluding restructuring charges, income related to our first year of the MyFitnessPal divestiture earnout and the noncash amortization of debt discount on our senior convertible notes, our adjusted net income was $67 million or $0.14 of adjusted diluted earnings per share. From a balance sheet perspective, inventory was down 9% to $811 million, driven by continued improvements in our operating model and inbound shipping delays due to COVID-related supply chain pressures. Our cash and cash equivalents were $1.7 billion at the end of the quarter, and we had no borrowings under our $1.1 billion revolving credit facility. Finally, following last year's convertible bond exchanges, we are proud to share that our cash position less debt of $663 million nearly doubled to $1 billion by the end of the fourth quarter. Looking forward, one last reminder about our fiscal reporting year change. Mechanically, the current period we're in right now, January 1 through March 31, 2022, will serve as a transition period until we begin our new fiscal year 2023 on April 1. To revisit what we detailed last year, we believe this change, namely putting our two largest quarters in the middle of our new fiscal year, will provide us with greater visibility when providing our initial annual outlook. In this respect, by the time of our next call, which is expected in early May, we'll have booked orders in hand for the majority of our fall/winter wholesale business. That said, let's turn to our outlook for the current transition quarter. From a revenue perspective, we now expect our transition period to be up at a mid-single-digit rate compared to the previous expectation of a low single-digit rate increase. This includes approximately 10 points of revenue headwinds related to reductions in our spring/summer 2022 wholesale order book from supply constraints associated with ongoing COVID-19 pandemic impacts. Moving forward, we expect many of these headwinds to continue well into fiscal 2023 until longer-than-usual transit times, backlogs and congestion find balance, associated freight and logistics costs normalize and inbound shipping delays subside. At this time, we do expect these uncertainties to cause material impacts and variability in our future results. And accordingly, we will remain cautious and agile as we operate our business into fiscal 2023. That said, the proactive strategies we're employing, greater operational agility and overall demand for the Under Armour brand give us confidence in our ability to navigate this dynamic and challenging business environment effectively. And we believe these COVID-related supply chain pressures are just a temporary speed bump on our road to continued profitable growth over the long term. Turning to gross margin. We expect our transition quarter rate to be down approximately 200 basis points against our Q1 2021 adjusted gross margin, which includes approximately 240 basis points of negative impact from higher freight expenses related to ongoing COVID-19 supply chain challenges in addition to an unfavorable sales mix, partially offset by pricing benefits. With that, we expect operating income to reach approximately $30 million to $35 million and diluted earnings per share to be approximately $0.02 to $0.03. In closing, we're proud of the record results we achieved in 2021 and the consistent progress we've made over the past couple of years. This gives us great confidence in our brand and business and our team's ability to navigate this dynamic environment. As we work through our transition quarter and head into fiscal 2023, we're monitoring and tracking the dynamic supply chain and inflationary pressures. And we'll be mindful of the uncertainty and volatility that comes along with it. These conditions demand that we maintain a high degree of agility, and I am confident we will.	q4 adjusted earnings per share $0.14. q4 earnings per share $0.23. qtrly revenue was up 9 percent to $1.5 billion (up 8 percent currency neutral) compared to prior year. qtrly inventory was down 9 percent to $811 million. under armour - qtrly gross margin rose 130 basis points to 50.7% versus prior year, driven by benefits from pricing and restructuring charges in prior year. sees gross margin is expected to be down 200 basis points compared to prior year period's adjusted gross margin in q1. now expects to recognize $525 million to $550 million in charges related to 2020 restructuring plan. currently expects to recognize any remaining charges related to plan by end of q1 of its fiscal year 2023. sees q1 revenue to increase at a mid-single-digit rate versus previous expectation of a low single-digit rate increase. related to restructuring plan, recognized $514 million of pre-tax charges to date, including $14 million in q4 of 2021. q1 diluted earnings per share are expected to be $0.02 to $0.03. currently expects material impacts for its spring-summer 2022 season. could be further material impacts on under armour's results in future periods due to covid-19, supply chain constraints, others.
And I want to get the call started with a few comments about our overall performance for Unifi's third quarter. So all in all, we had a solid quarter three, stronger than we anticipated, and we continued to see a steady recovery from the pandemic. Our Brazil and Asia business had very strong sales and gross profit performance. That's whether you look at it versus Q3 of last year or versus the previous quarter. North American sales saw a year-over-year growth in March, so we now have all three regions showing solid growth trajectory. Our EBITDA performance was very positive in Q3. Our balance sheet continues to be strong as does net debt, and our overall financial performance really puts us in a position so that we can invest in growth as we move into the future. If you look at Q4, while there's still some uncertainty in the Brazil market and even the U.S. market with regards to COVID. Even with that, we see a path to sequentially improving our sales for Q4 and finishing the fiscal year in a way that sets us up for a strong 2022. I'd like to tell you about one positive trend that's growing in the market that's worth noting. There's a very definite momentum for sustainable products from consumers and also from our customers. This bodes well for REPREVE's future, and we can hear this in the discussions that we have with our customers and in their future plans for not only apparel but also home furnishings, footwear and also automotive. Many customers are increasing their commitments to making products using recycled material, and they're actually taking action on those commitments. This quarter 3, we've seen the REPREVE hang tags with our co-branding partners increase by 80%. Now that number year-to-date is 50% so that we can see the trends continuing to strengthen. For the fiscal year, we expect to end the year at 90 million hang tags on products across the marketplace, so the awareness of our brand is climbing in a very positive way. The management team at Unifi is now seeing the benefit of being in place and working together for multiple quarters after what I'd consider to be a fairly instable management situation over previous years. This is now starting to pay dividends and has become a clear driver of our improved performance. I got to say that I'm very proud of the team, and I'm grateful for their resiliency over these last 12 months. As Al mentioned, our third quarter fiscal 2021 results surpassed our initial expectations and are a testament to our strong global presence and the resilience of both our employees and our business model. Their compliance to the safety measures we put in place over a year ago has allowed us to maintain low COVID case numbers, while continuing to operate our business effectively and navigate a recovery. On slide three, we have provided an overview of the quarter. The business demonstrated another quarter of significant strength, and I'm very happy to report we exceeded pre-pandemic revenue levels. Q3 revenues were up 10% sequentially and 5% on a year-over-year basis, with solid performance across all segments and geographies. We generated a 530 basis point improvement in gross margin year-over-year due to the strong results we saw in our Brazil and Asia segments. Brazil had the strongest segment performance during the third quarter, and momentum in that region continued well past Q2 as improved selling prices and product availability during Brazil's economic recovery led to strong margin performance. Our Asia segment's also demonstrated strength during Q3 as volumes continued to trend up year-over-year, experiencing a meaningful return to growth. Our team in Asia has continued to successfully manage cost and improve product mix, allowing for gross margin expansion. In regards to the U.S. raw material costs and supply chain, the March 2021 quarter was the most volatile period we've seen in quite a few years. Many people and businesses in Texas experienced harsh weather conditions in February, but we were fortunate that our supply chain remained operational, albeit with surcharges on selected input materials and freight. Combination with rising petrochemical prices, our raw material costs exhibited a meaningful step-up during the March 2021 quarter. With those higher costs now in our business, we have been working closely with our customers to ensure that the appropriate selling price adjustments are implemented. We do expect some margin pressure to occur into Q4 from the inherent lag that occurs during such a process. However, we do remain confident in our underlying business momentum and our responsiveness in addressing these cost headwinds. Stepping back to the consolidated business, again, our financial position remains strong and easily supported the two bolt-on acquisitions we completed in the fiscal 2021. In addition, I am proud of the progress we've made with improving our balance sheet across the globe. Switching to REPREVE-branded Fiber. I am pleased to report that momentum remains, comprising 33% of net sales in this Q3 -- in Q3 versus 29% for the year ago quarter. And as you can see on slide four, the trend remains strong. Sequentially, REPREVE Fiber was lower than our record Q2 performance, and this is not a concern due to the typical seasonality of the Chinese New Year and the outperformance by Brazil's predominantly virgin platform. We have several exciting brand highlights to touch on today, starting with our traditional co-branding partnerships which have continued to accelerate. Realtree launched their new fishing shirts at Walmart, which contained REPREVE and carry the iconic REPREVE green bottle hang tag. In addition, EleVen, a brand by Venus Williams, launched a women's tennis coat collection that co-brands with REPREVE. These launches represent an extension of REPREVE into broader sporting goods categories. In the home goods category, we continue to win new business and launched several programs this quarter. Our customer, Marina's carpets, a Turkish producer and retailer of carpeting, launched a line of carpeting made from REPREVE. And additionally in the U.S., Rollease Acmeda launched Ambient Renew, a new line of eco-friendly window coverings using REPREVE in the place of PVC. From a marketing and media perspective, we had a remarkable few months working with various partners to promote REPREVE's sustainability benefits for them and, of course, for society. For example, you may have caught the television ads that feature REPREVE during the Phoenix Open Golf tournament, created by the newly rebranded WM, formerly known as Waste Management. WM is a major supplier of bailed recycled plastic bottles used in our U.S. bottle washing facility and announced in February that they will be outfitting their staff with uniforms made from REPREVE via our customers, Aramark and Cintas. In addition to being our customer, WM is working on additional rebounding campaigns, which will continue to feature REPREVE and Unifi as a strategic sustainable partner who enables recycling. WM will continue to air 30-second commercials on national television that feature how Unifi's U.S.-based manufacturing transforms recycled plastics. It also mentioned that through our partnership with L2 Brands and Pepsi's sponsorship of the Super Bowl halftime show, t-shirts made with REPREVE were provided a surprise for Pepsi's social media followers. In March, our sponsorship of the Pac-12 Team Green resulted in additional television advertising on the Pac-12 network and ESPN, with circular economy stories that explain how we take bottles from many university campuses and transform them into well-known branded apparel that can be purchased from their university bookstores. We believe that telling these stories will enhance REPREVE equity and brand awareness in the broader consumer market. Our momentum continues to build and partnerships such as these have propelled REPREVE's growth. This quarter, we hit a milestone of 25 billion bottles recycled into REPREVE. This growth led us to congratulate our valued customers who drove us to this point, with the announcement of our fourth annual Champions of Sustainability Awards in March. These awards celebrate bottle cap milestones achieved by our customers as well as newcomers and partners and innovation. Now turning to our operating segment performance during the third quarter. I will provide some high-level commentary on each segment before Craig takes you through more specific details. Polyester came a little lower on a year-over-year basis, and the shortfall can be attributed to last year's ramp-up in demand as antidumping volumes drove strong utilization and sales trends just prior to the impact of COVID-19. That said, over the last nine months, the Polyester segment has shown strength, achieving a gross margin of 10% during the pandemic versus 8.2% in the prior pre-pandemic comparable period. The Asia segment delivered another strong quarter as business conditions continued to improve and net sales surpassed pre-pandemic levels. Volumes in Asia were up significantly and benefited from pull-through on new and existing customer programs. With Brazil, as Al noted, had another record-setting quarter and beat our own internal forecast. Similar to the outperformance we experienced in the region during the first and second quarter, our unique market position has continued to allow us to take market share that was previously held by competitive importers. Our team in Brazil continues to do great work and has been able to capture even more unfulfilled demand. We will work to hold on to our market share gains within the region, but note that the COVID-19 knockdowns that lasted from late March into April are expected to impact volumes in the June 2021 quarter. With that said, as Brazil worked its way out of the recent spike in COVID-19 cases and the country's retail environment opens back up in the coming months, we anticipate that volumes will ramp back up to normal levels during the first quarter of our new fiscal year. Lastly, the Nylon segment performance met our expectations for the quarter, reflecting a balanced sales level. Now before I pass the call over to Craig, I will simply remind everyone that our ongoing trade petitions, involving textured polyester yarn imported from four countries: Indonesia, Malaysia, Thailand and Vietnam continue as expected. We anticipate further determinations will be published in the next two months. Like the rest of the team, I am pleased with our third quarter fiscal 2021 results and our ability to navigate the complexities of this recovery with a regional and responsive business model. Because of these strong results, we are able to return to our quarterly comparative discussions on a year-over-year basis, which is something that we have not been able to do for the past several quarters. I will begin with a quick overview of profitability before moving on to slide five. Operating income and adjusted EBITDA were up significantly from Q3 of fiscal 2020. The increase is primarily attributable to the gross profit outperformance by Brazil, further aided by robust results from Asia. Operating income and adjusted EBITDA in the just completed quarter included two specific expense items that are worthy of additional commentary: first, we recognized the remaining fiscal 2021 maximum bonus expense in Q3 of fiscal 2021 due to the overall outperformance of Unifi's adjusted EBITDA from our consolidated business. As such, we recorded approximately $2.4 million of expense in the just completed quarter that was originally anticipated for the fourth quarter of fiscal year 2021. Of this additional expense, approximately 2/3 affected SG&A expense and the other 1/3 affected cost of sales. Second, as our installation of new eAFK Evo texturing machines in Yadkinville, North Carolina continues to ramp up. We disposed of some older machinery with remaining book value, generating a noncash loss of $2.5 million in this third quarter. This was included in other operating expense in the income statement and was not added back to our calculation of adjusted EBITDA. Consolidated net sales increased to $178.9 million, up 4.6% from $171.0 million in Q3 of fiscal 2020. For the Polyester segment, prior period sales volumes were boosted by the finalization of antidumping trade petitions against China and India, in combinations with customers accelerating purchases in February 2020 and in anticipation of April and March 2020 lockdowns. The Asia segment exhibited a return to pre-pandemic momentum with continued underlying demand from REPREVE, driving segment revenue growth of 25.5%. The Brazil segment maintained its position of market strength, adjusting prices to accommodate movements in global pricing dynamics and competition, driving 22.1% revenue growth in spite of a much weaker Brazilian real than one year ago. The Nylon segment was essentially flat to the prior year with a shift in sales mix after the first three months of impact from the recently completed Fiber and Yarn acquisition, which was a positive contributor to both revenue and profitability for this segment. Slide six provides an overview of gross profit, exhibiting the 66% increase in gross profit and 530 basis point increase in gross margin from Q3 fiscal 2020 to Q3 fiscal 2021. Gross profit for the Polyester segment increased $190,000 as the shortfall in sales volume was more than offset by an improved sales mix. The Asia segment was able to increase gross profit by $2.6 million or 290 basis points from an improved sales mix and supply chain efficiencies. In Brazil, we were able to triple gross profit from $3.4 million to $10.6 million and achieved a record gross margin of 41.2% due to higher pricing levels underpinned by a strong market position. The Nylon segment was essentially flat in comparison to Q3 of fiscal 2020. Slides seven and eight include a net sales overview and gross profit overview, respectively, for the nine months ended March 2021 versus March 2020. Moving on to the balance sheet on Slide 9. Stability in our debt and liquidity positions is demonstrated by maintaining diligence around working capital components and generating cash flows while completing two bolt-on acquisitions during this fiscal 2021. Great progress recently on our net debt metric, we continue to have 0 borrowings on our ABL revolver, which had an availability of $63 million as of March 28, 2021. Unifi's commitment to financial health has allowed us to leverage our strong balance sheet during 12 months challenged by the global pandemic. We will continue to allocate capex to new eAFK Evo texturing technology in the Americas. Under our balanced approach to capital allocation, we will continue to invest in the business to drive innovation and organic growth, maintain a strong balance sheet and remain opportunistic with share repurchases and M&A opportunities. You will note we were able to include more detailed forecast information than we have been able to provide in the past couple of quarters, as our business visibility continues to return to, let me say, more normal levels. The third quarter's strong performance supports the expectation we laid out earlier in the fiscal year that we will see incremental progress in net sales trends throughout fiscal 2021. We are encouraged by recent sales trends in our REPREVE and other value-added products and expect recent strengths to continue. With this sustained business momentum, the company anticipates sales volumes to increase and June 2021 quarter net sales to improve sequentially on the March 2021 quarter by approximately 1% to 3%. Its adjusted EBITDA for the fourth quarter of fiscal 2021 is expected to be in the range of $12 million and $14 million and includes our current expectations for the following: pandemic uncertainty, especially following a quarter of record performance from the Brazil segment; raw material cost increases that occurred in the March 2021 quarter that will adversely impact gross profit for the June 2021 quarter due to the inherent lag in responsive selling price adjustments, with those impacts partially offset by a lack of incentive compensation expense due to the full recognition during the first nine months of fiscal 2021. Lastly, we expect an effective tax rate of between 45% and 55%. And given the momentum from the third quarter, our fourth quarter capex should fall in the range of $10 million to $12 million. I believe our strong performance during the just completed quarter reflects the resiliency of our global business model and what we can achieve under normal market conditions. Going forward, we continue to focus on managing our costs, selling prices and working capital to drive gross margin improvement, using our innovation to partner with global brand leaders interested in sustainable products in an effort to diversify and grow our portfolio, and maintaining our strong financial position and strong balance sheet to expand opportunities through further organic growth and strategic M&A.	q3 sales rose 4.6 percent to $178.9 million.
Actual results may differ significantly because of risks and uncertainties that are difficult to predict. We will also describe our business using certain non-GAAP financial measures. UGI delivered strong third quarter results and performed well while managing the ongoing impact of the COVID-19 pandemic. Our third quarter GAAP earnings per share was $0.71, while adjusted earnings per share was $0.13, $0.05 over a $0.08 performance in the comparable prior year period, reflecting strong execution across our diversified business and increased margins at UGI International. On a year-to-date basis, our GAAP earnings per share of $4.48 and adjusted earnings per share of $3.30 represent record earnings through the first three quarters of the fiscal year. We are really pleased with this performance, which demonstrates the earnings strength of our diversified business. During the Q2 earnings call, we shared the revised earnings per share guidance of $2.90 to $3 for this fiscal year. Given the strong year-to-date performance, we expect to be at the top end of our guidance range. Next, I'll comment briefly on several key accomplishments during the quarter before turning it over to Ted, who will provide you with an overview of UGI's financial performance. During the quarter, our teams continued to execute on our major business initiatives as we deliver reliable earnings growth, progress incremental opportunities related to renewables and make investments to rebalance our portfolio. We are well positioned to meet our objectives and are pleased with the pipeline of opportunities ahead. Turning to the key highlights for the quarter. UGI Utilities is on track for another record year of capital expenditure, where we will invest in infrastructure replacement and reinforcement. These investments, which are primarily focused on replacement of cast iron and bare steel, are expected to drive continued reliable earnings growth as our PA utility has seen a rate base CAGR of 11.4% over the past five years. The Utilities team also continues to focus on adding new customers across our system with more than 2,200 new residential heating and commercial customers added in Q3 and roughly 10,000 added on a year-to-date basis. Our Midstream & Marketing business continues to leverage our supply assets to take advantage of opportunities that arise, and we continue to expect that we will invest substantial capital over the next several years. Our recent investments in the UGI Appalachia system, including our interest in the Pine Run system continue to perform well, and we were pleased with the strong production volumes during the quarter. As we continue to see growth in demand and rising prices, we remain confident that our midstream assets position us well for future opportunities. Our LPG businesses had a strong quarter of execution as we continue to deliver on the business transformation initiatives we previously outlined. We will drive efficiencies within our operations, improve the customer experience and remain focused on operational and commercial excellence. We are on track to deliver the previously targeted benefits for both AmeriGas and UGI International. And expect that this strategy, coupled with continuous improvement, will generate customer and shareholder value. Our teams are progressing on exciting and attractive range of investment opportunities in renewable solutions as we execute against the renewable strategy that we previously shared with you. Yesterday, we announced that UGI Energy Services has entered into definitive agreements to develop innovative food waste digestive projects to produce renewable natural gas in Ohio and Kentucky through the Hamilton RNG joint venture. In conjunction with that project, pipeline quality RNG will be injected into a local natural gas pipeline that serves a regional distribution system. In addition, we are able to leverage GHI, which will be the exclusive offtaker and marketer of RNG for Hamilton RNG, similar to the arrangement with Cayuga RNG. In addition, during our last investor update, we discussed the intent to create a joint venture for the production and use of renewable dimethyl ether. We have started the regulatory filing process with the European authorities, and we will provide an update on our future calls as we progress on this venture. As you can see, we are making strong progress on a number of initiatives across our businesses. We will remain focused on executing against our strategy of delivering reliable earnings growth, exploring renewables opportunities and rebalancing our portfolio. We are confident that this will allow us to continue to deliver long-term earnings per share growth of 6% to 10% and 4% dividend growth. I'll return later on the call to discuss other business updates. As Roger mentioned, we're pleased with the strong third quarter results. We delivered adjusted diluted earnings per share of $0.13, an increase of $0.05 over the prior year fiscal quarter. Our reportable segments had EBIT of $98 million compared to $81 million in the prior year. This table lays out our GAAP and adjusted diluted earnings per share for fiscal year 2021 compared to fiscal year 2020. As you can see, our adjusted diluted earnings exclude a number of items such as: the impact of mark-to-market changes in commodity hedging instruments, a gain of $1.09 this year versus $0.55 in the third quarter of fiscal 2020. Last year, we recorded an $0.18 impairment of our ownership interest in the Conemaugh Station. This interest was divested as of September 30, 2020. Also last year, we had a $0.02 loss on foreign currency derivative instruments. We adjusted out $0.07 of expenses associated with our LPG business transformation initiatives compared to $0.02 in the prior year. Lastly, we had a $0.44 impairment related to our PennEast assets. In June, the U.S. Supreme Court ruled in favor of PennEast, which is categorically good news for the industry and consumers. Natural gas will continue to play an important role in meeting our energy needs. However, even with this positive news, it is unclear when other remaining issues, such as a decision by FERC on the request to phase the project will be resolved allowing the project to be brought into service. This has led us to impair our investment. While there is uncertainty regarding the timing of PennEast, we have ample opportunity to deploy capital in other areas that meet our return objectives as we have discussed in the past. Looking at our year-over-year quarterly performance, this chart provides some additional color to the $0.05 improvement in earnings we achieved versus the prior year period. This performance was largely due to higher volumes at our international LPG business on weather that was almost 55% colder than prior year. There was also an increase due to the new gas base rate that went into effect at Utilities at the beginning of this calendar year as well as continued discipline in margin and opex management throughout our businesses. Our domestic businesses saw warmer weather than prior year, which impacted demand at AmeriGas and the Utilities. At the corporate level, we saw a $0.15 decrease versus the prior year period, largely due to CARES Act tax benefits that were realized last year. When we shared our revised FY 2021 guidance range of $2.90 to $3, we noted that this included $0.10 of anticipated COVID headwind in tax benefits of roughly $0.12 from CARES and other strategic tax planning actions. Our experience during the quarter continues to align with the amounts we previously projected. And as Roger shared, we expect to deliver at the top end of our guidance range. Delivering at the top end of our guidance range and given our year-to-date non-GAAP results of $3.30, we expect that Q4 will see a sizable reduction that is primarily driven by tax items when compared to the prior year period. In FY 2020, the entire GILTI tax benefit was realized in Q4, while that benefit is reflected in the quarterly results of FY 2021. In addition, our leverage of the CARES Act is reduced with our strong performance this year. Looking at the individual businesses. AmeriGas reported EBIT of $11 million compared to $19 million in the prior year. There was a slight increase in total retail volume driven by an 18% increase in national account volumes in comparison to the prior year period. This volume increase fully offset a 19% decrease in cylinder exchange volume that we saw as sales normalized after a significant uptick in Q3 of FY 2020. When compared to 2019 third quarter, there was a 5% increase in cylinder exchange volume this quarter. Overall, the business saw a decline of $14 million in total margin that was largely attributable to customer mix. We saw lower volumes in the higher-margin residential and cylinder exchange customer segments that was partially offset by the higher volumes from lower-margin commercial and motor fuel customer segments. Other income increased by $7 million, largely due to higher finance charges, which were suspended in response to the COVID pandemic in the prior year period and onetime gains on asset sales in the current period. UGI International generated EBIT of $41 million compared to $21 million in fiscal 2020. Retail volumes increased by 21%, largely due to the significantly colder than prior year weather that I described earlier. And recovery on certain volumes that were impacted by the COVID-19 pandemic last year. This increase in bulk and cylinder volumes drove the higher total margin and offset the slightly lower unit margins given the 81% increase in average wholesale propane prices over prior year. We saw roughly an $18 million or 86% improvement in the year-over-year constant currency performance in EBIT. Separately, our hedging strategy which is intended to offset the multiyear impact of foreign currency exchanges is working as intended, and reducing the volatility associated with U.S. dollar shifts over time. Moving to the natural gas businesses. Midstream & Marketing reported EBIT of $21 million, which was fairly consistent with fiscal 2020. The business experienced improved margins from capacity management, gas gathering and renewable energy marketing activities in comparison to the prior year period. Our recent investment in Pine Run continues to deliver in line with our expectations and is the primary driver for the increase in this quarter's EBIT versus prior year. UGI Utilities delivered a strong performance for the quarter and reported EBIT of $25 million, $4 million higher than the prior fiscal year. This increase was largely attributable to continued growth in our customer base and implementation of increased gas base rates on January 1. Depreciation expense increased due to continued distribution system and IT capital expenditure activity. Turning to our liquidity. Cash flows remained strong with a 9% increase in the year-to-date cash provided by operating activities over the corresponding prior year period. As of the end of the quarter, UGI had available liquidity of $2.4 billion, approximately $800 million more than the prior year period. Our balance sheet remains strong. We continue to be comfortable with the financing capacity across all of our business units and are well within our debt covenants. We have now completed the financing needed to close the Mountaineer acquisition, and that includes a mix of debt and equity units consisting in part of convertible preferred stock, which is consistent with the financing mix that we shared in the past. And with that, I'll hand the call back over to Roger. Before we move to Q&A, I'll share with you some other key business updates since our last call. First, the Mountaineer acquisition continues to progress smoothly. In July, we completed a key milestone in the regulatory process by filing an agreement for settlement as well as providing testimony in a hearing before the commission. Our next step will be to file a proposed order by August 10, seeking the commission's approval. While the precise timing of the commission's approval is uncertain, we have completed several key steps in the regulatory approval process, and now expect to close well before the end of the calendar year and even potentially within this fiscal year. We continue to expect the transaction will be accretive to earnings in the first full year of operation and believe Mountaineer will provide meaningful growth opportunities moving forward. During the quarter, our UGI Utilities Electric division reached a settlement agreement on its rate case and filed a joint petition for approval of that agreement with the Pennsylvania PUC on July 19. Under the terms of the settlement agreement, the Electric division would be permitted to increase base rates by $6.15 million, and we anticipate new rates going into effect in November 2021. Separately, the second phase of the gas base rate increase of $10 million went into effect on July 1. In July, UGI Utilities completed construction of a new state-of-the-art centralized safety training facility. Safety is our top priority and a core value at UGI. We are pleased to place this new facility in service as it reinforces our commitment to safety across the organization. Lastly, our AmeriGas team continues to increase the footprint of our home delivery service, Cynch. During the quarter, we launched Cynch in three additional markets, bringing the total to 23 cities across the U.S. As we look forward to the remaining quarter in this fiscal year and fiscal year 2022, we are pleased with the strong year-to-date performance and the investment opportunities available to us as we execute on our strategy. We have demonstrated our resiliency and our ability to operate effectively despite a challenging and volatile macro environment. I remain confident that we're well positioned both strategically and financially to continue executing and delivering reliable long-term earnings per share growth of 6% to 10% and return capital to shareholders through a robust dividend that we expect to grow at 4% over the long term. To do this, we will remain committed to our core businesses, driving continuous improvements and efficiencies in our operations and lean into investment opportunities in our natural gas business and in renewable energy solutions.	q3 adjusted earnings per share $0.13. q3 gaap earnings per share $0.71. sees fy earnings per share $2.90 to $3.00.
This is Courtney Holben, Vice President of Investor Relations. Before we begin, I'd like to cover a few details. Although appropriate under generally accepted accounting principles, the company's results reflect charges that the company believes are not indicative of its ongoing operations and that can make its profitability and liquidity results difficult to compare to prior periods, anticipated future periods or to its competitors' results. These items consist of post retirement, debt exchange and extinguishment and cost reduction and other expense. Management believes each of these items can distort the visibility of trends associated with the company's ongoing performance. The following measures are often provided and utilized by the company's management, analysts and investors to enhance comparability of year-over-year results as well as to compare results to other companies in our industry. Non-GAAP operating profit, non-GAAP diluted earnings per share, free cash flow and adjusted free cash flow, EBITDA and adjusted EBITDA and constant currency. From time to time, Unisys may provide specific guidance or color regarding its expected future financial performance. Such information is effective only on the date given. Unisys generally will not update, reaffirm or otherwise comment on any such information, except as Unisys deems necessary, and then only in a manner that complies with Regulation FD. Copies of those SEC reports are available from the SEC and along with the other materials I mentioned earlier on the Unisys investor website. We achieved double-digit year-over-year revenue growth and significant year-over-year improvements to profitability and cash flow. Progress in the quarter against our key strategic goals included advancing our DWS transformation, broadening our cloud capabilities and expanding our enterprise computing solutions. I would note that enterprise computing solutions or ECS, is a new name for the segment previously referred to as ClearPath Forward. This is a change to the segment name only, not to the ClearPath Forward product line. Mike will provide detail on our financial performance and accomplishments, but first, I will give some insight into the business. Starting with Digital Workplace Solutions, or DWS, our goal has been to transform this business to focus on higher growth and higher-margin solutions through broadening our offering portfolio and increasing our focus on experienced solutions through a build/partner/buy approach. Our recognized leadership position in the DWS market, supported by our IntelliServ platform, world-class delivery capabilities and NPS scores consistently and significantly above IT services averages, positions us to achieve these goals. The second quarter continued our work, laying the foundation for a sustainable growth through execution against this strategy, with a focus on maturing and enhancing our solution portfolio. Speaking of organic developments, we are building out additional solutions to support cloud-native Virtual Desktop interface within workplace as a service and are hiring new consultative resources to expand our transformation services capabilities, all within DWS. We also continue enhancing this -- the automation and artificial intelligence capabilities in our solutions, including completing the migration of all service desk clients to our cloud contact center platform as of April, allowing for increased usage of conversational AI solutions in voice and chat and expanded deployment of all of our IntelliServ automation capabilities for these clients. Automation as a percentage of service desk ticket volume increased 500 basis points sequentially and 300 basis points year-over-year in the second quarter. With respect to partner developments, we enhanced our modern device management capabilities including by entering into several new partnerships during the quarter. We are already leveraging these new partnerships to create more powerful end-to-end solutions for our clients. We also acquired Unify Square, a unified communications as a service, or UCaaS company, with a focus on seamlessly managing, securing and optimizing enterprise communications and collaboration, including through partnerships with companies such as Microsoft and Zoom. Unify Square broadens our UCaaS portfolio, which is projected to be one of the fastest-growing portions of the DWS market. The acquisition also enhances our experience solutions and expertise, which improve the productivity of clients' digital workplaces and deliver higher value than our traditional DWS offerings. Finally, we also see significant cross-selling opportunities as a result of this transaction, especially since the two companies have only one shared significant client. For DWS, during the quarter, one of the largest healthcare providers in the U.S. awarded us a contract under which we will proactively measure and improve user experience, increased productivity of field services and service desk personnel, decreased service tickets and enhanced device and software management with real-time data. A key differentiation in our proposal was our holistic approach to device management and proactive experience capabilities. We also signed a contract with a consortium of U.S.-based energy companies to provide a full range of IT solutions, including digital workplace, application support and cloud infrastructure with security oversight and protection. Moving to the C&I segment. Our emphasis is to grow cloud in our targeted markets. We believe our established credentials, CloudForte IP-led platform and embedded security solutions position us to achieve this goal. During the second quarter, strong revenue growth continued in C&I, with cloud revenue specifically growing 28% year-over-year. In July, we completed a new release of capabilities within the CloudForte platform with improved automation and standard repeatable approaches to increase speed and reliability of hybrid-cloud deployments. Security is embedded with cloud-capable Stealth and AI-enabled threat protection and detection and faster remediation. The new capabilities also allow for quicker application releases and advanced Kubernetes and container deployments. By focusing on a secure transition to the cloud, we differentiate ourselves with clients, including a number in the U.S. public sector as well as with third-party advisors and industry analysts. In addition to existing partnerships with Microsoft Azure and AWS, we recently announced joining the Google Cloud Partner-Advantage Program as a Google Cloud and Google Workspace reseller partner. With respect to client wins, during the quarter, we expanded modernization and security work at the Georgia Technology Authority and with the Virginia Information Technologies Agency, both highlighting our opportunities for add-on work and our continued success with U.S. state government clients. We also signed a contract with the State of Wisconsin that spans both our C&I and DWS segments to provide a cloud-based contact center solution that will improve the experience of how citizens interact with government. As I noted, this refers to the segment previously referred to as ClearPath Forward. Our near-term goal for this business has been to grow revenue through expanding and enhancing ECS services, while maintaining the stability of license revenue. We believe there is meaningful opportunity to expand ECS services, given our relatively low penetration, combined with our clients' increasing desire to migrate to cloud and hybrid environments and for a seamless application set that works across these architectures. Clients also need help managing application workflow creation and orchestration in these environments. We are uniquely positioned to help with all of this given our embedded IP. We recently released a new version of ClearPath Forward with enhanced capabilities and functionality. The new release allows clients to enhance existing ClearPath Forward applications using Python and enhances interoperability with other environments. It is also uses enhanced security features, including expanded-multifactor authentication and mobile device facial recognition and fingerprint identification. Our partnership with Microsoft Azure offers another avenue for growth within ECS as clients migrate to ClearPath Forward cloud and hybrid environments. We recently went live with ClearPath Forward for Azure with a public sector client, and we are in discussions with a number of additional clients. We're seeing early stage traction with ECS services expansion, with revenue from these services up 2% year-over-year. License revenue in the quarter was also strong, helped by higher volumes than anticipated, which Mike will discuss later. We signed a contract with one of the largest financial services institutions in Brazil during the quarter, for consulting and application services for their ClearPath Forward and related application environment, including development and modernization relating to the integration of more than 90 systems to support the institution's mortgage processing operations. Moving to our go-to-market metrics. Our efforts across segments resulted in total company TCV being up 50% year-over-year in the second quarter and 24% sequentially. Total company Pipeline was up 2% sequentially, though down 3% year-over-year. However, as of the end of July, Pipeline was up 8% versus the end of the first quarter this year and 2% versus the end of the second quarter last year. We continue to be recognized for our market leadership in important areas of the business, including being named a leader for Managed Security Services in Australia, Brazil and the U.S. and a leader in Technical Security Services in the U.S., all in ISG's Provider Lens for Cyber Security Solutions and Services. In late July, we launched a new corporate website, which we encourage you to visit. It is faster and more user-friendly, giving visitors a richer experience and an easier way to learn about our solutions. We expect the new website to help visitors gain a deeper understanding of the outcomes, our capabilities deliver and to lead to additional opportunities for us. And finally, with respect to workforce management, our workforce management initiatives such as upskilling, rotations, work from anywhere flexibility and enhanced recruiting efforts have been benefiting us. Although total company last 12 months voluntary attrition was 12.9% in the second quarter, versus 10.4% in the first quarter, the second quarter level was 210 basis points lower than the prior-year period, and 480 basis points lower than the pre-pandemic level in the second quarter of 2019. Our attrition levels have not impacted the ability to meet client demand, in part due to the workforce management initiatives I highlighted. Our open positions filled internally increased 13% since year-end 2020. Applicants for open position increased 30% sequentially. Our time-to-fill positions decreased 25% since year-end 2020, and referral based hiring has increased significantly relative to last year. So in conclusion, we are energized by the progress we are making toward the goals we laid out at the beginning of this year. Those efforts not only include with respect to clients but also include with respect to bringing on friends and others that they know into this company, which shows quite a lot about our existing associates' views of this company. In my discussion today, I'll refer to both GAAP and non-GAAP results. As a reminder, reconciliations of these metrics are available in our earnings materials. As Peter highlighted, we made continued progress in the second quarter against many of the key strategic goals that we outlined in our Investor Day earlier in the year, while also achieving strong financial results including double digit year-over-year revenue growth and significant year-over-year improvements to profitability and cash flow. Peter covered much of the progress on our strategic goals, so I'll focus more on the financial accomplishments, including the fact that we were free cash flow positive for the quarter. Overall, our second quarter results were in line with or slightly ahead of our internal expectations, and we met or exceeded consensus estimates on all key metrics. Revenue grew 18% year-over-year and 1% sequentially, supported by revenue growth in each of our segments. DWS revenue grew 10% year-over-year, driven in part by growth in revenue from our new proactive experienced solutions and the early results of the new partnerships that Peter mentioned. Additionally, this was the segment and the quarter most impacted by COVID last year, so the post COVID recovery also contributed to year-over-year revenue improvement. DWS revenue was also up 4% sequentially. Our emphasis within C&I on cloud work for our targeted sectors is also yielding positive results, demonstrated by revenue growth for the segment of 10% year-over-year and 1% sequentially. Within C&I, cloud revenue was a key driver of growth, up 28% year-over-year in the quarter. As Peter noted, the segment formerly referred to as ClearPath Forward has been renamed enterprise computing solutions or ECS. I would note that ClearPath Forward product name is unchanged but will refer to the license revenue from these and other solutions as ECS license revenue. ECS segment revenue grew significantly year-over-year, up 40% and showed a 1% sequential increase. The growth was driven in part by higher license revenue than anticipated based on higher volumes than projected in the quarter, Additionally, ECS services revenue grew 2% year-over-year. The second quarter represents the strongest year-over-year revenue growth that we anticipate for 2021. As we've previously noted, we expect ECS license revenue to be split 55% and 45% between the first and second half of the year, with the third quarter assumed to be the lightest of the year. As a reminder, the prior year first half/second half split was 40% and 60%, with 40% of the full year segment revenue coming in the fourth quarter. This year's renewal schedule is much more evenly distributed with significantly less reliance on fourth quarter signings. Total company backlog was $3.3 billion as of the end of the second quarter relative to $3.4 billion as of the end of the prior quarter. Of the $3.3 billion, we anticipate $375 million will convert into revenue in the third quarter. The sequential decline in backlog was attributable to a delay in a signing of a large DWS contract that we expected in the second quarter and ultimately was signed in July. Our plan calls for go-to-market strategic initiatives that Peter highlighted to begin expanding the pipeline and improving our backlog over the coming quarters. As we indicated in January, we expect our year-end backlog to show positive growth year-over-year. The seasonality trends I referenced regarding revenue have been anticipated, and overall, we're on plan for revenue for the full year 2021. As a result, we're reaffirming our full year guidance range of 0% to 2% year-over-year revenue growth. The operating efficiency enhancements that we've undertaking as well as our shift to higher-value solutions drove significant year-over-year improvement to non-GAAP operating profit margin in the second quarter. This metric was up 950 basis points year-over-year to 9.7%, supported by year-over-year improvements to gross margin in each of the segments. DWS gross margin increased 840 basis points year-over-year to 15.2%. This was helped by higher margins earned on some of the newer proactive experience solutions and increased automation. Our operational efficiency improvements, such as reducing our real estate footprint and refining our workforce management strategy as well as post-COVID revenue recovery also contributed to margin increases. DWS gross margin was also up 210 basis points sequentially. C&I gross margin improved 730 basis points year-over-year to 12.5% and was up 280 basis points sequentially, helped by higher cloud revenue and the same real estate and workforce management cost efficiencies that I note for DWS. ECS gross margin increased 1,430 basis points year-over-year to 61.3%, helped by flow-through of strong ECS license revenue driven by the renewals and volume increases that I noted earlier against the relatively fixed cost base. ECS gross margin was roughly flat sequentially with both periods over 61%. As I've noted, our margins were aided by the cost efficiencies and automation that we've been implementing. I've highlighted in previous discussions that pre-reinvestment, we were targeting $130 million to $160 million of run rate savings exiting 2021. And as of the end of the second quarter, I'm happy to report that we've completed all the actions necessary to achieve this target, and our expected run rate savings exiting 2021 is at the high end of that range. Approximately $35 million of the annualized actual savings was included in the second quarter results, and we believe the full amount of savings will be realized by the end of next year. As Peter noted, our workforce management initiatives have been very effective and helped drive the total cost of labor as a percent of revenue to continue to decline. The metric was down 80 basis points sequentially in the quarter, even factoring in retention-focused salary increases that we implemented during the period. During the second quarter, we also successfully achieved our goal of removing $1.2 billion in gross pension liabilities from the balance sheet. In conjunction with the final actions to achieve this, we recognized a non-cash settlement charges of approximately $211 million or $2.37 per diluted share, which was the only reason that our net loss from continuing operations was $140.8 million or $2.10 per diluted share. The improvements to non-GAAP operating profit also flowed through to adjusted EBITDA, which increased 125% year-over-year to $94.4 million. Adjusted EBITDA margin increased 860 basis points year-over-year to 18.2%, and non-GAAP diluted earnings per share increased significantly to $0.68 from a loss of $0.15 in the prior year period. capex for the second quarter was $23 million, down 35% year-over-year, reflecting the continuation of our capital-light strategy and our focus on integrating best-of-breed solutions to enhance our client offerings and help optimize software development costs. The margin expansion and capex reductions also contributed to significant year-over-year improvements in cash flow, resulting in us being free cash flow and adjusted free cash flow positive for the quarter. Cash from operations improved $56 million year-over-year and was positive at $42 million. Free cash flow improved $69 million year-over-year to a positive $19 million, and adjusted free cash flow improved $92 million to a positive $55 million. These metrics were all up significantly on a sequential basis relative to negative cash flow for each metric during the first quarter. As we look to the rest of the year, we're projecting our third quarter non-GAAP operating profit margin to be roughly in line with the prior year period. Fourth quarter non-GAAP operating profit margin is anticipated to be the strongest of the year, though lower year-over-year, in part due to the ECS license renewal timing I mentioned earlier. As with revenue, the seasonality trends in profitability were expected and were on plan overall for the year with respect to non-GAAP operating profit margin and adjusted EBITDA margin. As a result, and in addition to affirming revenue guidance, we're also reaffirming our guidance ranges for these two metrics at 9% to 10% and 17.25% to 18.25%, respectively. We're also forecasting our capex spend for the year to be lower than initially anticipated and now is expected to be approximately $115 million. Other full year cash flow expectations are the following: we anticipate cash taxes to be approximately $45 million to $55 million, and we expect restructuring payments to be approximately $65 million to $70 million. Additionally, as we noted in January, working capital is currently at a run rate use of approximately $20 million to $30 million, which we still believe will improve over time. As a result of all of this, we are projecting to be free cash flow positive for the full year 2021. To wrap up, I'd like to echo Peter's enthusiasm about the progress we're making in just two quarters into our refresh strategy, which we've been able to implement as a result of our improved balance sheet. We're appreciative of the hard work that our associates have been putting in to help drive this transformation, and we look forward to continual successful execution over the remainder of the year.	compname announces 2q21 results. q2 non-gaap earnings per share $0.68 from continuing operations. q2 loss per share $2.10 from continuing operations.
This is Courtney Holben, Vice President of Investor Relations. Before we begin, I'd like to cover a few details. Although appropriate under generally accepted accounting principles, the company's results reflect charges that the company believes are not indicative of its ongoing operations and that can make its profitability and liquidity results difficult to compare to prior periods, anticipated future periods or to its competitors' results. These items consist of post-retirement, debt exchange and extinguishment, and cost reduction and other expense. Management believes each of these items can distort the visibility of trends associated with the company's ongoing performance. The following measures are often provided and utilized by the company's management, analysts and investors to enhance comparability of year-over-year results as well as to compare results to other companies in our industry, non-GAAP operating profit, non-GAAP diluted earnings per share, free cash flow and adjusted free cash flow, EBITDA and adjusted EBITDA and constant currency. From time to time, Unisys may provide specific guidance or color regarding its expected future financial performance. Such information is effective only on the date given. Unisys generally will not update, reaffirm or otherwise comment on any such information, except as Unisys deems necessary and then only in a manner that complies with regulation FD. Copies of those SEC reports are available from the SEC and along with the other materials I mentioned earlier on the Unisys's investor website. During the third quarter, we made continued progress executing on our strategy for sustained revenue growth and margin improvement by expanding our solution portfolio and enhancing our go-to-market efforts while managing our workforce to successfully attract and retain talent in a competitive labor market. We also increased gross profit and free cash flow year-over-year. Mike will provide detail on our financial performance and accomplishments. But first, I will give some insight into the business. Starting with Digital Workplace Solutions, or DWS, our goal has been to transform to a higher growth and higher-margin business by enhancing and expanding our solution portfolio with a focus on proactive experience, leveraging our recognized leadership position in the market and our IntelliServ and Power Suite platforms. In the third quarter, we made progress toward these strategic goals, while exiting some contracts that weren't core to how we plan to grow this business. With respect to the build portion of our build partner buy strategy, we have developed our experienced model office solution, or XMO. This offering analyzes data from multiple sources, including device experience tools such as our Power Suite solution, our Cloud contact center platform and other satisfaction and sentiment tools to identify and remediate pain points and improve user experience. This will help clients achieve business goals such as maximizing productivity and improving employee engagement and will also streamline our support model by reducing reactive service needs. Additionally, we defined and began incorporating our second-generation experience level agreement or XLA framework into contracts, providing a more advanced persona-based way for clients to assess the impact our solutions are having on user experience. We believe we are leading the market in advancing to second-generation XLAs and our clients are responding positively. We also filled several key leadership and architect rules during the quarter. With respect to partnerships in DWS, we have broadened our relationships with some leading device experience management partners to become channel partners in addition to solution partners. And our integration of Unify Square is progressing as we continue to actively assess additional opportunities to enhance our solution portfolio through acquisitions. In the quarter, we signed a DWS contract with a global commercial real estate services firm to implement a case management system, which will help the client move to a centralized global model for this process and technology. Also in the quarter, Unify Square signed contracts with nearly 20 new logo clients, including consulting contracts and Power Suite software subscriptions focused on migrating to or managing Zoom and Microsoft Teams, UCaaS environments. Moving to Cloud and Infrastructure Solutions, or C&I. We continue to execute on our strategy of growing Cloud in our targeted markets by leveraging our established credentials, CloudForte and embedded security solutions to help clients transform their traditional ITO environments to effective hybrid and multi-Cloud solutions. Revenue growth continued during the third quarter in C&I with Cloud revenue specifically growing 26% year-over-year. As we noted on our last call, in July, we completed a new release of our CloudForte program. And since July, we have continued to enhance the artificial intelligence embedded in CloudForte with a specific focus on Cloud spend optimization. We're also utilizing predictive analytics to help clients avoid incidents and automated root cause analysis to remediate and prevent future issues. Additionally, increased migration automation in our solution allows us to move significantly more workloads to the Cloud more quickly at increased levels of reliability. We are on schedule for a new release of the CloudForte platform with additional functionality in the fourth quarter. We're also expanding our partnering with CloudForte, including enhanced integration with Google Cloud, increasing our ability to deliver outcome-based end-to-end Cloud services to clients using Google Cloud and to help them optimize their workforce environment. We have broadened our work with AWS and Microsoft Azure, increasing automation to enable a more seamless experience for clients with improved functionality, while also enhancing cost efficiency. We are assessing potential C&I acquisition candidates with a focus on enhancing specific capabilities and increasing geographic coverage. And during the quarter, we signed a contract with a leading Mexican insurance company to design a hybrid environment, integrating public and private Clouds and to perform related migration work. Turning to Enterprise Computing Solutions, or ECS. Our goal is to grow revenue through expanding the ECS ecosystem while maintaining license revenue to bill. We are enhancing our existing services and platforms and developing new solutions to help clients manage their ClearPath Forward environments. We are incorporating advanced AI and automation into our application life cycle management platforms and workflow-oriented design into our application development solutions. We're also expanding the interoperability of our ClearPath Forward systems, which are already able to be deployed in the public Cloud via ClearPath Forward for Azure to enable use in Hybrid and multi-Cloud environment. Our IP-led industry-focused solutions, such as AirCore and Elevate, represent an additional opportunity for growth in ECS. We're partnering with software and platform developers to modernize our application development and to enhance our life cycle management of these solutions, and we are working with channel partners to embed these industry applications into their solutions to increase our client reach. We are also evaluating opportunities to acquire smaller companies that support ClearPath Forward. We recently signed a contract with New Zealand's Waka Kotahi NZ Transport agency to extend our engagement to manage IT infrastructure on the ClearPath Forward platform that supports systems processing approximately 25 million driver's license and 60 million motor vehicle transactions per year. Turning to our broader go-to-market efforts. Our total company TCV was up 13% year-over-year in the third quarter, and total ACV was up 30% year-over-year. As we price contracts, we're aiming to offset our anticipated cost increases relating to the competitive market for labor. Total company pipeline was also up 5% sequentially, supported by growth in our proactive experienced DWS solutions and Cloud solutions pipelines, which increased sequentially, both on a dollar basis and as a percent of total pipeline. We are increasing awareness in our new DWS and Cloud capabilities, meeting frequently with industry analysts, such as Gartner, IDC, Everest, ISG, and HFS, and we have been recognized for our leadership in a number of areas. We were recently named a leader in advisory firm ISG's provider lens study on the future of work in both managed employee experienced services and managed digital workplace services in the U.S., the U.K. and Brazil, in addition to other regional leadership recognition. We were also named a leader in the next-gen private and Hybrid Cloud-managed services by ISG in the U.S., the U.K. and Brazil, and were recognized by IDC as a major player in worldwide managed multi-Cloud services. We have evolved significantly as a company. And we're launching a global advertising campaign to help ensure that the market knows who Unisys is today. We're undertaking a similar initiative aimed at attracting talent in key recruiting geographies. We're also expanding the depth and breadth of content on our website and implementing a cross-selling initiative to highlight our full portfolio of solutions across segments to clients. The mark of the talent remains highly competitive, but our workforce management efforts, including compensation retention adjustments and increased associate initiatives such as talent development, internal mobility and focus on work-life flexibility have helped us to continue to attract and retain key resources needed to execute on our strategy. Our last 12-month voluntary attrition was 15.3%, which is significantly below the pre-pandemic level of 17% for the third quarter of 2019. The demand for open roles filled internally as a percent of total, increased six points for the year-to-date versus 2020 to 36%, reflecting the effectiveness of our internal development, mobility programs and upskilling and referrals represent over 20% of total hiring on a year-to-year basis. Our commitment to DEI is a bedrock of our people strategy. With that, I'll turn over the call to Mike to discuss our financial results. In my discussion today, I'll refer to both GAAP and non-GAAP results. As a reminder, reconciliations of these metrics are available in our earnings material. As Peter highlighted, during the third quarter, we continue executing on our strategy for sustained revenue growth and margin improvement by expanding our solution portfolio and enhancing our go-to-market efforts while proactively managing the workforce and increasing gross profit and free cash flow year-over-year. Overall, our year-to-date performance is in line with our internal expectations, and we are reaffirming all full year 2021 guidance metrics as a result. During the third quarter, we grew revenue in two of our three segments with continued year-over-year revenue growth in both C&I and ECS. Our ongoing enhancements to our Cloud capabilities and efforts to increase awareness with industry analysts and clients continue to yield results with C&I revenue growth of 1.7% year-over-year to $118.9 million in the third quarter. This was supported by Cloud revenue growth within the segment of 26% year-over-year. One item to keep in mind going into the fourth quarter is that we expect our C&I revenue to be down year-over-year due to a timing issue associated with revenue recognition from a public sector client that benefited us in the fourth quarter of 2020 as well as some runoff of traditional infrastructure work that's not part of how we're planning to grow this business. We still expect C&I to be the fastest-growing segment overall for the full year 2021. The enhanced functionality associated with our ECS solutions, including ClearPath Forward for Azure and our focus on growing ECS services continues to provide benefits to the ECS segment. ECS revenue grew 1.8% year-over-year. This growth was helped by higher license revenue than expected in part due to a contract being renewed for a longer duration than initially anticipated. I think the fact that clients are signing eight year agreements for ClearPath Forward operating system is a testament to the strength of the solution and the modernization roadmap that supports this offering. ECS services revenue grew 1% year-over-year. As we've previously noted, we had expected the third quarter to be the lightest of the year in terms of license revenue, which we still expect to be split approximately 55% and 45% between the first and second half of the year. This software renewal cadence is as expected and actually de-risks the fourth quarter as ECS license revenue is more evenly distributed throughout the year, with a lot less reliance on fourth quarter signs. As a reminder, the prior year first half/second half split was 40% -- 60%, with 40% of the full year segment revenue coming in the fourth quarter. We expect overall 2021 ECS revenue to be roughly flat year-over-year. With respect to DWS, we're moving into the next phase of our transformation of this segment with a heavy emphasis on our go-to-market implementation, enabling us to bring our enhanced experienced solutions to new and existing clients. We have transitioned away from some heritage contracts that were not core to how we're planning to grow this business. We also saw some impacts related to supply chain shortages, and both of these items impacted revenue, which was down 4.7% year-over-year to $141.3 million. As a result of all of this, the total company revenue was down 1.5% year-over-year in the third quarter to $488 million. As I noted, though, this does not change our expectations for revenue for the full year as this quarterly cadence was anticipated and was embedded in our guidance, as was our expectation for year-over-year decline in the fourth quarter revenue due to the timing issues I mentioned, which is why we're reaffirming that guidance at 0% to 2% year-over-year revenue growth. The company backlog was impacted by the continued shift of our mix of business toward higher growth and higher-margin solutions and the exiting of some nonstrategic contracts. Additionally, during 2021, we have seen the duration of contracts and backlog shortening as it did in 2020 and 2019. As a result, total company backlog was $3 billion as of the end of the third quarter relative to $3.3 billion as of the end of the prior quarter. Type of solutions that we are shifting our mix toward are less capital-intensive and have a shorter implementation timeframe, which we expect will lead this backlog to convert to revenue more quickly than it has in the past. This is supported by year-over-year increase in ACV that Peter noted. Of the $3 billion in backlog, we expect approximately $380 million will convert into revenue in the fourth quarter. Third quarter total company gross profit was up year-over-year, and gross profit margin was up year-over-year as well. These results were supported by year-over-year improvements in C&I and ECS gross margins. C&I gross profit increased 116.3% year-over-year to $9.3 million, and gross margin improved 410 basis points to 7.8%, driven by the improvements to margin in both Cloud and traditional infrastructure work. ECS gross profit increased 28.8% year-over-year to $97 million, and gross margin improved 1,360 basis points to 65%, helped by the higher revenue I mentioned earlier. DWS gross profit was $16.8 million relative to $21.6 million in the prior year period, largely driven by the flow-through impact of lower revenue. DWS gross margin was 11.9% relative to 14.6% in the prior year period. As with revenue, our year-to-date non-GAAP operating profit margin results are roughly in line with internal expectations, and accordingly, we're reaffirming our full year 2021 guidance for this metric at 9% to 10%. SG&A expense increased year-over-year in the quarter, largely due to increased investments in our go-to-market efforts, primarily related to direct sales support and increases in noncash-based compensation. As a result, total company non-GAAP operating profit margin was 5.7% relative to 8.6% in the prior year period. We anticipated additional investments in our go-to-market efforts over the next few quarters to support our growth strategy, increased awareness of our enhanced solution portfolio and within the context of a highly competitive labor market across the IT services industry, increased compensation to retain and attract top talent, we need to maximize our growth strategy. Based on this, we expect to be toward the lower end of the non-GAAP operating profit margin guidance I just mentioned. Consistent with our discussions over the last couple of quarters, I'm pleased to report that we've concluded our cost optimization program, and it is now fully underpinned. The annualized savings associated with this program are at the high end of the targeted range we provided, which was $130 million to $160 million. As I mentioned already, the reinvestment of a portion of these savings has begun and will continue through the first half of 2022. Our net loss from continuing operations was $18.7 million or $0.28 per diluted share versus $13.3 million or $0.21 per diluted share in the prior year period. Non-GAAP net income was $6.9 million versus $36.8 million in the prior year period, and non-GAAP diluted earnings per share was $0.10 versus $0.51 in the prior year period. These GAAP and non-GAAP net income and earnings per share results are reflective of lower operating profit that I mentioned as well as higher taxes this year due to the geographies in which the income was earned. As with revenue and non-GAAP operating profit margin, our year-to-date adjusted EBITDA results are generally in line with our expectations, and so we are reaffirming full year 2021 guidance for this metric at 17.25% to 18.25%. Adjusted EBITDA in the quarter was $74.6 million relative to $82.3 million in the prior year period, and adjusted EBITDA margin in the quarter was 15.3% versus 16.6% in the prior year period based on similar drivers as non-GAAP operating profit and margin. Likewise, as with operating profit, we expect to be toward the lower end of the guidance range in light of these investments in our team to support growth in a competitive labor market. We continue our capital-light strategy and our focus on integrating best-in-class offerings to enhance our solutions and optimize our development costs. Our capital expenditures declined year-over-year again in the third quarter, down 18.4% to $26.1 million. We now expect capex to be between 100 and $110 million for the full year 2021, which is lower than our previous expectations. Free cash flow and adjusted free cash flow also continued to improve, with free cash flow up 14.9% year-over-year to $39.4 million and adjusted free cash flow up 36.3% to $69.9 million. These cash flow metrics were also up significantly on a sequential basis, and we continue to expect to be free cash flow positive for the full year 2021. In continuing our efforts to further derisk our balance sheet, we completed a transfer of additional gross pension liabilities in October through a $235 million annuity contract. We expect a onetime noncash pre-tax settlement charge in the fourth quarter associated with this liability transfer of approximately $130 million or $1.94 per share. Another positive balance sheet item to note is last week, Moody's has resolved the positive outlook associated with our debt by providing an upgrade of our corporate family rating to B1 with a stable outlook, and our senior secured notes were upgraded to B1 as well. To wrap up, our third quarter was consistent with our expectations and represent continued progress on our refresh strategy and the achievement of both our short and long-term financial goals, and we look forward to continuing this progress in the fourth quarter. Mike will be taking on the role of President and Chief Operating Officer, effective upon the hiring of a new CFO. As you know, Mike has played a central role in the significant financial transformation of the company since becoming CFO in 2019, including the substantial strengthening of the company's balance sheet. Mike has also played an important operational role in the company, and he currently oversees our corporate development efforts and our strategy function. Eric has been instrumental in improving the financial performance of the company over the last few years and in the implementation of our new strategy and operating model as well as other elements of the company's business during his tenure. Eric will be leaving his current role on November 30. We have begun a search for a new CFO, and Mike will continue to fill that role until we have appointed a new CFO. At that point, he will transition to President and Chief Operating Officer. I will assume Erik's responsibilities on an interim basis until the CFO transition is complete. As a reminder, I also served as President from January of 2015 until March of 2020. We wish Eric's success in his future endeavors and look forward to Mike's contributions in his new role.	compname reports 3q21 results. compname announces 3q21 results. q3 non-gaap earnings per share $0.10 from continuing operations. q3 loss per share $0.28 from continuing operations. q3 revenue fell 1.5 percent to $488 million. q3 non-gaap earnings per share $0.10. company reaffirms fy 2021 guidance. announced appointment of unisys cfo mike thomson as president & coo, effective upon hiring of a new cfo. thomson will succeed current president and coo eric hutto who is stepping down to pursue other interests.
In addition, during today's call, we will be discussing non-GAAP financial metrics. We are pleased to report our results for the third quarter ended September 30, 2020. UMH continues to achieve excellent results despite the COVID-19 pandemic. Our rent collections remain in line with our historical performance. Currently, over 98% of our third quarter rental and related charges have been collected. Demand throughout our communities remain strong as evidenced by our 320 basis point improvement in same community occupancy and our 54% sales growth as compared to the same quarter last year. We further demonstrated the success of our business plan by obtaining $106 million of GSE financing at 2.62%. This loan pioneered GSE acceptance of up to 60% rental homes in communities. Subsequent to quarter end, this capital was used to redeem our 8% Series B preferred stock. This 500 basis point improvement will result in over $5 million in additional FFO per year or approximately $0.12 per share. UMH is well positioned to excel in 2021. Normalized FFO for the third quarter was $0.18 per diluted share compared to $0.15 in the prior year period. This represents an increase of 20%. We are pleased that our $0.18 dividend per quarter is now fully covered by our current operating performance. This is prior to the positive impact that the redemption of our Series B preferred will have on FFO. Our community operating results continue to improve. In accordance with our business plan, the value-add communities that we have acquired over the past few years are now starting to deliver significant revenue growth and are positively impacting our overall performance. Throughout the pandemic, we have continued our capital improvements, expansions and rental home additions. Our communities look better and are operating more efficiently than ever before. Total income for the quarter is up 16%. Year-to-date, total income is up 11%. Our operating expense ratio has decreased from 47.8% to 44.6%. The combination of income growth and expense ratio reduction resulted in overall NOI growth of 17% for the quarter and 19% for the year. Our same-property occupancy rate improved 320 basis points to 86.9% from the same quarter last year. This translates to an increase of 706 revenue-producing sites year-over-year. This occupancy growth has contributed to income growth of 8.6% for the third quarter and 7.8% year-to-date, generating same-property NOI growth of 12.9% and 13.7%, respectively. This is the fourth quarter in a row that we have delivered double-digit same-store NOI growth. The primary driver of our overall occupancy and revenue growth is the rental home program. Through the COVID-19 crisis, rental homes have proven to be as stable and income stream as homeowner occupied sites. We have increased our rental home portfolio by 684 units so far this year. We are on track to add 800 to 900 new rental units this year. We now own approximately 8,100 rental homes. At quarter end, our rental home occupancy rate was 95.4%. As a result of our performance through COVID, we are more convinced than ever that rental homes and manufactured housing communities are the best way to provide quality affordable housing. We continue to seek value-add acquisition opportunities in strong markets where we can implement our rental home program. We recently entered into a line of credit with FirstBank secured by our rental homes and the income derived by them. This line allows us to tap into the equity that we have in our rental homes at a reasonable rate of prime plus 25 basis points. Our goal is to continue to increase our rental home program and reduce the cost of capital used for that purpose. Gross sales for the quarter were $6.8 million, representing an increase of 54% over the same period last year. Gross sales for the year are at $15 million, which is now up 8% over the first three quarters of 2019. Despite the COVID-19 pandemic, we continue to see increasing demand for sales throughout our portfolio. Our sales generated income of approximately $640,000 for the quarter and approximately $450,000 for the year. As we continue to grow our sales volume, we expect to generate meaningful income, which will further improve FFO. To ensure that we have the lots available to generate this volume, we are working on developing additional sites at many of our best sales locations. We remain on track to complete the development of 191 sites this year. In 2021, we expect to obtain approvals on approximately 800 sites. We should develop about 400 of these approved sites in the next 18 months. During the quarter, we closed on the acquisition of two communities containing 310 sites for a total purchase price of $7.8 million or $25,000 per site. These are value-add communities with an in-place occupancy rate of 64%. Over the next few months, we expect to complete our initial turnaround work and begin to infill the communities with rental homes. These communities are both located in markets that we already operate in, creating management efficiencies. We have been able to add to our acquisition pipeline. We have executed letters of intent on four communities in three new states that fit our growth criteria. These communities contain approximately 580 sites, of which 64% are occupied. The total purchase price for these communities is $21 million or $36,000 per site. On previous calls, we have discussed our plans to improve community operating results, acquire and expand communities, improve sales profitability, refinance our capital stack and ultimately improve our FFO. During extremely difficult economic circumstances, we have achieved many of these goals and made substantial progress toward achieving the others. We have covered our $0.18 dividend prior to the positive impact that the redemption and refinance of our Series B preferred will have on earnings. This change in our capital stack is expected to add $0.12 of FFO per share annually. We have laid the foundation to deliver excellent FFO growth in 2021 and beyond. Now Anna will provide you with greater detail on our results for the quarter and for the year. Normalized FFO, which excludes realized gains on the sale of securities and other nonrecurring items, was $7.4 million or $0.18 per diluted share for the third quarter of 2020 compared to $6 million or $0.15 per diluted share for the prior year period. As we had previously announced, we redeemed all 3.8 million issued and outstanding shares of our 8% Series B cumulative redeemable preferred stock totaling $95 million on October 20. This, together with our recent GSE financing, will generate savings of approximately 500 basis points or $0.12 per share annually going forward. Rental and related income for the quarter was $36.4 million compared to $32.9 million a year ago, representing an increase of 10%. Community NOI increased by 17% for the quarter from $17.2 million in 2019 to $20.1 million in 2020. These increases are attributable to our acquisitions, rent increases, the success of our rental home program and reduction of our operating expense ratio. Our operating expense ratio improved from 47.5% for the third quarter of 2019 to 44.7% for the current quarter. For the nine months, our expense ratio decreased from 47.8% to 44.6%. At quarter end, our portfolio average monthly site rent increased by 2.7% to $455 over the same period last year. Our average monthly home rent increased by 2.8% to $781 over the same period last year. Same-property income for the third quarter increased 8.6% over the same period last year, while expenses increased by 3.2%, resulting in same-property NOI growth of 12.9%. Sales of manufactured homes increased 54% for the quarter from $4.4 million in 2019 to $6.8 million in 2020. We sold a total of 108 homes, of which 48 were new home sales and 60 were used home sales. The gross profit percentage improved from 25% for the three months ended September 30, 2019, to 31% for the current quarter. For the nine months, we sold a total of 252 homes, of which 102 were new home sales and 150 were used home sales. The gross profit percentage was 29% and 27% for the nine months ended September 30, 2020 and 2019, respectively. As we turn to our capital structure, at quarter end, we had approximately $507 million in debt, of which $472 million was community level mortgage debt and $35 million was loans payable. 93% of our total debt is fixed rate. The weighted average interest rate on our mortgage debt was 3.81% at quarter end compared to 4.14% in the prior year. The weighted average maturity on our mortgage debt was 6.3 years at quarter end compared to 6.2 years a year ago. At quarter end, UMH had a total of $383 million in perpetual preferred equity, not including the $95 million of our Series B preferred stock, which was redeemed on October 20. Our preferred stock, combined with an equity market capitalization of $564 million and our $507 million in debt, results in a total market capitalization of approximately $1.5 billion at quarter end, representing an increase of 3% over the prior year period. From a credit standpoint, our net debt to total market capitalization was 31%. Our net debt less securities to total market capitalization was 25%. Our net debt to adjusted EBITDA was 5.8 times. Our net debt less securities to adjusted EBITDA was 4.7 times. Our interest coverage was 4.1 times, and our fixed charge coverage was 1.5 times. From a liquidity standpoint, we ended the quarter with $55 million in cash and cash equivalents, $60 million available on our unsecured credit facility with an additional $50 million potentially available pursuant to an accordion feature and $29 million available on our revolving lines of credit for the financing of home sales and the purchase of inventory. We also had $85 million unencumbered in our REIT securities portfolio. This portfolio represents approximately 6% of our undepreciated assets. We limit our portfolio to no more than 15% of our undepreciated assets. With the exception of reinvesting our dividends, we are committed to not increasing our investments in the REIT securities portfolio. The company continues to enhance its liquidity position. Through our preferred and common stock ATM programs, we raised net proceeds of $9.8 million during the quarter and $73 million during the nine months. Subsequent to quarter end, we raised an additional $14.2 million through these programs. Additionally, as Sam mentioned, in October, we entered into a $20 million line of credit with FirstBank secured by our rental homes and the income derived by them. This line is expandable to $30 million with an accordion feature. In conjunction with the Series B preferred stock redemption, subsequent to quarter end, we drew down $30 million on our unsecured credit facility and $26 million on our margin line. We have been incredibly pleased with the performance of our portfolio of 124 communities. We believe the favorable performance will continue in the years ahead. Our staff, despite the burden of the pandemic, has continued to serve the housing needs of our communities. UMH has acquired communities, installed and rented new homes, profitably sold homes, completed capital improvements, expanded communities and financed communities and rental homes at historically low interest rates. As a result of these accomplishments, UMH is well positioned for a productive 2021 and beyond. The shortage of affordable housing is a critical domestic issue facing our nation. The pandemic has caused the population migration from the cities to the suburbs. UMH is now experiencing an increased demand for affordable single-family housing. In an age where environmental, social and governance concerns are highly valued, UMH seeks to become a preferred investment as it provides the nation with much-needed affordable housing. UMH's capital stock includes preferred shares that could be redeemed with lower-cost capital in both 2022 and 2023. Our properties have become more valuable. They have increased occupancy levels and improved operating metrics. Incumbent properties should become eligible for increased GSE financing at low rates. The potential for favorable changes in the capital stock is one important factor. The favorable economics in the housing market provides a pathway for UMH's improved operating results. Housing values are now increasing because of economic fundamentals. In addition, the winds of inflation may also begin to blow across the landscape. We have built a much needed important housing company over our 53 year history. The years ahead can reflect the prudence of long-term values and visions.	q3 adjusted ffo per share $0.18.
I'm Steven Sintros, UniFirst's President and Chief Executive Officer. Actual future results may differ materially from those anticipated, depending on a variety of risk factors. As I have said the last couple of quarters, I want to start by saying that first and foremost, our thoughts are for the safety and well-being of all those dealing with the impact of this virus. Overall, we're pleased with the results of our first quarter, which came in mostly as expected from a top line perspective. Consolidated revenues for the quarter were $446.9 million, down 4% from our fiscal 2020 first quarter. These results were impacted by a strong quarter from both the nuclear and cleanroom operations of our Specialty Garments segment. Fully diluted earnings per share for the quarter was $2.20, which exceeded our expectations as many variable expenses trended lower than our projections. As we have discussed, the pandemic has clearly highlighted the essential nature of our products and services. We believe the need and demand for hygienically clean garments and work environments positions our company well to support the evolving economic landscape. Like many businesses, we expect the quarters ahead to be uneven and bumpy, but we continue to be confident in the Company's position to weather the storm. We also continue to position our sales resources to take advantages of opportunities that exist in the market today and as the economy recovers. Some positive trends of note for the quarter include new business installs at roughly the same level as the first quarter a year ago, as well as improved customer retention. In addition, although reductions in wearers continue at higher than normal levels, the significant reductions experienced in our energy-dependent markets during the third and fourth quarters of fiscal 2020 have started to moderate. Overall, the outlook continues to be difficult to forecast. Vaccine optimism is being balanced by uncertainty as to when and how quickly the vaccine will create positive movement in the economy. In addition, the recent surge in positive COVID cases has started to cause increased business restrictions in certain states, provinces and municipalities. The impact of these or further potential restrictions could have an impact on our results moving forward. As a result of the ongoing uncertainty, we will not be providing any guidance at this time. As we've talked about over the last year or two, we continue to be focused on making good investments in our people, infrastructure and technologies. All of our investments designed to deliver solid long-term returns to all UniFirst stakeholders and are integral components to our primary long-term objective to be universally recognized as the best service provider in our industry. Our solid balance sheet positions us well to meet the ongoing challenges presented by the COVID-19 pandemic while continuing to invest in growth and strengthen our business. Certain investments scheduled for this year will continue as planned including the deployment of our new CRM system. As we've talked about before, some of these investments will pressure on margins in the near term. However, we feel strongly that keeping these improvements to our company on schedule, will be critical to our long-term success. As Steve mentioned, in our first quarter of 2021, consolidated revenues were $446.9 million, down 4% from $465.4 million a year ago and consolidated operating income decreased to $56 million from $60.1 million or 6.7%. Net income for the quarter decreased to $41.9 million or $2.20 per diluted share from $48.2 million or $2.52 per diluted share. Our effective tax rate in the quarter was 25% compared to 22.1% in the prior year which unfavorably impacted the earnings per share comparison. Our Core Laundry operations revenues for the quarter were $393.2 million, down 5.6% from the first quarter of 2020. Core Laundry organic growth, which adjusts for the estimated effect of acquisitions as well as fluctuations in the Canadian dollar, was also 5.6%. Throughout our quarter, our weekly revenues remained relatively stable. However, as expected, our organic growth rate trended unfavorably compared to our prior sequential quarter, due to the timing of certain annual pricing adjustments in the prior year. Core Laundry operating margin decreased to 12.4% for the quarter or $48.9 million from 12.9% in prior year or $53.8 million. The decrease in the segment's profitability was primarily due to the impact of the decline in rental revenues on our cost structure, which was partially offset by lower travel-related, healthcare and energy costs. However, the segment's operating income exceeded our expectations due to a slightly stronger revenue performance, combined with a number of other costs that trended favorably compared to our expectations. As we have discussed in the past, some of our expenses can be variable from quarter to quarter and difficult to forecast in the short term. We do expect that a number of these costs that have been trending favorably will eventually normalize and pressure margins in the quarters ahead. Energy costs decreased to 3.6% of revenues in the first quarter of 2021, down from 3.9% in prior year. Revenues from our Specialty Garments segment, which delivers specialized nuclear decontamination and cleanroom products and services, increased to $38.1 million from $33.4 million in the prior year or 14.2%. This increase was primarily due to higher direct sales and project-related work in the U.S. and Canadian nuclear operations as well as continued growth in the clean room operations. Segment's operating margin increased to 18.8% from 14.6%. This increase was primarily due to lower production and delivery costs as a percentage of revenues as well as lower travel-related, healthcare and energy costs. These items were partially offset by higher merchandise expense as a percentage of revenues. The Specialty Garments' quarterly top line and profit performance significantly exceeded our expectations as certain direct sales and project related work that had been deferred in the second half of fiscal 2020 related to the COVID-19 pandemic were finally realized as well as some additional direct sale activity that was anticipated later in fiscal 2021 came through early. As we've mentioned in the past, this segment's results can vary significantly from period to period due to seasonality and the timing of nuclear reactor outages and projects that require our specialized services. Our First Aid segment's revenues were $15.5 million compared to $15.7 million in prior year. However, the segment's operating profit was nominal compared to $1.4 million in the comparable period of 2020. This decrease is primarily due to reduced sales from the segment's higher margin wholesale business combined with continued investment in the Company's initiative to expand its first aid van business into new geographies. We continue to maintain a solid balance sheet and financial position with no long-term debt and cash, cash equivalents and short-term investments totaling $473 million at the end of our first quarter of fiscal 2021. For the first three months of fiscal 2021, capital expenditures totaled $41.8 million as we continue to invest in our future with new facility additions, expansions, updates and automation systems that will help us meet our long-term strategic objectives. Our quarterly capex spend was elevated primarily due to the purchase of a building in New York City for $14.1 million, which will provide us a strategic location for a future service center. During the quarter, we capitalized $2.9 million related to our ongoing CRM project which consisted of license fees, third-party consulting costs and capitalized internal labor costs. As of the end of our quarter, we had capitalized a total of $25.5 million related to the CRM project. As discussed on our last call, we are piloting a number of locations and expect that we will start a broader deployment in the second half of this fiscal year, at which time we will begin depreciating the system. Eventually, the depreciation of the system combined with additional hardware we will install to support our new capabilities, like mobile handheld devices for our route drivers, will ramp to an estimated $6 million to $7 million of additional depreciation expense per year. During the first quarter of fiscal 2021, we repurchased 41,000 common shares for a total of $7.2 million under our previously announced stock repurchase program. As of November 28, 2021 [Phonetic], the Company had repurchased a total of 355,917 common shares for $59.5 million under the program. As Steve discussed, due to continued uncertainty regarding how states, provinces, municipalities and our customers will respond to the recent surge in positive COVID cases, as well as how quickly the vaccine will provide pandemic relief to the economy, we will not be providing guidance at this time. However, I will remind you that our second fiscal quarter tends to be a lower margin quarter due to the seasonality of certain expenses that we incur. As we have done in our recent quarters, we also wanted to provide you an update on our current revenue trends. Throughout December, the weekly rental billings in our Core Laundry operations have been trending down compared to the comparable weeks in prior year by approximately 3.5% to 4%.	compname posts q1 earnings per share $2.20. q1 earnings per share $2.20. q1 revenue $446.9 million versus refinitiv ibes estimate of $438.5 million. had no long-term debt outstanding as of november 28, 2020. at this time, overall outlook in quarters ahead remains uncertain.
I'm Steven Sintros, UniFirst's president and chief executive officer. Actual future results may differ materially from those anticipated depending on a variety of risk factors. Overall, we are pleased with our results for the first quarter of fiscal 2022. Our team continues to focus on providing industry-leading services to our customers as well as selling prospective customers on the value that UniFirst can bring to their businesses. The results for our first quarter were largely as we anticipated, with consolidated revenues growing 8.8% and an overall adjusted operating margin for our core laundry operations of approximately 10%. The team continues to execute well, producing solid performances in both new account sales as well as customer retention during the quarter. In addition, wearer additions versus reductions during the quarter were positive, indicating the continued growth and recovery of our customer base. This is a favorable comparison to a year ago when many customer wearer levels remained depressed due to the impact of the pandemic. The strong year-over-year growth in the quarter was also impacted by adjustments to customer pricing as we continue to work with our customers through this inflationary environment. As a reminder, from a profitability perspective, we discussed during our year-end earnings call that going forward over the next few years, we are going to be reporting adjusted results, which exclude the impact of costs that we are expending on three discrete strategic initiatives that are critical in our efforts to transform the company in terms of our overall capabilities and competitive positioning. As a reminder, these three initiatives are the rollout of our new CRM system, investments in the UniFirst brand, and a corporatewide ERP system with a strong focus on supply chain and procurement automation and technology. As we have talked about over the last year or two, we continue to be focused on making good investments in our people, our infrastructure, and our technologies. All of the investments designed to deliver solid long-term returns for UniFirst stakeholders and are integral components of our primary long-term objective to be universally recognized as the best service provider in our industry. After excluding our costs in our quarter related to these investments, our adjusted operating margin is showing an anticipated decline compared to a year ago. The comparison of adjusted margin is being impacted by increases in costs we've been highlighting for a couple of quarters now. Some are simply bouncing back from depressed levels during the pandemic and others are being impacted by the inflationary environment and some are being impacted by both. As a reminder, these costs include merchandise amortization, costs related to raw materials and the overall supply chain disruption, the cost to hire and retain labor, energy, and travel. Our solid balance sheet positions us well to meet these ongoing challenges while continuing to make investments in growth and strengthen our business. Along those lines, during December, we closed on two small acquisitions, which will improve our footprint in key markets. As we have highlighted before, acquisitions continue to be part of our overall growth strategy. Despite the challenges in the overall operating environment, we continue to be confident in our ability to manage and execute through these obstacles. We maintain a sharp focus on taking care of our employees, our customers, and bringing new customers into the UniFirst family. As we have discussed previously, the pandemic has clearly highlighted the essential nature of our products and services and we feel the company is positioned well to support the evolving economic landscape. In our first quarter of 2022, consolidated revenues were $486.2 million, up 8.8% from $446.9 million a year ago, and consolidated operating income decreased to $44.8 million from $56 million in -- or 20.1%. Net income for the quarter decreased to $33.7 million or $1.77 per diluted share from $41.9 million or $2.20 per diluted share. Our financial results in the first quarter of fiscal 2022 included $5.9 million of costs directly attributable to the three key initiatives that Steve discussed. Excluding these initiative costs, adjusted operating income was $50.7 million, adjusted net income was $38.1 million, and adjusted diluted earnings per share was $2. Although our financial results in the prior year may have included direct costs related to these key initiatives, which in our first quarter of 2021 would have primarily been for our CRM initiative, the company did not specifically track the amounts that were being expensed. This is because the amount was less significant in value and a large number of the costs were still being capitalized. As a result, we will not be providing adjusted amounts for the prior year comparable period. Our core laundry operations revenues for the quarter were $428.8 million, up 9.1% from the first quarter of 2021. Core laundry organic growth, which adjusts for the estimated effect of acquisitions as well as fluctuations in the Canadian dollar, was 8.6%. This strong organic growth rate was primarily the result of customer reopenings, solid sales performance, and improved customer retention in fiscal 2021 as well as efforts to share with our customers the cost increases that we are seeing in our business due to the current inflationary environment. Core laundry operating margin decreased to 8.5% for the quarter or $36.5 million from 12.4% in the prior year or $48.9 million. Costs we incurred during the quarter related to our key initiatives were recorded to our core laundry operations segment. And excluding these costs, the segment's adjusted operating margin was 9.9%. The decrease from prior year's operating margin was primarily due to higher merchandise amortization, which continues to normalize from depressed levels during the pandemic, as well as the effect of large national account installations, which are providing additional merchandise amortization headwinds. Also, inflationary pressures and the overall supply chain disruption continued to impact our other merchandise costs. During the quarter, the adjusted operating margin was also impacted by higher travel and energy costs as a percentage of revenues as well as wage inflation we are experiencing, responding to the very challenging employment environment. Energy costs increased to 4.3% of revenues in the first quarter of 2022, up from 3.6% in prior year. Revenues from our specialty garments segment, which delivers specialized nuclear decontamination and cleanroom products and services, increased to $39.5 million from $38.1 million in prior year or 3.5%. This increase was primarily due to growth in our cleanroom and European nuclear operations. The segment's operating margin increased to 21.9% from 18.8%, primarily due to lower merchandise costs as a percentage of revenues. As we've mentioned in the past, this segment's results can vary significantly from period to period due to seasonality and the timing of nuclear reactor outages and projects that require our specialized services. Our first aid segment's revenues increased to $17.8 million from $15.5 million in prior year or 14.8%. This increase was due to improved top line performance in both our wholesale distribution as well as our first aid van business. However, the segment had an operating loss of $0.3 million during the quarter primarily due to continued investment in the company's initiative to expand its first aid van business into new geographies. We continue to maintain a solid balance sheet and financial position with no long-term debt and cash, cash equivalents, and short-term investments totaling $478.1 million at the end of our first quarter of fiscal 2022. During the quarter, our net cash provided by operating activities was impacted by our reduced profitability as well as heavier than normal working capital needs of the business. Contributing to these higher working capital needs were elevated supply inventory balances related to the ongoing supply chain disruption as well as increases to rental merchandise and service as our balance sheet position continues to normalize coming out of the pandemic-impacted period. Capital expenditures for the quarter totaled $31.1 million as we continued to invest in our future with new facility additions, expansions, updates, and automation systems that will help us meet our long-term strategic objectives. Now that our CRM project has transitioned from a development phase to deployment, the majority of the costs are now being expensed. As a result, the capitalization of costs related to our CRM project in the quarter totaled only $1.7 million. During the first quarter of fiscal 2022, we repurchased 22,750 common shares for a total of $4.8 million under our previously announced stock repurchase program. I'd like to take this opportunity to provide an update on our outlook. At this time, we now expect our full-year revenues for fiscal 2022 will be between $1.94 billion and $1.955 billion. This revised top-line guidance includes the anticipated impact of the two small acquisitions we closed in December that Steve discussed. These acquisitions are expected to add approximately $10 million to our fiscal 2022 revenues. We further expect that our diluted earnings per share for fiscal 2022 will now be between $5.50 and $5.80. This earnings per share guidance assumes an effective tax rate of 24% and continues to include an estimate of $38 million worth of costs directly attributable to our key initiatives that will be expensed during the year. Please also note the following assumptions regarding our guidance. Core laundry operations adjusted operating margin at the midpoint of the range is now 9.2%, which reflects continued pressure from costs that trended lower during the pandemic and the current inflationary environment. Our assumed adjusted tax -- our assumed adjusted tax rate for fiscal 2022 is 24.25%. Adjusted diluted earnings per share is expected to be between $7 and $7.30. Guidance does not include the impact of any future share buybacks or potential tax reform, and guidance assumes a stable economic environment with no pandemic-related headwinds, including potential expenses related to government COVID-19 mandates.	q1 revenue $486.2 million. q1 earnings per share $1.77. now expect revenues for fiscal 2022 to be between $1.940 billion and $1.955 billion. expect 2022 diluted earnings per share to be between $5.50 and $5.80. 2022 adjusted diluted earnings per share is expected to be between $7.00 and $7.30.
I'm Steven Sintros, UniFirst's President and Chief Executive Officer. Actual future results may differ materially from those anticipated, depending on a variety of risk factors. As I have the last couple of quarters, I want to start by saying that first and foremost, our thoughts are for the safety and well-being of all those dealing with the impact of the COVID-19 pandemic. Our second quarter results continued to be impacted by the pandemic as well as severe winter storms in Texas and the surrounding states during February. Considering these challenges, we are pleased with the solid results for our quarter. They truly continue to deliver in every way. Consolidated revenues for our second quarter were $449.8 million, down 3.2% from the prior year and fully diluted earnings per share was $1.71, down 6% from the prior year. Shane will provide the details of our quarterly results shortly. Our second quarter began during a time where positive COVID-19 cases were surging and there was strong potential for further economic shutdowns. Cases have sharply declined during the quarter from those peaks and vaccinations have started to pick up, creating more stability in our overall operating environment. That being said, economic activity remains somewhat stagnant, and we have yet to see significant recovery activities take hold. This is especially true in the energy dependent markets that we service which have also stabilized, but have not yet begun to recover. We continue to focus on providing our valuable products and services to existing customers and selling new customers on the value that UniFirst can bring to their business. As we have discussed, the pandemic has clearly highlighted the essential nature of our products and services. We believe the need and demand for hygienically clean garments and work environments positions our Company well to support the evolving economic landscape. We continue to position our sales resources to take advantage of the opportunities that exist in the market today and as the economy recovers. Although our new account sales have been solid during the first six months of the year and comparable to the first half of fiscal 2020, they are down from the record level set in fiscal '19. The overall impact from COVID-19 as well as sharp declines in activity in the energy dependent markets that we service are contributing to those comparisons. This decline has been partially offset by increased sales to existing customers. On a positive note, we do expect stronger activity over the second half of the year, and from a retention standpoint, we are showing marked improvements over the first half of fiscal 2020. Although the trajectory of an eventual recovery is difficult to forecast, we do feel that the improved stability in the overall environment allows us enough comfort to share with you our outlook for the remainder of the year which Shane will provide shortly. Vaccine optimism continues to be balanced by uncertainty as to when and how quickly the vaccine will create strong positive movement in the economy. Our solid balance sheet positions us to meet these ongoing challenges presented by the COVID-19 pandemic while continuing to invest in growth and strengthen our business. As we've talked about over the last year or two, we continue to be focused on making good investments in our people, our infrastructures and our technologies. All of these investments are designed to deliver solid long-term returns to UniFirst stakeholders and are integral components to our primary objective to being universally recognized as the best service provider in our industry. We continue to make good progress on these core initiatives such as our CRM systems project. We are pleased to report that we have successfully completed several pilot locations and have now officially moved into the deployment phase of the initiative. Our CRM deployment is certainly a foundational change to our infrastructure that will allow for service improvements and efficiencies moving forward. We will continue to invest in our future over the next several years, including key investments in supply chain, other technology infrastructure, route efficiency, as well as our brand. We will provide additional details as we progress with some of these key initiatives in the quarters ahead. As Steve mentioned, our second quarter of 2021's consolidated revenues were $449.8 million, down 3.2% from $464.6 million a year ago. And consolidated operating income decreased to $40.7 million from $44.1 million or 7.8%. Net income for the quarter decreased to $32.6 million or $1.71 per diluted share from $34.7 million or $1.82 per diluted share. Our effective tax rate in the quarter was 22.7% compared to 24.2% in the prior year which favorably impacted the earnings per share comparison. As a reminder, our tax rate can move from period to period based on discrete events including excess tax benefits and efficiencies associated with the employee share based payments. Our core laundry operations revenues for the quarter were $398.2 million, down 3.4% from the second quarter of 2020. Core Laundry organic growth which adjusts for the estimated effective acquisitions as well as fluctuations in the Canadian dollar was negative 3.6%. Throughout the quarter, our weekly revenues remained relatively stable as we did not experience any significant headwinds from states, provinces, municipalities or our customers responding to the surge in positive COVID-19 case counts during the holiday period. Nor did we see any significant tailwind from the impact of the rollout of the COVID-19 vaccines. However, during the quarter, our top line performance was impacted by approximately $2 million from the effect of severe winter storms in Texas and the surrounding states on our operations as well as our customer locations. Core Laundry operating margin decreased to 8.9% for the quarter or $35.4 million from 9.3% in prior year or $38.4 million. The segment's profitability was negatively impacted by the decline in rental revenues on our cost structure as well as higher healthcare claims costs. In addition, the lost revenue and additional expense we incurred from the severe winter storms in Texas and the surrounding states reduced our operating income by approximately $2.6 million or $0.10 on EPS. These items were partially offset by lower merchandise and travel related costs. As Steve discussed, throughout the pandemic we have maintained our long-term perspective when managing the business, and as a result, we continued to invest in our core initiatives, including the further development and upcoming deployment of our CRM system. Energy costs increased to 4.2% of revenues in the second quarter of 2021, up from 4.1% in prior year. This increase was primarily due to additional utility expenses the Company incurred related to higher demand during the severe winter storms in Texas and the surrounding states. Excluding those elevated expenses, energy costs would have been 3.9% of revenues as the benefit that we have been seeing over the last several quarters started to moderate with the price of fuel increasing nationally. Revenues from our Specialty Garments segment, which delivers specialized nuclear decontamination and cleanroom products and services, decreased to $35.2 million from $36 million in prior year or 2.1%. This decrease was primarily due to lower activity in the US and Canadian nuclear operations, which was partially offset by continued growth in the cleanroom business. Both periods discussed benefited from significant one-time direct sales, which contributed to strong top line performance in a quarter that is usually negatively impacted by seasonality. The segment's operating margin increased to 14.9% from 12.9%, primarily due to higher gross margin on its direct sales as well as lower travel related costs. These items were partially offset by higher payroll costs as a percentage of revenues. As we've mentioned in the past, this segment's results can vary significantly from period to period due to seasonality and the timing of nuclear reactor outages and projects that require our specialized services. Our First Aid segment's revenues were $16.3 million compared to $16.4 million in the prior year. However, the segment's operating profit was nominal compared to $1.1 million in the comparable period of 2020. This decrease is primarily due to reduced sales from the segment's higher margin wholesale business, combined with continued investment in the Company's initiative to expand its first aid van business into new geographies. We continue to maintain a solid balance sheet and financial position with no long-term debt and cash, cash equivalents and short-term investments totaling $509.6 million at the end of our second quarter of fiscal 2021. For the first half of fiscal 2021, capital expenditures totaled $66.9 million as we continue to invest in our future with new facility additions, expansions, updates and automation systems that will help us meet our long-term strategic objectives. As a reminder, capex spend is elevated primarily due to the purchase of a $14.1 million building in New York City in our first quarter of 2020 which will provide us a strategic location for a future service center. During the quarter we capitalized $2.2 million related to our ongoing CRM project which consisted of license fees, third-party consulting costs and capitalized internal labor costs. As at the end of our quarter, we had capitalized a total of $27.7 million related to our CRM project. At this time, we have started a deployment of this application to our numerous locations and anticipate this will continue through fiscal 2022 and into fiscal 2023. As a result, we will start to depreciate the system over a 10 year life in our third fiscal quarter of 2021, with depreciation in the second half of the year approximating $1.5 million to $2 million. [Technical Issues] for our new capabilities like mobile handheld devices for our route drivers will ramp to an estimated $6 million to $7 million of additional depreciation expense per year. During the second quarter of fiscal 2021, we repurchased 12,200 shares of common stock for a total of $2.3 million under our previously announced stock repurchase program. As of February 27, 2021, the Company had repurchased a total of 368,117 shares of common stock for $61.8 million under the program. At this time we believe our ability to project our results has improved, and I would like to take this opportunity to provide an update on our outlook for fiscal 2021. We expect our fiscal 2021 revenues to be between $1.793 billion and $1.803 billion, which at the midpoint of the range assumes an organic growth rate in our core laundry operations of 3.5%. As a reminder, the prior year comparison for the second half of fiscal 2021 will be negatively impacted by a $20.1 million large direct sale to a healthcare customer that we recorded in our third fiscal quarter of 2020. Full year diluted earnings per share is expected to be between $7.30 and $7.65. This outlook assumes an operating margin in our core laundry operations for the second half of the year of 10.4% and reflects additional expense we expect to incur related to the deployment of our CRM system of approximately $5 million. Just to be clear, this amount includes the depreciation expense that I mentioned earlier.	compname posts q2 earnings per share $1.71. q2 earnings per share $1.71. q2 revenue $449.8 million versus refinitiv ibes estimate of $446.4 million. sees fy earnings per share $7.30 to $7.65. sees fy revenue $1.793 billion to $1.803 billion.
I'm Steven Sintros, UniFirst's President and Chief Executive Officer. Actual future results may differ materially from those anticipated, depending on a variety of risk factors. I want to start the call by saying that our thoughts go out to all the individuals and businesses, continuing to be impacted by the coronavirus pandemic. This is an unprecedented time for our company, the country and the world, and first and foremost, our thoughts are for the safety and well-being of all those dealing with the impact of this virus. It goes without saying that the company's focus in the third quarter centered around our pandemic response efforts, including our top priority of ensuring the safety of our Team Partners, while continuing to provide our value-added services to the many essential businesses in our communities. We as a company as well as our customers continue to adapt to the practical challenges of operating in this ever changing environment. During the quarter, our results were most impacted by customer closures, primarily the result of state mandated shutdowns of non-essential businesses. In addition, we have been dealing with higher than normal reductions of wearers and customers who have remained open or recently reopened. Part of this impact has been driven by the decline in the demand of oil and the corresponding reduction in business activity in the energy dependent markets that we service. During the quarter, customer closures peaked in mid-April, causing the weekly revenues of our core laundry operations to be down about 18% at that time, from the weekly revenue run rate in the weeks of February and March immediately preceding the disruption. From that point in April until last week, revenues have been steadily -- have steadily recovered to the point where last week's revenues were down about 8% from pre-pandemic run rates. This recovery was primarily fueled by the reopening of businesses. In addition, we have also benefited from the increase in sale of personal protective equipment, primarily face masks and hand sanitizers and soaps. Of the revenue shortfall that remains, businesses that remain closed or limited, such as restaurants, business services, hotel, schools and entertainment are prominently represented. As I'm sure you can appreciate, it remains a fluid environment with many states recently reporting increases in many of the metrics that you're using to measure the status of the virus spread. As a result of the evolving nature of the pandemic and its impact on our communities, our ability to assess the financial impact on our -- the ability to assess the financial impact on our business continues to be limited. As a result, we are not providing guidance for the remainder of fiscal 2020. With respect to the third quarter results. Consolidated third quarter revenues were $445.5 million, a decrease of 1.8% over the same quarter a year ago. The overall shortfall in revenue was mitigated by a large direct sale of $20.1 million to a large healthcare customer as well as strong revenues from our First Aid segment. Our consolidated operating margin was 6.2%, and was impacted by the revenue shortfall in our US and Canadian laundry operations as well as numerous costs related to our COVID-19 response efforts. For example, we instituted certain compensation programs to mitigate the impact of our revenue decline on our service teams' wages as well as to show appreciation to all of our front-line workers for their continued dedication and commitment during the early months of the pandemic. These programs are temporary in nature and we currently expect that they will begin to phase out in the fourth quarter. Shane will take you through the details of our financial results shortly. Although we instituted some reduction in labor and cost containment during the quarter, based on the evolving situation with our customers, our financial strength and our desire to support our employees during these difficult times, we were patient in our approach. We will continue to be patient as we work to get our arms around the longer term impact of this pandemic. In the meantime, we will continue to support our employees, our customers, and make decisions in line with improving our business in the long run. Despite all of the events of the quarter, we continue to generate positive free cash flows and ended the quarter with $421.3 million in cash and cash equivalents on hand and no debt on our books. As a result, we believe we are well positioned to deal with the adversity that we are facing related to the coronavirus pandemic. In addition, the pandemic has clearly highlighted the essential nature of our products and services. We believe the need in the demand for hygienically clean garments in work environments positions our company well to support the evolving economic landscape. Like many businesses, we expect the quarters ahead to be uneven in bumpy, but we are confident in the company's position to weather the storm and take advantage of a broad economic recovery. As Steve mentioned, consolidated revenues in our third quarter of 2020 were $445.5 million, down 1.8% from $453.7 million a year ago. And consolidated operating income decreased to $27.7 million from $60.2 million or 54%. Net income for the quarter decreased to $21.3 million or $1.12 per diluted share from $47.2 million or $2.46 per diluted share. Our Core Laundry Operations revenues for the quarter were $388.4 million, down 2.8% from the third quarter of 2019. Core Laundry organic growth, which adjusts for the estimated effective acquisitions as well as fluctuations in the Canadian dollar was negative 3.2%. During the quarter, our revenues were mostly impacted by customer closures related to the coronavirus pandemic as well as related reductions in workforce for customers who remained open. The company was able to partially offset these declines with a $20.1 million direct sale to a large healthcare customer as well as increased safety and PPE sales. The result of our customers increased focus on maintaining a hygienically clean and safe work environment for their employees and patrons. Core Laundry operating margin decreased to 5.1% for the quarter or $19.7 million from 13.4% in prior year or $53.4 million. The segment's profitability was affected by many items, including the impact of the decline in rental revenues on our cost structure, a higher cost of revenues related to the large $20.1 million direct sale and additional costs the company incurred related to the pandemic. Some of the more notable items include merchandise amortization, which is expense that is recognized related to rental merchandise that has been placed in service, was up significantly as a percentage of revenues. This is because our merchandise in service is amortized on a straight-line basis over the estimated service lives of the related merchandise, which average approximately 18 months. Although our new garment additions into service were down significantly in the quarter, the amortization expense was little changed because of the amortization of prior period expenditures. As Steve discussed, our number one priority during the quarter was the safety of our employees. And we sourced a significant amount of safety supplies for internal use. Over the last few months these products were in high demand and prices were significantly higher than they had been prior to the pandemic. These prices have recently started to normalize and as a result, we expect that the costs we will incur in subsequent periods will be dramatically less than our current quarter. We incurred additional costs related to certain employee compensation programs we instituted during the quarter, also discussed by Steve, and some of these programs will continue into the fourth quarter of 2020. As of last week, our weekly revenues were down about 8% from pre-pandemic run rates, primarily related to customer locations that remained closed. During the quarter, the company recorded additional reserves for uncollectible accounts receivable, primarily due to the increased risk that these customers will be able to pay their outstanding balances. These items were partially offset by lower incentive compensation due to revised expectations of the company's growth and profitability in fiscal 2020 as well as lower healthcare, energy, and travel related costs as a percentage of revenues. Energy costs decreased to 3.4% of revenues in the third quarter of 2020 from 4.2% in prior year. Revenues from our Specialty Garments segment, which delivers specialized nuclear decontamination and cleanroom products and services, decreased to $36.2 million from $37.3 million in prior year or 3.1%. This decrease was largely due to lower direct sale activity in the quarter, partially offset by growth in our cleanroom and European nuclear operations. The segment's operating margin increased to 17.6% or $6.4 million from 14.4% or $5.4 million in the year ago period. This increase was primarily due to bad debt recovery from a customer in bankruptcy and lower travel-related costs. These items were partially offset by higher merchandise expense and costs incurred responding to the pandemic, including employee compensation and amounts paid for internal use safety supplies. As we've mentioned in the past, this segment's results can vary significantly from period to period due to seasonality and the timing of nuclear reactor outages and projects that require our specialized services. Our First Aid segments revenues increased to $20.9 million from $16.6 million in prior year or 26%. This increase was primarily due to increased demand for the segment safety and PPE offerings. Operating margin decreased to 7.8% from 8.4%, primarily due to higher merchandise costs as a percentage of revenues. We continue to maintain a solid balance sheet and financial position, with no long-term debt and cash, cash equivalents and short-term investments totaling $421.3 million at the end of our third quarter of fiscal 2020. Cash provided by operating activities for the first three quarters of the fiscal year was $205.4 million, an increase of $6.0 million from the comparable period in prior year. For the first three quarters of fiscal 2020, capital expenditures totaled $91.2 million. We continue to scrutinize our capital expenditures due to ongoing uncertainty related to COVID-19. As we move through the remainder of our fiscal year, we will continue to evaluate the timing of our growth-related capital expenditures, taking into consideration the revenue recoveries that we continue to see. During the quarter, we capitalized $3.3 million related to our ongoing CRM project, which consisted of license fees, third-party consulting costs, and capitalized internal labor costs. In the first three quarters of our fiscal year, we have capitalized a total of $9.9 million related to this project. During the third quarter of fiscal 2020, we repurchased 46,667 shares of common stock for a total of $7.5 million under our previously announced stock repurchase program. The company has not repurchased any additional shares since early in this fiscal quarter, due to the uncertainty related to COVID-19. As of May 30, 2020, we had repurchased a total of 314,917 shares of common stock for a total of $52.3 million under the program. And we would now be happy to answer any questions that you may have.	q3 earnings per share $1.12. q3 revenue $445.5 million versus refinitiv ibes estimate of $382.5 million. continue to believe that ability to assess financial impact on business remains limited. not providing guidance for remainder of our fiscal 2020.
I'm Steven Sintros, UniFirst President and Chief Executive Officer. Actual future results may differ materially from those anticipated depending on a variety of risk factors. As we look back over our fiscal year 2021, we are pleased with what we have accomplished as a team in the face of what continues to be a unique and challenging operating environment. During the year, our Company and the communities that we operate and then serve continue to deal with the impact of the COVID-19 pandemic. Progress was certainly made at the introduction of vaccines has allowed for improvements in the overall public health situation as well as the reopening of many businesses. As you are all keenly aware however, the challenges related to COVID-19 continue to evolve and are not fully behind us just yet. I also want to continue to highlight that for over a year now, our team partners have continued to put forth tremendous efforts in the face of the many obstacles created by the pandemic. They've worked extremely hard to take care of each other and our customers during these extraordinarily challenging times. For our full year fiscal 2021, the Company reported revenues of $1.826 billion exceeding fiscal 2020's total of $1.804 billion. When we provided guidance at the beginning of the fiscal year, we had articulated that showing any growth during fiscal 2021 would be a challenge. Therefore, overall, we were pleased with this outcome. Our Core Laundry Operations revenue over the second half of the year were positively impacted by a modest level of customer reopenings as well as increases in the sale of PPE. In addition, our Specialty Garments segment was also a strong contributor to our overall results, producing a record year from a top and bottom line perspective. From a profit perspective, full year diluted earnings per share was $7.94 compared to $7.13 in fiscal 2020. The improved earnings comparison for the full year was primarily due to our depressed results in the second half of fiscal 2020 when the impact of the COVID-19 pandemic was greatest on our business, primarily in the form of customer closures. Shane will provide the details of our fourth quarter results shortly. As we've talked about over the last year or two, we continue to be focused on making good investments in our people, our infrastructure and our technologies. All of our investments designed to deliver solid long-term returns to our UniFirst stakeholders and are integral components to our primary long-term objective to be universally recognized as the best service provider in the industry. As we look ahead to fiscal 2022, there are number of key initiatives, we are excited about progressing as we continue to transform the Company in terms of our overall capabilities and competitive positioning. The first being the rollout of our new CRM system which we have spoken quite a bit about previously. We continue to make solid progress on this key initiative, which we will continue -- which will continue through fiscal 2022 and well into fiscal 2023. The second is an investment in the UniFirst brand. Our brand is an area that has not been significantly invested in over the years and we are excited for this revitalization which will not only evolve the look and feel of who UniFirst is, but will solidify our message internally and externally around what we stand for as a company and why we are a great choice for existing and prospective customers and employees. Finally, during fiscal 2022, we will be embarking on a multi-year project to implement a corporate wide ERP system with a strong focus on supply chain and procurement automation and technology. This phase initiative will become the core of UniFirst technology footprint and will integrate and complement the capabilities of the CRM system, we are currently deploying. From an operating standpoint, heading into fiscal 2022, we carry solid momentum from a top line perspective into the year. Despite the external challenges that the team has hindered, our sales performance has been very solid selling both new business as well as internally to our existing customers. In addition, our customer retention for fiscal 2021 was much improved compared to recent years. We also will clearly be looking to work with our customers to sharing the cost increases that we are experiencing in various aspects of the business. As a result of these top line drivers, we expect organic growth for fiscal 2022 to exceed what we've been experiencing in recent years. Shane will provide the details of our outlook shortly. From a bottom line perspective, there are two categories of costs. We expect to present challenges from a margin perspective in fiscal 2022. The first group consists of costs that are bouncing back from depressed levels during the pandemic, and costs that are being impacted by the increasingly inflationary environment. Last quarter, I highlighted some of these items including merchandise amortization, costs related to raw materials and the overall supply chain disruption, the cost to hire and retain labor, energy and travel. The second group consists of investments we are making in the future of our company. A subset of these costs relate to building stronger overall capabilities as a company that we feel are necessary to enhance our competitors -- competitiveness, accelerate growth and ultimately improve efficiency and profitability. These investments are being made in several areas including human resources, supply chain, central services and marketing among others. In addition, significant costs are expected to be invested in fiscal 2022 and upcoming years related to the three discrete initiatives I discussed earlier. Going forward we'll be carving out the portion of costs related to these initiatives that we view are transitionary, and excluding them from a measure of adjusted profitability and we will continue to report until these key initiatives are completed. You can expect we'll be providing regular communication during our quarterly earnings calls regarding cost that we are expanding during these large initiatives, so investors can have a better sense of what our results look like excluding some of these costs. Even excluding these transitory costs related to these large initiatives, our margins will be pressured in fiscal '22 by investments we continue to make in our overall capabilities. However, we feel strongly about the need to invest in these areas and believe in the future benefits they will provide. We also firmly believe, on the other side of these initiatives, there will be opportunities not only to rationalize the direct costs related to these initiatives, but to improve the overall efficiency of our cost structure that currently is working to support multiple systems through this technology transformation. Our solid balance sheet positions us well to meet our ongoing challenges while continuing to make these investments in growth and strengthen our business. We also continue to routinely evaluate our strategy around capital allocation. As part of that review, we announced earlier today, we will be increasing our quarterly dividend by 20% to $0.30 per share of the Company's common stock and $0.24 per share on the Company's Class B common stock. At this time, we believe that a continued annual increase to our dividend was over time expands, commensurate with our free cash flow generation will be a foundational piece to our capital allocation strategy. In addition, we have reloaded our share purchase authorization program to allow for the Company to purchase up to $100 million of its outstanding shares. And finally, as always we continue to focus on providing our valuable products and services to existing customers and selling new customers on the value UniFirst can bring to their business. As we have discussed, the pandemic has clearly highlighted the essential nature of our products and services. We believe the need and demand for hygienically clean garments and work environments positions our Company well to support the evolving economic landscape. Consolidated revenues in our fourth quarter of 2021 were $465.3 million, an increase of 8.5% from $428.6 million a year ago. Consolidated operating income increased to $44.9 million from $40.8 million or 10.1%. Net income for the quarter increased to $34.6 million or $1.82 per diluted share from $31.6 million or $1.66 per diluted share. Our effective tax rate in the quarter was 22% compared to 26.6% in the prior year. As a reminder, our tax rate can move from period to period based on discrete events including excess tax benefits and efficiencies associated with employee share based payments. Our Core Laundry operations revenues for the quarter were $415.1 million and increased 7.9% from the fourth quarter of 2020. Core Laundry organic growth which adjusts for the estimated effective acquisitions as well as fluctuations in the Canadian dollar was 7.2%. This increase was primarily driven by the COVID-19 pandemic, significantly impacting our customer operations and wearer [Phonetic] levels in prior year as well as solid sales performance and improved customer retention in 2021. Core Laundry operating income was $41.8 million for the quarter, up from $38.1 million in prior year. And the segment's operating margin increased to 10.1% compared to 9.9% in 2020. The increase in 2021's operating margin was primarily due to lower merchandise amortization as a percentage of revenues, partially offset by higher energy, healthcare claims cost and travel. In addition, production payroll cost increased as a percentage of revenues, but were offset by costs we incurred responding to the pandemic in prior year providing a favorable comparison. Company's G&A costs also trended higher during the quarter as we prepared for and advanced the key initiatives that Steve discussed earlier. Energy costs increased to 4.2% of revenues in the fourth quarter of 2021, up from 3.5% a year ago. Revenues from our Specialty Garments segment which deliver specialized nuclear decontamination and cleanroom products and services were $33.9 million for the fourth quarter of fiscal 2021, an increase of 22.5% over 2020. The segment's strong top line growth was driven by improved performance in both its cleanroom as well as its US and European nuclear operations. The segment's operating income increased to $4.1 million or 12.1% of revenues from $2 million or 7.1% of revenues in the year-ago period. This increase was primarily due to the improved revenue performance resulting in strong operating leverage as well as lower casualty claims expense as a percentage of revenues. These benefits were partially offset by higher merchandise cost as a percentage of revenues. As we've mentioned in the past, this segment's results can vary significantly from period to period due to seasonality as well as the timing and profitability of nuclear reactor outages and projects. Our First Aid segment's revenues in the fourth quarter of 2021 decreased to $16.3 million from $16.4 million primarily due to elevated PPE sales in the prior year, partially offset by growth in the First Aid van business. In addition, the segment had an operating loss in the quarter of $1 million compared to operating income of $0.7 million in 2020. The current quarter's operating results reflect continued investment in the Company's initiative to expand its First Aid van business into new geographies. We continue to maintain a solid balance sheet and financial position with no long-term debt and cash, cash equivalents and short-term investments totaling $512.9 million at the end of fiscal 2021. Cash provided by operating activities for the year was $212.3 million, a decrease of $74.4 million from the prior year. This decrease was primarily due to sizable working capital needs of the business as some of our asset positions which were abnormally depressed during the pandemic have returned to pre-pandemic balances. Capital expenditures for fiscal 2021 totaled $133.6 million as we continue to invest in our future with new facility additions, expansions, updates and automation systems that will help us meet our long-term strategic objectives. During the quarter, we capitalized $2.3 million related to our ongoing CRM project which consisted of both third-party consulting costs and capitalized internal labor costs. As of August 28, 2021, we had capitalized $34.2 million related to the CRM project. As a reminder, we started deploying this system to our locations earlier in the fiscal year and anticipate, this will continue through fiscal 2022 and well into 2023. We are depreciating this system over a 10 year life, including the additional hardware we installed to support our new capabilities like mobile handheld devices for our route drivers, we incurred approximately $2 million in depreciation and amortization in fiscal 2021 [Phonetic]. In 2022, we expect that the amortization of the system and depreciation of the related hardware will approximate $5 million in total and eventually ramp to an estimated $6 million to $7 million per year. Although, our acquisition activity in fiscal 2021 was relatively nominal, we continue to look for and aggressively pursue additional targets as acquisitions remain an integral part of our overall growth strategy. I'd like to take this opportunity to provide our outlook for fiscal 2022. At this time, we anticipate our full year revenues for fiscal 2022 will be between $1.92 billion and $1.945 billion. This top line guidance assumes a Core Laundry organic growth rate of approximately 6.1% at the midpoint of the range. As Steve mentioned, this strong expected organic growth rate is primarily a result of customer reopenings, solid sales performance and improved customer retention in fiscal 2021 as well as anticipated efforts to share with our customers, the cost increases that we are seeing in our business. For fiscal 2022, we further expect that our fully diluted earnings per share will be between $5.70 and $6.10. This guidance includes $38 million of costs that we expect to incur in the fiscal year directly attributable to the three key initiatives that Steve discussed, our CRM and ERP system initiatives and our branding efforts. Excluding these transitionary investment costs, our Core Laundry operations adjusted operating margin assumption at the midpoint of the range is 9.5%. This adjusted operating margin reflects certain costs that are normalizing from depressed levels during the pandemic like merchandise amortization and travel costs, costs we are incurring to hire and retain labor in this challenging employment environment, elevated input costs related to the current inflationary environment and global supply chain challenges as well as additional investments we are making in strengthening our overall capabilities. Based on the current energy prices, we are modeling the energy costs in our Core Laundry operations will increase to 4.6% of revenues in fiscal 2022, up from the previously discussed 4.2% in 2021. Next year's effective tax rate is assumed to be 24% compared to 22% in fiscal 2021. Our Specialty Garments' segment revenues are forecast to be relatively flat compared to 2021. However, the segment's operating income is expected to be down approximately 11%. As a reminder, fiscal 2021 was a record year for this segment from both a top and bottom line perspective and the anticipated decline in operating margin is due to the timing and relative profitability of its planned outages and project work. Our First Aid segment's revenues are expected to be up approximately 10% compared to 2021. However, this segment's profitability will be relatively marginal in 2022 as a result of the investments, we continue to make in building out the geographic footprint of our van operation. We expect that our capital expenditures in 2022 will approximate $125 million. Our guidance for fiscal '22 also assumes our current level of outstanding common shares. No impact related to potential tax reform and no deterioration in the current economic environment. In addition, as I'm sure that you are aware, last month President Biden issued broad sweeping vaccine and or testing requirements for all companies with more than 100 employees. These rules have not yet been finalized nor has an effective date been communicated. As such, we have not included any costs in our forecast that we do expect would be incurred to comply with these requirements.	compname announces financial results for the fourth quarter and full year of fiscal 2021; quarterly dividend increase; new $100 million share repurchase authorization. q4 earnings per share $1.82. q4 revenue $465.3 million. for fiscal 2022, expect revenues to be between $1.920 billion and $1.945 billion. for fiscal 2022, expect fully diluted earnings per share to be between $5.70 and $6.10.
All went very well, and we expect him fully back in just a few days. I'm quite confident he is listening now, so I hope you're doing well, Boss. We're here today to discuss third-quarter results and the expanding opportunities we see looking ahead. As a result of the progress at both Optum and UnitedHealthcare, we have increased our 2021 adjusted earnings outlook to a range of $18.65 to $18.90 per share. We continue to prioritize three themes Andrew has discussed before which our -- before which are foundational to the growth of our enterprise. First, unlocking the collaborative potential within Optum and UnitedHealthcare for the benefit of all. Second, further developing our technology and data science platform to aid patient care and experience and to help the system run better. Third, strengthening our consumer experience, capabilities and value. I'll briefly highlight a couple of items for you. You will likely have seen the CMS Medicare Advantage Star quality rating showing 95% of our UnitedHealthcare members will be in four star-rated plans or better for 2023, up from 78% for 2022 and a new high for our company. Within Optum Care, on behalf of the many payers we serve, 99% of Medicare Advantage patients will be in four-star plans or better for 2023. A second important highlight in the quarter. We were encouraged by the ongoing strength in our employer and individual business, which has now grown by over 330,000 people this year with revenue up 7% year over year. We continue to see active interest in our product innovations, such as our All Savers level-funded offering and are encouraged by our competitiveness in the market and momentum heading into '22. We also elevated consumer connectivity by incorporating fitness offerings from industry-leading partners. OptumHealth continues to build momentum as well. Entering the open enrollment period for Medicare Advantage, we have more than 2.2 million people served under physician-led, fully accountable arrangements and expect '22 to be another year of record expansion in this key part of our portfolio. Our broad home-based clinical care initiatives at Optum and UnitedHealthcare are central to improving near and longer-term health outcomes for people with medical, behavioral and social needs. These efforts include Optum at Home, which delivers high-quality primary care services in the convenience of the home setting and support recovery after hospitalizations. Seniors served by our home and community offering experienced a 14% lower rate of hospital admissions and about a 4% higher rate of physician encounters. In addition to caring for people in their homes, we continue to expand capabilities in other optimal sites of care, including via digital means. Optum is distinctively enabling virtual care for patients using their own primary care physicians and with behavioral clinicians. For example, a physician engaging in a virtual visit with a patient can easily bring in a behavioral health professional for a real-time consultation. UnitedHealthcare is using Optum's virtual capabilities to introduce a new suite of digital-first products, offering a near seamless experience between virtual and traditional primary, specialty, and urgent care. We expect during 2022 and beyond to further build on these opportunities to connect and integrate multiple channels of care, simplify the experience for patients and providers and deliver quality care that is affordable and in the optimal setting. Let me now go a little deeper in a few areas to give you an assessment of how we're doing on the themes I mentioned at the outset. OptumInsight continues to drive better clinical and operational performance at the health system level. Last week, we reached a new multiyear partnership with a leading and innovative health system, SSM Health, whose 40,000 employees, 33 hospitals and post-acute facilities and 300 physician clinics serve the people of Missouri, Oklahoma, Wisconsin and Illinois. OptumInsight brings real value in helping systems strengthen and scale essential functions, such as care coordination, revenue cycle management and digital modernization, all to improve health outcomes and patient's care experiences. These and similar efforts to simplify processes, reduce administrative burdens and help our partners focus -- help our partners focus more attention on their care -- on their core missions of patient care. OptumRx continues to deliver to health system partners, such as its new multiyear agreement with Point32Health, which serves more than 2 million people in New England through its founding organizations, Harbor Pilgrim Health Care and Tufts Health Plan. OptumRx will provide integrated pharmacy benefit and specialty offerings that will enhance services and deliver improved affordability for their plan members. OptumRx is having a substantial impact through its community behavioral health pharmacies, which now serve nearly 700,000 people with mental health, addiction and other conditions through more than 600 dispensaries across 47 states. The pharmacies deliver a high-touch approach to care that contributes to a more than 90% medication adherence rate and lowers emergency room visits and hospitalizations by 18% and 40%, respectively, driving better outcomes and a lower total cost of care. Within our UnitedHealthcare government businesses, we have increased processing efficiency by 25% over the last year by using Optum technology to improve auto adjudication rates and intelligent work distribution to appropriately skilled channels. We have many such initiatives underway across the enterprise in affordability, provider experience and product development as we employ advanced technology and data analytics to drive even greater value for the people we serve and the health system. Before turning over the call to John, a quick word on our pending combination with Change Healthcare. We continue to work diligently to satisfy regulatory requests and now believe, based on our experience so far, the transaction should close in the first part of 2022. We are highly energized about the positive impact we can have working together with the exceptional change team, a team aligned with our mission and values and focused on delivering substantial benefits for the healthcare system. These benefits will include helping clinicians by simplifying access to real-time, evidence-based guidance as they are serving patients, closing gaps in care more rapidly to improve health outcomes and lower cost, reducing unnecessary complexity by removing administrative waste and obstruction to make the care process simpler, more cost effective and more transparent. And bringing greater convenience and simplicity to managing consumer health finances, while ensuring care providers get paid more quickly and accurately. Optum and Change Healthcare's capabilities fundamentally are complementary and distinct because both companies already successfully serve health plans and state governments, care providers and consumers in a highly competitive market. We believe this combination will make the healthcare system work better for everyone and bring exceptional value to those we serve. This growth was led by OptumHealth, primarily our care businesses. In the third quarter, the Optum platform comprised 54% of enterprise operating earnings and continues to show strong growth momentum. Our performance reflects the diverse and complementary strengths of our business, setting the stage for growth in the years ahead. Our updated full-year '21 outlook includes unfavorable COVID impacts, consistent with the expectations we have discussed throughout the year. During the third quarter, while direct COVID care and testing costs ran above the expectations we had nearly a year ago, we again saw elective care offsetting the impacts of higher case rates, much like previous cycles in the pandemic. This quarter, there were approximately 60,000 COVID hospitalizations meaningfully above the second quarter, with the month of August peaking at nearly 30,000 and then declining in September. Looking at specific business performance. OptumHealth's third-quarter revenue and earnings increased 32% and 37%, respectively, year over year. Revenue per consumer grew by 30%. This reflects the increasing impact and number of value-based relationships within OptumCare. The expansion of our in-home and community health platform, as well as the growing acuity of the needs we can serve. OptumInsight's revenue grew 13% in the quarter, and earnings grew 15% as the revenue backlog increased by 12% to $22.3 billion. We see overall business development sourcing and activity levels increasing, particularly with care provider customers, and for our software and analytics offerings. OptumRx revenue and scripts grew 6% year over year and earnings, 5%. OptumRx has seen both strong customer retention levels and sales success for the largely completed '22 selling season and early activity for '23. The third quarter showed increasing member growth in our commercial offerings, particularly in employer-sponsored benefits. Increased employment is a broad underlying contributor, but we are particularly encouraged by the growth we are achieving in our affordable consumer-centric offerings. Medicare Advantage membership has grown 745,000 this year, inclusive of plans which serve dual special needs members. We expect to add a total of over 900,000 Medicare Advantage members. The number of people served through managed Medicaid grew by more than 1 million members over last year as we began to serve people in new regions such as North Carolina, Kentucky and Indiana, and as state-based redetermination activities remained paused. We were honored to begin serving people in the Missouri Medicaid expansion this month. Our liquidity and capital positions remain strong with third-quarter cash flows from operations at $7.6 billion, or 1.8 times net income, and we ended the quarter with a debt-to-capital ratio of 39%. Now, with the close of the third quarter, your attention understandably turns to next year. As is our custom, we will offer a few early observations here while reserving the majority of this conversation for our November 30 investor conference, which we hope will be held in person in New York. Our businesses are both growing and operating well with strong momentum heading into next year. While the pandemic-related impacts remain difficult to predict, given the current trends, we would expect a lower unfavorable COVID impact than experienced in '21. Still, as the dramatic variation over the last 20 months has demonstrated to all, prudent management suggests we should offer an outlook respectful of the fact that the current situation is without precedent. Taking all elements together at this distance, we see current analyst consensus as reasonably beginning to calibrate a '22 outlook. Envisioning that consensus as being toward the upper end of our initial adjusted earnings per share outlook range, with the range being similar to that offered initially for '21. The still untapped collaborative potential between UnitedHealthcare and Optum to benefit individuals in the system, the power of applied technology to advance care and service, improved opportunity in consumer health and experience and the passion of our people. These and so many other elements lead us to believe our performance expectations for the years ahead remain fully supportive of our long-term 13% to 16% earnings-per-share growth outlook. We look forward to going into more detail on both our view of '22 and the many years of growth beyond at our investor conference. With that, operator, let's open it up for question. One per caller, please.	sees fy adjusted earnings per share $18.65 to $18.90. company's full year 2021 outlook for net unfavorable covid-19 earnings effects is consistent with previous expectations. cash flows from operations in q3 were $7.6 billion.
Our SEC filings can be found in the Investors section of our website. Net income for the first quarter of 2021 included: first, the net after-tax loss from the second phase of the closed block individual disability reinsurance transaction of $56.7 million, which is $0.27 per diluted common share. Second, the after-tax amortization of the cost of reinsurance of $15.8 million, which is $0.08 per diluted common share and a net after-tax realized investment gain on the company's investment portfolio and this excludes the net realized investment gain associated with the reinsurance transaction of $13.5 million or $0.06 per diluted common share. Net income in the first quarter of 2020 included a net after-tax realized investment loss of $113.1 million, which is $0.56 per diluted common share. So excluding these items, after-tax adjusted operating income in the first quarter of 2021 was $212 million or $1.04 per diluted common share compared to $274.1 million or $1.35 per diluted common share in the year-ago quarter. Mark is an experienced leader in the insurance industry, and we're very happy to have him here at Unum. Our first-quarter results represent a solid start to 2021. With improving trends, we entered the quarter with positive momentum and -- I'm sorry, entering second quarter with positive momentum and increasing optimism. We expect to see a strong second-half recovery from the COVID-related pandemic. It certainly has been a tumultuous period, but we believe we are well-positioned both strategically and financially to return to our pre-pandemic levels of profitability and margins in the coming quarters. Each quarter over the past year, we've described how the COVID-19 pandemic and resulting economic impacts have influenced our operations and financial results across our business. Each quarter has had its own set of dynamics. This quarter was no different with the sharp increase in infections and deaths through the year-end period. We have seen rapid changes since that period of time, but nonetheless, it has had an impact on the quarter. First, COVID has significantly impacted mortality experience in our life insurance businesses and generated higher volumes of short-term disability claims and leave requests at the workplace. Additionally, the severe dislocations to the economy and national employment levels have dampened our premium growth by slowing sales and negating the natural growth we typically see in our in-force premium base. And finally, the downdraft in the financial markets last spring and the sharp decline in interest rates further pressured new money yields. We expect each of these trends to turn. Throughout these challenging times, I've been proud of how our employees have stepped up and successfully met our corporate purpose to help people thrive throughout life's moments. As we stand today, I'm confident that the challenges posed by COVID-19 and the 2020 recession are largely behind us. I'm optimistic that while the pandemic certainly is not over, and we expect to see lingering effects into the second quarter, we will also see a strong recovery in our results through the balance of 2021. Coming back to our first-quarter results, the core business continued to perform well, generating solid sequential premium growth, continued strong persistency, and favorable benefits experience across most lines. The challenges from COVID continue to be well-defined within our life insurance product lines, primarily within Unum U.S. Group life. While the human loss from the pandemic continues to be heartbreaking for all of us, COVID-19 related mortality across the U.S. has been trending favorably on a weekly basis from peak levels in December and January. Our own results mirror these week-to-week improving trends that you see in national statistics, and we look forward to improved results in our life insurance lines, beginning in the second quarter and accelerating further into the second half of 2021. In addition to improving COVID-related trends for mortality and infection rates, we are very encouraged by the improving economic environment that's emerging. The forecast for strong GDP growth in coming quarters, along with continued financial fiscal stimulus and further improvement in employment levels and wage growth, we are expecting to see -- expecting both of those to be beneficial to the growth of our business. Additionally, the improved interest rate environment and ongoing strength in the credit markets are all positives for us. We believe we are already beginning to see these benefits emerge in our results. Most notable, the increase of 2.8% in premium income growth we experienced in our core business segments from the fourth quarter of 2020 to the first quarter of 2021. This growth is reemerging due to continued strong persistency trends in our major product lines, along with the sales rebound that has emerged in our U.S. employee benefit lines combined with the stabilization and natural growth on our in-force blocks as employment levels improve. We anticipate that this will accelerate through the year as sales momentum continues to build and economic growth reemerges as a tailwind for us. I mentioned the improving trend that is evident in COVID-related mortality, but as infection rates also subside, we expect to see more favorable trends in our short-term disability and leave services line that have been adversely impacted over the past year. In our other lines of business, we saw good results with the benefit experienced in the first quarter. Our voluntary benefits businesses for Unum U.S. and Colonial performed well this quarter. Outside of the impacts, we felt in our life insurance exposures. The recently issued individual disability line continued to show favorable benefits experience, and we saw a very good recovery in our Unum UK results this quarter with strong performance in the group income protection and group critical illness lines, offsetting adverse COVID-related mortality there as well in the group life. The benefits experience for our Unum U.S. long-term disability line was within our expectations and consistent with the trends of the past several quarters. Though it was up from the very favorable performance of the fourth quarter as we anticipated. Finally, experience in our long-term care line remained quite favorable relative to our long-term expectations. Though we believe results in this line are beginning to trend back toward our long-term expected ranges. A couple of thoughts on our investment portfolio. This is another area where we've seen meaningful improvement over the past several months. For the first quarter's performance, our alternative asset portfolio has now fully recovered from the markdowns recorded in the second quarter of last year and are on a solid path to generating the expected returns going forward. We remain very pleased with the overall performance and quality of the portfolio and are currently seeing very few areas of credit concerns and an increased outlook for upgrades within the portfolio. Turning to our capital position. Our strong position gives us significant financial flexibility to execute our growth plans going forward. Our holding company cash position finished the quarter at $1.7 billion, aided by the successful completion of Phase two of the closed Disability Block Reinsurance transaction. Risk-based capital for our traditional U.S. insurance companies remained solidly above our targets at 370%, and our leverage is down three points from a year ago. As the pandemic winds down, we are evaluating alternatives on how to best utilize this capital position to drive growth in line with our strategy as well as shareholder value. We expect to have more on that for you in the coming months. As we look to enter an accelerated recovery period, an important area of differentiation for us and is the strong engagement we have continued to have with our commercial markets. That connection starts with a strong employee engagement, and I continue to be very proud of the work our employees continue to do to provide excellent service to our customers while we have navigated through this disruptive time. It's no surprise that strong employee engagement drives the strong claimant satisfaction scores we are seeing. Additionally, I'm very pleased to see the growing acceptance of the various digital capabilities we have invested in over the past several years. Recently, we rolled out our new total leave offering, which will help employers and employees better manage the complex leave process. We anticipate that these advanced tools and capabilities will help us further enhance our leadership position in the employee benefits market. And finally, a couple of words on how we have focused on our culture of the company. Our purpose is clear in serving the working world at time of need. It requires a foundation of strong values throughout the enterprise. We are proud to be recognized as one of the world's most ethical companies designated by Ethisphere. You can see some of the great work in our newly launched ESG report on our website. It adds to the totality of who we are at Unum. Now I'll ask Steve to cover the details of the first-quarter results. I'll start with the Unum US segment, which reported adjusted operating income for the first quarter of $115.7 million compared to $143.5 million in the fourth quarter. As I'll describe in greater detail, these results were significantly impacted by COVID-related mortality in our group life business line and the life insurance line within the voluntary benefits business. Beyond the significant mortality impact, we were pleased with the underlying performance of the rest of the businesses, particularly the 2.7% increase in premium income related to the fourth quarter. Starting with the Unum US group disability line, adjusted operating income for the first quarter was $64.1 million compared to $64.7 million in the fourth quarter of 2020. We were very pleased to see premium income increased by 3.5% compared to the fourth quarter, with solid sales this quarter, very good persistency, and natural growth stabilizing. The benefit ratio was 74.8% compared to the very favorable 72.5% in the fourth quarter. As we expected, the first quarter benefit ratio was elevated due to the short-term disability line, where we continue to see high COVID-related claims driven by infection rates. We continue to expect the annual group disability benefit ratio to run in the 73% to 74% range with some quarterly volatility. There are two other points to mention on group disability: first, net investment income was slightly higher in the first quarter, largely driven by higher miscellaneous investment income. Second, the expense ratio improved nicely, declining to 28.4% in the first quarter from 30.4% in the fourth quarter. Some of this improvement relates to timing of expenses. So the ratio is likely to move up slightly in future quarters those stay below the fourth-quarter level. We're pleased with the improvement in the expense ratio this quarter as we balance making investments to further enhance our service capabilities with managing through the ongoing pressures on expenses from our leave services offerings related to COVID driven volumes. Adjusted operating income for Unum US Group Life and AD&D continue to show the impact of COVID-related mortality, with a loss of $58.3 million in the first quarter compared to a loss of $21.9 million in the fourth quarter. The change from the fourth to the first quarter is largely explained by the national COVID-related mortality trend that showed an increase from approximately 145,000 nationwide observed deaths in the fourth quarter to approximately 200,000 in the first quarter. Our 1% claims rule of thumb for Unum share of COVID-related mortality did hold consistent in the quarter, and we estimate that we incurred approximately a 2,050 COVID claims with an average claim size of approximately $50,000. Non-COVID-related mortality did not have a significant impact on results in the first quarter as while incidence was slightly higher on a seasonally adjusted basis, it was largely offset by a lower average claim size compared to the prior quarter. Now looking ahead to the second quarter, national COVID mortality is trending favorably from the peak level seen in December and January. Second-quarter estimates of U.S. COVID-related mortality are in the 50,000 to 60,000 range compared to the first quarter level of approximately 200,000. We are seeing this improving trend in our COVID claims experience as well. The magnitude of the decline is expected to drive a recovery in our group life results. However, the 1% rule of thumb we have experienced throughout the pandemic is likely to change somewhat. If the age distribution of mortality changes and is skewed more to younger people and away from the elderly population due to the vaccine rollout, we would expect to see a higher percentage of national claim counts and a higher average claim size since working-age policies tend to have higher policy amounts than retired and over age 65 individuals. This does equate to an approximately $40 million impact to group life income from COVID-related claims compared to over $100 million in the first quarter. In other words, using these estimates, we would expect our group life earnings to improve by approximately $60 million from the first quarter to the second quarter to an approximately breakeven level of earnings in the second quarter. Now shifting to the Unum US supplemental and voluntary lines, we saw an improved quarter with adjusted operating income of $109.9 million in the first quarter compared to $100.7 million in the fourth quarter. Outside of the COVID-related mortality impacts we saw in the voluntary benefits life insurance line, we were generally pleased with the trends we saw in this segment. The individual disability line continues to generate favorable results with a benefit ratio at 42.4% in the first quarter compared to 42% in the fourth quarter and 52.1% in the year-ago quarter, driven primarily by continued favorable incidence and mortality trends in the block. Benefits experienced for voluntary benefits, excluding life insurance exposure, was generally in line with our expectations. Finally, utilization in the dental and vision line was higher this quarter, pushing the benefit ratio to 73.2% in the first quarter compared to 65.4% in the fourth quarter. Dental and vision utilization has been volatile since the significant decline in utilization we experienced in the second quarter of 2020. Sales for Unum US in total declined by 10.3% in the first quarter compared to the year-ago quarter. Within that, sales increased 15.9% for the employee benefits lines, which are STD, LTD, group life, and AD&D combined, with a good mix of growth in both large case and core market business. This is consistent with our outlook that sales in our group employee benefit lines would recover more quickly than our voluntary benefits businesses. We are currently seeing a good level of quote activity in the group markets, which has recovered to pre-pandemic levels. Recovery and sales growth in the supplemental and voluntary lines is slower, which is in line with our expectation. Our recently issued individual disability sales were down 25.1% in the quarter, coming off a strong pre-pandemic first quarter last year. Voluntary benefit sales were down 21.5% in the quarter, which is consistent with our view that mid and larger case VB sales will take longer to recover. Large case VB sales, in particular, have a longer sales cycle and are more concentrated around January one effective dates, so we wouldn't expect to see growing momentum there until later in the year. Finally, sales in dental and vision were 25.9% lower, caused by the disruption in group sales resulting from discounts and other incentives, many carriers are providing in response to the unusually favorable claims trends seen in the second quarter of last year. We are seeing a positive offset with higher persistency for dental and vision at 87.4% for the first quarter compared to 81.9% in the year-ago first quarter. Persistency for our major product lines in Unum US were in line to higher this quarter relative to the first quarter last year, giving us a good tailwind of premium growth for the full year. Now let's move on to Unum International segment, where adjusted operating income for the first quarter showed a strong improvement to $26.4 million compared to $20.7 million in the fourth quarter last year. A big driver of this improvement was improved results in Unum U.K. with adjusted operating income of GBP18.6 million in the first quarter compared to GBP15.4 million in the fourth quarter. Benefits experience improved in the U.K. with strong performance in the group income protection line due to improved claim recoveries and higher levels of mortality, and we also experienced improved performance in the group critical illness line. This improvement offset adverse experience in the group life line, largely resulting from a higher level of COVID-related mortality. Unum Poland has seen adverse impacts from COVID on its results in the first quarter relative to the year-ago quarter, but we are pleased with the growth we're seeing in this business with growth in premium income of 11.7% on a year-over-year basis. Although we are encouraged by the improved income in the international operations, we do remain cautious with our near-term outlook as both the U.K. and Poland deal with COVID and related economic impacts. Next, we are very pleased with the results generated by Colonial Life, with adjusted operating income of $73.3 million in the first quarter compared to $71.2 million in the fourth quarter. This uptick was primarily driven by a slight improvement in the benefit ratio and a lower expense ratio. The benefit ratio of 55.4% was slightly improved from 56.6% in the fourth quarter but did remain higher than our historical trends due to the continued impact from COVID on our life insurance line. Results in the accident, sickness, and disability line, as well as the cancer and critical illness line, were generally consistent with our long-term experience. Premium income for the first quarter picked up slightly from the fourth quarter, increasing 1.8%, primarily the result of favorable persistency trends. We will need to see further recovery in new sales to rebuild premium growth back to the historic levels of 5% to 6%. We're encouraged by the sales trends we saw in the first quarter for Colonial. Although quarterly sales were down 9.2% year-over-year, that has sharply improved from the 31% cumulative decline we experienced for the last three quarters of 2020. We look forward to further improvement in sales momentum over the balance of 2021. We are encouraged by the uptake we are seeing in our recently developed digital enrollment tools, which in the quarter accounted for about 1/3 of our enrollments. It is also encouraging that face-to-face enrollments are rebuilding as we find new, safe and socially distanced ways to conduct these face-to-face enrollments. And turning to the Closed Block segment. Adjusted operating income, excluding the impact of the Closed Block individual disability reinsurance transaction, was $97 million in the first quarter compared to $104.2 million in the fourth quarter last year, both strong quarters relative to our historical levels of income for this segment. Looking at the primary business lines within the Closed Block, for the LTC block, the interest adjusted loss ratio was 77.7% for the first quarter compared to 60.2% in the fourth quarter, excluding the income of the reserve assumption update in the fourth quarter of last year. The results for the first quarter remain favorable to our long-term assumption of a range of 85% to 90%, primarily due to the continued impact of COVID-related mortality on our claimant block. In the first quarter, we estimate the accounts were approximately 15% higher than expected, a similar trend to what we experienced in the fourth quarter. LTC claim incidence was higher in the first quarter compared to the fourth quarter and remains volatile on a monthly basis. We anticipate that the interest-adjusted loss ratio for LTC will likely revert to our long-term range over the next several quarters as mortality and incidence trends normalize from the impacts of COVID. For the Closed Disability Block, the interest adjusted loss ratio was 68.9% in the first quarter and 79.5% in the fourth quarter, both excluding the impacts from the reinsurance transaction in these quarters. The underlying experience on the retained block, which largely reflects the active life reserve cohort and other smaller claim blocks we intend to retain ran favorably to our expectations, primarily due to lower submitted claims. Then wrapping up my commentary on the quarter's financial results, the adjusted operating loss in the corporate segment was $38.9 million in the first quarter. This is favorable to the fourth quarter 2020 adjusted operating loss of $42.7 million, primarily due to higher net investment income, which offset a slightly higher level of operating expenses. Keep in mind that the assets backing the required capital, which were freed up from the individual disability reinsurance transaction have now been allocated to the corporate segment and generate a higher level of absolute net investment income for this segment. As these assets are allocated out to the product lines in future quarters or deployed, the favorable net investment income for the corporate segment is expected to decline. Now I'd like to turn to the completion of the Closed Block individual disability reinsurance transaction, which we first announced back in December. Phase two involved the transfer of approximately $767 million of assets to the reinsurer and the recording of a net after-tax loss on the transaction of $56.7 million. The components are detailed in the statistical supplement. In addition, the amortization of the after-tax cost of reinsurance was $15.8 million this quarter. With the transaction now completed, we are very pleased with the ultimate release of approximately $600 million of capital to holding company cash and the flexibility that creates for us. Now I'd like to next turn to our investment portfolio with a few points to highlight. First, we recorded an after-tax net realized investment gain of $66.9 million in the first quarter. Of that gain, $53.4 million was associated with the completion of Phase two of the Closed Block individual disability reinsurance transaction. These assets had unrealized gains, which were realized and the assets were transferred to the reinsurer at market value. The balance of this quarter's realized investment gains, which result from normal investment operations was $13.5 million and was largely driven by a positive mark on our Modco embedded derivative balance. Second, as I mentioned previously, we continue to see a strong recovery in the valuation mark on our alternative invested assets of $35.9 million this quarter, following a positive mark of $29.4 million in the fourth quarter. Given the current portfolio size, we would expect quarterly positive marks in the portfolio of $8 million to $10 million. We have now fully recovered the valuation lost from the market decline in early 2020, while also earning our expected returns over that period. I'd also note that it was a higher-than-average quarter for traditional miscellaneous investment income from bond calls in the first quarter, following an unusually low amount in the fourth quarter. Third, with Phase two of the reinsurance transaction, we were able to retain approximately $361 million of invested assets that were not transferred to the reinsurer. Of that amount, $234 million of investment-grade assets with a book value -- with a book yield of 7.4% have been allocated to the LTC portfolio. And then finally, we remain very pleased with the overall quality of the investment portfolio. During the first quarter, we saw only $92 million of investment-grade bonds downgraded to below investment grade and $13 million of upgrades of below-investment-grade bonds to investment-grade status. Our holdings of high-yield fixed-income securities were 7.7% of total fixed income securities at the end of the first quarter, which was down from 7.9% at year-end 2020. Our watch list of potentially troubled investments remains at very low levels as we've taken advantage of the rebound in the credit market to reduce our exposure of these positions. Then looking to our capital position, we are very pleased with the financial position of the company and the flexibility it provides us as we come out of the pandemic. The risk-based capital ratio for our traditional U.S. insurance companies is slightly over 370% and holding company cash is at $1.7 billion as of the end of the first quarter, both well above our targeted levels. In addition, I'd note that our leverage ratio has declined to 26%, providing additional flexibility. We are actively evaluating our capital plans as we come out of the pandemic, and we'll have more to update you on in the coming months. Importantly, we intend to focus on the deployment opportunities that we believe can create the greatest value for the company and our shareholders which historically has included investing in the growth of our core businesses, maintaining a competitive dividend and payout ratio and repurchasing our shares in the market. I'll close my comments with an update to our expectations regarding our outlook for 2021. With our fourth-quarter reporting in February, we outlined our expectation of a modest decline of 5% to 6% for full-year 2021 adjusted operating income per share relative to the 2020 level of $4.93 per diluted common share. In our view, that continues to be a realistic outlook as we look for a strong recovery in the second half of 2021, following some lingering COVID-related mortality impacts in the second quarter. As you can hear from our comments, we continue to be very pleased with the operational performance of the company through what has been an extraordinary environment. We believe we're well-positioned to benefit from improving business conditions as vaccines take hold and mortality and infection rates from COVID-19 continue to subside.	q1 adjusted operating earnings per share $1.04. qtrly total revenue $3,072 million versus $2,871.1 million. company anticipates a strong recovery in after-tax adjusted operating income per share in second half of 2021.
Our SEC filings can be found in the Investors section of our website at unum.com. Net income for the second quarter of 2020 included net after-tax realized investment gains of $25.4 million and an after-tax impairment loss of $10 million on the right-of-use asset related to one of our operating leases on an office building, we do not plan to continue to occupy. Net income in the second quarter of 2019 included a net after-tax realized investment loss of $5.7 million. As a reminder, net realized investment gains and losses include changes in the fair value of an embedded derivative in a modified coinsurance arrangement, which resulted in an after-tax realized gain of $33.1 million in the second quarter of 2020 and an after-tax realized investment loss of $600,000 in the year ago quarter. Therefore, the net after-tax realized investment loss from sales and credit losses totaled $7.7 million in the second quarter of 2020. So excluding these items, after-tax adjusted operating income in the second quarter of 2020 was $250.1 million or $1.23 per diluted common share compared to $286.9 million or $1.36 per diluted common share in the year ago quarter. Despite the many challenges brought on by the COVID-19 pandemic, the corresponding sharp economic downturn and the resulting upheaval and unemployment conditions and workplace environments, we produced solid financial results in the second quarter. The operating trends we experienced were generally consistent with the expectations we discussed in the first quarter. However, the magnitude of the pluses and minuses was different than expected, particularly with mortality trends. We'll outline these impacts as well as other COVID related impacts on the business in greater detail throughout our commentary today. Before I get into the discussion of the results, I want to express how proud I am of the hard work and dedication of our teams over these past several months through this difficult time. Our teams are feeling challenge and uncertainty in their own lives, but their efforts to support our customers, communities as well as each other through this time has been exceptional. We have remained true to our purpose of helping people thrive throughout life's moments. And what we are witnessing today has amplified the need for what we do. We are also focused on the disciplined execution of our business plans and adapting to our changing world. We are operating very well in a largely work-from-home setting with high customer satisfaction and solid productivity. In this environment, we continue to be well prepared to navigate through a variety of economic scenarios. The entire set of circumstances we face today reinforces the need for our core business of providing affordable and accessible financial protection products to individuals and their families through the work site. The fragility of many Americans' financial lives has never been more obvious than what we are experiencing today. Our focus on delivering great social value remains paramount. It ranges from supporting a family with a loss of a loved one to helping America's workers with short-term disability to many other needs created by this pandemic. It is why we are here. If we turn to the totality of our second quarter financial results, we were pleased with the overall performance this quarter in the wake of the stressful conditions in the business environment. Adjusted operating earnings per share were $1.23, which is down from the $1.36 of the year ago second quarter, but was solid overall given the headwinds of the market. We experienced more volatility within our segment results than usual, and we'll walk you through the details throughout our commentary. Starting with our top line. We continue to see growth in premiums, which were up 1.7%, while underlying business origination was more mixed. When we think of our business growth, we think first of customers that are staying with us because of the value of the protections we provide. This is even more true in the midst of the pandemic. Persistency levels are holding up well so far this year, with only modest impacts currently. It is reasonable to expect that persistency will be further pressured in the second half of the year as the effects of lower unemployment lower employment levels flow through our blocks, particularly in our voluntary benefits businesses. Sales trends showed varying levels of impacts depending on the distribution model, size of customer and product and services set. Unum US Total sales declined just under 3%. International sales increased just over 1%, while Colonial Life sales declined 43%, reflecting the challenges of face-to-face sales. These trends were consistent with our expectations as cases with large companies performed better than smaller businesses and group life performed better than the voluntary lines. We expect premium income for our core business segments to be flat to a slight increase for full year 2020 after increasing just over 2% in the first half. From a benefits perspective, clearly, mortality impacts are the biggest variable on people's minds. When the pandemic started, it was believed to impact older ages much more severely, which meant the belief was that group carriers, such as us, would see less claims as the working population skews younger. In fact, what we saw was that death rates were similar to our overall non-COVID age distribution, negatively affecting our U.S. group life block and our other life insurance blocks within our voluntary benefits businesses and the U.K. On the other hand, higher mortality drove significantly higher claim terminations in the long-term care block resulting in the interest adjusted loss ratio of 67%, which is well below historical trends. Steve will provide more detail in his comments, but our experience was generally consistent with the trends for mortality as published in national studies. Beyond these outsized mortality impacts experienced this quarter, we saw several other less severe anomalies in our benefits trends resulting from the pandemic, which touched every part of the company. In the U.K., disability results continue to be challenged by the limitations we are experiencing in accessing the healthcare system to get the information we need to adjudicate and settle claims and return claimants to work. Within Unum US, our growing leave management business experienced higher volumes, which drove higher expenses and dampened profitability in the group disability line. Our dental businesses, on the other hand, benefited from unusually low utilization rates, producing favorable operating income for Unum US supplemental and voluntary. And within the group disability line, newly submitted long-term disability claims were slightly higher, but with strong claim recoveries and favorable short-term disability trends, we experienced favorable risk performance in the Unum US group disability loss ratio. On our investment portfolio, we saw a very dramatic improvement in the credit markets in the second quarter as the Fed became heavily involved in bringing forms of stimulus to aid the economy and the purchase of debt securities. Combined with improved oil prices, we saw reduced credit losses, much lower ratings migration and a sharply improved net unrealized gain position in our fixed income portfolio relative to the first quarter. So far, we are tracking favorably to the credit scenario we laid out in the first quarter. On the other hand, Fed actions in a more difficult economy have pushed interest rates to low levels. So in the world of tightening credit spreads and low government rates, ongoing pressure to new money yield is creating a challenging environment to put money to work for our team. When we bring it all together, we saw excellent statutory earnings generated again this quarter, which has been true for the first half of the year. Our capital metrics remained solid with RBC at approximately 370% and holding company cash of $1.6 billion. The results this quarter demonstrate the resilience of the franchise and underscore the disciplined approach we take to operating the business, while bringing good value to our customers. Now I'll ask Steve to cover the details of the second quarter results. And while doing so, give you some insights into what impacts were seen from the current business environment and how they could play out in the third quarter. I'll also discuss what trends we're seeing in the investment portfolio and the impacts we see it having on our capital position. To reiterate Rick's comments, we are pleased with the overall results for the second quarter. There was more volatility than we normally see in our segment results but the fact that overall results remain solid and our statutory results were very good speaks to the balance of our business mix and the focus we have maintained on discipline in all aspects of managing the company. Looking at the quarter from a high-level perspective, I want to start with a summary of what we estimate the COVID-19 and related impacts were on our second quarter results. To be clear, these are our best estimates as we do not always know that a claim is directly tied to COVID, but this is intended to give you our best approximation of the impacts. I'll break the impacts into three categories, starting with impacts to claims experience. We estimate that COVID produced a net unfavorable impact to our claims experience of between $12 million and $16 million, with the biggest unfavorable impacts occurring within Unum US group life the overall Unum UK results and the Closed Disability Block. We did experience favorable financial impacts in the dental and long-term care blocks, as I'll describe in a moment. The second category covers impacts to net investment income and the investment portfolio, which we estimate in the range of $24 million to $28 million unfavorable. The larger items were the mark on our alternative asset investment portfolio and the valuation of hybrid securities, which I'll detail in the Closed Block discussion. The third category is expenses, which relates primarily to higher expenses in our leave services business, driven by higher utilization of those services. In all, these items produced an unfavorable impact in the high $40 million to $50 million range on a before-tax basis for the second quarter. Although there was an unfavorable impact to sales and persistency, it is more difficult to quantify the current quarter impact on earnings. With that said, I'll start my discussion with Unum US. Adjusted operating income declined 9% to $231.9 million, primarily reflecting adverse mortality impacts from COVID-19 on the group life business, along with higher expenses in our leave management operation. This offset favorable benefits experience in the group disability line and stronger earnings growth in the supplemental and voluntary lines of business. Premium growth for Unum US in the second quarter was 1.2% year-over-year, which is a slightly lower trend than we have seen in recent quarters. The current sales environment remains challenging, declining by 2.9% in total for the segment. As we expected, we saw better sales results in the large case market for group products with those sales advancing 9.5% compared to a decline of 3.6% for sales of core market group products using 2,000 lives as a dividing line. In the large case segment, we continue to experience success selling packaged products with HR Connect, which is a secure connection between Unum and select employer HCM systems that automates many time-consuming HR activities. Persistency in Unum US was generally lower year-over-year, though we did see a slight increase in voluntary benefits. Persistency levels and new sales activity will continue to be watch areas as we navigate the volatile employment trends in coming quarters. Claims trends for Unum US showed a wide range of results in the second quarter, but the benefit ratio for this segment was generally consistent year-over-year at 68.1% compared to 67.6% in the year ago quarter, reflecting our broad diversification within the employee benefits market. The group disability line continue to show strong performance producing an improved benefit ratio of 72.8% in the quarter compared to 74.7% last year, driven by strong claim recoveries. This was offset by higher submitted claim incidents, although the recent trend in paid claims has been more favorable. Within the supplemental and voluntary lines, both the individual disability and voluntary benefit lines showed consistent trends year-over-year. While the dental and vision line benefited from a sharp decline in utilization due to COVID-19. This pushed the benefit ratio significantly lower to 36% from 71.6% last year. We are already seeing a utilization already seen utilization return to more normal levels for dental and vision and expect the benefit ratio to increase, but remain volatile as the pandemic continues to play out. The leave management business, which is reported within the group disability line, experienced significantly higher volumes related to COVID-19, driving higher expenses for that line, which negatively impacted earnings. The group life and AD&D line had a sharp decline in adjusted operating income to $19.4 million in the quarter from $62.7 million a year ago as the benefit ratio increased significantly to 81.8% in the quarter from last year's 72.9%, predominantly driven by COVID-19-related mortality. We experienced an increase in the number of paid claims this quarter by approximately 12% or slightly over 900 excess claims, along with an increase in the average claim size by approximately 7%. In addition, at the end of the second quarter, we estimated an additional number of incurred but not reported COVID claims leading to an increase in the IBNR reserve balance for group life of $7 million. To put this into perspective, the total impact to the quarter was approximately 1,100 excess life claims above our quarterly average, which is slightly less than 1% of the approximately 120,000 COVID-19 deaths reported by Johns Hopkins in the second quarter. Our experience tracked national trends closely throughout the second quarter with higher claims reported from the New York and New Jersey Metro area early in the quarter and the later skewing more to the South and Midwest in the second half of the quarter. Overall, despite the volatility, it was a good quarter for Unum US. Looking ahead, third quarter claims trends will likely continue to be volatile as the pandemic continues, though likely less than what we experienced this quarter. Given the recent trend in COVID-related mortality, we expect group life claims to remain elevated in the third quarter and recommend that you follow the mortality data provided by Johns Hopkins to get a sense for how our claims experience may evolve. Finally, we are already seeing a return to more normal utilization in the dental block. The Colonial Life segment produced very good earnings this quarter with adjusted operating earnings of $90.9 million, an increase of 7.7% over the year ago quarter. Premium income increased 4.2% as persistency held up well, offsetting the decline we are seeing in new sales activity. This quarter, new sales declined by 43%, reflecting the challenges of selling and enrolling in what has traditionally been a face-to-face sales environment. The benefit ratio was slightly lower at 50.7% compared to 51.4% a year ago as improved results in accident, sickness and disability and cancer and critical illness offset the incrementally higher mortality we experienced in the business. Overall, it was a good earnings quarter for Colonial Life, but we're likely to see further pressure on top line growth from the pandemic until sales activity recovers. We anticipate some rebound in third quarter sales, though it will continue to remain pressured relative to the year ago quarter. We believe that the investments we've been making in digital capabilities to support growth and improved productivity will benefit us in this environment. We are excited to see increased utilization of these new tools by our agency force. In addition, we will likely see further pressure on persistency in the coming quarters given the volatility in employment conditions and pressure on small businesses. Results in our Unum International segment remained weak this quarter with adjusted operating income of $15.1 million compared to $30.7 million a year ago. We continue to have challenges in getting the necessary documentation and certifications for claim assessments and terminations, given the disruption in our customers' workplaces and the overburdened healthcare system in the U.K. from COVID-19. While we did see some improvement at the end of the second quarter, this trend continued to pressure results in the group disability line. Additionally, like our U.S. group life trends, we experienced higher mortality in the U.K. group life block, which represents a little less than 20% of the overall U.K. business. Premium income, however, did increase in both Unum UK, up 1.9%; and Unum Poland, up 11.1%, both in local currency. Financial results from our Poland operation were very good again this quarter with a strong year-over-year increase in adjusted operating income. Looking forward, economic conditions in the U.K. are expected to remain pressured by the COVID-19 pandemic, the ongoing Brexit negotiations and the low interest rate environment, creating significant headwinds for the U.K. business. Business trends in June were more favorable than April and May as we are beginning to see some improvement in the information flow necessary to produce claim recoveries. However, a full recovery may be slow and is not expected until there is increased confidence that the health aspects of the pandemic are under control and that the economy will rebound. The Closed Block segment produced a very good quarter with adjusted operating income increasing almost 9% to $36.7 million. I'll discuss the operating trends of the LTC and Closed Disability Blocks in just a minute, but first, let me walk through some of the factors impacting net investment income, which is an important driver of results in this segment. In total, net investment income for the Closed Block segment declined 8% in the second quarter to $326.3 million. As we have discussed with you in the past, we allocate most of our alternative investments to this segment as we feel that over time, these investments can generate higher returns, which are important in supporting the LTC line. Along with these higher potential returns over the long-term income volatility in quarterly investment income, that was evident this quarter with a negative market value adjustment on these investments of $31.3 million reflecting market values at March 31, which are reported on a lagged basis. To put this in perspective, in 2019, we reported average quarterly positive marks of approximately $8 million a quarter. So this was a significant negative variance from historical results. With the second quarter recovery in financial markets, we do expect the valuation for many of these investments has also improved and will be reflected in our third quarter reporting. We do not expect, however, a full recovery in the third quarter, but do expect them to fully recover over time and generate our assumed returns. The second item to note regarding investment income for the Closed Block are the marks on two perpetual preferred securities that are mark-to-market quarterly and reported through net investment income, not as a part of realized investment gains or losses. These are energy-related investments and both rebounded strongly in the second quarter with the recovery in oil prices. Therefore, there is a positive market value adjustment of $10 million in the second quarter compared to the $17 million negative adjustment in the first quarter. Aside from these impacts to net investment income, the long-term care line within the Closed Block had an exceptionally positive quarter. The second quarter interest adjusted loss ratio dropped to 67%, bringing the rolling four quarters ratio to 81.1%, well below the expected range of 85% to 90%. The favorable results were primarily driven by elevated claim mortality, which was approximately 30% higher than average this quarter. Higher mortality was not evident this quarter in the active lives block, but we continue to closely monitor that experience. New claim incidents for LTC was also favorable this quarter, driven in part, we believe, by the hesitancy of many to enter nursing homes or assisted living facilities or receive home care because of the pandemic. Given the uncertainty of the timing of future claim filings, as a result of the pandemic, we did increase the incurred but not recorded reserve for long-term care by an incremental $20 million in the quarter. In addition, we decreased our near-term mortality assumption in our best estimate claim reserve. We believe this will take into account potential acceleration of mortality in our claimant population. Looking out to the third quarter, we expect mortality in the claimant block to remain elevated, though not at second quarter levels. Also related to LTC, we made further progress this quarter with several new rate increase approvals on in-force business, and now we're at 65% of our $1.4 billion reserve assumption. The Closed Disability Block experienced an increase in the interest adjusted loss ratio to 89.5% in the quarter from 81.3% a year ago, driven primarily by higher submitted incidents. New claims submissions, which we attribute in part to COVID-19 and related to economic impacts, were heavy in the early part of the second quarter, but they did return to more normal levels later in the quarter. Mortality did not have a meaningful impact on Closed Disability results this quarter. I'd like to now turn to a discussion of the investment portfolio, which showed a dramatic recovery from the first quarter, given the recovery in the financial markets. A few points to highlight are: first, net after-tax realized investment losses from sales and credit losses declined to $7.7 million in the second quarter from $44.4 million in the first quarter of this year. Second, downgrades of investment-grade securities to high-yield totaled $193 million for the second quarter compared to $336 million in the first quarter. You'll recall, we previously referenced $119 million of downgrades that occurred in April. So the activity in May and June declined significantly. The increase in second quarter downgrades created a minimal $11 million increase to required capital, which impacted the second quarter RBC ratio by only one point. And then third, the net unrealized gain position on the fixed maturity securities portfolio improved to $7.4 billion in the second quarter from $4.3 billion at the end of the first quarter. Within that, the Energy Holdings, which do total 9.2% of our fixed maturity securities moved to a net unrealized gain position of $437 million from a net unrealized loss of $350 million, a significant improvement in values due to spread tightening, given the recovery in economic and oil prices. In the first quarter, we outlined an investment credit scenario for defaults and downgrades of investment-grade securities to high-yield for 2020, that assumed as a base case $85 million of defaults and $1.6 billion of downgrades. We are tracking favorably to this scenario and have refreshed our view of our portfolio on a credit-by-credit basis. Our capital forecast now includes $70 million of defaults and $1.3 billion of downgrades in 2020, including what we have already experienced. We will monitor our investment portfolio and realize there is continued uncertainty in the markets for the remainder of the year, but are optimistic that the portfolio will outperform these planning assumptions. Even with this scenario, we still expect to meet our capital metric targets for risk-based capital and holding company liquidity throughout 2020. Looking to our capital position. We finished the second quarter in very good shape with the risk-based capital ratio for our traditional U.S. insurance companies at approximately 370%, above the 350 targeted level and holding company cash at $1.6 billion. We target maintaining holding company cash at greater than 1 times our fixed obligations, which is approximately $400 million. During the second quarter, we issued $500 million of debt. And as a reminder, we have a $400 million debt maturity in September. Beyond this upcoming maturity, the next maturity is not until 2024. In addition, an important driver of our capital position is after-tax statutory operating earnings in our traditional and U.S. insurance companies, which were quite strong again in the second quarter, totaling $327 million compared to $278 million in the year ago quarter. I would reiterate that in a very tough environment that the team and the strength of the franchise have responded. We enter the second half of the year recognizing the challenges if the pandemic persists, but we have been adapting well and continue to stay focused on serving our customers well. So I'll ask Jonathan to begin the question-and-answer session.	q2 adjusted operating earnings per share $1.23. suspending its financial guidance for remainder of 2020.
Our SEC filings can be found in the Investors section of our website at unum.com. Net income for the third quarter of 2020 included a net after-tax realized investment gain of $3.8 million and after-tax cost related to an organizational design update of $18.6 million. Net income in the third quarter of 2019 included a net after-tax realized investment loss of $20.8 million and after-tax debt extinguishment costs of $19.9 million. So excluding these items, after-tax adjusted operating income in the third quarter of 2020 was $245.9 million or $1.21 per diluted common share compared to $282.7 million or $1.36 per diluted common share in the year ago quarter. Our third quarter performance demonstrates a very good operating performance by our Unum team. This is in the face of difficult business and economic conditions that persist in our world, and specifically in the employee benefits market. Overall, our financial results were solid this quarter and largely consistent with the expectations we set back in July. In the previous two quarters, we outlined what we believe are the factors that will influence our business, and these have evolved largely as expected, though impacts and recoveries are moving at different speeds. So in the backdrop, I'd like to outline the high level business and economic conditions that persisted throughout the quarter and had meaningful impact on our results. As we look at it, there are three major trends to follow. First and foremost, the health effects of COVID-19 remains significant with high mortality and high infection rates that impacted our benefits experience in multiple ways. Second, the sharp spike in unemployment rates in the spring has abated somewhat, but unemployment remains high relatively to pre-COVID levels and continues to present a headwind to our growth rates. Third, we are beginning to see parts of the economy reopen and individuals return to more normal behavior and activities in their daily lives. This trend, when done in a responsible way, we think is a positive, but it did produce more negative impacts on our results in the third quarter relative to the second quarter. It may take time, but the longer term implications of the containment of the COVID-19 pandemic, leading to a full reopening of the economy will be very beneficial for our business. So when we take these three dynamics; health, unemployment and gradual reopening, I'd like to highlight the important trends affecting our business in the current quarter. Sadly, high mortality rates continued into the third quarter and impacted our life insurance businesses as well as seeing higher mortality within our long-term care claimant population. Although these claims impact our results, it reaffirms exactly why we are here; to take care of people at time of need. Our average death claim is around $50,000. And this may be the only form of life insurance these individuals and their families have. We are also seeing infection rate negatively impact our short-term disability and leave services businesses. These increases will follow the course of the pandemic and will abate as infection rates slow. Coming out of the March timeframe, the shock of shutting down the economy froze new business trends and disrupted our delivery models. We also saw high unemployment negating what we usually see as growth in payrolls. As our delivery models adapt and employment conditions stabilize, our long-term premium growth rates will return as the economy improves and more people get back to work. Although we are happy to see at the early phases of the reopening of the economy tend to produce more short-term negative trends for us with higher dental utilization relative to the second quarter and a return to more normal levels of non-COVID-related STD claims in concert with COVID-related claims remaining elevated. So this is a moment in time, and we look forward to seeing these influences moderating and settling back down in future quarters. We remain very committed to our business model. And we expect to return to more normal business and economic conditions, while demonstrate to providing financial protections to the workforce is good for employers and their employees. As we head into the final months of 2020, there are clearly some positive trends that have continued despite the challenges of this year. An example is that we continue to see strong performance from our Unum U.S. long-term disability business. This is a testament to our disciplined approach over many years to all facets of managing this business. Benefits experienced in the closed long-term care block remained favorable, while the team continued to make progress on achieving rate increase approvals. The investment portfolio continued to trend favorably and expectations around impairments and downgrades have not materialized to the extent predicted. Our investment team has done a good job of analyzing our credit portfolio at a granular level and is executed well in this environment. And finally, our capital position remains with very good RBC at approximately 380% and holding company cash at $1.2 billion at quarter end, both nicely above our targeted levels. Despite the pandemic and the challenges it presents in the day-to-day management of our operations, we continue to operate the company with a focus on the future. The $18.6 million of organizational design update cost we recorded this quarter was part of an ongoing effort and continue to manage our operations with an eye toward the future. The savings generated allowed us to continue to reallocate dollars to invest in the growth areas of our business. Importantly, we are seeing the pay-offs with investments made to date with the growing adoption of our digital assets throughout the organization, which is leading to strengthened relationships with customers and their employees. A few examples of these returns on our investment include our HR Connect platform, which digitally links our customers' HCM systems directly to Unum benefits. This allows for the automation of activities such as enrollment, billing, leave management and evidence of insurability. Additionally, we have made investments to improve the customer experience through web and mobile claim submission tools and automated claimant communications. And one final example I'll mention is the MyUnum platform that creates a simple and intuitive end-to-end self-service experience for clients to administer their benefits and ultimately eases the administrative burden for HR managers. These are just a few of the ways we are transforming our operations to better serve employers, their employees and their families throughout these difficult times. It also positions us well for the future. To wrap up, I want to express how proud I am of the hard work and dedication of our teams this year through these difficult conditions. Our teams feel the challenge and uncertainty in their own lives, but their efforts to support our customers and each other has been exceptional. We have remained true to our purpose of helping people thrive throughout life's moments, and what we are witnessing today has amplified the need for what we have always done. And now, I'll ask Steve to cover the details of the third quarter results. Our intent is to show how the company is progressing through the pandemic and resulting recession, and outline for you the impacts it has had on our results. As Tom outlined in his opening, after-tax adjusted operating income in the third quarter was $245.9 million or $1.21 per common share. By comparison, in the second quarter of this year, excluding the lease impairment costs and net realized investment gain, after-tax adjusted operating income was $250.1 million or $1.23 per common share. The tax rate was impacted this quarter by an increase in the U.K. corporate tax rate to 19% from 17% adding $9.3 million in additional tax expense. So we believe a good starting point for analyzing our results this quarter on a sequential basis is to look at before tax adjusted operating income, which showed a slight increase to $318.5 million in the third quarter compared to $316.5 million in the second quarter. As I begin, let me remind you of the economic and business conditions that existed in the quarter and outline the impact that it had on our results. First, obviously COVID-19 had a significant impact on the external environment, driving a high level mortality once again plus the continued high level of infections. Excess deaths in the U.S. from COVID totaled an estimated 80,000 in the third quarter. The high mortality rate clearly impacted results in the Unum U.S. group life and Voluntary Benefits businesses and Closed Block long-term care. In addition, the high rate of COVID infections that continued through the third quarter resulted in elevated short-term disability claims and drove higher expenses in the leave services business. Second, employment conditions remained challenging. The unemployment rate is rebounding to 7.9% for September compared to the peak level in April of 14.7%, but by comparison remained significantly higher than 3.5% % at September 30, 2019 and a strong monthly employment reports leading up to the spike in April. High unemployment levels throughout the quarter negatively impacted premium growth in our U.S. employee benefits business lines as it negated the benefit we usually experience from natural growth in the in-force blocks. At the same time, there has been a reopening of the economy with some people beginning to return to more normal activity in their daily lives. We saw this with dental utilization that rebounded from the low utilization rates of the second quarter, higher AD&D claim activity, which often mirrors property and casualty claims, higher non-COVID STD claims as individuals begin to catch-up on procedures postponed in the spring and some normalization of LTC claim incidents, though those trends remain highly volatile for month-to-month. Finally, financial markets were generally stronger in the quarter. This is most impactful to Unum and the credit markets where bond spreads continue to tighten on average, while U.S. treasury rates increased a few basis points. While this combination continues to create a challenge for achieving attractive new money yields on investment opportunities, it is generally favorable for credit conditions and our outlook going forward for potential credit impacts that is credit downgrades and impairments. In addition, income from our alternative asset investment portfolio improved back to our historical expectations this quarter after a significant negative mark in the second quarter. Against this high level backdrop, I'll focus on our reporting lines beginning with Unum U.S. group disability. Adjusted operating income for the third quarter was $73 million, down slightly from $76 million in the second quarter. Several factors impacted results on a sequential quarter basis. First, we experienced pressure on STD claims from continued high COVID impacts, while non-COVID claims began to return to normal levels. Second, pressure on expenses from a continued high level of leave volumes, which increased over the second quarter and were approximately 60% above year ago volumes. And third, pressure on premium growth due to lower recent sales activity and a reversal natural growth in the in-force block due to the increase in unemployment. These trends were partly offset by continued favorable results in the long-term disability block, but generally stable in new claim incidents and continued strong claim recoveries as well as favorable net investment income driven by a higher level and miscellaneous investment income. As Rick said, we continue to be very pleased with the consistency of the results in LTD as demonstrated by group disability benefit ratio of 74.1% this quarter, which is consistent with the ratio a year ago of 74.2%. Adjusted operating income for Unum U.S. group life and AD&D remain depressed at $13.9 million for the third quarter compared to $19.4 million in the second quarter. When we analyzed these results, we believe that the impacts from the group life mortality matched up very consistently with the mortality trends we outlined for you in the second quarter. The big driver of the sequential quarter decline in income was due to a weaker performance in the AD&D line where we experienced higher claims. This is driven in part by seasonal patterns, but also by reopening of the economy, which resulted in higher rates of accidents. Shifting back to the COVID impact on the group life business in the quarter, we experienced slightly more than 900 excess life claims or about 12% higher than expected, benchmarked against a base of approximately 80,000 COVID-related deaths nationwide as reported by Johns Hopkins. This compares to our second quarter reporting, which showed approximately 1,100 total excess death or about 14% higher than expected relative to reported base of 120,000 COVID-related deaths. As we stated before, our rough estimate is that we expect to see approximately 1% at the U.S. mortality by count given our market share of life insurance in the country. While there continues to be a lot of volatility in these trends, all in all, we view these results to be largely in line with our expectations. We believe our year-to-date experience in group life is correlated closely to national trends and statistics, and over the year, the characteristics of our COVID claims has followed the evolution of the virus' impact nationwide. We believe this close relationship to national trends will continue, and suggest you use that as a basis for your projections and estimates in future quarters. I'll add that so far in the fourth quarter, these trends are matching our third quarter results with a slightly higher average claim size, which is now in the low $50,000 range. The Unum U.S. supplemental and voluntary lines experienced a more significant decline in the third quarter from the very favorable second quarter with adjusted operating income of $101.3 million in the third quarter compared to $136.5 million in the second quarter. The biggest driver we experienced was a pickup in utilization in the dental and vision block from the unusually favorable trends in the second quarter. In addition, we saw an elevation in average claim size as policyholders caught up on dental services they put off in prior months. This resulted in the benefit ratio increasing to 76.8% from 36% in the second quarter. Within the voluntary benefits line, we saw an uptick in the benefit ratio due to higher life claims in the block, which we believe are largely driven by COVID. For the individual disability line, benefits experience returned to a more normal level of both claim incidents and size of new claims. Beyond these benefit and trends, premium income in the supplemental voluntary lines declined 2.8% on a sequential quarter basis due to lower new sales in recent quarters, slightly lower persistency and the effects of weaker employment trends by natural growth. Sales for Unum U.S. declined 18.5% in the third quarter compared to the year ago quarter. The group lines, which are LTD, STD and group life combined, increased by 1.5% as we continue to see good traction from our HR Connect platform that links customer HCM systems directly to Unum. As we expected and outlined on previous calls, the supplemental lines showed more pressure than the group lines. Voluntary benefits sales declined 35.8% year-over-year. But keep in mind that third quarter sales for this line largely reflects second quarter enrollments, which were significantly disrupted by the pandemic and economic shutdown. Dental and vision sales declined 33.1%, largely due to the disruption we are seeing in group sales activity as in-force providers are offering discounts and other incentives in response to the unusually favorable claim trends the industry experienced in the second quarter. Moving to the Unum International segment. We are pleased to see improvement in adjusted operating income to $21.4 million in the third quarter compared to $15.1 million in the second quarter. While Unum Poland, continue to be a strong performer overall, the bulk of the sequential quarter improvement came from Unum U.K., which produced adjusted operating income of GBP15.2 million in the third quarter compared to GBP10.1 million in the second quarter. Colonial Life continued to report favorable results with adjusted operating income of $92.2 million in the third quarter compared to $90.9 million in the second quarter and $87.2 million in the year ago quarter. Premium income for the third quarter declined 4.3% from the second quarter driven by the decline in sales this year and the negative impacts from individual lapses with in-force cases. The benefit ratio was slightly elevated in the third quarter at 52.2% compared to 50.7% in the second quarter, largely reflecting the continued higher life and STD claims related to COVID with less offset from favorable accident and cancer lines. Net investment income also benefited this quarter from a higher amount of miscellaneous investment income. Sales for Colonial Life declined 27.6% year-over-year in the third quarter, an improvement over the second quarter when sales showed a decline of 43% year-over-year. The sales environment remains challenging, but we are encouraged by the adoption of the digital sales tools we have developed. While our traditional agent assisted sales remain pressured, we are seeing strong double-digit sales growth from the telephonic enrollment and the self-service platform. In addition, agent recruiting remained strong with an 8% increase year-over-year. And then in the Closed Block segment, adjusted operating earnings increased to $70.8 million in the third quarter compared to $36.7 million in the second quarter, largely driven by the continued favorable impact on high claimant mortality on the LTC block and a return to more normal positive marks on the alternative investment portfolio from the significant decline in value as of the end of the second quarter. Keep in mind that the valuation of much of the alternative portfolio is recorded on a one quarter lag. The positive mark on the holds was $11.3 million this quarter compared to a loss of $31.3 million in the second quarter, which we've reflected the negative market conditions at the end of the first quarter. For the LTC block, the interest-adjusted loss ratio was 67.4% in the third quarter compared to 67% in the second quarter, and over the past four quarters is now 75.6% compared to our long-term expected range of 85% to 90%. Our claimant mortality was a major factor again this quarter as mortality was approximately 15% higher than expected. This impact was less than the second quarter, which was approximately 30% higher than normal. Unlike the second quarter, we did see new claim incidents for LTC return to more normal levels. However, the month-to-month trends remain highly volatile. Therefore, we increased IBNR reserves for LTC again this quarter. At this point, we are not seen anything in these claim trends that would change our long-term assumptions. For the closed disability block the, interest-adjusted loss ratio was 86.6% in the third quarter compared to 89.5% in the second quarter with slight improvement in underlying claims experience. Coming back to LTC, we are pleased to have another successful quarter of in-force premium rate increase approvals, which gets us to $1 billion of the $1.4 billion of margin in our reserve assumptions. So then wrapping up my commentary on the quarter's financial results, the adjusted operating loss in the corporate segment was $77.4 million in the third quarter. Included in this are expenses related to the organizational design update that Rick referenced in his comments of $23.3 million before taxes or $18.6 million after taxes. Excluding these costs, the adjusted operating loss of $54.1 million was consistent with our expectations and was largely driven by interest expense on our outstanding debt, which totaled $49 million in the third quarter. With the maturity in September of a $400 million debt issue, our interest expense is expected to decline to approximately $45 million in the fourth quarter. For the corporate segment, in total, we continue to expect quarterly losses in the mid $15 million range. I'd like to now turn to a discussion of the investment portfolio, which continues to show a strong recovery from the first quarter given the recovery in the financial markets. A few points to highlight are; first, net after-tax realized investment losses from sales and credit losses totaled $7.3 million this quarter compared to $7.7 million in the second quarter and $44.4 million in the first quarter. This is consistent with our expectation that the majority of the impairments would be realized in the first quarter. Second, the trend of downgrades of investment-grade securities to high yield continued to improve, and our outlook for potential future downgrades has improved. In the third quarter, we saw $141 million of these downgrades compared to $193 million for the second quarter and $336 million in the first quarter. The impact to RBC this quarter was immaterial. Third, the net unrealized gain position on the fixed maturity securities portfolio improved to just over $8 billion from $7.4 billion in the second quarter and $4.3 billion at the end of the first quarter. And then finally, we continue to bring down our expectation for potential credit impairments and credit downgrades given the performance of the portfolio the past few quarters and are increasingly positive outlook for credits. Our outlook for fallen angels for 2020 is now half of our original scenario. This gives us further confidence in exceeding our capital targets at year end 2020. Then looking to our capital position, we finished the quarter in very good shape with the risk-based capital ratio for our traditional U.S. insurance companies at approximately 380% and holding company cash at $1.2 billion, both comfortably above our targeted levels. Again, the cash balance at September 30 reflects the $40 million debt maturity in September and our next maturity is not until 2024. I'll wrap up by reiterating the results we are seeing remain consistent with what we had anticipated. We will likely continue to experience more volatility in our results as long as the pandemic persist, but remain encouraged by the overall profitability of the company and our financial position. We continued to be pleased with the operational performance of the company through what continues to be an extraordinary environment. And we do believe we are well positioned to benefit from an improving economy and better business conditions as society continues to reopen. And in the meantime, we'll continue to focus on crisp execution to manage through today's challenges. So I'll ask the operator to begin the question-and-answer session.	q3 adjusted operating earnings per share $1.21. qtrly after-tax adjusted operating income was $1.21 per diluted common share.
Our SEC filings can be found in the Investors section of our website at unum.com. Net income for the third quarter of 2021 included the after-tax impairment loss on internal-use software of $9.6 million or $0.05 per diluted common share, the after-tax amortization of the cost of reinsurance of $15.5 million or $0.08 per diluted common share, the net after-tax reserve decrease related to reserve assumption updates of $143.3 million or $0.70 per diluted common share, and a net after-tax realized investment loss on the Company's investment portfolio of $100,000 or a de minimis impact on earnings per diluted common share. Net income in the third quarter of 2020 included after-tax costs related to an organizational design update of $18.6 million or $0.09 per diluted common share, and a net after-tax realized investment gain on the Company's investment portfolio of $3.8 million or $0.01 per diluted common share. Excluding these items, after-tax adjusted operating income in the third quarter of 2021 was $210.5 million or $1.03 per diluted common share compared to $245.9 million or $1.21 per diluted common share in the year ago quarter. We saw top-line growth in our business lines at good returns. We also recognized the continued challenge that COVID presents on our near-term results. It has cast a shadow on our core returns, but we still see a great business that we believe will return to the levels of profitability that we expect. Let me start with the overall operations before commenting on these COVID trends. I would first highlight that core premium growth has been steady and tracking to the expectations we previously laid out for you. On a year-over-year basis in the third quarter, Unum US generated an increase in premium income of 1.2%. Colonial Life was slightly better than breakeven, falling three previous quarters with negative comparisons, and our International lines also generated positive premium trends. This premium growth momentum is building back as sales growth reemerges, persistency remains favorable, and the external environment of employment growth and wage inflation benefits our business. Outside of the COVID-related impacts, we remain very encouraged with the benefits experience and operating income contributions from our other business lines. The supplemental and voluntary lines, Colonial Life, our International businesses and our Closed Block segment all showed generally stable results and made substantial contributions to income this quarter. We're also pleased with our overall investment results this quarter. It was another quarter for strong returns from our alternative investments and also another quarter of higher than normal bond call premiums. The underlying credit quality of the portfolio is excellent and the investment team remains diligent in their analysis of our credits through the changing market dynamics. With this backdrop of strength, we were also highly affected by the evolving nature of the COVID pandemic. Given the breadth of our customer base across the U.S., we have seen this quarter we have been impacted by the resurgence of higher infections, hospitalizations and mortality brought on by the Delta variant. As we have discussed throughout the pandemic, the best way to monitor COVID's impact on our results is to follow national mortality and infection rates. Differently in this quarter, we also need to focus on how the demographics of the incremental mortality relate specifically to our customer base. To put it in context, in the third quarter, the U.S. experienced a significant increase in national COVID mortality counts to approximately 94,000 lives, which is almost double the 52,000 in the second quarter. The dramatic increase over the course of the third quarter occurred very rapidly and consistently throughout the quarter. In fact, just 90 days ago, most experts were estimating a third quarter mortality count of approximately 44,000 deaths, an estimate that has more than doubled over the course of the quarter. The absolute increase in mortality has certainly been impactful to our industry and for us, most notably in our Unum US group life business, although we also saw impacts in our voluntary benefits lines. Beyond the higher mortality counts in aggregate, data from the CDC also shows that the third quarter working-aged individuals comprised approximately 40% of the COVID-related mortality, double that of the fourth quarter of 2020 and first quarter of 2021 before vaccinations began to widely be available. This shift in demographics impacts us three-fold. First, we announced the higher impacts in the working-age population, our primary customers who are covered by our group and voluntary products. In addition, these younger working-aged individuals tend to have higher benefit amounts that we saw before. An additional, but smaller impact that we see is that Delta -- the Delta variant has brought on a resurgence of infections and hospitalizations, leading quickly to higher claims at our short-term disability business and pressure on our group disability benefit ratio. While COVID impacts are evident in our results this quarter, we believe as the pandemic continues to come better under control with increased vaccinations and advanced treatments, then we will see a strong reemergence of growth and profitability in our business. The recovery from COVID has been delayed longer than we anticipated by the Delta variant, but we do expect to see a recovery ahead. It is because of that view that we're excited to begin to deploy a portion of the Company's excess capital in a way that we believe can create value for our shareholders. We start first with a capital position that remains very healthy with holding Company cash of $1.6 billion and weighted average risk-based capital ratio for our traditional U.S. -- U.S.-based life insurance companies at approximately 380%. This gives us the opportunity to begin to deploy a portion of that capital to enhance shareholder value, while also maintaining a healthy position for opportunities that could materialize in the future. Last week, we were pleased to announce the $250 million share repurchase authorization approved by our Board, which we intend to initiate in the fourth quarter with an execution of an accelerated share repurchase of $50 million. We expect to continue the program through the end of 2022. In addition to buying shares, we also plan to accelerate recognition of the premium deficiency reserve for the Long-Term Care Block by a similar amount over this same timeframe. We see value in accelerating the recognition ahead of the original seven-year schedule and could see its completion as early as the end of 2024 under certain market conditions. Even with the additional capital we plan to allocate to share buybacks and accelerated PDR recognition, we will continue to maintain a strong capital position and flexibility. While we remain optimistic over the long-term, given the volatility of the pandemic, we will move our traditional December Analyst Meeting to the first quarter of 2022 to discuss with you our full-year outlook. The area to stay focused on is our continued premium growth in our core business lines looking into 2022, as well as the impact of our capital deployment plans. We expect the impact of the pandemic to subside over the course of next year, but we do expect fourth quarter of this year to be impacted similarly to the third quarter. We are watching the national numbers as are all of you, and as the Delta wave subsides, we look to return to the growth and profitability we believe that we can deliver. Now, I'll ask Steve to cover the details of the third quarter results. I will also describe our adjusted operating income results by segment, excluding the impacts from our GAAP reserve assumption updates. The biggest component of the actuarial reserve review was the release of $215 million before tax in the Unum US long-term disability line. Claim reserves should represent our best estimate of the future liability, and since the last GAAP reserve review, investments in our operations have impacted our claims management and resulted in improvements in claim recoveries over the past several years, which we now believe are sustainable. As such, these reserves have been adjusted to better reflect the expected costs of claims. This reserve update will have little impact on our forward expectations for earnings from this line or the expected benefit ratio. The reserve review also determined that reserves should be increased in three lines within the Closed Block reporting segment. For the Closed Group Pension Block, policy reserves were increased by $25.1 million before tax. For the Closed Disability Block, claim reserves were increased by $6.4 million before tax. And finally for Long-Term Care, claim reserves were increased by $2.1 million before tax. Although the net of these reserve updates are excluded from adjusted operating income, they did contribute $0.70 per share to the Company's book value. I'll start the discussion of our operating results with the Unum US segment, where COVID significantly impacted our results this quarter, driving higher mortality and a higher average claim size in the group life business and higher short-term disability claims in the group disability business. For the third quarter in the Unum US segment, adjusted operating income was $88.5 million compared to $179.3 million in the second quarter. Within the Unum US segment, the group disability line reported adjusted operating income, excluding the reserve assumption updates of $39.5 million in the third quarter compared to $59.9 million in the second quarter. The primary driver of the decline was an increase in the benefit ratio to 78.9% in the third quarter compared to 74.7% in the second quarter, which was primarily driven by increased claims in the short-term disability line related to the COVID Delta variant and the current external environment. Premium income declined slightly on a sequential quarter basis, but we were pleased to see an uptick in growth to 2.6% on a year-over-year basis. While short-term disability results were challenged this quarter, our long-term disability line performed in line with our expectations as new claim incidence showed an increase mostly driven by the flow-through of STD claims to LTD status, which was offset by continued strong claim recoveries. It is likely that we will continue to see an elevated overall group disability benefit ratio as COVID and the current external environment continue to impact our STD results. We do feel that COVID is a key driver of the higher benefit ratio for the group disability line and that as direct COVID impacts lessen over the first part of next year, we will see improvement in the benefit ratio. Adjusted operating income for Unum US group life and AD&D declined to a loss of $67.1 million in the third quarter from income of $5.2 million in the second quarter. This quarter-to-quarter decline of roughly $70 million was largely driven by the changing impacts from COVID that Rick described in his comments. We were impacted by the deterioration in COVID-related mortality from our reported 52,000 national deaths in the second quarter to approximately 94,000 in the third quarter along with the age demographic shifting to higher impacts on younger working-aged individuals. Estimated COVID-related excess mortality claims for our Group Life Block increased from approximately 800 claims in the second quarter to over 1,900 claims in the third quarter. Accordingly, our results reflect mortality to level that represents approximately 2% of the reported national figures compared to a 1% rate experienced through 2020 when mortality was more pronounced in the elderly population. With a higher percentage of working-age individuals being impacted, we also experienced higher average benefit size, which increased from around $55,000 in the second quarter to over $60,000 this quarter. Finally, non-COVID-related mortality did not materially impact results in the third quarter relative to the experience of the second quarter. Looking ahead to the fourth quarter, our current expectation is for U.S. COVID-related mortality to continue to worsen to approximately 100,000 deaths. With continued higher mortality among working-aged individuals, we believe that group life results will remain under pressure with the expected fourth quarter loss similar, if not potentially worse than the experience of the third quarter. Now looking at the Unum US supplemental and voluntary lines, adjusted operating income totaled $116.1 million in the third quarter compared to $114.2 million in the second quarter, both very good quarters that generated adjusted operating returns on equity in excess of 17%. Looking at the three primary business lines. First, we remain very pleased with the performance of individual disability recently issued block of business which has generated strong results throughout the pandemic. We continue to see very favorable new claim incidence trends and recovery levels in this block. The voluntary benefits line reported a strong level of income as well, though income was slightly lower on a quarter-to-quarter comparison. The uptick in the benefit ratio in the third quarter to 46.6% from 44.2% in the second quarter was driven by increased COVID-related life insurance claims, which offset generally favorable results in the other VB product lines. Finally, utilization in the dental and vision line improved, leading to an improvement in the benefit ratio to 75% this quarter from 77.1% in the second quarter. Looking now at premium trends and drivers, total new sales for Unum US increased 7.7% in the third quarter on a year-over-year basis compared to the declines that we experienced in the first half of the year. For the employee benefit lines which do include LTD, STD, group life, AD&D and stop-loss, total sales declined by 2.5% this quarter, primarily driven by lower sales in a large case market and generally flat sales in the core market, which are those -- which are those markets under 2,000 [Phonetic] lines. Sales trends in our supplemental and voluntary lines rebounded strongly in the quarter, increasing 21.8% in total when compared to the year ago quarter. We saw sharp year-over-year increases in the recently issued individual disability line up 22.9% and in the dental and vision line up 48.2%. Voluntary benefit sales also recovered following lower year-over-year comparisons in recent quarters, growing 13.7% in the third quarter. We also saw overall favorable persistency trends for our major product lines in Unum US. Our group lines aggregated together showed a slight uptick to 89.4% for the first three quarters of 2021 compared to 89.1% last year. Both the voluntary benefits and dental and vision lines also showed year-over-year improvements, while the individual disability line declined slightly. The solid persistency numbers and improving sales trends provide a good tailwind for premium growth as we wrap up this year and move into 2022. Now let's move on to the Unum International segment. We had very good -- we had a very good quarter with adjusted operating income for the third quarter of $27.4 million compared to $24.8 million in the second quarter, a continuation of the improving trend in income over the past several quarters. The primary driver of these results is our Unum UK business, which generated adjusted operating income of GBP18.4 million in the third quarter compared to GBP16.8 million in the second quarter. The reported benefit ratio for Unum UK improved to 79.2% in the third quarter from 82.5% in the second quarter. The underlying benefits experience was favorable for our Group Income Protection Block, primarily due to lower new claim incidence through -- though claim recoveries continue to lag our expectations somewhat. The Group Life Block experienced adverse mortality primarily from non-COVID-related claims incidence and higher average size. We did not see much impact this quarter from COVID in our UK Life Block. Benefits experience in Unum Poland was also favorable this quarter helping generate a slight improvement in adjusted operating income. Premium growth for our International businesses was also favorable this quarter compared to a year ago. Looking at the growth on a year-over-year basis and in local currency to neutralize the benefit we saw from the higher exchange rate, Unum UK generated growth of 2.9% with strong persistency and the continued successful placement of rate increases on our in-force block. Additionally, sales in Unum UK rebounded in the third quarter, increasing 40.2% over last year. Unum Poland also generated growth of 12.5%, a continuation of the low double-digit premium growth this business has been producing. Next, results for Colonial Life are in line with our expectations for the third quarter with adjusted operating income of $80.1 million compared to the record quarterly income of $95.8 million in the second quarter. As with our other U.S.-based life insurance businesses, Colonial's life insurance block was negatively impacted by COVID-related mortality, which was the primary driver in pushing the benefit ratio to 55.9% in the third quarter compared to 51.7% in the second quarter. We estimate that adverse COVID-related claims experienced in the life block impacted results by approximately $16 million, the worst impact we have seen from COVID throughout the pandemic and a level that is likely to persist through the fourth quarter. Experience in the other lines being accident, sickness and disability and cancer and critical illness remained in line with our expectation and continue to drive strong earnings for this segment. Additionally, net investment income increased 25% on a sequential basis in the third quarter, largely reflecting unusually large bond call activity this quarter. We do not expect the benefit from bond calls to net investment income to continue at this level in the fourth quarter. We were very pleased with the improving trend we are seeing in premium growth for Colonial Life, which was flat this quarter on a year-over-year basis after showing year-over-year declines in each of the past three quarters. Driving this improving trend in premiums is a continuing rebound in sales activity at Colonial Life increasing 28.6% on a year-over-year basis this quarter and now showing a 21.1% increase for the first three quarters of 2021 relative to last year. Persistency for Colonial Life continues to show an encouraging trend at 78.9% for the first three quarters of 2021, more than a point higher than a year ago. In the Closed Block segment, adjusted operating income which does include -- which excludes the reserve assumption updates and the amortization of cost of reinsurance related to the Closed Block individual disability reinsurance transaction that did fully close earlier this year was $109.8 million in the third quarter and $111.2 million in the second quarter, both very strong results driven by favorable overall benefits experience in both the Long-Term Care line and Closed Disability Block, and strong levels of investment income to -- due to higher than expected levels of miscellaneous investment income, which I will cover in more detail in a moment. Looking within the Closed Block, the LTC Block continues to produce results that are quite favorable to our long-term assumptions. The interest adjusted loss ratio in the third quarter was 74.8% and over the past four quarters is 71.8%, which are both well below our longer-term expectation of 85% to 90%. In the third quarter, we continue to see higher mortality experience in the claimant block, where accounts were approximately 5% higher than expected which is similar to our experience in the second quarter. LTC submitted claims activity was higher in the third quarter, though much of the increase has not resulted in significant ongoing claim costs. Looking out to the end of 2021 and into 2022, we do anticipate that the interest adjusted loss ratio for LTC will likely trend closer, though slightly favorable to our long-term assumption range, as mortality and incidence trends continue to normalize from the impacts of COVID. For the Closed Disability Block, the interest adjusted loss ratio was 58.2% in the third quarter compared to 69.6% in the second quarter, both very favorable results for this line. The underlying experience on the retained block, which largely reflects the active life reserve cohort and certain other smaller claim blocks we retained performed very favorably relative to our expectations, primarily due to lower submitted claims again this quarter. So overall, it was a very strong performance again this quarter for the Closed Block segment. Higher miscellaneous investment income continues to contribute to the strong adjusted operating income for the segment, driven by both higher than average bond call premiums, as well as strong performance in our alternative asset portfolio. Looking ahead, we estimate the quarterly adjusted operating income for this segment will over time run within a range of $45 million to $55 million, assuming more normal trends for investment income and claim results in the LTC and Closed Disability lines. First, we saw a high level of bond calls again this quarter as many companies refinanced higher coupon debt and took advantage of today's favorable credit market conditions. We recorded approximately $20 million in higher investment income from bond calls this quarter relative to our historic -- our historical quarterly averages. The Closed Block and Colonial Life segments were the primary beneficiaries of higher investment income this quarter. Unum US was in line with historic averages, but lower this quarter than what we received in the second quarter. While these calls enhance current period investment income, they are volatile from quarter-to-quarter. Second, we continue to see strong performance in our alternative investment portfolio, which earned $38.2 million in the third quarter, following earnings of $51.9 million recorded in the second quarter. Both quarters are well above the expected quarterly income on the portfolio of $12 million to $14 million. The higher returns this quarter were generated from all three of our main sectors being credit, real estate and private equity, and reflected the strong financial markets and strong economic growth. It is hard to predict quarterly returns for miscellaneous investment income, but for the fourth quarter, we believe that they will moderate to our expected quarterly returns. Moving now to capital, the financial of the Company continues to be in great shape, providing a significant financial flexibility. The weighted average risk-based capital ratio for our traditional U.S. insurance companies improved to approximately 380%, and holding company cash was $1.6 billion as of the end of the third quarter, both of which are well above our targeted levels. In addition, leverage has trended lower with equity growth and is now 25.7%. As Rick mentioned, we're very pleased to clarify our capital deployment plans for the balance of 2021 and for 2022. For context, with the capital measures that I just discussed, we are in a very strong capital position with substantial financial flexibility. Our strategy for deployment has not changed and our priorities remain consistent, including first, funding growth in our core businesses; second, supporting our LTC Block; third, executing opportunistic acquisitions that support our long-term growth; and fourth, returning capital to shareholders in the form of dividends and share repurchases. We began to roll our plans out last week with the announcement of the authorization by our Board of Directors and to repurchase up to $250 million of our shares by the end of 2022. We plan to begin this program with the execution of an accelerated share repurchase of $50 million in the fourth quarter. We also plan to allocate capital to accelerate the recognition of the premium deficiency reserve for the LTC Block by a similar amount by the end of 2022. We feel that this combination strikes a good balance of repurchasing our shares at what we believe are very attractive prices, while also fully fund in the PDR ahead of the original 2026 target to help lessen the valuation drag on our stock from the LTC exposure. With this additional deployment of capital, we continue to project having a very solid capital position at the end of 2022 with holding company cash around $1 billion and an RBC ratio well above our target. Now shifting topics, I wanted to give you a brief update on our progress in adopting ASC 944 or Long Duration Targeted Improvements. As a reminder, this accounting pronouncement applies only to GAAP basis financial statements and has no economic statutory accounting or cash flow impacts to the business. We continue to feel good about our readiness to adopt the pronouncement as of January 1, 2023, and we'll be sharing some qualitative information in our Form 10-Q filing, which is later today. Although we continue to evaluate the effects of complying with this update, we do expect that the most significant impact of the transition date will be the requirement to update our liability discount rate with one that is generally equivalent to a single A interest rate. We expect this will result in a material decrease to accumulated other comprehensive income and primarily be driven by the difference between the expected interest rates from our investment strategy and interest rates indicative of a single A rated portfolio. As we continue to progress our work, we plan to provide updates to you in 2022 as we near adoption. So let me close with an update on our expectations for the remainder of 2021. With COVID-related mortality expected to increase further in the fourth quarter to approximately 100,000 nationwide deaths, we expect to see similar, if not slightly worse trends for mortality impacts on our life insurance businesses in the fourth quarter than we did experience in the third quarter. The Unum US group disability benefit ratio is also likely to remain elevated due to continued high levels of STD claims. In addition, we do not anticipate miscellaneous investment income to be as strong in the fourth quarter as it was in this quarter. These impacts will likely pressure our fourth quarter results relative to what we experienced here in the third quarter. As Rick mentioned, we plan to update you on our 2022 outlook during the first quarter of 2022 when we expect to have a more informed view of COVID mortality and infection trends. We feel confident that premium growth in our core business segments in 2022 can build off of the momentum that began to reemerge this year and then we'll also see the benefits of executing our share buyback authorization. With that said, future COVID trends will be a very important factor in our expected benefits experience. We do continue to be pleased with the operational performance of the Company through what has been an extraordinary environment. We believe we're really well positioned to benefit from today's strong business conditions and we have to remain vigilant as COVID-related mortality and infection rates continue to persist.	q3 adjusted operating earnings per share $1.03. will not provide an outlook for remainder of 2021.
Our SEC filings can be found in the Investors section on our website at unum.com. Net income for the fourth quarter of 2020 included the following items, a net after-tax gain from the Closed Block individual disability reinsurance transaction of $32 million, an increase to the reserves backing the Closed Block long-term care product line of $119.7 million after tax, an increase to reserves backing the group pension block, which is a part of the other product line within the Closed Block of $13.8 million after-tax, and a net after-tax realized investment gain on our investment portfolio, excluding the net realized investment gain associated with the Closed Block individual disability reinsurance transaction of $1.6 million. So net income in the fourth quarter 2019 included a net after-tax realized investment gain of $7.2 million and after tax debt extinguishment cost of $1.7 million. So excluding these items, after tax adjusted operating income in the fourth quarter of 2020 was $235.3 million or $1.15 per diluted common share compared to $290.7 million or $1.41 per diluted common share in a year ago quarter. We certainly appreciate you all joining us today. And today, we will take you through our financial and operating results for the fourth quarter which finalized many of the items we shared with you on our Investor Day back in our Investor meeting in December. This will be inclusive our Closed individual disability reinsurance transaction, which we are very happy about. So let me start by saying, we closed out a very tumultuous year in a very strong position, as we continue to navigate the challenges of the pandemic. But I'd also like to recognize the entire Unum team who have shown great resilience through the year and ensuring that our customers are well cared for and that we continue to build a dynamic employee benefits franchise. Many of these factors including COVID-related mortality, saw a resurgence in the fourth quarter that is carried over into the early weeks of 2021. These factors will help frame up our financial results during our discussion today, as well as our views for 2021. First of all, the impacts from COVID-19 and related economic challenges in 2020. Have been very transparent in our financial results. And those impacts were amplified in our fourth quarter results by this resurgence that I mentioned with related deaths and infections specifically in December. As we'll discuss in greater detail COVID-related deaths in the US for the full year totaled 345,000 with 138,000 occurring in the fourth quarter. Further, over half of these fourth quarter deaths occurred in December alone, making it the deadliest month that we saw in the pandemic in 2020. Since we met with you at our Investor meeting in mid December, death counts have increased significantly. Sadly, that trend has continued into January and we will no doubt -- and it will no doubt impact our first quarter results even more than what we've seen in previous quarters. To detail that high mortality in our life insurance business lines high-claim rates in short-term disability and high expenses from leave volumes with partial offsets from high claim terminations caused by mortality and the closed of long-term care block. As we look forward, we are very optimistic that this will turn. Recently, we have seen infection rates declining coupled with the rollout of vaccines. The CDC reports that approximately 80% of the COVID-related deaths have been over the age of 65 and this population will be vaccinated in the coming months. This same group also represented about 50% of our group life deaths by count, many of whom are retirees who maintain some level of their coverage. This in turn is expected to drive a strong rebound in our results, likely in the second half of 2021, and cause us to expect to get back to our historic levels of growth and profitability in 2022. There will be some volatility in our results as we progressed through this rollout period, but we remain highly confident in a full recovery as we get the pandemic behind us. The pandemic and related impacts on the economy have also had significant impacts on our top-line premium income. Our premiums in our core businesses for several years have seen growth in the 5% range. But this year, it only grew by 0.6%. And in the fourth quarter, it was down by 1.4%. This outcome was consistent with the revised outlook we provided when the pandemic first hit that premium income would be flat to up slightly for the full year with declining year-over-year comparisons throughout 2020. So to give perspective on the drivers of premium headwinds, there are three macro factors to highlight. First, the immediate shift to work from -- to a work from home environment in March, resulting from the onset of the pandemic has significant impacts on new sales. Full year sales for our core business segments, all declined in 2020, Unum US by 10%, Colonial Life by 27% and Unum International by 9.5%. The most impacted were the voluntary benefit lines, which have a heavier emphasis on face to face sales and enrollments which require active selection. Looking forward, this has created an acceleration of the trends we were seeing with an increased adoption of digital sales and enrollment tools, that we have invested in over the past few years, especially for our Colonial Life agents, where we saw a 240% increase in the number of agents utilizing these digital tools. Looking at the group market, we are encouraged by the momentum, which was initially impacted by the dramatic economic shock of the pandemic, but is recovering to a more normal pace of activity as people have slowly returned to work. Also helping our premium is how persistency is held up well in the face of the pandemic across most of our business lines. The benefits and services we provide are highly valued by employers and [Technical Issues] they're -- came through and the retention of benefit plans, despite the financial stress many employers were facing. I believe it also reflects the investments we have made in our customer service and the dedication of our employees to serve these customers in this time. And finally, natural growth had a significant impact and a slowdown in premium growth in 2020. The shock to employment levels in the spring, rising from 3.5% to a peak of 14.7% virtually wiped out all the benefit we usually see from growth in employee count and wages for existing customers. We expect to see the benefits of natural growth reemerge as the pandemic slows and employment levels improve throughout 2021 with a more complete recovery in 2022. The next broad factor to highlight is the interest rate environment, which continues to be a headwind for all insurance and financial services companies. Over the course of 2020, the yield on a 10-year treasury fell from its peak of 1.92% at the beginning of the year to a low of 50 basis points in March and ended the year at 92 basis points. These levels coupled with historically tight credit spreads continue to create challenges for achieving attractive new money yields for our investment portfolio. Our strategy to gradually build out our alternative investment portfolio has benefited us with a well-diversified portfolio that focuses on consistent, predictable cash flows. In addition, we have also taken the necessary steps to lower our interest rate assumptions as part of our annual reserve adequacy assumption updates. In the tragedy of the pandemic, we see the economic effects on Unum is a once in a lifetime event. Unlike what you might see in a P&C CAT event. This impact has been spread out over the course of a year. It will impact our growth and profitability for a period of time, but we will come back strong. We would also note that through this period, our capital remained in excellent shape, as we ended the year in a strong financial position with healthy capital levels above our targets and holding company cash almost 4 times our target. This speaks to the financial resiliency of our franchise. And just as importantly the pandemic will be looked at as an event which we have successfully met our purpose, which is helping people through lifes challenging moments and reinforce the social value of the benefits we provide to working people and their families. We have paid out over $150 million in COVID claims, mostly in small face amounts and provided by a company as a benefit. I continue to be very proud of the work of our employees to provide excellent service to our customers, while we have navigated through this disruptive year. In our most recent surveys, we have seen strong improvements in both overall Unum employee engagement and claim and satisfaction scores over 2019. I'm also very pleased that despite disruption is presented in 2020. Our teams were able to complete an important transaction which was the sale through reinsurance of our Closed Block of individuals disability business. Once fully executed, it will have the benefit of freeing up approximately $650 million of capital, primarily to holding company cash, part of which we see in our fourth quarter numbers. The transaction is a culmination of many years of effectively managing this book of business and helps us move our capital to more effective uses. Well, the numerous disruptions of 2020 have masked the progress we are making in growing many of our more capital efficient businesses such as Voluntary Benefits, Dental and Vision and Medical Stop Loss, we are well positioned strategically and competitively in these product lines and I'm very optimistic about their long-term growth potential. So to wrap up the year, we will look back on 2020 as the year of COVID. It changed so much of our world, it changed a lot in how we operate our business, but it only reinforced our purpose as a company. We saw high mortality rates, short-term claims volatility and the unprecedented disruption to the economy and the workplace. But these are times when we step-up and deliver on our promises. And we did, as our highly engaged and dedicated employees provided excellent service to our customers when they most needed it. In a year of unprecedented challenges from the economy, interest rates, credit markets and the health crisis, the strength of our capital metrics improved year end in 2020 compared to a year ago, with holding company cash increasing $650 million to $1.5 billion, risk-based capital holding steady at 365% and leverage declining almost 3 points to 26%, the measures of strength and stability of the company combined with the know-how of our team give us great confidence as we work through what we all hope are the last stages of the pandemic to a more stable environment ahead. [Technical Issues] cover the details of the fourth quarter results. This will allow us to show how the company's business lines are progressing through the pandemic and resulting economic challenges, and outline for you the impacts it has had on our results. Before I do so, I want to level set our reported adjusted operating income of $1.15 per share for the fourth quarter against the outlook we provided at our December 17, outlook meeting, which did call for adjusted operating earnings per share within a range of $1.14 to $1.24. Looking back on those assumptions we provided in December actual fourth quarter results for premium growth sales, persistency, year end capital metrics and investment income impacts were consistent with the expectations we discussed. In addition, the capital benefits from the Closed Block individual disability reinsurance transaction which were realized Phase one were slightly better and the reserve increased for LTC as well as the capital contributions we made to back this block were consistent. The one area that did diverge significantly from our expectations with late quarter mortality, for setting [Phonetic] expectations for benefits experience, our outlook was based on an assumption of fourth quarter mortality from COVID-19 of 92,000 deaths nationwide. Actual mortality turned out to be substantially higher at approximately 138,000 excess deaths with December accounting for over 50% of those deaths. More specifically 25% of the quarter's excess deaths occurred in the last two weeks of the year with the average daily death count approaching 2600 pushing our reported income toward the lower end of our expected range. The year-end surge that occurred negatively impacted our deferred tax operating income by approximately $22 million relative to the midpoint of our expectation, primarily in Unum US Group Life with minor impacts to short-term disability, Voluntary Benefits and Colonials Life Insurance business. This was offset in part by approximately $10 million favorable before tax operating income in long-term care from higher claim claimant mortality. This $12 million net impact late in the quarter impacted our operating income by $0.05 per share. As Tom outlined in his opening after tax adjusted operating income in the fourth quarter was $235.3 million or $1.15 per common share. By comparison in the third quarter of this year, after-tax operating income was $245.9 million or $1.21 per common share. So we saw about an $11 million decline in sequential quarterly earnings. As I'll outline in my comments in more detail, the primary drivers of that quarter-to-quarter change were higher mortality impacts in US Group Life and Colonial, higher short-term disability claims and leave volumes and group disability, and lower levels of miscellaneous investment income from bond call premiums. We did experience some favorable offsets from long-term care claims experience and positive marks on the alternative investment portfolio. Before I begin my discussion of operating results this quarter, let me summarize for you the economic and business conditions that existed in the quarter and outline the impacts that it had on our results. First, as I mentioned, COVID-19 continues to have a significant impact on the external environment, driving a high level of mortality plus a continued high level of infections. These count showed a significant resurgence in the fourth quarter as excess deaths in the US from COVID totaled an estimated 138,000 compared to 80,000 in the third quarter. The impacts to our business are higher mortality across our Life Insurance business lines and increased short-term disability claims, which increased by 3% relative to the third quarter. Second, employment conditions remain challenging. Fortunately, the unemployment rate is gradually improved to 6.7% for December compared to 7.8% for September and the peak level in April of 14.8%. However, today's rate is higher than the 3.5% level, the US economy was experiencing heading into the pandemic a year ago, high unemployment rates negatively impacted premium growth in our core business lines it a negated the benefit we usually experienced from natural growth in the in-force blocks. We are seeing signs in our results as the impact is leveling out supporting our view that premium growth in 2021 for our core segments is expected to show a slight increase with group line increases offsetting small declines in the voluntary businesses. With a resurgence of infections and mortality in the fourth quarter, the reopening in the economy, with some people returning to more normal activity in their [Technical Issues] day -- generate some inconsistencies [Technical Issues] COVID-related STD claims increased with the resurgence of infections pressuring overall STD benefits experience. Leave requests continued to run significantly above year-ago levels and on a quarter-to-quarter basis, driving continued expense pressure in the group disability line. Providing a small offset that was dental utilization in the fourth quarter, which was somewhat lower than we experienced in the third quarter. The net impact to our fourth quarter results from these trends was negative, related to what we experienced in the third quarter. Finally, financial market conditions were generally favorable in the quarter. This is most impactful to Unum in the credit markets where corporate bond spreads continue to tighten while US Treasury rates did increase. This combination continues to create a challenge for achieving attractive new money yields on investment opportunities, but it is favorable for overall credit quality and our outlook going forward for potential credit impacts. We've seen a dramatic reduction in downgrades and impairments in the first quarter 2020, as well as the significant decline in our watchlist for potential credit concerns. In addition, the marks on our alternative asset investment portfolio showed a strong improvement in the fourth quarter and we estimate the portfolios recovered roughly half of the valuation decline experienced in the second quarter. Against this high level backdrop, I'll now focus on our business lines, beginning with Unum US group disability. Adjusted operating income for the fourth quarter was $64.7 million compared to $73 million in the third quarter. There were three primary factors that impacted these results. First, we experienced pressure on STD claims from the resurgence in COVID infection rates with the volume of COVID-related stand-alone STD claims, increasing 45% by count from the third quarter to the fourth quarter. Second, pressure on expenses from leave request volumes remains high and continued to impact results, with those volumes running approximately 6% higher relative to the third quarter. And third, pressure on net investment income impacted operating income as miscellaneous investment income was $10 million lower due to lower levels of bond call premiums. Miscellaneous investment income from bond calls was unusually high in the third quarter at $12 million and slightly below average in the fourth quarter at $2 million. These trends were partly offset by continued favorable results in the long-term disability block with generally stable new claims incidents and continued strong claim recoveries. We continue to be very pleased with the consistency of the results and LTD throughout this volatile environment as demonstrated by the group disability benefit ratio of 72.5% this quarter, the lowest in recent history, compared to 74.1% in the prior quarter. Adjusted operating income for Unum US Group Life and AD&D remained depressed with a loss of $21.9 million in the fourth quarter compared to income of $13.9 million for the third quarter, with the change driven primarily by unfavorable claims experience. The pandemic clearly impacted results. Though our analysis continues to show a consistent pattern between our mortality trends and the National COVID mortality statistics. That is we continue to see approximately 1% of the excess mortality by count in our Group Life results. Specifically, in the fourth quarter, we had approximately 1,300 excess claims by count or slightly under 1% of the 138,000 reported deaths nationwide. In the third quarter, we reported slightly more than 900 excess life claims benchmark against the base of approximately 80,000 COVID related deaths nationwide, a higher claim count of approximately 350 at an average claim size of $50,000 in the fourth quarter, accounts for part of the decline in operating earnings. Looking ahead to the first quarter, the national mortality rate in January has exceeded the experience of December and will likely further pressure results in Group Life in the first quarter. We believe this 1% mortality relationship to national trend will continue in the early part of 2021 and suggest that you use that as a basis for your projections and estimates in future quarters. Over time this relationship could change and potentially exceed 1% on what we expect to be a declining overall mortality count as vaccinations rollout to different sectors of the population, initially to the elderly, teachers, medical personnel and first responders, but we will update you as these trends evolve. The Unum US supplemental and voluntary lines experienced consistent -- generally consistent results in the fourth quarter with adjusted operating income of $100.7 million compared to a $101.3 million in the third quarter. While consistent in total, there were some different trends for each of the primary product lines. The voluntary benefits results were softer in the fourth quarter driven by worse experience in the individual life and short-term disability [Technical Issues] higher by COVID related claims. The IDI line had favorable results with the benefit ratio declining to 42% in the fourth quarter from 48.6% in the third quarter, driven primarily by favorable incidence and mortality trends in the block. Finally, results in the Dental and Vision business improved in the fourth quarter with the benefit ratio declining to 65.4% from 76.8% primarily driven by lower utilization. Sales for Unum US declined 7% in the fourth quarter compared to the year ago quarter, sequentially though we see sales momentum building with improvement in the year-over-year decline from 18.5% in the third quarter to 7% in the fourth quarter. Reflecting there is still -- there is still difficult yet improving commercial environment. Total sales for group lines meaning LTD, STD and Group Life combined decreased 4.3% as the fourth quarter experience the impact of a higher than normal level of large case sales recorded in the third quarter. Although new sales were down in total, we continue to be encouraged by the success from our HR Connect platform, which provides the differentiated experience on leading HCM platforms. Sales on this platform increased 6% in the fourth quarter over the year ago quarter and increased 17% for the full year. On the persistency front all group products saw an uptick from the third quarter. As discussed throughout 2020 and on our outlook call, the supplemental lines show more pressure than the group lines, voluntary, benefits sales declined 24.2% compared to the year ago quarter, but did improve their sequential year-over-year decline, which is 35.8% in the third quarter. Dental and Vision sales declined 9.4% as we continue to see disruption in group sales stemming from discounts and other incentives carriers are providing in response to the unusually favorable claim trends, the industry experienced in the second quarter. This dynamic is evident in our persistence results as well, which improved to 85% versus 82.6% in the year ago quarter. Similar to VB, we also see momentum building in the sequential year-over-year sales decline improved in dental and vision from down 33.1% in 3Q to down 9.4% in 4Q. Finally, stop-loss sales continue to grow from a small base, up over 140% for the fourth quarter and full year providing a good long-term growth opportunity for us in a very capital efficient product line. Moving to Unum International segment. Adjusted operating income for the fourth quarter remained generally consistent at $20.7 million compared to $21.4 million in the third quarter. Income for Unum UK was GBP15.4 million this quarter compared to GBP15.2 million in the prior quarter. Overall benefits experience was slightly favorable quarter-to-quarter, so premium income was slightly lower due to persistency and an increase in reinsurance ceded. Unum Poland saw more pressure on its results in the fourth quarter relative to prior quarters due to impacts from COVID, which began to emerge late in the year. Although, we are encouraged by the improved income in the second half of 2020 in the international operations. We are cautious with our near-term outlook as both the UK and Poland and deal with COVID impacts and related economic shutdowns. Colonial Life had a more challenging fourth quarter with adjusted operating income of $71.2 million compared to $92.2 million in the third quarter. These results were primarily impacted by a higher benefit ratio of 56.6% compared to 52.2% in the third quarter, which was primarily driven by higher COVID-related life insurance and disability claims as well as weaker results in the cancer and critical illness products. In previous quarters, the negative impacts on our life block from COVID claims had been partially offset in favor -- by favorable results in our other two product lines. However, in the fourth quarter, those favorable offsets were negated by a pickup and utilization of many of our health and wellness, and accident products where performance had been favorable. Premium income for the fourth quarter was in line with the third quarter. As we indicated in our prior meetings, it will take a return to more normal sales growth before we see growth reemerge in premium income. I'd also point out the fourth quarter net investment income was lower than third quarter, reflecting the unusually large $8.1 million of miscellaneous investment income we did record in the third quarter. Sales for Colonial Life declined 26.5% in the fourth quarter relative to year ago. This represents some improvement related to year-over-year trends we saw in the second and third quarters, which were down 43% and 27.6% respectively. The sales environment remains challenging, but we are encouraged by the adoption of the digital sales tools we have developed. While our traditional agent assisted sales remained pressured, we saw a 30% increase in telephonic enrollment and a 25% increase in our digital self service platforms. In addition, agent recruiting remains strong with a 10% increase year-over-year. In the Closed Block segment, adjusted operating earnings increased to $104.2 million in the fourth quarter, which did exclude the significant items that I'll cover in just a moment. This compares with $70.8 million in the third quarter, largely driven by the impact of higher climate mortality on the LTC block and positive marks on the alternative investment portfolio following the significant decline that we saw in value as of the end of the second quarter. The positive mark on the alts was $29.4 million in the fourth quarter compared to $11.3 million in the third quarter and a loss of $31.3 million in the second quarter, which did reflect the negative market conditions at the end of the first quarter. We estimate that we have recovered about half of the valuation hit we saw in the second quarter, focused mostly on the equity based and credit segment of the portfolio, and we anticipate additional recovery in future quarters. For the long-term care block the interest adjusted loss ratio was 60.2% in the fourth quarter, excluding the impact of the reserve assumption update, which I'll cover separately in a moment. [Technical Issues] the results of both quarters remain well below our expected long-term range of 85% to 90%. The underlying results this quarter continued to be highly favorable relative [Technical Issues] driven by higher mortality on the claimant block. Claimant mortality by count was approximately 15% higher than expected in the fourth quarter. As a reminder, claimant mortality was approximately 15% higher than expected in the third quarter and 30% higher in the second quarter. For the Closed Disability Block, the interest adjusted loss ratio was 79.5% in the fourth quarter, excluding the impacts from the reinsurance transaction, compared to 86.6% in the third quarter. Fourth quarter experience was more consistent with our expectations as the reinsurance transaction closed in mid December, our results reflect the performance of this block for the majority of the fourth quarter. Then wrapping up my commentary on the quarter's financial results, the adjusted operating loss in the corporate segment was $42.7 million in the fourth quarter. This is favorable to the run rate of losses of $45 million to $50 million per quarter that we did outline for you back in our December meeting, primarily due to lower expenses in this quarter. Now I'd like to cover the significant items recorded in the quarter, beginning with the Closed Block individual disability reinsurance transaction that we announced at our December outlook meeting. While the accounting treatment for the transaction is complex, the primary economic impact is the ultimate release of approximately $650 million of capital backing this block, primarily as holding company cash. This occurs with the closing of the first phase of the transaction we're reporting today with our fourth quarter results and the completion of Phase two, which we're making very good progress on here in the first quarter and we will discuss at our first quarter earnings call. From a balance sheet perspective, the active life cohort of the block is being accounted for under deposit accounting rules and then the disabled life cohort is being accounted for as reinsurance. As a result of accounting under different accounting model we are separating the transaction components, which results in recognizing a prepaid cost of reinsurance on the DLR component and a deposit asset on the ALR cohort. The prepaid cost of reinsurance of $815.7 million, which largely reflects the negative ceding commission and difference between GAAP and statutory reserves held on the block, will be amortized over the life of the block with the amortization reported as a non-GAAP measure and excluded from our adjusted operating earnings. The deposit asset related to the ALR cover is initially $88.2 million and will be adjusted going forward to reflect the net cash flows related to the performance and accretion of interest. As I mentioned, there is a lot of complexity in the accounting of the transaction, but the economic impact driving the rationale for the transaction is the release of capital back in the block, primarily to holding company cash and the financial flexibility it provides us. As we also just discussed back in our December meeting, we completed an update of our GAAP reserve adequacy for the LTC block and did record a reserve increase of $119.7 million on an after-tax basis which was really at a midpoint of our expected range. The assumptions we implemented with this review were generally consistent with what we described previously. As we mentioned, we lower the interest rate assumption for the 10-year treasury yield to an ultimate rate of 3.25% and extended the mean reversion period to seven years. This change added approximately $500 million to reserves, but we also had favorable offsets with the success of our rate increase approval program lower expense expectations and movements in our group LTC inventories. Cash contributions for the LTC blocks ended 2020 consistent with the expectations we provided at our outlook meeting. The amounts contributed for full year 2020 were $411 million for Fairwind and $55 million for First Unum. The Fairwind contribution includes funding $181 million after-tax for the LTC premium deficiency reserve in conjunction with the Maine Bureau of Insurance Examination. These are all reflected in the capital metrics I'll outline in the capital discussion. Also in the fourth quarter, as part of our GAAP reserve adequacy review, we did record a reserve increase of $13.8 million after tax in the group pension block, which is included in the other product line within Closed Block segments. This Closed Block has reserves of approximately $700 million and runs off at a rate of approximately $40 million annually. The reserve increase was really driven by lowering the interest rate assumption for this block to be more consistent with that of the LTC block. I'd like to now turn to our investment portfolio with a few points to highlight. First, we recorded a large after-tax realized investment gain of over $1 billion in the quarter. This is largely related to the reinsurance transaction as the assets being transferred to the reinsurer were mark to market before being transfered as part of Phase one of the transaction. These assets had large and unrealized gains, which were realized and the assets were transferred to the reinsurer at market. Second, and related to the reinsurance transaction, we were able [Technical Issues] assets, which had [Technical Issues] to the Closed Disability Block, but were not transferred to the reinsurer as part of the transaction. This quarter we allocated $360 million of these securities with a 7.4% yield and BBB rating to the LTC investment portfolio. These above market yields add strength to the balance sheet and represent additional economics of the transaction. Third, the overall quality of the portfolio remains in very good shape. During the fourth quarter, we saw only $85 million of investment grade bonds downgraded to below investment grade, and $52 million of which will be upgraded back to investment grade status when the acquisition of that company is completed this year. Our watch list is of potentially troubled investments has declined, a very low levels and we have taken -- as we have taken advantage of the rebound in the credit markets to trade out of these positions. A final point I'll make is that we saw a strong recovery in the valuation mark on our alternative investment assets of $29.4 million this quarter. Given the current portfolio size, we would expect quarterly positive marks on the portfolio between $8 million and $10 million. We estimate we have recovered about half of the valuation loss from the market decline in early 2020 and continue to expect a full recovery over time. I'd also note that it was an unusually low quarter for traditional miscellaneous investment income from bond calls. Following an unusually high amount in the third quarter, you will see that impact in many of our core business lines. Now looking to our capital position, we finished the year in very good shape with a risk-based capital ratio for our traditional US insurance companies at approximately 365% and holding company cash at $1.5 billion, which are both comfortably above our targeted levels. The cash balance, includes the capital released from the Phase one of the reinsurance transaction of approximately $400 million and we'll have an additional benefit at Phase two of the transaction is completed in the first quarter. So in total, once the reinsurance transaction was fully executed in the first quarter, we anticipate releasing over $650 million of capital, primarily to the holding company. In addition, our leverage ratio has declined to 26.2%. So now I'll close my comments with an update to our expectations regarding our outlook for 2021. At our outlook meeting back in December, we indicated that we expected 2021 after tax adjusted operating income to be relatively flat with our expected income for 2020. We also outlined a pattern for expected income of the first half 2021, mirroring the second half of 2020 with then the second half of 2021 beginning to rebound to more historic levels of growth and profitability. So now based on the higher than estimated COVID-related mortality we experienced in the fourth quarter of 2020 and our revised assumption of a 30% increase in mortality accounts in the first quarter of 2021. We now expect a modest decline of 5% to 6% for full year 2021 adjusted operating income per share. We anticipate COVID having a more negative impact on our first quarter results with mortality in January being the worst month of the pandemic. However, we continue to expect second half 2021 income to be in line with our previous outlook producing a stronger recovery as the impacts of the pandemic subside. As for our outlook for capital metrics, we anticipate year end 2021 level of holding company cash and risk-based capital to be very in line with our year-end 2020 metrics of 365% RBC and $1.5 billion of holding company liquidity, which will provide a strong stable capital base as we work through the remaining impacts from the pandemic. I I'll summarize by saying that we continue to be pleased with the operational performance of the company through continues to be an extraordinary environment. And we do believe we are well positioned to benefit from improving business conditions as vaccines take hold and we move past the December and January surge in mortality and new COVID infections. In the meantime, we'll continue to focus on the crisp execution and managed through the challenges we see today. We will be -- this will be his last quarterly earnings call. So I just want to recognize Peadar. Peadar has been a great part of our executive team and we will certainly miss his leadership and expertise. I will ask the operator to begin the Q&A session.	q4 adjusted operating earnings per share $1.15 excluding items. anticipates a strong recovery in after-tax adjusted operating income per share in second half of 2021. qtrly total revenue $4,273.5 million versus $3,034.6 million.
Our SEC filings can be found in the Investors section of our website at unum.com. Net income for the fourth quarter of 2021 included the aftertax amortization of the cost of reinsurance of $15.5 million or $0.08 per diluted common share and a net aftertax investment loss on the company's investment portfolio of $6.8 million or $0.03 per diluted common share. Net income in the fourth quarter of 2020 included a net aftertax gain from the closed block individual disability reinsurance transaction of $32 million or $0.16 per diluted common share. A net aftertax reserve increase related to assumption updates of $133.5 million, which is $0.66 per diluted common share; and a net aftertax investment gain on the company's investment portfolio, excluding the net aftertax realized investment gain associated with the closed block individual disability reinsurance transaction of $1.6 million or $0.01 per diluted common share. So excluding these items, aftertax adjusted operating income in the fourth quarter of 2021 was $182 million or $0.89 per diluted common share compared to $235.3 million or $1.15 per diluted common share in the year ago quarter. As we wrap up 2021, what we saw in the fourth quarter is a continuation of the good performance of our business model, impacted by the difficult environment of ongoing COVID-related claims. Before getting to the quarter, I'd like to recognize the extraordinary work of our teams in serving our customers in this challenging time through their empathy, passion and resilience. Throughout the pandemic, they have not wavered in fulfilling our purpose, while still positioning the company for the future. As we turn to our financial results, our fourth quarter played out largely as we anticipated, with aftertax adjusted operating earnings per share at $0.89 for the fourth quarter. I'll come back to the COVID impacts in a minute, but as we look beyond these areas of our business directly impacted by COVID, I'm very pleased with many of our product lines that performed well in the quarter. Adjusted operating income for the Unum US supplemental and voluntary line this quarter was among the highest in our history, with strong results in the IDI recently issued and voluntary benefit lines, as well as more stable performance in the dental and vision line. colonial life produced a solid level of income this quarter, with a strong adjusted operating return on equity of approximately 16%. In addition, adjusted operating income in our international business continues to build momentum and the overall performance in the closed block remains strong. We saw a favorable benefits experience in both long-term care and individual disability and continued excellent returns from our alternative investment portfolio. In addition to the favorable returns from the alternative investments more broadly, our investment portfolio is in great shape as we continue to see very healthy credit trends. Looking at the top line, we are also very pleased with the trend in premium income growth for our core business segments. This includes the acceleration in year-over-year growth that we have seen in recent quarters. Premium growth in the fourth quarter on a year-over-year basis was just under 3% for our core businesses in aggregate, with growth of 3% for Unum US, 7% for international businesses and 1% for colonial life. Persistency levels have remained healthy. We are also seeing a growing benefit to our top line from natural growth, with strong employment levels and wage growth coming through in our in-force block. From a benefits perspective, our results were significantly impacted by COVID claims. We saw continued elevated mortality in the group life business. COVID-related mortality remained elevated at the national level and the age demographics continued to show a high impact among working-aged individuals. As in the third quarter, the fourth quarter was due to the Delta variant. The age demographics are a key driver for our business and there was a slight decrease to 35% of national deaths in the fourth quarter from 40% in the prior quarter. We will continue to watch this dynamic as new variants like omicron emerge. In addition, we continue to see pressure on our short-term disability results from the high levels of infection rates and hospitalizations. These also lead to an increase in leave request volumes, which pressure expenses in the group disability line. These COVID impacts are clear in our results and will linger into 2022. But as the impact from the pandemic lessens, we anticipate seeing recovery from the underlying strength of the business. And finally, our capital position remains in a very, in very healthy shape, even after paying more than $0.5 billion in life claims through the pandemic. The weighted average risk-based capital ratio for our traditional U.S.-based life insurance companies was approximately 395% to close the year and holding company cash totaled $1.5 billion. Both of these metrics are well ahead of our long-term targets and relative to year-end 2020, holding company cash remained stable and RBC improved by approximately 30 points. This is the highest year-end RBC level since year-end 2016 and also reflects the impacts from the C1 factor changes that were implemented in 2021. In addition, we added $400 million of pre-capitalized trust securities, which gives us contingent capital on top of our pre-existing credit lines. All of this points to broad financial flexibility moving into 2022. Steve will get into our total LTC funding actions, but one area to highlight is our First Unum subsidiary, where we have been adding reserves and capital for the last decade. For the first time in many years, we released reserves at year-end and we're able to pay a dividend to our holding company. This is an example that the funding needs for LTC can turn, particularly as interest rates move up. Overall, we wrapped the year with a very strong capital picture. Looking forward, our outlook in the near term will be influenced by COVID trends, specifically the level of mortality, its demographics and the rate and severity of COVID infections. We expect improvement in these trends over time, but it has proven difficult to forecast these trends and their impacts. Our focus remains the same, that is to ensure that we are taking the appropriate actions to rebuild profit margins and the overall level of earnings back to pre-pandemic levels. This will take several quarters, assuming diminishing COVID-related impacts over time. An important step in this process is to take the appropriate pricing actions with our new sales and renewals. That disciplined approach can have near-term implications for sales and persistency, but we have worked hard to be known in the market as a disciplined and consistent price when we work with our customers through these pricing actions. We experienced that, to some extent, with fourth quarter sales in Unum US, particularly large case and mid-market sales in the group disability and lifelines, but we think it is the appropriate path to take. As we take these actions, we were pleased with the multiple business lines that showed very good sales trends, particularly colonial life, the Unum US voluntary benefits and individual disability benefits businesses and our international segment. The breadth of our offerings allow us to manage through challenges in some lines as we look to overall growth. Looking ahead, we plan to connect with you later in February on the 25th to provide our outlook for the full year 2022 and give you insights into the strategic actions we're taking to deliver on our purpose, to protect more people and position ourselves for good profitable growth. To wrap up, I'm very pleased with our position as we move into 2022. It's a testimony to the strength of our franchise that despite the impacts from COVID in the past two years, the primary measure to the top-line growth and capital strength have improved over the course of the year, providing us with optimism for growth and the underpinnings of a strong capital base. Now, I'll ask Steve to cover the details of the fourth quarter results. I will also describe our adjusted operating results by segment, excluding the impacts from our GAAP reserve assumption updates that did occur last quarter. I'll start the discussion of our operating results with the Unum US segment, where COVID again significantly impacted our results this quarter, driving high mortality and a high average claim size in the group life business and higher claims in the group disability business. For the fourth quarter in the Unum US segment, adjusted operating income was $81.4 million compared to $88.5 million in the third quarter. Within the Unum US segment, the group disability line reported adjusted operating income of $34.1 million in the fourth quarter compared to $39.5 million in the third quarter. We saw promising trends in premium income, which increased 2.9% relative to the third quarter and 5% on a year-over-year basis, with increasing levels of natural growth as we benefit from improving employment levels along with rising wages. The expense ratio was elevated this quarter at 29.9% compared to 28.1% in the third quarter, which reflected higher people-related costs and technology spend to support our digital strategies. The benefit ratio for group disability and the underlying drivers were generally steady in the fourth quarter relative to the third quarter. The ratio did improve slightly to 78.3% from 78.9% in the third quarter, primarily driven by a lower level of incidence in the short-term disability line. While short-term disability results did improve this quarter, STD continues to be impacted by high COVID-related claims and, therefore, remains a drag on the overall profitability of this line relative to our pre-COVID trends. The LTD line experienced generally stable incidence in the fourth quarter relative to the third and claim recoveries remain strong. We expect to continue to see an elevated overall group disability benefit ratio as COVID and the current external environment continue to impact our results. We do feel that COVID is a key driver of the high benefit ratio for the group disability line and that as direct COVID impacts lessen over time, we will see improvement in the benefit ratio back toward prepandemic levels. Adjusted operating income for Unum US group life and AD&D declined to a loss of $71.7 million for the fourth quarter from a loss of $67.1 million in the third quarter. This quarter-to-quarter decline was primarily impacted by a decrease in the deferral of acquisition costs in the quarter due to lower expected recoverability in the short term as a result of the losses driven by COVID-related life claims for the full year. This impacted the quarter by approximately $15 million. The benefit ratio improved to 98.3% for the fourth quarter compared to 100.6% in the third quarter. We were impacted by the continued high level of national COVID-related mortality, which was a reported 94,000 in the third quarter and increased to a reported 127,000 in the fourth quarter. Age demographics continue to show a high impact on younger, working-aged individuals though this impact is lessened in the fourth quarter. For our group life block, we estimate that COVID-related excess mortality claims declined from over 1,900 claims in the third quarter to an estimated 1,725 claims in the fourth quarter. Accordingly, our results reflect an improvement to approximately 1.4% of the reported national figure in the fourth quarter compared to approximately 2% of the reported national figures in the third quarter. We also experienced a higher average benefit size, which increased to around $65,000 in the fourth quarter from just over $60,000 in the third quarter. And then finally, non-COVID-related mortality did not materially impact results in the fourth quarter relative to the experience in the third quarter. So looking ahead, the level of composition of COVID-related mortality will heavily influence our group life results. While we are waiting until later this month to hold our 2022 outlook meeting when we expect to have a more informed view of potential trends for the year, it is clear that first quarter mortality will continue to impact our group life results and we suggest that you follow the national trends as a basis for your projections and estimates. Now, looking at the Unum US supplemental and voluntary lines, adjusted operating income totaled $119 million in the fourth quarter compared to $116.1 million in the third quarter, both of which are very strong quarters that generated adjusted operating returns on equity in the range of 17% to 18%. Looking at the three primary business lines. First, we remain very pleased with the performance of the individual disability recently issued block of business, which has generated strong results throughout the pandemic. The benefit ratio was generally stable at favorable overall levels from the third quarter to the fourth quarter, with strong recoveries offsetting an increased level of incidents. The voluntary benefits line reported a strong level of income as well, with a benefit ratio in the fourth quarter declining to 42.9% from 46.6% in the third quarter, primarily reflecting strong performance across the A&H products. And finally, utilization in the dental and vision line decreased relative to the third quarter leading to an improvement in the benefit ratio to 65.6% compared to 75% in the third quarter. Now, looking at premium trends and drivers, we were pleased to see an acceleration in premium income growth for Unum US in the fourth quarter, with a year-over-year growth of 3%. For full year 2021, premium income increased 1%. The group disability product line had a very positive quarter, with premium increasing 5% year over year, with strong growth in the STD line as well as the benefit of natural growth on the in-force block. We estimate the benefit we're seeing from natural growth across our businesses to be in the 3% to 3.5% range measured on a year-over-year basis, with different impacts to our various product lines. To date, we've seen more of a benefit from rising wages overall, with the benefit from higher employment levels being more pronounced in the less than 2,000 lives sector of our blocks than in our larger case business. Persistency levels were slightly lower year over year, but remain at strong overall levels. New sales were down for both the STD and LTD lines reflecting the pricing actions we are taking in the market and increased competition. For the group life and AD&D line, premium income increased 2.1% year over year, benefiting from higher persistency and favorable trends and natural growth. Compared to a year ago, fourth quarter sales were lower by 4.7%. Finally, in the supplemental voluntary lines, premium income increased 0.6% in the fourth quarter relative to last year, with strong sales growth in both the voluntary benefits and the individual disability recently issued lines, a year-over-year increase of 8.3% in dental and vision premium income, as well as strong improvement in persistency in the voluntary benefits line. Now, moving to the Unum international segment. We had a very good quarter, with adjusted operating income for the fourth quarter of $27.1 million compared to $27.4 million in the third quarter. The primary driver of our international segment results is our Unum UK business, which generated adjusted operating income of GBP 18.7 million in the fourth quarter compared to GBP 18.4 million in the third quarter. The reported benefit ratio for Unum U.K. was 81.4% in the fourth quarter compared to 79.2% in the third quarter. The underlying benefits experience was generally consistent between the two quarters, with favorable experience in group life offsetting a slightly higher benefit ratio in group disability. The quarter-to-quarter increase in the benefit ratio was largely driven by the impact of rising inflation in the U.K. As we have outlined in previous quarters, the higher benefit payments we make that are linked to inflation are offset with higher income that we received from inflation index-linked yields in the investment portfolio. Benefits experienced in Unum Poland continued to trend favorably and adjusted operating income was generally consistent from quarter to quarter. The year-over-year premium growth for our international business segment was also strong this quarter. On a local currency basis to neutralize the impact from changes in exchange rates, Unum UK generated growth of 5.1% with strong persistency, good sales and the continued successful placement of rate increases on our in-force block. Additionally, sales in Unum UK were strong in the fourth quarter, increasing 28.1% over last year. Unum Poland generated sales growth of 43.6%, a continuation of the strong growth trend this business has been producing. So next, I'll move to the colonial life results. They remain at healthy levels and in line with our expectations, with adjusted operating income of $80 million in the fourth quarter and $80.1 million in the third quarter. One of the primary drivers of results between the third and fourth quarters was an improvement in the benefit ratio in the fourth quarter to 52.5% compared to 55.9% in the third quarter. This was largely driven by lower cancer and life insurance claims. Offsetting this improvement was a lower level of miscellaneous investment income, with the fourth quarter at an average level for bond calls compared to the unusually high income we saw in the third quarter from calls. We were pleased to see a continuation in the improving trend in premium growth for colonial life, which did increase 1.1% on a year-over-year basis after being flat to negative over the past four quarters. Driving this improving trend in premiums is the improvement in persistency and sales activity. For the fourth quarter, sales for colonial life increased 7.8% compared to a year ago and for the full year 2021, sales increased 16.1%. Persistency for colonial life ended the year in a strong position, increasing to 79.3% for the full year compared to 77.8% in 2020. In the closed block segment, adjusted operating income, excluding the amortization of cost of reinsurance related to the closed block individual disability reinsurance transaction and the items related to the reserve assumption update in the prior quarter, was $76.7 million in the fourth quarter compared to $109.8 million in the third quarter. For both the long-term care and closed block individual disability lines, we saw favorable results relative to our long-term assumptions, but we did see benefits experience continuing to return to more historic levels of performance. For LTC, the move in the interest adjusted loss ratio to 82.2% in the fourth quarter from 74.8% in the third quarter was driven by less favorable terminations and recoveries, partially offset by lower submitted new claims. For the closed block individual disability line, the move in the interest adjusted loss ratio to 75.4% in the fourth quarter from 58.2% in the third quarter was driven by higher submitted claims. Again, the experience for both lines in the fourth quarter remained favorable relative to our long-term assumptions. Higher miscellaneous investment income continues to contribute to the strong adjusted operating income for the closed block segment. However, we did experience a reduction of approximately $10 million in total miscellaneous investment income from the third quarter to the fourth quarter, with the reduction driven by a lower level of bond calls. The contribution to income from our alternative asset portfolio remained approximately the same between the two quarters, with improved results from our exposure to real asset partnerships. Looking ahead, I'll reiterate from our messaging in prior calls with you that we estimate quarterly adjusted operating income for this segment will, over time, run within a $45 million to $55 million range, assuming more normal trends for investment income and claim results in the LTC and closed disability lines. So then wrapping up my commentary on the quarter's financial results, the adjusted operating loss in the corporate segment was $45.1 million in the fourth quarter and $45.4 million in the third quarter, which are both generally in line with our expectations for this segment. I'd also mention that the tax rate for the fourth quarter of 2021 was lower than we historically reported at 17.3%, with the favorability as compared to the U.S. statutory tax rate, driven primarily by tax exempt income and various credits. The comparable full year tax rate of 20.2% is consistent with our expectations and in line with the past two years. Moving now to investments and net investment income. Miscellaneous investment income has had a meaningful impact on our financial results and quarterly comparisons. For the fourth quarter, we saw a decline of approximately $16 million relative to the third quarter, driven by a significant reduction in bond call activity, which was unusually high in the third quarter, but was still elevated above average levels for us in the fourth quarter. Our alternative investment portfolio remained very strong, generating income of $39.4 million in the fourth quarter compared to $38.2 million in the third quarter. The closed block segment continues to be the primary beneficiary of the strong performance of the alternatives portfolio, while the reduced level of net investment income from bond call activity primarily impacted colonial's sequential results. For the full year 2021, miscellaneous investment income generated unusually high levels of income, which we expect to moderate in 2021. Moving now to capital. The financial position of the company continues to be in great shape, providing us significant financial flexibility. insurance companies improved to approximately 395% and holding company cash was $1.5 billion at the end of the year, both well above our targeted levels. In addition, leverage has again trended lower with equity growth and is now 25.3%. During the fourth quarter, we successfully added $400 million of contingent capital through pre-capitalized trust securities, with a 4.046% coupon and 20-year tenor, which we view as a cost-effective way to enhance our balance sheet strength and flexibility. In terms of capital deployment in the fourth quarter, we executed an accelerated share repurchase transaction to buy back $50 million of our shares. We continue to anticipate repurchasing approximately $200 million of our shares during 2022. And looking at the capital contribution to support the LTC business, we were really pleased with the improvements in the fourth quarter outcomes. Capital contributions in the Fairwind subsidiary were $165 million for the fourth quarter and totaled $285 million for the full year 2021, which was a decline from $424 million in 2020. The recognition of the premium deficiency reserve for LTC, which is included in the Fairwind capital contributions, totaled $346 million after tax for full year 2021. A portion of the funding for the PDR was generated from the favorable operating earnings in the Fairwind subsidiary and its high capital levels. Moving to First Unum, given the better position of the LTC Block in that subsidiary, resulting from higher interest rates and the benefit of rate increase approvals for that block during 2021, we were in a position to release $75 million of the asset adequacy reserve after many years of additions to that reserve. With this reserve release, we were able to take a $30 million dividend out of First Unum in the quarter, the first in several years. Finally, we have a small portion of our LTC business in the provident life and accident subsidiary. And with the increase in interest rates and repositioning our investment portfolio, the premium deficiency reserve in that block was reduced by $66 million after tax. To summarize, we experienced favorable outcomes for LTC contributions given the improved interest rate environment, recent underlying performance of the block and rate increases on the in-force block. So in closing, I wanted to give you an update on our progress in adopting ASC 944 or long-duration targeted improvements. As I mentioned in October, this accounting pronouncement applies only to GAAP basis financial statements and has no economic, statutory accounting or cash flow impacts to the business. We continue to feel good about our readiness to adopt the pronouncement as of January 1, 2023 and began to communicate some qualitative information with the filing of our third quarter Form 10-Q. Although we continue to evaluate the effects of complying with this update, we expect that the most significant impact of the transition date will be the requirement to update our liability discount rate with one that is generally equivalent to a single A interest rate. As we stated in the 10-Q, we expect this will result in a material decrease to accumulated other comprehensive income and primarily being driven by the difference between the expected interest rates from our investment strategy and interest rates indicative of a single A rated portfolio. We plan to provide updates to you in 2022 as we near adoption. Specifically, we plan to provide an update on the impact at the transition date as well as our 2022 outlook with a conference call on February 25. We'll release details on the logistics for that call in the next several days. I'd reiterate, we continue to be pleased with the operational performance of the company through what continues to be an extraordinary environment. We believe we're well positioned to benefit from today's business environment, but remain vigilant as COVID-related mortality and infection rates continue to persist.	compname reports q4 adjusted operating earnings per share of $0.89. q4 adjusted operating earnings per share $0.89. anticipates hosting a conference call on february 25, 2022 to provide its outlook for 2022. qtrly total revenue $2,979.1 million versus $4,273.5 million.
During the quarter, the Union Pacific team dealt with multiple network disruptions that required us to rebuild bridges, reroute trains and connect more closely with other links in the supply chain to support and to serve our customers while we still have work ahead, our employees' dedication is a critical success factor in navigating all of those challenges. Turning to our third quarter results. This compares to $1.4 billion or $2.01 per share in the third quarter of 2020 despite the network and global supply chain challenges our quarterly operating ratio of 56.3% improved 240 basis points versus last year and represents a third quarter record. We also set 3rd quarter records in operating income, net income and earnings per share. The team did an excellent job of managing the business to produce strong results a comparison to 2019 a period with higher volumes further highlights our performance and demonstrates our focus on driving productivity and network efficiency to overcome external factors. We also continue to make progress on our goal to reduce our carbon footprint. The team achieved strong productivity to produce an all-time quarterly record low fuel consumption rate. This represented a 1% improvement versus 2020 and helped our customers eliminate 5.7 million metric tons of greenhouse gas emissions. In the quarter by using Union Pacific versus truck, momentum is building and before the end of the year, we plan to detail our emissions reduction plan with the release of our initial Climate Action Plan. Before I talk about our market performance. Focusing back on our review of the business, our 3rd quarter volume was flat compared to a year ago. Gains in our bulk and industrial segments were driven by market strength in our business development efforts. Those gains were offset by declines in our premium business group as our served markets continue to be impacted by semiconductor chip shortages and global supply chain disruption, however, freight revenue was up 12%, driven by higher fuel surcharges, strong pricing gains and a positive mix. Let's take a closer look at each of these business group, starting out with our bulk commodities. Revenue for the quarter was up 14% compared to last year, driven by a 4% increase in volume and a 9% increase in average revenue per car, reflecting strong core pricing gains and higher fuel surcharge revenue. Coal and renewable carloads grew 9% year-over-year and 17% from the second quarter. Our efforts to switch customers to index-based contracts are supporting domestic coal demand as a result of higher natural gas prices coupled with increased coal exports. Grain and grain products were down 1% compared to last year and down 9% from the second quarter, due primarily to lower US grain stocks. However, this was partially offset by our business development efforts and strong demand for biofuels. Fertilizer carloads were up 10% year-over-year due to strong agricultural demand and increased export potash shipment. And finally, food and refrigerated volume was flat year-over-year and sequentially from the second quarter. Moving on to industrial, industrial revenue improved 22% for the quarter, driven by a 14% increase in volume. Average revenue per car also improved 6% driven by higher fuel surcharge core pricing gains and positive mix. Energy and specialized shipments were up 16% compared to last year and up 5% versus the second quarter, the gains were due to an increase in petroleum products as demand recovers from this time last year, and new business wins from Mexico energy reform. Volume from forest products grew 15% year-over-year primarily driven by demand for brown paper used in corrugated boxes along with strong housing starts driving lumber shipments. However, compared to the second quarter volume was down 2% due to the impact of the lot of fire in Northern California. Industrial chemicals and plastic shipments were up 6% year-over-year due to strengthening demand and business wins that production rate for plastic improved from 2020. Metals and minerals volume was up 21% compared to 2020 and up 3% versus the second quarter, primarily driven by our business development effort along with strong steel demand as industrial markets recover coupled with favorable comps for frac sand. Turning now to premium revenue for the quarter was up 1% as a 9% decrease in volume was more than offset by higher average revenue per car. ARC increased by 11% from higher fuel surcharges and core pricing gains. Automotive volume was down 18% compared to last year and down 4% versus the second quarter. Semiconductor shortages had an adverse impact to both our finished vehicles and auto parts business segment. Intermodal volume decreased 6% year-over-year and 8% compared to the second quarter. International volume continue to face challenges from global supply chain disruption with regard to domestic, strong demand and new business wins were also hampered by supply chain disruptions, plus e-commerce business all tough comp versus last year. Now looking ahead to the 4th quarter of 2021. Starting out with our bulk commodities, we're optimistic about grain business due to another strong harvest and grain export demand. Also grain products will continue to benefit from growth of the biofuel market food and refrigerated volume should be positive with increased consumer demand, post pandemic restaurant reopenings and truck penetration growth. Lastly, we expect coal to remain strong for the remainder of the year based on our current natural gas futures, inventory replenishment, as well as export demand. Looking at -- looking at our industrial markets. We continue to be encouraged by the strength of the forecast for industrial production for the rest of 2021, which will positively impact many of our markets like metals and forest. The year-over-year comps to our energy markets are favorable. However, we expect narrow spreads will negatively impact crude by rail shipment, but on a positive note, we expect to mitigate the lower cruise shipments with strengthened other petroleum and LPG product. And lastly for premium, we anticipate continued challenges in automotive related for semiconductor shortages for the 4th quarter. In regards to intermodal, limited truck capacity, inventory restocking and strength in retail sales will continue to drive intermodal demand in the 4th quarter. However, we expect international volumes to be constrained as ocean carriers have recently taken additional actions to speed up their container returns as challenges in labor, port capacity, warehouses and drayage persist. And on the domestic side, opportunities will face continued supply chain challenges with limited Holloway capacity and floor chassis turn time. Overall, I'm encouraged by the opportunities in front of us for the rest of 2021 but more importantly, I want to recognize the commercial team, as they continue to focus on providing solutions for our customers to win in the marketplace. As we had in the 2022, our commercial team is driving growth through new business plan. From wildfires to mudslides and hurricanes, the team demonstrated perseverance to restore our network and deliver strong financial results. In addition, as Kenny just described, the demand picture has turned out differently than we expected at the beginning of the year. Working closely with marketing the operating team has adjusted transportation plans and added resources into the network for surging demand in coal, metals, lumber and grain. These actions demonstrate the agility and strength of our franchise. Taking a look at our key performance metrics for the quarter on slide 9. Driven by wildfires and weather events during the quarter our freight car velocity and trip plan compliance metrics deteriorated compared to 2020. Freight car velocity decreased due to increased terminal dwell and higher operating inventory levels, which led to lower trip plan compliance results. Our entire team has been fully engaged on restoring network fluidity and the recovery is progressing. We are seeing improvement in our metrics with reduced up car inventory and improved freight car velocity. Our reported weekly metrics show the time required to recover the network from these events. While we made improvement from our freight car velocity weekly low of 184 in August, to 210 miles per day in the last 2 weeks of September, our goal remains to return freight car velocity toward and 220 miles per day. Our intermodal trip plan compliance results improved and on August the low of 61% to gain 12 points in September to 73%. Our manifest and auto trip plan compliance results improved from 57% in August to 61% in September. We recognize improving trip plan compliance is critical to support our customers and our long-term growth strategy. We have maintained higher crew and locomotive resources in the short term to assist and reducing excess car inventories to drive increased fluidity. As operating car inventory declines, we will quickly adjust resources to current volume levels. Our cooperation and work with partners at the West Coast ports have reduced rail container dwell back to more normal levels, and with the Biden administration's efforts to expand operations at the port to ease congestion, we stand ready to move more rail containers provided that point further along the supply chain can handle increased volume. While there is still work to be done, the team is confident in our ability to restore service to the levels our customers expect and deserve. Turning to slide 6, we continue to make good progress on our efficiency initiatives, however, disruptions during the quarter impacted these results as well. Locomotive productivity declined 8% compared to a year ago as we deployed additional resources to handle traffic reroutes. Our record 3rd quarter workforce productivity was driven by efficiencies in our Engineering, Mechanical and management workforces and offset slightly by increases in train and engine workforce to address our network recovery. We continued our focus on increasing train length, achieving a 4% improvement from the 3rd quarter 2020 to approximately 9,360 feet. Now that the bridge has been restored, the team is again driving productivity through increasing train length as evidenced in our September train length growth to over 9,500ft. Turning to slide 11. Our ability to grow train length is also enabled by the completion of 9 sidings to date in 2021 with an additional 26 under construction or in the final planning stages. These investments will enable a more reliable and efficient service product for future growth. We also produced a record quarterly fuel consumption rate improving 1% compared to last year. Through productivity initiatives and technology improvements, we were able to offset most of the inefficiencies stemming from the wildfires. The operating department understands the importance we play in achieving our long-term greenhouse gas emission goals and have more work underway. Our approach is multi-pronged with the primary emphasis around our locomotive fleet, both looking at alternative energies as well as biofuel. As we drive productivity and manage the various network challenges in 2021. The health and safety of our workforce is paramount, although our year-to-date employee safety results have not shown improvement in 2020 recent monthly trends provide positive momentum for the team to build upon. Again, our approach is across a number of fronts, including employee engagement, broader deployment of technology as well as looking externally for best practices. Additionally, we reduced cost of rail equipment incidents during the quarter. We are encouraged by the improvement but know that we must maintain focus on promoting a safe working environment to reduce employee injuries. So everyone goes home safe each day. Safe operations also have a direct impact on our service product. So this work will benefit all stakeholders. Wrapping up on slide 12, as we look to close out 2021, I have the utmost confidence that we will continue to improve safety, increased network fluidity, improve our service product and drive productivity as we support business growth with our customers. As you heard from Lance union Pacific achieved strong 3rd quarter financial results with earnings per share of $2.57 on an operating ratio of 56.3%. As noted in an 8-K last month, we incurred additional expense this quarter related to wildfires, and weather the full impact of those events including loss revenue negatively impacted our operating ratio of 50 basis points and earnings per share by $0.05. Rising fuel prices throughout the quarter, negatively impacted operating ratio by 140 basis points. However, the year-over-year impact of our fuel surcharge programs added $0.05 to EPS. Setting aside these exogenous issues, UP's core operational performance drove operating ratio improvement of 430 basis points and added $0.56 to EPS. Our performance demonstrates the resiliency and efficiency built into our franchise through PSR even when operating in less than ideal conditions. Looking now at our 3rd quarter income statement on Slide 15 where we're showing a comparison to both 3rd quarter 2020 as well as 3rd quarter 2019. The comparison of 2021 to 2019 most clearly illustrates the efficiency we've achieved over the past 2 years, as we generated 9% higher operating income on 4% less volume. For 3rd quarter 2021, the operating revenue up 13% and operating expense only up 9%. We generated 3rd quarter record operating income of $2.4 billion, net income of $1.7 billion and earnings per share also with 3rd quarter records. Looking more closely at 3rd quarter revenue. Slide 16 provides a breakdown of our freight revenue both year-over-year and sequentially versus the second quarter. Freight revenue totaled $5.2 billion in the 3rd quarter, up 12% compared to 2020 and 1% compared to second quarter. Looking first at the year-over-year analysis, although volume was flat, the overall demand environment remains strong and supports pricing actions that yield dollars exceeding inflation. On a year-over-year basis, those gains were further supplemented by a positive business mix, driving 650 basis points in total improvement. Lower intermodal shipments, combined with higher industrial shipments drove that positive mix. Fuel surcharges increased freight revenue 600 basis points compared to last year as our fuel surcharge programs continue to chase rising fuel prices. Looking at freight revenue sequentially, lower volume versus the second quarter decreased rate revenue 250 basis points, highlighted by the factors that Kenny highlighted. Continued core pricing gains and a more positive business mix. Increased freight revenue 75 basis points on a sequential basis, driven by that same combination of higher industrial carloads and lower intermodal shipments. Finally, rise in fuel prices and the resulting uptick in sequential fuel surcharges increased freight revenue 125 basis points. Now let's move on to Slide 17 which provides a summary of our 3rd quarter operating expenses, which increased 9% in total versus 2020. The primary driver of the increase was fuel expense, up 81% as a result of a 74% increase in fuel prices, a small offset to the higher prices was a 1% improvement in our fuel consumption rate. Better efficiency was a product of both our business mix and productivity initiatives, which offset inefficiencies associated with wildfires in the quarter. Looking further at the other expense line. Compensation and benefits expense was up 3% versus 2020. Third quarter workforce levels were down 1% compared to last year despite our train and engine workforce growing 3%. This increase reflects the additional crews needed to navigate the network impact from bridge outages and whether. Management, engineering and mechanical workforces together decreased 3%. Wage inflation along with higher recrew and overtime costs associated with our network issues increased cost per employee 4% while still a tad elevated this level of per employee compensation increase is more in line with future expectations. Purchased services and materials expense was flat, as higher locomotive and freight car maintenance associated with the larger active fleet was offset by reduced contractor expense. And with automotive shipments forecasted to remain soft for at least the balance of the year, we now expect purchased services and material expense to only be up low-single digits for full year versus 2020. Equipment and other rents was flat consistent with volume. Other expense decreased 10% or $29 million this quarter, driven primarily by lower write-offs of in progress capital projects in 2021. As we look ahead to the 4th quarter. Recall that last year we incurred a one-time $278 million non-cash impairment charge in this expense category. Looking now at our efficiency results on Slide 18 operating challenges during the quarter, again impacted our productivity, which totaled $45 million. In total for 2021 productivity is at 280 million dollars led by our train length improvement and locomotive productivity offset by roughly $55 million of weather and incident related headwinds. Our incremental margins in the quarter were a very strong 94% driven by solid pricing gains, positive business mix as well as continued efficiency. PSR clearly gives us the platform to add volumes to our network in an extremely efficient manner. Turning to Slide 19, year-to-date cash from operations increased to $6.5 billion from $6 billion in 2020, a 9% increase. Our cash flow conversion rate was a strong 95% and year-to-date free cash flow increased $728 million or 38% driven by higher net income and lighter year-to-date, capital spend compared to last year. Supported by our strong cash generation and cash balances, we've returned $7.9 billion to shareholders year-to-date through dividends and share repurchases. Actions taken during the year include increasing our industry-leading dividend by 10% in May and repurchasing $27.5 million shares, totaling $5.9 billion. We finished the 3rd quarter with a comparable adjusted debt-to-EBITDA ratio of 2.8 times, which is on par with second quarter. We remain committed to returning great value to our owners and are demonstrating that again this year. Wrapping things up on Slide 20, as you heard from Kenny, the overall economic environment remains positive. It provides confidence for the future growth of our company. Bulk is driven by strong grain volumes and coal continues to exceed expectations. Industrial volumes remain consistent and strong across many sectors like forest products, metals and plastics. So we are bullish on several fronts, but as you also well aware headwinds and autos and Intermodal persist, global supply chain disruptions, semiconductor shortages and the additional pressure with international intermodal volumes that Kenny just described continue to constrain our premium volume. So, balancing these variables and with just over 2 months left in the year, we now expect volume to be up closer to 5% for full year 2021. We are also adjusting our productivity guidance for the year, down to $350 million as the weather impact and related network challenges impede the progress we expect to make with our efficiency in 2021. To put that in context, however, at the end of this year we will have generated almost $1.8 billion of productivity since our implementation of PSR in late 2018. So great work overall by the team. And more importantly, this lower cost structure and improved service product provide Union Pacific the foundation for future growth and strong incremental margins. Lower expectations for volume and productivity are headwinds to our 2021 operating goal. In addition, we've seen fuel prices continue to rise and pressure margins. In fact, over the last 30 days, barrel prices have increased around $10 with spot diesel prices up over $0.25 per gallon. Offsetting some of this margin pressure is a positive business mix and strong pricing environment. So, all in, we now expect our full year operating ratio improvement to be in the neighborhood of 175 basis point or not quite to the high end of the guidance range we established back in January, we view that level of improvement as another great milestone on our journey to 55. x operating ratio in 2022, especially in light of the unexpected headwinds we've had to overcome to get here. Wrapping it up, it was a tough quarter operationally. We made great strides to strengthen our franchise and achieved solid results. In fact, we stand poised to finish 2021 as Union Pacific's most profitable year ever. That achievement would not be possible without our tremendous employees. So we're on the front lines every day serving our customers safely and efficiently while producing these record results. While our safety metrics lag 2020 there are some positive signs, including strong September results that indicate we're taking the right actions to produce desired long-term results. The entire team understands that safety is foundational to everything we do at Union Pacific. Our service product has shown improvement over the past 60 days. But there is still work to be done with increasing volumes related to the grain harvest and intermodal peak season approaching. We understand the importance of delivering for our customers. The opportunity to provide freight solutions to our customers is strong and gives us confidence that our long-term goals for growth remain intact. And as you heard from Kenny even with macroeconomic headwinds, we're winning with our customers, while supply chain disruptions will likely persist in the next year, we see our 3rd quarter and year-to-date results as proof of our team's ability to perform in the face of significant challenges as headwinds turned to tailwinds, we're well positioned to build off our success and deliver even more value to our stakeholders.	q3 revenue rose 13 percent to $5.6 billion. q3 earnings per share $2.57. set a quarterly record for fuel consumption rate. qtrly union pacific's 56.3% operating ratio improved 240 basis points. higher fuel prices negatively impacted operating ratio by 140 basis points in quarter. qtrly business volumes, as measured by total revenue carloads, were flat.
These reports, when filed, are available on the UPS investor relations website and from the SEC. For the fourth quarter of 2021, GAAP results include a noncash after-tax mark-to-market pension charge of $14 million and after-tax transformation and other charges of $45 million. The after-tax total for these items is $59 million, an impact to fourth quarter 2021 earnings per share of $0.07 per diluted share. The mark-to-market pension charge of $14 million represents losses recognized outside of a 10% corridor on company-sponsored pension and postretirement plans. Unless stated otherwise, our comments will refer to adjusted results, which exclude year-end pension charges and transformation and other charges. What an incredible year it's been at UPS. Let me begin by recognizing the efforts of our amazing UPSers, 534,000 strong around the world. Not only did our team once again provide industry-leading service during peak, but over the last year, we delivered 1.1 billion COVID-19 vaccine doses, with 99.9% on-time service. I'm so very proud of our team and what we've accomplished. The external environment is challenging due to the ongoing impacts of the pandemic, labor tightness, upstream supply chain jams and rising inflation. But inside our better, not bigger framework, we are maniacal about controlling what we can control. We are laser-focused on improving revenue quality, reducing our cost to serve and allocating capital in a disciplined fashion. This is enabling us to move faster and to be more agile so that we capture the best opportunities in the market, enhance the customer experience and continuously improve our financial performance. Looking at the fourth quarter, our results exceeded our expectations, driven by improved revenue quality across all three of our business segments and significant gains in productivity. Consolidated revenue rose 11.5% from last year to $27.8 billion, and operating profit grew 37.7% from last year to $4 billion. This is the highest quarterly operating profit in the company's history. And for the full year 2021, our business delivered record financial results. Consolidated revenue increased 15% to reach $97.3 billion, and operating profit totaled $13.1 billion, 50.8% higher than last year. We generated $10.9 billion in free cash flow, more than double the amount generated in the prior year. And diluted earnings per share were $12.13, an increase of 47.4%. In a moment, Brian will provide more detail about our financial results. At our June investor and analyst day, I said intent is not a strategy and vision without action is just a dream. At UPS, we are acting on our customer-first, people-led, innovation-driven strategy as we transform nearly every aspect of our business. Starting with customer first. As we've discussed, we are focused on growing in the parts of the market that value our end-to-end network, including B2B, healthcare, SMBs and large enterprise accounts. In 2021, our SMB average daily volume grew 18% and represented 26.8% of our total U.S. volume, putting us on track to achieve our 2023 target of more than 30%. Our digital access program, or DAP, makes it easy for SMBs to access UPS services, and it's an important driver of our SMB growth. In 2020, I challenged the team to turn DAP into a $1 billion business. In 2021, DAP generated $1.3 billion in revenue. Looking ahead, we expect DAP to reach more than $2 billion in 2022 as we add new partners and expand to additional countries. And in the fourth quarter, our international SMB revenue growth rate was 18%. As we expand DAP, grow with SMBs across Europe and introduce new partnerships, we expect to gain overall SMB revenue share faster than the market growth. Healthcare is another market we are focused on. And in 2021, our healthcare portfolio reached more than $8 billion in revenue. Here, we serve complex customers with our global footprint of healthcare facilities and cold chain solutions. Our healthcare expertise and end-to-end solutions are unmatched in the industry, and we are well on our way to hitting our $10 billion revenue target for 2023. And amid the bottlenecks and uncertainty, our supply chain solutions group is providing customer supply chain flexibility and resiliency through alternative routings and solutions. Demand for forwarding products continued to be strong in the fourth quarter. In fact, ocean shipments were up double digits and container rates remain elevated in the market. Now, from an experience perspective, customer first is about providing a frictionless end-to-end customer experience. We are attacking the biggest pain points first and, over the last several months, have rolled out improvements to the digital experience in pickup, claims and ups.com. You may not know this, but we generate over $9 billion in gross revenue annually from transactions on our global website. We redesigned the U.S. site in 2021 and saw site visits grow 100-fold, with an equally impressive growth in monthly page views, up from 10,000 in January to 600,000 in December. We've got more plans to improve the ups.com experience around the world. which should lead to higher revenue and better customer satisfaction. We know it will take time to move the needle on our Net Promoter Score, which stands at 30, but we set a target of 50 and have laid out a path to get there. Moving to the second element of our strategy, people led. Here, we focus on the employee experience and making UPS a great place to work. We measure our performance by how likely an employee is to recommend others to work at UPS. When I became CEO in 2020, our likelihood to recommend metrics stood at 51% globally, and our goal is to surpass 80%. We've made great strides, gaining 10 percentage points to finish 2021 at 61%. And now to the last leg of our strategic platform, innovation driven is at the heart of what we do. Our global smart logistics network, powered by technology developed by UPS engineers, enabled us to deliver another successful peak. It may have been our hardest peak ever. We had higher volume than we expected at the beginning of the quarter and lower volume at the end, but our sales, engineering and operating teams remained agile and pivoted with changes in global market conditions and the needs of our customers. We delivered excellent service levels, avoided chaos costs and improved efficiency in the network. In fact, productivity in our U.S. operations improved by 1.7% for the fourth quarter, as measured by pieces per hour. Progress on the innovation-driven element of our strategy is all about driving higher returns on invested capital. As Brian will detail, in 2021, we reversed a multiyear downward trend in this metric and delivered a return on invested capital of 30.8%, 910 basis points above 2020. We remain disciplined in our capital allocation priorities and commitments. In regard to capital expenditures, we are increasing our investments back into the business to drive innovation and growth. We just started the first phase of what we're calling smart package, smart facility, which, over time, will put RFID tags on all of our packages. This initiative will enhance customer experience while improving UPS productivity by eliminating millions of manual scans every day. Brian will share more detail on our capex plans during his remarks. In June, we told you we were going to target a dividend payout ratio at year-end of 50% of adjusted earnings per share, and we're doing just that. Today, the UPS board approved a 49% increase in the quarterly dividend, from $1.02 per share to $1.52 per share. This represents the largest quarterly dividend increase in our company's history. Our strategy is building a solid foundation for our business and enabling agility. While we expect 2022 to be another challenging year, we've got momentum. So let me end by sharing our 2022 financial goals. Building on the record results we delivered last year, we anticipate delivering our 2023 consolidated revenue and operating margin targets one year ahead of our plan. In 2022, consolidated revenues are expected to be about $102 billion. Operating margin is expected to be approximately 13.7% and return on invested capital is anticipated to be above 30%. Brian will provide more details on our outlook. I'm excited about the many opportunities in front of us. In my comments, I'll cover three areas, starting with our fourth quarter results, then I'll cover our full year 2021 results, including cash and shareholder returns. And lastly, I'll share our financial outlook for 2022. In the fourth quarter, supply chain challenges and the emergence of the Omicron COVID-19 variant weighed on global economic growth. In fact, the U.S. December retail sales report came in lower than forecasted, and the inventory-to-sales ratio remained at historic lows. Despite these factors, our financial performance was better than we expected as the progress we've made executing our strategy continues to deliver strong results. Consolidated revenue increased 11.5% to $27.8 billion. Consolidated operating profit totaled $4 billion, 37.7% higher than last year. Consolidated operating margin expanded to 14.2%, which was 270 basis points above last year. For the fourth quarter, diluted earnings per share was $3.59, up 35% from the same period last year. And full year earnings per share was $12.13 per diluted share, an increase of 47.4% year over year. Now, let's look at our business segments. U.S. domestic delivered outstanding fourth quarter results. Our success was driven by gains in revenue quality and productivity, as well as our ability to quickly adjust our network to match capacity with the needs of our customers while providing industry-leading service. Average daily volume increased by 39,000 packages per day, or 0.2% year over year, to a total of 25.2 million packages per day. This was below our expectations due to the soft retail environment in December. Regarding revenue quality, the impact of our better, not bigger approach is continuing to drive improvement in customer mix. In fact, SMB average daily volume, including platforms, grew 8.4%, outpacing the market. And in the fourth quarter, SMBs made up 25.8% of U.S. domestic volume, up 240 basis points versus last year. Mix also shifted positively toward commercial volume as our B2B average daily volume continued to recover and was up 8.8%. B2B represented 36% of our volume compared to 33% in the fourth quarter of 2020. For the quarter, U.S. domestic generated revenue of $17.7 billion, up 12.4%, driven by a 10.5% increase in revenue per piece. Fuel drove 380 basis points of the revenue per piece growth rate and demand-related surcharges drove 110 basis points of the growth rate increase. Revenue per piece grew across all products and customer segments, with ground revenue per piece up 10%. Total expense grew 8.1%. Fuel drove 230 basis points of the expense growth rate increase. Wages and benefits, which included market rate adjustments, drove 410 basis points of the increase. And the remaining increase in the expense growth rate was due to several factors, including higher depreciation, federal excise taxes and weakened expansion costs. Productivity improvements helped partially offset the increase in expense. For example, through our ongoing efforts to optimize our trailer loads, we eliminated over 1,000 loads per day compared to the same time period last year. Our teams did an excellent job executing our plan and adjusting where appropriate. Early in the quarter, volume came in stronger than expected, and we quickly adjusted the network by leveraging our weekend operations, package flow technology and automated facilities. Late in the quarter, volume levels were lower than we expected as Omicron and inventory challenges negatively impacted the enterprise retail sector. Again, our operators adjusted the network and, importantly, also pulled out cost. We decreased staffing levels and returned rental equipment early, which helped to lower the year-over-year operating expense growth rate. The U.S. domestic segment delivered $2.2 billion in operating profit, an increase of $786 million or 57% compared to the fourth quarter of 2020, and operating margin expanded 340 basis points to 12.2%. The segment delivered excellent results by focusing on revenue quality and adjusting network capacity. Because of tough year-over-year comps and COVID-19 dynamics, we anticipated a fourth quarter decline in average daily volume, which was down 4.8%. On a more positive note, product mix was favorable, with B2B average daily volume up 4.7% on a year-over-year basis. This partially offset a decline in B2C volume, which was down 18.4% compared to an increase of 104% during the same period last year. In addition to tough year-over-year comps, total export average daily volume declined by 5.2% due to the decrease in volume between the U.K. and Europe arising from Brexit disruptions and from fewer flights coming out of Asia. In the fourth quarter, we operated 105 fewer flights than planned, primarily due to COVID-19. Despite these factors, for the fourth quarter, international revenue increased 13.1% to $5.4 billion. Revenue per piece increased 16.4%, including a 730-basis-point benefit from fuel and a 340 basis point benefit from demand-related surcharges. The international segment delivered record operating profit and fourth quarter operating margin. Operating profit was $1.3 billion, an increase of 14.7%, and operating margin was 24.7%. Now, looking at supply chain solutions. The business segment delivered record fourth quarter top and bottom-line results as our team executed extremely well in a challenging environment. Revenue increased to $4.7 billion, up 6.7%, despite a $789 million reduction in revenue from the divestiture of UPS freight. Looking at the key performance drivers. Forwarding revenue was up 37.9% and operating profit more than doubled as global market demand remained strong and capacity stayed tight. International air freight kilos increased 3.3%. And in ocean freight, volume growth on the Transpacific Eastbound Lane, our largest trade lane, grew 7.8%, which was more than twice the market growth rate. Within Forwarding, our truckload brokerage unit grew revenue and profit by double digits, driven by revenue quality initiatives and strong cost management. And our healthcare portfolio delivered strong profits in the fourth quarter, led by pharma and medical device customers. In the fourth quarter, supply chain solutions generated strong operating profit of $456 million and delivered an operating margin of 9.7%. Walking through the rest of the income statement, we had $173 million of interest expense. Other pension income was $267 million. And lastly, our effective tax rate came in at 22%. Now, let me comment on our full year 2021 results. Starting at the consolidated level, revenue increased $12.7 billion to $97.3 billion. We reduced our cost to serve through a combination of nonoperating cost reductions, along with improved productivity. We grew operating profit by $4.4 billion, an increase of 50.8%, finishing the year at $13.1 billion. Operating margin was 13.5%, an increase of 320 basis points. And for context, this is the highest consolidated operating margin we've had in 14 years. We increased our ROIC to 30.8%, an increase of 910 basis points. We generated $10.9 billion of free cash flow, an increase of 114% over 2020, and we strengthened the balance sheet by paying off $2.55 billion of long-term debt. And we reduced our pension liabilities by $7.8 billion, which improved our debt-to-EBITDA ratio to 1.9 turns compared to 3.6 last year. And we returned over $3.9 billion of cash to shareholders through dividends and share buybacks. Now, for a few full year highlights for the segments. domestic, operating profit was up 62.7%, an increase of $2.6 billion, to reach $6.7 billion for the full year. And we expanded operating margin to 11.1%, a year-over-year increase of 340 basis points. International grew operating profit by $1.2 billion, ending the year at a record $4.7 billion in profit. And operating margin was 24.2%, an increase of 200 basis points. And supply chain solutions increased operating profit by $649 million, up 61.3%, and delivered operating margin of 9.8%, 280 basis points above 2020. 2021 was an outstanding year for UPS, which brings us back to our outlook for 2022. Global GDP is expected to grow 4.2%. We are continuing to pay close attention to and manage through several external factors, including COVID-19, inflationary pressures, upstream supply chain constraints and labor shortages. As a result, we expect the environment to remain dynamic in 2022. Most importantly, within this backdrop, we will focus on controlling what we can control and continuing to advance our strategic initiatives. And as Carol stated, we expect to deliver our 2023 consolidated financial targets one year early. So looking at 2022, on a consolidated basis, revenues are expected to be about $102 billion, which takes into account the divestiture of UPS freight. Additionally, consolidated operating margin is expected to be approximately 13.7%. In U.S. domestic, we anticipate revenue growth of around 5.5%, with revenue per piece growing faster than volume. We expect pricing in the industry to remain firm and will continue to price based on the value we provide to our customers. As a result, we anticipate domestic operating margin will expand around 50 basis points in 2022. Lastly, in the U.S., we expect to deliver an incremental revenue-to-profit conversion percentage in the low 20s for the full year. Moving to the international segment. We expect to continue growing faster than the market. Revenue growth is anticipated to be approximately 7.7%, with volume growing slightly faster than revenue. More specifically, we expect to grow fastest in our transborder ground products. Additionally, we expect international demand-related surcharges to remain elevated in 2022. Pulling it all together, operating profit in the international segment is expected to increase around 5% and operating margin is anticipated to be around 23.6%. In supply chain solutions, we expect revenue to be around $17 billion, driven by continued strong growth in healthcare and elevated demand in Forwarding. However, we expect ocean surcharge rates to moderate below 2021 peak levels. Therefore, we expect operating profit to be down from what we reported in 2021. Operating margin is expected to be about 9.4%. And for modeling purposes, below the line, we anticipate $1.2 billion in other pension income, partly offset by $665 million in interest expense. The full year net impact is expected to be around $570 million, which can be spread evenly across the quarters. Now, let's turn to full year 2022 capital allocation. As we discussed at last year's Investor and Analyst Day, we've transitioned to a disciplined and programmatic approach to capital expenditures. In line with the capex range we shared then, we expect 2022 capital expenditures to be about 5.4% of revenue or $5.5 billion. These investments will continue to improve overall network efficiency and move us further down the path to achieving our 2050 carbon-neutral goals. About 60% of our capital spending plan will be allocated to growth projects and about 40% to maintenance. Let me give you a few project highlights. We have 30 delivery centers and two automated hub projects planned to be delivered this year. Combined, these projects will enable us to drive greater efficiency by better balancing sort capacity with delivery capacity. We will purchase over 3,700 alternative fuel vehicles this year, including around 425 arrival electric delivery vehicles to be deployed in the U.S. and in Europe. We will take delivery of two new 747-8 aircraft in 2022, which adds international capacity and will make predelivery payments on the 19 Boeing 767 freighters that we announced in December. The 767s are planned to enter our fleet between 2023 and 2025. And lastly, across these projects and others, our annual capital expenditures will again include over $1 billion of investments that support our carbon-neutral goals. Now, let's turn to our expectations for cash and the balance sheet. We expect free cash flow of around $9 billion, including our annual pension contributions, which are equal to our expected service costs. As Carol mentioned, the board has approved a dividend per share of $1.52 for the first quarter, which represents a 49% increase in our dividend. We are planning to pay out around $5.2 billion in dividends in 2022, subject to board approval. We expect to buy back at least $1 billion of our shares, and we'll evaluate additional opportunities as the year progresses. We expect diluted share count to be about 880 million shares throughout the year. Finally, our effective tax rate is expected to be around 23%. In closing, the strategic and financial progress we've made in 2021 delivered consistent returns and created strong momentum as we entered 2022. We remain laser-focused on continuously improving our financial performance by enhancing revenue quality, reducing our cost to serve and staying disciplined on capital allocation. And operator, please open the lines.	releases 4q 2021 earnings. sees fy revenue about $102 billion. for q4 of 2021, gaap results include a total charge of $59 million, or $0.07 per diluted share,. for q4 of 2021, gaap results include a total charge of $59 million.
As you saw yesterday, we reported a really strong performance out of the gate in '21 and what's shaping up to be a great year. We knew we had built good momentum in Q4 and that the economy was moving in the right direction. But the first quarter was still uncertain as we ended the year, while not anymore, both our operating conditions and our performance have improved faster than we expected. We gained back a lot of the ground on the rental revenue, narrowing the decline from 2020 and importantly, we exited the quarter up year-over-year in March. Our customers are also optimistic. They're gaining more visibility and they're turning to us for the equipment they need. Just a few months into the year, we've absorbed almost all of the excess fleet we had in 2020. This was evident in the sequential improvement in our fleet productivity that we reported. And we took advantage of a healthy used-equipment market driving record retail sales to generate almost 30% more proceeds in the quarter than we did a year ago. None of this would be possible without our greatest asset, our employees and their willingness to take on the challenges as well as the opportunities presented to them. A lot of people know how much I respect them for their commitment and our customers feel the same way. And I'm proud to report the team United delivered $873 million of adjusted EBITDA in the first quarter and they did it safely turning in another quarterly recordable rate below one. Given all these factors, we feel confident in raising guidance across the board. This includes a new revenue range that starts above the top end of the previous guidance. We feel equally comfortable leaning into M&A as evidenced by our recent acquisition of Franklin Equipment and our agreement to acquire General Finance, which we expect to close mid-year. We feel the time is right to allocate capital to attractive deals like these that meet our M&A criteria for a strong strategic, financial and cultural fit. With Franklin, we added 20 stores to our General Rental footprint in the Central and Southeast regions. General Finance is a market leader in mobile storage and modular office rentals. And these services complement our current specialty in gen rent offerings and we're excited about the opportunity to unlock additional growth while solving more of our customers' needs with these new products. We'll be entering these markets with a strong presence and established footprint and a talented team with solid customer relationships, many of them new to our company. It's a textbook example of one plus one equaling more than two. Now let us pivot to demand, where we have more good news to share. The rebound we are seeing in our end markets is broadly positive. And this is true of our General Rental business, and even more so in our Specialty segment. Specialty had another robust performance led by our Power & HVAC business. Rental revenue for Specialty moved past the inflection point and it was positive year-over-year for the full quarter. And we're continuing to invest in growing our specialty network with six cold starts year-to-date and another 24 planned this year. And now I'll drill down to our customers and our end markets. Customer sentiment continues to trend up in our surveys, as a majority of our customers expect to see growth over the next 12 months. And importantly, the percent of customers who feel this way has climbed back to pre-pandemic levels. And we think there are few reasons for this. For one thing, our customers have a significant amount of work-in-hand and they can also see that our project activity is continuing to recover. The vaccines are rolling out, restrictions are easing in most markets, and the weather is turning warmer. Three positive dynamics converge in right before our busy season. Also we're seeing the return of activity in the manufacturing sector after more than a year of industrial recession. And the construction verticals that have been most resilient throughout COVID are still going strong, areas that we've discussed like technology and data centers, power, healthcare, and warehousing and distribution. And with infrastructure, our customers are encouraged that it's back on the table in Washington. Most of the infrastructure categories and the administration's current proposal are directly in our wheelhouse, things like bridges, airport and clean energy. And we'll see how the process goes, but almost any infrastructure spending will benefit us in the long term both directly and indirectly. Now there are some markets that are taking longer to recover, like energy. Most parts of the energy complex including downstream remains sluggish. Additionally, retail office and lodging are largely in limbo. So while we are firing on all cylinders at United, there are pockets of the economy that are still catching up and this means more opportunity for us down the road. I'll sum up my comments with this perspective. 2021 is shaping up to be a promising year and our performance, says a lot about our willingness to lean into that promise, whether it's with capex, M&A, cold starts or other strategic investments in the business. Our balance sheet and cash flow give us the ability to keep every option on the table. Throughout last year, we made the decision to retain capacity by keeping our branch network and our team intact. And now at the end -- the economic indicators are flashing green. Our strategy is paying off by driving value for our people, our customers and our shareholders. And with that, I'll ask Jess to take you through the numbers, and then we'll go to Q&A. Over to you, Jess. The strong start to the year is reflected in our first quarter results as rental revenue and used sales exceeded expectations and costs were on track, that strength carried through to our revised guidance and more on that in a few minutes. Let's start now with the results for the first quarter. Rental revenue for the first quarter was $1.67 billion, which was lower by $116 million or 6.5% year-over-year. Within rental revenue, OER decreased $117 million or 7.7%. In that a 5.7% decline in the average size of the fleet was a $87 million headwind to revenue. Inflation of 1.5% cost us another $24 million and fleet productivity was down 50 basis points or a $6 million impact. Sequentially fleet productivity improved by a healthy 330 basis points recovering a bit faster than we expected. Finishing the bridge on rental revenue this quarter is $1 million in higher ancillary and rerent revenues. As I mentioned earlier, used equipment sales were stronger than expected in the quarter, coming in at $267 million, that's an increase of $59 million or about 28% year-over-year, led by a 49% increase in retail sales. The end market for used equipment remained strong and while pricing was down year-over-year, it's up for the second straight quarter with margins solid at almost 43%. Notably, these results in used reflect our selling over seven year old fleet at around half its original cost. Let's move to EBITDA. Adjusted EBITDA for the quarter was just under $873 million, a decline of $42 million or 4.6% year-over-year. The dollar change includes an $84 million decrease from rental, in that OER was down $86 million, while ancillary and rerent together were an offset of $2 million. Used sales were tailwind to adjusted EBITDA of $19 million, which offset a $2 million headwind from other non-rental lines of business and SG&A was a benefit in the quarter up $25 million as similar sales the last couple of quarters. The majority of that SG&A benefit came from lower discretionary costs mainly T&E. Our adjusted EBITDA margin in the quarter was 42.4%, down 70 basis points year-over-year and flow through as reported was about 62%. I mentioned two items to consider in those numbers. First, as I mentioned in our January call, we'll have a drag in bonus expense during 2021, as we reset to our plans target of that reset started in the first quarter. Second, used sales made up a greater portion of our revenue this quarter, which was a revenue mix headwind. Adjusting for those two results is an implied detrimental flow through for the quarter of about 37%. Across the core business, the first quarter's cost performance played out as we expected and reflects our continued discipline as we respond to increasing demand and is our costs continue to normalize. Our shift to adjusted EPS, which was $3.45, that's up $0.10 versus Q1 last year, primarily on lower interest expense and a lower share count. Quick note on capex. For the quarter gross rental capex was $295 million. Our proceeds from used equipment sales were $267 million, resulting a net capex in Q1 of $28 million. Now turning to ROIC, which remained strong at 8.9%. As we look back over what's obviously been a challenging 12 months. One of the things that we're most pleased with is the ROIC we've generated, which has consistently run above our weighted average cost of capital through what was the trough of the down cycle. Free cash flow was also strong at $725 million for the quarter. This represents an increase of $119 million versus the first quarter of 2020 or about a 20% increase. As we look at the balance sheet, net debt is down 21% year-over-year without having reduced our balance by about $2.3 billion over those 12 months. Leverage continues to move down and was 3 times at the end of the first quarter, that compares with 2.5 times at the end of the first quarter last year. Liquidity remains extremely strong. We finished the quarter with over $3.7 billion in total liquidity that's made up of ABL capacity of just under $3.2 billion and availability on our AR facility of $276 million. We also had $278 million in cash. And since Matt mentioned our acquisitions earlier, I'll take a second here to note that we expect to fund the General Finance deal later this quarter with the ABL. This update does not include any impact from General Finance. If we close as expected in June, we'll update our guidance likely on our Q2 call in July to reflect the impact of that business. What is included in this update is mainly three things. First, the impact of higher rental revenue. Second, increased used sales capitalizing on a stronger than expected retail market. And third, the contribution of our Franklin Equipment acquisition, which we estimate at about $90 million of revenue and $30 million of adjusted EBITDA for the remainder of the year. We revised our current view to rental revenue given the start to the year and how we expect things to play out from here. The increase in our guidance reflects a range of possibilities with a growth opportunity over the remainder of the year, largely follows normal seasonality, albeit from a higher starting point. And as you can see at midpoint, our updated guidance implies strong double-digit growth over the remaining nine months of the year. A quick note on the guidance change in EBITDA and what hasn't changed in this revision, which is our continuing to manage costs tightly even as activity ramps more than forecasted. Our revised range on adjusted EBITDA considers that cost performance across the core business, and reflects the impact of higher used sales and the Franklin acquisition with margins and flow through in line with our prior guidance. A certain of our costs continue to normalize from low levels in 2020. Bonus expense remains the headwind we've discussed previously, and at midpoint is about a 60 basis point drag in margin year-over-year. Finally, the increase in free cash flow reflects the puts and takes, from the changes I mentioned and remains robust at a midpoint of $1.8 billion. Operator, would you please open the line.	qtrly adjusted earnings per share of $3.45.
Three months ago we said that 2021 was shaping up to be a great year for United Rentals, and that's still very much the case. Our operating environment continues to recover. Our customers are increasingly optimistic about their prospects and our company is continuing to lean into growth from a position of strength as a premium provider and our industry's largest one-stop shop, with the supply leader in the demand environment, and we've leveraged that to deliver another consecutive quarter of strong results. The big themes of the second quarter are strong growth in line with our expectations and robust free cash flow, either after the step up in our capex, positive industry indicators, including a strong used-equipment market, where pricing was up 7% year-over-year. The expansion of our go-to-market platform through M&A and cold starts. This is timed to the broad based recovery in demand and our focus on operational discipline, as we manage the increase in both volume and capacity, while driving fleet productivity of nearly 18%. Another key takeaway our safety performance and I'm very proud of the team for holding the line on safety with another recordable rate below 1, while at the same time managing a robust busy season and on-boarding our acquired locations. This includes General Finance, which we acquired at the end of May. As you know, this was both a strategic and financial move designed to build on our strength. The acquisition expanded our growth capacity and gave us a leading position in the rental market for mobile storage and office solutions. The integration is going well. And while we still have more work to do, we're moving steadily through our playbook. As you saw in our release, we raised our outlook to include the expected impact of General Finance and other M&A we closed since the first quarter. It also includes some additional investments we plan to make in capex that will serve us beyond 2021. This outlook follows the higher guidance we issued in April when we raised every range compared to our initial guidance. So as you can see, we're tenacious about pursuing profitable growth and the investments we're making will still have a positive impact on our immediate performance as well as future years. And before Jess gets into the numbers, I want to spend a few minutes on our operating landscape. Almost all of the challenges of 2020 have right of themselves. We have a better line of sight and so to our customer. When we surveyed our customers at the end of June, the results showed that over 60% of our customers expect to grow their business over the coming 12 months, which is a post-pandemic high. And notably, only 3% saw a decline coming over the same period. Customer optimism is a great barometer and the trends we see in the field support their view. 2021 is a pivotal year for us. It confirms our return to growth, including our 19% rental revenue growth in the second quarter. I'll point to some of the drivers of that growth, starting with geography. The rebound in our end markets continues to be broadly positive with all geographic regions reporting year-over-year growth in rental revenue. Our Specialty segment generated another strong performance with rental revenue topping 25% year-over-year, including same-store growth of over 19%. And importantly, we grew each major line of business by double digits, which underscores the broadness of the demand. For years now, our investment in building out our specialty network has been a key to our strategic position. These services differentiate our offering to customers and add resilience to our results throughout the cycle and this is true of cold starts as well as M&A. This year, we've opened 19 new specialty branches in the first six months, which puts us well on our way to our goal of 30 by year-end. We're also investing in growth in our General Rental segment, where the big drivers are non-res construction and plant maintenance. Both areas a continuing to gain traction and most of our end markets are trending up. Verticals like chemical process, food and beverage, metals and mining, and healthcare all showing solid growth. And while the energy sector remains a laggard, it was up year-over-year for the first time in eight quarters. We also have customers in verticals that are less mainstream, like entertainment, where demand for our equipment on movie sets and events more than doubled in the quarter. And while it's a relatively small part of the revenue, it's a good sign to see it come back. I also want to give you some color on project types. There are two takeaways, the diversity of the projects in Q2 and the fact that each region contributed to growth in its own way. The recovery has taking root across geographies and verticals on both coasts, with solid activity in heavy manufacturing, corporate campuses, schools and transmission lines. In this quarter, we're also seeing project starts in power transit and technology. These job sites are using our General Rental equipment and our trench safety and power solutions. And fluid solutions has seen a rebound in chemical processing and sewer [Indecipherable] as well as mining. These are just a few of the favorable dynamics in a very promising up cycle. And I want to put that in context. 2020 was about the temporary loss of market opportunity, particularly in the second quarter. Now, the pendulum is swinging back. And 2021 is about locking in that opportunity within the framework of our strategy and our team is managing that extremely well. One proof point is our financial performance and the confidence we have in our guidance. Another is our willingness to lean into growth today to create outsized value tomorrow. And it's about more than capex and cold starts. We're constantly exploring new ways to capture growth by testing new products in the field, developing new sales pipelines and forging digital connections with customers. And finally, the most important proof point is the quality of our team. You could see that reflected our safety record and our strong culture. And here's the thing to remember about 2021. This is still the early innings of the recovery. We're committed to capitalize on more and more demand as the opportunity unfolds. We see a long runway ahead to drive growth, create value and deliver shareholder returns. Over to you, Jess. When we increased our 2021 guidance back in April, we expected a strong second quarter supported by the momentum we were seeing to start the year. We're pleased to see that play out as anticipated with the second quarter results. And importantly, we're also pleased to see the momentum accelerate in our core business and support another raise to our guidance for the year. We've also added the impact from our acquisitions, notably the General Finance deals. And I'll give a little bit more color on our guidance in a few minutes, but let's start now with the results for the second quarter. Rental revenue for the second quarter was $1.95 billion, that's an increase of $309 million or 19%. If I exclude the impact of acquisitions on that number, rental revenue from the core business grew a healthy 16% year-over-year. Within rental revenue, OER increased $231 million or 16.5%. The biggest driver in that change with fleet productivity, which was up 17.8% or $250 million, that's primarily due to stronger fleet absorption on higher volumes in part as we comp the COVID-impacted second quarter last year. Our average fleet size was up 0.2% or a $3 million tailwind to revenue and rounding out OER, the inflation impact of 1.5% cost us $22 million. Also within rental, ancillary revenues in the quarter were up about $65 million or 31% and rerent was up $30 million. And we'll talk more about the increase in ancillary revenues in a moment. Used equipment sales came in at $194 million, that's an increase of $80 million or about 10%. Pricing at retail in the quarter increased over 7% versus last year and supported robust adjusted used margins of 47.9%, and that represents a sequential improvement of 520 basis points and is 190 basis points higher than the second quarter of 2020. Used sales proceeds for the quarter represented a strong recovery of about 59% of the original cost of fleet that was on an average over seven years old. Let's move to EBITDA. Adjusted EBITDA for the quarter was $999 million, an increase of 11% year-over-year or $100 million, that included $13 million of one-time costs for acquisition activity. The dollar change includes a $141 million increase from Rentals and in that, OER was up $125 million, ancillary contributed $10 million and rerent added $6 million. Used sales were tailwind to adjusted EBITDA of $12 million and other non-rental lines of business provided $6 million. The impact of SG&A and adjusted EBITDA was a headwind for the quarter of $59 million, which came mostly from the resetting of bonus expense. We also had higher commissions on better revenue performance and higher discretionary expenses like T&E that continue to normalize. Our adjusted EBITDA margin in the quarter was 43.7%, down 270 basis points year-over-year and flow-through as reported was about 29%. Let's take a closer look at margin and flow-through this quarter. Importantly, you'll recall that our COVID response last year included a swift and significant pullback in certain operating and discretionary costs that was especially pronounced in the second quarter and is impacting flow-through this year as activity continues to ramp and costs continue to normalize. We expect this will play through the rest of the year, notably in the third quarter. And specific to the second quarter, we've shared in previous calls that one of the costs that will reset this year is bonus expense from the low levels incurred last year. As a result, we had an expected drag in flow-through in the second quarter as we reset and now true up this year's expense. Flow-through and margins were also impacted as anticipated by acquisition activity, including the one-time costs I mentioned earlier. I also mentioned higher ancillary revenue in the second quarter, which represents in part the recovery of higher delivery costs. Delivery has been an area where we've seen the most inflation pressure, including higher costs for fuel and third-party hauling. While recovering a portion of that increase in ancillary protected gross profit dollars, it impacted flow-through and margin this quarter as a pass-through, and we expect to see that play out over the next couple of quarters as well. Adjusting for these few items, the implied flow-through for the second quarter was about 46% with implied margins flat versus last year. With our expenses normalizing, that reflects the cost performance across the core that came in as expected. I'll shift to adjusted EPS, which was $4.66 for the second quarter, including a $0.13 drag from one-time costs. That's up $0.98 versus last year, primarily on higher net income. Looking at capex and free cash flow. For the quarter, gross rental capex was a robust $913 million. Our proceeds from used equipment sales were $194 million, resulting in net capex in the second quarter of $719 million, that's up $750 million versus the second quarter last year. Even as we've invested in significantly higher capex spending so far this year, our free cash flow remains very strong at just under $1.2 billion generated through June 30th. Now turning to ROIC, which was a healthy 9.2% on a trailing 12-month basis. Notably, our ROIC continues to run comfortably above our weighted average cost of capital. Our balance sheet remains rock solid. Year-over-year, net debt is down 4% or about $454 million. That's after funding over $1.4 billion of acquisition activity this year with the ABL. Leverage with 2.5 times at the end of the second quarter. That's flat to where we were at the end of the second quarter of 2020, and an increase of 20 basis points from the end of the first quarter this year, mainly due to the acquisition of General Finance in May. I'll look at our liquidity, which is very strong. We finished the quarter with over $2.8 billion in total liquidity. That's made up of ABL capacity of just under $2.4 billion and availability on our AR facility of $106 million. We also had $336 million in cash. Looking forward, I'll share some color on our revised 2021 guidance. We've raised our full year guidance ranges at the midpoint by $350 million in total revenue and $100 million in adjusted EBITDA, as we now expect stronger double-digit growth for the core business in the back half of the year. Our current guidance also includes the impact of acquisition activity since our last update, predominantly to include General Finance. That increase for acquisitions reflects $250 million in total revenue and $60 million in adjusted EBITDA, which includes $15 million of expected full year one-time costs. Additional capex investment will help support higher demand. To that end, we raised our growth capex guidance by $300 million, a good portion of which reflects fleet we are purchasing from Acme Lift. While the fleet will provide some contribution in 2021 and is assumed in our guidance, we expect to see the full benefit next year. Finally, our update to free cash flow reflects the additional capex we'll buy as well as the puts and takes from the changes I mentioned. It remains a robust $1.7 billion at the midpoint and we'll continue to earmark our free cash flow this year toward debt reduction to enhance the firepower we have to grow our business. Jonathan, would you please open the line.	qtrly adjusted earnings per share of $4.66.
As we look back on the past year, I feel that 2020 was a proven ground for our company. It gave us the opportunity to prove the resiliency of our business model and the disciplines we've engineered for more than a decade: things like capital management, cost management, operational agility and the willingness of our team to embrace change. We've demonstrated these capabilities during choppy periods in the past, but last year wasn't just a downturn, it was a sharp and significant economic disruption. And we stood up to those conditions while keeping our people safe, streamlining our operating costs, aggressively flexing our capex and managing our excess capital to reduce leverage. In addition, we kept our full year adjusted EBITDA margin to within 50 basis points of 2019, despite significantly lower market demand, and we generated record free cash flow. And now, things are getting better. Most of our end markets have been on a steady path to recovery since the third quarter, and we saw that continue in Q4. These factors help us narrow the gap in rental revenue year-over-year from being down over 13% in Q3 to down just 10% in Q4. And as you saw yesterday, our fourth quarter results were better than our guidance for total revenue, adjusted EBITDA and free cash flow. I was also pleased that throughout 2020, we stayed laser-focused on execution, while remaining flexible and agile in a very fluid environment. And most importantly, we never wavered from our fierce determination to take great care of our employees and our customers. We didn't resort to reactive cuts in our service capacity that would harm our customer service or slow us down in the upcycle or impact our long-term earnings power. Early on, we committed to keeping the key in the ignition on capacity so we could start the engine up at any time. And as we enter '21, this has proven to be the right decision. The execution of that decision rests squarely with our people, and they have consistently delivered. They're the reason why our safety reportable rate remained below one for all four quarters of 2020. And it's a credit to their professionalism that our COVID protocols were adopted so quickly companywide, allowing us to serve our customers safely. And the financial results you saw yesterday were generated by the talent and commitment of our people all working together as one UR. It's an exceptional team, and I'm very proud to work beside them. Now let's look forward to the current year. COVID isn't a traditional cycle, but it's a cycle nonetheless. And we believe it will continue to have an impact for the foreseeable future. As our guidance indicates, we'll continue to gain ground in '21 as we work our way back toward pre-COVID levels. Our sentiment echos the majority of our customers in our recent surveys, the comments we hear from the field and other external data points we've collected. We're optimistic of the year, while being realistic that visibility is still somewhat limited. What our guidance doesn't show is the cadence of demand this year. But once we lapped the first quarter, our toughest comp will be behind us, and then we expect to return to growth as we move through '21. And we base this on a couple of factors. The recent spike in COVID cases is projected to settle down in the coming months, which should help reactivate some projects that were temporarily halted. And as the vaccines are rolled out, business confidence should continue to improve. And this will provide a tailwind for both capital projects and MRO spending. And as demand trends up, we're well positioned to be first call for our customers. And before I get into our operating environment, I want to mention our fourth quarter revenue from used equipment sales. It was $275 million, almost 13% higher than prior year, and it was driven by healthy retail demand. And as you know, we look at the strength of the used equipment market as a key indicator for the rental industry. And when the retail market is favorable, it tells us that contractors are projecting needs for that fleet. Another positive indicator is that our industry overall showed great discipline on the supply side in 2020, and this is a good place to be as activity ramps up. Looking at our operating environment, there are some encouraging signs. The verticals we called out as most resilient on our last call are continuing to lead project activity in markets like power, healthcare, distribution and technology. Within these verticals, we're looking at a range of jobs, including data centers, hospitals, warehouses and even power plants. And on the other side of the ledger, petrochem continued to be soft in the fourth quarter. The good news is that we're seeing light at the end of the COVID tunnel, and we expect this sector to do better this year led by scheduled turnaround activity in downstream and chemical process. Within non-res, which is our largest revenue base, a number of new projects broke put ground in the fourth quarter and others plan to start up this year. These include some big stadium projects that were postponed when COVID hit. And the same is true of airport construction and renovation. We see a number of these multiyear projects back on the table. And to a lesser degree, road and bridge work, which generally has remained steady. Infrastructure has been topical since the election. And while the details and the timing are unknown at this point, President Biden has been clear that this will be a priority for his administration. And as the economy continues to heal, United Rentals is in a strong position to benefit from any increase in end market spending, including infrastructure. And we've invested for years in positioning the company for this type of scenario. Our specialty segment had another good quarter, led by our power and HVAC business, which generated fourth quarter same-store revenue that was higher than the prior year. It underscores the importance of our ongoing investments in specialty operations. In total, we plan to open another 30 specialty cold starts this year, which is double the number that we opened last year. And this will bring us close to 400 specialty locations by December. You may recall our mantra that figure doesn't really matter unless we're constantly driving for better. And the way we get there is by doing what we say we're going to do. 2020 did its best to challenges on that, but we came through for all of our stakeholders, and the learnings we gained from that experience have been incorporated into our operations. And we'll leverage these learnings as we return to growth. Finally, we said we would fulfill our responsibility to investors by protecting the long-term earnings power of the business, and we're doing that, too. The takeaway from 2020 isn't what went wrong in the external environment, it's what went right when we committed to a course of action and met our goals. Yesterday, you saw the results of that commitment. And today, we're telling you that we intend to deliver again in '21. So I'll stop here and ask Jess to take you through the numbers, and then we'll go to Q&A. So Jess, over to you. Our financial results in the fourth quarter were better than we expected, with rental volumes continuing to recover and strong used sales activity at retail, and more on both in a minute. Costs were in line and supported by -- supported solid margins in the quarter. Free cash flow for the year also exceeded expectations, and our leverage at year-end was down versus 2019. That's all good news as we move into 2021. I'll provide some color on our '21 guidance before we get to Q&A. Let's start now with the results for the quarter. Rental revenue for the fourth quarter was $1.85 billion, which was lower by $208 million or 10.1% year-over-year. Within rental revenue, OER decreased $190 million or 10.9%. In that, a 5.6% decline in the average size of the fleet was a $98 million headwind to revenue. Inflation of 1.5% cost us another $25 million, and fleet productivity was down 3.8% or a $67 million impact. Sequentially, fleet productivity improved by a healthy 420 basis points, mainly from better fleet absorption. Rounding out the decline in rental revenue for the quarter was $18 million in lower ancillary and rerent revenues. As I mentioned earlier, used equipment sales were stronger-than-expected in the quarter, coming in at $275 million. That's an increase of $31 million or about 13% year-over-year, driven almost entirely by an increase in retail sales. That reflected OEC sold up 35% year-over-year in the retail channel for the second quarter in a row. Used margins in the quarter were solid at 42.5%. Notably, these results in use reflect our selling over seven-year-old fleet at just shy of 50% of original cost. Let's move to EBITDA. Adjusted EBITDA for the quarter was just under $1.04 billion, a decline of $117 million or 10.1% year-over-year. The dollar change includes a $143 million headwind from rental. And in that, OER made up $140 million and ancillary and rerent together were the remaining $3 million. Used sales were a tailwind to adjusted EBITDA of $11 million, which offset a $3 million headwind from our other non-rental lines of business. And SG&A was another benefit in the quarter of $18 million, with the majority of that help coming from lower discretionary costs, mainly T&E. Our adjusted EBITDA margin in the quarter was 45.5%, down 150 basis points year-over-year, and flow-through as reported was about 66%. I'll mention two items to consider in those numbers. First, used sales made up a greater portion of our revenue this quarter, which was a headwind to margin and flow-through. Second, I mentioned on our Q3 call, back in October, that we had a benefit in bonus expense in Q4 2019 that would cause a drag this Q4. Adjusting for those two items implies a margin of 46.1% and flow-through for the quarter of just over 56%. Both results were largely as expected and pointed to continuing cost discipline even as certain operating costs started to normalize. A quick comment on adjusted EPS, which was $5.04 That compares with $5.60 in Q4 last year. The year-over-year decline is primarily due to lower net income from lower revenue. Let's move to capex. For the quarter, rental capex was $176 million, bringing our full year spend to $961 million in gross rental capex, which was 55% less than what we spent in 2019. Proceeds in 2020 from used equipment sales were $858 million, resulting in net capex of $103 million. ROIC remained strong at year-end, coming in at 8.9%. That continues to meaningfully exceed our weighted average cost of capital, which currently runs about 7%. Year-over-year, ROIC was lower by 150 basis points, primarily due to the decline in revenue. Turning to free cash flow, which was a record for us at over $2.4 billion in 2020. This represents an increase of over $860 million versus 2019. As we look at the balance sheet, our having dedicated the majority of our free cash flow to debt reduction in 2020 resulted in a $1.9 billion or almost 17% decrease year-over-year in net debt. Leverage was 2.4 times at year-end, down from 2.6 times at the end of 2019. Liquidity remains extremely strong. We finished 2020 with just under $3.1 billion in total liquidity. That's made up of ABL capacity of just over $2.7 billion and availability on our AR facility of $166 million. We also had $202 million in cash. Our view to total revenue includes a return to growth in rental revenue with the season, starting in April. We look forward to getting past the challenging comp in Q1 as we lapped the start of the pandemic and move to delivering rental growth for the rest of the year. Our guidance includes a range of outcomes given our seasonal patterns and assumptions we've made on the pace of continuing recovery across our end markets. We're planning for another strong year in used sales, and we'll look to increase our capex spend to replace that fleet. Within our guidance, that reflects over $1.9 billion in replacement capex. Beyond that, we continue to be focused on absorbing the fleet we own, and we'll adjust our growth capital accordingly with total spend planned at pre-COVID levels. Our range on adjusted EBITDA considers not only the volume growth we expect in revenue, but also our continuing to manage costs tightly. We'll leverage what we've learned in 2020 using our own capacity to support our customers with less reliance on third-parties. As our business continues to recover, we'll also see a reset of costs that ran low in 2020, such as T&E and bonuses. Finally, one of the best indicators of the strength of our business model is the resiliency of our cash flow, especially as we invest behind growth. In 2021, we expect another year of generating significant free cash flow, and that's after considering a return to over $2 billion in capex spending. We'll continue to use our free cash flow to pay down debt and reduce our leverage. Operator, would you please open the line?	anticipate another robust year of free cash flow generation, after significantly increasing our capex to support growing demand. rental revenue for q4 was $1.854 billion, reflecting a decrease of 10.1% year-over-year.
Also joining us on the call are our Chief Risk Officer, Jodi Richard; and our Chief Credit Officer, Mark Runkel. I'll begin on Slide 3. In the second quarter, we reported earnings per share of $1.28. We released $350 million in loan loss reserves this quarter supported by our outlook on the economy and continued improvement in credit quality metrics, the pace of which has been better than expected. Net revenue totaled $5.8 billion in the second quarter. As expected, net interest income grew in the second quarter, while our fee businesses benefited from improving consumer and business spending trends. Notably, as of late June, total sales volumes for each of our three payments businesses, credit and debit card, merchant acquiring and corporate payment systems, were above 2019 levels for the first time since the beginning of the pandemic. Our expenses were relatively stable compared with the first quarter. Our book value per share totaled $31.74 at June 30, which was 4% higher than March 31. During the quarter, we returned 79% of our earnings to shareholders in the forms of dividends and share buybacks. Following the results of the Federal Reserve's stress tests in late June, we announced that management will recommend that our Board of Directors approve a 9.5% increase in our common dividend in the third quarter payable in October. Slide 4 provides key metrics, including a return on tangible common equity of 20.9%. Slide 5 highlights continued strong trends in digital activity. Average loans were stable compared with the first quarter, in line with our expectations. Strong demand for our instalment loans drove other retail loan growth, while C&I loans increased 0.9%, supported by strong growth in asset-backed lending, partly offset by continued pay down activity and other C&I categories. We saw a decline in residential mortgage loans and increased pay downs. Average credit card loan balances were stable compared with the first quarter as the payment rates remained high at 38%, reflecting a significant level of consumer liquidity. However, period end balances increased 4.5% on a linked quarter basis as we saw some pickup in activity toward the end of the quarter. Turning to Slide 7. Average deposits increased 0.7% compared with the first quarter and grew by 6.4% compared with a year ago, reflecting the significant level of liquidity in the financial system. Our overall deposit mix continues to be favorable. In the second quarter, our non-interest bearing deposits grew 5.9% linked quarter, while time deposits declined by 8.1%. Time deposits now account for 6% of total deposits compared with 11% a year ago. Slide 8 shows credit quality trends, which continue to be better than expectations. Our net charge-off ratio totaled 0.25% in the second quarter compared with 0.31% in the first quarter. The ratio of non-performing assets to loans and other real estate was 0.36% at the end of the second quarter compared with 0.41% at the end of the first quarter. We released reserves of $350 million this quarter, reflective of better-than-expected credit trends and a continued constructive outlook on the economy. Our allowance for credit losses as of June 30 totaled $6.6 billion or 2.23% of loans. The allowance level reflected our best estimate of the impact of improving economic growth and changing credit quality within the portfolios. Slide 9 provides an earnings summary. In the second quarter of 2021, we earned $1.28 per diluted share. These results include the reserve release of $350 million. Net interest income on a fully taxable equivalent basis of $3.2 billion increased 2.4% compared with the first quarter, primarily driven by higher yields and volumes in our investment securities portfolio and favorable earning asset and funding mix shifts, partly offset by lower loan yields. Our net interest margin increased 3 basis points to 2.53%. The impact of lower loan yields was more than offset by a favorable mix shift in both our investment portfolio and funding composition as well as lower premium amortization expense. Slide 11 highlights trends in non-interest income. Compared with the year ago, non-interest income was relatively stable as the expected decline in mortgage banking revenue and commercial product revenue was offset by higher payments revenue, trust and investment management revenue, treasury management fees and deposit service charges. On a linked quarter basis, non-interest income increased 10%, driven by higher business and consumer spending activity, reflecting broad-based reopenings of local economies. Both year-over-year and linked quarter mortgage banking revenues were negatively impacted by slower -- slowing refinancing activity and reduced gain on sale margins. Linked quarter mortgage revenue growth of 15.7% was primarily driven by the favorable linked quarter impact of a change in fair value of mortgage servicing rights, net of hedging activities. Slide 12 provides information on our Payment Services business. In the second quarter, total payments revenues increased 39.5% versus a year ago and was higher by 16.4% compared with the first quarter. Each of our three payments businesses saw strong revenue growth on both a linked quarter and a year-over-year basis, reflective of the strengthening economy and the increased spend activity. Credit and debit card revenue increased 39.4% on a year-over-year basis, driven by stronger credit card sales volumes and higher prepaid card processing activities related to government stimulus programs. Sales volume trends, which are the primary driver of payments revenues, are encouraging. The bottom charts on Slide 12 indicate that as of the end of June, total sales volumes across each of the three payments businesses exceeded comparable 2019 levels. Certain pandemic impacted spend categories continue to lag, in particular corporate T&E. However, consumer travel and hospitality spend volumes are rebounding faster than we expected and the pace of improvement in recent weeks has accelerated a bit. Turning to slide 13. Non-interest expenses was relatively stable on a linked quarter basis as expected. Slide 14 highlights our capital position. Our common equity Tier 1 capital ratio at June 30 was 9.9% compared with our target CET1 ratio of 8.5%. Given an improving economic conditions in the second quarter, we bought back $886 million of common stock as part of our previously announced $3.0 billion repurchase program. For the third quarter of 2021, we expect fully taxable equivalent net interest income to be relatively stable compared to the second quarter. We expect total payments revenues to be relatively stable compared to the second quarter, but we'll continue to track favorably on a year-over-year basis. While we expect sales volumes growth in each of our three payments businesses to continue to improve sequentially, prepaid card volumes are expected to decline toward pre-pandemic levels as the impact of government stimulus dissipates. We expect non-interest expenses to be relatively stable compared to the second quarter. Credit quality remains strong. Over the next few quarters, we expect the net charge-off ratio to remain lower than normal. For the full year of 2021, we expect -- we currently expect our taxable equivalent tax rate to be approximately 22%. I'll hand it back to Andy for closing remarks. Our second quarter results came in as expected. And there are many reasons we are optimistic as we head into the second half of the year. The economy continues to recover toward pre-pandemic activity levels and the consumer and business spending activity continues to improve. Credit quality trends have been a positive surprise. And our payments volumes have come back a bit faster than we expected as recently as a few months ago. We are well positioned for the cyclical recovery that we expect to play out over the next several quarters. More importantly, we are well positioned to delivering superior growth and industry-leading returns on equity over the next several quarters, given our business mix, our comprehensive and holistic payments and banking capabilities and our expansive distribution model supported by world-class digital capabilities. We will now open up the call to Q&A.	u.s. bancorp - q2 diluted earnings per common share $1.28. qtrly diluted earnings per common share $1.28. qtrly net charge-off ratio of 0.25% in 2q21 compared with 0.31% in 1q21 and 0.55% in 2q20. allowance for credit losses declined $350 million during the quarter given improving economic outlook and credit trends. cet1 capital ratio up to 9.9% at june 30, 2021, versus 9.0% at june 30, 2020.
We hope that you and your families are doing well. As many of you know, the TDS family of companies has a practice of long, orderly succession periods to ensure a smooth and seamless transitions. And in that spirit, I will be transitioning the Corporate Relations role to Colleen Thomson over the next couple of quarters. Colleen brings significant knowledge of US Cellular, where she has held leadership positions since 2012. I am excited to have you meet her. And after that transition, Iam remaining with the company in the role of Corporate Secretary for both TDS and US Cellular. And as most of you know, we've historically held our calls at 9 AM on Friday, but there is a calendar conflict this quarter and we moved our call to accommodate that. But going forward, we do expect to move our call back to Friday's at 9 AM Central. We know it's a busy day. We provide guidance for both adjusted operating income before depreciation and amortization, or OIBDA, and adjusted earnings before interest, taxes, depreciation and amortization or EBITDA to highlight the contributions of US Cellular's wireless partnerships. In terms of our upcoming IR schedule, Slide 3. US Cellular is attending the Wells Fargo Virtual TMT Summit on November 30th. And then in January, we are attending the Raymond James Deer Valley Summit in person on January 3 through 5 and Citi's Apps Economy Conference virtually on January 6. And as always, our open-door policy can now be open door, open phone, open video. So, please reach out if you're interested in speaking with us. Turning to Slide 4. We continue to make progress on our environmental, social and governance or ESG program. And most recently, we published TDS's very first ESG report. From our founding over 50 years ago, TDS believes that being a good corporate citizen is fundamental to our long-term success. This being serving as a good steward of the environment and enacting governance practices that align with our corporate values, and truly carrying about our customers, our associates and striving to enhance the lives of the people in the communities we serve. These responsible practices, which make up the S in ESG are what we call our 3 Cs; customer, culture and community. Going forward each quarter, we're going to briefly highlight a recent action that illustrates this commitment. Before turning the call over, I want to remind everyone that due to the FCC's anti-collusion rules related to the ongoing Auction 1-10, we will not be responding to any questions related to spectrum auctions. Before speaking about the balance sheet, I want to recognize all the actions that both business units are taking to lead to higher returns and stronger businesses over the next several years. As we've discussed on past calls, maintaining financial flexibility is one of the pillars of our corporate strategy. Over the years, we've worked to retain relatively low leverage levels, long-dated debt maturities, sufficient undrawn revolving credit facilities and term loans, and significant cash balances to make sure we have the financial resources we need to fund our businesses. On Slide 5, I want to call your attention to all the work that has been done to raise new capital to fund the growth in our business as well at the same time, lowering the average cost of our balance sheet. As you can see, we've raised $3.4 billion since the beginning of 2020 at an average cost of 4.9% and redeemed six separate bond series comprising $1.6 billion in debt with a weighted average cost of 7%. The new capital is a mix of low cost, preferred stock and very long-term retail bonds, along with shorter term EIP securitization debt and bank term loan debt. This fulfills a commitment we made at the beginning of the year to reduce the average cost of our balance sheet and diversify our funding sources. Going forward, we believe that we will continue to have excellent access to the debt capital markets through a variety of instruments in order to continue to fund our business. Finally, before turning the call over to LT, I want to point out that our income tax rate for the quarter was 29%. This is up significantly from the 2020 level in which we saw significant one-time benefits from the CARES Act, which have not recurred. We continue to see positive momentum in those growth areas of our business and we're making progress toward our return on capital goals. Later on, I'm going to let Doug cover the operational and the financial highlights of the third quarter, but first I thought I'd provide a few thoughts on some of these strategic priorities. So top of mind for me continues to be the competitive environment. During the third quarter, we saw a continuation of aggressive promotions in the industry for both new and existing customers. They have had an impact on our postpaid subscriber results and on loss on equipment for the quarter. We expect the high level of promotional aggressiveness to continue through the holiday season and beyond. I'm really pleased with the operational pivot that we've made toward regionalization. We've effectively leveraged that regional strategy to test a variety of different offers and to help us hone in on an approach to properly balance the subscriber growth with profitability. We had a variety of offers in the marketplace in conjunction with the iPhone launch, some much more aggressive than others. And I'm pleased that we're now set up to effectively trial multiple approaches in the marketplace. It's going to be help us -- It's gonna help us be much more effective in optimizing our business. I spoke to you last quarter about some of our new initiatives to drive growth in our business and government in our prepaid operations. We reported another strong quarter of results for prepaid, and we're seeing positive momentum in business sales, particularly in the IoT space and the private networking space. We're also seeing some really terrific traction in our tower business. Applications are up substantially, and operating metrics, particularly cycle times, have improved meaningfully. It's clear to the industry that we're open for business in towers and we're really seeing the benefit of that approach. Talking briefly about network, our network modernization program in multi-year 5G deployment remains on track, the majority of our traffic is now carried by sites that have 5G deployed, equally important, we're getting 5G devices into our customers' hands. So far we have about a quarter of our smartphone subscribers with 5G capable devices. I'll talk a bit about millimeter wave spectrum. We're optimistic on the use of the spectrum for fixed wireless access, we're continuing trials to validate network performance and customer experience and we recently launched commercial offers in a small set of markets, we have more aggressive commercialization plan in 2022. We're offering commercial millimeter wave fixed wireless access speeds of up to 300 megabits per second and to date we're seeing many customers experiencing speeds that far exceed that. Given the speeds that we're seeing in our trials and the enthusiastic reception we received from customers, it's clearly demand for this type of home broadband service. We also believe this product to be a game changer in conjunction with deeper fiber buildouts and helping to bridge the digital divide. I'm also optimistic that the house will be able to address their differences shortly and see their way clear to pass the infrastructure funding bill that's already been passed by the Senate on a bipartisan basis. Hope we can reach a satisfactory outcome so that we have the funding needed to get this technology deployed to those in this underserved areas that need it. To talk briefly about supply chain constraints, they have impacted us like everyone in the industry, we continue to experience some constraints on certain devices. We think we're managing this pretty effectively. It has not had a material impact on our results to date. On the network side, we're seeing extended lead times for various network related components from multiple suppliers. But today, we've been able to mitigate these risks in partnership with our suppliers, like everyone, we continue to closely monitor ongoing global supply and logistics risks. I'd like to end with a comment about the people at US Cellular. And we recently completed our annual engagement survey and the results confirm what I've observed since joining this company. Engagement is incredibly high. We recently received a net promoter score 40, which is an amazing loyalty score. This is especially important right now given expectations about what you're hearing in the press around the great resignation. On that note, our current retention rates are actually higher than they were a year ago. That has a tangible impact on our financials. It comes to things like on boarding and training costs. Let's start with the review of customer results on Slide 8. Postpaid handset gross additions increased by 3,000 year-over-year, largely due to higher switching activity in combination with our strong promotional activity. Of course, this was against the backdrop of industrywide promotional aggressiveness on handsets. We saw connected device gross additions declined 26,000 year-over-year. This was driven by lower sales of Internet products such as hotspots and tablets compared to the prior year when we experienced an increase in demand due to the pandemic. Total smartphone connections increased by 8,000 during the quarter and by 65,000 over the course of the past 12 months. That helps to drive more service revenue given that smartphone ARPU is substantially higher than feature phone ARPU. Moving to Slide 9, I also want to call it the strong trends for prepaid, which were driven by enhancements to our prepaid offerings. We saw prepaid gross additions improved by 9,000 year-over-year. Next, let's turn to the postpaid churn rate shown on Slide 10. Postpaid handset churn depicted by the blue bars was 0.95% up from 0.88% a year ago. This is driven by voluntary churn, which continues to run higher year-over-year as a result of increased switching activity and aggressive industry wide competition. Involuntary churn also increased slightly in the quarter, but it's still below pre-pandemic levels. Total postpaid churn combining handsets and connected devices was 1.15% for the third quarter of 2021 higher than a year ago as we've also seen churn increase on connected devices due to certain business and government customers disconnecting devices that were activated during the peak periods of the pandemic in 2020. Now let's turn to the financial results on Slide 11. Total operating revenues for the third quarter were $1.016 billion, a decrease of $11 million or 1% year-over-year. Retail service revenues increased by $25 million to $699 million. The increase was driven in part by a higher average revenue per user, which I will discuss in a moment. Inbound roaming revenue was $30 million, that was a decrease of $12 million year-over-year driven by a decrease in data volume and rates. One of the factors contributing to this data volume decrease is the merger of Sprint and T-Mobile and the migration of Sprint roaming traffic to T-Mobile's network. Other service revenues were $59 million flat year-over-year. Finally, equipment sales revenues decreased by $24 million year-over-year due to a decrease in average revenue per unit, in large part as a result of an increase in promotional activity as well as a decrease in overall sales volume. We continue to engage an aggressive promotional activity during the third quarter of 2021 to remain competitive with the industry. As LT mentioned earlier, our level of promotional aggressiveness differed by region as we look to optimize our approach creates subscriber gains and profitability. A portion of the resulting promotional costs reduce equipment sales revenues and increased loss on equipment which represents equipment sales revenue [Indecipherable] equipment sold. In addition, loss on equipment in the third quarter 2020 was mitigated by the impacts of the pandemic, specifically lower switching activity and thus aggressive promotional activity. As a result of the combined impact of these factors [Indecipherable] equipment increased $19 million year-over-year from $5 million in 2020 to $24 million in 2021, this change in [Phonetic] loss of equipment was the primary driver of our decline in profitability year-over-year. We expect the aggressive promotional environment to persist for the remainder of 2021 and into 2022 and our full year guidance for 2021 reflects the corresponding financial impact. Now a few more comments about postpaid revenue shown on Slide 12, the average revenue per user or connection was $48.12 for the third quarter up $1.02 or approximately 2% year-over-year. On a per account basis, average revenue grew by $2.72 or 2% year-over-year. The increases were primarily driven by favorable plan and product offering mix, an increase in regulatory revenues and an increase in device protection revenues. Turning to Slide 13, as we continue our multi-year network modernization in 5G rollout, control of our towers remains critical. By owning our towers, we ensure that we maintain operational flexibility to add new equipment and make other changes to our cell sites without incurring additional costs. As you can see on this slide, with the assistance of our third-party marketing agreement, we have seen steady growth in tower rental revenues. Third quarter tower rental revenues increased by 6% year-over-year. We are seeing positive momentum in tower colocation applications and we'll continue to focus on growing revenues from these strategic assets. Moving to Slide 14, I want to comment on adjusted operating income before depreciation, amortization and accretion and gains and losses. To keep things simple, I'll refer to this measure as adjusted operating income. As shown at the bottom of the slide, adjusted operating income was $213 million, a decrease of 8% year-over-year. As I commented earlier, total operating revenues were $1.016 billion, a 1% decrease year-over-year. Total cash expenses were $803 million, an increase of $8 million or 1% year-over-year. Total system operations expense increased 1% year-over-year. Excluding roaming expense, system operations expense increased by 7% due to higher circuit costs, cell site rent and maintenance expense. Roaming expense decreased $8 million or 17% year-over-year driven by lower data rates and lower voice usage. Cost of equipment sold decreased $5 million or 2% year-over-year due to a significant decline in Connected Device sales, partially offset by slightly higher average cost per unit sold as a result of the mix shifting more heavily toward smartphone sales. Selling general and administrative expenses increased $11 million or 3% year-over-year, driven primarily by an increase in bad debts expense and cost associated with supporting enterprise projects and billing system upgrades. Turning to Slide 15, I'll touch on adjusted EBITDA, which starts with adjusted operating income and incorporates the earnings from our equity method investments along with interest and dividend income. Adjusted EBITDA for the quarter was $262 million, a decrease of $20 million or 7% year-over-year. Equity in earnings of unconsolidated entities remain flat year-over-year and we expect the fourth quarter 2021 distribution from the LA partnership to be aligned with the distribution received in the fourth quarter of 2020. Next, I want to cover our guidance for the full year 2021. For comparison, we're showing our 2020 actual results. First, we have narrowed our guidance for service revenues to range of $3.075 billion to $3.125 billion, maintaining the midpoint. For adjusted operating income and adjusted EBITDA, we are maintaining our guidance ranges of $850 million to $950 million and $1.025 billion to $1.125 billion respectively. Maintaining wider ranges reflects our expectation of a continued highly competitive environment for the remainder of the year as well as uncertainty related to the amount of promotional expense that will be incurred during the holiday selling season. For capital expenditures, we are decreasing our guidance range to $700 million to $800 million as we are moving certainly equipment and project spend into 2022, this shift did not impact our 2021 build plan and as LT mentioned our multi-year 5G and network modernization program remains on track. We have also provided a breakdown of capital expenditures by major category. I'm pleased to report on our results and the progress we are making on our strategic priorities as we move toward the end of the year. TDS Telecom grew its footprint 6% from a year ago, now serving $1.4 million service addresses across its market. Based on the successes we have experienced to date, we are increasing our fiber deployment program substantially with the announcement of additional new communities in Wisconsin, Idaho and North Carolina and we are entering into the state of Montana. This significantly advances our goal to bring state of the art dropping capability and competition to more growing communities. In addition, we are now capable of delivering 2 gig Internet speeds in our Spokane, Washington and Meridian, Idaho market and going forward, we will launch 2 gig product in all of our new fiber expansion market. 2 gig provides an exceptional customer experience, doubling our previous maximum speed offering and helping to further differentiate us from the cable competition. Also in the quarter, we completed fiber to the home construction in our Southern Wisconsin cluster where we are seeing total broadband penetration of 38% in the fully launched cluster. In total, during the quarter, we added 20,000 fiber service addresses surpassing 40% of our wireline service addresses, a key milestone for us. From a financial perspective, overall, we grew our topline 2% while planned investment spending on new market launches resulted in lower adjusted EBITDA as expected. Turning to Slide 18, we remain committed to the strategic priorities we set out at the beginning of the year. As previously discussed, our primary objective is to generate growth by investing in our high-speed broadband services. We have a multifaceted approach to this growth that includes leveraging existing networks and constructing greenfield fiber in new markets to expand our footprint. We are very pleased that where we have invested in fiber and our incumbent market, we have achieved superior market share and in our expansion markets we are seeing strong customer pre-registration. In addition, we continue to drive faster speeds in our more rural incumbent market by building to meet our ACAM obligations in utilizing State Broadband grant. We were recently awarded two broadband grants in Wisconsin to expand fiber services to two rural communities. Moving to Slide 19, total residential connections increased 3% due to broadband growth in new and existing markets, partially offset by a decrease in voice connection. Total telecom broadband residential connections grew 7% in the quarter as we continue to fortify our network with fiber and expand into new market. We are on track in our network construction under the A-CAM program also helping to drive growth in our incumbent market. Overall, higher value product mix and price increases drove a 4% increase in average residential revenue per connection. On Slide 20, you can see the broadband connection growth across all markets. Our focus on fast reliable service has generated a 13% increase in total residential broadband revenue. We are offering 1 gig broadband speeds to 57% of our total footprint, including both our fiber and DOCSIS 3.1 market. The 1 gig product along with our 2 gig product in certain expansion markets are important tool that will allow us to defend and to win new customers. In areas where we offer 1 gig service, we are now seeing 20% of our new customers taking the superior product. Turning to Slide 21, we have augmented our success growing broadband with our TDS TV offering. A majority of TDS Telecom's residential customers take advantage of bundling options as 63% of customers subscribed to more than one service which helps to keep our churn well. Residential video connections were nearly flat, wireline growth of 6% driven by our expansion market nearly offset losses in the cable market. Video continues to remain important to our customers. For example, we are experiencing a 38% video attachment rate to every broadband connection in our wireline market where we offer IPTV services. Our strategy is to increase video connections through the offering of our cloud-based TDS TV plus product. The rollout of this product currently cover 61% of our total operations including cable. Moving to Slide 22, we continue to be very bullish on our fiber strategy and how it will transform TDS Telecom in a very meaningful way over the next several years. As we discussed last quarter, given the attractiveness of this opportunity and the heightened level of participation by other over builders, our sense of urgency has increased. We have upsized the number of expansion markets we expect to build over the next several years as well as increasing our fiber builds within our existing footprint. Fiber is the most economical long-term solutions to deliver the best broadband experience. We continue to refine our market selection criteria, and are highly confident in this process. As a result of this strategy, 40% of our wireline service addresses are now served by fiber, which is up from 34% a year ago. This is driving revenue growth while also expanding the total wireline footprint 8% to 891,000 service addresses. On Slide 24, we highlighted the total service addresses to the cluster. The clusters that are in construction and we are actively marketing. We recently announced our expansion of fiber into several new communities. Further expanding our existing clusters we announced Nampa, Idaho and several communities in Wisconsin including [Phonetic] anchor markets Green Bay and (Indecipherable). In addition, we announced several communities that will plant a flag in new geographies. Eau Claire, Florida and Onalaska, Wisconsin creating a Western cluster Billings, Montana, the first in this state and several communities just southeast of Charlotte in North Carolina, where we operate a cable market today. In total, these communities add more than 270,000 additional service addresses to our existing fiber deployment plan. Through the third quarter, we have 358,000 total fiber service addresses and are working to build out the footprint in these announced market growing to 929,000 service addresses over the next several years. Year-to-date, we completed construction of 51,000 fiber addresses, adding 20,000 service addresses in the quarter. This progress continues to be slower than planned due to permitting complexity and contractor scheduling delays and is putting pressure on service address delivery target in the fourth quarter. For example in Meridian, Idaho, we experienced a temporary delay on more than 35,000 service addresses and just recently have restarted construction. As a result, we expect to fall short of our construction goal this year, but still improve our delivery compared to last year. Therefore, we have lowered our guidance for capital expenditures to reflect these delays, but we still expect to be within the guidance range for revenue and adjusted EBITDA for the year. We also continue to proactively manage future construction and customer equipment inventory demand where we are seeing lengthening leave times with our suppliers. As an example, some contractors have experienced staffing shortages and are unable to complete fiber builds in the desired timeframe, we will continue to monitor these challenges and update you on our progress going forward. On Slide 25, total revenues increased 2% year-over-year to $252 million driven by the strong growth in residential revenue, which increased 6% in total. The chart include residential revenue mix, which highlights the increasing contribution of our expansion markets. Incumbent wireline markets also showed solid residential growth of 3% due to increases in broadband connections as well as increases from within the broadband product mix, partially offset by a 4% decrease in residential voice connection. Cable residential revenue grew 6%, also due to increases in broadband connections as well as the product mix. Commercial revenues decreased 6% in the quarter, primarily driven by lower CLEC connections, partially offset by a 5% increase in broadband connection, wholesale revenues decreased 5% due to certain state USF support timing. So let me sum up the combined financial results for the quarter as shown on Slide 26. Total revenues increased 2% from the prior year as growth from our fiber expansions that increases in broadband subscribers exceeded the declines we experienced in our legacy business. Cash expenses increased 3% due to both supporting our current growth as well as spending related to future expansion into new market, which is not yet reflected in our revenue. Future market costs include direct costs such as sales, marketing, real estate and technicians in addition to shared service costs necessary to support new market growth. As a result, adjusted EBITDA decreased 2% to $77 million as expected. Capital expenditures were down 1% to $91 million as increased investment in fiber to finance were offset by decreased cent on core operation and on Slide 27, we provided our updated 2021 guidance. Our revenue and adjusted EBITDA are right in line with our expectations. And now that we are closer to the end of the year, we are narrowing our ranges and slightly increasing the midpoint on revenue. We expect revenues to be between $990 million and $1 billion, $20 million and adjusted EBITDA to be between $295 million and $315 million. With the construction delays and build challenges I mentioned earlier, we are lowering our expectations for capital expenditures to be between $400 million and $450 million. It's the dedication and hard work of all our associates that contribute to our company's success and for that I am grateful. I look forward to sharing our final 2021 quarterly results with everyone in February. Operator, we're ready to take questions.	q3 revenue $1.016 billion. united states cellular corp qtrly earnings per share 38 cents.
We wanted to send our continued best wishes out to you and your families and hope that you are all well. We provide guidance for both adjusted operating income before depreciation and amortization, or OIBDA and adjusted earnings before interest, taxes, depreciation and amortization, or EBITDA, to highlight the contributions of UScellular's wireless partnerships. In terms of our upcoming IR schedule, Slide 3, we will be virtually attending the Raymond James Institutional Investors Conference on March 2, the Morgan Stanley TMT Conference on March 4, and the Deutsche Bank Media, Internet & Telecom Conference on March 9. And our open-door policy obviously is now more of an open phone or an open video policy, so please reach out to us, if you'd like a meeting. Before turning the call over, I want to remind everyone that due to the FCC's anti-collusion rules related to Auction 107, which are still in effect, we will not be responding to any questions relating to that auction. I'm going to make some brief comments about the balance sheet and our funding position. But before doing so, I'd like to recognize the impressive operational and financial results of both businesses in 2020. It is these results that give us the confidence to invest back into the businesses. As we've discussed on past calls, maintaining financial flexibility is one of the pillars of our corporate strategy. Over the years, we've worked to retain relatively low leverage levels, long-dated debt maturities, sufficient undrawn revolving credit facilities, and significant cash balances, while at the same time making sure we have the financial resources we need to fund our businesses. As you can see on Slide 4, at year-end, TDS continue to have a good financial position, including ample available funding sources consisting of cash and cash equivalents, available revolving credit facilities, undrawn term loans and undrawn portions of our EIP securitization facility. UScellular and TDS Telecom are both currently in investment cycles, with UScellular investing in network modernization, 5G and spectrum, and TDS Telecom aggressively investing in out-of-territory fiber. Given this, we were very busy last year raising new capital and locking in committed sources of capital. At UScellular, we executed on two $500 million bond transactions, increased the size of our term loan in EIP securitization program, and extended the term of our revolver. At TDS, we put in place a new term loan and extended our revolver. These financings put us in a position to largely fund our capital plans for 2021. Nevertheless, we will continue to look for opportunities to lock down additional financing during 2021 to satisfy future funding needs, especially our fiber program, reduce the cost of our balance sheet and otherwise adjust our balance sheet. We believe that we have access to a wide range of potential debt and debt-like securities. I also want to highlight that in 2020, the CARES Act provided a unique opportunity to carry back tax losses from 2020 against profits made in prior years when the federal tax rates were 35%, which is 14% higher than the current rate. To take advantage of this, among other actions, we accelerated some capital spending from 2021 into 2020. The net effect of all this activity was an expected cash refund of approximately $180 million, the majority of which we expect to receive in the first half of 2021, which includes a permanent tax benefit of $60 million. For GAAP accounting purposes, this yielded an unusually low effective tax rate of 6.4%. TDS continues to return value to its shareholders primarily through dividends, as we again raised our dividend, representing the 47th consecutive year that we have increased it. In sum, we are in a financially solid position to take advantage of growth opportunities in each of our businesses. We're going to cover not just our strong results for the fourth quarter and all of 2020, but we'll also lay out our plans and objectives for 2021. So, I've been here long enough now to understand that this is a heck of a company and we have a lot of potential and we have the culture and we have the assets to seize the opportunities in front of us. I'm looking forward to discussing that with all of you today. If we flip to Page 6, just to state the obvious, 2020 was a challenging year. I think it underscored not just the strength and resilience of our company, but just how essential our services are basically to society. I think the entire industry has stepped up to the challenge of 2020. And I think that the public views us very differently than they did before the pandemic. And I think this will have lasting benefits. Operationally, pandemic led to significant increased demand in the network. We saw over 50% increases in data usage year-over-year. On the flip side, we saw decreased store activity. Our traffic was down almost 30% in the fourth quarter, and that's just a little bit less impact than the retail industry in general over that same time period. I'm really proud about how our team responded. As you'll see in the numbers that Doug is going to go through, we recorded very low levels of churn. It's proof that our network team continues to deliver outstanding experience. We also posted strong subscriber numbers, proof that our sales teams are doing the most with the available opportunities. Most importantly, we've worked hard to ensure the safety of our associates and our customers. Just to put a little bit of detail behind that, employees whose jobs can be performed remotely are working from home. We do consistent enhanced cleanings of our facilities, all of our associates have PPE that they are worn during customer interactions, we have a daily health check for all of our associates, and we continue to require social distancing and mask wearing in all of our Company facilities and that includes our stores. We reported a strong year with improved subscriber and financial results. And Doug is going to provide some more details in a moment, but just at a high level, we maintained low postpaid churn, we grew postpaid net adds. Service revenues were increased, driven mostly by an increase in postpaid ARPU. Cash expenses decreased as a result of favorable bad debt expense and continued expense discipline. We realized increased income from our equity method investments and all of that together drove adjusted EBITDA to increase 5% year-over-year. As I mentioned earlier, we experienced a 54% year-over-year increase in daily usage, but we managed our systems operations expenses to only a 3% year-over-year increase. We also completed our VoLTE rollout in the fourth quarter. We ended the year with 5G capability at 24% of our cell sites. And those cell sites handle 50% of our overall traffic. By the end of the first quarter of this year, we'll have 5G service in at least a portion of every single one of our markets. Let's turn the page to Slide 7. 2020 has placed us in a strong position. We've got great sales and profitability momentum. And so our strategic imperatives for 2021 are pretty simple, you need to drive growth. We've adopted a regional model to be more agile, respond better to our customers, and execute more market-specific promotions. We'll also be enhancing our digital capabilities to provide better lifecycle management, targeting and messaging. We're also placing increased emphasis on the prepaid in the B2B segments and we currently under index on those and I've mentioned those growth areas in previous calls. Our long-term goal is to improve return on capital. We have a fairly clear mission for our organization. And that's to connect our customers to the things that matter most to them. Executing on that mission requires investment. As you'll see when Doug goes through our capital plans, we need to expand our return on capital in order to optimize that investment. We'll be pulling every lever at our disposal to improve return over time. You can expect to see revenue growth, coupled with expense discipline, as well as capital optimization. That approach will not be limited to our wireless operating business. We'll also be looking to optimize the significant value that exists within our broader asset portfolio, that includes our towers, spectrum and our partnerships. Network performance continues to be a hallmark of our strategy. We'll be continuing our network modernization program and the multi-year 5G deployment. We will begin to deploy our millimeter wave spectrum in order to offer fixed-wireless access. We're starting with three test markets. That will give us some valuable learnings as we look to rollout this high speed product to additional markets in our footprint. One of the factors that drew me to UScellular is that this company is built on the foundation of bringing connectivity to the underserved. You can expect to see us working with regulators and partners in the industry to continue to work toward ensuring that all Americans have access to high-quality and affordable communication services. It's important to note that I view this issue as separate from encouraging 5G deployment. As an industry, we need to focus on 5G leadership for America. We also need to make sure we're bridging the digital divide, and those two issues are not always synonymous. We'll continue to focus on culture development. We have an amazing culture at UScellular, but we have to continue to emphasize diversity, equity and inclusion efforts to ensure that we remain a fantastic place to work. Finally, I want to take you back to the first bullet on this page. When it comes to pandemic, I'm optimistic there is a light at the end of the tunnel, but we have to remain vigilant and we have to remain focused on keeping our customers and associates safe. We had a lot of challenges in 2020. Let me pass it over to Doug. Let me touch briefly on postpaid connections results during the fourth quarter shown on Slide 8. Postpaid handset gross additions decreased due to lower switching activity and decreased store traffic due primarily to the impacts of COVID-19. This decrease was partially mitigated by increased demand for connected devices. Total smartphone connections increased by 47,000 over the course of the past 12 months. That helps to drive more service revenue, given that smartphone ARPU is about $21 higher than feature phone ARPU. As mentioned, we saw connected device gross additions increase by 12,000 year-over-year. This was driven by gross additions of hotspots, routers and fixed wireless devices, as a result of an increase in demand by customers seeking wireless products to meet their need for remote connectivity due to the impacts of COVID-19. During Q4, we saw an average year-over-year decline in store traffic of around 30% related to the impacts of COVID-19. The decrease in store traffic had a negative impact on gross additions, although connected device activity remained stronger than the prior year. Next, I want to comment on the postpaid churn rate shown on Slide 9. Currently, as you would expect, churn on both handsets and connected devices is running at low levels. Postpaid handset churn, depicted by the blue bars, was 1.01%, down from 1.11% a year ago. This was due primarily to lower switching activity as customers' shopping behaviors were altered due to the pandemic. The FCC Keep Americans Connected Pledge ended on June 30. And about 60% of the customers that were on the pledge at June 30 are actively paying. Our churn was not materially impacted by the pledge in the fourth quarter or the full-year 2020. Total postpaid churn, combining handsets and connected devices, was 1.21% for the fourth quarter of 2020, also lower than a year ago. Now let's turn to the financial results on Slide 10. Total operating revenues for the fourth quarter were $1.073 billion, a modest increase year-over-year. Retail service revenues increased by $17 million to $683 million. The increase was primarily due to a higher average revenue per user, which I will discuss in a moment. Inbound roaming revenue was $33 million. That was a decrease of $9 million year-over-year, driven by a decrease in data volume. One of the factors contributing to this data volume decrease is the merger of Sprint and T-Mobile and the migration of Sprint roaming traffic to T-Mobile's network. Other service revenues were $60 million, an increase of $5 million year-over-year, partially due to a 9% increase in tower rental revenues. Finally, equipment sales revenues increased by $8 million year-over-year due to an increase in average revenue per unit for new smartphones, partially offset by lower accessory sales. Now a few more comments about postpaid revenue shown on Slide 11. Average revenue per user or connection was $47.51 for the fourth quarter, up $0.94 or 2% year-over-year. On a per account basis, average revenue grew by $3.88, or 3% year-over-year. The increases were driven by several factors, including increased device protection revenues, an increase in regulatory recovery revenues and having proportionately fewer tablet connections, which on a per unit basis contribute less revenue than smartphones. Turning to Slide 12. As we continue our multi-year network modernization and 5G rollout, control of our towers remains very important. By owning our towers, we ensure we maintain the operational flexibility to add new equipment and make other changes to our cell sites without incurring additional costs, which is very important, particularly when you're going through a technology evolution. While the towers support our network strategy, we also recognize that they are valuable and provide a financing alternative which we evaluate along with our other financing options. As you can see on the slide, with the assistance of our third-party marketing agreement, we have seen steady growth in our tower rental revenues. Fourth quarter tower rental revenues increased by 9% year-over-year. We will continue to focus on growing revenues from these strategic assets. Moving to Slide 13, I want to comment on adjusted operating income before depreciation, amortization and accretion and gains and losses. To keep things simple, I'll refer to this measure as adjusted operating income. As shown at the bottom of the slide, adjusted operating income was $178 million, a decrease of 2% year-over-year. As I commented earlier, total operating revenues were $1.073 billion, a 2% increase year-over-year. Total cash expenses were $895 million, increasing $24 million or 3% year-over-year. Total system operations expense increased year-over-year. Excluding roaming expense, system operations expense increased by 7%, driven partially by costs associated with our network modernization and 5G deployment, including higher maintenance and support costs for network operations, higher cell site rent expense and an increase in costs to decommission network assets. Note that total system usage grew by 36% year-over-year. Roaming expense increased $3 million, or 9% year-over-year, due to a 68% increase in off-net data usage, partially offset by lower data rates. Cost of equipment sold increased $14 million, or 5% year-over-year, due primarily to an increase in the average cost per unit for new smartphones, partially offset by a decrease in accessory sales. Selling, general and administrative expenses decreased $4 million, or 1% year-over-year, driven primarily by a decrease in bad debts expense. Bad debts expense decreased $10 million, due to lower write-offs, driven by fewer non-pay customers as a result of a better credit mix and improved customer payment behavior. Also contributing to the decrease was lower advertising expense due to reduced sponsorship expense from canceled events related to COVID-19. Turning to Slide 14 and adjusted EBITDA, which starts with adjusted operating income and incorporates the earnings from our equity method investments along with interest and dividend income. Adjusted EBITDA for the quarter was $222 million, flat year-over-year. Equity and earnings of unconsolidated entities increased by $4 million, or 11%. Total operating revenues were $4 billion, a modest increase year-over-year. This was driven by an increase in retail service revenues due to higher average revenue per user, partially offset by a decline in the average postpaid subscriber base. Also contributing to the increase were higher tower rental revenues and miscellaneous other service revenues. These increases were partially offset by decreases in inbound roaming revenues and equipment sales. Total cash expenses were $3.2 billion, a decrease of $29 million year-over-year. This was due primarily to a decrease in selling, general and administrative expenses, driven by decreases in bad debts expense and advertising expense. Also contributing to the decrease was lower cost of equipment sold. Such factors were partially offset by an increase in system operations expense. System operations expense increased by 3%, despite a 54% increase in total system usage on our network and a 59% increase in off-network data usage. Adjusted operating income and adjusted EBITDA grew by 5%. Next, I want to cover our guidance for the full -year 2021. For comparison, we're showing our 2020 actual results. Our guidance assumes that COVID-19 does not cause any significant incremental economic consequences that would negatively impact our business. As such, COVID-19 financial impacts consistent with those experienced in the second half of 2020 have been contemplated in establishing the assumptions used in developing our financial guidance. For total service revenues, we expect a range of approximately $3.025 billion to $3.125 billion. This reflects our expectation of low single-digit growth in billed revenues and ongoing pressure with respect to inbound roaming revenues as legacy Sprint roaming traffic continues to decline and other carriers take measures to manage their roaming traffic. We expect adjusted operating income to be within a range of $800 million to $950 million, and adjusted EBITDA within a range of $975 million to $1.125 billion. This guidance reflects our estimates for moderate growth in both revenues and cash expenses. Cash expenses are impacted by estimated increases in loss on equipment due to a higher expected transaction volume and bad debts, as this expense trends toward pre-pandemic levels. For capital expenditures, the estimate is in a range of $775 million to $875 million. This reflects our expectation of lower network capital spend. We have provided a breakdown by major category for our 2020 and estimated 2021 capital expenditures. We were able to pull some network spend forward into 2020 from 2021, and completed our VoLTE deployment, which contributed to the decrease in expected 2021 capital expenditures compared to 2020. I'm pleased to speak to you about our progress on our growth strategies by sharing some of our accomplishments during the past year. Overall, Telecom had an outstanding year. Our highest priority, much like UScellular, has been to keep our employees and customers safe during the pandemic. This required quick actions, sound judgments and a significant number of new protocols to service our customers, creativity on the part of our sales and marketing teams and flexibility across the entire organization. Despite the many challenges we had to overcome, we grew revenues 5% and reinvested savings from operational efficiencies into our growth initiatives, while still modestly improving adjusted EBITDA. The pandemic continues to confirm the importance of high-speed Internet and how important our investments have been to serve all of our customers. We continue to remain focused on expanding and upgrading our broadband services. We see the opportunity to work with industry allies, seeking additional support to improve Internet for our rural customers to help bridge the digital divide. We have been extremely active in deploying fiber by investing a $130 million during 2020. In addition to the expansion of fiber-to-the-home infrastructure, we connected over 67,000 service addresses to our network, bringing total fiber addresses to 307,000, both in existing markets and our growing expansion markets. We have moved new markets from the planning stage to construction, and have been very pleased with our pre-launch registrations and orders. It is critical to build these fiber networks and connect subscribers quickly to stay in front of potential competitors. We have an active pipeline of identified markets and a tested game plan to plant our flags in new markets that will expand our out-of-territory footprint even further. We had strong broadband sales across both our wireline and cable markets. We continue to improve our broadband products in terms of speed, capacity and reliability. As a result, we have continued to see increased market share. We have augmented this success with the launch of our TDS TV+ offering across our wireline IPTV markets and cable markets. I'm really pleased with our next generation video platform. It enhances the customer experience by combining linear and non-linear programming and enabling personalized content recommendations, while adding user interfaces to mobile devices. As a bundle, these products provide a best-in-class customer experience and help us to increase our broadband market share. Equally important is our focus on operating lean. Through system and process improvements, we are taking costs out of our legacy business, so we can redeploy those savings into our growth initiatives. We achieved significant cost savings in 2020. We curtailed spending due to the uncertainty of the pandemic and achieved savings through our aggressive supply chain management. We also accelerated self-serve capabilities and preventative network maintenance, which reduced truck rolls and calls into our call center. In our fourth year of investment under the A-CAM program, we spent $30 million and have exceeded our subscriber gross add and revenue projections for the year. We met our year-four A-CAM obligations for reportable locations in all, but two states, where we have taken measures to address this shortfall. Finally, we have successfully integrated the Continuum acquisition that closed on December 31, 2019. We are upgrading the existing plant to DOCSIS 3.1, and are deploying fiber in neighborhoods not previously built. The financial results have been in line with our expectations, confirming our desire to pursue opportunistic cable acquisitions. Now turning to slides 19 and 20. Our 2021 strategic priorities remain focused on growth and continuous improvement. Our goal for the year is to generate overall revenue growth of around 3%, with new market growth offsetting wireline commercial and wholesale erosion and cable continuing its strong performance. We plan to deliver 150,000 new fiber service addresses by the end of 2021, more than doubling last year's address delivery and increasing our wireline footprint by nearly 20%. Within our markets, we expect to continue to increase our broadband market share and improve our product offerings to increase ARPU. We continue to be bullish on our fiber strategy. Fiber is the most economical long-term solution to deliver the best broadband experience. Selecting the right markets remains key. And while we have an attractive funnel of markets identified, we continually refine our selection process with new learnings. Our marketing and sales techniques enable us to effectively market at the neighborhood level. This gives us tremendous flexibility over timing and execution to consistently target a high broadband take rate. Our strategy to cluster markets is critical, as it gives us economies of scale and better returns over time. Additionally, our strategy capitalizes on strong macroeconomic trends, such as growing work-at-home environments, strong population migrations in our chosen markets, favorable advances in technology that support our platform, and bipartisan support for rural broadband funding. In closing, I want to highlight our most powerful resource. It's the strength, resiliency and talent of our people and their proven ability to execute our focused strategy. Fostering diversity, equity and inclusion in our teams makes us even stronger. Our team may not be the largest in the industry, however, they are highly motivated to compete and win. Let me begin by highlighting our consolidated financial results for the quarter, as shown on Slide 21. Revenues increased 6% from the prior year, as growth from our fiber expansions, increases in broadband subscribers and the Continuum cable acquisition exceeded the declines we experienced in our legacy business. Cash expenses increased 8%, due to additional spending from our growth initiatives and increases in facility maintenance. Adjusted EBITDA declined 2% to $74 million. Capital expenditures increased to $147 million, as we continue to increase our investment in fiber deployment and success-based spend. I will cover our total fiber program more in detail in a moment, but for now, let's turn to our segments beginning with wireline on Slide 22. Broadband residential connections grew 9% in the quarter, as we continue to fortify our network with fiber and expand into new markets. From a broadband speed perspective, we are offering up to 1 gig broadband speeds in our fiber markets as 13% of our wireline customers are taking this product where offered. Across our wireline residential base, including our new out-of-territory markets, 40% of broadband customers are taking 100 megabit speeds or greater compared to 33% a year ago, helping to drive a 5% increase in average residential revenue per connection. Wireline residential video connections grew 8%. And at the same time, we expanded our IPTV markets to 55, up from 40 a year ago. Video remains important to our customers. Approximately 40% of our broadband customers in our IPTV markets take video. Our strategy is to increase this metric as we expand into new markets that value these services and through our new TDS TV+ product. Our IPTV services in total cover 41% of our wireline footprint today, leaving opportunity to further leverage our investment in video. Slide 23 shows the progress we are making this year on our multi-year fiber footprint expansion, which includes fiber into existing markets and also out-of-territory fiber builds. As a result of this strategy, over the last several years, 307,000 or 36% of our wireline service addresses are now served by fiber, which is up from 30% a year ago. This is driving revenue growth, while also expanding the total wireline footprint 7% to 845,000 service addresses. We recently announced our expansion of fiber into the city of Boise, Idaho and the Fox Cities, several communities centered around Appleton, Wisconsin. These additional markets bring our fiber program, which began in 2019, to 430,000 service addresses, which will expand our total footprint -- our total fiber footprint to 620,000 service addresses by 2024. We continue to be pleased with overall take rates, which are generally exceeding expectations in the areas we have launched to date. We are expecting our fiber service address delivery to double in 2021. Now looking at our wireline financial results on Slide 24. Total revenues increased 1% to $173 million, largely driven by the strong growth in residential revenues, which increased 8% due to growth from broadband and video connections as well as growth from within the broadband product mix, partially offset by a 2% decrease in residential voice connections. Commercial revenues decreased 8% to $37 million in the quarter, primarily driven by lower CLEC connections. Wholesale revenues decreased 3% to $46 million due to certain state USF timing support. In wireline, cash expenses increased 3% on higher video programming fees, maintenance expense and advertising, partially offset by the capitalization of new modems previously expensed. In total, wireline adjusted EBITDA decreased 8% to $50 million. Moving to cable on Slide 25. Cable total revenues increased, due to the acquisition of Continuum and increased broadband connections. Total cable connections grew 2% to 379,000, driven by 8% increase in total broadband connections. Broadband penetration continued to increase, up 200 basis points to 46%. On Slide 26, total cable revenues increased 18% to $76 million, driven in part by the acquisition. Without the acquisition, cable revenues grew 9%, driven by growth in broadband connections for both residential and commercial customers. Our focus on broadband connection growth and fast reliable service has generated a 27% increase in total residential broadband revenue, including organic growth of $5 million or 18%. Also driving the revenue change is a 6% increase in average residential revenue per connection, driven by higher-value product mix and price increases. Cash expenses increased 19%, including those from the acquisition, or 12% excluding acquisition due to increased employee expense. As a result, cable adjusted EBITDA increased 14% to $23 million in the quarter. Before I move to guidance, let me summarize our consolidated financial results for the full year, as shown on Slide 27. Revenues increased 5%, about half of which was due to the cable acquisition. Cash expense also increased 5%, again, mostly due to the acquisition, but also as we redeploy spending from our legacy businesses to our growth initiatives and expansion into new markets. Adjusted EBITDA grew 1% from last year to $317 million. On Slide 28, we provided guidance for 2021. We are forecasting total Telecom revenues of $975 million to $1.025 billion in 2021, compared to $976 million in 2020. This reflects our goal of 3% top line growth, driven by continued improvements in both the wireline and cable segments. This includes contributions from our new fiber markets growing to $22 million in 2020 to nearly $50 million in 2021, offsetting declines in the legacy parts of our business. The increase in revenue will contribute to an adjusted EBITDA that we expect will be between $290 million to $320 million in 2021, compared to $317 million in 2020. Increases in fiber expansion costs are expected to outpace cost reductions made in other areas of our business, as we expect to more than double our service address delivery in 2021 compared to 2020. Capital expenditures are expected to be between $425 million and $475 million in 2021 compared to $368 million in 2020. Wireline capex guidance includes $240 million for fiber deployments, nearly double our 2020 spending as well as nearly $90 million in success-based spending in both wireline and cable and approximately $25 million for the A-CAM program. And Shelby, we are ready to take questions.	q4 revenue $1.073 billion versus refinitiv ibes estimate of $1.06 billion. united states cellular corp - sees 2021 capital expenditures $775-$875 million.
As we announced last September, Colleen Thompson will be taking over leadership of the IR function in May. We've been working together to ensure a smooth transition, but I'll certainly be involved for the next few months. I've spoken to a number of you in the past couple of months, but for those that I haven't met yet, I look forward to the opportunity. We provide guidance for both adjusted operating income before depreciation and amortization or done and adjusted earnings before interest, taxes, depreciation and amortization, or OIBDA, and adjusted earnings before interest, taxes, depreciation and amortization, or EBITDA, to highlight the contribution of UScellular's wireless partnerships. In terms of our upcoming IR schedule, on Slide 3, the team is dividing and conquering conquering and presenting at both the Raymond James and the Morgan Stanley conferences on March 7. And then on March 14th, we will be participating at the Deutsche Bank conference. And as always, our open-door policy can now be an open door, phone or video policy. So please reach out if you're interested in speaking with us. In December, we announced that I will be retiring in May, and Vicki Villacrez will be replacing me. Vicki has been CFO of TDS Telecom since 2012 and prior to that, led financial planning and strategic analysis for the enterprise, so this transition should be very seamless. Vicki has been an important driver of TDS Telecom's success over the past 10 years, and she will bring a wealth of experience to her new job. I congratulate her on this new challenge. On Slide 4, as we look to -- at 2022, I want to highlight all the positive trends impacting our businesses. Demand for broadband continues to grow. Connectivity, whether mobile or fixed, is a necessity to remote education, healthcare, and work. The markets we serve, primarily suburban and rural, are benefiting from people migrating to these areas out of major cities. Additionally, 5G offers high speed fixed wireless. And with fiber available to only 30% of households in the U.S., this represents a great opportunity for us. TDS was founded 50 years ago on a mission of bringing connectivity to unserved and underserved markets, so the introduction of the infrastructure bill brings opportunities for both of our businesses. And lastly, over that time, TDS has also held a multi-stakeholder approach to good corporate citizenship at the forefront of its values. As we expand our ESG program, we are essentially reinforcing the values that we have already had, caring about customers and associates, striving to enhance the lives of people in our communities, as well as serving as a good steward of the environment. As we discussed on our past calls, maintaining financial flexibility is one of the pillars of our corporate strategy. Our strong financial position and ready access to the debt capital markets enabled UScellular to purchase valuable mid-band spectrum while also enabling TDS Telecom to expand investments in our growing fiber program. This strong financial position and market access will be important as we continue to invest in our fiber program in the future, as Jim will discuss later in the call. Before the business units discuss their successes, I want to briefly talk about the transformation of our balance sheet as illustrated on Slide 5. First, we have worked to diversify our funding sources through a variety of different types of financings, including preferred stock and export credit term loan, a syndicated term loan, new 10-year co-bank term loans, and an increase in our equipment installment receivables securitization facility. In addition, we had a goal to lower the average cost of our financings. Since the beginning of 2020, we have raised three and a half billion in new capital, both debt and preferred equity at 4.8% while at the same time redeeming $1.8 billion in debt. That carried a weighted average cost of 6.9%, reducing our average cost from 6.7% to 5%, and resulting in $37 million in annual coupon savings. Importantly, going forward, we believe that this -- that we will continue to have access to the debt capital markets through a variety of instruments to continue to finance our future growth. Finally, I want to highlight that we have again increased our dividend rate. This represents the 48th consecutive year that we increased our dividend, quite an accomplishment. We continue to see positive momentum in several focus areas of the business, and that includes prepaid, business and government, and fixed wireless. We've developed tactical plans to reach our return on capital goals over the next three years. I'm going to let Doug cover the operational and financial highlights, as well as our guidance for 2022. I first want to provide a few thoughts on these strategic priorities. Last year, we launched a regional aviation strategy. That's something our competitors can't replicate. That lets us test and optimize a wide range of actions, and that includes pricing constructs, promotions, media mix. The renewed focus on prepaid led to some encouraging initial results and positive prepaid ads for the year, as well as laying the foundation for future growth with expanded distribution and a new approach to lifecycle management. Last year, we laid the foundational work to build the business and government side of the business. And that includes segmentation and specialization of our internal sales team, as well as the addition of new distribution, new partners, new channels. And this should position us to generate meaningful revenue growth. As I discussed in previous calls, we've strengthened our market position as a tower company, made numerous enhancements, which let the market know that we're open for business. You can see that in the results. I think we're just getting started here. Turning to the network, we continue to pursue our network modernization program in our multi-year 5G deployment. The majority of our traffic is now carried by sites that have 5G deployed. And equally important, we're getting 5G devices into our customers hands. So far, nearly 30% of our smart phone subscribers have 5G-capable devices. The biggest development on the network side in 2021 was our targeted acquisition of C-Band and DOD spectrum. We now have a really solid mid-band spectrum portfolio. Even though the auctions were quite expensive when you compare them historically, I'm really pleased that our outcome. And I'm going to ask Mike Irizarry to give you a bit more detail on this. Turning to Slide 8, we continue to advance our 5G spectrum strategy. And with the spectrum we acquired in the C-Band and DOD auctions, we will have mid-band spectrum and substantial majority of our operating footprint, covering 80% of our subscribers with 100 megahertz of mid-band. This is in addition to our strong, low band and millimeter wave spectrum positions. Mid-band serves as the bridge between our low band and our high band holdings. As a reminder, we have previously acquired millimeter wave spectrum with an agreeable spectrum depth of 530 megahertz across our footprint. This gives us strong positions in all three spectrum bands low, mid and high, and provides us plenty of capacity to continue to deliver outstanding mobile and fixed wireless services to our customers and support future 5G services and use cases. In total, including required incentive and relocation payments, we have invested slightly over $2 billion in mid-band spectrum and have done so at efficient prices as our average price per megahertz pop that we paid in both auctions, 107 and 110, was lower than the overall auction averages. As mentioned earlier, we were able to successfully raise the capital to finance these purchases while also reducing our cost of financing. We are preparing to deploy mid-band equipment on our network, optimizing power climbs, and radio requirements for both DOD and C-band, as well as leveraging efficiencies with our ongoing 5G modernization plan. These efforts will begin prior to our C-band spectrum being cleared, which will allow us to turn on our mid-band spectrum efficiently. Overall, our strong spectrum position and the network experience that it enables will be key to enabling our 2022 goals, which LT will discuss next. We turn to Page 9. Our strategic priorities for 2022 will look familiar to you, and they build on our progress in 2021. Our mission remains the same. Our company is dedicated to connecting our customers to the places and the people that matter most to them. As you know, executing that mission requires a lot of investment. I mentioned the investment we made in spectrum earlier. You're going to hear from Doug later that we plan to maintain a steady pace of capital investment. We modernize our network and roll out the mid-band spectrum that we purchased. Or to justify that investment, we have to expand our return on capital. And that's the key metric we use to set our long-term plans for the business. One key opportunity that we have in the next year or two that should help a lot with our return on capital goals is to take advantage of the funds being allocated through the recently passed Infrastructure Investment and Jobs Act, the IIJA. This is a potential game changer, not just for UScellular, but for finally connecting the un- and underserved, particularly in rural America. Put some context around it, you got $46 billion allocated to broadband. The specific allocations are still being worked out but you can think of about $20 billion likely flowing to the states that we operate in and at least $8 billion flowing to the areas where we operate network. A lot of that will go to fiber, it should. As I mentioned in our last call, I would encouraged the Department of Commerce had committed to avoiding symmetry requirements. That allow its fixed wireless to potentially play a big role as well. I talked in previous calls about how encouraged I am by the results from our millimeter wave fixed wireless trials. You see nearly one gig of speeds across seven kilometers with line of sight. We've commercially launched our millimeter wave product at 300 gigs. That's a massive improvement over existing solutions. But the challenges in the tower economics, in order provide comprehensive coverage, we need much denser towers. The IIJA can provide the funding necessary to make the economics work. It's a lot cheaper to build and run fiber to one tower, covers hundreds of homes and businesses, than it is to run fiber to each of those individual locations. And the exciting part is that the benefit doesn't stop with fixed wireless. We can use infrastructure funding to improve the economics for tower builds to focus on fixed wireless. You can also improve the coverage profile of 5G. That'll significantly improve our mobile network experience to our postpaid and prepaid base. This is an extra benefit to provide funding to wireless carriers for broadband deployment the fiber can't match. And just in case you forgot, and I know you didn't, we're also the only mobile operator that owns our towers. So we can market those new towers to other carriers, which also creates positive economics. It would take several years to execute this plan but I'm enthusiastic about the prospects to work with state and local governments to really improve the experience for underserved areas, helping to bridge the digital divide in the communities in which we invested, significantly advancing our network, and doing it all with positive economics for our stakeholders. And before I talk more about the growth levers for 2022, I do want to talk about one other key strategic area, and that's our talent. We manage the great resignation incredibly well thus far. Our attrition was relatively stable year over year in 2021. We recognized on Forbes list of America's best employers. We're number 141 in the country. That's up from number 413 last year, and we're ranked as the best employer in telecom. That's ahead of Cox at 180, ahead of Verizon at 244, ahead of T-Mobile at 336, and ahead of a lot of others that weren't even ranked. And in my view, that's due to the tremendous culture of this place but we're going to have to keep investing in it. And you can expect to see an even increased emphasis on diversity, equity, and inclusion to ensure that we remain a fantastic place to work. And if you'd like to witness our customer-focused culture firsthand, I encourage you to tune in to Undercover Boss on CBS on March 4th just to see how powerful our culture is, and you can also laugh at my outrageous mustache. A major strategic objective for us is growth, and I want to cover that objective in a bit more detail. We made a lot of investments in growth in 2021. We started to see the benefits in many areas of the business. Prepaid is a really good example. We pivoted the business to net add growth, and I expect even better momentum in 2022. The one area, and it's a big one, but I was not satisfied with last year, was our postpaid net additions and the lack of growth in our postpaid connections base. The environment remains as competitive as ever, particularly for upgrades, and that carries challenging economics for the entire industry. At the same time, customers are holding devices for longer than ever, and that somewhat dilutes the impact of aggressive device promotions. That's a really challenging dynamic, not just for UScellular. We've a variety of initiatives underway to stabilize our postpaid market share through improvements on value proposition, customer lifecycle management, and the digital experience. You can also expect to see us continue to leverage our regional approach, adjusting our go-to-market on a community-by-community basis, getting even closer to our customers. We talked briefly in the business and government sector. We laid the groundwork in the space in 2021 with new distribution. We're confident in our ability to expand revenues in this area in the long term, particularly in the IoT and the private networking space. As a regional operator, UScellular has always been a part of the communities we serve. We estimate there are over 3 million businesses in our operating footprint. That provides real opportunity to significantly expand our market share going forward. Finally, we expect continued growth from our tower portfolio. We made a number of operational changes in 2021, including substantially reducing cycle time. As a result of that work, we have really strong sales momentum heading into this year. Before I hand it to Doug, let me just share a few thoughts on our 2022 guidance. We expect to see expanded retail service revenue. We're going to continue to see headwinds from roaming and that affects overall service revenue. Additionally, our guidance assumes a continuation of aggressive, ongoing promotional activities, and that's on both upgrades and acquisitions. I'm bullish on growth over the long term, and we're making the necessary investments in distribution and in network to make it happen. Our long-term goal remains substantive expansion and return on capital. We'll be pulling every lever at our disposal to improve return over time. You can expect to see revenue growth, coupled with expense discipline, as well as capital optimization. That will hopefully be supported by meaningful participation in some of the government funding efforts that I mentioned earlier. With that, let me hand it to Doug to cover some of the details on subscribers and financials. Let's start with a review of customer results on Slide 11. Posted handset gross additions increased by 6,000 year over year, largely due to higher switching activity in combination with a strong promotional activity. Of course, this is against a backdrop of industrywide promotional aggressiveness on handsets. We saw our connected device gross additions to climb 12,000 year over year, driven by lower hotspot sales compared to the prior year, when we experienced an increase in demand due to the pandemic. Next, let's turn to the postpaid churn rate shown on Slide 12. Postpaid handset churn was 1.10%, up from 1.01% a year ago. This is driven primarily by voluntary churn, which continues to run at higher year over year -- these are higher year over year as a result of increased switching activity and aggressive industrywide competition. Involuntary churn also increased slightly in the quarter. Total postpaid churn combined in handsets and connected devices was 1.35% for the fourth quarter of 2021, higher than a year ago due to the higher handset churn and certain business and government customers disconnecting connected devices that were activated during the peak periods of the pandemic in 2020. Moving to Slide 13. Prepaid and continue to improve compared to the prior year, driven by enhancements to our prepaid offerings throughout the year. We saw prepaid gross additions increased by 7,000 year over year and saw an overall increase of 14,000 to our prepaid base compared to prior year end. Now let's turn to the financial results on Slide 14. Total operating revenues for the fourth quarter were $1.068 billion, essentially flat year over year. Retail service revenues increased by 2% to $696 million, primarily due to a higher average revenue per user, which I will discuss in a moment. Inbound roaming revenue was $24 million, decrease in 27% year over year due to lower data volume and rates. One of the factors contributing to this data volume decrease is the merger of Sprint and T-Mobile, and the continuing migration at Sprint roaming traffic through T-Mobile's network. Other service providers were $62 million, up 3% year over year. Finally, equipment sales revenues decreased by 4% year over year, in large part as a result of an increase in promotional activity. We continue to engage in aggressive promotional activity during the fourth quarter of 2021 to remain competitive with the industry. A portion of the resulting promotional cost reduces equipment sales revenue and increases loss on equipment. In addition, loss on equipment in the fourth quarter of 2020 was mitigated by the impacts of the pandemic. Specifically, lower switching activity and less aggressive promotional activity relative to 2021. And as a result of the combined impact of these factors, loss on equipment increased $24 million year over year. This change in loss on equipment, however, was offset by a reduction in other operating costs as profitability increased slightly compared to the prior year. We expect the aggressive promotional environment, including retention offers, to persist throughout 2022 and our guidance for 2022 reflects the corresponding financial impact. Now, a few more comments about postpaid revenue shown on Slide 15. Average revenue per user or connection was 48.62 for the fourth quarter, up 2% year over year. On per comp basis, average revenue per -- average revenue also grew 2% year over year. The increases were driven primarily by favorable plan and product offering mix and an increase in device protection revenue. These increases were partially offset by an increase in promotional costs. As you can see on Slide 16, we have seen steady growth in tower rental revenues. Fourth quarter tower rental revenues increased by 9%. We are seeing positive momentum in tower co-location applications and we'll continue to focus on growing revenues from these strategic assets. Moving to Slide 17, I want to comment on adjusted operating income before depreciation, amortization, and accretion in gains and losses. To keep things simple, I'll refer to this measure as adjusted operating income. As shown in the slide, adjusted operating income was $181 million, an increase of 1% year over year. As I commented earlier, total operating revenues were $1.068 billion, essentially flat. Total cash expenses were $887 million, a decrease of 1% year over year. Total system operations expense decreased 3%, largely driven by lower roaming expense resulting from lower data rates and lower voice usage, combined with lower cell site maintenance. Cost of equipment sold increased 4% due to an increase in units sold in a higher average cost per unit sold, driven by a higher mix of smartphone sales. Selling, general, and administrative expenses decreased 4%, driven primarily by decreases in advertising and legal expenses. Suggested EBITDA, which incorporates the earnings from our equity method investments along with interest and dividend income, was $225 million, an increase of 1% year over year. Total operating revenues are $4.1 billion, a 2% increase year over year. This is driven by an increase in retail service revenues due to higher average revenue per user and an increase in equipment sales. Also contributing to the increase were higher tower rental revenues and miscellaneous other service revenues. These increases were partially offset by a decrease in roaming revenues. Total cash expenses were $3.3 billion, an increase of 3%. This is due to -- this is due primarily to an increase in cost of equipment sold, partially offset by a decrease in selling, general, and administrative expenses. Excluding costs of equipment sold, cash expenses decreased 1%. Adjusted operating income and adjusted EBITDA declined 1% due primarily to an increase in loss on equipment, which increased $70 million from $41 million to $111 million, which is a result of the highly competitive and promotional environment that we experienced throughout 2021. Next, I want to cover our guidance for the full year 2022. Again, our guidance assumes the aggressive promotional environment that we experience in 2021 will persist throughout 2022. We expect ranges of approximate $3.1 billion to $3.2 billion in service revenues, $750 million to $900 million in adjusted operating income, and $925 million to $1.075 billion in adjusted EBITDA. This guidance reflects our estimates for low single digit growth in retail service revenue, continued decline of high margin roaming revenue, continued elevated levels of promotional costs, including loss on equipment, given the anticipated aggressive promotional environment, and modest growth in other cash expenses as we continue to invest in 5G and the growth areas of our business. For capital expenditures, the estimate is in a range of $700 million to $800 million. Our multi-year 5G and network modernization program remains on track. We will also continue our targeted millimeter wave buildout in 2022 and begin making investments to deploy the mid-band spectrum we acquired in auctions 107 and 110. We've also provided a breakdown of capital expenditures by major categories. I'm pleased to share that our transformation to become the preferred broadband provider in our markets is well underway. I've never been more optimistic about TDS Telecom's future. We're in a strong position today to do a number of growth initiatives we started executing on five years ago. In fact, we surpassed $1 billion in operating revenues and we exceeded 500,000 broadband connections for the first time in TDS Telecom's history. In 2021, we turned up 86,000 new fiber marketable service addresses, bringing total fiber addresses to nearly 400,000. It's critical to build these fiber networks and connect customers quickly to stay in front of potential competitors. We have an active pipeline of identified markets and continue to plant [Inaudible] in the most attractive new markets that will expand our footprint even further. We continued to address the broadband needs in our most rural markets by upgrading our copper networks with federal AKM funding and state broadband grant programs. We've continued to transform our workforce and adapt to the opportunities and challenges brought on by the pandemic and labor shortages. We moved to a hybrid work environment. In addition, we have placed extra emphasis on strategic strategies to promote diversity, equity, and inclusion objectives through our organization to keep us an attractive employer. Our associates are our most powerful resource. Moving to Slide 22, we have five strategic pillars enabling our robust transformation. First, we are growing our scale through fiber market expansions. Second, we are growing our revenue through increased revenue per connection, customer penetrations, and through continued fiber expansions. In our third pillar. We are continuously streamlining and automating our operations to reduce legacy costs and invest in new growth initiatives. Our first -- fourth pillar is keeping the customer at the center of everything we do, continuously investing in customer experience improvements. Finally, the foundation of our entire business is our highly engaged, resilient, and dedicated workforce. We invest in our people to make sure we attract and retain top talent. Moving to Slide 23, let me share some specific data points that demonstrate the transformation happening within our business. I have set bold goals for the team, which will require us to scale up more quickly, plant more [Inaudible] and build relationships with our vendor partners. As we execute our strategy over the next five years, we plan to reach approximately 2.2 million service addresses, with about 60% of those addresses being fiber and 80% capable of gig or faster speeds. As Pete mentioned earlier, we have several strong underlying trends as tailwinds to our broadband strategy. There's increased bipartisan support for providing high quality, affordable broadband services to rural America. With support from state and federal broadband programs, we intend to significantly reduce our expansion to ungraded copper, and we will continue to see opportunities to improve broadband products for our most rural customers. Our strategy is working. For the past several years, we have ramped up our broadband strategy, investing in our networks, and we are positioning the business for faster growth over the next five years. On Slide 24, I'll describe our fiber program in more detail. We plan to triple our total fiber service addresses over the next five years to 1.2 million with aspirations of increasing that target as we identify new opportunities. Our sense of urgency has increased given the attractiveness of this opportunity and the heightened level of participation by other overbuilders. Specifically in 2022, we expect service address delivery to outpace 2021 by one-and-a-half to two times. Along with the rest of the industry, we continue to face an actively managed broader economic, supply chain, labor challenges affecting our industry, including permitting complexities and contractor delays. For example, to increase our speed to market, we are accelerating our deployment schedules. We are adding more markets to increase our flexibility, and we are strengthening our relationships with our vendors and strategic partners. We have a rigorous process for selecting expansion markets. We focus on areas that have a favorable competitive environment, such as areas that do not have fiber competition, have potential for household growth, and have customers with the propensity to adopt high broadband speeds. We also look to partner with communities, who are eager to bring fiber into their cities and offer a welcoming regulatory environment. Finally, we work for the ability to create larger market clusters so we can leverage our network and fuel resources. For the markets we have selected, we expect to achieve broadband penetration rates between 40% and 50% in a steady state, making us the leader in our markets. Our experience today is supporting the business case penetration assumptions and we are pleased with our fiber expansion results so far and see even more opportunities for further expansion. As we announced earlier, Vicki will be replacing Pete Sereda as CFO of TDS. Vicki has been instrumental in driving the successful transformation at TDS Telecom, and we look forward to her contributions leading the finance teams across the TDS enterprise. Michelle's previous -- previously served as vice president of financial analysis and strategic planning at TDS, and I am confident she will excel in her new position. I am very proud to have served as TDS Telecom's CFO for the past 10 years, and I look forward to continued success in my new role at TDS. I've been working closely with Michelle over the last several years on TDS Telecom's strategy, and I'm looking forward to her continuing TDS Telecom transformation. With that said, let me begin by highlighting some of our operational accomplishments for the quarter. Moving to Slide 25, we grew our total service addresses 7% year over year, and are now offering one gig broadband speeds to 58% of our total footprint. Total residential connections increased 2% due to broadband growth in new and existing markets, partially offset by a decrease in voice and video connection. Despite the connection losses, video continues to remain important to our customers and a key part of our bundling strategy as it helps to increase our broadband penetration and reduce churn. Looking at the chart on the right, overall, higher value product mix and price increases drove a 4% increase in average residential revenue per connection. Moving on to Slide 26, you can see the broadband connection growth across all markets. Total telecom broadband residential connections grew 7% in the quarter as we continue to fortify our networks with fiber and expand into new markets. We are on track in our network construction under the AKM program, also helping to drive growth in our incumbent market. Our focus on fast, reliable service has generated a 12% increase in total residential broadband revenue. The one gig product, along with our two gig product in certain markets, are important tools to allow us defend and to win new customers. In areas where we offer one gig service, we are now seeing 20% of our new customers taking this superior product. On Slide 27, total revenues increased 2% year over year, driven by strong broadband growth. Residential revenues increased 6% across all markets. Commercial revenue decreased 7% in the quarter on lower [Inaudible] connections, partially offset by a 5% increase in broadband connection. Wholesale revenue decreased 2%. Let me sum up the combined financial results for the quarter and the year, as shown on Slide 28. Total revenues increased 2% in the quarter and 3% for the year. And growth from our fiber expansions and increases in broadband subscribers exceeded the declines we experienced in our legacy business. Cash expenses increased 2% in the quarter and 5% for the year due to both supporting our current growth, as well as spending related to future expansion into new markets, which is not yet reflected in our revenue. Future market costs include direct cost, such as sales, marketing, real estate and technicians, in addition to shared service costs necessary to support new market growth. Adjusted EBITDA increased 2% for the quarter to $75 million, but decreased 2% for the full year due to planned investment spending on new market. Capital expenditures increased 2% for the quarter and 12% for the year due to increased investment in fiber deployment. On Slide 29, we've provided guidance for 2022. Our guidance factors in the foundational investments we are making to support the fiber expansion program over the next several years. We are forecasting total telecom revenues of $1.01 billion to $1.04 billion. This reflects our goal of top-line growth, driven by continued improvements in residential revenue across all of our markets, offsetting declines in the legacy parts of our business. A key assumption in our guidance is how many marketable fiber service addresses we can deliver. Our plans include address delivery of approximately 160,000 fiber service services. Given our construction delays last year, our conservative approach to financial guidance factors in potential shortfalls in service address delivery should we experience similar challenges. A reminder that seasonality will impact the quarterly cadence of fiber service address delivery, starting slowly in the first quarter and steadily building throughout the year. Adjusted EBITDA is expected to be between $260 million $290 million in 2022, compared to $310 million in 2021. This increase in adjusted EBITDA is primarily due to our heightened market expansion plans that Jim just discussed. We expect increases in front-end loaded market expansion costs to outpace cost reductions made in other areas of the business. Capital expenditures are expected to be between $500 and $515 million in 2022, compared to $411 million in 2021. Nearly 90% of our capital spending is allocated to broadband growth, with more than 60% going directly into cyber investment. With that, I'd like to say it's been my pleasure to serve as TDS Telecom CFO and to drive our shift in strategy to be the preferred broadband provider. I look forward to updating you in my new role in the future.	q4 revenue $1.068 billion. united states cellular corp - provides guidance for 2022.
I'll refer you to today's news release for UTI's comments on that topic. The safe harbor statement in the release also applies to everything discussed during this conference call. During today's call, we'll refer to adjusted operating income or loss, adjusted EBITDA, and adjusted free cash flow, which are non-GAAP measures. Adjusted operating income or loss is income or loss from operations, adjusted for items that affect trends and underlying performance from year-to-year and are not considered normal recurring cash operating expenses. Adjusted EBITDA is net income or loss before interest expense, interest income, income taxes, depreciation, amortization, and adjusted for items not considered as part of the company's normal recurring operations. Adjusted free cash flow is net cash provided by or used in operating activities less capital expenditures, adjusted for items not considered as part of the company's normal recurring operations. Starting with the third quarter of fiscal 2019 and through fiscal 2020, we will report operating metrics such as student applications and starts, excluding our Norwood, Massachusetts campus. As we have shared previously, Norwood stopped accepting new student applications in the second quarter of fiscal 2019 and will fully close before the end of fiscal year 2020, so we believe it is appropriate to exclude its impact. We sincerely appreciate your interest and investment in UTI and look forward to working with you in the future. As many of you know, and for those of you who are new to the call, UTI is the nation's leading provider of technical training for automotive diesel, collision repair, motorcycle, and marine technicians, and we also offer welding technology and computer numerical control, CNC machining programs. We have a nationwide network of 13 campuses, where we offer hands-on training in state-of-the-industry labs, complemented by our new online training, which allows us to offer quality education during the COVID-19 pandemic and will serve UTI and its students going forward. Our newly assembled executive management team is leading that charge and is supported by a solid balance sheet and excellent financial flexibility. In our 54-year history, UTI has proven its ability to adapt to changing financial and regulatory landscapes and has seen increased student demand in times of economic hardship. I'll add more on that later, but first, I'd like to discuss the recent quarter and review how we're approaching the COVID-19 crisis, preparing for the near-term, and positioning the company for the future. In the second quarter, results were positive, and we demonstrated continued momentum. New student starts were, up 6.6% year-over-year, excluding our Norwood campus, where we're winding down operations. Contracts for the quarter grew 4.5% year-over-year, and our show rate improved 100 basis points. Total revenues increased 1.2% to $82.7 million. Net income, which included an income tax benefit of $10.8 million, was $10.1 million, and adjusted EBITDA was $3.1 million. Troy will get into more details of our financial results a little later in the call. Indeed, it was a busy quarter. We bolstered our executive leadership team with new leaders heading up our corporate strategy, IT, and legal departments, changed our marketing and admission functions, and began the search for new commercial and human resource officers. And we wish Roger Penske well, as he transitioned off the board after more than 20-years of insightful guidance and counsel. Even in the face of the pandemic and as many challenges, we continue to move forward with our growth and improvement initiatives; including expanding our welding program to new campuses, optimizing admissions and marketing, and maximizing the productivity of our campuses. In February, we successfully raised $49.5 million in a primary equity offering led by B. Riley FBR, who also led the December secondary offering and brought in many new investors. Like many businesses, we began to feel the impact of COVID-19 pandemic in the last two weeks of March. We were able to quickly pivot the business model in response, implementing changes that will help see us through the pandemic and innovations that can serve our students and our business for the long-term. In response to this unprecedented situation, we implemented strict, CDC-guided safety precautions at all of our campuses and our home office, and quickly transitioned our in-person education model to online. As the threat was first identified, we remained operational and immediately implemented protocols recommended by the CDC. As governors and local officials began to issue orders and mandate closings of schools and businesses, we suspended all in-person classes at our 13 campuses on March 19 and transitioned all classroom learning to online. The following week, we transitioned our first wave of students to the online platform, and within less than two weeks, we were fully operational and up and running. We're proud of the dedicated team and their extraordinary efforts, as this type of curriculum transition would normally take many schools many, many months to execute. Today, we have over 11,000 students enrolled, with more than 8,000 currently progressing their education through the online platform, including over 500 students, who have started directly into the online platform over the past several weeks. Our online curriculum consists of instructor-led lectures and demonstrations, and we continue to engage students and give them one-on-one support through virtual classroom reviews and virtual office hours. The transition to the online curriculum has been successful and opens new opportunities for the company and our students. However, the uncertainty and disruption created by COVID-19 crisis means we do have more students on leave of absence. We are now beginning to meet those students' need to practice and master hands-on skills that are so important to their success, by resuming in-person training, while online education continues. To protect our students and staff, and align with the CDC guidelines and state and local directives, we have -- we are modifying our class sizes and schedules for safety and social distancing. As of today, Dallas, Ft. Worth and Houston campuses are operating in this modified format, and our Avondale, Arizona, Phoenix, Arizona, Long Beach, California, and Mooresville, North Carolina campuses should resume face-to-face labs the week of May 11th, and Florida's not far behind. We've also revised our marketing message to focus on the durable opportunities for skilled technicians in the transportation field. Broadly, our message to potential students feeling the economic impact of the virus is, we feel for you, we're here for you, and we want you to come to UTI because this is where the jobs are now and in the future. Now, with no live sports on TV, broadcast media consumption among our target demographic is down. In order to optimize our lead generation in this environment, we cut $2 million from our broadcast budget and have intensified our focus to where our target audiences are spending their time right now, which is social media. It's paying off, evidenced by our inquiry activity. Inquiries pre-COVID through the first half of March were better than the prior year and beat our internal expectations. While we did see a significant dip in mid-March through the first week in April, we've seen an accelerating improvement since then. The full month of April performed similar to the first half of March, solidly above prior year and our internal expectations. We also have shifted our admissions model, which has been almost exclusively face-to-face, and are now connecting with students and their parents through online meetings, virtual tours, and other events. For example, in April, in addition to telephone interview, our admission reps averaged 80 virtual interviews a day. Our admissions reps have noticed an increase in the number of people, who want to talk and meet with us virtually, many of whom have come away with the -- impressed by the technical education we offer and our teaching facilities. If you haven't had a chance to visit one of our campuses in person yet, I invite you to go to our investor website, where you can take a virtual tour and see for yourself. While it by no means has been easy transition, we're proud of the work to keep the students in school through the crisis and are finding innovative ways to introduce our education to people, who can greatly benefit from it, especially now, as our country begins to process and emerging from the crisis and moves into a period of economic recovery. Today, new student enrollments are above where they were last year at this point. This bodes well for our fourth quarter, where the majority of our students start. But with fewer students currently active in school overall, and the expense of transitioning online and modifying our educational model, we've taken some decisive actions to reduce cost. This required some very difficult decisions, including the furlough of approximately 280 of our employees. Employees on furlough continue to receive full benefits, and we look forward to bringing them back as soon as we're able to reopen all of our campuses and our student population continues to recover. So, to sum it up, right now, we're keenly focused on student retention, continuing to grow and bring in new students, and cash preservation. There of course will be challenges as the world recovers from COVID-19, but we believe our deeply held commitment to delivering value for both our students and industry partners, and our strength in innovation, which allowed us to transition to an online model and find safe and effective ways to offer our unique, industry-aligned education, will continue to serve UTI and our students. As Jerome noted, we performed well for the majority of our fiscal 2020 second quarter and posted solid results, but they were impacted, starting in mid-March by the COVID-19 pandemic, which lowered our revenue approximately $2.5 million to $3 million from our pre-COVID expectations for the quarter. The revenue impact is primarily a timing differential, due to the temporary student leaves of absence, or LOAs, we have discussed. We partially offset the revenue impact on profitability by taking steps to mitigate costs, such as the employee furloughs, and reduced variable and discretionary spend across the enterprise for categories like travel, contract services, and campus supplies, so that the profitability impact in the quarter was approximately $1.25 million to $1.7 million. As students on LOA return to continue their education, we fully expect to recover the associated revenue and profit. We're also stringently managing payment terms with our vendors, working cash optimization opportunities on a number of fronts. For student metrics, new student starts in the second quarter increased 6.6% year-over-year, and were 2,093 in the quarter. In the first half of 2020, starts were higher by 7.1% year-over-year. We saw start growth across all three channels in the quarter and year-to-date. This is all same-store growth and is driven by enrollments, which were higher by 4.5% in Q2 and 5.1% year-to-date, and show rate improvement of 100 basis points in the quarter and in the first half. We continue to yield very positive results from our marketing, student engagement, and grant strategies. I'll now turn to a few highlights on our second quarter and first half 2020 financial results. Revenue increased 1.2% to $82.7 million, driven by higher revenue per student, partially offset by a decrease in the average student population, due to the student LOAs that caused the $2.5 million to $3 million impact in the quarter I mentioned previously. First half 2020 revenue of $170 million is up 3.1% versus the first half of fiscal 2019, due primarily to higher revenue per student. Average students for the quarter were down 3.1% year-over-year, and slightly positive for the first half of the year, when compared to the first half of 2019. We ended the second quarter with 7,373 active students. This has since increased to approximately 8,300 active students, with another approximately 600 students on LOA, who only need to complete their remaining hands-on labs to graduate from the program. There are approximately 2,500 other students currently on LOA versus approximately 300 at the same time last year. While we cannot be certain, based upon their scheduled return dates and feedback we have gathered to-date, we would expect that a significant majority of these students will elect to resume their education over the coming months, as we resume hands-on labs on our campuses and the overall COVID-19 situation further stabilized. Operating expenses decreased by 4.7% to $83.2 million, for our fifth straight quarter of year-over-year expense declines, while growing revenue. The year-over-year decrease in the quarter is primarily due to lower costs related to compensation and benefits, as a result of reduced headcount and benefit plan savings. Compensation and related costs were 52% of revenue in the quarter and down 450 basis points as a percent of revenue year-over-year. Headcount was 1,645 as of March 31st, a decrease of 70 versus the end of the prior-year quarter. Also of note, when you look at the P&L line items, you continue to see the impact of the lease standard implementation this fiscal year, with higher year-over-year occupancy costs offset by lower depreciation costs, due to the change in treatment for build-to-suit leases. First half 2020 expenses of $166.2 million are down 6.4% year over year. Specific to COVID, we incurred expenses from increased cleaning and related supplies throughout March, as well as costs related to our online learning transition and disrupted campus operations in the last two weeks of the month. We're quantifying all the COVID cost impacts, beginning in March and continuing through the duration of the crisis, so we can better understand run rate impacts, and also ensure we have appropriate details to support available cost offset opportunities afforded with the CARES Act. As we think about our cost structure and our employee-related costs on our campuses, the introduction of the online curriculum enables significant efficiency opportunities. Our student-to-on-campus instructor ratio is typically 27:1, while a typical online learning ratio is much higher. As we begin to resume hands-on labs on our campuses in the near term, we will have some inefficiencies, as the student-to-instructor ratio will be 9:1. However, we will maintain a blended model, with online learning for the classroom component, and we'll look to integrate this more permanently over time, along with other efficiencies we develop through our current remote operation. Net income for Q2 was $10.1 million, translating to basic and diluted earnings per share of $0.18. We had 32.7 million basic shares outstanding as of the end of the quarter, which reflects the 6.8 million shares transferred from treasury stock for our February equity offering. Q2 net income improved $15.4 million from the prior-year quarter and included a $10.8 million income tax benefit resulting from net operating loss carryback revisions within the CARES Act. Assuming the IRS is able to process the refund request in a reasonable timeframe, we would expect to receive the cash refunds by the end of the fiscal year. First half 2020 net income is $14.8 million, up $27.8 million year over year, and also includes the income tax benefit. Operating cash flow of $10.9 million for the first half of 2020 increased $8.1 million year-over-year and reflects our improved profitability in cash management, as well as working capital timing. As I spend a moment on our adjusted results, a quick reminder that our adjustments for FY '20 reflect costs associated with the Norwood campus closure and with our CEO transition, while in FY '19, they reflect costs associated with the termination of our transformation consultant agreement and with the Norwood campus closure. Adjusted operating income for the quarter was $500,000, a $4.7 million increase year-over-year, and $7 million for the first half of 2020, a $14.2 million year-over-year improvement. Adjusted EBITDA was $3.1 million in Q2, a $2.3 million year-over-year increase, and $13.1 million for the first half, an $11 million year-over-year improvement. Both the Q2 and first half results include the $1.3 million per quarter negative year-over-year impact, due to the leasing standard implementation this fiscal year. Adjusted free cash flow was $6.7 million for the first half of 2020 and increased $3.7 million versus the prior year. Capex was $5.2 million for the first half of 2020, up slightly versus the prior year, and reflects spend associated with our welding program expansion investments, the Exton, Pennsylvania facility rightsizing, and other spending. Through our February equity raise, we significantly strengthened our balance sheet to enable further steps in our long-term strategy of growth, diversification, and scale. Our available liquidity as of March 31st was $118.1 million, which includes $76.6 million of unrestricted cash and cash equivalent, and $41.5 million of short-term held-to-maturity securities. These consist of Treasury securities and high-quality corporate bonds, and provide us incremental yield benefits. In addition to the cash preservation, operational and cost efficiencies, and working capital management actions I've mentioned, there are further opportunities resulting from potential applicability of the CARES Act. As we announced previously, we expect to receive approximately $33 million in grant funds through the CARES Act Higher Education Emergency Relief Fund. Per the Department of Education's guidelines, at least 50% of these funds will be used to grant emergency financial aid to students impacted by COVID-19. The company also intends to use a portion of these funds to offset costs that have arisen as a result of the COVID-19 crisis, for the operations and infrastructure investments needed to support our students' education and curriculum needs during this time. We are expecting additional guidelines from the Department of Education that will give us better clarity on what costs and investments these grant funds can be used to offset. There may also be opportunities for us to leverage the employee retention credit. We are currently reviewing the updated guidelines released by the IRS late last week for potential applicability. From a cash perspective, we are electing to defer our payroll tax payments starting with April 2020 through the end of calendar 2020, and expect a quarterly cash benefit of approximately $1.5 million to $2 million. Note, we are not eligible for the Payroll Protection Program, due to our size, and are not currently applying for any other loan programs, but do not completely rule out doing so if we deem it beneficial or necessary. Turning briefly to our real estate footprint optimization efforts, for the Norwood campus closure, we were running ahead of schedule, prior to the suspension of in-person instruction at the campus. We are still pushing to have the campus fully closed before the end of this fiscal year, dependent upon the timing of the campus resuming hands-on labs, and potential delays to those students' graduation date. Our headquarters relocation and downsizing remains on track for completion by June 30th. As noted previously, this action will save approximately $1.3 million annually. We also have longer-term opportunities across a number of our campuses for consolidation and rightsizing, and are actively engaged with landlords on these discussions. The introduction of the blended learning environment may afford us new efficiency opportunities in the future and is something we will incorporate into these discussions. We expect to have more details on these actions in the coming quarters. As we announced in our business update on April 22nd, we have withdrawn our guidance for fiscal 2020. As we noted then and I've touched on today, there are multiple variables related to COVID-19 that can impact our business. The five key variables we are closely tracking, continued engagement of students in the online curriculum; timing of resuming hands-on labs at our campuses; timing of students returning from LOAs; potential cost recovery opportunities associated with the CARES Act, and Q4 and post-COVID-19 student demand. Assuming by the end of the third fiscal quarter all of our campuses are open for hands-on labs, and a significant portion of the current student LOAs return without material new LOAs, we estimate that the overall negative impact from COVID-19 would primarily be realized in the fiscal third quarter. In this type of scenario, we estimate full-year revenue could be roughly flat to FY '19. However, if any of these are not the case, or we see deterioration in our current Q4 start expectations as a result of COVID-19, then we will likely see negative financial impacts extending into Q4 and an overall greater impact to the fiscal year. Regarding cash, as we look to the third quarter under the same scenario, we expect we will be a measurable cash user. The seasonality of our business would normally have us consume cash in the quarter, given Q3 is our lowest-revenue quarter in the fiscal year. This will be heightened in the quarter, due to the expected Q3 COVID impact, and also, the delay in receipt of Title IV funds for existing students, until they complete their current hands-on labs. Under this scenario, we estimate that the net cash burn in Q3 could range between $25 million and $35 million, and that we could fully recover it in Q4. However, while we normally generate most of our full-year cash flow in the fourth quarter, we will need to see how these factors play out, along with a more complete view of Q4 starts, before we can understand how the year will look from a cash and total liquidity perspective. We will continue working to minimize impacts to profitability and cash flow under any scenario. Note, these are only estimates around potential scenarios and should not be considered revised guidance. As leading indicators, we are very encouraged by the fact we were able to start over 500 students directly into the online curriculum in April. We started resuming hands-on labs at several of our campuses, and that we are pacing ahead of last year and are within a few percentage points of our original goal for FY '20 new student enrollments. We still have a few months to make up the gap caused by COVID-19, which is not out of the question, given the momentum we've regained with our marketing and admissions activity. We will also be looking to attract a broader audience of potential students, given the macroeconomic circumstances. We are working as diligently as possible across all the dimensions I've discussed to minimize financial impacts, while ensuring the health and safety of our students and employees. Success on near-term student retention and cash preservation will ensure that UTI's long-term growth agenda can be maintained, and the company could possibly emerge even stronger on the other side of the COVID-19 disruption. Before closing, I want to commend all of our UTI employees for their amazing efforts over the past two months, overcoming every challenge put in front of them. We are fortunate to have such a dedicated and talented workforce, which is one of our key competitive advantages. As we continue to support our students and team through this uncertain time, we remain confident in our ability to attract and train the technicians this industry needs. In times of weak economy, like what we are facing today, there will be fewer jobs available that offer competing entry-level wages, which drives interest in the technical trade skills education and the student value proposition that UTI provides. We anticipate seeing benefits gained by the new marketing and admissions and blended learning approaches we are using, which have potential to accelerate timelines and speed and increase capacity. Online instruction is more efficient in terms of number of students per teacher, and the format could help reach new students, for whom the program format, in particular the length, did not work for them in the past. The new blended learning offering would help increase capacity, for example, at Dallas and Bloomfield, and will help us allow to have staggered lab starts. It can also help us reevaluate our real estate footprint moving forward, as a significant space is currently used in in-person classroom instruction. We are moving ahead, while deliberately being cautious on identifying longer-term organic and inorganic growth opportunities. Now, the lead times on these opportunities vary in length, none with an immediate turnaround, and some that can be very long. We look forward to providing updates as appropriate on those.	compname reports q2 earnings per share of $0.18. q2 earnings per share $0.18. q2 revenue $82.7 million versus refinitiv ibes estimate of $83.5 million.
During today's call, we'll refer to adjusted operating income or loss, adjusted EBITDA and adjusted free cash flow, which are non-GAAP financial measures. Adjusted operating income or loss is income or loss from operations, adjusted for items that affect trends and underlying performance from year-to-year and are not considered normal recurring cash operating expenses. Adjusted EBITDA is net income or loss before interest expense, interest income, income taxes, depreciation, amortization and adjusted for items not considered as part of the Company's normal recurring operations. Adjusted free cash flow is net cash provided by or used in operating activities less capital expenditures, adjusted for items not considered as part of the Company's normal recurring operations. Starting with the third quarter of fiscal 2019 and through fiscal 2020, we have reported operating metrics such as student applications and starts, excluding our Norwood, Massachusetts campus. As we have shared previously, Norwood stopped accepting new student applications in the second quarter of fiscal 2019 and the campus was fully closed in July 2020. So we believe it is appropriate to exclude its impact. Before I jump in, please indulge me, while I once again share heartfelt debt of gratitude to the UTI team who in 2020 represented the very best in human spirit and dedication, while helping our institution, our students, our industry partners navigate some of the most challenging conditions imaginable. Troy will then provide some guidance on a handful of key metrics for 2021. The three areas I'd like to focus on in the next few minutes are outcomes, accomplishments and our vision for the future of UTI. Outcomes are metrics and standards that have truly set us apart in the industry for the past five decades, continue to underscore our unique value proposition today and will be critical to the success of our business strategies going forward. With respect to accomplishments, I'll share with you some thoughts and examples of the effectiveness and importance of the credentials our students earn, as well as innovations we put into place to help our students succeed more efficiently and effectively in the workforce. And finally, I'd like to share with you our vision for the future of UTI by updating you on our growth and diversification plans. Let me start with outcomes. At the very heart of our operating model and UTI's unique value proposition is the relentless focus on improving the employment and career outcomes for our current students and graduates. This starts with ensuring that they succeed in their vocational curriculum and successfully graduate. Our keen kept on the number of students who persistent in their education and graduate is one of the ways which we prove our value every day. Nationally, just 40% of college students earn a certificate or degree within six years of beginning their post-secondary studies, yet at UTI nearly 70% of our students graduate within two years. This is in no small part due to the investment our faculty and support teams make in the success of our students. We worked closely and individually with them to work through the many challenges that life brings so that they can stay focused on their passion, finish their studies and go on to rewarding careers. One such recent example is Jonathan Pagen. After graduating from high school, Jonathan joined the U.S. Army, where he served four years as a mechanic. Following this further, after leaving the military he enrolled in a local community college to pursue a degree in electronics engineering. Jonathan soon found that there was his word, just too much involved with navigating the community college courses including general education requirements and electives that were not part of his chosen field. He said it was just to challenging to keep up and was looking for a more focused education, so he enrolled at our Avondale, Arizona campus, where he completed our core auto program and went on to our forward advanced training program. Jonathan graduated during the pandemic, and immediately went to work in Arizona for a dealership. He told us that he loves the security of having a good steady job and doing something that he likes, and wants to do every day, rather than in his words, struggling through college or working in a random job that would not be as much fun or fulfilling. Jonathan's goal is to become Ford master technician. The story of Jonathan and all students like him makes us proud at UTI and is all too familiar example of the student who is struggling or a traditional career path and found success at UTI. His journey also underscores another area of focus for UTI, employment. While only 47% of those who attend traditional post-secretary of institutions are working in their field of study today, approximately 80% of UTI's graduates go to work in their chosen field after graduation. Over the years, our teams have worked diligently to build our industry partnerships and employer networks in order to directly connect our students to employment opportunities during school and upon graduation. As we've outlined in past updates, the Bureau of Labor Statistics projects the year there are nearly 160,000 new technicians annually needed in our subject areas over the next 10 years. While technician training will only provide the market with a combined set of credentials of about 50% of those needed to go out into the workforce, this disconnect underscores that the jobs are there, students just need programs designed to match their interest and talents, industrial training that provides the hard and soft skills and credentials employers require and connections to industry opportunities. In the last three years, we brought innovative agreements with over 4,500 employers offering a range of incentives to attract and retain our graduates. Over 3,500 of them offer lucrative tuition reimbursement programs up to $25,000. These programs help students more easily evaluate and find employment opportunities, erase debt they accumulated while in school, and lower the possibility of student loan default. We've also created an early employment partnership program with key employers designed to offer employment, mentoring and hands-on experience to students, while they're in school, with the opportunity to continue after graduation at higher salaries and receive tuition reimbursement. Employers and manufacturer partnerships like these are at the heart of how we maintain such high employment outcomes for our students and deliver trained talent to our industry partners at the same time. Nothing underscores the value of these types of partnerships more than the story of Volare Cantare, who recently graduated from our Houston campus. Although Valerio says he has always been a car guy, he initially chose to enroll in a four year college for engineering degree right out of high school. By the second year, he knew it wasn't right for him and he transferred to our Houston campus for automotive and diesel program. Valerio itself here, he was among one of the top students in this program, and only one of 12 students Nationwide selected to participate in the most recent Porsche advanced training program. For someone like Valerio, whose Venezuelan heritage talking that Porsche is the brand, it was in his word, a boyhood dream come true. He started and completed the program during the pandemic, using our new blended learning model following his graduation in late September, he went for work right away at Momentum Porsche in Houston, a job he loves. Four year degree programs can be right choice for many young adults,. but for others like Valerio, a fast track, quality technical education can be a powerful path to success. Valerio who has experienced both education models told us college was no comparison to what he learned at UTI. Now Valerio story is not an isolated case, all the graduates of Valerio's class in the course technology apprenticeship program, which is offered exclusively in partnership with Universal Technical Institute, whet immediately to work at Porsche dealerships in New York, California, Texas, Florida, Pennsylvania North and South Carolina and Alabama. All tuition and housing costs are covered by Porsche and the Company also arranges local part-time employment for students, while they're in the 23-week program. The Porsche program is offered in a blended format combining online education with hands on training and CDT compliant labs. Porsche directly supports, equips and invests in the program, allowing students to receive training on all the latest Porsche vehicles and technologies. We've seen similar results during the pandemic for our recent graduating classes coming out of other manufacturer specific advanced training programs, including 98% employment for the Volvo graduates, a 100% employment for Peterborough program, who graduated on October 30. As you can see the outcomes and metrics that mean the most to us are aligned with those that mean the most to our students, manufacturer partners and employers. Persistence, graduation and ultimately employment rates are what have defined the success of our education model for the past five decades and will continue to do so going forward. Now, I'd like to highlight some of the past year's accomplishments. Candidly, there were times in 2020 where it felt like just staying on our feet was a Herculean task, yet due to the hard work and discovery of new and innovative approaches, all of our 12 campuses in eight states are fully operational and have been serving our students throughout the entire quarter. We continue to follow the CDC federal recommendations and guidelines as well as local health authority guidelines and recommendations. We continue to work closely with students with respect to concerns about their health to help them continue their education toward achieving their career goals. Despite the challenges, we continue to provide the high quality, state of the industry technical training for which we're known. Our campuses have accomplished a great deal. Since resuming hands on labs last quarter, we graduated over 2,770 technicians and continue to see high employment rates as the transportation industry continues to serve the nation as critical infrastructure. It's taken innovative new approaches to teaching and learning in order to continue to meet the robust employer demand and support students in completing their education through this challenging year. We're maintaining a key focus on investing capital to hone our new blended learning approach, fine-tuning the student experience and ensuring student success in this new environment. Blended learning model will be how UTI students learn going forward. This innovation offers increased safety, and flexibility to our UTI students, better prepares them for high-tech careers that require both hands on and digital skills and aligns with how industry increasingly trains, up skills, and rolls out new technology to its own workforce. With that in mind, we're also providing students with laptops, to ensure that each and every student has viable, cost effective means of accessing the online portion of the curriculum and will serve as an important tool to take with them as they begin their careers. To date with the assistance provided by CARES Act funding we've distributed over 12,000 computers and we'll be continuing the program going forward. It's important to note, that combining the $17.1 million that we've now distributed directly to students in CARES Act emergency grants, with the funds utilized to purchase the laptops for students, $23 million or approximately 70% of UTI's Higher Education Emergency Relief Fund allocation has been distributed directly to students in the form of cash and technology. Other accomplishments in 2020 also include the continued expansion of our successful welding technology training program. We added our fourth and fifth programs at our Houston and Long Beach campuses during the fiscal year 2020. Our current plan is to launch welding technology at Lisle campus early in the second quarter and a seventh program in fiscal 2021 as well. We continue to see strong demand for our welding program across campuses. On average, once fully ramped, each new welding site launch increases overall student starts by about 1.5%. Welding is an important component of our growth and diversification strategy as it broadens our student base and allows us to serve a much wider range of industry customers. At the same time, it complements our core technical training business and is consistent with our commitment to quality education that prepares students for rewarding careers. The U.S. Bureau of Labor Statistics projects that there will be more than 400,000 total job openings for welding over the next decades. With our campuses is fully operational, our new blended learning model firmly in place, and our welding expansion continuing, I'd like to highlight the positive trends and momentum in our business right now. As of October, nearly 80% of our students are on regular course schedules, which means they are no longer making up labs. This is a dramatic improvement from last quarter, when that figure was running at 40%. Now nearly 3% of our population are exclusively participating online; again, a significant improvement over the last quarter. Further, the introduction of the new learning model has enabled us to double our class densities since the beginning of the year, while still maintaining CDC health protocols. This increased capacity allows us to better meet the growing demand for our education in more efficient and effective manner. Another innovation I've touched on in the past is our marketing and admissions operating models. Our messages have been hone to highlight the robust and durable job opportunities in our field. This sharpening of our strategy is paying off. Media inquiries were up 25% in both Q3 and Q4 compared to 2019. Now, we did see some slowdown due to the election, as the campaigns poured millions, and if not billions of dollars into the marketplace seeking that much coveted 18 to 24-year-old voter. But we're already seeing double-digit rebound in November, which bodes well for our December, January and February starts. Our admissions organization has also transitioned to primarily a virtual model, and we're seeing some of the upside benefits and efficiencies created by cutting down on travel and other impediments in what was primarily a high touch strategy. Not only are increase increasing as noted above, but conversion rates for those increase in the last few months were up nearly 30%. New students scheduled to start for the coming quarters and fiscal year are looking very strong right now and momentum across the business continues to build. As far as student starts in the fourth quarter, overall starts trailed 2019, yet were up 1.1% on a comparable basis. In September, we saw double-digit increases in starts and more importantly showed nice improvement over July and August in the third quarter. Looking briefly into Q1 2020, October was great and November is trending even stronger. The number of students who are scheduled to start and start themselves are up double digits. We're off to a strong start in 2021. The overall message here is that, we have our new normal operating model firmly in place. The front-end of our business funnel is continuing to strengthen and gain momentum. Troy will share with you some of the details on Q4 and 2020 results and how this momentum translates into guidance for 2021 in just a few minutes, but let me first spend a few minutes looking forward. We're moving into 2021 with the strongest financial foundation we've had in decades. And as I just indicated, our business momentum is accelerating. With that as a backdrop, I want to take just a few moments to review some of the strategies we've initiated and are pursuing in earnest. The management team supported by our Board continues to focus on around of parallel strategies of growth and diversification, both portions of the strategy, could and likely will be realized by a combination of organic and our inorganic actions. We're looking to maintain flexibility and optionality in terms of timing and capital allocation. The organic components of this growth strategy are focused on both program expansions and extensions, where appropriate and new campus locations as needed. The inorganic components of this growth strategy, which is primarily composed of potential M&A activity could include both tuck-in acquisitions, which give us access to new location, as well as more transformative steps. Both organic and inorganic actions are very much alive and receiving regular attention from the management team and the Board. It's our plan to make some announcements on this front in the coming months. Diversification, another important component of our strategy and also continues in both organic and inorganic ways. And as you heard, we continue to be active on this front. Efforts to address student financing, overall affordability and reliance on title for funding are in the planning stages. Business model transformation opportunities such as those born of implementing our new and more flexible and efficient blended learning model around the horizon. And not unlike our growth strategies, acquisitions are also a potential component of this effort. Growth and diversification are the cornerstones of our path forward, yet it's also important to underscore that there are multiple levers at our disposal to become even more efficient and strengthen the Company as we grow. One such example is, that our efforts to rationalize our existing real estate footprint and optimize our real estate strategy remains in the forefront of our team's attention. Troy will provide more details, but it should not be underestimated how these efforts can and will strengthen the financial foundation of the future. In connection with this implementation of strategic plans I've just outlined, we're reviewing our cash needs and potential usages. As part of this exercise, we're evaluating in collaboration with the UTI Board of Directors, the opportunity to replace our stock repurchase plan, which was initially set at $25 million and had approximately $10 million of authorization remaining. If we believe circumstances are favorable for repurchases, a concept, which we have been asked about in the past, and we are still able to invest in our attractive roster of higher ROI growth and diversification initiatives, our new plan would give us the needed flexibility to act. We will provide you with additional information if and when that purchase plan is put into place. Before I hand the call over to Troy, I want to briefly speak to the idea or view out there bordering on consensus in some parts of the investment community that a Democratic administration is automatically and universally back for our institution and the industry we are part of, the profit education. Most notably is the notion that in order to qualify for federal funding institutions such as ours, will need to first prove that they are worthy of federal support. As I outlined today in the form of metrics, examples and outcomes, at UTI, we've held ourselves to a high standard in delivering for our students and industry partners for 50 years. Our business model is built on one key tenant, when our student succeed, we succeed. Regardless of whether we have a Republican or Democratic presidential administration or Congress, we're optimistic about the future and the path for UTI. We believe both political parties and administrations are big supporters of the tight and value of education and credentials we provide for students. The need for our service is mission critical to keeping America moving, especially during the country's economic recovery. We saw some benefits from the Trump administration and we're hearing about plans including increasing Pell grants and rebuilding infrastructure that could turn into benefits from the Biden administration. As Jerome outlined, we are very pleased with the progress we made during the quarter and with our operating results for the quarter and the fiscal year, given the many challenges presented by COVID-19. Starting with student metrics. We started 5,772 new students in the fourth quarter, which increased 1.1% year-over-year when adjusting for the extra start that occurred in the 2019 fiscal fourth quarter and was down 10.3% year-over-year including it. New students scheduled to start increased 6.9% year-over-year for the fiscal fourth quarter, excluding the prior year extra start. We saw a significant positive shift in the momentum of new student starts earlier in the quarter to later in the quarter. We're looking at start dates from August 31 through the end of September, when over 3,200 new students started the program. We saw a 14.8% year-over-year increase and exceeded our pre-COVID expectation by almost 7%. New students scheduled to start for this period increased almost 20% year-over-year and exceeded our pre-COVID expectations by almost 15%. That momentum has continued into the first quarter of fiscal 2021, with thus far through our most recent start we have seen strong double-digit year-over-year growth in new student starts. And we are currently seeing the same year-over-year strength and the pacing of new students scheduled to start for the first and second quarters. For fiscal year 2020, we started to 11,283 new students. While this was down 2.4% as compared to fiscal 2019, I'll point out that we started two-thirds of these students during the pandemic directly into our new blended learning model. Additionally, we saw growth in three of the four quarters of the fiscal year -- above last nine most recent quarters. In the fourth quarter we saw improved show rate performance versus the third quarter, with the show rate down 360 basis points year-over-year versus down 400 basis points from the prior quarter. Similar to starts, we saw markedly better results from the August 31 start date through September with the year-over-year show rate down only 180 basis points for that period. So far in the first quarter of fiscal 2021, the overall show rate for our most recent start has improved 140 basis points versus the same prior-year pre-COVID period. For fiscal 2020, show rate was down 220 basis points, with the decline all due to COVID impact in the third and fourth quarters. We attribute the impact primarily to the fact that roughly 50% of our students relocate to attend our programs, but this increases to 55% to 60% in the fourth quarter, when we start more than half our students for the year, most of them from the high school channel. Throughout the third and fourth quarters, we have worked extensively with our admissions and campus teams and our students and their families to address any COVID-related concerns they may have. We are seeing the benefits of those efforts through the improved show rates over the past few months. As far as student progression through the curriculum, we are incredibly proud of the progress our team and our students have made since our last earnings call. During the fourth quarter, we graduated approximately 1,900 students and as of the completion of the most recent course rotation, the percentage of students fully current and not be in makeup labs was 78% versus 40% at the time of our last earnings call. The percentage of students who were exclusively participating online decreased to 3% versus 13% at the time of our last earnings call. This progress allowed us to recognize approximately $8 million of the $11 million revenue deferral from last quarter. However, the net deferral as of the end of the quarter stood at approximately $6 million and reflects additional deferrals during the quarter based upon the varying stages of progression for students who are still at makeup lessons. We have also seen measurable improvement and stabilization and the number of students lease of assets or LOAs. As of the end of the quarter, the total number of students on LOA was approximately 700 or 5% total students and are at a consistent level currently. This compares to approximately 12% at the end of the June quarter and 9% at the time of our last earnings call. Given the dynamics of COVID, we will likely remain around 5% to 6% of total students in the near term, which is a few points above pre-COVID levels. Average students for the quarter were 11,251, an increase of 2.9% versus the same period last year. Total end of period active students was 12,524, a 1.3% increase versus the comparable period. Ending the year positive on these metrics is a testament to the resiliency of the UTI team and the incredible progress they have made working with our students since COVID initially impacted our campus operations in late March. Turning to the financials for the quarter and full-year. Revenues for the fourth quarter decreased 12.9% year-over-year to $76.3 million and increased approximately $22 million or 40% sequentially versus the third quarter. The year-over-year change was primarily driven by the patient student progress in completing in-person labs due to disruptions from the pandemic, which drove the decrease in the average revenue per student of approximately 15%, inclusive of the revenue deferral. Sequentially, we saw an approximately 13% increase in the average revenue per student. Based upon the current trajectory of students completely makeup labs, we expect to see measurable quarterly improvement in the net revenue deferral in a revenue per student throughout fiscal 2021. For the full year, revenues decreased 9.3% to $300.8 million, also primarily driven by the revenue deferral, the overall pace of student progress in completing in-person labs, as well as lower average students due primarily to the COVID-related LOAs in the third quarter. We prudently controlled costs throughout the quarter, with operating expenses for the quarter decreasing 14.7% versus the prior year to $70.2 million. The decrease fan both education services costs as well as SG&A. It was attributable to lower headcount and related compensation and benefit expenses along with lower occupancy, depreciation and travel expenses. Operating expenses for the fiscal year were $304.6 million and decreased 10.2% versus the prior year. Productivity improvements and proactive cost actions have been a key part of our operating model the past several years, and we continue to identify and execute on efficiency opportunities throughout our cost structure, while improving and investing in the overall student experience. Operating income for the quarter was $6.2 million compared to an operating loss of $5.4 million in the prior year quarter. Net income for the quarter was $6.5 million, an 18% increase versus the prior-year period. For fiscal year 2020, net income was $8 million compared to a net loss of $7.9 million in 2019. As previously noted, our full-year net income includes a $10.7 million tax benefit resulting from the application of revised net operating loss carryback rules from the CARES Act. Basic and fully diluted earnings per share were $0.10 and $0.09 for the fourth quarter, respectively, and both were $0.05 for the full year. Total shares outstanding as of the end of the quarter were 32,647,000, slightly higher than the prior quarter. Adjusted EBITDA was $9.7 million for the quarter as compared to $10.4 million in the prior-year period. For fiscal year 2020, adjusted EBITDA was $14 million compared to $17 million for fiscal year 2019. For the year-over-year comparison, recall that we implemented the new lease standard in fiscal 2020 and did not adjust prior year results. Taking this into account, full-year adjusted EBITDA increased by approximately $2 million year-over-year on a comparable basis. This is despite $31 million of lower revenue and is a very strong outcome, considering all that transpired in fiscal 2020. Note our adjustments for fiscal 2020 reflect costs associated with the Norwood campus closure and with our CEO transition, while in fiscal 2019 they reflect costs associated with Norwood and a consultant termination fee. Our balance sheet strengthened further in the quarter with available liquidity of $114.9 million as of September 30, which includes $76.8 million of unrestricted cash and cash equivalents and $38.1 million of short-term held to maturity securities. This is a $23 million quarter-over-quarter increase, which is consistent with the increase in liquidity we generated in the fourth quarter of fiscal 2019. This is a notable outcome considering the challenging operating environment during the quarter. For the fiscal year, operating cash flow was $11 million, while adjusted free cash flow was $4.3 million, including $9.3 million of capex. We estimate that cash flow was negatively impacted by $10 million to $15 million for the year due to the timing of tighter fund flows tied to COVID related delays and student progression through the curriculum. You can see this impact and increase in our tuition receivables versus this time last year, most of which we expect we realized in fiscal 2021. We believe that our strong balance sheet and ability to generate free cash flow provides us with a solid foundation to execute on our growth strategy as we enter into fiscal 2021. We are actively working on number of strategic initiatives that will create value for our business, our students and our shareholders, and that we plan to share more details on in the months ahead. I'll also provide a brief update on our use of the CARES Act per funds. During the quarter, we completed disbursing the $16.6 million of emergency student funds. We also allocated $600,000 of the institutional funds for emergency grants to students. For the remaining institutional funds, we utilized $9.1 million of these funds in the fourth quarter. Of this amount, $5.7 million was for our student laptop PC program. The remainder was for technology and curriculum investments, health and safety on our campuses and costs associated with additional lab sessions to allow for social distancing. We have approximately 900,000 in institutional funds remaining. Now, let me touch on our real estate footprint optimization efforts. To recap the actions completed in fiscal 2020, we completed our Exton campus rightsizing of 71,000 square feet in the first quarter and our home office relocation in 16,000 foot reduction in June. We gave back the remaining 152,000 square feet for the Norwood campus after closing it in July, and we signed a new lease for our Sacramento campus in September, which will reduce that campus by 128,000 square feet at the end of calendar 2021. Combined these actions reduce our annual occupancy cost by over $8 million, with all that Sacramento captured in our Q4 run rate. We are actively negotiating with landlords in other campuses for similar actions. We will share more details when the negotiations are finalized. Our total lease facility portfolio currently stands at 1.85 million square feet. We are also exploring owning versus leasing certain campus facilities, given the strength of our balance sheet, the potential opportunities in the commercial real estate market. Another topic to touch on is the 8-K filed in September regarding the distribution of the preferred shares held by Coliseum Holdings to certain affiliated and non-affiliated entities. We view the distribution as very much in support of our strategic objectives and as overall important step that would further bolstering UTI's capital structure. We appreciate the efforts Coliseum went through to initiate and implement the distribution, as well as their overall support of the Company and focus on long-term value creation for all shareholders. The net effect of this distribution was to reduce Coliseum's direct and indirect holdings to 24.9% of total UTI outstanding shares on an as-converted basis. This ownership threshold is important to the Company, at any action involving 25% or more of the Company's total outstanding shares would require a change in control review by the Department of Education. This type of review could take as long as six to nine months and could delay any future organic or inorganic strategic actions we may be pursuing. The shares held by Coliseum and their affiliates are currently limited by a 9.9% voting and conversion cap which can be lifted through further actions by then, and the Company. We have communicated with a few of the larger preferred shareholders, while we can't sue [Phonetic] for them or them for their attention at any specific point in time, we understand that they are supportive of the Company and our long-term growth strategy, thus and tend to be long-term holders. Lastly, for the terms governing the preferred shares, the Company has the option to require to conversion of any or all outstanding preferred shares, if the volume weighted average price of the Company's common stock equals or exceeds $8.33 for 20 consecutive trading days. This price could change over time based upon certain adjustments. Looking forward, given our business model, we already have considerable visibility into fiscal 2021 and we feel very positive about the outlook based upon what we are seeing right now. Students we have currently generate a significant portion of the fiscal year revenue. New student enrollments and starts are pacing very strongly so far for the year, and we have visibility into and control of the key components of our cost structure, as well as planned investments and productivity improvements. However, the potential for ongoing impacts from the pandemic cannot be fully determined to quantify. Impacts could be on new student enrollments, show rates, LOAs, withdrawals, and overall student progression through the curriculum, all of which could negatively impact revenue. Regardless, we would expect to manage costs to limit potential impacts to profitability and cash flow, as we did through the actions we took just for 2020. Additionally, with our blended learning model fully functioning and the enhancements we have planned, we have the ability pivot rapidly in the event of any future campus disruptions, which is a capability we did not possess back in March when the pandemic struck. With that backdrop, I will now provide our guidance for fiscal 2021. For both new student starts and revenue, we expect year-over-year growth of 10% to 15%. For net income, we expect a range of $14 million to $19 million. For adjusted EBITDA, we expect a range of $30 million to $35 million. For adjusted free cash flow, we expect a range of $20 million to $25 million, which assumes capex of $15 million to $20 million, approximately two-thirds of the planned capex support high ROI investments, including the two welding programs we are launching in fiscal 2021, enhancements to our online curriculum and our campus optimization efforts. The remaining amount represents a consistent level of annual maintenance capex and new projects that were deferred from fiscal 2020. From a timing perspective, we expect starts to be higher year-over-year in every quarter, reflecting the momentum we have referenced with growth in Q1 and Q3 being more pronounced. We expect revenue to be down a few points year-over-year in the first half of the year as we made continued progress on the lab makeup progress and up measurably in the back half of the year, particularly in Q3. Profit will also be down versus the prior year in the first half, with the growth in the back half of the year. Cash flow should follow more normal pattern, neutral to modest cash generation in the first half, cash usage in the third quarter and a significant cash generation in the fourth quarter. To the extent any strategic actions, we now have an impact of fiscal 2021, we will update this guidance accordingly. We will also continue monitoring the situation very closely and we'll update you if it causes any material change in our expectations. Despite this financial uncertainty, with the visibility we have into the business and the confidence we have in our operating model, we feel it is appropriate to provide guidance for the investment community as an understanding of where we see the business heading over the upcoming fiscal year. To summarize, the outlook for our business is growing, as we are seeing significant growing interest in our highly valued programs across the country. We're making key investments in our core value proposition, our programs, industry relationships and talent. We're continuing to engage our prospective students via new pathways and methods and they are responding. We're continuing to innovate our educational delivery model in ways that support us today, but also opened new opportunities for the future. We're adapting every day to changes occurring in our market, political and business environment and have demonstrated our ability to operate effectively even when faced unprecedented challenges. We are proud that the innovations and improvements that we have made and will continue to make, have made a stronger UTI today and a better UTI positioned for the future. Our business remains resilient and we continue to make meaningful improvements. Our financial position is strong and clearly superior to many in our industry. Finally, the academic and employment proposition we offer is more valuable than ever to our students, potential employers and industry partners.	compname reports q4 earnings per share of $0.09. q4 revenue $76.3 million versus refinitiv ibes estimate of $85.5 million. universal technical institute - expects double-digit growth in new student starts, revenue, adjusted ebitda, net income, and adjusted free cash flow in 2021. qtrly earnings per share $0.09.
Also in attendance today is Bob Hevert. Bob was recently appointed Senior Vice President, Chief Financial Officer and Treasurer, effective July 31, as we will discuss in further detail momentarily. The accompanying supplemental information more fully describes these non-GAAP measures and includes a reconciliation to the nearest GAAP measures. The company believes these non-GAAP measures are useful in evaluating its performance. Bob brings over 30 years of industry experience in regulatory matters and corporate finance and has testified in over 300 proceedings as an expert witness. In fact, Bob has testified on behalf of Unitil in each of the states where we operate, including most recently as the cost of equity witness in our recent rate case in Maine. Bob was previously with ScottMadden as Partner and Practice Area Leader of Rates, Regulation and Planning. We believe that Bob's proven track record of success and his broad industry experience will be of great value to the company and its shareholders. At this point, I'd like to give Bob the opportunity to just say a few words. I have worked with Unitil on a variety of matters for many years. And during that time, I became familiar with the company's employees, its culture, and its commitment to excellence, all of which I am sure have proven to be a benefit to both customers and shareholders. I'm very excited to join the Unitil team, and I look forward to helping advance the company's long-term strategies. Well, we're happy to have you on board, Bob. As Todd mentioned earlier, Bob's appointment will become effective on July 31 or tomorrow, at which point, Larry Brock will step down as CFO. Larry will continue on with company as Senior Vice President, working closely with Bob. With that, I'll now move on to slide five, where today, we announced net income of $3.1 million or $0.21 per share for the second quarter of 2020, a decrease of $0.9 million or $0.06 per share compared to 2019. The company estimates that the ongoing COVID-19 pandemic unfavorably impacted net income by approximately $0.4 million or $0.03 per share. During the first half of 2020, net income totaled $18.3 million or $1.23 per share. As a reminder, in the first quarter of 2019, the company recognized a onetime net gain of $9.8 million or $0.66 in earnings per share on the company's divestiture of its nonregulated business subsidiary, Usource. Adjusting for the divestiture gain, net income was down by $2.4 million or $0.16 per share compared to 2019, reflecting warmer winter weather in 2020. The year-to-date decrease in earnings is primarily due to the warmer-than-normal winter weather in Q1, which unfavorably affected net income by approximately $3.1 million or $0.20 per share. Turning to slide six. Similar to last quarter, I'd like to recap the company's COVID-19 pandemic response. Our highest priority continues to be the safety of our customers and of our employees. In response to the COVID-19 emergency, we implemented our crisis response plan in order to execute preventive and proactive measures during this unprecedented time, and we've also enacted a phased opening plan. The company is currently operating in its limited reopening phase under which most office employees are continuing to work from home when possible. In addition, we continue to require social distancing as well as masks, hygiene, travel limitations and other measures to protect our employees and prevent the spread of the COVID virus. Operationally, the company has continued to provide safe and reliable service through the COVID-19 emergency. Employees entering customers' homes are being routinely tested to ensure the safety of both our customers and our employees. We quickly adapted to social distancing and other recommended guidelines while ensuring operational continuity, and our workforce has seamlessly transitioned to work-from-home standards where appropriate. Our employees have risen to this extraordinary challenge while continuing to provide exceptional customer service, and the company as a whole remains prepared to adapt in order to serve our customers and communities. On slide seven, we provide an update of how our states are being impacted by the COVID-19 pandemic. Unfortunately, many parts of the country have experienced an acceleration in the rate of new COVID-19 cases and consequently, reopening plans are being rolled back in some places. However, in New England, we remain cautiously optimistic that testing, tracing, masks, social distancing and other measures have successfully slowed the spread of COVID-19 as the new case counts across our territories appear to have leveled off. The percentage of positive COVID-19 tests in our service areas also have stabilized at rates considerably lower than the national average. As the number of new COVID-19 cases have slowed, emergency orders have been moderately relaxed as part of a phased reopening plan in the states where we operate. As outlined on this slide, many businesses, including retail, restaurants and personal services, began reopening during Q2. I would also note that most of the major development projects that we have discussed in the past continue to proceed in our service areas, which should contribute to our expanding customer base. On slide eight, we've again summarized our 5-year investment plan. We have not revised our investment plans as a result of the COVID-19 pandemic. And in fact, through the first half of 2020, our capital spending is more than $10 million higher in comparison to the same period in 2019. On slide nine, as I previously stated, I simply wanted to reaffirm that we do not anticipate any change to our current dividend policy as a result of the pandemic. I'll begin the sales and margin discussion on slide 10. In the second quarter of 2020, our gas gross margin was $22.9 million, a decrease of $0.4 million from 2019. We estimate that the COVID-19 emergency unfavorably impacted gas margin by $0.8 million due to lower commercial and industrial usage. In addition, the warmer early summer weather impacted gas margin unfavorably by $0.2 million in the quarter. These decreases were partially offset by $0.6 million due to higher distribution rates and customer growth in 2020 compared to 2019. Natural gas therm sales decreased 9% in the second quarter of 2020 compared to the same period in 2019. The decline in gas sales units primarily reflects lower C&I usage due to the ongoing COVID-19 emergency as well as the warm early summer weather. In total, the company estimates that weather-normalized gas therm sales, excluding decoupled sales, were down 5.6% in the quarter. Commercial and industrial sales were down 10.7% and residential usage was down 2.1% in the quarter compared to prior year. On a weather-normalized basis, excluding decoupled sales, the company estimates that C&I sales were down 7.4% and residential sales would have been up 3.2% in the quarter. Moving to slide 11. For the first six months of 2020, our gas gross margin was $65.3 million, a decrease of $1.5 million from 2019. The decrease was primarily driven by the historically warm winter weather in the first quarter of 2020 that I discussed during our last quarter's earnings call. The company estimates that year-to-date sales margin was lower by $2.7 million due to warmer weather, partially offset by customer growth. We also estimate that the COVID-19 emergency unfavorably impacted margin by $0.8 million due to lower C&I usage. These volume variances were partially offset by higher natural gas distribution rates of $2.0 million in 2020. Through the first six months of 2020, natural gas therm sales decreased 7.5% compared to 2019. We attribute the decline in gas sales to the historically warm winter weather in the first quarter of 2020 and the ongoing COVID-19 emergency. The company estimates that weather-normalized gas therm sales, excluding decoupled sales, were down 1.2% year-over-year. Finally, I would note that we are currently serving 1,731 or 2.1% more gas customers than at the same time in 2019, illustrating our growing customer base. Next, on slide 12, we discuss electric margin. In the second quarter of 2020, our electric gross margin was $22.4 million, which is flat to 2019. Electric sales margins were higher by $0.4 million in the period due to higher electric distribution rates, customer growth and warmer early summer weather. The ongoing COVID-19 emergency negatively impacted electric margin by a net $0.4 million due to lower C&I usage of $0.6 million, partially offset by higher residential usage of $0.2 million. Total electric kilowatt hour sales decreased 2% in the second quarter of 2020 compared to the same period in 2019. The decline in electric sales units primarily reflects lower C&I usage due to the ongoing COVID-19 emergency and warmer early summer weather, partially offset by increased sales to residential customers due to the COVID-19 pandemic stay-at-home orders and the increased use of air conditioning during the warmer early summer period. In total, the company estimates that normal electric kilowatt hour sales, excluding decoupled sales, were down 4.9%. Commercial and industrial sales were down 11% and residential usage was up 12.8% in the quarter. On a weather-normalized basis, excluding decoupled sales, the company estimates that C&I sales were down 12.2% and residential sales would have been up 6.4% in the quarter. Moving to slide 13. For the first six months of 2020, our electric gross margin was $45.5 million, which is again flat to 2019. In the period, electric sales margins were higher than 2019 by $0.8 million due to higher electric distribution rates, customer growth and warmer early summer weather. However, these positive differences were offset by the impacts of warmer winter weather in the first quarter of $0.4 million, and as I mentioned last slide, the ongoing COVID-19 emergency also negatively impacted margin by $0.4 million. Through the first six months of 2020, electric kilowatt hour sales decreased 0.5% compared to 2019. We attribute the decline in electric sales principally to the lower average usage by C&I customers as a result of the ongoing COVID-19 emergency and warmer winter weather, which adversely impacted the usage of electricity for heating purposes. This was partially offset by increased sales to residential customers due to warmer early summer temperatures and the fact that people spent more time at home than usual during the COVID-19 stay-at-home orders. The company estimates that weather normal electric kilowatt sales, excluding decoupled sales, were down 1.1% in the period. The number of electric customers being served has increased by 755 or 0.7% compared to the prior year. Next, on slide 14, we'll discuss the financial impact on Unitil of the COVID-19 emergency. We are closely monitoring the COVID-19 emergency and its impacts on the financial health of the company. As Tom mentioned earlier, we have estimated that as a result of the COVID-19 emergency, earnings per share were negatively impacted by $0.03 in the second quarter of 2020. As we just discussed, the combined impact on gas electric sales margin from the COVID-19 emergency was $1.2 million in the second quarter of 2020. However, this was somewhat offset by net lower O&M expenses of approximately $0.6 million that the company identified to be related to the COVID-19 emergency. The lower O&M related to the COVID-19 was due to lower employee benefit costs, primarily lower health insurance claims incurred in the second quarter of $1.0 million, partially offset by net $0.4 million higher other pandemic-related costs related to the purchasing of PPE supplies, facility cleaning, higher bad debt provisions and other expenses. Overall, O&M was down by $1.3 million in the second quarter of 2020 compared to 2019, and the remaining decrease is primarily due to lower utility operating costs in the period. The company is also working closely with our regulators and local utility working groups to develop reporting mechanisms to respond to requests from our regulators about the financial impacts of the COVID-19 emergency. Due to the ongoing moratorium on service disconnections, the company expects to incur higher levels of customer arrears, which could translate to higher bad debt expense. We'll be tracking the activity, and we are exploring potential options to recover expenses related to the emergency through the regulatory process. I'd like to point out that supply related bad debt, which is historically approximately 45% of all write-off activity, is tracked and recovered in reconciling mechanisms and does not impact the company's earnings. Also, as I mentioned last call, the company has no intention to alter staffing levels as a result of the COVID-19 emergency. In order to help stakeholders gauge the potential impact of COVID-19 on sales margin, the company has provided sensitivities between usage and margin for the third and fourth quarters of 2020. Turning to the balance sheet. In the second quarter, the company successfully priced $95 million of long-term debt through the private placement market. The debt was priced at competitive investment-grade rates, and we anticipate the transaction to close in quarter 3. The capital will be used to refinance existing and maturing debt, fund our investment programs and for other general corporate purposes. With the company's existing credit facility, which has a borrowing limit of $120 million, and the proceeds recently of the recently priced debt, the company has ample liquidity to execute our growth plans. Moving on to slide 15. We provide an earnings bridge analysis comparing 2020 results to 2019 for the 6-month period ended June 30. I'd like to note that this layout is slightly different from the Form 10-Q as we isolate the impact of the 2019 Usource divestiture and related revenues and expenses. As discussed, 2020 year-to-date gross margin is lower than 2019 by $1.5 million, largely due to the warmer winter weather. Core operation and maintenance expenses decreased $1.5 million compared to the same period in 2019. This decrease is primarily driven by lower employee benefit costs of $1.1 million as well as lower maintenance and storm expenses of $1.0 million, partially offset by higher bad debt expense and higher professional fees of a net $0.6 million. Depreciation and amortization was higher by $0.8 million, reflecting higher levels of utility plant in service. Taxes other than income taxes increased by $1.1 million, reflecting higher levels of net plant in service as well as a nonrecurring tax abatement realized in 2019 of $0.6 million. Interest expense was flat, reflecting interest on higher interest on long-term debt, offset by lower interest on short-term borrowings. Other expense increased $0.3 million due to higher retirement benefit costs. Next, we've isolated the full Usource impact of $10.3 million, which was realized in 2019. This includes the after-tax gain on the divestiture of $9.8 million, in addition to $0.5 million, which is the net of revenues and expenses realized through Usource operations in 2019. Lastly, income taxes decreased $0.3 million, reflecting lower pre-tax earnings in the period. So this bridge analysis shows the net changes to reconcile our 2019 net income of $30.5 million to our 2020 earnings of $18.3 million for the first six months of the year. On slide 16, we'll begin our discussion of rate case activity in 2020. As we announced last quarter, our base rate cases in Maine and Massachusetts have concluded. We received an order from the Maine PUC, approving an increase to base revenue of $3.6 million. In Massachusetts, the gas settlement approved has a total distribution revenue increase of $4.6 million, which will be phased in over two years. We began collecting the majority of this revenue award on March 1, 2020, while $0.9 million of the award will be included in rates starting March 1, 2021. The gas settlement was lower as a result of $1.8 million lower expenses related to the pass back of excess deferred income taxes, lower depreciation and a removal of retirement costs from base distribution rates. The Massachusetts electric settlement allows for a distribution increase of $0.9 million to become effective November of 2020. The electric settlement was lower by $1.1 million as a result of lower expenses related to the pass back of excess deferred income taxes and the removal of retirement costs from base distribution rates. The electric settlement also allows for the implementation of a new major storm reserve fund, which will help mitigate expense volatility related to future storms. The company was planning to file the UES rate case during 2020 with the test year 2019, but we expect to defer the filing until the first half of 2021. And I'd point out that both UES and Northern New Hampshire are required by the New Hampshire PUC to propose revenue decoupling in their next rate case to be filed 2021 or later. Over on slide 17, we have provided a summary of significant distribution rate changes in 2020. In 2020, we have been awarded over $7 million of rate relief. As I mentioned last slide, the Fitchburg rate case awards would have been a combined $2.9 million higher if not for lower depreciation and amortization expenses and the removal of retirement costs from base rates. On Slide 17, the negative amounts for the Fitchburg capital trackers reflect the transfer of collections from the tracker mechanisms and into base distribution rates. Also, we have precedent for long-term rate plans or cost trackers across all of our utility subsidiaries. Finally, on Slide 18, we provide the last 12 months' actual return on equity in each of our regulatory jurisdictions. Unitil, on a consolidated basis, earned a total return on equity of 8.4% in the last 12 months. The company estimates that after weather normalizing the warm winter weather in the first quarter of 2020, the consolidated return on equity would have been 9.3%.	compname reports q2 earnings per share $0.21. q2 earnings per share $0.21.
Speaking on the call today will be Tom Meissner, Chairman, President and Chief Executive Officer; and Bob Hevert, Senior Vice President, Chief Financial Officer and Treasurer. Moving to Slide 2. Statements made on the call should be considered together with cautionary statements in other information contained in our most recent Annual Report on Form 10-K and other documents we have filed with or furnished to the Securities and Exchange Commission. The accompanying supplemental information more fully describes these non-GAAP financial measures and includes a reconciliation to the nearest GAAP financial measures. The company believes these non-GAAP financial measures are useful in evaluating its performance. I'm going to begin on Slide 4 today. So, today we're pleased to announce net income of $2.7 million or $0.18 per share for the second quarter of 2021. For the first half of 2021, net income was $21.6 million or $1.44 per share. This represents an increase of $0.21 per share over the same six-months period of 2020 and reflects higher Electric and Gas adjusted gross margins. Next, I'd like to quickly review a few high level themes. First, we reiterate our long-term guidance of 5% to 7% growth in earnings per share with 2021 earnings expected to be somewhat above the higher end of the range relative to 2020. Second, the company recently announced a goal of achieving net zero emissions by 2050. This announcement is a major step for the company and reflects our commitment to environmental stewardship and corporate responsibility. Finally, I would also like to note the filing of another strategic rate case in New Hampshire for our gas utility, Northern Utilities. Combined, the pending rate applications for Unitil Energy Systems and Northern Utilities request a nearly $20 million increase in base distribution revenues. Bob will discuss the details of these filings later in the call. Moving to Slide 5. As I noted earlier, on June 21, we announced our goal to reduce companywide direct greenhouse gas emissions by at least 50% by 2030 relative to 2019 levels and to achieve net zero emissions by 2050. These goals are part of our overall commitment to environmental stewardship, sustainability and corporate responsibility. As I've said before, our vision is to transform the way people meet their evolving energy needs to create a clean and sustainable future. We will continue to work with customers, policy makers and industry leaders to reduce emissions from the energy supply delivered to our customers. With that, I'll now pass it over to Bob, who will provide further detail on our financial results. I will begin on Slide 6. As Tom noted today, we announced second quarter earnings per share of $0.18. This represents a year-over-year decrease of $0.4 million or $0.03 per share. On a year-to-date basis, net income increased by $3.3 million or $0.21 per share compared to 2020. Strong year-over-year earnings growth primarily is the result of higher Electric and Gas adjusted gross margins, partially offset by higher operating expenses. As Tom mentioned, we expect full year 2021 earnings to be ahead of our 5% to 7% long-term earnings per share growth range relative to 2020 earnings of $2.15 per share. Turning to Slide 7. For the six months ended June 30, 2021, Electric adjusted gross margin was $48 million, an increase of $2.5 million or 5.5% relative to 2020. The increase in Electric adjusted gross margin reflects higher residential unit sales of 2.8% and higher commercial and industrial unit sales of 3.1%. Customers increased 0.8% over the first half of 2020. The higher sales volumes reflect customer growth and improving economic conditions. As noted on Slide 8, for the six months ended June 30, 2021, Gas adjusted gross margin was $72.8 million, an increase of $7.5 million or 11.5% compared to 2020. The increase in Gas adjusted gross margin reflects higher rates of $5.1 million and the combined net effect of $2.4 million from the net favorable effect of customer growth, colder winter weather and warmer spring weather. The first half of 2021 was 2.1% colder year-over-year, contributing to higher natural gas therm sales of 4.2%. Higher sales also reflect 1,200 additional customers served compared to the same period in 2020. Moving on to Slide 9. We provide an earnings bridge comparing 2021 results to 2020 for the quarter. As noted earlier, 2021 adjusted gross margin increased $10 million as a result of higher rates and higher unit sales. Operating and maintenance expenses increased $2 million. The current year increase is attributable to higher utility operating costs, higher labor costs and higher professional fees. In the second quarter of 2020, the company realized a benefit from lower labor costs related to the COVID pandemic. As the economies in our service area recover, we have seen that trend reverse, primarily in the area of healthcare. The increase in operating expenses also includes an increase of $0.4 million or roughly $0.02 per share related to a recent decision by the New Hampshire Public Utilities Commission's not to authorize the creation of a regulatory asset for incremental bad debt related to the COVID pandemic. Instead the order states these costs will be addressed in each utilities' next rate case. Unitil is in a unique position in that we have pending both Electric and Gas rate cases in New Hampshire through which we will seek recovery of those costs. Depreciation and amortization increased by $2.7 million, reflecting higher levels of utility plant in service. Taxes, other than income taxes, decreased by $0.2 million, primarily due to lower payroll taxes, partially offset by higher local property taxes on higher utility plant in service. Interest expense increased by $0.9 million, reflecting interest on higher long-term debt balances, partially offset by lower rates on lower levels of short-term borrowings. Other expense decreased by $0.5 million, largely due to lower retirement benefit and other costs. Lastly, income taxes increased by $1.8 million as a result of higher pre-tax earnings. Turning now to Slide 10. The Unitil Energy rate case, which I've discussed on previous calls, is progressing as expected with temporary rates of $4.5 million becoming effective on June 1. Yesterday, we filed a multi-year rate plan in New Hampshire for our gas utility, Northern Utilities. In that case, we proposed a $7.8 million rate base increase with a $3.2 million temporary rate increase. You may recall that in New Hampshire, it is typical to collect a portion of the revenue deficiency through temporary rates prior to receiving a final order. We anticipate temporary rates for Unitil -- excuse me, for Northern Utilities to become effective in the third quarter of 2021. Temporary rates are reconciled to the final rate case award and the difference is collected or refunded usually over a one-year period. Our filing also includes a full revenue per customer decoupling proposal and a multi-year rate plan to recover certain capital expenses made in 2021, 2022 and 2023. We anticipate that these rate case filings in New Hampshire will support the return on equity at Unitil Energy Systems and Northern Utilities. Wrapping up with Slide 11. With the first half of 2021 behind us, we're pleased with what the company has accomplished. At this time, we believe our investment plan for 2021 is on track and our regulatory initiatives are proceeding on schedule. We look forward to providing further updates on our next call.	unitil - q2 earnings per share $0.18. q2 earnings per share $0.18.
Speaking on the call today will be Tom Meissner, Chairman, President and Chief Executive Officer; Bob Hevert, Senior Vice President, Chief Financial Officer and Treasurer. The accompanying supplemental information more fully describes these non-GAAP measures and includes a reconciliation to the nearest GAAP measure. The company believes these non-GAAP measures are useful in evaluating its performance. Turning to Slide 4. We provide an outline for topics to be covered in today's call. Beginning on Slide 5. Today, we announced net income of $0.3 million or $0.02 per share for the third quarter of 2020. The company estimates that the ongoing COVID-19 pandemic unfavorably impacted third quarter net income by approximately $0.01 per share. Through the first three quarters of 2020, net income is $18.6 million or $1.25 per share. For comparison purposes, recall that in the first quarter of 2019, the company recognized a onetime net gain of $9.8 million, or $0.66 per share, on the company's divestiture of its nonregulated business subsidiary, Usource. Adjusting for this onetime gain, net income is down about $4.4 million or $0.29 per share compared to 2019. The year-to-date decrease in earnings is primarily due to the warmer than normal winter weather in Q1, which unfavorably affected net income by approximately $3.1 million or $0.20 per share. In addition to the warmer winter weather, we estimate that net income has been unfavorably impacted by approximately $0.04 per share due to the COVID-19 pandemic. Turning to Slide 6. And similar to last quarter, I'd like to recap the company's response to the COVID-19 pandemic. Our highest priority continues to be the safety of our customers and of our employees. In response to the ongoing pandemic, we implemented our crisis response plan to help execute preventive and proactive measures during which are during this unprecedented time and have also enacted a phased reopening plan. The company is currently in its limited reopening phase and is still requiring all office employees to work remotely wherever possible. The company also employed a large number of field workers to construct and maintain its energy infrastructure. These workers have adopted new policies and personal protective equipment to ensure the health and well-being of themselves and of our customers. Operationally, the company has continued to provide safe and reliable service throughout the pandemic. Employees entering customers' homes are being routinely tested to ensure the safety of both our customers and our employees. We quickly adapted to social distancing and other recommended guidelines while ensuring operational continuity and our workforce has seamlessly transitioned to work from home where appropriate. Our employees have return to this extraordinary challenge while continuing to provide exceptional customer service. In fact, after tropical storm Isaias, we were able to restore power to all of our customers within a 24-hour period. An example of our best-in-class storm restoration system and our ability to adapt in order to serve our communities safely and reliably. We've also been able to provide mutual aid to support other utilities in the region and their restoration efforts seven times this year. I would also briefly point out that the states where we operate are managing the pandemic relatively well in comparison to other regions of the country. The positive test rates in each of our states rank in the lowest 10 of all 50 states. And less than half of the national average. On Slide 7, we're pleased to announce that our 2020 corporate sustainability and responsibility report was recently issued on October 22. This report expands on the inaugural corporate responsibility report released last year and outlines our vision for sustainability and explains how our business strategies will align with the environmental, social and economic expectations of our customers and communities. This report also -- the reports to be published in the future will also define our objectives and strategies and report on key metrics to track our progress and illustrate the benefits to stakeholders. Sustainability is central to our mission and vision, the interactive report can be found on our website at unitil.com. Turning to Slide 8. Our sustainability goals primarily fall under three categories. First, we are focused on advancing the grid. The need to reduce carbon emissions has driven a fundamental transformation within the energy sector, as customers adopt new technologies and as clean renewable energy resources are increasingly distributed across the electricity delivery system, the fundamental architecture of the electric grid must advance. We are actively investing in five key areas that will support our objective of advancing the electric grid and transforming the customer experience. This includes advanced metering, grid intelligence, distributed energy, customer services and innovative rate design. These initiatives will provide customers with greater control and visibility into their energy use, enabling and will enable distributed energy resources, access to the system and advance the system security, safety and reliability. The company also believes that natural gas remains key to a sustainable future as a cleaner and more affordable option for our customers. We estimate that the impact over the last 10 years from our customers choosing natural gas rather than home heating oil has had the impact of taking roughly 60,000 cars off the road. Nearly 2/3 of main households still rely on fuel oil as their primary energy source for home heating, a larger proportion than in any other state in the United States. In New Hampshire, more than 2/5 of households rely on fuel oil, the second highest proportion of the nation behind Maine. This unusually high penetration of fuel oil presents significant opportunities to reduce emissions through continued customer conversions to natural gas. As we continue to expand the availability of natural gas to more customers, we also will continue to replace outdated infrastructure and modernize our gas system. As a result, we decreased our fugitive emissions from natural gas distribution by 47 metric tons over the last two years, lowering our total generation of fugitive greenhouse gas emissions by 9% in 2019 when compared to 2017. We also continue to look for opportunities to add renewable natural gas to our supply portfolio. In Q3 of this year, we issued a request for expressions of interest to several parties to identify sources of existing or planned RNG resources. We will continue to evaluate the viability of adding RNG into our supply. Another area central to sustainability is creating a sustainable future through our people. Finding and retaining quality, highly motivated employees is critical to our sustainability over the long term. We are also committed to providing a safe and healthy working environment to our employees and our contractors and the public. In fact, our safety metrics place us in the top 1/3 of our industry peers and have continued to improve over time. Not only is it important to keep employees safe in the field, but also to ensure that they are respected in the workplace. At Unitil, we strive to be an employer of choice for everyone regardless of race, religion, color, gender or sexual orientation by maintaining and accepting, respectful and nondiscriminatory workplace where people are encouraged to bring their unique perspectives to the table. We believe the framework we've established from employee relations has been successful as backed by a recent employee survey where 90% of our employees report being proud to work for Unitil. Our goal is to be the most technologically advanced utility in the region or the utility of the future. Our vision and mission have grounded us during this historically uncertain time and will guide us to a clean and sustainable energy future as we provide energy for life. Turning to Slide 9. As I mentioned on last quarter's call, our investment forecast still has not changed as a result of the COVID pandemic. In fact, compared to the prior year, we have increased our capital investment by more than 20%. We anticipate continuing to realize strong rate base growth, given our broad investment opportunities and advancing the grid and supporting and modernizing our gas distribution infrastructure. To provide one example where we are facilitating the integration of distributed energy resources and overall system efficiency. We are installing a 2-megawatt utility-scale battery storage system in our Massachusetts service area. This energy storage system has the ability to serve over 1,300 homes for over two hours and is designed to reduce peak loading on the substation equipment. This project has a capacity representing over 2% of our system peak in Massachusetts and offers a solution to advanced grid operations control cost variability and aid in the overall system reliability as we support renewable energy solutions. I'll begin with the sales and margin discussion on Slide 10. Year-to-date 2020, our electric gross margin was $70 million, a decrease of $0.6 million compared to 2019. The decrease in electric margin reflects lower C&I demand sales related to the economic slowdown caused by the COVID-19 pandemic. Lower average usage per customer associated with energy efficiency and warmer winter weather. We estimate the COVID-19 pandemic unfavorably affected electric margin by approximately $0.7 million. Through the first nine months of 2020, total electric kilowatt hour sales increased 1.2% relative to 2019. Residential sales increased 8.2% primarily reflecting stay at home orders and continuing remote work, along with warmer summer weather relative to the prior year. C&I sales decreased 3.6%, reflecting lower usage due to the COVID-19 pandemic. Moving to Slide 11. For the first nine months of 2020, our gross gas margin was $83.3 million, a decrease of $2.2 million over 2019. That decrease was driven principally by the historically warm winter weather in the first quarter, which we have discussed in the past. The company estimates that year-to-date gas margin was lower by $3.2 million due to warmer weather. We also estimate that the COVID-19 pandemic unfavorably affected gas margin by $1.3 million due to lower commercial and industrial usage. Those unfavorable variances were partially offset by higher distribution rates and customer growth of $2.3 million. Through the first nine months of 2020 natural gas therm sales decreased 7.1% compared to 2019. We attribute the decline in gas sales to the historically warm winter weather and the COVID-19 pandemic. The company estimates that weather-normalized gas therm sales, excluding decoupled sales, were down 1.9% year-over-year. I also note, we currently are serving 2.9% more gas customers than in the same time in 2019, illustrating our growing customer base. Moving on to Slide 12, we provide an earnings bridge analysis comparing 2020 results to 2019 for the nine months period ending September 30. As we've provided in the past, this layout is slightly different than the Form 10-Q as we isolate the effect of the Usource divestiture and related revenues and expenses. As I noted, 2020 year-to-date gross margin -- excuse me, gross sales margin is lower than 2019 by $2.8 million. Core operation and maintenance expenses decreased by $0.9 million compared to the same period in 2019. This decrease primarily is due to lower employee benefit costs of $1.2 million as well as lower maintenance expense of $0.3 million, partially offset by higher bad debt expense of $0.4 million and higher professional fees of $0.2 million. Depreciation and amortization was higher by $1.7 million, reflecting higher levels of utility plant and service. Taxes other than income taxes increased by $0.9 million, reflecting property taxes associated with higher levels of net plant and service and a nonrecurring tax abatement realized in 2019 of $0.6 million, that increase was partially offset by $0.6 million of payroll credits realized in the third quarter associated with the Coronavirus Aid, Relief and Economic Security Act, also known as the CARES Act. Interest expense decreased by $0.2 million, reflecting lower interest rates on short-term debt. Other expense increased by $0.4 million due to higher retirement benefit costs. Next, we've isolated the full Usource effect of $10.3 million, which was realized in 2019. This includes the after-tax gain on the divestiture of $9.8 million and $0.5 million, reflecting the net of revenues and expenses realized through Usource operations in 2019. Lastly, income taxes decreased $0.8 million, reflecting lower pre-tax earnings in the period. Next, on Slide 13, we summarize the effect of the COVID-19 pandemic. We are closely monitoring the pandemic and any potential effect on the company's financial health. As Tom mentioned earlier, we estimate that the COVID-19 pandemic affected earnings per share by $0.01 in the quarter, bringing the year-to-date effect to $0.04 per share. The combined effect on gas and electric sales margin was $0.8 million in the third quarter of 2020 and $2 million year-to-date. The company has been able to largely offset the decline in revenue with lower expenses. Although O&M expenses in the third quarter were minimal. Year-to-date O&M expenses have been favorable by $0.7 million. That favorable variance was driven principally by lower health insurance claims, slightly offset by higher pandemic costs related to PPE supplies and cleaning expenses. As noted earlier, the company was able to lower taxes other than income taxes by $0.6 million by recognizing payroll tax credits associated with the CARES Act. To help stakeholders gauge the potential effect of COVID-19 pandemic on sales margin, the company has provided sensitivities between usage and margin for the fourth quarter of 2020. Now turning to Slide 14. In the third quarter, we received proceeds of $95 million of long-term debt. The debt was placed at our regulated subsidiaries and carries an average interest rate of 3.72% with a 20-year tenor. The proceeds were used to refinance existing short-term debt and to better match the long-term nature of our utility plant assets. As a result of the financing, we have liquidity of about $161 million, enabling the company to continue executing on our long-term plan. On Slide 15, we are pleased to announce that our gas transmission pipeline, Granite State Gas, recently filed an uncontested rate settlement with the FERC providing for an annual revenue increase of $1.3 million, with rates to become effective in the fourth quarter of this year. We reached that settlement with the New Hampshire and Maine state regulators and agencies. The settlement includes a 3-year capital tracking mechanism that will accelerate cost recovery for investments made after the test year. The settlement illustrates our healthy and productive relationship with state agencies and regulators. Turning to Slide 16. Our regulatory outlook in 2021 includes the planned filing of base rate cases in New Hampshire for both Unitil Energy, our electric distribution utility, and Northern Utilities, our natural gas utility. We plan to file decoupling mechanisms in both cases. If those mechanisms are approved, the percentage of our decoupled sales to total sales would increase from approximately 25% to 75%, and over 80% of our meters would be under decoupled rate structures. Turning to Slide 17. We believe that our long-term capital investment goals remain intact with ample investment opportunities in modernizing and expanding our utility system. We believe we are well positioned to continue executing our growth strategies, while pursuing our sustainability goals, all while maintaining excellent service to customers throughout these unprecedented times. Lastly, we expect to provide any updates to our capital spending plan during our Q4 earnings call.	compname reports q3 earnings per share $0.02. q3 earnings per share $0.02.
We are off to a strong start to 2021, with solid first quarter results. Including, close to 12% top line growth, margin expansion in excess of 200 basis points, and a total annualized return on average equity of 23.2%. We continue to make progress on our reinsurance program renewal and were oversubscribed on our first cat bond in March at rates below the low end of our initial range. We have now completed procurement of our Allstate's first event reinsurance program for UPCIC for the 2021 wind season, and we'll have additional details in May as we finalize the remaining pieces of our risk management strategies for our insurance company subsidiaries. In addition, we were encouraged earlier this month when the Florida Senate passed Bill 76, which would enable Floridians to have reliable access to property insurance. For a number of years, Florida has been a significant outlier compared to the rest of the country when it comes to litigated property claims, which has put significant pressure on the Florida property insurance marketplace. We have not been immune to these market dynamics. And during the first quarter, we actively reduced our policies in force sequentially and reduced new and renewal policy counts in aggregate this quarter when compared to the first quarter of 2020. That being said, we continue to monitor closely the companion bill in the House, House Bill 305, which has differences from the Senate Bill 76. We look forward to continue to make positive strides throughout 2021 and should have additional details on our reinsurance program renewals in the next several weeks. As a reminder, discussions today on adjusted operating income and adjusted earnings per share are on a non-GAAP basis and exclude effects from unrealized and realized gains and losses on investments and extraordinary reinstatement premiums and related commissions. Adjusted operating income also excludes interest expense. We ended the first quarter with total revenue up 11.7% to $262.8 million, driven by primary rate increases from 2020, earning through the book as policies renew and an improvement in the unrealized portion of the investment portfolio, partially offset by the impact of higher reinsurance costs when compared to the first quarter of 2020. Margins expanded by 210 basis points for the quarter, driven by the incremental fall-through profit from the top line as previously discussed, lower losses in LAE and lower operating expenses as a percentage of direct premiums earned. EPS for the quarter was $0.84 on a GAAP and non-GAAP adjusted basis. As to underwriting, direct premiums written were up 9.2% for the quarter, led by direct premium growth of 10.2% in Florida. On the expense side, the combined ratio improved one point for the quarter to 93.1%. The improvement was driven by a two-point improvement in the loss and LAE ratio from decreased weather, favorable prior year reserve development, and a benefit from our claims adjusting business, partially offset by increased reinsurance costs and less than one point of current year strengthening on a direct basis, when compared to the first quarter of 2020. The expense ratio improved on a direct earned basis by 45 basis points as a result of operating efficiencies but was more than offset by the impact of increased reinsurance costs on the net ratio resulting in a one-point increase in the net expense ratio for the quarter. On our investment portfolio, net investment income decreased by 56.3% to $3 million for the quarter, primarily due to significantly lower yields on the reinvested portfolio following the sale of a majority of securities in the portfolio that were in an unrealized gain position in the third and fourth quarters of 2020. Unrealized equity losses improved substantially during the quarter when compared to the market volatility seen last March as a result of the COVID-19 pandemic. Total invested assets increased 10.6% to $1 billion since year-end 2020. In regards to capital deployment, during the first quarter, the company repurchased approximately 15,000 shares at an aggregate cost of $245,000. On April 22, 2021, the Board of Directors declared a quarterly cash dividend of $0.16 per share of common stock, which is payable on May 21, 2021, to shareholders of record as of the close of business on May 14, 2021. As mentioned in our release yesterday, we are maintaining our guidance for 2021. We still expect GAAP and non-GAAP adjusted earnings per share range of between $2.75 and $3 and a return on average equity of between 17% and 19%. The guidance assumes no extraordinary weather events in 2021 and also assumes a flat equity market for GAAP EPS. If weather events exceed plan, we expect to see both a benefit from our claims adjusting business and increased loss costs.	universal insurance holdings q1 revenue $262.8 million. q1 revenue $262.8 million. q1 adjusted non-gaap earnings per share $0.84. q1 gaap earnings per share $0.84. maintaining its guidance for 2021.
Yesterday, we reported solid second quarter results, underpinned by strong top line growth as a result of the pockets of attractive pricing and volume, resulting in an annualized return on average equity in the first half of 2020 of 15.5%. In addition, we continue to enter new states as an agent serving independent third-party carriers with our digital insurance agency Clovered. We launched Clovered just over a year ago and continue to add partners and expand its offerings to consumers, while enhancing the overall digital experience. Clovered continues to be an attractive growth opportunity for us with approximately 40% premium growth from the year ago quarter to its total book of business, while growing non risk bearing business by over 200% in the same time period. The shift to online policy acquisition continues to grow, in part, due to a very desirable refinance and new home market. Clovered represents Universal Property & Casualty's fastest growing agency across it's nearly 10,000 independent agents. So, we're off to a solid start to the first half of the year overall, including the successful completion of our reinsurance renewal on time and on budget. We are taking a more measured approach to guidance as a result of previously announced, but starkly above average weather events in the second quarter. Our liquidity and ability to drive growth remains strong, and we continue to execute for our consumers and stakeholders. As a reminder, discussions today on adjusted operating income and adjusted earnings per share are on a non-GAAP basis and exclude effects from unrealized and realized gains and losses on investments, and extraordinary reinstatement premiums and related commissions. Adjusted operating income also excludes interest expense. EPS for the quarter was $0.62 on a GAAP basis and $0.52 on a non-GAAP adjusted earnings per share basis, and $1.23 and $1.32 for the first half of 2020, respectively. Direct premiums written were up 13.1% for the quarter, led by strong direct premium growth of 14.5% in states outside of Florida and 12.8% in Florida. For the first half of 2020, direct premiums written were also up double digits, led by 16.5% in states outside Florida and 13.8% in Florida. In both cases, growth was led by increased volume, rate increases becoming effective in a series of states, along with slightly improved retention, contributing to premium growth. On the expense side, the combined ratio increased 12.6 points for the quarter to 99.5% and 9.8 points for the first half of 2020 to 96.8%. The increases were driven primarily by the previously announced increased weather events in the second quarter, a higher core loss ratio and the impact of higher reinsurance costs on the combined ratio, partially offset by a reduction in the expense ratio. Total services revenue increased 16.8% to $16.1 million for the quarter and 20.9% to $31.5 million for the first half of 2020, driven primarily by commission revenue earned on ceded premiums. On our investment portfolio, net investment income decreased 16.6% to $6.2 million for the quarter and 16.3% to $13 million for the first half of 2020, primarily due to lower yields on cash and short term investments during the first half of 2020 when compared to the first half of 2019. The prior year also included onetime income benefits from a special dividend received and onetime reduction in investment expenses. Also to note, we had an increase in our cash and cash equivalents position by 82.2% when compared to the end of 2019 as a result of taking a defensive posture as COVID-19 impacts continue to be felt across the global economy. In regards to capital deployment, during the second quarter, the company repurchased approximately 572,000 shares at an aggregate cost of $10 million. For the first half of 2020, the company repurchased approximately 884,000 shares at an aggregate cost of $16.6 million. The company's current share repurchase authorization program has $11.7 million remaining as of June 30, 2020, and runs through December 31, 2021. On July 6, 2020, the Board of Directors declared a quarterly cash dividend of $0.16 per share payable on August 7, 2020, to shareholders of record as of the close of business on July 31, 2020. As mentioned in our release yesterday, we are updating our full year guidance to reflect the previously announced historically above average second quarter weather events. We now expect a GAAP earnings per share range from $2.31 to $2.61 and a non-GAAP adjusted earnings per share range of $2.40 to $2.70, assuming no extraordinary weather in the latter half of 2020 and no realized or unrealized gains for the second half of 2020. This would yield a return on average equity derived from GAAP measures between 13.5% and 16.5% for the full year. I will start with some additional color on prior year catastrophe events, then I'll touch on our experience to date with the second quarter 2020 weather events, and I'll conclude with a few comments on our reinsurance program effective June one. On prior year catastrophe events, we continue to make significant progress in resolving the remaining open claims and, of course, handling the newly reported claims as quickly as possible. As of 6/30, Hurricanes Matthew and Florence each were in the single-digit open claims and continue to be very near the end. Hurricane Michael had a little over 100 claims open. And as we start to approach the end on this storm, we did elect to book a modest $9.5 million increase in gross ultimate as of 6/30. This change does not impact our net loss position. On Hurricane Irma, despite the fact that 1,800 new claims were reported during the second quarter, we still successfully reduced the remaining open claim count. As of 6/30, the open Irma account stood at just over 450 we are preparing for the three year statute of limitation for filing new Irma claims to pass in early September, so we can make a final push on closing this event. There was no change to the ultimate as of 6/30. We were directly impacted by 14 different second quarter PCS events, which led us to book an additional $17 million of net pre-tax loss beyond our original weather loss plan as of 6/30. A few highlights worth mentioning. We secured more open market catastrophe coverage than at any other point in Universal's history. The top level of UPCIC's reinsurance tower provides coverage to a one in 300-year level. The final estimated cost was in line with our original guidance at approximately 34.6% of estimated direct earned premium for the 12-month treaty period. This compares to 33.3% at this time last year, reflecting a 4.1% increase year-over-year. Given the state of the reinsurance market and the industry's recent loss experience, we view the pricing levels as reasonable for this treaty period.	universal insurance holdings q2 gaap earnings per share $0.62. q2 gaap earnings per share $0.62. adjusted 2020 outlook to reflect historically above average q2 weather events. qtrly direct premiums written up 13.1% to $404.7 million. have not seen a material impact from covid-19 pandemic on co's business. sees 2020 gaap earnings per share in a range of $2.31 - $2.61. sees 2020 non-gaap adjusted earnings per share in a range of $2.40 - $2.70.
We continued to see headwinds in the third quarter as we dealt with elevated industrywide weather events year-to-date, particularly in coastal states. Our catastrophe response teams have directly engaged with our insureds to ensure they receive the attention they deserve. As previously announced, we were affected by full retention events from Hurricanes Isaias and Sally in addition to other PCS events year-to-date. As the Statute of Limitations for Hurricane Irma approach is ending, we experienced increased prior-year companion claims, as the window closed. This increase in claims led us to increase our reserves in years prior to 2020. We feel good to have Hurricane Irma behind us, the ability to strengthen reserves appropriately and proud of our employees for their contributions during these unprecedented times. Our vertically integrated suite of capabilities continues to differentiate us in our home state. Our primary rate increases continue to flow through our book, as evident by our strong direct premiums written growth of 19.4% in the quarter. We continue to selectively write new business, are quickly approaching $1.5 billion in premiums in force, and are optimistic about our prospects in the future. As a reminder, discussions today on adjusted operating income and adjusted earnings per share are on a non-GAAP basis, and exclude effects from unrealized and realized gains and losses on investments and extraordinary reinstatement premiums and related commissions. Adjusted operating income also excludes interest expense. EPS for the quarter was a loss of $0.10 on a GAAP basis and a loss of $1.43 on a non-GAAP adjusted earnings per share basis. Year-to-date, GAAP earnings per share was $1.14 and negative $0.08 on a non-GAAP adjusted earnings per share basis. Despite elevated activity year-to-date, we produced an annualized year-to-date return on average equity of 10% with a book value per share that remained relatively flat since the end of 2019 at $15.15. As to underwriting, direct premiums written were up 19.4% for the quarter, led by strong direct premium growth of 18.8% in states outside of Florida and 19.6% in Florida. The quarter's growth benefited from organic new business growth and primary rate increases continuing to flow through the book. On the expense side, the combined ratio increased 36.9 points for the quarter to 134.7%. The increase was primarily driven by previously announced increased weather events in addition to prior years reserve development and the continuation of occurring incremental reserves for current accident year loss cost. In addition, higher reinsurance cost affected the base of the ratio. These increases were partially offset by a benefit from our claims adjusting business and a reduction in the expense ratio. Turning to services, total services revenue increased 14.9% to $17.1 million for the quarter, driven by commission revenue earned on CD premiums and an increase in policy fees. On our investment portfolio, net investment income decreased 40.1% to $4.6 million for the quarter, primarily due to lower yields on cash and fixed income investments during 2020 when compared to 2019. Realized gains for the quarter were $53.8 million and resulted from taking advantage of increased market prices on our available-for-sale debt investment portfolio. We took the opportunity to monetize the increase in fair value of our investment portfolio as a means to enhance surplus for UPCIC. This facilitates our growth strategy in a hardening primary rate market while strengthening reserves. Cash and cash equivalents increased 122.5% to $405.1 million when compared to the end of 2019 as a result of the actions taken to realize investment gains leading to higher investment cash flows. As a result of the sales and reinvestment, future portfolio investment income will reflect current market rates. In regards to capital deployment, during the third quarter, the company repurchased approximately 534,000 shares at an aggregate cost of $9.9 million. Year-to-date, the company repurchased 1.4 million shares at an aggregate cost of $26.5 million. On July 6, 2020, the Board of Directors declared a quarterly cash dividend of $0.16 per share of common stock, which was paid on August 7, 2020, to shareholders of record as of the close of business on July 31, 2020. As mentioned in our release yesterday, we are updating our full year guidance to reflect increased top line revenue, offset by elevated third quarter loss and loss adjustment expense. We now expect a GAAP earnings per share range of $1.80 to $2.10 and a non-GAAP adjusted earnings per share range of $0.55 to $0.85, assuming no extraordinary weather events in the fourth quarter of 2020 and no realized or unrealized gains for the fourth quarter. This would yield a return on average equity derived from GAAP measures of between 11.1% and 14.1% for the full year. We continue to make significant progress in resolving the remaining open claims on prior-year catastrophe events. And as Steve noted, we reached the Statute of Limitations milestone for Hurricane Irma claims. We did see over 2,000 new Irma claims reported during the third quarter and we elected to book the un-gross ultimate at $1.55 billion. The modest run-up in claims filed in advance of the three-year Statute of Limitation for filing new Irma claims that expired in the second week of September was expected, but we were surprised and disappointed to see quite a number of non-cat Irma companion claims filed simultaneously. This phenomenon contributed to a portion of our third quarter prior-year adverse development. We will continue to monitor the effects of these late reported Irma and Irma-related claims going forward. But we are extremely pleased with the diligence of our claims adjusting staff. As of 9-30, Hurricane Michael had a little over 100 claims open, as we start to approach the end on this storm. We did elect to book the Michael gross ultimate at $386 million. This change does not impact our net loss position. Each of these events was booked at 9-30, expecting a full retention loss under its respective reinsurance program. For Hurricane Isaias, that was $15 million pre-tax under our other states program, and for Hurricane Sally, that was $43 million pre-tax under our all states program. Together, these two events resulted in a total net impact of approximately $58 million pre-tax, approximately $44 million after-tax.	q3 gaap loss per share $0.10. qtrly non-gaap adjusted loss per share of $1.43). sees fy 2020 gaap earnings per share $1.80 - $2.10. sees fy 2020 adjusted non-gaap earnings per share $0.55 - $0.85.
This is a particular note during the current ongoing COVID-19 pandemic when the length severity of the crisis and results of economic and business impacts are so difficult to predict. For information on some of the factors that can affect our estimates, I urge you to read our 10-K for the year ended March 31, 2021, and Form 10-Q for the most recently ended fiscal quarter. Such risks and uncertainties include, but are not limited to, the ongoing COVID-19 pandemic, customer-mandated timing of shipments, weather conditions, political and economic environment, government regulation and taxation, changes in exchange rates and interest rates, industry consolidation and evolution and changes in market structure or sources. Finally, some of the information I have for you today is based on unaudited allocations and is subject to reclassification. In an effort to provide useful information to investors, our comments today may include non-GAAP financial measures. We are off to a good start for fiscal year 2022. Results for our tobacco operations segment improved on higher African carryover tobacco shipments and a favorable tobacco product mix in the three months ended June 30, 2021 compared to the three months ended June 30, 2020. Our Ingredients Operations segment, which includes our October 2020 acquisition of Silva International delivered very strong performance in the three months ended June 30, 2021. It is exciting to begin to see the positive outcome from our capital allocation strategy, which we put in place in May 2018 with the goal of ensuring that we are well positioned for the future. investments in our tobacco business have enabled us to expand the supply chain services we provide our customers and to create footprint rationalization efficiencies, and we are seeing the returns from those investments in our results. Our plant-based ingredients platform is coming together nicely. We continue to believe we are on track for our ingredients businesses to meet our previously announced goal of representing 10% to 20% of our results in fiscal year 2022. We are excited about the performance of our investments thus far, and we'll continue to see prudent strategic opportunities to enhance our businesses and return value to our shareholders. Turning to our results. Net income for the quarter ended June 30, 2021, was $6.4 million or $0.26 per diluted share compared with $7.3 million or $0.29 per diluted share for the quarter ended June 30, 2020. Consolidated revenues of $350 million for the first quarter of fiscal 2022, increased by $34.2 million compared to the same period in fiscal year 2021. The increase was mainly due to the addition of the business acquired in October 2020 in the Ingredients Operations segment, partly offset by modestly lower comparative leaf tobacco sales volumes. Turning to the segments. The first fiscal quarter is historically a slow quarter for our tobacco businesses. Operating income for the Tobacco Operations segment increased by $3.8 million to $8.9 million for the quarter ended June 30, 2021, compared with the quarter ended June 30, 2020. Although tobacco sales volumes were down modestly, segment results improved on carryover shipments, product mix and increased supply chain services to customers in the quarter compared to the same quarter in the prior fiscal year. Carryover crop shipments were higher in Africa in the quarter ended June 30, 2021, compared to the same quarter in the prior fiscal year, in part due to some shipments that were delayed from fiscal year 2021. Brazil experienced an improved product mix on lower volumes in the quarter ended June 30, 2021, compared to the same period in the prior fiscal year when high volumes of lower-margin carryover crops shift. Carryover tobacco crop shipments were lower and product mix was less favorable in Asia in the first quarter of fiscal year 2022 compared to the same quarter in fiscal year 2021. And in the first quarter of fiscal year 2022, we also provided increased supply chain services to customers for wrapper tobacco compared to the same quarter in the prior fiscal year. Selling, general and administrative expenses for the tobacco operations segment were lower in the quarter ended June 30, 2021, compared to June 30, 2020, primarily on higher recoveries of value-added taxes and advances to suppliers. Operating income for the Ingredients Operations segment was $4.3 million for the quarter ended June 30, 2021, compared to an operating loss of $0.7 million for the comparable quarter in the prior fiscal year. Results for the segment improved year-over-year on the inclusion of the October 2020 Silva acquisition. For the first quarter of fiscal 2022, our Ingredients Operations saw strong volumes in both human and pet food categories as well as some rebound in demand from sectors that have been suffering during the ongoing COVID-19 pandemic. Selling, general and administrative expenses increased in the quarter ended June 30, 2021, compared to the same quarter in the prior fiscal year on the addition of the acquired business. Our tobacco and plant-based ingredients businesses are both currently performing according to our plans. Like other industries, we are seeing some logistical constraints around the world with regard to vessel and container availability stemming from the ongoing COVID-19 pandemic. However, at this time, we do not know what significant such constraints may have on shipment timing or our results. We are continuing to monitor these and other pandemic-related conditions, which affect our operations. And lastly, as part of our ongoing efforts to set high standards of social and environmental performance to support a sustainable supply chain, we have developed targets to reduce greenhouse gas emissions, which are consistent with the levels required to meet the goals of the Paris Agreement, limiting global warming to well below two degrees centigrade above preindustrial levels. Our targets were recently approved by the science-based targets initiative and reflect our commitment to reduce our global greenhouse gas emissions by 30% by 2030.	q1 earnings per share $0.26. q1 revenue $350 million.
I am joined today by Steve Weisz, Chief Executive Officer; our President, John Geller; and Tony Terry, our new Executive Vice President and Chief Financial Officer. These statements are subject to numerous risks and uncertainties, as described in our SEC filings, which could cause future results to differ materially from those expressed in or implied by our comments. Throughout the call, we will make references to non-GAAP financial information. While most of the time we are joining you from sunny Florida, today is particularly exciting is we're at the New York Stock Exchange to celebrate an important milestone for Marriott Vacations Worldwide, our 10th year anniversary as an independent publicly traded company. 10 years ago we were a pure-play vacation ownership company, with three brands, 64 resorts and approximately 420,000 owners. Today we're about vacation experiences, with seven brands, 120 resorts and 700,000 loyal owners in our vacation ownership business and we also have 3,200 resorts and 1.3 million members in our exchange business and more than 150 other resorts and lodging properties in our third-party management business. Our large portfolio of offerings allows our owners and members to access virtually any kind of vacation experience they can ever want. We've built a business characterized by strong organic growth and recurring cash flow, driven in part by our capital-efficient inventory approach. This has provided fuel to enable us to expand our resort footprint and pursue M&A activities, including the acquisitions of ILG and Welk Resorts, while simultaneously returning excess cash to shareholders. We've built an incredible team of talented associates throughout the world, I'm sincerely appreciative of their dedication and contributions to our success. I'm equally grateful for the millions of loyal owners, members and guests who have put their trust in us to deliver remarkable vacation experiences time and time again to help fuel this growth. And there's much more to come, including new products, new digital tools to delight our existing customers, while also attracting new ones. I've been with Marriott Vacations for 25 years. I can honestly say that our best days are still ahead of us. Starting with our vacation ownership business. Occupancies in our North American resorts were very strong during the quarter, despite softness in a few markets due to the Delta variant and the fires in the Lake Tahoe Basin. For example, we ran nearly 95% occupancy in Hawaii for the quarter, so when the government asked travelers to stay away for a few months, we did see occupancy soften a few points late in the quarter. In Orlando, another large market for us, occupancy dipped during August and September due to the variant, while occupancies at our Florida Beach resorts were well above 2019 levels, illustrating travelers' desire to get back on vacation. Our urban locations continued to improve nicely during the quarter, with San Diego running over 85% occupancy and Boston running nearly 95%. And encouragingly, we saw a nice sequential improvement in our European locations as the quarter progressed. With the strong domestic occupancy, we delivered $380 million in contract sales which was within 3% of 2019 levels. First-time buyers represented more than 30% of contract sales improving sequentially from the second quarter. And this is important for the health of the system as first-time buyers have historically doubled their revenue contribution within the first five years of ownership. And with the products we sell resonating with customers now more than ever VPG excluding, Welk was almost $4500, nearing 30% higher than the third quarter of 2019 with both first-time buyer and owner VPG up double digit. Moving to our exchange and third-party management business. Interval signed a contract with LS Resorts of leading all-inclusive developer in Nexa. This resort group will transition its members to interval on January 1, leveraging our technology to ensure a seamless customer experience. And with the acquisition of Welk Resorts earlier this year, we are now working to transition, Welk owners to Interval effective January 1, one year earlier than originally planned. This will not only add new numbers to the Interval network, but also highly desirable inventory in key leisure destinations such as San Diego, Loscabos, Breckenridge and Lake Tahoe. In total these agreements will bring nearly 50,000 new members through the interval system beginning on January 1. Companywide, we also continue to make good progress on our technology initiatives to drive growth and expand margins. For example, our Vacation Ownership business recently launched new digital reservation technology which we expect to increase our marketing efficiency and improve customer service. Interval is continuing to work to significantly expand its addressable market beyond this time share and we look forward to sharing our progress on this initiative with the next year. And we're making good progress linking our Marriott Westin and Sheraton brands into a single point based product, greatly improving owner access across our Marriott branded portfolio products in the first half of next year. So let's talk about the balance of the year. We continue to be very encouraged with the improvement of our business. Occupancies remain very strong in October with particularly strong in reach and novel properties. The integration of Welk into our high vacation ownership business continues to go well and we're working diligently to transition Welk owners to Interval, a year earlier than originally planned. We sold more tour packages in the third quarter than we did in the second, ending September with more than 214,000 tours in our package pipeline. And with the strong ramp-up of package sales this year, we ended the quarter roughly in line with 2019 despite causing most marketing activities for much of last year. Owner and preview reservations for the first half of next year are up 10% compared to the same time in 2019. In a recent survey 71% of our owners stated that they are likely to travel within the next three months with 90% likely to travel in the next 12 months. With the change in government restrictions our Cancun and Cabo reports are once again allowed to operate at full capacity and Hawaii's Governor is once again welcoming vacationers to the island. And we're looking forward to welcoming our international guests back to our US resorts this month now that the restrictions have been relapsed. All of this puts us in a position to close the year on a high note and setting us up for a strong 2022. But before I start, I want to congratulate Tony for his recent promotion. I've had the pleasure of working closely with Tony since I joined Marriott Vacations nearly 13 years ago and I couldn't be happier for him. Today, I'm going to review our third quarter results, highlight the continued strong recovery across our businesses and discuss the strength of our balance sheet and liquidity position, as well as our expectations for the fourth quarter. Starting with our Vacation Ownership business. The value of our leisure-focused business model was evident again this quarter. Despite the Delta variant occupancies continue to hold strong in the quarter with owner occupancies above 2019 levels though this was partially offset by some softness in transient and preview bookings. As a result, we grew contract sales by 5% sequentially in the third quarter to $380 million which was almost back to 2019 levels. VPG was largely unchanged compared to the second quarter and remain well above pre-pandemic levels, illustrating how well our product continues to resonate with customers as well as the benefits of our channel optimization initiatives. Adjusted development profit increased 19% sequentially to $98 million. Adjusted development profit margin expanded sequentially by 335 basis points to 30%, the highest margin in our 10 years since becoming a public company, highlighting the benefits of more efficient marketing and sales spending, lower inventory costs and synergy savings. Turning to our rental business, as I mentioned last quarter, in order to get more of our owners back on vacation, we decided early in the pandemic to allocate more of our rental keys to owners as demand recovered. This did impact our transient keys rented during the third quarter, but with average revenue per key, increasing 9% sequentially, rental revenues increased 11% and profit grew 73%. The stickier revenue businesses within our vacation ownership segment also performed well in the quarter. Resort management revenue increased 2% compared to the second quarter and margin was approximately 56% and financing profit increased 16% from the prior year due to the inclusion of Welk. With our contract sales growing 5% sequentially in the third quarter, and financing propensity improving to 60%, our notes receivable balance increased sequentially. Based on these trends and the acquisition of Welk, we expect our 2022 financing profit to be well above 2019 levels. Our portfolio also continues to perform well with the delinquency and default activity in line or even below pre-pandemic levels for each of our brands, and we expect to complete our next securitization this quarter and terms remain very favorable. Turning to the acquisition of Welk, while we're not providing detailed results for the Welk business given its relative size, our vacation ownership results did include $30 million of contract sales and $18 million of adjusted EBITDA better than we anticipated. As a result, total adjusted EBITDA in our vacation ownership segment increased 18% sequentially to $215 million. The quarter benefited from strong growth in development and rental profit and the impact of our business transformation initiatives, enabling us to deliver margins that were nearly 360 basis points higher than two years ago. Turning to the exchange and third-party management segment, active members at Interval declined slightly on a sequential basis, and average revenue per member declined 7% due to lower exchange volumes, which I mentioned last quarter. As a result, adjusted EBITDA at our exchange and third-party management segment declined $2 million sequentially. However, margins expanded by 70 basis points on cost-saving initiatives. I'm also very excited about all the new resort affiliations Steve talked about, which will bring nearly 50,000 new interval members to the system by early next year. Finally, corporate G&A expense declined 20% sequentially in the third quarter, primarily related to lower bonus expense. As a result, total company adjusted EBITDA increased 25% in the quarter on a sequential basis to $205 million and margin improved to over 27%, more than 300 basis points above the third quarter of 2019, demonstrating the strength of our leisure-focused business model and the benefits of our synergy and transformation initiatives. Moving to our balance sheet, as I mentioned last quarter, we've been preparing to return to a balanced capital allocation approach. So with the recovery in the business, we felt that now was the right time to reduce our corporate debt by the $500 million, we borrowed last May at the onset of the pandemic and begin to return cash to shareholders again. In September, we've paid off the remaining $250 million of our 6.5% notes due 2026. We followed that in October by repaying $250 million of the 6% and 8% notes we issued last May. With our current corporate debt at $2.5 billion and the strong recovery in the business, we are on track to get back to debt to adjusted EBITDA of three times or less. And more importantly by taking advantage of the favorable rate environment and healthy capital markets, we expect our cash interest expense next year to be around $20 million lower than our 2019 cash interest expense. We ended the quarter with $448 million of cash, gross notes receivable eligible for securitization of $278 million and almost $600 million of available capacity under our revolver. Pro forma for the debt repayment in October, we had $4.1 billion of debt outstanding including $1.6 billion of non-recourse debt related to our securitized notes receivable as well as total liquidity of more than $1 billion. Finally our Board of Directors reinstated our quarterly dividend and authorized the $250 million share repurchase program effective September 10, enabling us to repurchase $4.5 million of our own shares in the last couple of weeks in September. We also paid a dividend in October, our first since before the pandemic. Looking ahead, while we're not giving guidance, I do want to help you think through what the balance of the year could look like. The fourth quarter has started off well with contract sales above 2019 levels with occupancies at pre-pandemic levels in most of our North America resorts and international travelers now able to visit the United States again. We expect tours to grow sequentially in the fourth quarter while VPGs will remain well above pre-pandemic levels. As a result, we expect contract sales to grow to between $385 million and $405 million in the fourth quarter just above the fourth quarter 2019 at the midpoint. Similar to prior years, we expect reportability to be positive in the fourth quarter. For those trying to compare our fourth quarter results to the fourth quarter of 2019, remember that reportability that year positively impacted our adjusted EBITDA by $22 million. And this year, we only expect the benefit to be in the $10 million to $12 million range. Finally, while we're not providing free cash flow guidance today, with more than $640 million of excess inventory, I would expect our adjusted EBITDA to adjusted free cash flow conversion to be well above our normal 55% range for a number of years enabling us to return to our historic capital allocation strategy.	projects contract sales of $385 million to $405 million in q4 of 2021.
These uncertainties are detailed in documents filed regularly with the SEC. We use adjusted constant dollar amounts as lead numbers in our discussions because we believe they more accurately represent the true operational performance and underlying results of our business. You may also hear us refer to reported amounts which are in accordance with U.S. GAAP. Due to the significant impact of the coronavirus pandemic on our prior year figures, today's call will also contain certain comparisons to the same period in fiscal 2020. These comparisons are all on a reported dollar basis. On June 28, 2021, the company completed the sale of its Occupational Workwear business. Accordingly, the company has reported the related held-for-sale assets and liabilities of this business as assets and liabilities of discontinued operations and included the operating results and cash flows of this business in disc ops for all periods through the date of sale. Joining me on the call will be VF's Chairman, President and CEO, Steve Rendle; and EVP and CFO, Matt Puckett. As we move through the halfway point of our fiscal year, I remain encouraged by the underlying momentum across the portfolio and the broad-based nature of this strength gives me confidence that we are driving the right strategy to accelerate growth in the quarters ahead. Looking through pandemic-related disruption and near term headwinds in China, we continue to see a healthy retail landscape, a strong consumer outlook and accelerating demand signals across our business. While the recovery has not been as linear as we had anticipated for some parts of our business, I'm proud of how our teams continue to deliver through the volatility. This is certainly where we excel. We are focused on what we can control. And despite a more challenging environment than we had envisioned, we are able to reaffirm our fiscal '22 revenue and earnings outlook; a clear testament to the resiliency and optionality of our model. We see our business emerging in an even stronger place than before the pandemic. We've accelerated our strategy to be a more digitally enabled enterprise for driving significant investment behind key capabilities to connect with our consumers. We are driving organic growth as we elevate direct channels, distort Asia, led by China, and accelerate our consumer-minded, retail-centric, hyper-digital business model transformation. On top of that, our number one strategic priority to drive and optimize our portfolio has netted us significant benefits. Over the past five years, we have strategically evolved and simplified our portfolio from 32 brands to 12 brands, each with significant D2C and international opportunity, squarely focused on large, growing addressable markets. The macro trends around outdoor and active lifestyles, health and wellness, casualization and sustainability have only strengthened over the past 20 months and our current portfolio is well-positioned to benefit from these accelerating tailwinds. Active portfolio management remains an evergreen process and M&A remains our top capital allocation priority. This is a differentiator and a competitive advantage for VF as we continue to refine our portfolio mix to maximize exposure to the most attractive parts of the marketplace. We are confident that we have the right strategy and our continued execution on each of these key strategic pillars positions VF for a stronger emergence. Now, moving into our Q2 results. While noisy, our second quarter results highlight ongoing progress against our strategy and reflect a healthy, accelerating underlying business with broad-based strength across our portfolio. I'll start with Vans, which delivered 7% growth in Q2 despite meaningful wholesale shipments pushed into Q3, representing sequential improvement in underlying demand despite a more challenging than anticipated operating environment. The EMEA business has accelerated meaningfully during the quarter. However, in the U.S., encouraging brick and mortar recovery trends, which had been building into July, were impacted by the Delta surge and its implications across our most important markets. This led to sharp shifts in store traffic trajectory during the peak back-to-school window. Additionally, the brand faced headwinds in Asia Pacific with virus disruption across the region and a more challenging near term consumer environment in China. While Vans Americas Q2 recovery did not meet our expectations, I'm pleased with our team's response. We're focused on what we can control. Our retail associates are driving best-in-class conversion, up 20% relative to pre-pandemic peaks this quarter in the Americas. And despite the impact of expedited freight, the Vans Americas team has brought full price DTC gross margins above fiscal 2020 levels, supported by discounting below pre-COVID levels. At the same time, leveraging our strong inventory position, we've secured additional shelf space at several key wholesale accounts for the second half. So despite a more challenging operating backdrop than anticipated, we are able to hold on to the low end of our prior outlook for Vans and now expect 7% to 9% growth relative to fiscal 2020. We're confident in Vans' strategic choices as evidenced by improving demand signals and strong consumer engagement. The September Vans Horror collection launch supported the fifth highest sales day on record for our Americas DTC digital business achieving a 100% sell-through within days. We are encouraged by the ongoing strength from Progression Footwear lines, up 15% relative to fiscal 2020 led by UltraRange and MTE and are pleased with the continued growth in Vans Family membership reaching 18.5 million consumers globally. Our confidence in the long-term runway for Vans remains unchanged. The brand came into this disruptive period exceptionally strong and consumer engagement has remained healthy. The active space remains a large and growing TAM and the casualization trend continues to present a long-term tailwind for Vans. And although Vans remains a very important part of our story, we must remember that VF is not just one brand. We have a diversified portfolio of global brands, each with exposure to attractive TAMs with enduring tailwinds. We have significant shared platforms of expertise, highlighted by our international platforms and global supply chain, which are enabling broad-based profitable growth. And as a result, our model drives ongoing capital allocation optionality to further enhance VF's growth and shareholder return profile. Matt will build on many of these themes shortly, but I'd like to start with an overview of the broad-based momentum we're seeing across the portfolio. Starting with The North Face, which delivered 29% growth in Q2 despite significant wholesale shipments pushed into Q3, representing a sharp acceleration of underlying demand alongside meaningful margin improvement. Our international businesses are gaining share, while the underlying U.S. business has accelerated meaningfully this quarter on tight inventories driving high quality sales. We remain encouraged by the strength across categories as TNF has been successful at balancing On- and Off-Mountain messaging to its consumers. On-Mountain platforms like FutureLight, Vectiv and the recently launched Advanced Mountain Kit continue to drive strong sell-through and reinforce TNF's performance credibility. Off-Mountain lifestyle apparel and equipment are delivering outsized growth as strong 365-day demand persisted led by Logowear, Apex and [Indecipherable]. We also saw strong performance for more versatile athletic-inspired products, highlighted by the Wrangler franchise. We are raising the outlook for TNF to 27% to 29% growth in fiscal 2022. We continue to believe this moment for TNF is under-appreciated. This will be a $3 billion business, delivering high-teen growth relative to fiscal 2020 levels, with strong margin expansion underway. Looking into next year, The North Face will continue to benefit from broad-based brand momentum, fueled by innovation, extremely clean distribution channels, increasing year-round relevancy and ongoing tailwinds from the outdoor marketplace, supported by growing consumer interest in active outdoor lifestyles. We therefore expect The North Face to be at least within its long-term plan range of high-single-digit growth in fiscal 2023. Moving on to Dickies, which continues to build upon its incredible run, delivering 19% growth in the quarter. The brand is driving their integrated marketplace strategy, supporting growth horizontally across work and work-inspired categories, as well as vertically as they focus on higher tiers of distribution and bring new consumers into the brand. Sell-through remains elevated and demand signals continue to be strong. Across the globe, the Dickies team remains focused on the key drivers of their business, expanding core workwear beyond traditional channels and leveraging the brand's authenticity to accelerate the Lifestyle segment. Icons have been a focus for the marketing and sales teams and the results are compelling, highlighted by the accelerated growth of the 874 Work Pant. There are several versions of this 50-year-old icon, supported by ongoing innovation, which collectively have delivered over 100% growth year-to-date. In addition to the strong growth trajectory at Dickies, we remain encouraged by the significant margin expansion runway which accelerated in Q2 on the back of strong full price selling and SG&A leverage. We're proud of the continued success at Dickies, which we feel is another under-appreciated part of the story. We are raising the outlook for Dickies to at least 20% growth in fiscal '22, representing at least 30% growth relative to fiscal '20. We expect the brand will approach $1 billion next year as Dickies celebrates its 100-year anniversary. Next, Timberland delivered 25% growth in Q2, despite significant wholesale shipments pushed into Q3, representing an acceleration of underlying demand over the quarter. The PRO business remains a consistent growth driver for the brand, supported by a new campaign celebrating the skilled trades to inspire the next generation of worthy workers. Despite historically low inventory levels, core boots and outdoor footwear continue to show strength as we head into the holiday, each growing over 40% in Q2. Timberland continues to create and own boot culture with the September introduction of GreenStride Eco-Innovation in boots for the first time. The Solar Ridge Hiker launched with much fanfare in New York City and posted 50% sell-through in North America. Two more GreenStride drops will hit in October, driving further momentum behind its important franchise. At the same time, the TrueCloud collection, another eco leadership story, drove strong traffic and social engagement across all regions. We believe the Timberland brand is in a much healthier position today relative to where it was before COVID. This leadership team has a sharpened focus on the brand's product architecture, getting back to Timberland's core, work and outdoor, sustainability and craftsmanship, while increasing energy and newness. They have refocused strategic clarity around the target consumer and on executing the right go-to-market set of choices. The brand is demonstrating strong marketplace discipline, reducing discounts and thoughtfully rebuilding depleted inventory while driving significant improvements in profitability. The integration of Supreme continues to move according to plan and our teams are learning from this highly productive business, including how they manage product creation, building energy ahead of drops, and optimizing assortments in product flow across regions with great agility. Looking forward, we remain confident in the significant whitespace opportunity for this brand across geographies with a clear opportunity to leverage VF platforms. Supreme remains on track to become VF's fifth billion dollar brand in the coming years. And lastly, when speaking to the broad-based strength across our portfolio, I'd like to briefly shine a light on our three outdoor emerging brands: Smartwool, icebreaker and Altra. This group collectively represents nearly $550 million in revenue for the mid-to-high-teen growth profile longer term. While smaller today, these brands are all profitable and are exposed to the attractive tailwinds around health and wellness, active outdoor lifestyles and sustainability. And we're seeing it in their results. The Smartwool brand is up nearly 60% [Phonetic] year-to-date, representing high-teens growth relative to fiscal 2020. We've accelerated investment in brand awareness campaigns, highlighting the high performance and versatility of this product, while targeting an active, younger consumer. We're seeing it pay off with broad-based strength across categories, led by apparel and outsized growth from new consumers. Our other natural fiber brand, icebreaker, has successfully relocated the core leadership team from New Zealand to our Stabio headquarters, further integrating into our EMEA platform, which will accelerate the brand's global reach. The brand has grown nearly 30% year-to-date with balanced growth across its largest markets in Europe and the U.S. Base layers, tees and underwear represent about 70% of icebreaker global revenue confirming the consumer appeal of a 100% natural product in next-to-skin categories. And lastly, Altra, the fastest growing brand in our portfolio is celebrating its 10th anniversary this year by establishing its legendary Lone Peak franchise as the number one trail running business in the U.S. The brand has continued to build accolades from the running community with awards from Runners World, Self Magazine, Women's Health and Outside Magazine across multiple franchises. Through the first half of the year, the brand has grown over 60% relative to fiscal 2020 and we expect this to accelerate into the back half of the year as the brand continues to expand its presence in road running with innovative new styles and designs. We see tremendous opportunity for Altra to expand distribution domestically and internationally, leveraging its differentiated product and continued strong tailwinds for this category. I see significant potential for each of these brands to deliver outsized growth in the years to come. We have demonstrated the ability to scale brands in the big businesses and have confidence that, over time, these outdoor emerging brands will become another strong component of VF's financial algorithm. While we remain in a disrupted environment, I believe VF's long-term prospects are even more attractive today. We've accelerated our transformation strategy. We have further optimized our portfolio and importantly, this portfolio today is capable of delivering greater broad-based strength, relative to where we were before the pandemic. This gives us even greater confidence in our ability to drive high-single-digit topline and low-teens earnings growth at a minimum as we emerge as an even stronger company. I'm happy to give an update on our progress as we navigate the recovery and importantly, I am encouraged by the resiliency of our business during the first half of fiscal 2022. The environment has clearly evolved differently than we had planned in May. However, our teams remain focused on what we can control, and they are delivering. The underlying topline recovery across the majority of our business has exceeded our plan, offsetting new challenges in the APAC region and ongoing disruptions across the supply chain network. With thoughtful allocation of investments, we've been able to drive continued strategic investment spending, while leveraging other parts of our SG&A base to protect earnings. As a result, I'm proud of our ability to hold on to our fiscal 2022 earnings outlook of about $3.20 despite a more challenging than anticipated operating environment, including an incremental headwind of about $0.09 from expedited freight. This should be a strong signal that this management team is committed to leveraging the significant optionality in our model to deliver on our earnings commitment. Before unpacking our Q2 results, I want to quickly run through the operating environment across the region and share the latest outlook for our global supply chain. Starting with the Americas region, product delays and reduced traffic during virus surges impacted the business during the highest volume periods this quarter. However, the region was able to deliver 22% organic growth in Q2, representing continued sequential underlying improvement. Retailers remain bullish on the upcoming holiday season and we are focused on delivering products in time to support strong demand signals. Cancellation rates remain historically low due to tight inventories, conversion remains exceptionally strong, and we see continued reductions in promotions compared to last year, driving strong average selling prices. Next, the EMEA region delivered mid-teen organic growth in Q2 despite meaningful supply chain disruption, particularly for The North Face. The underlying business continues to perform above the overall market, supported by strong performance of key Digital Titans. This region was strong before the pandemic and has shown incredible resiliency throughout this disruptive period. Stores are showing continuous recapture of volumes despite softer street traffic in large metro areas. We are encouraged to see the brick-and-mortar DTC business for both The North Face and Vans, and quite meaningfully this quarter, each returning to positive growth relative to fiscal year '20. Recovery momentum and sustained growth are expected to accelerate throughout the year as vaccine rollouts progress. Finally, the APAC region delivered low-single-digit organic growth despite a more challenging backdrop than anticipated for parts of our portfolio. Due to a resurgence of COVID-19 across the region, economic growth and consumer confidence has softened since July. Parts of our business in China have been further impacted by weaker digital traffic for non-domestic brands. This has been more impactful for Active brands relative to Outdoor. Across the portfolio, we believe we are performing better in our respective categories versus other international brands. And while we remain bullish on the long-term opportunity in the region, these pressures have impacted our near-term outlook. We now expect low-teen growth in China in fiscal 2022. Moving on to our global supply chain. The environment remains challenging and has continued to deteriorate following our Q1 call in late July. The resurgence of COVID-19 lockdowns in key sourcing countries like Vietnam have resulted in more impactful production delays and the logistics network continues to face unprecedented challenges. We are experiencing increasing product delays from the supply chain disruption, which is creating meaningful quarter-to-quarter volatility in our results. Let me unpack all of this in a little more detail. Due to VF's large and strategically diversified sourcing footprint, our overall production capacity has remained better positioned than most with about 85% of production operational throughout the quarter. Pressures have generally concentrated in the southern region of Vietnam, which represents about 10% of VF's overall sourcing mix. We remain confident in our ability to navigate the production environment. However, the logistics network remains under increasing pressure. Ports are generally open, but operations remain severely impacted by labor and equipment availability, servicing significantly higher ship volumes. As a result, our dwell times at points of destination have increased significantly. In aggregate, supply delays are pervasive and, in some cases, have extended 8 weeks to 10 weeks. As a result, in the most recent quarter, we had a material shift of revenue from Q2 into Q3 with more than half of this tied to Vietnam. Despite these delays, cancellation rates have remained below historical levels, signaling strong demand and tight channel inventories. However, delays ultimately impact product availability across the marketplace. Virtually all of our brands are experiencing delayed collections, style and, in some cases, insufficient size assortment, limiting their ability to fully meet strong demand. For example, the Supreme brand has experienced around 30% less inventory around drops. So despite strong sell-through trends, we are losing volume from limited supply. This environment is where our world class supply chain differentiates itself, highlighting the significant competitive advantage VF has created with its platform. We have always maintained a diversified sourcing footprint to provide resiliency against unforeseen changes in the operating or geopolitical environment. For example, our largest market, Vietnam, only represents about one-fourth of our sourcing mix. And within Vietnam, we work with multiple partners and have presence in multiple provinces, both between the northern and southern regions of the country, and maintain access to multiple ports. Our teams are leveraging VF's scale and relationships to navigate the challenging logistics environment in the most cost-effective way. We continue to utilize expedited freight across the large number of air providers. We've doubled our network of ocean carriers and significantly expanded the number of ports utilized across the globe. Our commercial and supply chain teams are working closely with our key wholesale partners, increasingly using direct shipping and our work indicates we're doing better than most of the competitive set at keeping products on the shelves. Our relationship with these key wholesale partners continues to strengthen with our open, transparent and timely communication throughout this dynamic situation. So despite the unprecedented level of disruption across the global supply chain, our teams have been able to keep products flowing, supporting our strong holiday growth plan and allowing VF to effectively hold our revenue guide for fiscal 2022. Moving into some additional highlights on our second quarter. Total VF revenue increased 21% to $3.2 billion despite a significant amount of orders shifted from Q2 into Q3, implying continued sequential underlying improvement for the portfolio. For context, we estimate this shift represented a mid-to-high single-digit impact to VF's Q2 growth rate relative to fiscal 2020. Our adjusted gross margin expanded 300 basis points to 53.9% due to higher full price realization, lower markdowns, favorable mix and around 20 basis points contribution from Supreme. When compared to prior peak gross margins in fiscal 2020, our current year gross margin was impacted by about 180 basis points headwind from incremental expedited freight and FX. Excluding these two items, our organic gross margin in Q2 is over 100 basis points above prior peak levels, driven by favorable mix and strong underlying margin rate improvement. And as a reminder, our Q2 2020 gross margin was very strong. So our ability to deliver this level of underlying expansion against fiscal year '20 margins is a strong testament to the health of our brands in the marketplace. Our SG&A ratio improved in Q2, down 100 basis points organically to 37.2% despite elevated distribution spend and continued growth in strategic investments. This strong underlying leverage was driven by discretionary choices and is a clear reflection of the optionality within our model, supporting organic earnings per share growth of 60%. I'm proud of our team's ability to deliver earnings of $1.11 in Q2 despite incremental expedited freight expense and significant wholesale shipment timing headwinds in the quarter, reflecting the strong underlying earnings momentum of the portfolio. Now a few comments on our revised fiscal 2022 outlook. We are holding our revenue guidance to be about $12 billion despite a weaker China outlook in the near term and a lower than expected back-to-school performance at Vans in the U.S. and ongoing supply chain challenges; all of this, highlighting the broad-based strength across our brands and geographies. Our gross margin outlook is now about 56%, including 40 basis points of incremental freight cost relative to what we had expected in July, implying an improving underlying gross margin outlook. And adjusting for incremental freight and FX, our fiscal 2022 outlook implies over 100 basis points of underlying gross margin expansion relative to peak gross margins in fiscal 2020, driven by favorable mix and clean full price sell-through. We are holding our operating margin outlook to around 13% for fiscal 2022 despite the incremental freight cost covered. As Steve said, we're focused on what we can control and for me, SG&A control is clearly top of mind. We are offsetting supply chain and distribution cost headwinds with spend reduction actions, while protecting strategic investments and demand creation. The business is driving impressive underlying leverage and our confidence is strong that we can continue to accelerate this over time. Finally, as discussed, we are reaffirming our full year earnings outlook of around $3.20 despite about $0.09 of incremental costs directly attributed to the supply chain disruption; a strong testament of portfolio resiliency and the optionality of our model. Before the pandemic, VF was more reliant on the Vans brand. Today, however, we have a much larger portion of our business performing at or above our expectations. There is broad-based momentum across the portfolio. VF also has a power -- has powerful enterprise platforms, highlighted by our world-class supply chain, which provides a significant competitive advantage to our business. And lastly, VF has the capacity to drive meaningful incremental shareholder value through capital allocation optionality. We've demonstrated this over the course of the pandemic by maintaining our dividend and trading our occupational work business for the Supreme brand. As we have line of sight to our leverage threshold, we have this additional optionality and we'll be opportunistic in share repurchases moving into the balance of this fiscal year. VF is not just one brand. We are a diversified portfolio of strong brands supported by world-class enterprise platforms, which we believe at minimum can drive high-single-digit revenue growth, low-teens earnings growth and provide meaningful capital allocation optionality moving forward.	sees fy revenue about $12 billion. sees fy adjusted earnings per share about $3.20. qtrly revenue from continuing operations increased 23 percent to $3.2 billion. full year fiscal 2022 adjusted earnings per share is expected to be around $3.20. qtrly adjusted earnings per share from continuing operations $1.11. majority of vf's supply chain is currently operational. port congestion, equipment availability and other logistics challenges have contributed to increasing product delays. vf is working with its suppliers to minimize disruption and is employing expedited freight as needed. as covid-19 uncertainty continues, vf expects ongoing disruption to its business operations.
These uncertainties are detailed in documents filed regularly with the SEC. We use adjusted constant dollar amounts as lead numbers in our discussion, because we believe they more accurately represent the true operational performance and underlying results of our business. You may also hear us refer to reported amounts, which are in accordance with U.S. GAAP. During the fourth quarter of 2020, the company determined that the occupational workwear business met the held-for-sale and discontinued operations accounting criteria. Accordingly, the company has reported the related assets and liabilities of the occupational workwear business in discontinued operations as of the date noted above and included the operating results of this business in discontinued operations for all periods presented. As always, I hope our comments today find you and your loved ones healthy and safe. As we put behind us, we've unfortunately experienced a tumultuous start to 2021 highlighted by the political and ideological divide in our nation as well as ongoing challenges presented by the pandemic across the US, UK in other countries around the world. Even so I remain optimistic about the year ahead and to improvements in our geopolitical, macroeconomic and pandemic related situations and I'm confident in VF plan to accelerate growth, continue advancing our business model transformation and deliver on our commitments to our shareholders and stakeholders around the world. VF performance during the third quarter was largely ahead of expectations despite additional COVID related disruption to our business. Consumer engagement with our brands remains strong and we have conviction that the secular trends related to casual externalization, health and wellness and the desire to get outdoors will be enduring. Our business is on track to return to growth in the fourth quarter and I am confident that the strategy we have in place positioned us well to accelerate growth as we head into fiscal 2022. At that time, our business had essentially fully reopen across the globe and underlying business trends have continued to stabilize. We saw strong momentum in China and across our digital platform, which we continue to view as leading indicators for our business. Confidence from this momentum, as well as early signs of stability and recovery across our portfolio more broadly, supporting our preliminary outlook for fiscal 2021 and the decision to raise our dividend. Further, in early November, we announced the acquisition of Supreme. Our willingness to execute the transaction during the pandemic was a function of the resiliency of Supreme's business model, our early and decisive actions to ensure liquidity as well as our increased confidence in the trajectory of our organic portfolio. Fast forward to today, our business has continued to perform ahead of expectations and our confidence and visibility heading into fiscal 2021 [Phonetic] continues to improve. While the environment has proven to be somewhat more difficult than expected, the performance of our business demonstrates the resilience of our portfolio. While the full extent of these headwinds was not contemplated in our initial fiscal 2021 outlook, we were able to more than absorbed these impacts as a result of the continued strength of our digital and China businesses as well as better than expected performance from our North Face and Timberland brands globally. As a result of the momentum we see building across our portfolio, fueled by our business model transformation, coupled with the closing of the Supreme transaction, we are raising our fiscal 2021 outlook. Scott will impact the details in a moment. Before getting into the highlights for the quarter, I'd like to provide an update on our progress against our business model transformation. Understanding and focusing on our consumer connectivity is at the heart of our transformation journey. Our teams continue to activate capabilities to better understand and build more intimate relationships with our consumers. Digitize the go-to-market process and enhance and integrate the online and offline consumer experience. The continued impact of the pandemic has forced an ongoing reaffirmation of our priorities and we remain committed to both the near-term brand specific initiatives and long-term enterprise wide platform investments. Continued investment behind our transformation is critical to our success and long-term growth aspirations, I'm pleased with the significant progress we've made throughout 2020 as evidenced by the resiliency of our performance during this past holiday season and the momentum that is building across our portfolio as we head into fiscal 2022. A recent proof point of these accelerated initiatives has been enabling our brands to build omni-channel consumer journeys and optimize supply chain efficiency. On our last call, we shared that ship from store functionality was activated across the majority of our Vans and North Face full price stores, ahead of the holiday season, specifically within our EMEA platform. Our teams engineered homegrown solutions to deliver buy online pickup in store, ship from store and reserve online buy in the store right before lockdown down measures applied across the region. These businesses were able to utilize retail inventories and leverage ship from store capabilities when the stores were forced to shut down, supporting an 80% increase in digital revenue. Phase 2 of this project is currently under way with the plan to go live in the coming months, including save the sale functionality, which will allow our brands to leverage retail inventory when an item is out of stock online. Turning to our brand highlights from the quarter. Vans revenue continued to sequentially improve declining 8% as 48% growth in Digital was more than offset by brick and mortar store reclosures in the Americas and EMEA markets. The brand accelerated to 9% growth in APAC, led by 58% digital growth and 20% growth in China. From a product standpoint, all-weather MTE styles increased at a double-digit rate and the Ultra range increased high single digits as Vans consumers turn to more outdoor and active oriented franchises. Vans ranked number one among the largest brands during the Singles' Day on Tmall getting 700,000 new consumers. Also in November Vans customs launched on Tmall becoming the first global brand offering a full customization engine on this platform, the collaboration with Dave drove the launch generating 870,000 unique visitors on the customer site that day. The Vans family member base continues to grow globally with membership approaching 14 million consumers. Although the headline number for Vans reflects the challenging brick and mortar operating environment in the US and Europe, we remain confident in the underlying trajectory of the business and expect at least low double-digit growth in the fourth quarter on a reported basis. Continued momentum in China and across the digital platform normalized inventory levels across all regions and strong consumer growth and engagement support the brand's return to growth beginning in the fourth quarter. Moving on to the North Face. Revenue declined 2% with continued sequential improvement in the Americas and double-digit growth in Europe and Asia. Europe remains a bright spot for the brand with 17% growth, including a 112% digital growth, offsetting the impact of significant store closures in the region. Global TNF digital increased 61% with accelerated growth across all regions driving a return to positive growth in D2C. In North America, the VIP loyalty program drew 40,000 sign ups, a more than 90% increase versus last year. TNF continue to drive a significant increase in consumer engagement through authentic and purpose led marketing activations. Core off mountain icons such as the New-C [Phonetic] franchise performed well and the TNF Gucci Ecolab generated tremendous brand energy with over 15 billion media impressions since its December launch. Yes, you heard that right over 15 billion media impressions since its December launch. On mountain product also performed well highlighted by future like to expansion deeper into the product assortment leading to triple-digit growth versus the prior year. The new footwear platform Vective [Phonetic] has been well received exceeding our initial sell and targets for this spring's launch. We are pleased with the performance of the North Face and encouraged by the brand strong momentum heading into next year. On a reported basis, we now expect fiscal 2021 revenue for the North Face to declined less than 10% including greater than 20% growth during the fourth quarter. Timberland revenue declined 17% relative strength from apparel and positive growth in both outdoor footwear and the pro-business were more than offset by softness in classic footwear, which was significantly impacted by limited inventory availability. Timberland continues to drive brand energy with key influencers and retailers to high profile collaborations and the launch of new franchises. The new work Summit boot was launched this quarter contributing to record traffic to Timberland pros digital site, which saw more than a 100% growth. We're encouraged by the opportunity for true cloud. A new innovative eco-friendly franchise made from renewable and recycled materials and green straight a new franchise anchored in outdoor. While still early, and I'm pleased with Timberlands progress in the evolution and diversification of Timberlands new and innovative product portfolio. Continued momentum from Timberland Pro, apparel and non-classics footwear coupled with improving demand and inventory levels for core classics position the Timberland brand for continued progress heading into fiscal 2022. Dickies revenue increased 7% with strong demand across all regions and growth across all channels. The work inspired lifestyle product portfolio continues to develop at a rapid pace increasing at a double-digit rate across all three regions. Work inspired lifestyle product now represents about a third of global brand revenue. Brand interest accelerated in the quarter-over-indexed toward the key 18 to 24-year-old consumer demographic supported by the United by Dickies global campaign and focus on the brands icon stories. Finally, we are thrilled to have closed on the acquisition of Supreme. This move is further validation of the actions we've taken over the past four years to position our portfolio into those parts of the market where there is strong consumer engagement in demand. We are confident that the Scream transaction will serve as a spark for another layer of transformative growth and value creation for VF and our stakeholders. In early January we announced the transformation plan for APAC operations. This represents the first significant action under Project enable. Highlights include the following. We will transition our brands center of operations to Shanghai. We will transition the Asia product supply hub to Singapore, I'll also redeploying some of the product supply talent and resources throughout primary sourcing countries to work more closely with key suppliers and drive greater efficiency. We will establish an additional shared services center in Kuala Lumpur, Malaysia, to serve as the home for central activities within our enterprise functions. As you would expect we will take great care as we move through the transition process during the next 12 to 18 months. And as always, we are committed to supporting the personal needs of all impacted and relocating associates and their families. I'm encouraged by the recent performance and resilience of our business and optimistic about the growth outlook for our brands as we move into fiscal 2022 and beyond. As we said from the onset of the pandemic with great change comes great opportunity. I am confident VF will emerge from this pandemic an even stronger position ready to build upon our storied history an established track record of delivering strong returns to all stakeholders. What a year beginning with the unprecedented enterprise preservation actions at the onset of the pandemic to the acquisition of Supreme this has been an unbelievable period for VF and I'm grateful for the work that's been done by our teams around the globe to position us for growth and success moving forward. To recap our quick and decisive actions to ensure liquidity have allowed us continued invested throughout this disruptive period highlighted by our ability to acquire Supreme a perfect complement to our portfolio and accelerant to our long-term strategy and transformation agenda. Our aggressive control of inventory while prioritizing newness has allowed us to maintain brand momentum while positioning us for a return to profitable growth from the beginning of the fourth quarter and into the next fiscal year and our sharp control on discretionary spending and the launch of project enable presents a tailwind toward operating leverage moving forward, and the ability to direct more dollars to our highest priority growth investments. So while the near-term environment remains noisy including lock downs, store closures and inventory constraints I could not be more pleased with the overall health of our enterprise and the composition of our portfolio heading into next year. I'll open with a quick update on Supreme which I know is of interest to many of you. As announced on December 28, we closed the acquisition for an aggregate purchase price of approximately $2.1 billion subject to customary adjustments. We expect Supreme to contribute about $125 million of revenue and $0.05 of adjusted earnings to the fourth quarter of fiscal 2021. As disclosed that announcement, we expect Supreme to contribute at least $500 million of revenue and at least $0.20 of adjusted earnings in fiscal 2022. We're now moving into the integration phase and carefully on boarding Supreme into the VF family. Focused on applying the appropriate amount of governance and oversight where needed while maintaining a light touch approach in other areas to avoid over burdening the brand. We're committed to keeping it business as usual for the brand and its teams, while at the same time understanding how we can begin to enable the brand's growth and strategic vision while activating synergy opportunities where appropriate. While it's early days, there is a lot of excitement about the future among both the VF and Supreme teams and we're off to a great start. Moving on to an overview of the operating environment across the regions. Starting with the Americas continued virus related lock downs and disruption present near-term challenges. With that said, the outdoor and active categories continue to outpace overall apparel performance and demand trends have remained resilient. Retailer inventories appear to be well positioned to exiting the holiday season but do remain abnormally low in certain categories and channels. Despite continued traffic headwinds our Americas business sequentially improved with nearly 50% digital growth offset by store closure headwinds. Moving on to the EMEA region where we've seen a second wave of the virus introduce more severe lockdown measures than previously anticipated. As a result the broader EU economy has been among the hardest hit by the pandemic this quarter. As the vaccine rollout is starting across Europe. The region is bracing for another wave of COVID 19 and the UK recently extended more restrictive locked downs until February. There are reasons for optimism however with digital acceleration continuing throughout the region, as we've seen across our own brands and with our digital partners such as Zalando and Asos. VF EMEA digital business grew more than 80% in the quarter despite half of our brick and mortar stores being closed for a large portion of the quarter, the EMEA region, saw a meaningful sequential improvement and returned to positive growth on a reported basis. Finally, the APAC region continues to offer greater stability than any other even as the effects of the pandemic leaner. China has seen a pickup in consumer spending with positive growth in apparel and footwear categories. We continue to view APAC is the leading indicator of the larger macroeconomic environment. Our Mainland China business grew 15% led by strength at Vans which grew 21%. The D2C business in Mainland China accelerated to percent growth led by 24% growth in digital. China retail partner inventory continues to improve and our partner, comp sales return to growth this quarter. We're excited by the continued momentum in China and have high confidence in our outlook of 20% growth this year. Now turning to highlights from the quarter. Total VF revenue declined 8% in line with our expectations. International declined 4% as a 4% decline in EMEA was offset by 1% growth in APAC, including 11% growth in Greater China. Our D2C business also declined 4% driven by store closures and continued soft traffic in the Americas and EMEA. Our digital business grew 49% with strong performance across virtually every brand in the portfolio. Including our pure play digital wholesale partners, our total digital business represented about one third of total revenue in the quarter. We now expect D2C digital revenue growth to exceed 50% for fiscal 2021 on a reported basis and including our digital wholesale business, we expect total digital penetration to approach 30% for the year. Gross margin contracted 150 basis points to 57%, the third consecutive quarter of sequential improvement aided by moderating promotional activity. The decline versus last year was primarily driven by higher levels of promotion and 90 basis points from FX transaction partially offset by 90 basis points of favorable mix benefit, while the promotional environment remains a headwind, it has slightly better than our expectations. As we move into the fourth quarter and into fiscal 2022. We expect the impact of promotions and discounting to continue to moderate. Our SG&A spending decline about 4% relative to last year as we return to more normalized levels of strategic investment spending, including demand creation, approaching historical levels of investment. As expected, we did experience cost pressure from higher freight and distribution expenses, although these were more than offset by reductions in discretionary spending and leveraged elsewhere throughout the cost base. We expect to continue to invest in our strategic priorities in the fourth quarter as we return to growth. Inventories were down 14% at the end of the third quarter, consistent with our prior expectations. We expect to exit our fiscal year end March with inventories at equilibrium in support of our forward growth outlook. We also see relatively clean inventory levels at retail globally positioning our brands for a return to more profitable growth heading into next year. As expected, service and in-stock levels improved as COVID related disruptions had less of an impact in the quarter. Our liquidity position remains strong. We ended Q3 with approximately $3.9 billion of cash and short-term investments in addition to roughly $2 billion remaining undrawn on our revolver. After funding the Supreme acquisition, we expect to exit fiscal 2021 with more than $1.5 billion in cash and nearly $2 billion remaining undrawn on our revolver. Our capital allocation priorities remain consistent supported by our robust liquidity position. We remain fully committed to growing our dividend, which continues to be an integral part of our TSR model. Our share repurchases program remains on hold as we focus on deleveraging the balance sheet following the acquisition of Supreme. So now turning to our updated outlook. We are raising our fiscal 2021 outlook and now expect full-year revenue to be between $9.1 billion and $9.2 billion and full-year earnings per share of approximately $1.30. The increase in our outlook includes the accretion from Supreme in the fourth quarter results, implying a modestly higher outlook for the organic business. We're also raising our free cash flow outlook to approximately $650 million. I know many of you are eager to understand our initial expectations for fiscal 2022. While it's too early to provide a preliminary outlook at this time, I will provide a few high-level comments to help you understand how we're thinking about the evolution of our business as we head into next year. Overall, we see an improving consumer backdrop, particularly in our core categories, along with brand momentum across our largest properties globally. The accelerated shift toward digital in China are beneficial to our fundamentals and recent portfolio actions are immediately accretive to our revenue growth and margin profile. We continue to see encouraging signs of stabilization in the retail marketplace and a normalization of inventory flows from a healthier supply chain. We intend to continue to distort investment toward our strategic priorities and business model transformation in support of our powerful brand portfolio. Taken together, I remain optimistic about the strength of our growth algorithm going forward and I'm confident in our ability to emerge from this crisis in an advantaged position. The portfolio actions we've taken over the last five years have left us well positioned to continue delivering superior returns to our shareholders.	sees fy adjusted earnings per share about $1.30. sees fy revenue $9.1 billion to $9.2 billion. qtrly revenue from continuing operations decreased 6% (down 8% in constant dollars) to $3.0 billion. as covid-19 uncertainty continues, vf expects ongoing disruption to its business operations. qtrly increase in direct-to-consumer digital revenue of 53% (49% in constant dollars). inventories were down 14 percent in quarter compared with same period last year. intends to continue to pay regularly scheduled dividend & is not currently contemplating suspension of dividend.
These uncertainties are detailed in documents filed regularly with the SEC. We use adjusted constant dollar amounts as lead numbers in our discussion because we believe they more accurately represent the true operational performance and underlying results of our business. You may also hear us refer to reported amounts which are in accordance with U.S. GAAP. During the fourth quarter of 2020, the Company determined that the Occupational Workwear business met the held-for-sale and discontinued operations accounting criteria. Accordingly, the Company has reported the related assets and liabilities of the Occupational Workwear business in discontinued operations as of the date noted above and included the operating results of this business in discontinued operations for all periods presented. As always, I hope our comments today find you and your loved ones healthy and safe. As we conclude our fiscal '21 year, I'm proud of the way both VF and our people navigated what turned out to be one of the most disruptive years in our Company's 122-year history. We didn't know how the pandemic would unfold and we didn't know how long it would last. But we did know one thing, we were determined not just to survive the situation, but to capitalize on the moment, emerge even stronger, and position VF and our brands for the next chapter of growth and value creation. Combined with our early actions to preserve liquidity and protect our balance sheet, today I can say with confidence that VF is indeed emerging from this crisis as a stronger, smarter, and more focused enterprise. Throughout fiscal '21, our teams remain sharply focused on executing their plans and we continue to invest in our brand's greatest opportunities to drive growth. As you all know, our organic portfolio had strong momentum heading into this crisis, delivering 9% revenue and 19% earnings growth through the first nine months of fiscal '20. All of the actions we've taken throughout fiscal '21 have been squarely focused on regaining the strong organic momentum as we exit the pandemic. We also remained focused on driving inorganic growth by evolving our portfolio to align with near and long-term market opportunities. This is exactly what we did by acquiring Supreme in late 2020 which we believe will deliver significant value creation for VF shareholders in the years to come. In addition, we announced late last month that we've entered into a definitive agreement to sell our Occupational Workwear businesses. The sale of this business will provide greater financial flexibility to fuel the long-term strategic growth initiatives for our remaining portfolio. The continued effects of the pandemic forced an ongoing reaffirmation of our priorities. We've been actively working to accelerate our hyper digital journey in fiscal '21, with continued focus on a central consumer data platform that's accessible to our brands and that enables them to understand consumers more deeply and to engage them in more meaningful and personal ways, and we leveraged new technologies and processes to further digitize our go-to-market approach with advancements in 3D design and development, virtual product reviews and digital printing capabilities that shorten production calendars and accelerate our ability to flow newness and innovation. We also kicked off project Enable, a multi-year initiative to evolve our organizational design to ensure we have the right capabilities, resources and talent in place to propel us forward. This work includes up-skilling and reskilling parts of our workforce to equip them with the know-how to thrive in a digital first world. The Project Enable will help us accelerate our business model transformation and reduce our global cost structure by about $125 million over three years. Along with our focus on business performance and advancing our strategy, we have remained determined to continue building our reputation as a purpose-led company that leads by example. We continue to activate our people first approach through fiscal '21. We prioritized the health and safety of our people worldwide and went to great lengths to support their financial well-being. I'm extremely proud to say that even during the darkest days of the crisis when nearly all our stores around the world were closed for months on end, not one of our retail associates was laid off or furloughed because of the pandemic. We also continue to meet our commitments to the communities we serve and the planet we all share. Last year was a year of tremendous progress in our efforts around the world to advance environmental sustainability. We allocated the net proceeds from our EUR500 million green bond, the first in the apparel footwear industry, toward VF's eligible, sustainable projects worldwide. Collectively, these projects are helping to deliver meaningful environmental benefits. In addition, we announced our goal to eliminate all single-use plastic packaging, including poly bags by 2025. Going forward, all remaining non-plastic packaging used by VF and our brands will originate from sustainable sources and be designed for reuse or recyclability. We also published our first human rights report in alignment with the United Nations' guiding principles on business and human rights. We're very proud of this work, and we aim to continuously improve as we uphold human rights in all our operations and across our global supply chain. Beyond the global pandemic, other events of last year laid bare the pervasive racial and social economic injustices that plague our world, especially as they impact people of color. In response, VF and our brands took action to build on our inclusion and diversity work by establishing the Council to Advance Racial Equity, CARE. Although CARE is still young, we believe it will be a galvanizing force for our entire company as we take collective actions in the years ahead to fight for racial equity and social justice. Operating as a purpose-led company is not just the right thing to do, it is what our employees and our consumers expect. Brands are more than businesses which deliver product, they have the ability to influence positive movements within their communities. This builds deeper connectivity and engagement between our brand and their consumers, supporting long-term profitable relationships. We are a purpose-led and performance-driven organization. Transitioning to our financial results, I want to start with a few highlights from this past year. By any measure, the collective work of our associates to navigate fiscal '21 was nothing short of remarkable. Despite unprecedented challenges from rolling virus surges and lockdowns globally, we were able to deliver global revenues of $9.2 billion and adjusted earnings per share of $1.31, in line with our outlook shared in January. Throughout the year, Digital and China propelled our business forward. Our D2C digital business delivered 55% organic growth. And when combined with pure play digital wholesale, our total Digital business grew over 40% and accounted for nearly 30% of total revenue. These figures demonstrate how quickly the world turned online and how well our teams adapted to the new reality with incredible speed and agility. In fact, during the five-month period, our digital technology teams engineered home-grown solutions to enhance our e-commerce platform and stand up a new omnichannel capabilities, including buy-online-pickup-in-store, ship-from-store, and reserve-online-buy-in-store programs. These new offerings further simplify the shopping experience for our consumers and enabled us to utilize retail inventory through our digital channels when stores were closed, all of which helped to generate around $50 million of incremental revenue this year. Our China business also remained consistently strong throughout fiscal '21 growing 20% and surpassing $1 billion in revenue and exceeding our long-term plan targets. We bolstered our China operations by appointing VF's first ever President of Greater China and we're in the process of restructuring our Asia Pacific operations by moving our brand's regional center from Hong Kong to Shanghai. This will enable our brands to strengthen their in-country presence and gain even deeper insights into our Chinese consumers. We have generated approximately $1 billion in free cash flow in fiscal '21, a testament to the resiliency of our portfolio and strong execution from our global teams. While many of our peers were forced to pause their dividend commitments, our strong balance sheet and command over free cash flow supported our ability to modestly raise our dividend this year, returning $760 million to shareholders. A key objective throughout this year was to exit fiscal '21 in a clean inventory position. I'm pleased to say that we ended this year with owned inventories down 18% and our disciplined brand and marketplace management approach globally has resulted in clean inventory positions across channels. Turning to our outlook. Excluding Supreme, this represents high-single-digit organic revenue growth, above prior peak fiscal 2020 levels. Said differently, we expect our Big Four brands to not only fully recover revenue lost during the pandemic, but delivers -- to deliver strong growth relative to prior peak levels. Before getting into our fiscal '22 plan, I want to take a moment to address a specific question which always is top of minds with this audience, what gives me confidence in Van's ability to reaccelerate and deliver on its forward growth commitments? Throughout the past year, the Vans conversation has been focused on the disruption caused by supply delays, the outsized impact of store closures, and the cumulative impact of inventory and marketing investment constraints. As we have consistently discussed, these issues are all short term and episodic which have no impact on the long-term runway for this brand. As we enter fiscal '22, there are several near-term catalysts which give me confidence in Vans' ability to regain momentum and return to the low-double digit growth path we laid out in 2019. First, we know that the deep connectivity of Vans stores and associates are a distinct competitive advantage for the brand. Our stores drive higher loyalty member enrollment, greater purchase frequency and higher average order value. A return to in-store shopping will restore this advantage, growing the Vans community while driving a higher annual spend per consumer. Second, a return to normal social usage occasions will accelerate purchases from depressed levels the brand experienced during the pandemic. This is not just a return to in-person schooling for younger consumers. This is a return to seeing family and friends, dining-out, attending concerts and sporting events and traveling. We know Vans has remained top of mind for its core consumers who are ready to reengage with the brand as they return to a normal cadence of lifestyle activities. And lastly, beginning next month, Vans will initiate a globally coordinated weekly drop cadence that marries both product and experiential demand creation to drive energy, excitement and brand heat. A key learning from the past year has been the importance of flowing new product and associated storytelling to deepen engagement with existing consumers and attract new consumers to the brand. This will be accompanied by an elevated vans.com experience to enhance the consumer journey around these exciting drops. While Vans is our largest brand, I don't want to lose sight of the momentum we're seeing across the remainder of our portfolio. As Matt will unpack shortly, our recovery this quarter and the strength of our fiscal '22 plan is broad based. There is tremendous momentum at The North Face and Dickies, which we expect to accelerate. We believe Timberland has reached an important inflection point and Supreme is off to a strong start and its path for sustainable long-term growth and value creation could not be more clear. Taken together, I'm entering this year with a strong sense of optimism. We have a best-in-class portfolio of brands with momentum, a leadership team across our brands and enterprise that possesses the skills and capabilities to lead our teams and to deliver on our commitments. There are tailwinds from both the strengthening consumer across the globe and in the categories where we are most present, and inventory levels are in good shape. Each of our brands are uniquely positioned to thrive in the coming year and return to their respective long range plans as we emerge from this crisis as a stronger company. And first, Steve, let me say how honored, excited and appreciative I am to have the opportunity to serve as CFO of this amazing 122-year old company. Rest assured, you've had an impact on VF that is immeasurable and you will be missed by all, but by none more than me. Best wishes my friend. So, let me start with an overview of the operating environment across geographic regions. Starting with the Americas, the U.S. environment continues to improve with vaccine distribution, easing lock down measures, and a strengthening consumer. We started Q4 with about 15% of our doors closed in the region, mostly in California. As we sit today, virtually all of these doors have reopened. While store traffic remains depressed, conversion and AUR have been strong, and we have seen sequential improvement across the brick-and-mortar fleet, with a notable acceleration in March. Each of our largest brands returned to double-digit growth in the Americas, and our total D2C business increased 16% led by 57% growth from digital. Wholesale channel inventories remain clean, particularly across the outdoor categories, which will provide a strong backdrop to the U.S. wholesale business as we progressed through fiscal 2022. In EMEA, the region has been impacted by rolling store closures throughout the entirety of fiscal '21 and our teams continue to navigate this disruption during Q4. We started the quarter with about half of our doors closed and finished the quarter with about 60% of doors closed. Key markets such as the U.K. and Germany were basically fully closed throughout the fourth quarter. Lockdowns are expected to ease beginning in May for most countries, except Germany and France, although a slower start to vaccine rollouts will likely hindered the pace of recovery in the coming months. Despite this choppier brick-and-mortar recovery, our teams have continued to leverage digital, driving 99% growth in that channel during the period, with broad based strength across the portfolio. Vans digital increased 92%; The North Face, 118%; and Timberland, 122%. Our strong partnerships with digital partners such as Asos and Zalando also delivered impressive growth, accelerating in the quarter. We expect strong underlying digital momentum to translate into accelerated growth in fiscal 2022. The APAC region has demonstrated incredible resiliency throughout the past year, led by Greater China and a strong consumer. Our Greater China business surpassed the $1 billion milestone in fiscal '21 growing 20%, capped off by 70% growth in Q4. Congratulations to our teams in the region for this important milestone. This represents nearly 25% growth over our fiscal 2019 Q4 revenue, the prior peak before the impact of COVID. All VF brands achieved growth in the region, led by 93% growth at The North Face and 107% growth at Dickies. We continue to view China as the leading indicator of the broader recovery in our business. And as our largest growth opportunity, we remain focused on maintaining momentum and continuing with investments focused toward our Distort to Asia strategy. The transition of our brand leadership teams and commercial operations to Shanghai is on track, which includes standing up a digital hub and establishing a consumer centric structure that will help us transform and advance our capabilities serving Greater China and the region. Globally, our supply chain teams continue to navigate port congestion, capacity constraints, transitory cost pressures, and elevated volatility across the network. Our teams are working tirelessly to minimize the impact of these challenges. However, we expect volatility and certain headwinds to continue for the foreseeable future. Fortunately, we have one of the strongest supply chains in the industry and are prepared for this challenge, having successfully navigated the unprecedented disruption over the past year. Now, moving into our fourth quarter highlights. The impact of this was contemplated in our 2021 outlook shared in January. This benefit was magnified relative to Q4 due to the low base in the prior year and supply chain disruptions resulting from COVID-19. Importantly, this dynamic is reflected in the fiscal 2022 plan growth rates we will cover shortly. VF delivered 19% growth in Q4 or 12% organic growth despite headwinds from supply chain disruptions and more extended lockdowns throughout Europe. The strength of our business was broad based with 16% growth from the Big Four brands, an acceleration for many of our emerging brands, highlighted by a 53% growth from Altra. In its first quarter with VF, the Supreme brand contributed over $140 million of revenue, exceeding our expectations. As expected, Vans inflected positively, delivering 10% global growth as strength in the Americas and APAC regions more than offset larger than expected headwinds from store closures in Europe. Globally, Vans has seen balanced momentum and performance across heritage and progression footwear. During Q4, skate high, authentic and old-school heritage styles each grew double digit, while the proskate and MTE progression lines each grew more than 30%. Apparel also performed well, including mid-teens growth in women. Van's digital growth accelerated to 52% including a growing contribution from omnichannel sales which represented over 10% of digital revenue in the Americas. Vans stores also returned to growth globally after sequential quarterly improvement throughout fiscal 2021. Vans D2C consumers returned strongly during March, both in stores and online and across both existing and new consumers. The Vans family loyalty program added 1.2 million members in the U.S. in the last four months and now has nearly 15 million enrolled globally. With the reopening of Vans store fleet, new membership growth has accelerated in March and April. The North Face delivered 23% growth led by 56% growth in digital. TNF achieved double-digit growth across all regions and channels as outdoor category tailwinds remain robust globally. From a product standpoint, the brand experienced relative strength from several on mountain categories including outerwear led by our FutureLight offering and footwear, led by our new VECTIV line. We see continued validation of the brand's innovation engine, recently highlighted in Outside Magazine's 2021 Summer Buyers Guide, which feature six products from The North Face, including Gear of the Year Awards for two VECTIV products, awarded the best trail running and hiking shoes of 2021. Momentum at The North Face also extent to the brand's off mountain product portfolio, with strength from logowear and Iconic franchises such as the Nuptse, which increased more than 75%. The brand also wrapped up the Gucci collab, with the largest earned media campaign in The North Face's history with more than 17 billion impressions, yielding worldwide 100% sell-through of all collaboration outerwear. And lastly, due partially to an exceptionally strong first responder program throughout fiscal 2021, The North Face's digital business increased 63% including 49% growth in new paid customers via adding 1.6 million in new loyalty members in the Americas. Timberland increased 19% with continued momentum behind outdoor footwear, apparel, Timberland PRO, and an accelerating classics business. Digital increased 96% with additional strength from key digital retail partners. The brand successfully rolled out several new product stories including GreenStride which has garnered strong early read. Timberland delivered 54% global digital growth in fiscal 2021 and is entering this year with broad-based momentum across the product portfolio. Finally, Dickies increased 19% with continued strength across regions channels and categories. The brand continued its strong performance in APAC, highlighted by more than 120% growth in Greater China. Work inspired lifestyle product increased at a double-digit rate across all regions and represented 40% of total revenue. Despite headwinds from the pandemic, the brand delivered 7% growth in fiscal 2021 through strong execution against the strategic pillars of digital, China and work-inspired product categories. Fourth quarter adjusted earnings per share was $0.27, including a $0.06 contribution from Supreme, representing 89% organic growth and a strong start to our earnings recovery. Our liquidity remained strong as we ended the year with approximately $1.45 billion in cash and short-term investments and approximately $2.2 billion remaining undrawn on our revolver. As Steve referenced earlier, we've entered into a definitive agreement to sell our Occupational Work business to Redwood Capital Investments, which is expected to close in late Q1. This will provide an additional source of liquidity and further reduce our net leverage position. Moving now to our outlook for fiscal 2022. We expect total VF revenue to approximate $11.8 billion, representing about 28% growth from fiscal '21 and a low double-digit increase relative to our prior peak revenue in fiscal 2020. This includes approximately $600 million of Supreme revenue. Excluding the Supreme business, our fiscal 2022 outlook implies growth of about 23%, representing high-single-digit growth relative to fiscal 2020. By brand, we expect Vans to generate between 26% and 28% growth, representing a 7% to 9% increase relative to prior peak revenue. The North Face is expected to increase between 25% and 27%, representing 14% to 16% growth relative to fiscal 2020 and surpassing $3 billion in global brand revenue. We expect Timberland to increase between 16% and 18%, which implies revenue in line with prior peak levels. Lastly, we expect continued strength from Dickies with growth accelerating to between 10% and 12% which implies revenue up about 20% from fiscal 2020. By region, excluding Supreme, we expect Europe to increase about 30%, representing about 15% growth relative to prior peak revenue. We expect continued momentum in APAC with close to 20% organic growth led by ongoing strength in China, where we expect growth to exceed 20%. In the Americas, we expect organic revenue growth of greater than 20%. By channel, again excluding Supreme, we expect our D2C business to increase between 28% and 30%, including about 15% growth in digital. We expect approximately half of total VF revenue to come from D2C this year. And including pure play digital wholesale, we expect our total digital penetration in fiscal 2022 to exceed 30%. Finally, our wholesale business is expected to grow at a high-teen rate, essentially recovering revenue lost over the past year and returning to prior peak levels. Moving down the P&L, we expect gross margin in excess of 56%, representing organic margins above prior peak levels. We expect an operating margin of about 12.8%, which implies high single-digit organic growth in our SG&A spend relative to fiscal 2020 levels. Now, let me take a moment and unpack our expected SG&A growth relative to those prior peak levels. A large piece of the growth relates to continued investment against our growth focused strategic priorities. Relative to fiscal '20, our fiscal '22 plan assumes over $150 million of incremental investments in demand creation and our business model transformation to be more consumer-minded, retail-centric and hyper-digital, which supports the strong growth commitments cover today. Other large drivers within SG&A are episodic to this year. A large piece of the growth is simply from foreign currency. Foreign currency translation represents about 20% of the expected dollar growth in SG&A. Another episodic piece of our SG&A growth relate to elevated distribution and freight. We are confident in our ability to mitigate these cost pressures over time in addition to the strong pricing power our brands enjoy globally. However, higher costs will be a near-term headwind to profitability. Moving forward, we see a path to SG&A leverage as we exit fiscal 2022. And given the composition of our portfolio today, we see at minimum, a return to our long-term earnings algorithm from our 2024 plan with strong gross margin expansion and SG&A leverage supporting investment optionality. To wrap up our fiscal 2022 P&L outlook, we expect our tax rate to approximate 15%, which brings us to earnings per share of about $3.05, including an expected $0.25 per share contribution from the Supreme brand. Finally, we expect to generate over $1 billion in operating cash flow. Capital expenditures are planned to approximate $350 million. This includes the impact of growth investments as well as deferred capital spending from fiscal 2021 as a result of COVID. There are no changes to our capital allocation priorities moving forward. Our strong balance sheet will continue to be a focus and we expect to end fiscal 2022 with net leverage between 2.5 times and 3 times. We remain committed to growing our dividend. And, as always, we will remain opportunistic with M&A and other capital allocation alternatives, which we will explore as appropriate. So, in summary, we could be -- we could not be more pleased with how VF has navigated fiscal 2021. We fully executed on our plans in a challenging environment, driving digital growth, managing free cash flow, and investing in our organic business while evolving our portfolio to best position us for long-term value creation. As a result of the hard work throughout fiscal '21, we're exiting this year with broad-based momentum across the portfolio and I'm very confident in VF's ability to drive accelerated growth into fiscal '22 and beyond.	compname says 2022 revenue is expected to approximate $11.8 billion. sees fy adjusted earnings per share $3.05. sees fy revenue $11.8 billion. q4 adjusted earnings per share $0.27 including a $0.06 contribution from acquisitions. qtrly revenue increased 23% (up 19% in constant dollars) to $2.6 billion. 2022 revenue is expected to approximate $11.8 billion.
Ron Bernstein, Senior Advisor to Liggett Vector Brands, will join us during the question and answers. Nick will then summarize the performance of the tobacco business. As of September 30, 2020, Vector Group maintained sufficient liquidity, with cash and cash equivalents of $451 million, including cash of $76 million at Douglas Elliman and $148 million at Liggett, and investment securities and investment partnership interests with a fair market value of $174 million. Now turning to Vector Group's operations for the three and nine months ended September 30, 2020. For the three months ended September 30, 2020, Vector Group's revenues were $547.8 million, compared to $504.8 million in the 2019 period. In addition to increases in revenue in both the Tobacco segment and Douglas Elliman, the 2020 revenues include $20.5 million from the sale of a real estate investment in The Hamptons. Net income attributed to Vector Group for the third quarter of 2020 was $38.1 million, or $0.25 per diluted common share, compared to net income of $36 million, or $0.23 per diluted common share, in the third quarter of 2019. The company recorded adjusted EBITDA of $103.3 million, compared to $73.7 million in the prior year. Adjusted net income was $38.3 million, or $0.25 per diluted share, compared to $36.2 million, or $0.23 per diluted share, in the 2019 period. For the nine months ended September 30, 2020, Vector Group revenues were $1.45 billion and were flat when compared to $1.46 billion in the 2019 period. Our Tobacco segment reported an increase of $63.9 million in revenues, and our Real Estate segment reported a decline in revenues of $80 million. While our Real Estate segment reported increases in revenues in the first and third quarters, the year-to-date decline reflects the dramatic impact of the COVID-19 pandemic on Douglas Elliman's results in the second quarter of 2020 as well as an unusual year-over-year comparison because of the acceleration of real estate closings in New York City in the 2019 second quarter. This acceleration occurred in anticipation of the increase in the New York state mansion tax on residential real estate on July 1, 2019. Net income attributed to the Vector Group for the nine months ended September 30, 2020, was $60.7 million, or $0.39 per diluted common share, compared to net income of $90.3 million, or $0.56 per diluted common share, for the nine months ended September 30, 2019. The company recorded adjusted EBITDA of $240 million, compared to $206.9 million in the prior year. Adjusted net income was $106.9 million, or $0.70 per diluted share, compared to $92.3 million, or $0.59 per diluted share, in the 2019 period. For Douglas Elliman's results for the three months ended September 30, 2020, we reported $208 million in revenues, net income of $11.8 million and an adjusted EBITDA of $14.1 million, compared to $201.2 million in revenues, net income of $1.9 million and adjusted EBITDA of $3.4 million in the third quarter of 2019. For the nine months ended September 30, 2020, Douglas Elliman reported $506.5 million in revenues, a net loss of $62.2 million and adjusted EBITDA of $5.3 million, compared to $606 million of revenues, net income of $6.6 million and adjusted EBITDA of $11 million in the first nine months of 2019. Douglas Elliman's net loss for the nine months ended September 30, 2020, included pre-tax and noncash impairment charges of $58.3 million and pre-tax restructuring charges of $3.3 million. When compared to both the second quarter of 2020 and the third quarter of 2019, Douglas Elliman's third quarter closed sales improved significantly in markets complementary to New York City, including The Hamptons as well as in Palm Beach, Miami, Aspen and Los Angeles. Nonetheless, the COVID-19 pandemic continues to have a significant effect on the New York City real estate market. To address the impact of COVID-19, in April 2020 Douglas Elliman reduced personnel by 25% and began consolidating some offices and reducing other administrative expenses. These expense reduction initiatives resulted in a decline in Douglas Elliman's third quarter 2020 operating and administrative expenses, excluding restructuring charges, of approximately $17.8 million compared to the third quarter of 2019 and $39.8 million for the nine months ended September 30, 2019. We believe these initiatives have and will continue to provide long-term upside to Vector Group stockholders. Furthermore, fourth quarter cash receipts have continued to strengthen when compared to the third quarter in all regions, including New York City. During the third quarter, Liggett continued its strong year-to-date tobacco performance, with revenue increases and margin growth contributing to a 25% increase in tobacco adjusted operating income. As noted on previous calls, we are well into the income growth phase of our Eagle 20's business strategy and remain very pleased with the results to date. Our market-specific retail programs have proven successful, and we remain optimistic about Eagle 20's increasing profit contributions and long-term potential. Our results also reflect the resilience of Pyramid, which continues to deliver substantial profit and market presence for the company. Pyramid has strong distribution and is currently sold in approximately 98,000 stores nationwide. I will now turn to the combined tobacco financials for Liggett Group and Vector Tobacco. For the three and nine months ended September 30, 2020, revenues were $318.9 million and $918.4 million, respectively, compared to $303.3 million and $854.5 million for the corresponding 2019 periods. Tobacco adjusted operating income for the three and nine months ended September 30, 2020, was $91.6 million and $240.2 million, respectively, compared to $73 million and $202.5 million for the corresponding periods a year ago. Liggett's increase in third quarter earnings resulted primarily from higher gross profit margins associated with increased net pricing and lower per-unit Master Settlement Agreement expense. The lower per-unit MSA expense reflects stronger U.S. industry cigarette volumes in 2020, which has increased the value of our market share exemption under the MSA. Similar to other consumer product categories, cigarette industry volumes have outperformed recent historical trends and have benefited from increased consumer demand related to changes in the underlying cigarette purchasing patterns associated with the COVID-19 pandemic. According to Management Science Associates, overall industry wholesale shipments for the third quarter increased by 1.1%, while Liggett's wholesale shipments declined by 2.2%, compared to the third quarter in 2019. For the third quarter, Liggett's retail shipments declined by 1.1% from 2019, while industry retail shipments increased 1.7% during the same period. Liggett's retail share in the third quarter declined slightly, to 4.2%. The modest decline in Liggett's third quarter year-over-year retail share was anticipated, with Eagle 20's volume growth slowing due to increased net pricing. This is consistent with our income growth strategy for Eagle 20's, which began in the second half of 2018. Eagle 20's is now priced in the upper tier of the U.S. deep discount segment. Nonetheless, Eagle 20's retail volume for the third quarter increased by approximately 2% compared to the 2019 period, and it remains the third largest discount brand in the U.S. and is currently being sold in approximately 84,000 stores nationwide. The continued growth of Eagle 20's despite increased pricing also reinforces the effectiveness of our long-term strategy to continue to build volume and margin for our business using well-positioned discount brands providing value to adult smokers. With that in mind, and after identifying volume growth opportunities in the U.S. deep discount segment, in August we expanded the distribution of our Montego brand by 10 states, primarily in the Southeast. Prior to August, Montego was sold in targeted markets in only four states. Montego will be competitively priced in the growing deep discount segment, and we will take a measured approach with further expansion. Montego represented about 6.8% of Liggett's volume for the third quarter of 2020 and 5.6% of Liggett's volume for the nine months ended September 30, 2020. To date, we are pleased with the initial wholesale, retail and consumer response to Montego, and I will provide further updates in the coming quarters on our progress. In summary, we are very pleased with our third quarter 2020 performance, particularly in light of the current macroeconomic environment. Our results continue to validate our market strategy and reflect our competitive advantages within the deep discount segment, including our broad base of distribution, consumer-focused programs and the executional capabilities of our sales force. As we look ahead, we remain focused on generating incremental operating income from the strong sales and distribution base of both Pyramid and Eagle 20's. Finally, while we are always subject to industry and general market risks, we remain confident that we have effective programs to keep our business operating efficiently, while supporting market share and profit growth. Vector Group has strong cash reserves and has consistently increased its tobacco unit volume and profits and has taken the necessary steps to position its real estate business for future success. We are pleased with our long-standing history of paying a quarterly cash dividend. It remains an important component of our capital allocation strategy. While we will continue to evaluate our dividend policy each quarter, it is our expectation that our policy will continue well into the future.	q3 adjusted earnings per share $0.25. q3 revenue $547.8 million.
Ron Bernstein, Senior Advisor to Liggett Vector Brands will join us during the Q&A. I'm also pleased that Dick Lampen, our longtime Executive Vice President, who was recently appointed Chief Operating Officer and a member of our Board of Directors is joining us on the call. Dick's broad executive experience and deep operational understanding of the Company from serving in a variety of senior leadership roles for Vector Group and its affiliates since 1995 make him a valuable addition to our Board and a natural fit to be COO. Additionally, Dick's experience as CEO of Ladenburg Thalmann Financial Services and vast knowledge of the ways that technology can benefit a brokerage business will be valuable to Douglas Elliman as it continues to enhance the technology-based experience of its agents. It will also be helpful identifying potential synergies leading to further reductions in Douglas Elliman's operating expenses. Nick will then summarize the performance of the tobacco business. As of December 31, 2020, Vector Group maintained significant liquidity with cash and cash equivalents of $353 million, including cash of $94 million at Douglas Elliman and $45 million at Liggett, and investment securities and investment partnership interests with a fair market value of $188 million. Additionally, in the first quarter of 2021, we took advantage of favorable capital markets and issued $875 million of 5.75% senior secured notes till 2029. All proceeds were used to retire older notes. Now turning to Vector Group's operational and financial results. For the three months ended December 31, 2020, Vector Group's revenues were $554.6 million compared to $439.6 million in the 2019 period. The $115 million increase in revenues was a result of an increase of $25.7 million in the Tobacco segment and $89.3 million in the Real Estate segment. Net income attributed to Vector Group was $32.3 million or $0.21 per diluted common share compared to $10.7 million or $0.06 per diluted common share in the fourth quarter of 2019. The company recorded adjusted EBITDA of $93.4 million compared to $52.5 million in the prior year. As we will discuss later, we continue to be pleased with Liggett's execution of its still growing strategy as well as Douglas Elliman's resilience and rebound in the second half of 2020. Adjusted net income was $32.6 million or $0.21 per diluted share compared to $17.8 million or $0.11 per diluted share in the 2019 period. For the year ended December 31, 2020, Vector Group's revenues were $2 billion compared to $1.9 billion in the 2019 period. Net income attributed to Vector Group was $92.9 million or $0.60 per diluted common share compared to $101 million or $0.63 per diluted common share for the year ended December 31, 2019. The company recorded adjusted EBITDA of $333.4 million compared to $259.4 million in the prior year. Adjusted net income was $139.5 million or $0.91 per diluted share compared to a $110.11 million or $0.70 per diluted share in the 2019 period. Now turning to Douglas Elliman. Before we review the results, I'd like to recognize the resilience of the Douglas Elliman team of 6,700 agents and 750 employees in addressing the challenges of 2020. We have long believed our team sets us apart from other residential real estate brokerage firms. And when Forbes recently recognized Douglas Elliman in its 2021 list of America's Best Large Employers we were humbled. This recognition is a testament to the hard work and resiliency of the Douglas Elliman family. We congratulate the Douglas Elliman team for this well earned and deserved recognition. Now to Douglas Elliman's financial results. For the three months ended December 31, 2020, Douglas Elliman reported $267.5 million in revenues, net income of $14 million and an adjusted EBITDA of $16.7 million compared to $178.1 million in revenues and net loss of $432,000, and adjusted EBITDA loss of $5.7 million in the fourth quarter of 2019. For the year ended December 31, 2020, Douglas Elliman reported $774 million in revenues, a net loss of $48.2 million and adjusted EBITDA of $22.1 million compared to $784.1 million in revenues, net income of $6.2 million and adjusted EBITDA of $5.3 million in 2019. Douglas Elliman's net loss for the year ended December 31, '21 included pre-tax charges for non-cash impairments of $58.3 million as well as restructuring charges and related asset write-offs of $4.6 million. In the fourth quarter of 2020, Douglas Elliman's revenues increased by 50% from the fourth quarter of 2019 as its closed sales continue to improve in rural markets complementary to New York City, including the Hamptons, Palm Beach, Miami, Aspen and Los Angeles. Our New York City business began to stabilize in the fourth quarter and we are well positioned in New York City. Furthermore, Douglas Elliman's expense reduction initiatives continued in the fourth quarter and its fourth quarter 2020 operating and administrative expenses, excluding restructuring and asset impairment charges, declined by approximately $7.9 million compared to the fourth quarter of 2019 and $47.7 million compared to the year ended December 31, 2019. We believe these initiatives have and will continue to provide long-term upside to Vector Group stockholders. In addition, when compared to the first quarter of 2020, first quarter 2021 cash receipts have continued to strengthen from 2020 levels in all regions except New York City. 2020 proved to be an extraordinary and challenging year for our tobacco operations, and I'm very proud of our response to that challenge. Our employees remained resilient throughout and stay focused on the task at hand. They also embraced a tremendous team spirit and I believe our excellent performance throughout this difficult year reflects that effort. During the fourth quarter Liggett continued its strong year-to-date performance with revenue increases and margin growth contributing to a 33% increase in tobacco adjusted operating income. As noted on previous calls, we are well into the income growth phase of our Eagle 20's business strategy and remain very pleased with the results. Our market-specific retail programs have proven successful, and we remain optimistic about Eagle 20's increasing profit contributions and long-term potential. Our results also reflect the resilience and strong distribution of Pyramid, which continues to deliver substantial profit and market presence to the company. I will now turn to the combined tobacco financials for Liggett Group and Vector Tobacco. The three months and year ended December 31, 2020 revenues were $286.1 million and $1.2 billion, respectively compared to $260.3 million and $1.11 billion for the corresponding 2019 periods. Tobacco adjusted operating income for the three months and year ended December 31, 2020 were $80 million and $320.2 million, respectively compared to $60.1 million and $262.6 million for the corresponding periods a year ago. Liggett's increase in fourth quarter earnings was the result of higher gross profit margins associated with increased volumes, high net pricing and lower per unit Master Settlement Agreement expense. The lower per unit MSA expense reflects stronger U.S. industry cigarette volumes in 2020, which has increased the value of our market share exemption under the MSA. Similar to some other consumer product categories, cigarette industry volumes outperformed recent historical trends and benefited from increased consumer demand related to changes in underlying cigarette purchasing and consumption patterns associated with the pandemic. Wholesale inventory levels remained elevated throughout the fourth quarter as a result of the prospect of increased restrictions and lockdowns associated with COVID-19 and the timing of industry price increases. However, we anticipate a normalization of wholesale inventory levels over the course of the first quarter. According to Management Science Associates, overall industry wholesale shipments for the fourth quarter increased by 3.4% while Liggett's wholesale shipments increased by 2.1% compared to the fourth quarter in 2019. For the fourth quarter, Liggett's retail shipments declined 0.3% from 2019, while industry retail shipments increased 0.6% during the same period. Liggett's retail share in the fourth quarter declined slightly to 4.21% from 4.25% in the same period last year. The modest decline in Liggett's fourth quarter year-over-year retail share was anticipated as Eagle 20s' volume growth slowed due to increased net pricing. This is consistent with our income growth strategy for the brand, which began in the second half of 2018. Eagle 20s is now priced in the upper tier of the U.S. deep discount segment. Eagle 20s' retail volume for the fourth quarter of 2020 was essentially flat compared to the prior year period. It remains the third largest discount brand in the U.S. and is currently sold in approximately 84,000 stores nationwide. The continued strength of Eagle 20s despite increased pricing also reinforces the effectiveness of our long-term strategy to continue to build volume and margin for our business using well-positioned discount brands that provides value to adult smokers. With that in mind and after identifying volume growth opportunities in the U.S. deep discount segment, in August we expanded the distribution of our Montego brand to an additional 10 states, primarily in the southeast. Prior to August, Montego was sold in targeted markets in four states. Montego is competitively priced in the growing deep discount segment and we plan to take a measured approach with further expansion. Montego represented 8.6% of Liggett's volume for the fourth quarter 2020, and 6.3% of Liggett's volume for the year ended December 31, 2020. To date, we remain very pleased with the initial response to Montego now sold in approximately 25,000 stores representing a 50% increase from the end of the third quarter. In summary, we are very pleased with our 2020 performance, particularly considering the current macroeconomic environment. Our results continue to validate our market strategy and reflect our competitive advantages within the deep discount segment, including our broad base of distribution, consumer-focused programs, and the execution capabilities of our sales force. As we look ahead, we remain focused on generating incremental operating income from the strong sales and distribution base of both Pyramid and Eagle 20s. Finally, while we are always subject to industry and general market risks, we remain confident we have effective programs to keep our business operating efficiently while supporting market share and profit growth. Vector Group has strong cash reserves, has consistently increased its tobacco market share and profits, and has taken the necessary steps to position its real estate business for future success. We are pleased with our long-standing history of paying a quarterly cash dividend. It remains an important component of our capital allocation strategy. While we will continue to evaluate our dividend policy each quarter, it is our expectation that our policy will continue well into the future.	q4 adjusted earnings per share $0.21. q4 revenue $554.6 million.
If you have any questions after reviewing these tables, please feel free to contact our Investor Relations team after the call. The refining business saw a strong recovery in the first quarter as various pandemic-imposed restrictions were eased or withdrawn and as more and more people receive vaccinations. However, Winter Storm Uri disrupted many U.S. Gulf Coast and Mid-Continent facilities in February due to the freeze and utilities curtailments. Although our refineries and plants in those regions were also impacted, they did not suffer any significant mechanical damage and were restarted within a short period after the storm. While we did incur extremely high energy costs, I'm very proud of the Valero team for safely managing the crisis by idling or shutting down the affected facilities and resuming operations without incident. With many of the country's Gulf Coast and Mid-Continent refineries offline due to the storm, there was a significant 60 million barrel drawdown of surplus product inventories in the U.S., bringing product inventories to normal levels. Lower product inventories, coupled with increasing product demand, improved refining margins significantly from the prior quarter. Crude oil discounts were also wider for Canadian heavy and WTI in the first quarter relative to the fourth quarter of last year, providing additional support to refining margins. In addition, our renewable diesel segment continues to provide solid earnings and set records for operating income and renewable diesel product margin in the first quarter of 2021. Our wholesale operations also continue to see positive trends in U.S. demand, and we expanded our supply into Mexico with current sales of over 60,000 barrels per day, which should continue to increase with the ramp-up of supply through the Vera Cruz terminal. On the strategic front, we continue to evaluate and pursue economic projects that lower the carbon intensity of all of our products. In March, we announced that we were partnering with BlackRock and Navigator to develop a carbon capture system in the Midwest, allowing for connectivity of eight of our ethanol plants to the system. In addition to the tax credit benefit for CO2 capture and storage, Valero will also capture higher value for the lower-carbon intensity ethanol product in low carbon fuel standard markets such as California. The system is expected to be capable of storing 5 million metric tons of CO2 per year. In our Diamond Green Diesel 2 project at St. Charles remains on budget and is now expected to be operational in the middle of the fourth quarter of this year. The expansion is expected to increase renewable diesel production capacity by 400 million gallons per year, bringing the total capacity at St. Charles to 690 million gallons per year. The expansion will also allow us to market 30 million gallons per year of renewable naphtha from DGD 1 and DGD 2 into low-carbon fuel markets. The renewable diesel project at Port Arthur or DGD 3 continues to move forward as well and is expected to be operational in the second half of 2023. With the completion of this 470 million gallons per year capacity plant, DGD's combined annual capacity is expected to be 1.2 billion gallons of renewable diesel and 50 million gallons of renewable naphtha. With respect to our refinery optimization projects, we remain on track to complete the Pembroke Cogen project in the third quarter of this year, and the Port Arthur Coker project is expected to be completed in 2023. As we head into summer, we believe that there's a pent-up desire among much of the population to travel and take vacations, which should drive incremental demand for transportation fuels. We're already seeing a strong recovery in gasoline and diesel demand at 93% and 100% of pre-pandemic levels, respectively. Since March, air travel has also increased, as reflected in TSA data, which shows that passenger count is now nearly double of what it was in January. We're also seeing positive signs in the crude market with wider discounts for sour crude oils and residual feedstocks relative to Brent as incremental crude oil from the Middle East comes to market. All these positive data points, coupled with less refining capacity as a result of refinery rationalizations, should lead to continued improvement in refining margins in the coming months. We've already seen the impacts of these improving market indicators, with Valero having positive operating income and operating cash flow in March. In closing, we're encouraged by the outlook on refining as product demand steadily improves toward pre-pandemic levels, which should continue to have a positive impact on refining margins. We believe these improvements, coupled with our growth strategy and low-carbon renewable fuels, will further strengthen our long-term competitive advantage. So with that, Homer, I'll hand the call back to you. For the first quarter of 2021, we incurred a net loss attributable to Valero stockholders of $704 million or $1.73 per share, compared to a net loss of $1.9 billion or $4.54 per share for the first quarter of 2020. The first quarter 2021 operating loss includes estimated excess energy costs of $579 million or $1.15 per share. For the first quarter of 2020, adjusted net income attributable to Valero stockholders was $140 million or $0.34 per share. The adjusted results exclude an after-tax lower of cost or market, or LCM, inventory valuation adjustment of approximately $2 billion. The refining segment reported an operating loss of $592 million in the first quarter of 2021, compared to an operating loss of $2.1 billion in the first quarter of 2020. The first-quarter 2021 adjusted operating loss for the refining segment was $554 million, compared to adjusted operating income of $329 million for the first quarter of 2020, which excludes the LCM inventory valuation adjustment. The refining segment operating loss for the first quarter of 2021 includes estimated excess energy cost of $525 million related to impacts from Winter Storm Uri. Refining throughput volumes in the first quarter of 2021 averaged 2.4 million barrels per day, which was 414,000 barrels per day lower than the first quarter of 2020 due to scheduled maintenance and disruptions resulting from Winter Storm Uri. Throughput capacity utilization was 77% in the first quarter of 2021. Refining cash operating expenses of $6.78 per barrel were higher than guidance of $4.75 per barrel, primarily due to estimated excess energy costs related to impacts from Winter Storm Uri of $2.21 per barrel. Operating income for the renewable diesel segment was a record $203 million in the first quarter of 2021, compared to $198 million for the first quarter of 2020. Renewable diesel sales volumes averaged 867,000 gallons per day in the first quarter of 2021. The ethanol segment reported an operating loss of $56 million for the first quarter of 2021, compared to an operating loss of $197 million for the first quarter of 2020. The operating loss for the first quarter of 2021 includes estimated excess energy costs of $54 million related to impacts from Winter Storm Uri. First quarter of 2020 adjusted operating loss, which excludes the LCM inventory valuation adjustment, was $69 million. Ethanol production volumes averaged 3.6 million gallons per day in the first quarter of 2021, which was 541,000 gallons per day lower than the first quarter of 2020. For the first quarter of 2021, G&A expenses were $208 million and net interest expense was $149 million. Depreciation and amortization expense was $578 million, and the income tax benefit was $148 million for the first quarter of 2021. The effective tax rate was 19%. Net cash used in operating activities was $52 million in the first quarter of 2021. Excluding the favorable impact from the change in working capital of $184 million and our joint venture partner's 50% share of Diamond Green Diesel's net cash provided by operating activities, excluding changes in DGD's working capital, adjusted net cash used in operating activities was $344 million. With regard to investing activities, we made $582 million of total capital investments in the first quarter of 2021, of which $333 million was for sustaining the business, including costs for turnarounds, catalysts and regulatory compliance, and $249 million was for growing the business. Excluding capital investments attributable to our partner's 50% share of Diamond Green Diesel and those related to other variable interest entities, capital investments attributable to Valero were $479 million in the first quarter of 2021. On April 19, we've sold a partial membership interest in the Pasadena marine terminal joint venture for $270 million. Moving to financing activities, we returned $400 million to our stockholders in the first quarter of 2021 through our dividend. And as you saw earlier this week, our board of directors approved a regular quarterly dividend of $0.98 per share. With respect to our balance sheet at quarter end, total debt and finance lease obligations were $14.7 billion and cash and cash equivalents were $2.3 billion. The debt-to-capitalization ratio net of cash and cash equivalents was 40%. At the end of March, we had $5.9 billion of available liquidity, excluding cash. We expect capital investments attributable to Valero for 2021 to be approximately $2 billion, which includes expenditures for turnarounds, catalysts and joint venture investments. About 60% of our capital investments is allocated to sustaining the business and 40% to growth. Over half of our growth CAPEX in 2021 is allocated to expanding our renewable diesel business. For modeling our second-quarter operations, we expect refining throughput volumes to fall within the following ranges: Gulf Coast at 1.65 million to 1.7 million barrels per day; Mid-Continent at 430,000 to 450,000 barrels per day; West Coast at 250,000 to 270,000 barrels per day; and North Atlantic at 340,000 to 360,000 barrels per day. We expect refining cash operating expenses in the second quarter to be approximately $4.20 per barrel. With respect to the renewable diesel segment, with the start-up of DGD 2 in the fourth quarter, we now expect sales volumes to average 1 million gallons per day in 2021. Operating expenses in 2021 should be $0.50 per gallon, which includes $0.15 per gallon for noncash costs such as depreciation and amortization. Our ethanol segment is expected to produce 4.1 million gallons per day in the second quarter. Operating expenses should average $0.38 per gallon, which includes $0.05 per gallon for noncash costs such as depreciation and amortization. For the second quarter, net interest expense should be about $150 million, and total depreciation and amortization expense should be approximately $590 million. For 2021, we still expect G&A expenses, excluding corporate depreciation, to be approximately $850 million, and the annual effective tax rate should approximate the U.S. statutory rate. Lastly, as we reported last quarter, we expect to receive a cash tax refund of approximately $1 billion later this year. Before we open the call to questions, we again respectfully request that callers adhere to our protocol of limiting each turn in the Q&A to two questions.	q1 loss per share $1.73. valero energy - qtrly operating loss includes estimated excess energy costs of $579 million, or $1.15 per share, related to impacts from winter storm uri. q1 adjusted earnings per share $0.34 excluding items. valero energy - refinery throughput volumes averaged 2.4 million barrels per day in q1 2021, which was 414 thousand barrels per day lower than q1 2020. valero energy - continues to target a long-term total payout ratio between 40 and 50 percent of adjusted net cash provided by operating activities. valero energy - pembroke cogen project is on track to be completed in q3 2021 and port arthur coker project is expected to be completed in 2023.
If you have any questions after reviewing these tables, please feel free to contact our investor relations team after the call. We saw continued improvement in our business during the fourth quarter with refining margins supported by strong product demand. In our system, we ended the year with gasoline demand at pre-pandemic levels and demand for diesel actually higher than pre-pandemic levels. We also saw a significant jet fuel recovery as domestic and international travel opened up, increasing from approximately 60% of pre-pandemic levels at the beginning of the year to approximately 80% at the end of the year. Product inventories were low as a result of the refining capacity rationalization that's taken place in the last two years and weather-related impacts from Winter Storm Uri and Hurricane Ida. On the crude oil side, OPEC+ increased production throughout the year with improving demand, supplying the market primarily with sour crude oils, resulting in wider sour crude oil discounts to Brent crude oil. As a result of all these dynamics, we saw a steady recovery in margins throughout the year, particularly for our complex refining system. In regards to our ethanol segment, ethanol prices were near record highs in the quarter, supported by strong demand and low inventories. Strong margins, coupled with solid operational performance across all of our segments, generated record quarterly operating income for our ethanol segment and record overall fourth quarter earnings for Valero. I am proud to say that 2021 was our best year ever for employee and process safety. In fact, we've set records for process safety for three consecutive years. These milestones are a testament to our long-standing commitment to safe, reliable and environmentally responsible operations. And despite the pandemic and weather-related challenges in 2021, our growth projects remained on track. We started up the Pembroke Cogeneration Unit in the third quarter of '21, which provides an efficient and reliable source of electricity and steam and enhances the refinery's competitiveness. In addition, the Diamond Green Diesel expansion project, DGD 2, commenced operations in the fourth quarter on budget and ahead of schedule. The expansion has since demonstrated production capacity of 410 million gallons per year of renewable diesel as a result of process optimization, above the initial nameplate design capacity of 400 million gallons per year. This expansion brings DGD's total annual renewable diesel capacity to 700 million gallons. Looking ahead, the DGD 3 project at our Port Arthur refinery is progressing ahead of schedule and is now expected to be operational in the first quarter of 2023. With the completion of this 470 million-gallon per year plant, DGD's total annual capacity is expected to be 1.2 billion gallons of renewable diesel and 50 million gallons of renewable naphtha. BlackRock and Navigator's large-scale carbon sequestration project is also progressing on schedule and is still expected to begin start-up activities in late 2024. Valero is expected to be the anchor shipper with 8 ethanol plants connected to this system, which should provide a higher ethanol product margin. The Port Arthur Coker project, which is expected to increase the refinery's utilization rate and improved turnaround efficiency, is expected to be completed in the first half of 2023. On the financial side, the guiding framework underpinning our capital allocation strategy remains unchanged. We remain disciplined in our allocation of capital, which prioritizes a strong balance sheet and an investment-grade credit rating. In 2021, we took measures to reduce Valero's long-term debt by approximately $1.3 billion. We ended the year well capitalized with $4.1 billion of cash and $5.2 billion of available liquidity, excluding cash and our net debt to capitalization was 33%. We continue to honor our commitment to stockholders, defending the dividend across margin cycles and delivering a payout ratio of 50% in 2021. And as recently announced, the board of directors has approved a quarterly dividend of $0.98 per share for the first quarter of 2022. Looking ahead, we remain optimistic on refining margins. with low global light product inventories, strong product demand, global supply tightness due to significant refining capacity rationalization and wider sour crude oil differentials. We also remain optimistic on our low-carbon businesses, which we continue to expand with the growing global demand for lower carbon-intensity products. We've been leaders in the growth of these businesses and maintain a competitive advantage with our operational and technical expertise. In closing, our team's simple strategy of pursuing excellence in operations, deploying capital with an uncompromising focus on returns and honoring our commitment to stockholders has driven our success and positions us well. So with that, Homer, I'll hand the call back to you. For the fourth quarter of 2021, net income attributable to Valero stockholders was $1 billion or $2.46 per share compared to a net loss of $359 million or $0.88 per share for the fourth quarter of 2020. Fourth quarter 2021 adjusted net income attributable to Valero stockholders was also $1 billion or $2.47 per share compared to an adjusted net loss of $429 million or $1.06 per share for the fourth quarter of 2020. For 2021, net income attributable to Valero stockholders was $930 million or $2.27 per share compared to a net loss of $1.4 billion or $3.50 per share in 2020. 2021 adjusted net income attributable to Valero stockholders was $1.2 billion or $2.81 per share compared to an adjusted net loss of $1.3 billion or $3.12 per share in 2020. The refining segment reported $1.3 billion of operating income for the fourth quarter of 2021 compared to a $377 million operating loss for the fourth quarter of 2020. Fourth quarter 2021 adjusted operating income for the refining segment was $1.1 billion compared to an adjusted operating loss of $476 million for the fourth quarter of 2020. Refining throughput volumes in the fourth quarter of 2021 averaged 3 million barrels per day, which was 483,000 barrels per day higher than the fourth quarter of 2020. Throughput capacity utilization was 96% in the fourth quarter of 2021 compared to 81% in the fourth quarter of 2020. Refining cash operating expenses of $4.86 per barrel in the fourth quarter of 2021 were $0.46 per barrel higher than the fourth quarter of 2020, primarily due to higher natural gas prices. The renewable diesel segment operating income was $150 million for the fourth quarter of 2021 compared to $127 million for the fourth quarter of 2020. Adjusted renewable diesel operating income was $152 million for the fourth quarter of 2021. Renewable diesel sales volumes averaged 1.6 million gallons per day in the fourth quarter of 2021, which was 974,000 gallons per day higher than the fourth quarter of 2020. The higher operating income and sales volumes were primarily attributed to the start-up of Diamond Green Diesel expansion project DGD 2 in the fourth quarter. The ethanol segment reported record operating income of $474 million for the fourth quarter of 2021 compared to $15 million for the fourth quarter of 2020. Adjusted operating income for the fourth quarter of 2021 was $475 million compared to $17 million for the fourth quarter of 2020. Ethanol production volumes averaged 4.4 million gallons per day in the fourth quarter of 2021, which was 278,000 gallons per day higher than the fourth quarter of 2020. And as Joe mentioned earlier, the higher operating income was primarily attributed to higher ethanol prices, which were supported by strong demand and low inventories. For the fourth quarter of 2021, G&A expenses were $286 million and net interest expense was $152 million. G&A expenses of $865 million in 2021 were largely in line with our guidance. Depreciation and amortization expense was $598 million and income tax expense was $169 million for the fourth quarter of 2021. The annual effective tax rate was 17% for 2021, which reflects the benefit from the portion of DGD's net income that is not taxable to us. Net cash provided by operating activities was $2.5 billion in the fourth quarter of 2021 and $5.9 billion for the full year. Excluding the favorable impact from the change in working capital of $595 million in the fourth quarter and $2.2 billion in 2021 and the other joint venture members' 50% share of Diamond Green Diesel's net cash provided by operating activities, excluding changes in DGD's working capital, adjusted net cash provided by operating activities was $1.8 billion for the fourth quarter and $3.3 billion for the full year. With regard to investing activities, we made $752 million of total capital investments in the fourth quarter of 2021, of which $353 million was for sustaining the business, including costs for turnarounds, catalysts and regulatory compliance and $399 million was for growing the business. Excluding capital investments attributable to the other joint venture members' 50% share of Diamond Green Diesel and those related to other variable interest entities, capital investments attributable to Valero were $545 million in the fourth quarter of 2021 and $1.8 billion for the year. Moving to financing activities. We returned $401 million to our stockholders in the fourth quarter of 2021 through our dividend and $1.6 billion through dividends in the year, resulting in a 2021 payout ratio of 50% of adjusted net cash provided by operating activities for the year. And our board of directors recently approved a regular quarterly dividend of $0.98 per share, demonstrating our sound financial position and commitment to return cash to our investors. With respect to our balance sheet at year-end, total debt and finance lease obligations were $13.9 billion and cash and cash equivalents were $4.1 billion. The debt-to-capitalization ratio net of cash and cash equivalents was 33%. In the fourth quarter, we completed a series of debt reduction and refinancing transactions that together reduced Valero's long-term debt by $693 million. These debt reduction and refinancing transactions, combined with the redemption of $575 million floating rate senior notes due 2023 in the third quarter, collectively reduced Valero's long-term debt by $1.3 billion. At the end of the year, we had $5.2 billion of available liquidity, excluding cash. We expect capital investments attributable to Valero for 2022 to be approximately $2 billion, which includes expenditures for turnarounds, catalysts and joint venture investments. About 60% of our capital investments is allocated to sustaining the business and 40% to growth. Approximately 50% of our growth capital in 2022 is allocated to expanding our low-carbon businesses. For modeling our first quarter operations, we expect refining throughput volumes to fall within the following ranges: Gulf Coast at 1.66 million to 1.71 million barrels per day, Mid-Continent at 395,000 to 415,000 barrels per day, West Coast at 185,000 to 205,000 barrels per day and North Atlantic at 430,000 to 450,000 barrels per day. We expect refining cash operating expenses in the first quarter to be approximately $4.80 per barrel. With respect to the renewable diesel segment, we expect sales volumes to be approximately 700 million gallons in 2022. Operating expenses in 2022 should be $0.45 per gallon, which includes $0.15 per gallon for noncash costs such as depreciation and amortization. Our ethanol segment is expected to produce 4.2 million gallons per day in the first quarter. Operating expenses should average $0.44 per gallon, which includes $0.05 per gallon for noncash costs such as depreciation and amortization. For the first quarter, net interest expense should be about $150 million and total depreciation and amortization expense should be approximately $600 million. For 2022, we expect G&A expenses, excluding corporate depreciation, to be approximately $870 million. Before we open the call to questions, we again respectfully request the callers adhere to our protocol of limiting each turn in the Q&A to two questions. If you have more than two questions, please rejoin the queue as time permits. Please respect this request to ensure other callers have time to ask their questions.	q4 adjusted earnings per share $2.47. q4 earnings per share $2.46.
As the operator indicated, please limit your Q&A participation to one question. This will help maximize participation during our time together. We appreciate your interest in Vulcan Materials and hope that you and your families continue to be safe and healthy. I want to begin by saying that our performance in the first quarter was a very promising start to the year. Demand in our markets continues to improve and our team executed well as evidenced by our financial results. Adjusted EBITDA, which excludes the gain on sale from our reclaimed quarry in California, was $244 million, up 22% compared to last year. This strong growth was driven in part by a 3% increase in aggregate shipments. Despite weather impacts across Texas and parts of the Southeast in February, we experienced a pickup in shipments and March proved to be a strong month. Residential starts continue to accelerate and highway starts also increased due to improved lettings in the third and fourth quarters of last year. We've experienced an increase in both the number of jobs and the shipping speed in the heavy nonresidential space which is also the most aggregate intensive. And finally, some of the jobs that had been postponed last year have started. With year-over-year improvement across our footprint pricing was the second driver of our EBITDA growth. Freight-adjusted aggregates pricing increased by 2% in the quarter. Adjusted for mix, the increase was 1.3%. This was as expected since we were shipping work that have been bid in the middle of the pandemic when there was uncertainty and a lack of demand visibility. As our 2021 price increases gain traction, we will see pricing improvement throughout the year. The third driver of EBITDA growth and the one most within our control was our exceptional cost performance in the quarter. Aggregate total cost of sales per ton was 2% lower than last year's first quarter. And cash cost of sales per ton declined by 3%. Cost control like this is an accomplishment and requires considerable discipline from our operators. The team focused hard on operational execution. And as a result, all of our operating parameters in the quarries improved year-over-year. We were pleased with the meaningful impact from our four strategic disciplines, which will continue to mature. The most compelling metric, continues to be our strong unit margin gains across the footprint. Aggregates, cash gross profit per ton, increased by 9%. This demonstrates the attractive operational earnings power of our aggregates business, when demand is combined with strong execution on our four strategic disciplines. Overall, our operating results this quarter, helped drive a 90 basis point improvement in our return on invested capital. Suzanne will provide further comments on this and other aspects of our financial performance. Let's now turn to our view of the end markets and then we'll cover how, that influence our outlook for the full year. Broadly speaking, the demand environment improved considerably over the last few months. Construction starts, as measured by Dodge, got better along with other leading indicators, like the Dodge Momentum Index and ABI. Construction employment levels continue to improve as well. Residential construction remains the strongest end market. There is pent-up demand for houses and new subdivisions are being built with more to come. The market fundamentals of low interest rates and reduced supply are still in place, which foreshadows continued growth. Housing starts are growing faster in Vulcan-served markets. The outlook for our nonresidential end markets remains limited. However, our quote activity has increased and leading indicators are improving, which suggest that a turnaround is happening. The strongest nonresidential sector relates to e-commerce and technology and encompasses data centers, warehouses and distribution facilities. According to Dodge, 90% of the growth in this sector will occur in Vulcan-served markets. Majority of non-res starts currently fits within this category, but we believe, a strong residential market combined with an increasingly open economy will drive additional demand in other nonresidential sectors. With respect to highways, state budgets and lettings are progressing as anticipated. We are seeing the improvement in lettings from the second half of 2020, now turning to shipments. The COVID-19 relief funds have provided a backstop for any loss transportation revenues for highways. Our country's leadership continues to work on an infrastructure package. Both parties have proposed substantial increases in highway funding and this is a priority for both the Democrats and the Republicans. To summarize, our view of end markets, demand is improving. We see evidence of this both on the ground with our customers and in the data from leading indicators. As a result, we've upgraded our aggregates volume guidance for 2021 to a range of 1% to 4% growth compared to 2020. Excluding the gain on the sale of the California property, we now expect full year adjusted EBITDA of between $1.38 billion and $1.46 billion. As we look forward to consider opportunities, we have three paths to growth, with higher returns. Those paths are organic growth, M&A and greenfields. I'll take each in turn. First, organic growth is a critical part of any strategy, because it offers the most attractive and compelling value proposition on a risk-adjusted basis. We have the best geographic footprint in the industry and the best operators in the industry but we are not satisfied. Our four strategic disciplines are designed to accelerate this organic growth strategy. And the benefits are clear as we grow our unit profitability. Second, we regularly review an active list of M&A targets. Last year the M&A market basically shut down. But it's reopened this year. We have a long history of making both large and small acquisitions when they are a good strategic fit. Since 2014, we've completed more than two dozen value-enhancing acquisitions in some of the fastest-growing markets in the country. And finally, we had a long and successful history of developing and opening new aggregate locations. This allows us to pinpoint the location of aggregates reserves in growth quarters where there is no acquisition opportunity. Additional benefits include more control over timing of capital investment and not paying a premium for the assets. We like having a balance between organic and inorganic growth. It provides a high degree of flexibility and is an important part of our capital allocation process and our ability to increase our return on invested capital. I'd like to start by highlighting four key areas to consider this quarter. Our aggregates unit profitability expansion, return on invested capital, balance sheet strength and the California land sale. Our aggregates gross profit per ton increased by 12% to $4.82. We believe this is important because improving the operational profitability of existing locations generally comes with limited capital investment as compared to other growth engines. When the improvements are both sustainable and widespread across the footprint, significant value is created. Our strategic disciplines are making an impact and we have a good track record of execution. Over the past three years our compound annual growth rate for gross profit per ton was 7%. The second key area is return on invested capital. As Tom mentioned, the 90 basis point improvement in the quarter pushed our return to 14.8% for the trailing 12 months ended March 31. While a higher returns profile is always good, the way in which the improvement is achieved is also important. As an example, the first quarter's ROIC gain was comprised of a 1% increase in invested capital and a 7% increase in adjusted EBITDA. This further highlights the importance of the unit profitability discussed earlier. Over the past three years, our trailing 12 months ROIC has improved by 280 basis points, driven by a 4% compound annual growth rate in invested capital and an 11% compound annual growth rate in adjusted EBITDA. The third area is the balance sheet. Our balance sheet strength has created significant optionality and flexibility as we consider our capital allocation priorities, our balanced approach to growth and shareholder returns. Our net debt to adjusted EBITDA ratio is 1.4 times, and we have nearly $900 million of cash on the balance sheet. Our debt has a weighted average maturity of 15 years, with no significant maturities in the near-term. And as always, we will continue to operate the business for the long term. We will not rush decisions to invest, just because extra capital is available. The last of the four key areas, I wanted to highlight, was the sale of the reclaimed quarry in Southern California. The sale generated $182 million of net proceeds and a pre-tax gain of $115 million. One of the strengths of our aggregates-focused business are the multiple opportunities to create value, and the life cycle of this quarry demonstrates that well. Now so far on the call, we focused entirely on the aggregates business. So let's shift briefly to non-aggregates. Gross profit in those segments collectively was $5.6 million in the quarter or $2 million less than last year. The severe weather mentioned earlier affected both asphalt volumes in Alabama, Tennessee and Texas, and concrete volumes in Virginia. With respect to the cost of diesel, it really wasn't much of a factor in the quarter, because the unit price of diesel was relatively unchanged from last year's first quarter. For the full year, we now anticipate that the cost of diesel fuel will be a headwind of approximately $25 million, reflecting higher prices since the start of the year. The last time we spoke with you we expected that our effective tax rate for 2021 would be 21%. We now expect the full year rate to be between 23% and 24%, following a 27% rate in the first quarter. The higher rate in Q1 and the revised expectation for the full year resulted from Alabama's recent change in the law, which modified the methodology by which a company apportions income to the state. This change had the effect of reducing our ability to fully utilize certain net operating loss carry-forwards in Alabama. And as a result, we recorded a $14 million charge in the first quarter. We will continue to operate Vulcan for the long-term. This means, staying focused on our strong local execution, driving unit margin expansion, maintaining a strong financial position and improving our returns.	qtrly total revenues $1,068.3 million versus $1,049.2 million. sees 2021 aggregates shipments to increase between 1 percent and 4 percent compared to 2020.
As the operator indicated, please limit your Q&A participation to one question plus a follow-up. This will help maximize participation during our time together. We appreciate your interest in Vulcan Materials Company. We hope you and your families are well and will continue to be safe and healthy. Despite the difficulties caused by the pandemic, our company continues to thrive as a direct result of their efforts. Turning now to the third quarter. Our financial results can be summed up very simply. Our teams delivered another quarter of aggregate unit margin expansion through improved pricing, disciplined operating performances and solid execution. Our aggregate cash gross profit per ton increased by 5% despite an 8% volume decline. Volume was obviously impacted by the pandemic, but also by severe wet weather across the Atlantic Coast, the Southeast and Texas and wildfires on the West Coast. We expanded our unit margins by remaining focused on what we could control and by making sure that we were well positioned to respond to a rapidly changing environment. We've talked about our four strategic disciplines for a number of quarters now, and we believe that they have been a critical part of our success this year. Our commercial excellence and our operational disciplines have been particularly helpful. On the commercial side, our aggregate mix adjusted sales price increased by approximately 3% in the quarter. On a year-to-date basis, mix adjusted pricing increased by 3.5% despite a 4% decline in volume. Operationally, year-over-year, our cash unit cost of sales was flat, both for the quarter and year-to-date. Cost control, operating efficiencies and a tailwind from diesel mitigated the impact of lower aggregate volume. Our four strategic disciplines continue to drive improvement in our unit margins. This is evidenced by our 7% year-to-date improvement in cash gross profit per ton. Suzanne will review the quarter and year-to-date results in more detail shortly, but first, I want to address the demand trends that we're seeing. Certain leading indicators are showing signs of improvement, both sequentially and year-over-year. However, the pace of recovery and the timing of shipments is not certain. Residential construction continues to be the most resilient of our market segments. Starts and permits have rebounded, particularly in our footprint. Single-family housing is leading the way, and we are especially well positioned in our markets to take advantage of this trend. Private nonresidential construction continues to be the most variable in use. Following the drop in the spring, construction starts have remained weak as compared to last year. However, we are encouraged by improvement in certain leading indicators, which could point to future growth. Dodge Data states that warehouses and distribution centers, now the largest nonresidential starts category continue to see growth. As a leading supplier in the majority of our markets, we are well positioned to serve all types of nonresidential business regardless of the category. According to Dodge, Vulcan-served states are expected to account for approximately 90% of the growth in warehouses and distribution centers over the next two years. In addition, nonresidential demand for commercial buildings, like gas stations and grocery stores has historically followed the build-out of new housing subdivisions. We could expect this type of traditional nonresidential construction to follow the growth we're experiencing in residential demand. As we think about these current trends, it's important to keep in mind that unlike the great recession of 2008, nonresidential construction going into the pandemic was not overbuilt. The uncertainty surrounding the pandemic has weighed more heavily on this segment. With respect to public highway construction, most Vulcan-served states have flat to increasing DOT budgets for their fiscal year 2021 versus 2020. This, coupled with a one-year extension of the FAST Act bodes well for highway demand. Now that state DOTs have greater clarity around highway revenues, lettings are returning to higher pre-COVID levels and are projected to continue to be consistent with state DOT budgets in 2021. Timing of shipments to highway projects may start a little slow early in 2021 due to states conservative approaches to lettings earlier this year, but will pick up as the year progresses. As a more recent data point, aggregate shipments in the month of October were down 5% due to one less shipping day. While one month doesn't constitute a trend, we were still pleased with the outcome and attribute this performance to better weather and pent-up demand from the third quarter. As we consider the remainder of 2020, we now believe we have sufficient near-term visibility to provide guidance for the full year. We expect that our 2020 adjusted EBITDA will range between $1.285 billion to $1.315 billion. This guidance range is predicated on no major changes in COVID-19 shelter-in-place restrictions, it also assumes our normal weather pattern. With respect to 2021, we are in the midst of our budget season and still have work to do. Visibility continues to improve. Therefore, we expect to be able to provide 2021 guidance in February. The key point to remember here is, while the pandemic has created uncertainty, our view of the underlying fundamentals of our business remains unchanged. Our aggregates-focused business is sound, resilient and adaptable to changing market conditions. We have a history of good operational execution, and this increases our confidence in our ability to compound unit margins. We're in the right geographies. Our balance sheet and liquidity position are a great source of strength and flexibility and will support our operational initiatives and our growth plans. Going forward, we will remain focused on the things that we can control, keeping our employees safe and healthy, taking good care of our customers and ensuring strong execution on our operating disciplines. We have confidence in our future success. And now I'll hand the call over to Suzanne for additional comments. I'll cover a few financial highlights and then comment briefly on our balance sheet and liquidity position. Our adjusted EBITDA for the third quarter was $403 million. Adjusted EBITDA margins increased by 210 basis points as compared to the prior year despite an 8% decline in total revenues. Significant contributors to our quarterly EBITDA margin improvement were: first, the aggregates unit margin expansion that Tom discussed earlier; and second, a 6% or $5 million year-over-year reduction in SAG expense. These metrics have improved on a year-to-date basis as well. Our aggregates cash gross profit per ton increased by 7% to $7.15, while aggregates volume decreased by 4%. SAG expense for the nine months declined by 5% or $14 million due to the execution of cost reduction initiatives and general cost control. Now I'd like to provide a little color on our quarterly segment performance. Starting with aggregates, volumes declined in most of our markets, reflecting weaker demand resulting from the pandemic. In addition, the key markets that Tom called out were particularly affected by severe weather as we experienced a record-setting number of named storms. California shipments were impacted by wildfires and resulting power outages, which interrupted the supply of cement or ready-mix concrete production. This limited construction activity. Aggregate sales price growth in the quarter of nearly 3% on a mix adjusted basis was widespread across our footprint, reflecting a positive pricing environment. The combination of sales price growth and good cost control more than offset reduced volume. And as a result, virtually all of our markets improved their respective unit profitability. Moving to our nonaggregates segments. Asphalt gross profit improved by $3 million as compared to last year's quarter. A 13% volume decline was more than offset by improved pricing and lower liquid asphalt costs. The concrete segment's gross profit was $12 million, a reduction of $3 million versus the prior year. Shipments decreased by 11% due to wet weather, particularly in Virginia, our largest concrete market. California's volume was also less than last year's third quarter due to the factors previously mentioned. On a year-over-year basis, we were particularly pleased with our improving return on investment profile. For the trailing 12 months ended September 30, ROI was 14.2%. And consistent with past practice, this was calculated on an adjusted EBITDA basis. Turning now to the balance sheet and liquidity. We took further steps this quarter to enhance our position. We renewed our revolving credit facility for another five years and took the opportunity to increase its size from $750 million to $1 billion. All other terms were substantially similar to those contained in the previous facility. At the end of the quarter, our leverage ratio was 1.7 times on a net debt-to-EBITDA basis, reflecting $1.1 billion of cash on hand. Approximately $500 million of this cash on hand will be used to repay a debt maturity coming due in March 2021. And at September 30, our available liquidity was a very healthy $2 billion. We also generated a robust $1.1 billion of operating cash flow in the trailing 12-month period. That represents a 23% increase as compared to the previous period. We have been and will continue to be disciplined about how we invest our cash and therefore, our capital allocation priorities are unchanged. Capital expenditures for the nine months totaled $229 million. And we now expect to spend between $300 million and $350 million this year, a modest increase from our prior guidance of $275 million to $325 million. For making marked progress toward our longer-term goal of $9 cash gross profit per ton and for driving our improved results through our four strategic disciplines.	qtrly total revenues $1,309.9 million versus $ 1,418.8 million. expect full-year 2020 adjusted ebitda of $1.285 billion to $1.315 billion.
We appreciate your interest in Vulcan Materials Company, and hope that you and your families continue to be safe and healthy. This is our first earnings call since closing the U.S. Concrete acquisition in late August. Therefore, Id like to begin by welcoming the former U.S. Concrete employees and customers to our Vulcan family. Despite these challenges, our team managed our controllable costs, move pricing higher in all segments and importantly, expanded our aggregates unit profitability for the 13th consecutive quarter. We generated $418 million of adjusted EBITDA this quarter, an increase of 4% as compared to last year. Profitability for the quarter was held back by factors I mentioned earlier, energy inflation was a significant $30 million headwind. Unit diesel prices were up over 50%, leading to $14 million of additional expense. The cost of liquid asphalt was over $100 per ton higher than last year. This sharp increase impacted our results by $16 million. And finally, labor constraints, especially for truck drivers, have caused delays and inefficiencies in our operations as well as those of our customers. Even with these headwinds, we improved our aggregate cash gross profit per ton by 3% and to $7.74. This was achieved through consistent execution of our four strategic disciplines which helped to drive volume growth, higher pricing and improved operating efficiencies. This strong performance and the momentum it provides sets us up well for 22, especially with respect to pricing. Total aggregate volume, including U.S. Concrete, increased by 8% versus last years quarter. On a same-store basis, volume was up 5%. This reflects continued improvement in demand across all end markets. The pricing environment in aggregates continues to be very positive across our footprint. Same-store prices were up 3.1% in the quarter and mix adjusted prices increased by 3.5%. We saw our early price increases gain traction and as a result, year-over-year average selling prices improved sequentially each quarter this year. Although inflationary pressures can create short- to medium-term headwinds, the combination of inflation and improving visibility to demand has and will continue to create a favorable environment for price increases. Operating efficiencies and disciplined cost control helped to offset some of the higher input costs we experienced. On a same-store basis, our aggregates unit cost of sales in the quarter increased by only 1.7% as compared to last year. Now excluding the diesel effect, unit cost of sales actually decreased by 1%. While costs will be lumpy, we have delivered comparable results for the trailing 12-month period. This solid performance in aggregates helped to more than offset reduced profitability in non-aggregates segment. Our Asphalt business was notably affected by both higher energy costs and wet weather. Quarterly gross profit in the segment fell from $30 million to $7 million. Higher liquid asphalt costs accounted for $16 million of this difference. We also experienced a rise in natural gas prices, which in turn impacted our plant production costs. Asphalt volume declined by 8% as volume growth in California was more than offset by lower Arizona volumes due to extremely wet weather. Average selling prices improved by almost 2% year-over-year and better than 2% sequentially, evidence that pricing actions are beginning to ease some of the illiquid asphalt inflation. I would expect continued price improvement as we pass along higher costs. In the Concrete segment, gross profit increased by 18%, reflecting our ownership of U.S. Concrete for one month. Same-store volumes declined by 7% due to the completion of large projects in Virginia and the availability of drivers to make up for any lost shipping days. For the quarter, same-store prices increased by 2%. Turning now to the demand picture. The story is relatively unchanged from the second quarter. Demand has improved across all of our major end markets as well as geographies. The residential end-use has shown continued strength with solid starts in single-family housing. Multifamily starts have also performed well. With respect to the nonresidential end market, improvement continues at a number of leading indicators we track. From its low point early this year, starts have consistently improved, returning to growth in recent months. The level of highway starts are up as states have moved back to more normal funding levels with Vulcan markets outpacing other markets. We look forward to the enactment of the bipartisan infrastructure bill and the significant impact on volumes for years to come. Now looking forward, I want to briefly touch on our growth strategy and give a very preliminary view of 2022. As we shared on past calls, we have three paths to growth. These three are organic growth, M&A and greenfields. Earnings growth in the underlying business is at the core of our growth strategy because it provides the most attractive and compelling value proposition on a risk-adjusted basis. The benefits of this focus are clear as we expand our industry-leading unit profitability despite the macro challenges we may face from time to time. We look for strategic opportunities that naturally complement our principal aggregates business. Given our leading market position, we have visibility to all deals that come to the market. The key is for us to be disciplined as we consider which deals to pursue. All opportunities are not created equal, and we want to do the deals that create the most value over time. And as the final pillar to our growth strategy is the development of greenfield sites. There are times when an acquisition target is not available in a particular growth quarter. If that is the case, we turn to new greenfield sites, and we have a long successful history of developing them. During this quarter, we completed the U.S. Concrete acquisition and were excited about the strategic fit and how it naturally complements our principal aggregates business in California, Texas and Virginia and gives us access to new platforms in New York and New Jersey. Already, our teams are working together to identify strategic opportunities. As you would expect, we are taking a thoughtful approach to integration to ensure that we capture all available synergies. Its still early days on the integration. We intend to give you a more detailed briefing in February, but were pleased with the wins weve seen so far. We are confident in our ability to generate at least $50 million of synergies on a 12-month run basis beginning midyear next year, when most of the integration is complete, but more to come. Suzanne will cover some additional highlights of the quarter and share our latest financial view on how we expect to finish 2021. The 2021 demand and inflationary environment sets us up well as we head into 2022. A key to our pricing strategy, were starting early in the spring with announced price increases. In certain markets, we launched further increases. These increases are evident in our sequential quarterly pricing growth. Already, we are discussing 2022 pricing expectations with customers. Clearly, we need to see where those conversations lead. But at this stage, I would be surprised if next years price increases are not at least 5%. The demand picture also looks good leaning into 2022, although we are watching the labor situation closely. If labor constraints do continue, its important to remember that the work is still there. It may just proceed at a slower pace. Effectively, extending the recovery and allowing us the opportunity to compound price, control costs and still grow earnings. Weve covered the key financial and operational highlights already. So Id like to speak to the following topics: First, our balance sheet strength and capital allocation priorities; second, our return on invested capital; and finally, our financial guidance for 2021. With respect to the balance sheet, we will continue to prioritize sensible leverage and financial flexibility in order to support our capital allocation strategy and maintain our investment-grade rating. The structure of our debt is sound with long maturities that make sense for our business. Due to our strong cash generation, we were able to reduce our net debt-to-EBITDA leverage ratio to 2.7 times following the U.S. Concrete acquisition. This is just above our stated range of two to 2.5 times and we will be focused on getting back within that range in the near term. Our capital allocation priorities remain unchanged and the consistent application of those while maintaining a sensible leverage range has allowed us to improve our return on investment over the past three years. For Legacy Vulcan, the return was 14.7%, up 240 basis points from three years ago, with the inclusion of one month of U.S. Concrete earnings, and a 1-quarter impact of the acquisition on average invested capital, our return was 14.2%. Well continue to focus on the sequential improvement of returns. Our guidance incorporates U.S. Concretes expected EBITDA contribution since acquisition as well as recent trends in demand, price and costs. Our adjusted EBITDA guidance range for the full year is now $1.43 billion to $1.46 billion. This includes $50 million to $60 million of EBITDA from the acquisition, but excludes $115 million gain on a land sale completed in the first quarter. Im sure there will be a number of questions on business trends and the outlook in the Q&A section. Our people are what makes Vulcan better every day. We have and will always operate Vulcan for the long term. This means a strong emphasis on keeping our people safe and continuously improving our already strong culture. Local execution is key to driving improvements in our business, particularly around our strategic disciplines. As we move forward, we will seek to maximize synergies with U.S. Concrete. As always, for Vulcan, we will maximize unit margin expansion through our four strategic disciplines. And remember, improving financial returns is of paramount importance.	qtrly total revenues were $1.52 billion, an increase of 16 percent compared to prior year.
We appreciate your interest in Vulcan Materials Company. We hope you and your families are and will continue to be safe and healthy. 2020 represented another year of strong earnings growth for Vulcan, despite the many challenges associated with the pandemic. Our results demonstrated the strength, flexibility and resilient nature of our aggregates business, but most of all 2020 demonstrated the commitment of Vulcan employees as they faced uncertainty and had to make adjustments, both in the professional and their personal lives. Our team stayed focus on operating safely, servicing our customers and making progress on our four strategic disciplines. Congratulations on a job well done. In a few minutes, Suzanne will share some fourth quarter highlights with you. But first, I'd like to summarize our full-year 2020 accomplishments, and discuss broad themes and where we are headed. Our full-year financial results were strong. Total company adjusted EBITDA increased 4% to $1.324 billion and EBITDA margin expanded by 150 basis points. Cash generation continued to be strong with operating cash flows increasing by 9% to $1.1 billion. And finally, one of our principal measures, return on invested capital improved by 40 basis points to 14.3%. These results were particularly noteworthy considering our annual aggregates volume declined by 3% as compared to 2019. Higher average selling prices and effective cost control were key drivers of this performance. Aggregates pricing improved by just over 3% on both a reported and mix-adjusted basis. Importantly, these pricing gains were widespread across our footprint. Our total cost of sales per ton increased by 2%, while our unit cash cost of sales, which is more controllable, only grew by 1%. This led to a 5.5% gain in our aggregates cash gross profit per ton. At $7.11, we are making good progress toward our longer term goal of $9 per ton. This improvement in unit profitability was supported by our four strategic disciplines, commercial excellence, operations excellence, logistics innovation and strategic sourcing. We also experienced improvements in each of our non-aggregates business segments. Collectively, gross profit improved 12% across these three segments. Unit profitability increased in both asphalt and country. Asphalt gross profit increased $12 million or 19% over the prior year, even though volumes declined 7%. This improvement in profitability resulted from stable sales prices and lower liquid asphalt cost. Our ready-mix concrete unit profitability increased 8%. Average selling prices increased by 2% and volume declined by 5%, primarily as a result of the cement shortages in California. The higher profitability in each of our business segments and our improving overall EBITDA margin set us up well for 2021. We are well positioned to take advantage of market opportunities in our geographic footprint. The demand environment is also improving, particularly in residential construction and highway construction. Let's take each market segment in turn. Residential continues to show strength, especially in single family. The market fundamentals of low interest rates, and reduced supply suggests that the growth will continue. This represents a clear opportunity for us as both permits and starts are growing faster in Vulcan-served markets. Highway lettings and awards returned to growth in the fourth quarter. State DOT budgets have stabilized, with most of our states showing budgets flat to up from 2020. The caution in this market segment is that it will require time to turn awards into shipments given the mid-year 2020 loan awards due to the pandemic. While timing of shipments is a variable, we will see improvement in highway shipments throughout 2021. As we said in the third quarter, the near-term outlook for the nonresidential construction sector provides the lease forward visibility. Dodge construction starts are still down year-over-year, but certainly, indicators are beginning to improve, perhaps signaling that potential improvement is just around the corner. Weakness lingers in the office space and hospitality related sectors, but there is growth in the heavier nonresidential categories like distribution facilities and data centers. In fact, warehouses are now the largest nonresidential category as measured by square feet and represent approximately one-third of construction awards. These projects are typically more aggregate intensive, and 90% of the near-term growth in this sector will occur in Vulcan-served states according to Dodge. The Administration and Congress are committed to an infrastructure-led economic recovery, and have indicated that they will focus on an infrastructure bill next, after the COVID-19 relief package. Clearly, our leading market positions will mean broad participation in infrastructure-related spending. We believe demand for aggregates will continue to improve as we progress through 2021. That being said, the timing of shipments to highway projects and nonresidential construction projects remains a variable. We consider these factors as we thought about our 2021 prospects and guidance. That said, we expect our adjusted EBITDA to be between $1.34 billion and $1.44 billion. We anticipate 2021 aggregates shipments could follow a range of a 2% decline to a 2% increase as compared to 2020. Regardless of volume swings, we will improve our full-year unit profitability in Aggregates. We expect aggregates freight-adjusted average selling prices to increase by 2% to 4% in 2021. And gross profit in our non-aggregates segments is forecast to improve by mid-single to mid-high single digits. To sum it up, 2021 will turn out to be a year of solid earnings growth. Before I discuss fourth quarter 2020 highlights, I'll fill in some additional details on our 2021 guidance. We made significant reductions in our selling, general and administrative expenses in 2020. We expect to further leverage our overhead costs in 2021 and anticipate our SG&A expenses to be between $365 million and $375 million. We anticipate interest expense to approximate $130 million for the full year. Barring any changes to federal tax law, our effective tax rate will be about 21%. The category of depreciation, depletion, accretion and amortization expenses will be around $400 million. Now with respect to capital expenditures, we invested $361 million in 2020. We expect to spend between $450 million and $475 million 2021. This includes fully restarting and advancing growth projects that were delayed last spring, such as the opening of a new quarry in California, capacity expansion at other quarries, and improvements to our logistics and distribution network. It also reflects a catch-up of operating capex that was postponed at the start of the pandemic. As always, we'll carefully monitor the economic environment and adjust our capital spending as necessary. As you model, you'll note that the combination of our assumptions for 2021 leads to another healthy year of cash generation. I'll now give a little color on the fourth quarter of 2020. Adjusted EBITDA was $311 million, up 4% from last year's fourth quarter. Aggregates volume declined by 1%, while reported pricing increased by 3% and mix adjusted pricing by 2%. Costs were slightly higher in the quarter due to additional stripping costs in advance of future shipping growth and the timing of repairs. There were two items that affected the comparability of our fully diluted earnings per share in both the fourth quarter and full-year 2020 as compared to those same periods in 2019. First, we recorded a one-time non-cash pension settlement charge of $23 million or $0.13 per diluted share in connection with the voluntary lump sum distribution of benefits to certain fully vested plan participants. This liability management action will benefit future pension expense and funding requirements. And second, the tax rate for fourth quarter and full-year 2020 was higher than in the comparable periods in 2019. Last year, the tax benefits associated with share-based compensation and R&D credits were greater than the same benefits in 2020. The resulting earnings per share effect was $0.04 per diluted share in the fourth quarter and $0.18 per diluted share for the full year. Moving on to the balance sheet, our financial position remains very strong with a weighted average debt maturity of 13 years and a weighted average interest rate of 4%. Our net debt to EBITDA leverage ratio was 1.6 times as of December 31, reflecting $1.2 billion of cash on hand. Approximately $500 million of this cash will be used to repay a debt maturity coming due next month. As Tom mentioned, our cash flow was robust in 2020 and contributed to year-over-year leverage reduction. Due to the uncertainty surrounding the pandemic and the resulting slowdown in economic activity, M&A was lighter than usual in 2020. We returned $206 million to shareholders through increased dividends and share repurchases. Our capital allocation priorities, which have helped to drive an improvement of 220 basis points and our return on invested capital over the last three years, remain unchanged. We will continue to operate Vulcan for the long term, and our focus on building an even stronger and more profitable business. We know that our leading market positions and our aggregates-focused business are strengths, along with our strong balance sheet. When combined with the execution capabilities that we demonstrated in 2020, as well as solid long-term fundamentals, we are excited about our future. While there may be challenges in 2021, we have confidence in its potential.	qtrly total revenue $ 1,175.1 million versus $ 1,186.2 million. in 2021, expects to spend between $450 million and $475 million on capital expenditures. sees 2021 aggregates shipments down 2 percent to up 2 percent versus 2020. sees year-over-year aggregates freight-adjusted price increase of 2 to 4 percent in 2021.
Avner will review our financial performance and provide trends and key assumptions for the balance of 2021 with closing remarks from Steve. This will be followed by Q&A. A replay of today's call will be available for the next seven days. I would now like to call over to our President and Chief Executive Officer, Steve Kaniewski. Before we recap our second quarter results, I would like to share some opening comments. Like many companies, we have faced unprecedented levels of cost inflation, especially raw materials and transportation since the beginning of the year. These levels are pervasive and must be accounted for in-market pricing. So, it has been an imperative for us to quickly increase prices globally across all of our businesses. Current economic trends lead us to believe that inflation will not mitigate in the near term, especially for durable goods and we will continue to take additional pricing actions in all segments as needed while inflationary pressures continue. For example, in North America, Irrigation, this year we've raised price five times on irrigation systems, totaling more than 30% inclusive of upcoming increases. And then Utility, utilizing our pricing mechanisms, we've raised price seven times on steel monopoles. As we have demonstrated over the past few years, price leadership is a strategic priority for us and will continue to be in all of our served markets. I want to commend them on the improvement in ship complete and on-time metrics, even as our business is accelerating. We're proud of our team's persistent focus and we expect to continue building on the strong momentum going forward. Record sales of $894.6 million increased $205.8 million or nearly 30% compared to last year, an increase more than 26% on a constant currency basis. Sales growth was realized in all segments, most specifically in Irrigation and Utility Support Structures. Starting with Utility, sales of $267.9 million grew $36.5 million or 15.8% compared to last year. Higher volumes were driven by strong broad-based demand from ongoing investments in grid hardening and modernization, as well as renewable energy generation. Moving to Engineered Support Structures, record sales of $269.4 million increased $16 million or 6.3% compared to last year. Favorable currency and pricing impacts as well as sales growth in wireless communication products and components were slightly offset by anticipated lower North American transportation market volumes. Global lighting and transportation sales grew 3.3% as pricing improved in all regions, and international markets benefited from increasing stimulus and infrastructure investments, especially in Europe and Australia. Wireless communication products and components sales grew 7.2% compared to last year. Carrier spending and support of 5G build-outs continues to drive strong demand globally, as evidenced by significantly higher sales of our small cell integrated products. Favorable pricing also contributed to sales growth. I want to take a moment to congratulate our ESS team on delivering a record quarter of sales in operating income. I'm especially proud of our commercial teams for their demonstrated price leadership during this inflationary environment. Turning to Coatings, sales of $98.2 million grew $18.2 million or 22.7% compared to last year and improved sequentially from last quarter due to improving end market demand, favorable pricing and currency impacts. During second quarter, we commenced operations at our new greenfield Coatings facility near Pittsburgh, Pennsylvania, built with enhanced processes to generate less heat and humidity and providing additional recycling opportunities. This facility aligns well with our ESG principles while serving the growing demand for new infrastructure in this region. Moving to Irrigation, record global sales of $282 million grew $131.3 million or 87.2% compared to last year with sales growth across all served markets, including more than 35% growth in our technology sales. Higher volumes and favorable pricing were driven by the continued strength of Ag market fundamentals and deliveries for the large Egypt project. In North America, sales of $156.1 million grew 57.6% year-over-year. Strong market fundamentals and improved net farm income projections continue to positively impact farmer sentiment generating strong order flow. Significantly higher volumes, higher average selling prices and higher industrial tubing sales, all contributed to sales growth. International sales of $125.9 million grew 1.4 times compared to last year, led by the ongoing delivery of the Egypt project, strong European market demand and record sales in Brazil. Our sales through the second quarter have exceeded full-year 2020 revenue, a testament to our market leadership in this region. Regarding our project pipeline in Africa, we recently were awarded more than $20 million of additional projects from new customers in Egypt, Sudan and Rwanda demonstrating our market leadership, global operations footprint and project management capabilities. Turning to Slide 5, during the quarter, we completed the acquisition of Prospera Technologies, an award winning global leader in AI and machine learning. For those who attended our virtual Investor Day in May, you will recall how we outlined our strategic pillars for long-term profitable growth. Accelerating innovation through investments in recurring revenue services is one of the critical components of our industrial tech growth strategy. Through this acquisition, together Valmont and Prospera have created the most global vertically integrated AI company in agriculture, immediately providing highly differentiated solution focused on in-season crop performance that is able to go beyond traditional irrigated acres. No one else in the industry can offer this kind of solution. Prospera brings advance agronomy and unprecedented visibility to the field. Their technology is currently being used on over 5,300 fields on a variety of crops including corn, soybeans, potatoes, wheat, onions, alfalfa and tomatoes. Growers are very excited about this technology as evidenced by strong adoption rates and the critical need for growers to reduce inputs while increasing yields, aligning well with our ESG principles of conserving resources and improving life. Through Prospera solution, vision and talented team, we are moving to the next stage of agricultural development. Today, approximately half of our irrigation technology sales are generated from recurring revenue services. With this acquisition, we expect those particular sales to grow more than 50% per year over the next three to five years. We also expect this acquisition to be accretive to the segment beginning in 2023, as we continue investing in our in-season data services. Integration is going well and we plan to share more on our accelerated market growth strategy in future quarters. Additionally, in today's market, the war for talent is pervasive and competitive. Prospera brings the strongest team in the industry and we are fortunate to have 100 highly talented and motivated employees on board, including experts in data science and machine learning. As you can tell, I'm very excited about this acquisition. It builds upon our demonstrated success over the past few years as we move forward together as one company. We also completed the acquisition of PivoTrac, the subscription based AgTech company that provides remote sensing and monitoring solutions for the southwest U.S. market, helping grow our technology sales to $50 million year-to-date. Turning to Slide 6, our solar business is another area where we are accelerating growth and new product innovation while supporting our sustainability commitments. During Investor Day, we talked about solar growth opportunities in both utility and agriculture and I'm very excited to see our growing pipeline of projects in both end markets. Our backlog of utility-scale and distributed generation projects has been increasing as we expand the solution globally. In the second quarter, we were awarded projects totaling $47 million. Additionally, over the past 18 months, we received more than 30 orders for the North American market. With our industry-recognized class of one status and the benefits of our scale and global supply chain, we're uniquely positioned to help support global customers with their renewable energy goals. Our Solar Solutions are also driving accelerated growth in agricultural markets. In the second quarter, we were awarded three projects, totaling $25 million. We've already completed several others in Sun Belt regions like Brazil and Sudan and our planning an official North American market launch this fall at the Husker Harvest Days farm event. We are also partnering with large global food producers to help them achieve their own ESG goals. Working together with our Utility Solar team and world-class Valley dealer network, we have formed a global cross-functional team committed to delivering integrated solutions to support Ag players in their markets. We're very excited about this growth potential. Turning to Slide 7. At our Investor Day, I talked about several of our ESG initiatives and highlighted the many ways that our products and services conserve resources and improve life and help build a more sustainable world. As we said before, ESG is a strategic priority for us. Our environment and social quality scores have improved significantly this year from a 6 to a 2 for environment and from a 6 to a 3 for social, while governance has held steady at a solid 2. While this is a continuous journey, we are proud of the progress we have made so far. I want to congratulate our teams and business partners who are strengthening our commitment to grow and innovation as a company with ESG in mind. Turning to Slide 9 and second quarter results. Operating income of $90.9 million or 10% of sales grew $25.2 million or 38% compared to last year driven by higher volumes in irrigation, improved operating performance and a favorable pricing notably in Engineered Support Structures. Diluted earnings per share of $3.06 grew more than 50% compared to last year, primarily driven by very strong operating income and a more favorable tax rate of 22.5%. This rate was realized through the execution of certain tax planning strategies. Turning to the segments. On Slide 10, in Utility Support Structures, operating income of $21.2 million or 7.9% of sales decreased $4.1 million or 300 basis points compared to last year. Strong volume, increased pricing and improved operational performance were more than offset by the ongoing impact of rapidly rising raw material costs during the quarter, which our pricing mechanisms did not allow us to recover. Moving to Slide 11 in Engineered Support Structures. Record operating income of $31.9 million or 11.9% of sales increased $9 million or 290 basis points compared to last year. We're extremely pleased with the results from deliberate proactive pricing actions taken by our commercial teams to more than offset the impact of rapid cost inflation. We are also recognizing the benefits of previous restructuring actions. Additionally, our operations team continue to drive performance improvement across the segment through improved productivity and product quality and better ship complete and on-time delivery metrics. Turning to Slide 12. In the Coatings segment, operating income of $14.7 million or 14.9% of sales was $4.3 million or 190 basis points higher compared to last year. Higher volumes, favorable pricing and operational efficiencies more than offset the impact of raw material cost inflation. Moving to Slide 13. In the Irrigation segment, operating income of $42.9 million or 15.2% of sales nearly doubled compared to last year and was 80 basis points higher year-over-year. Significantly, higher volumes and favorable pricing were slightly offset by higher R&D expense for strategic technology growth investments, including product development. Turning to cash flow on Slide 14. We delivered positive operating cash flows of $37 million and positive free cash flow this quarter despite continued inflationary pressures, increasing our working capital needs. This quarter we closed on Prospera acquisition for a purchase price of $300 million, funded through a combination of cash on hand and short-term borrowings on our revolving credit facility. We also acquired 100% of the assets of PivoTrac for $12.5 million, funded by cash on hand. As we stated in prior quarters, rapid raw material inflation can create short-term impacts on cash flows. The current market outlook indicates that general inflationary trends may not subside in 2021, so we would expect some continued short-term impacts. We expect working capital levels and inventory to remain elevated to help us mitigate supply chain disruptions and opportunistically lock in better raw material pricing. Accounts receivable will also meaningfully increase in line with sales growth. As our historical results have shown, we will see improvements in working capital as inflation subside. Turning to Slide 15 for a summary of capital deployment. Capital spending in first half of 2021 was $49 million and we returned $42 million of capital to shareholders through dividends and share repurchases, ending the quarter with just over $199 million of cash. Moving now to Slide 16. Our balance sheet remains strong with no significant long-term debt maturities until 2044. Our leverage ratio of total debt to adjusted EBITDA of 2.3 times remains within our desired range of 1.5 times to 2.5 times. We are increasing sales and earnings per share guidance for fiscal 2021. Net sales are now estimated to grow 16% to 19% year-over-year driven primarily by very strong agricultural market fundamentals. Further, we now expect Irrigation segment sales to grow 45% to 50% year-over-year and continue to assume a foreign currency translation benefit of 2% of net sales. 2021 adjusted earnings per share is now estimated to be between $10.40 and $11.10. I want to take a moment to discuss the rationale for providing an adjusted earning outlook going forward. As a technology company, the cost structure of Prospera is very different than any acquisition in Valmont's history, including a significant restricted stock grant for talent retention purposes. We have also acquired intangibles technology assets. We believe that by excluding Prospera's intangible asset amortization and share-based compensation in the adjusted financials, the metrics will provide a better comparison a future Irrigation segment performance as compared to historical results. Other metrics and assumptions for 2021 are also summarized on the slide and in the release. Turning to our second half 2021 Segment outlook on Slide 18. In Utility Support Structures, we expect a meaningful sequential improvement to the quality of earnings, beginning in the third quarter driven by margin improvement as pricing becomes more aligned with steel cost inflation. Moving to Engineered Support Structures, we expect continued short-term softness in North American transportation market and improved demand in commercial lighting. Demand for wireless communication products and components remains strong and we expect sales growth in line with expected market growth of 15% to 20%. Moving to Coatings, end market demand tends to correlate closely to general economic trends. We are focused on pricing excellence and providing value to our customers. Moving to Irrigation, we expect a very strong year 45% to 50% sales growth based on strength in global underlying Ag fundamentals, the estimated timing of deliveries of the large Egypt project and another record sales year in Brazil. A couple of reminders that I want to mention for this segment. The first is that the third quarter is a lower sales quarter compared to the rest of the year due to normal business seasonality. Second, deliveries of the large Egypt project began in fourth quarter 2020, which will affect year-over-year growth comparisons, and as Steve mentioned earlier, we have been consistently raising prices to offset inflationary pressures. Turning to Slide 19 and the long-term drivers of our segments. Overall, we continue to see strong demand and positive momentum across all businesses, evidenced by backlog of more than $1.3 billion at the end of second quarter and the demand drivers are in place to sustain this momentum into 2022. Like many others, we are closely monitoring the COVID Delta variant and continue to follow state and local regulations to keep our employees and customers safe. At present, government mandated shutdowns in Malaysia, have led to the temporary closure of three of our small facilities there. The expected impacts from these closures have been included in our full year financial outlook. Turning to Slide 20. In summary, I'm very pleased with our strong second quarter results and our team's ability to navigate and capitalize on challenging market dynamics. We believe this demonstrates the strength and sustainability of our business and long-term strategy, favorable end market trends and strong price leadership in the marketplace. As we discussed at our Investor Day, we remain focused on the execution of our strategy, which is fueled by our dedicated and talented team of 10,000 employees and our differentiated business model. Through our acquisition of Prospera Technologies and PivoTrac, we are accelerating growth through investments in innovation, technology and IoT building on our strategy to grow recurring revenue services. Finally, we're very positive on the year as demonstrated by our updated financial outlook and are poised and well positioned to capture growth and drive shareholder value in the future.	q2 revenue $894.6 million . q2 adjusted earnings per share $3.06. sees fy adjusted earnings per share $10.40 to $11.10. now expects full-year net sales to increase 16% to 19%, and irrigation segment sales to increase 45% to 50%. valmont - in utility support structures unit, sees meaningful sequential margin improvement in h2 as pricing aligns more with steel cost inflation. q2 revenue $90.9 million. valmont industries - expect meaningful sequential margin improvement in second half of 2021 as pricing becomes more aligned with steel cost inflation.
Avner will review our financial performance and provide an outlook for the balance of 2021 with closing remarks from Steve. This will be followed by Q&A. A replay of today's call will be available for the next seven days. It will also be read in full at the end of today's call. Today, I would like to begin by sharing some opening comments and then provide a brief overview of the quarter. Before I do that, I want to take a moment to recognize the contributions of Walter Scott, Jr., who served on our Board for more than 40 years and passed away late last month. Walter was an incredible individual whose wisdom and leadership were critical to Valmont's success over the years. His loss is felt deeply by those who knew him and the entire Omaha community. Walter's counsel, kindness and mentorship will truly be missed by all of us at Valmont. Moving on to the business. Our strong performance this quarter, once again, demonstrated the solid demand across our businesses and the consistent execution of our growth strategies, even amid a challenging global environment. Like most others, we have safety impacts of broad-based inflation, the COVID-19 Delta variant, and labor and supply chain disruptions. Government mandated lockdowns in Australia and workforce quarantines in North America, including Mexico and the Southeast United States, impacted certain utility and coatings facilities. Supply chain disruptions affect the timing of some shipments in our Irrigation and Solar businesses. Despite this, we delivered a strong quarter of growth and profitability. Our commercial and operations teams are managing exceptionally well through these unique dynamics of focus and perseverance, while continuing to prioritize employee safety and serve our customers. I'm extremely proud of our team's execution throughout this year. Record third quarter sales of $868.8 million increased more than 18% compared to last year. Sales growth was realized in all segments led by higher pricing and strong broad-based market demand with particularly substantial sales growth in Irrigation. Moving to the segments and starting with Utility. Sales of $276.5 million grew slightly compared to last year. A significantly higher pricing and higher volumes were mostly offset by renewable energy projects that did not repeat or that were pushed into future quarters due to customers' supply chain disruptions. North American utilities have been increasing their planned investments in transmission and distribution projects, even exceeding recent years of higher capital spending. Further, proposed capacity additions in the renewable energy sector are favorable demand drivers across our Utility business. We see strong demand continuing, as both utilities and developers have been increasing their forecast of additional projects over the next several years to comply with mandates to increase renewable energy generation. Moving to Engineered Support Structures. Sales of $281.1 million increased 10% year-over-year, led by favorable pricing in all markets and sales growth of more than 25% in wireless communication products and components. Pricing improvements across all product lines continued this quarter, and international markets are benefiting from higher stimulus and infrastructure investments, especially in Australia. 5G build-outs and significant investments by the major carriers are driving demand in our wireless communications business, providing a good line of sight into 2022. Sales of $96.7 million grew 10% year-over-year, driven by higher pricing, improved general end market demand and sales from our greenfield facility in Pittsburgh. Global sales of $240.3 million grew more than 72% year-over-year, with sales growth in all regions and higher sales of technology solutions. In North America, sales grew nearly 55%, as strong market fundamentals and improved net farm income projections continue to positively impact farmer sentiment, generating very strong order flow. International sales doubled year-over-year, led by solid demand in the Middle East and Africa, including the ongoing deliveries of the Egypt project and another record quarter of sales in Brazil. Last quarter, we highlighted our acquisition of Prospera Technologies. Integration is going well, and we are making substantial progress building on our new strategy to grow recurring revenue services. We are on track to meet the financial targets that we shared last quarter and look forward to sharing progress toward these goals in the future. In Irrigation, we have a unique market advantage due to our global footprint and highly differentiated AI solutions, both are critical components of our growth strategy. Over the past year, we have been increasing opportunities for local manufacturing in the markets we serve, especially in light of the challenging supply chain environment, labor availability and higher freight costs. For example, we recently localized some of our electronics assembly in Dubai facility and are increasing the total capacity in our Brazil factory by 50%, positioning us for long-term international market growth, while we continue enhancing service to our dealers and customers. We are also very pleased that our Irrigation backlog at the end of the third quarter was $388 million, up 26% year-over-year. Turning to slide five we've said before, ESG is embedded into the core of our company's purpose, and there are many ways of products and services to serve resources and improve life. One recent example of this is using Solar solutions to transform the Sudan desert into a prosperous and sustainable region for agricultural production. Sudan is the third largest country in the African continent. Agriculture is quickly becoming its primary economic driver, accounting for 40% of the nation's GDP and employing close to 80% of the local workforce. But arid conditions and a lack of direct access to electricity in the region are hindering its expansion. To help overcome these challenges, our Valmont Solar team recently installed a PV plant to bring power to center pivots. Sunlight is captured and transformed immediately into electricity, eliminating the need for a battery or secondary energy source. We're proud to have initiated this project powering pivots by solar energy, 100% independent from the grid. Our innovative solutions are leading the way, precision agriculture in Sudan, opening doors to other solutions that will enhance productivity, empower local communities to solve food security issues, and help build a more sustainable world. Turning to slide seven, and third quarter results. Operating income of $80.4 million or 9.3% of sales grew 20% year-over-year, driven by higher volumes in Irrigation and favorable pricing, notably in Engineered Support Structures. Diluted earnings per share of $2.57 grew 30% compared to last year, primarily driven by higher operating income and a more favorable tax rate of 23.5%, which was realized through the execution of certain tax planning strategies. Turning to the segments. On slide eight, in Utility Support Structures, operating income of $24.6 million or 8.9% of sales decreased 170 basis points compared to last year. Raw material costs continued to increase during the quarter, impacting our ability to fully recover cost to our pricing mechanism, leading to lower-than-expected margin. Also the impact of workforce quarantine in a few North American facilities led to operational inefficiencies, which we do not expect to repeat. Moving to slide nine. In Engineered Support Structures, operating income increased to $34.4 million or 12.2% of sales, a third quarter record. The benefits of proactive pricing actions have more than offset the impact of continued rapid cost inflation, better fixed cost leverage, including SG&A, also contributed to positive results. Turning to slide 10. In the Coatings segment, operating income of $12.5 million or 12.9% of sales decreased 270 basis points year-over-year. Profitability was impacted by a lag in pricing to recover higher inflation costs, including raw material and labor and start-up costs at the Pittsburgh facility. Moving to slide 11. In the Irrigation segment, operating income of $32 million, more than doubled compared to last year, and operating margin of 13.3% of sales improved 270 basis points year-over-year. Significantly higher volumes and favorable pricing were partially offset by higher SG&A expenses from the recent Prospera acquisition. We're also extremely pleased with the profitability of our industrial tubing business and international margin improvement led by consistent and proactive pricing actions taken by our global team. Turning to cash flow on slide 12. Year-to-date, we have delivered operating cash flows of $62 million, with the use of cash this quarter of $8.4 million that reflects higher working capital levels to support strong sales growth. As we stated in our prior quarters, rapid raw material inflation creates short-term impact on cash flow. For the balance of the year, we expect inventory levels to remain elevated to help mitigate supply chain disruption and strategically secures raw material availability to support strong sales growth. Accounts receivable will also increase in line with sales growth. As our historical results have shown, we will see improvements in working capital as inflation subsides. Turning to slide 13 for a summary of capital deployment. Year-to-date capital spending of $81 million includes $33 million for strategic growth investments and $55 million of capital was returned to shareholders through dividends and share repurchases, ending the quarter with approximately $170 million of cash. Moving on to slide 14. Our balance sheet remains strong. Based on our recently amended revolving credit facility, our net debt-to-adjusted EBITDA of 1.85 times remains within our desired range of 1.5 to 2.5 times. We're increasing our earnings expectations for fiscal 2021 by narrowing the earnings per share guidance range to $10.60 to $11.10. This reflects strong market demand and our solid execution this year and our confidence in our ability to continue this performance. Turning to our segment outlook on slide 16. In Utility Support Structures, we expect operating margins to improve sequentially as pricing becomes more aligned with steel cost inflation. Moving to Engineered Support Structures. We expect continued stable market condition in North American transportation market and order rates are beginning to improve. Demand for wireless communication products and components remains very strong, and we are on track to grow sales 15% to 20%, in line with expected market growth. We remained focused on pricing actions and providing value to our customers. We now expect sales to grow 50% to 53% this year based on strength in global underlying ag fundamentals and a strong global backlog. Looking ahead to 2022, strong market demand across our businesses, the strength and flexibility of our global teams and our continued pricing strategies give us confidence in achieving sales growth of 7% to 12%, and earnings-per-share growth of 13% to 15% in line with the three- to five-year growth targets that we have communicated at our Investor Day in May. Turning to slide 17. The long-term drivers of our businesses remain solid as evidenced by our record global backlog of more than $1.5 billion, up 35% from year-end 2020. These demand drivers are in place to sustain this momentum into 2022, and our business portfolio is well positioned for growth. We also continue to take pricing actions across our businesses where needed. Like others, we are closely monitoring inflation, supply chain disruptions and COVID. We are ready to take additional appropriate actions to address these issues across all our businesses, as needed. Meanwhile, our focus on following state and local regulations to keep our employees and customers safe is not wavered. Turning to slide 18. In summary, I'm very pleased with our strong third quarter results and our team's ability to navigate through challenging market dynamics. We've demonstrated our ability to grow sales through innovation and execution, while being flexible and responding quickly to meet customer needs. We've improved operating margins by executing on our pricing strategies and advancing operational excellence across our footprint. And we have invested in our employees and technology to drive new products and services and build upon the strength of our operations. Throughout 2021, we have been disciplined in allocating capital to high-growth strategic investments, while also returning capital to shareholders through dividends and share repurchases. Looking ahead to 2022, we are confident in our plan to deliver the outlook that we have communicated and remain focused on execution and our ESG principles to build upon our success, while creating additional stakeholder value and improving a return on investor capital.	q3 adjusted earnings per share $2.57. sees fy adjusted earnings per share $10.60 to $11.10. sees fy gaap earnings per share $10.10 to $10.60. q3 revenue $868.8 million versus refinitiv ibes estimate of $862.3 million. in 2022 we expect sales growth of 7% to 12%. in 2022 we expect sales growth of 7% to 12% and earnings per share growth of 13% to 15%.
Avner will review our financial performance and provide trends and key assumptions for 2021 with closing remarks from Steve. This will be followed by Q&A. A replay of today's call will be available for the next seven days. I could not be more proud of their efforts, as they worked hard in the face of the pandemic to provide our customers with the essential products and services while prioritizing safety in our workplace and our communities. Our team’s dedication and focus has positioned us very well for success in the future. Net sales of $798.4 million increased $115 million or 16.8% compared to last year, due to significantly higher sales in the Irrigation and Utility Support Structures segments. Starting with Utility, sales of $271 million, grew 16.9% year-over-year, led by significantly higher sales of global generation products, as expected. Strong demand for renewable energy generation is increasing and utilities continue to invest in a more resilient grid. Moving to Engineered Support Structures, sales of $256.1 million were similar to last year. Favorable pricing and currency impacts were offset by lower volumes, primarily due to lower international sales as COVID-19 impacts continue to affect end market demand, mostly in France and India. Sales of transportation products were higher in North American markets, driven by states continued investments in road and construction projects. Wireless communication structures and components sales were similar to last year's record fourth quarter led by continued strong demand and favorable pricing in all regions. Turning to Coatings, sales of $89.3 million, were similar to last year, but improved sequentially from the third quarter as demand continues to recover. In Irrigation, sales of $199.3 million, grew nearly 50% compared to last year with growth across all global regions. In North American markets, farmer sentiment has improved significantly as recent increases in agricultural commodity prices are leading to multi-year highs for soybeans, corn, cotton, and wheat. International sales growth was led by higher sales in the Middle East, European and South American markets, particularly in Brazil where we recognized another record quarter of sales and local currency. Deliveries of the multi-year project in Egypt also began during the quarter and we are pleased that how the project is progressing. This project and others like it are helping nations conserve water, strengthening their local economies, enhance food access and availability and support our commitment to improve life across the globe. During the quarter, we purchased the remaining 40% stake of Torrent Engineering and Equipment, a global designer integrator of high pressure water systems for the agricultural and industrial sectors. This acquisition supports our strategy to deliver full service engineered, turnkey water management solutions to our growers and is critical to large scale agricultural projects. Overall, sales and profitability were better than expected across all segments as we continue to successfully manage pricing and operational performance. Turning to the full year summary on slide 5, net sales of $2.9 billion, grew 4.6% compared to last year and 5.4 % excluding currency impacts. Earlier in the year, visibility of the pandemic impacts on our global end markets was somewhat unclear; however, we exited the year with a more confident view of the tailwinds across the majority of our markets. I'm very pleased with our performance and our focused execution throughout the year. Turning to the segments, strong sales growth in the Utility Support Structures was led by continued robust demand driven by renewables and grid resiliency and higher sales of global generation products. In Engineered Support Structures, our pricing actions and improved operational performance benefited us throughout the year. In North America, strong demand in transportation markets and an increasing number of site build outs ahead of 5G rollouts offset lower international end market demand. Access Systems sales were down 23% compared to last year due to a strategic decision to exit certain product lines. Turning to Coatings, sales were down 6.1% for the year, but improved sequentially in the second half of the year, tracking in line with improving industrial production levels. Turning to irrigation, 2020 began as the sixth consecutive year of an off-cycle in North America. Low grain prices and food supply disruptions from COVID affected demand earlier in the year. But, strengthening demand during the second half of the year led to a strong finish to 2020. In Brazil, very strong demand led to record sales with sales in local currency, growing 32% year-over-year. Additionally, sales of advanced technology solutions globally grew nearly 20% year-over-year to $67 million. These proprietary solutions now connect over 110,000 of our growers machines helping them to maximize yields, improve water efficiency and optimize input costs. Turning to slide 6, during 2020, we made significant progress in many key areas. We elevated our commitment to ESG throughout the organization and set a solid foundation to share more in 2021, of what we're doing to conserve resources and improve life. We accelerated innovation through new products and services including our Spun Concrete Distribution Poles and small cell solutions, as well as technology advancements in our Valley 365 platform for connected crop management and all segments benefited from disciplined pricing strategies throughout the year. We secured the largest irrigation order in the industry's history to supply $240 million of products, services and technology solutions to the Egypt market and we generated over $200 million in free cash flow through a continued intense focus on working capital management. We quickly responded to inflationary pressures, which occurred late in the year by implementing price increases in all four segments and have implemented additional increases in early 2021. We believe that a persistent focus on price and delivering customer value is the primary way to deliver strong operating performance and generate shareholder value. Turning to slide 7, last month, we announced a collaboration with the Republic of Kazakhstan to develop the first In-Country Center-Pivot Manufacturing Facility that will take advantage of the region's growing agricultural potential. Working with our joint venture partner Kusto Group, this multi-year agreement is helping enhance mechanized precision agriculture, creating a network of farms that will accelerate efforts to address food security, resource conservation, and increasing export demand. Kusto Group is a recognized leader in agribusiness and the application of innovative technologies in the region. Together, we have committed to build a local facility with an annual production capacity of up to 1000 pivots. Groundbreaking is planned to begin in the second half of 2021 with production ramping by 2024. As the largest economy in the region, Kazakhstan is rapidly embracing agriculture as a key economic contributor with a national plan to more than double the number of irrigated acres over the next 10 years. Growing regional demand coupled with excellent infrastructure will allow us to quickly and efficiently serve the greater market, starting with the multi-year agreement to supply a minimum of 4000 pivots. We are excited for the partnership and potential growth in the region and we'll provide further updates on our progress in future quarters. Please also note that for comparison purposes, references to 2019 operating income and earnings per share exclude the LIFO method of accounting for inventory, which was discontinued at the beginning of fiscal 2020. Fourth quarter operating income of $68.8 million or 8.6% of sales, grew 180 basis points, or 36% compared to last year, driven by improved operational efficiency in all segments, higher volumes in Utility and Irrigation and the non-recurrence of last year's losses in the Access System product line. Fourth quarter diluted earnings per share of $2.20, grew 46% compared to last year, driven by higher net earnings and non-recurrence of losses in the Access Systems business and a more favorable tax rate. Fourth quarter tax rate was 24.4% on an adjusted basis. This excludes a non-recurring $1 million benefit or $0.05 per share from the adoption of US Tax Regulation finalized in 2020 which allows for more favorable treatment of tax payments by our foreign subsidiaries. Turning to the Segments, on slide 10, in Utility Support Structures operating income of $28 million or 10.3% of sales decreased 110 basis points compared to last year. While strong volumes and improved operational performance drove higher profits, quality of earnings was impacted by higher mix of offshore and other complex deal structures. Moving to slide 11, in Engineered Support Structures, operating income of $24.4 million or 9.5% of sales increased 540 basis points over the last year. Overall, we were very pleased with the results from the actions we took to enhance pricing strategies and improved operational performance, which helped offset lower volumes in international markets as COVID-19 impacted market demand mainly in France and India. Turning to slide 12, in the Coatings Segment, operating income of $11.8 million or 13.2% of sales was similar to last year. Higher volumes primarily in Australia, New Zealand and a continued focus on operational excellence and standard work, offset lower external volumes in North American markets. Moving to slide 13, in the Irrigation Segment, operating income of $25.3 million or 12.7% of sales, was 380 basis points higher, compared to last year. Strong volumes across all global markets and improved operational efficiency were partially offset by higher R&D expense for strategic technology growth investments. Turning to cash flow on slide 14, our rigorous focus on working capital management helped us deliver solid operating cash flow of $316.3 million this year, an improvement over last year's strong performance and despite an early payment of approximately $18 million for the required 2021 Annual UK Pension Plan contribution. Turning to capital deployment, the full year summary is shown on slide 15. Capital spending for 2020 was $107 million, which includes approximately $42 million of investment in strategic growth opportunities and approximately $60 million of maintenance capital in line with historical levels. Growth investments include expansion of existing North American infrastructure operations to meet strong market demand, a new start-up coatings facility in Pittsburgh expected to come online at the end of first quarter 2021 and technology investments in our factory and our products. As mentioned last quarter, we resumed our share repurchase program in September returning approximately $93.4 million of capital to shareholders through dividends and share repurchases in 2020, ending the year with approximately $400 million of cash. We continue to have an active acquisition pipeline and are prioritizing strategic investments in higher growth products and markets and business solutions that align with ESG principles while meeting our return on investment capital goals. Moving now to slide 16, for balance sheet highlights. Our balance sheet remains strong with no significant long-term debt maturities until 2044. Our leverage ratio of total debt to adjusted EBITDA of 2.2 times remains within our desired range of 1.5 to 2.5 times and our net debt to adjusted EBITDA is at one time. Let me now turning to slide 17 for an update to our 2021 financial outlook, including key metrics and assumptions for first quarter and full year. For the first quarter, we estimate net sales to be between $740 million and $765 million and operating income margins between 9% to 10% of net sales. For the full year, net sales are estimated to increase 9% to 14% year-over-year, which assumes a foreign currency translation benefit of 2% of net sales. Earnings per share is estimated to be between $9 and $9.70, excluding any restructuring activities. Before we move to the segments, let me briefly comment on operating margins for the first half of 2021. With unprecedented raw material cost increases and higher freight costs, we have taken quick deliberate steps to implement pricing across all our segments. In some cases we have implemented multiple increases since the beginning of 2021 and are maintaining these strategies across our served markets. Turning to our Segment outlook on slide 18, in Utility Support Structures, our strong global backlog is providing good visibility. As mentioned, we have been aggressively adjusting prices due to rapidly escalating raw material costs. A reminder that pricing actions in response to rapid inflation in this segment historically take one to two quarters to recover, so we expect unfavorable gross margin comparisons of approximately 220 basis points in the first half of the year when compared to 2020. However; we do expect gross profit contribution for the full year to be favorable year-over-year as higher steel cost indices are reflected in selling prices. Moving to Engineered Support Structures, we have entered the year with a solid global backlog of $247 million. We anticipate some short-term softness in transportation markets as state and local tax revenues have been impacted by COVID, along with delays in approving the FAST Act extension. We expect demand for wireless communication products and components remains strong and anticipate curious investment in 5G to accelerate throughout 2021, with sales expected to grow approximately 15% this year. Moving to Coatings, end market demand tends to correlate closely to industrial production levels and we expect to see modest sequential growth as the economy continues to improve. Moving to Irrigation, we are providing additional details on our expected sales growth in this segment based on estimated timing of deliveries of the large Egypt project, strong net farm income driving positive farmer sentiment and a robust Brazilian market. Full year sales are expected to substantially increase 27% to 30% year-over-year. We expect another quarter of solid operating cash flows driven by continued emphasis on working capital management and ongoing footprint initiatives. Raw material inflation can also create short-term impacts on cash flows and as previously mentioned, we have enacted strategies to manage these impacts, including some raw material financial hedges to cover backlog. Finally, as part of our ongoing strategic portfolio review, we have decided to divest the access System product line, which generated $88 million of sales in 2020 and serves the Australia and Asia-Pacific markets. We do not see a path for this business to fit our long-term strategy of global product expansion and it will further reduce our exposure to mining and oil and gas end markets. Further updates will be provided in future quarters. Moving to slide 19, as we have consistently stated over the past year, the fundamental market drivers of our business remain intact and we are seeing a solid set up for 2021 across all end markets as evidenced by our record, $1.1 billion backlog at the end of the year. In Utility, our strong year-end backlog of nearly $565 million remains at elevated levels and demonstrates the ongoing demand and necessity for renewable energy solutions and grid hardening. We are pleased to announce that in the first quarter, we were awarded the third purchase order of approximately $70 million for the large project in the Southeast U.S., confirming our customers' confidence in our execution, quality and value. We are well positioned to be a preferred strategic partner with utilities and developers for the renewable energy goals and the expanding ESG focus in the Utility Industry is providing us with market opportunities. In Engineered Support Structures, we expect a solid year, with some short-term market softness in transportation as delays in last year's FAST Act renewal begin to flow through state budgets. We have been getting many questions about the impact of an infrastructure bill. If one is past, this segment will experience upside growth approximately 9 to 12 months after an enactment. The long-term market trends for both transportation and wireless communication structures and components remain solid and the critical need for infrastructure investment provides very good economic stimulus for nations. Given the record purchase price of the recent 5G spectrum auction in the US, we expect growth in wireless communication structures and components to accelerate in 2021. Carriers' investments are increasingly supporting work and school at home and macro build outs and suburban and rural communities, aligning with recent favorable trends in residential construction. Our Coatings business closely follows industrial production trends and general economic activity. The drivers remain solid and the preservation of critical infrastructure and extending the life of steel fits well within our ESG principles. And in Irrigation, recent improvements in net farm income have improve grower sentiment and tighter ending stocks have driven corn and soybean prices to 6 and 7 year highs. This improved demand along with strength across international markets and the large-scale multi-year project in Egypt is providing a good line of sight for 2021 as evidenced by our year-end global backlog of $328 million, an increase of 5 times the level from one year ago. Our investments in Technology remain a priority and this past year, we expanded our Valley Insights anomaly detection solution into more regions across North America. As we entered the third year of offering this innovative solution, I'm excited to share that the number of monitored acres more than doubled to $5 million in 2020 leading to twice as many growers using the service as compared to 2019. This critical milestone on the path to autonomous crop management is expected to double again in 2021 and we look forward to sharing more of this exciting journey with you later this year. Turning to slide 20, when analyzing the demand drivers across our business portfolio, one of the early findings of our ESG task force is how well our products and solutions align with ESG principles and themes. Altogether, I am very proud that approximately 90% of Valmonts net sales supports ESG efforts. As the world continues to transition to a clean energy economy, approximately 90% of our Utility Support Structures sales are tied to ESG, including 45% to renewable energy initiatives and 45% to grid resiliency and critical reliability efforts. Approximately 90% of Engineered Support Structures sales are also attributable to ESG. Valmont’s products improved traffic flow within roads and cities, while promoting public safety through our lighting solutions. Further, the need for a connected world is now as pressing as ever before, whether it's expanding wireless connectivity to rural communities or strengthening the smart city of the future, our wireless communication product support these initiatives. In coatings, nearly 100% of our sales helps preserve and extend the life of metals up to 3 times longer. Zinc and steel are both 100% recyclable and hot-dip galvanizing is a proven corrosion protection system and has one of the lowest carbon footprints of any coatings application. And in Irrigation, nearly all of our sales are tied to sustainability and conservation. The warming climate drives the need for a more efficient use of freshwater and the need to produce more food for our growing global population using sustainable farming techniques, it is critical imperative and is highly supported by our business. In terms of our own sustainability efforts, I'm very pleased that at the end of 2020, we exceeded our global electricity conservation goal set in 2018, resulting in a 14% reduction in normalized electricity consumption, well ahead of our 8% goal. As a further benefit, we also reduced our scope to carbon footprint by approximately 10,000 metric tons in 2020, a notable accomplishment by our green teams. We recognized the increasing focus by many of our stakeholders on addressing ESG and climate change. Next month, we will publish our annual sustainability report highlighting the ESG benefits of our products and solutions, additional metrics, employee well-being and our goals and leadership in key ESG elements. We're excited to highlight our commitments throughout the organization along with our plans to conserve resources and improve life in 2021 and beyond. Turning to slide 21, in summary, we are expecting solid operating performance and strong earnings per share accretion and are encouraged the sales growth is expected to exceed our stated long-term financial goal. We are focused on profitable growth and return on invested capital improvement while keeping our employees and communities safe and investing in our business for growth. Our strategic framework remains fully intact as we position Valmont for success, now and in the future. Finally, we are excited to announce our plans to host a Virtual Investor Day in May 2021 and we'll share more details in the coming weeks. As we prepare to celebrate our 75th anniversary as a company in March, I want to again recognize our 10,000 global employees. It is because of your dedication and hard work that we are able to exceed our commitments in 2020 and why I remain confident in our ability to create long-term shareholder value and deliver on our expectations moving forward.	q4 adjusted earnings per share $2.20. q4 sales $798.4 million versus refinitiv ibes estimate of $724.8 million. sees q1 sales $740 million to $765 million. sees 2021 diluted earnings per share estimated to be $9.00 - $9.70.
On the call, we have Raghu Raghuram, Chief Executive Officer; and Zane Rowe, Executive Vice President and Chief Financial Officer. Actual results may differ materially as a result of various risk factors described in 10-Ks, 10-Qs and 8-Ks VMware files with the SEC. In addition, during today's call, we will discuss certain non-GAAP financial measures. These non-GAAP financial measures, which are used as measures of VMware's performance should be considered in addition to, not as a substitute for or in isolation from GAAP measures. Our non-GAAP measures exclude the effect on our GAAP results of stock-based compensation, amortization of acquired intangible assets, employer payroll tax and employee stock transactions, acquisition, disposition, certain litigation matters and other items as well as discrete items impacting our GAAP tax rate. Our third quarter fiscal '22 quiet period begins at the close of business, Thursday, October 14, 2021. I'm pleased with our Q2 fiscal 2022 performance with revenue of $3.1 billion and non-GAAP earnings of $1.75 per share. I'm even more excited and energized today as I approach my 100th day as VMware's CEO. I've been spending a lot of concentrated time talking with customers and partners about the opportunities and challenges in the industry today and how we can help them navigate and innovate for the future. Over the last few years and especially during the pandemic, enterprises have accelerated their adoption of the cloud. Customers are evolving their strategy from a cloud-first to a cloud smart philosophy where they are picking the right clouds and cloud services for the right workload, including private cloud and even on the edge. And that means most of our customers are using not just one cloud today, but multiple clouds. Multi-cloud is emerging as the customers default strategy for these primary reasons. First, they need to deliver the best digital app experiences by choosing the location of their services based on the technical capabilities and performance. Second, they need to achieve business flexibility, lower cost and better control, and as a result, avoid being locked into a single cloud. Third, they need sovereignty, which is about the ability to control where their data resides. These customer needs are addressed with our multi-cloud portfolio. Number one is application modernization and cloud management. This is where Tanzu and our Cloud Management portfolio are critical as customers build, run and manage cloud-native workloads across public clouds. Number two is cloud-agnostic hybrid infrastructure with VMware Cloud, which provides a comprehensive platform for running enterprise workloads in private clouds and migrating them to any of the major public clouds. Number three are solutions that enable our customers to innovate at the edge and empower a more secure distributed workforce with Workspace ONE. And across all of these multi-cloud services, we have built our software defined networking and Carbon Black Cloud offering, which is a key component to provide zero trust security, flexibility and agility across all clouds. Customers are using our Tanzu platform to drive a consistent developer and cloud operations experience across all of their clouds, including data centers. As an example, one of the world's largest tire manufacturers adopted the Tanzu portfolio to manage a large container run time across their datacenter, Azure cloud and a number of manufacturing locations at the edge. We are also continuing to see customers who are building their application platform across hybrid clouds, adopting our complete stack for their private cloud environment that can extend to public cloud as needed. This full stack provides cost effectiveness and agility to run enterprise applications and build modern applications with our integrated Tanzu portfolio. For example, a Japanese automaker is building a next-generation open scalable private cloud platform to modernize their business using VMware Cloud Foundation as their infrastructure stack and Tanzu for modernizing their applications. Customers are also seeing the value of VMware Cloud Universal as it provides them flexibility to move to the cloud at their own pace and gives them freedom to move applications based on business conditions. We continue to see momentum with our cloud partners, providing more choice and flexibility for our customers. In Q2, VMware Cloud on AWS customers continued to expand their usage as we delivered key engineering capabilities and footprint expansion, including a new AWS Milan region. We continued to strengthen our go-to-market relationship with AWS, including the ability to offer additional products such as vRealize Cloud via the AWS resale channel. In April, we unveiled VMware SASE, a cloud-native scalable solution that serves as the one-stop shop for security and network services at the edge. VMware SASE provides customers a unified edge and cloud service model with a single place to manage business policy, configuration and monitoring. It is also a key component of the VMware Anywhere Workspace Solution which also includes VMware Workspace ONE and VMware Carbon Black Cloud and is designed to help companies deliver better and more secure experiences to their employees, no matter where they are in the world. We continued to work with Zoom Video communications during the quarter to drive interoperability between VMware Anywhere Workspace and the Zoom platform, enabling a better and more secure collaboration experience for hybrid work environments. We also added new innovations to VMware Horizon with new capabilities to make it easier for IT to manage deployments wherever they may be, on-premises or in the cloud. Over the past few months, VMware garnered recognition from industry-leading analysts. VMware has been recognized as a leader in the August 2021 Gartner Magic Quadrant for unified endpoint management tools for the fourth consecutive year. Additionally, VMware is positioned as a leader in the Forrester Wave Endpoint Security Software as a Service Q2 2021. And IDC ranked VMware Number 1 in worldwide IT automation and configuration management 2020 market share, as well as ranking VMware Number 1 in software-defined compute for 2020 market share. In Q2, we received recognition in support of our ESG efforts including ranking in the top 1% in emissions intensity versus industry peers on the ISS Climate Scorecard for the fiscal year 2020. VMware was also named to the Forbes 2021 List of Best Employers for Women and was recognized as the Best Place to Work for Disability Inclusion in 2021. As we head into fall, SpringOne and VMworld are both on the horizon. These events are the epicenter of industry conversations and breakthrough technological innovations. SpringOne takes place September 1 and 2, and is optimized for developers, DevOps pros and software leaders looking to build scalable apps and learn more about the Spring framework, Kubernetes, app modernization and more. VMworld, which takes place October 4 through 7, will again be a virtual event where attendees will hear more about our multi-cloud strategy and offerings, while also engaging in over 600 educational and technical content sessions while networking and connecting with peers. I look forward to seeing you online at the these two events. We remain on track to spin-off from Dell in early November of this year. As a stand-alone company, we will have increased strategic, operational and financial flexibility to drive VMware's growth strategy while also strengthening our long-standing strategic relationship with Dell, a partnership we expect will continue to benefit our customers and partners as well as both the Dell and VMware. We're pleased with our Q2 and first half of fiscal '22 financial performance. Total revenue for Q2 was $3.1 billion, with combined subscription and SaaS and license revenue growth of 12% year-over-year to $1.5 billion, which was above our expectations for the quarter. Subscription and SaaS revenue grew 23% year-over-year, with ARR up 26% to $3.2 billion. License revenue exceeded our expectations in Q2 with growth of nearly 3% year-over-year to $738 million. We continue to focus on developing and accelerating our subscription and SaaS portfolio and made good progress in Q2 toward that goal. Our largest contributors to sub and SaaS were VCPP, modern applications, EUC, Carbon Black and VMware Cloud on AWS, which grew revenue nearly 80% year-over-year. We continue to prioritize flexibility and choice for customers as they adopt our offerings. And in Q2, we saw customers take a slightly larger-than-expected mix of perpetual licenses as well as term licenses in certain product areas such as EUC. We're also driving continued momentum with our VMware Cloud solutions and hyperscaler-led agreements are becoming an important channel for scaling our cloud offerings. With this route to market, the length of time from bookings to revenue can be slightly longer as compared with VMware Direct sales. Our non-GAAP operating income for the quarter of $924 million was stronger than expected, driven by higher revenue and lower-than-expected expenses. Non-GAAP operating margin for the quarter was 29.4%, with non-GAAP earnings per share of $1.75 on a share count of 423 million diluted shares. We ended the quarter with $10.3 billion in unearned revenue and $5.9 billion in cash, cash equivalents and short-term investments. Q2 cash flow from operations was $864 million, and free cash flow was $777 million. RPO was $11.2 billion, up 8% year-over-year, and current RPO was $6.2 billion, up 11% year-over-year. Total backlog was $66 million, substantially all of which consisted of orders received on the last day of the quarter that were not shipped and orders held due to our export control process. License backlog at quarter-end was $19 million. We're pleased with the overall bookings performance in Q2 as we continue to grow our subscription and SaaS offerings. We saw year-over-year product bookings growth in major product categories, including our multi-cloud and modern applications businesses as well as EUC. Core SDDC product bookings increased over 20% year-over-year, with Compute also increasing over 20% and Cloud Management up over 30%. Growth in our Cloud Management business was driven by vRealize Cloud Universal, a service that enables customers to manage their entire multi-cloud environment, including on-prem, edge and public clouds. Adoption of vRealize Cloud Universal is a great validation of our multi-cloud strategy, with more customers now embracing a unified cloud-based approach for managing their hybrid and multi-cloud environments. EUC and NSX product bookings were both up in the strong double digits versus Q2 last year and vSAN product bookings grew in the low single digits year-over-year. Carbon Black Cloud and our Modern Applications business also had continued strong growth in the quarter. Subscription and SaaS ACV bookings for EUC grew in the strong double digits year-over-year, driven by both Horizon and Workspace ONE. As employees continued working in hybrid environments, customers are leveraging VMware's Workspace offerings to support employees anywhere they work from knowledge workers back in the office or at home to essential employees and frontline workers. In Q2, we repurchased 2.2 million shares in the open market at an average price of $160 per share. Through the end of Q2, we have utilized $2.2 billion from our current repurchase authorization of $2.5 billion. We successfully completed a $6 billion bond offering in preparation for a special dividend payout to all stockholders associated with our planned spin-off from Dell Technologies in early November of this year. Our Q2 cash balance does not reflect the proceeds from this bond offering. We will continue to invest in growing our business, both organically and inorganically and return excess capital to shareholders through share repurchases. We also remain committed to an investment-grade profile and credit rating and we expect to use free cash flow primarily to delever following our planned spin-off from Dell. Turning to guidance for fiscal '22. We are reiterating our expectation for total revenue of $12.80 billion, a growth rate of approximately 9% year-over-year. We expect to generate $6.27 billion from the combination of subscription and SaaS and license revenue or an increase of approximately 11.5%, with approximately 51.5% of this amount from subscription and SaaS. We're increasing guidance for non-GAAP operating margin for the full year to 29% and non-GAAP earnings per share to $6.90 on a diluted share count of 423 million shares. We're maintaining our cash flow from operations guidance of $3.9 billion, which now includes nearly $100 million in debt issuance costs and estimated costs associated with the planned spin-off. And we're also maintaining free cash flow guidance of $3.52 billion. For Q3, we expect total revenue of $3.12 billion or a growth rate of approximately 9% year-over-year. We expect $1.47 billion from subscription and SaaS and license revenue in Q3 and or an increase of nearly 12% year-over-year, with approximately 56% of this amount from subscription and SaaS. We expect non-GAAP operating margin to be 27% for Q3, with non-GAAP earnings per share of $1.53 on a diluted share count of 422 million shares. As we head into our second half and the spin-off later this year, we're energized by the opportunities we see to help customers leverage our trusted software foundation for their multi-cloud environments. And we look forward to seeing many of you at our Analyst Meeting to be held in conjunction with Virtual VMworld in early October. We'll notify you of the day and time in the coming weeks. Before we begin the Q&A, I will ask you to limit yourselves to one question consisting of one part, so we can get to as many people as possible. Operator, let's get started.	q2 non-gaap earnings per share $1.75. q2 revenue $3.14 billion versus refinitiv ibes estimate of $3.1 billion. remains on track for planned spin-off from dell technologies inc. in early november 2021.
On the call, we have Raghu Raghuram, Chief Executive Officer; and Zane Rowe, Executive Vice President and Chief Financial Officer. Actual results may differ materially as a result of various risk factors described in the 10-Ks, 10-Qs and 8-Ks VMware files with the SEC. In addition, during today's call, we will discuss certain non-GAAP financial measures. These non-GAAP financial measures, which are used as measures of VMware's performance, should be considered in addition to, not as a substitute for or in isolation from GAAP measures. Our non-GAAP measures exclude the effect on our GAAP results of stock-based compensation, employer payroll tax and employee stock transactions, amortization of acquired intangible assets, realignment charges, acquisition, disposition, certain litigation matters and other items, as well as discrete items impacting our GAAP tax rate. Our fourth quarter fiscal 2022 quiet period begins at the close of business, Thursday, January 13, 2022. I am pleased with the continued strong performance in Q3 fiscal year 2022 with revenue of $3.2 billion and non-GAAP earnings of $1.72 per diluted share. Earlier this month, we successfully completed our spin-off from Dell Technologies. As a stand-alone Company, we have more strategic and financial flexibility to deliver on our multi-cloud strategy. We are also able to partner even more deeply with all the cloud and on-premise infrastructure companies to create a better foundation that drives results for our customers. Customers continue to choose VMware as their trusted digital foundation to accelerate their innovation, and we continue to expand and advance our portfolio to meet their needs in these three ways: one, deliver a cloud-native app platform for building modern applications in a public cloud-first world; two, migrate enterprise applications to a cloud-agnostic infrastructure; and three, build out the secure edge to optimize across our workspace and edge-native applications. These three focus areas are built on a horizontal set of offerings across networking, security and management. It's clear that multi-cloud will be the model for digital business for the next 20 years and in this vibrant dynamic marketplace, the pace of innovation is relentless. VMware is at the center of it. In the modern app space, we recently provided the Department of Education for one of America's largest cities with application resiliency as part of their business continuity project. Leveraging VMware Tanzu, the customer now has improved ability to respond to ever-changing needs of students, their families and faculty while protecting student information and creating an environment to accelerate their innovation and automation. One of our new beta offerings in the space is the Tanzu Application Platform, which will make it easier and simpler for developers to drive productivity and velocity in a more secure fashion on any cloud. Our Tanzu portfolio is now one of the most comprehensive in the industry for both Kubernetes operations and developer experience. We also recently unveiled Tanzu Community Edition, a freely available, easy-to-manage Kubernetes platform for learners and users, and Tanzu Mission Control Starter, a multi-cloud, multi-cluster Kubernetes management solution available as a SaaS service. We are pleased to share some customer stories in support of our VMware Cloud services across the hyperscalers. PennyMac, a leading financial services firm is leveraging VMware Horizon on VMware Cloud on AWS to provide loan officers and call center agents a more secure work-from-anywhere virtual desktop in a fully automated and scalable cloud environment. We also worked with the University of Miami, who looked to the Azure VMware solution to support their VMware workloads on their preferred public cloud provider. Recently, we announced new advancements for VMware Cloud, the industry's first and only cloud-agnostic computing infrastructure. Newly unveiled Project Arctic will bring the power of cloud to customers running VMware vSphere on-premises. It will enable cloud-based management for hundreds of thousands of vSphere customers and vSphere deployments around the world. Customers will be able to benefit from life cycle management, cloud disaster recovery and cloud burst capabilities as an extension of their vSphere deployments. We will bring Project Arctic to market next year as the next step in making our portfolio available in a subscription and SaaS form factor. We also announced VMware Sovereign Cloud initiative, where we are partnering across our VMware Cloud providers to deliver cloud services on a sovereign digital infrastructure to customers in regulated industries. Lastly, we introduced a tech preview of an exciting new management technology, Project Ensemble. It is designed to manage apps across multiple public clouds, bringing together a comprehensive set of costs, security, automation and performance capabilities for the public cloud environment. VMware was once again ranked number one in the September 2021 IDC report titled Worldwide Cloud System and Service Management Software Market Shares, 2020: Growth Continues for the Top Vendors. In the area of Edge, we recently helped an international wholesaler with 800 stores across 30 countries to refresh its decade-old in-store platform. The VMware Edge Compute Stack is now serving as a single platform for both the customers existing and modern applications, offering a right-sized resilient solution that is providing ROI for their business. As a continued commitment to helping our customers at the Edge, we recently introduced VMware Edge, a product portfolio that will enable organizations to run, manage and better secure edge-native applications across multiple clouds anywhere. Together, VMware Cloud, Tanzu, VMware Edge and Anywhere Workspace offer our customers a solution for all of their applications across their multi-cloud environment. In the security space, VMware is delivering solutions built specifically for threats customers face today. We use the power of software, combined with a scaled-out distributed architecture, zero trust design principles and a cloud delivery model for better security that's easier to use. We are excited about our continuing innovation in SASE, Secure Access Services Edge, especially as many businesses are now working as a distributed workforce. We also announced the industry's first elastic application security edge, which enables the networking and security infrastructure at the data center or cloud edge to flex and adjust as app traffic changes. In the third quarter, VMware was positioned as a leader in The Forrester New Wave: Zero Trust Network Access Q3 2021. On the telco front, Vodafone recently selected VMware to deliver a single platform to automate and orchestrate all workloads running on its core networks across Europe, starting with 5G stand-alone. This recent work builds on Vodafone's previous selection of VMware Telco Cloud Infrastructure as its network functions virtualization platform. In the third quarter, VMware received additional recognition from leading industry analyst firms, once again being named as a leader in the August 2021 Gartner Magic Quadrant for Unified Endpoint Management Tools. Additionally, VMware was once again named a leader in the September 2021 Gartner Magic Quadrant for WAN Edge Infrastructure. Our innovation engine is thriving as we bought many of these new offerings, features, beta programs and partnerships to the forefront during VMworld 2021, which attracted approximately 116,000 registrants. We look forward to hosting VMworld China and VMworld Japan in the coming weeks. Our environmental, social and governance agenda continues to be very important to us and core to our culture. VMware received recognition for our ESG leadership by being included in the Dow Jones Sustainability Indices, one of the world's leading ESG benchmarks for the second consecutive year. In summary, we strive to serve our customers in three unique ways: by being the trusted foundation for their most critical business operations; by offering a best-of-breed, innovative portfolio of best-in-class solutions to fulfill their multi-cloud vision; and by having a broad set of strategic partnerships required to unlock the full potential of multi-cloud. We are pleased with our Q3 financial performance, which exceeded our initial expectations and is a continuation of the good performance we've seen all year. We saw solid demand in the quarter and continued to execute on our multi-cloud strategy. Total revenue for Q3 was $3.2 billion. Combined subscription and SaaS and license revenue grew 16% year-over-year totaling $1.5 billion, ahead of our guidance. Subscription and SaaS revenue of $820 million was up 21% year-over-year, in line with our expectations, representing 26% of total revenue for the quarter. Subscription and SaaS ARR was $3.3 billion, up 25% year-over-year in Q3. Our largest contributors to subscription and SaaS were VCPP, Tanzu, EUC, Carbon Black and VMware Cloud on AWS, which saw strong double-digit year-over-year growth in revenue and ARR. License revenue in Q3 grew 11% year-over-year to $710 million. The strength we saw was due to good execution in the quarter and our broad installed base of customers that see us as the trusted ally for their mission-critical workloads. Our strategy is resonating with our customers who are confident that their investments can be leveraged over the longer-term in multi-cloud environments. Our non-GAAP operating income for the quarter of $935 million was driven by our revenue performance and lower-than-expected growth in expenses. Non-GAAP operating margin for the quarter was 29.3% with non-GAAP earnings per share of $1.72 on a share count of 422 million diluted shares. We ended the quarter with $10.2 billion in unearned revenue and $12.5 billion in cash, cash equivalents and short-term investments, which includes proceeds from our $6 billion bond issuance. The bond issuance proceeds together with $4 billion of additional borrowings from term loan commitments, as well as other available cash on hand was used to fund a special dividend of $11.5 billion. The special dividend was paid on November 1 to all stockholders of record on October 29 in conjunction with our spin-off from Dell Technologies. Q3 cash flow from operations was $1,090 million and free cash flow was $984 million. RPO was $11.1 billion, up 9% year-over-year, and current RPO was $6.2 billion, up 11% year-over-year. Total backlog was $124 million, substantially all of which consisted of orders received on the last three days of the quarter that were not shipped and orders held due to our export control process. License backlog at quarter end was $34 million. We are pleased with the overall bookings performance in Q3 as we continue to scale our subscription and SaaS offerings. We saw strong year-over-year product bookings growth in major product categories. Core SDDC product bookings increased over 20% year-over-year. Compute was up low-double digits, and Cloud Management was up strong double digits year-over-year. Both of these were helped by our multi-cloud subscription and SaaS offerings. We saw momentum in VMware Cloud, which includes hyperscalers such as Amazon, Microsoft, Google and Oracle. We also continue to drive innovation in new product offerings across our Carbon Black Cloud and Tanzu platforms. NSX increased in the low double digits versus Q3 last year, and vSAN grew in the high-teens year-over-year. EUC product bookings, as well as sub and SaaS ACV bookings were up in the strong double digits year-over-year. In Q3, we repurchased approximately 1 million shares in the open market at an average price of $150 per share. In early October, our Board of Directors authorized up to $2 billion of stock repurchases through FY'24, which replaced the relatively small balance remaining on our prior authorization. As a part of our capital allocation framework, we plan to use our cash generation and balance sheet to invest in growing our business both organically and inorganically, paying down debt and returning excess capital to shareholders through share repurchases. In addition, we are committed to maintaining an investment-grade credit profile and rating. Turning to guidance for fiscal 2022. We're increasing our expectation for total revenue to $12,830 million, a growth rate of approximately 9% year-over-year. We expect the combination of subscription and SaaS and license revenue to total $6,305 million, an increase of approximately 12% year-over-year. Approximately 50.5% of this amount is expected to be subscription and SaaS. We are increasing guidance for non-GAAP operating margin for the full-year to 30% and non-GAAP earnings per share to $7.19 on a diluted share count of 422 million shares. We're also increasing our cash flow from operations guidance to $4.1 billion and increasing free cash flow expectations to $3.7 billion. This reflects our performance in Q3 combined with our outlook for FY'22. For Q4, we expect total revenue of $3,510 million or a growth rate of approximately 7% year-over-year. We expect $1,875 million from subscription and SaaS and license revenue in Q4 or an increase of nearly 9% year-over-year with approximately $860 million from subscription and SaaS, reflecting the current pace of adoption of our subscription and SaaS offerings. We expect non-GAAP operating margin to be 30.4% for Q4 with non-GAAP earnings per share of $1.96 on a diluted share count of 422 million shares. We typically provide some color on our upcoming fiscal year at this time. We are driving innovation across the portfolio, scaling our subscription and SaaS offerings and progressively making our products available as subscription and SaaS. Consistent with the outlook framework we presented at the Financial Analyst Meeting last month, we currently expect total FY'23 revenue to grow in the high-single digits while we continue to build out our subscription and SaaS portfolio. We are planning on growing our sub and SaaS revenue to nearly 30% of total revenue with our FY'23 exiting ARR growth rate exceeding FY'22's. We expect non-GAAP operating margin of approximately 28%, which is similar to our initial outlook for FY'22, reflecting continued investments in subscription and SaaS and the resumption of more normalized level of T&E as we support our customers. In closing, we are pleased with the progress we are making on our multi-cloud strategy as reflected in our performance this quarter and in our outlook for FY'22 and FY'23. As a stand-alone Company, we are well positioned to enable our customers' multi-cloud journey and become the multi-cloud leader. Before we begin the Q&A, I'll ask you to limit yourselves to one question consisting of one part so we can get to as many people as possible. Operator, let's get started.	q3 non-gaap earnings per share $1.72. revenue for q3 was $3.19 billion, an increase of 11% from q3 of fiscal 2021. subscription and saas arr for q3 was $3.31 billion, an increase of 25% year-over-year.
On the call, we have Zane Rowe, CFO and Interim CEO. Raghu Raghuram, COO, Products and Cloud Services; and Sanjay Poonen, COO, Customer Operations, will join for Q&A. Actual results may differ materially as a result of various risk factors described in the 10-Ks, 10-Qs and 8-Ks VMware files with the SEC. In addition, during today's call, we will discuss certain non-GAAP financial measures. These non-GAAP financial measures, which are used as measures of VMware's performance should be considered in addition to, not as a substitution for or in isolation from, GAAP measures. Our non-GAAP measures exclude the effect on our GAAP results of stock-based compensation, amortization of acquired intangible assets, employer payroll tax and employee stock transactions, acquisition, disposition, certain litigation matters and other items as well as discrete items impacting our GAAP tax rate. Our first quarter fiscal 2022 quiet period begins at the close of business, Thursday, April 15, 2021. We realize you're used to hearing Pat's voice as we start these quarterly conference calls. Pat is a true partner and a friend, and of course, will still be a VMware Board member. We're pleased with our Q4 financial performance, as it was a good finish to the fiscal year. Q4 total revenue increased 7% year-over-year, with non-GAAP earnings per share up over 8%. We finished fiscal 2021 with $11.8 billion in total revenue and non-GAAP earnings per share of $7.20 a share. This past year was one of unprecedented disruption and uncertainty, and we're proud of what the team accomplished. As we quickly adapted to a distributed workforce, we helped our customers accelerate their work-from-anywhere journey and their application and cloud monetization initiatives. We're seeing customers continue to choose VMware to help them deliver the digital foundation to power their apps, clouds, security and user experiences. Large global customers continue to align and partner with us, and the nature of our strategic relationships with our largest customers continues to grow. In Q4, we closed deals with significant aerospace and telco customers and saw particular strength in the financial sector, including wins with HSBC and Wells Fargo. We see financial services customers utilizing a combination of franchise solutions, ranging from modern apps and cloud infrastructure, to networking in our digital workspace offerings. We also continue to see momentum with key communication service providers, such as NTT DOCOMO and Telia increasing their focus on VMware solutions, as well as new and expanded contracts with additional Tier 1 communication service providers globally. In the retail sector, a large customer that's standardized on our technologies in their private cloud is leveraging VMware as a platform for their cloud migrations, while also investing in edge cloud infrastructure and using Tanzu for containers in their retail edge locations. We see this as a repeatable use case for other retailers, along with other e-commerce app development use cases, retailers are building on top of Tanzu. Our work with life sciences and healthcare customers is enabling their critical apps to run on our hybrid cloud and is helping to secure their user devices for employees working from anywhere. In addition, our partner ecosystem is driving momentum for VMware solutions. We're expanding the reach of our solutions through key strategic partnerships from our VCPP partners to hyperscalers, to system integrators. For example, earlier this month, we announced an expansion of our partnership with Accenture, resulting in the launch of their dedicated VMware business unit. The group will bring together approximately 2,000 professionals across a variety of industries with expertise in hybrid cloud and cloud migrations, cloud-native and application modernization, as well as security. We also recently formed a joint innovation lab with Lumen, designed to drive edge computing, security and secure access service edge or SASE for customers in a number of industries. Looking at the broader portfolio, we continue to further our multi-cloud strategy and are seeing traction as customers align app requirements to the cloud of their choice, whether it's private, hybrid or public. This quarter, we expanded our resell program with AWS to include additional VMware technologies and services such as VMware Cloud, Disaster Recovery and vRealize. Additionally, VMware Cloud on Dell EMC, a Dell Technologies cloud service from VMware expanded to the EMEA market with immediate availability in the UK, Germany and France. We continue to deliver on innovation with Tanzu. With the announcement of general availability of Tanzu Advanced edition, we now have three Tanzu additions in the market; Basic, Standard and Advanced. Each addition is targeted at a common customer challenge of modernizing infrastructure and applications. Tanzu Advanced includes all the capabilities that enterprises need to embrace DevSecOps and manage complete container life cycle. We continue to see strong positive reception to all three Tanzu additions. We also added container security to VMware Carbon Black Cloud, leveraging technology from our recent Octarine acquisition to provide visibility into on-prem and public cloud Kubernetes clusters. Our NSX portfolio offers a comprehensive set of L2 to L7 capabilities, implemented completely in software. We recently released the latest version of NSX, which included enhancements across routing, identity firewall, load balancing and cloud. In FY '21, VMware was recognized by top industry analyst firms as a leader in 13 key reports across cloud management, networking, hyperconverged infrastructure and end-user computing. In November, Forrester named VMware a leader in the Forrester Wave Hybrid Cloud Management Q4 2020. More recently, we were named a leader in December's 2020 Gartner Magic Quadrant for Hyperconverged Infrastructure Software. And in January, VMware was positioned as a leader in three IDC Marketscape reports related to the end-user computing space, including the Worldwide Unified Endpoint Management Software 2021 Vendor Assessment. From a broader corporate perspective, I'm personally pleased to highlight that we recently unveiled our 2030 agenda, which encapsulates how we will drive ESG goals into every aspect of our business. Our 2030 agenda is integrated into the business and is focused on three business outcomes; trust, equity, and sustainability. Recently, we also performed well in the areas of sustainability, earning the distinction of being included in the 2020 Dow Jones Sustainability Index among the world's leading ESG benchmarks. Now, let's move to more detail on our business performance as well as our forecast. In Q4, the combination of subscription, SaaS, and license revenue grew 8% year-over-year to $1.721 billion. We saw large enterprise demand strength throughout the quarter, which allowed us to close a record 35 deals over $10 million. This was balanced with good performance in our commercial business as well. Subscription and SaaS revenue increased 27% year-over-year for the quarter, with strong growth in our VMware Cloud Provider Program, end-user computing, Carbon Black, and VMware Cloud on AWS offerings. We continue to invest and expect to see further growth in this important area for us in FY 2022 and beyond. Our focus is on scaling existing offerings as well as adding new solutions. VMC on AWS once again had a great quarter, with both workloads and revenue nearly doubling year-over-year as we continue to expand functionality and use case adoption. As of the end of Q4, ARR for subscription and SaaS was $2.9 billion, an increase of 27% year-over-year. License revenue for the quarter declined 2% year-over-year to $1.014 billion. Now, this was better than expected as we had a strong deal closure rate throughout the quarter. Non-GAAP operating income increased 8% year-over-year in Q4 to $1.133 billion, primarily driven by better-than-expected revenue growth. Non-GAAP operating margin for the quarter was 34.4%, with non-GAAP earnings per share of $2.21 on a share count of 423 million diluted shares. We ended the quarter with $10.3 billion in unearned revenue and $4.7 billion in cash, cash equivalents, and short-term investments. Cash flow from operations for fiscal 2021 was $4.4 billion, which was well ahead of our expectations. Q4 cash flow from operations was $1.324 billion and free cash flow was $1.242 billion. Now, this strength was primarily due to our emphasis on closing certain deals prior to calendar year-end, which resulted in receiving the associated cash in FY 2021 rather than FY 2022. In addition, we benefited from early collections and advanced payments from partners and customers as well as certain other expenditures which were lower than expected in FY 2021. With subscription and SaaS becoming a larger share of total revenue, we're now providing our end-of-period total and current RPO. For Q4, RPO was $11.3 billion, up 10% on a year-over-year basis and current RPO was $6.2 billion, up 12% year-over-year. Total backlog was $93 million, substantially all of which consist of orders received on the last day of the quarter that were not shipped that day and orders held due to our export control process. License backlog at quarter-end was $23 million. Overall, our product portfolio performed well in Q4, with customers continuing to purchase solutions that contain multiple products. Core SDDC product bookings increased 12% year-over-year in Q4, highlighted by strength in our vRealize management offerings, which are now available both on a perpetual and SaaS basis. Compute product bookings also performed well, growing in the low single-digits year-over-year. NSX and vSAN had single-digit year-over-year declines, which was an improvement for both versus Q3 of FY 2021. These two technologies continue to be further integrated into our broader solutions. Three quarters of our EUC product bookings are now SaaS. EUC's ACV SaaS growth rate was 30% year-over-year in Q4, driven primarily by Horizon and our initiatives related to anywhere workspace. Given our focus on SaaS ACV, EUC product bookings decreased in the high-single digits year-over-year. Carbon Black Cloud once again grew in the high-double digits year-over-year, and we continue to make progress in expanding our endpoint and workload protection capabilities and delivering intrinsic security value to our customers. Our Tanzu portfolio exceeded expectations and had a strong attach rate in eight of the top 10 VMware deals in Q4. In Q4, we repurchased 2.7 million shares in the open market at an average price of $140 per share. At the end of Q4, we've utilized over $1.4 billion from our current repurchase authorization of $2.5 billion. Turning to guidance for fiscal 2022. We expect total revenue of approximately $12.700 billion or a growth rate of 8%, which is consistent with the early outlook provided on our last call. We expect to generate approximately $6.300 billion from the combination of subscription of SaaS and license revenue or an increase of 12% with approximately 55% of this amount from subscription in SaaS. We expect non-GAAP operating margin of 28% with non-GAAP earnings per share of $6.68 under diluted share count of 422 million shares. As I mentioned earlier, we had very strong cash flow from operations in Q4 due to a number of initiatives that resulted in exceeding our cash flow guidance by over $650 million. While we're extremely pleased with this result, the bulk of this over-achievement was accelerated from our upcoming fiscal year. Taking that into account for FY 2022, we currently expect cash flow from operations of $3.8 billion and free cash flow of $3.42 billion. On a normalized basis, taking into account the acceleration of cash into FY 2021, cash flow from operations would be roughly flat on a year-over-year basis for FY 2022, in line with our operating performance. For Q1, we expect total revenue of approximately $2.910 billion or a growth rate of 6%. We expect approximately $1.320 billion from combined subscription and SaaS and license revenue in Q1, an increase of 7% year-over-year, with over 55% of this amount from subscription and SaaS. Our expected growth rate for Q1 license revenue was impacted by continued growth in subscription and SaaS and the strength we saw in Q1 last year. We expect non-GAAP operating margin of 27.5% for Q1, with non-GAAP earnings per share of $1.49 on a diluted share count of 422 million shares. In closing, we're pleased with our Q4 performance, the improvements we're seeing in the macro environment, and are expanding opportunities to engage with our customers and partners. We're committed to executing at scale as we continue to build our subscription and SaaS business and invest in our future growth, while delivering technologies and solutions today that help our customers and partners with their digital transformations. Before we go to questions, I'm pleased to tell you that we are making progress on the potential spinoff of VMware from Dell. While our special committee of Independent Directors continues to evaluate the spin-off, we believe that it could be value-enhancing to VMware and its stockholders. We will not be commenting further on these discussions until there's more definitive news to share. Before we begin the Q&A, I'll ask you to limit yourselves to one question consisting of one part, so we can get to as many people as possible. Raghu and Sanjay are joining us now for Q&A. Operator, let's get started.	q4 non-gaap earnings per share $2.21. qtrly combination of subscription and saas and license revenue was $1.7 billion, an increase of 8%.
These documents as well as our supplemental financial information package are available on our website, www. vno.com, under the investor relations section. In these documents and during today's call, we will discuss certain non-GAAP financial measures. The call may include time-sensitive information that may be accurate only as of today's date. On the call today from management for our opening comments are Steven Roth, chairman and chief executive officer; and Michael Franco, president and chief financial officer. I hope everyone is healthy, continues to be vigilant and gets vaccinated. Let me say it again. Everybody, please get vaccinated. I'll start by sharing a few things that are happening on the ground, which I hope you all find interesting. The U.S. economy is resilient, it's growing. I might even say is booming, and so is New York. Financial, tech and almost all industries are achieving record results. In New York, apartment occupancy, which had dropped to as low as 70% during COVID, is now rapidly climbing back with record numbers of new leases being signed each week at higher and higher rents. Condo sales, which had stalled during COVID, are now active, albeit at discounted pricing, except I'm proud to say that our 220 Central Park South where resales are at a premium. This apartment and condo demand is coming from folks who live and work in New York, and that's a very good sign. At 220 Central Park South, where we are basically sold out, resale pricing is up, and that's an understatement. A recent spectacular example, which is now public, is a two-floor 12,000 square foot resale that traded at a record-breaking $13,000 per square foot, think about that. Our New York office division is now experiencing record incoming RFPs and requests for tours, including from many large and important occupiers who had been on the sidelines during COVID. Glen and his team are very busy. By the way, big tech is now very active looking for more space in New York to take advantage of New York's large, highly educated and diverse workforce. Here's an interesting fact, a Fortune 100 occupier household name who dropped out of the market during COVID has come back to market. They were originally looking for 300,000 square feet to house 2,800 employees. Post-COVID, after extensive study and space planning, they now need and are seeking 400,000 square feet, a 30% increase to house the same 2,800 employees. In both instances, their projected in-office occupancy is the same 60%. The fact that this occupier needs 30% more space post-COVID is contrary to all analyst expectations, but that is the fact. And we are hearing the same from many, although not all, but many of our tenants that they will need more space, not less post-COVID. One of our analysts and a friend recently wrote that our company suffers from PENN fatigue. It took us over a decade to assemble our vast PENN District hoardings, but as the same goes, this is our time. Here's where we stand. At Farley, we have delivered to Facebook all of their 730,000 square feet. Their tenant work is going full bore. The West Side of Seventh Avenue, along the three blocks stretching from 31st Street to 34th Street, is now a massive construction site, where we are transforming the 4.4 million square foot PENN one and PENN 2 into the nucleus of our cutting-edge connected campus. The 34th Street PENN 1 lobby just opened, and our unrivaled three-level amenity offering will be completed at year-end. Our full building PENN 2 transformation, including the bustle and reskinning, is 98% bought out on budget and off to a fair start. We couldn't be more excited. Our 14,000 square foot sales center the Seventh Floor of PENN 1 is now open to rate reviews from brokers and occupiers. After working with Glen and Josh in the sales center, the market is understanding our ambitious plans to make the PENN District, the crown jewel of the west side of the new New York. By the way, every quarter and every year, the West side is punching way above its weight, measured by high and growing leasing share -- market share of leases signed. Aside from our confidence and the market's enthusiasm, even at this early date, we are raising our PENN asking rents. We will shortly begin demolition of the Hotel Pennsylvania to create the best development site in town. We expect demolition and shutdown costs to be about $150 million, which you should look at as land cost. Our book basis in this property today is $203 million. And we are midstream in the process to make the unique high-growth PENN District a separate investable public security. Our best in the business team leaders in the PENN District are Glen Weiss Leasing, Barry Langer Development and Dave Bendelman Construction. Michael will cover our operating results in a moment, but I can say that, overall, leasing and occupancy statistics in New York tell a misleading story. While overall availability is 18%, assets newly built or repositioned since 2000 have a much lower direct vacancy rate of 11%. Last quarter, 88% of new leasing activity in Midtown was a Class A product. It's clear that the market is voting for new and repositioned assets As you would expect, Class A assets command higher pricing than Class B, in fact, one-third higher. Obviously, this is the place to be and you should know that substantially all of our assets are repositioned and in this competitive set. New York is coming back to life. Residential neighborhoods are bustling, less so the commercial canyons where office utilization is now approximately 23%. Remember, it's August, the vacation month. The largest employers in Manhattan have mandated a return to work by Labor Day or shortly thereafter, some with full staff in office and others with a flexible program allowing some work from home. As I have said before, I do not believe that the office will be threatened by the kitchen table. And I do not believe that even one or two work from home days per week by some number of a tenant's employees will be a negative to us. I, for one, I'm unable to predict whether it will take a month or a quarter for office buildings to be back to full up and the canyons to be teeming again. There is no magic date. All that matters is that it will happen soon enough. Last week, we announced that Wegmans, the premier grocer in the Northeast region, is opening its first store in Manhattan at our 770 Broadway replacing Kmart. And you can bet that we will do several more Manhattan deals with Wegmans. The fact that Wegmans is coming is creating excitement with it at last count, 43 print and broadcast press articles celebrating the announcement. Here is an interesting fact to it. Wegmans expects that as much as 50% of its volume will be from in-home delivery -- appropriately from to home delivery. We will be investing $13 million in TIs, leasing commissions and free rent in this long-term lease with a 65% GAAP mark-to-market increase over Kmart's rent. This quarter, we announced that we exercised a ROFO to acquire our partner's 45% interest in One Park Avenue in a transaction that values the building at $870 million. Based on the in-place floating rate loan, we project $18 million, $0.09 cents per share first-year accretion. Last summer, we brought 555 California Street to market for sale and are unable to achieve fair value, we withdrew, understandable at the height of COVID with travel restrictions and so forth. At that time, we said we will refinance and this past quarter, we did to the tune of $1.2 billion, netting us approximately $467 million at share. We can just carry on the new floating rate loan is almost exactly the same as the old much smaller fixed-rate loan. So one might say the $460 million is free money. Ironically, I believe, continuing to own this outstanding asset with this superb accretive financing is actually a better outcome. In New York replacement cost is rising quickly over the past many decades, replacement costs with a dip here and there has risen relentlessly. And if past this is pro-log, replacement costs will undoubtedly continue to rise as far as the eye can see. Replacement cost has always been a key predictor of future value a rising umbrella lifting all similar real estate values. And New York is the poster child of this phenomenon. Here is updated guidance for our retail business. For 2021, we guided cash NOI of $135 million. And now halfway through the year, we expect to do a little bit. For 2022, we guided cash NOI of $160 million, which we affirm. For 2023, we announced new cash NOI guidance of not less than $175 million. You should know that, as expected, Swatch exercised the termination option for a portion of their space at St. Regis, which is effective March 2023 with a $9 million termination fee. The Swatch owned Harry Winston store will remain under lease through its June 2031 expiry. The guidance above takes account of the Swatch termination. If I were a betting man, and I guess in some ways, I am, I would bet that we have already put in the bottom in New York that the worst of the best stuff is behind us and that New York will get better and better and so will New York real estate in space. In our case, occupancy rate, TIs and pricing have bottomed. I will start with our second-quarter financial results and end with a few comments on the leasing and capital markets. Second-quarter comparable FFO as adjusted was $0.69 per share compared to $0.56 for last year's second quarter, an increase of $0.13. The increase was driven by the following items. $0.09 from tenant-related activities, including commencement of certain lease expansions and nonrecurrent or straight-line rent write-offs impacting the prior period, primarily JCPenney and New York & Company. $0.02 from lower G&A resulting from our overhead reduction program and $0.02 from interest expense savings and the start of improvement in our variable businesses, primarily from BMS cleaning. Our second-quarter comparable results are consistent with the fourth-quarter run rate we discussed at the beginning of the year as is our overall expectation for the full year. Speaking of our variable businesses, we are beginning to see signs of recovery with a return to normalcy. BMS is nearing pre-pandemic levels. Signage is starting to pick up with healthy bookings in the second half of the year. Our garages are picking up as well and should be fully back in 2022. And finally, we have a number of trade shows scheduled for the fourth quarter. Other than Hotel Penn's income, we expect to recover most of the income from our variable businesses by year-end 2022 with the balance in 2023. Companywide same-store cash NOI for the second quarter increased by 0.5% over the prior-year second quarter. Our core New York office business was up 3.2%. Blending in Chicago and San Francisco, our office business overall was up 2%. Consistent with prior quarters, our core office business, representing over 85% of the company, continues to hold its own, protected by long-term leases with credit tenants. Our retail same-store cash NOI was down 6%, primarily due to JCPenney's lease rejection in July 2020. But excluding the impact of JCPenney's lease rejection, the same-store cash NOI for the remaining retail business was up 9.8%. Our office occupancy ended the quarter at 91.1%, down 2 percentage points from the first quarter. This was expected and driven by long expected move-out at 350 Park Avenue and 85 Tenth Avenue as well as 825 Seventh Avenue coming back into service. With the activity we have in our pipeline, this quarter should represent the bottom of our office occupancy, and it should improve quarter by quarter from here. Retail occupancy was up slightly to 77.3%. Now, turning to the leasing markets. Since our last call, the pace of office leasing activity in New York City has picked up each successive month. With the vaccination rates high, companies are now fully focused on their return to the office with many returning during the summer and a majority expected back soon after Labor Day. Predictably, the overall sentiment in New York continues to improve as company's return and the office market continues to heal. During the second quarter, leasing volume in Manhattan was its highest since the onset of the pandemic. And office tour activity has now exceeded pre-pandemic levels with more than 11 million square feet of active tenant requirements. Importantly, office-using employment in the city continues to strengthen. With more than 100,000 jobs now recovered, we're at 92% of the pre-pandemic peak. While leasing volume during the first half of 2021 was dominated by small to medium-sized transactions, driven by well-capitalized financial services and technology tenants, we are now seeing pent-up demand from larger occupiers across all industry types as many have formally entered the market. There are additional signals that the market continues to fought. Tenants are now entering into leases for longer terms and asking rents in concessions have stabilized. And in fact, as Steve alluded to, we have recently increased our asking rents in our top-tier assets, reflecting the strong demand for best-in-class assets. During the second quarter, we signed 33 leases, totaling 322,000 square feet with two-thirds coming from new companies joining our high-quality portfolio across the city. The average starting rent of these transactions was a strong $85 per square foot. The leasing highlight for the quarter was 100,000 square feet at PENN 1, further validating the market's resounding reception to our redevelopment of this property. The largest transaction was a new lease with Empire Healthchoice for 72,000 square feet. Our main competition here was newly constructed buildings in both Downtown and Midtown, our new dramatic lobbies in Plaza's best-in-class campus amenity program and premier access to transportation from the data. Looking toward the second half of 2021, our leasing pipeline has grown significantly since last quarter with more than 1 million square feet of leases in active negotiation, including 180,000 square feet of new leasing at 85 Tenth Avenue, as well as an additional 1.6 million square feet in various stages of discussion. This includes discussions with several large users newly interested in PENN 2 after seeing our vision at the Experience Center. Our activity is a balanced combination of new and renewal deals with the majority of our activity with companies in the financial, technology and advertising sectors. Our office expirations are very modest for the remainder of 2021 and 2022, with only 976,000 square feet expiring in total, representing 7% of the portfolio, and 150,000 of this square footage is in PENN 1 and PENN 2. As we look toward our 2023 expirations of 1.9 million square feet, of which 350,000 is in PENN 1 and PENN 2, we are, of course, already in dialogue and trading paper with many of these companies and anticipate announcing important transactions by year-end. Now, turning to theMART in Chicago, where the office market is also showing signs of life, and tenant demand is returning coming out of the pandemic. While short-term renewal leasing dominated the market during 2020, activity has picked up with almost 1 million square feet of new leasing completed during the second quarter, though concessions are unusually high. At theMART, we completed a 91,000 square foot long-term office renewal with 1871. Chicago's premier technology incubator for entrepreneurs and have an additional 80,000 square feet of new deals in negotiation. Two weeks ago, we produced our first trade show at theMART since February 2020 pre-pandemic. This show in partnership with International Casual Furniture Association featured the largest manufacturers of outdoor furniture in the country. Attendance was 10% higher than the same show produced pre-pandemic 2019, and feedback from exhibitors and attendees was very positive. We have eight upcoming trade shows calendared during the remainder of 2021, including NeoCon in October, the largest show in North America focused on commercial design, though we don't expect the tenants to reach 2019 levels this year. In San Francisco at 555, we are finalizing a couple of small, strong leases in our fall other than the cube. Turning to the capital markets now. The financing markets are wide open and aggressive for high-quality office companies and buildings, and we are taking advantage of the low all-in coupons. It bears repeating that in May, we upsized our 555 California Street loan from $533 million to $1.2 billion with no additional interest costs. We also reentered the unsecured debt market for the two tranche $750 million green bond offering at a blended yield of 2.77%. There was robust demand for our paper, underscoring investor support for our franchise and belief in New York City. We paid off the loan on theMART with the proceeds and added the remainder to our treasury. Finally, our current liquidity is a strong $4.492 billion, including $2.317 billion of cash and restricted cash and $2.175 billion undrawn under our $2.75 billion revolving credit facilities.	qtrly ffo per share adjusting for items $0.69.
An audio recording of today's call will be available on the Internet for a limited time and can also be accessed on our website. Today's remarks are governed by the safe harbor provisions of the 1995 Private Securities Litigation Reform Act. For a discussion of the risks associated with VPG's operations, we encourage you to refer to our SEC filings, especially the Form 10-K for the year ended December 31, 2019, and our other recent SEC filings. On the call today are Ziv Shoshani, CEO and president; and Bill Clancy, CFO. I will begin with some commentary on VPG's consolidated financial results and sales trends, the impact of the COVID-19 pandemic on our business, and the strategy and actions we have taken to mitigate that impact. Bill will provide financial details in the second-quarter 2020 outlook. Moving to Slide 3, I'd like to begin my remarks by commenting that VPG's team around the world for their hard work and for their dedication during these challenging times as they adjusted quickly to local restrictions and extraordinary working conditions. Their commitment to meeting the needs of our customers has been truly exemplary. Moving to Slide 4, even in the rapidly changing market conditions over the past few months, and we are satisfied with our financial and operating performance in the first quarter. We have ended the quarter with a positive book-to-bill of 1.08 and grew our total orders 4.4% from the same quarter a year ago. Moving to Slide 5, I'll discuss the operational and EH&S impacts on VPG from COVID-19. As the pandemic begin to unfold around the world, we took steps to keep our employees and customers safe. These measures included suspending business travel and enabling employees whose functions allowed to work from home effectively. We have also implemented workplace distancing and increased sanitizing common areas, as well as adjusting our work shifts to minimize contact with other employees. We know of four employees who tested positive for the virus. Of this, two have tested negative after the required quarantine period and two are currently under quarantine. As countries, states and local jurisdictions around the world implemented stay-at-home orders, we quickly made adjustments to maintain the continuity of operations while also complying with those regulations. While the majority of VPG's facilities were able to continue operations due to the essential nature of our products, our two facilities in India and in China were more significantly impacted. As we indicated in our earnings call in February, our facility in China was impacted by approximately three weeks by government-imposed restrictions. That facility returned to production in mid-February when those restrictions were lifted. Our facility in India was also shut down beginning in late March as a result of stay-at-homes order imposed by our Indian government. While this order has been extended to May 17, we received approval to resume partial operations on our India facility. As of today, with the exception of our India facility, our supply chains and logistics network are functioning as we are able to meet our customers' needs. We created an internal committee to monitor and manage the situation. Financially, we have implemented a companywide salary freeze and have reduced our planned capital spending for 2020 by 30%. Moving to Slide 5, in terms of the impact on demand for our products, one of VPG's strength is its broad diversity of VPG's markets, which is a major differentiator from other pure-play sensor technology companies during times of turbulent market conditions that we are seeing now. This breadth enables us to maintain our financial momentum within our segment as stronger end markets offset weaker ones. For Foil Technology Products segment, first-quarter sales of $30.5 million grew 2.8% sequentially, reflecting growth in precision foil resistors and shrinkages in test and measurement and consumer markets, which offset weaker sales in the general industrial market. Order for FTP in the first quarter grew from the fourth quarter of 2019 and included significant order for advanced sensors, which resulted in our book-to-bill of 1.25 as compared to 1.18. First-quarter sales of Force Sensors of 14.7% -- $14.7 million declined 2.4% and from the fourth quarter of 2019, reflecting slower demand in the industrial weighing markets as well as modest impact from a temporary government-mandated shutdown of our China facility. Nonetheless, we saw growth in OEM-driven sales for precision ag and construction applications. While a book-to-bill for Force Sensors in Q1 was 1.02, we expect our second quarter sales for these products to be impacted by the essential shutdown of our manufacturing facility in Chennai, India that I mentioned earlier. Assuming the full reopening of this facility on May 17, we expect that our Force Sensors revenues in the second quarter to be reduced by approximately $5 million to $7 million, which is reflected in our guidance. We also expect our operating profit to be impacted by approximately $3.5 million, reflecting the lower revenues, the required payments to employees during the shutdown period and of some partial operations and higher logistics costs. Following the lifting of these restrictions, we anticipate we will be able to recover the majority of the revenue shortfall in future quarters. Sales of Weighing and Control Systems in the first quarter of $22.5 million declined 7.9% sequentially. The decline in WCS sales was primarily due to the timing of the end user driven projects in the steel market, which offset modestly higher revenues for certain onboard weighing solutions. We expect to see lower revenue in the second quarter in WCS, primarily in the transportation market. Book-to-bill for WCS was 0.9 in the first quarter of 2020. As the world contents with the residual impact from the pandemic on the business environment, we are confident in both our strategy and our strong financial position to weather these turbulent times. We believe we have ample liquidity with a net cash of $42 million on our balance sheet and a new revolving credit facility we put in place in March 2020 that not only gives us expanded borrowing capacity should we need it, but also offers us lower borrowing rates and more favorable terms. Given the high degree of uncertainty in the macro environment, we are focused on what we can control, which are our key strategic initiatives, to both grow our business and to reduce our operating cost. These initiatives, which are critical to our company's future, are intact and we are -- and we intend to be ready to realize their potential as the global economic environment normalizes. On the growth side, we are moving forward with our FTP manufacturing project in Israel. As we have discussed, this project will support future growth of advanced sensors. While sales of these products were essentially flat sequentially, we have received large orders in Q1 in our other markets, such as consumer and medical. For the overload protection initiatives in Europe, our TruckWeigh and VanWeigh Solutions, which have already been tested by our key OEM truck and van manufacturers, and we have received very positive feedback. However, several of them have signaled that they are pushing out the implementation further into 2021, pending a return to a more normalized economic activity. Our aftermarket OEM sales for this product, which was expected to be booked in this year, was pushed into 2021. On the cost side, we have already implemented a number of initiatives over the past few years to consolidate our manufacturing footprint and to reduce our operating cost. We believe that these steps, which have been already contributed to the margin improvement in some key areas, will increase our operating leverage and financial returns once we see the return to more normalized economic condition. As we continue to meet the challenges of the pandemic and as we can remain vigilant in protecting our employees and our customers, we are confident that we will successfully navigate to these challenges. This confidence is based on strong business model and financial position, our diverse set of markets, and the depth of experience of the VPG management team across the world. Referring to Page 7 of the slide deck. In the first quarter of 2020, we achieved revenues of $67.7 million, operating income of $4.6 million or 6.9% of revenues, and net earnings per diluted share of $0.24. On an adjusted basis, which excludes $515,000 of acquisition purchase accounting adjustments related to the DSI acquisition in November 2019 and $130,000 of restructuring costs, our adjusted operating income was $5.3 million or 7.8% of sales and our adjusted net earnings per diluted share was $0.29. Our first-quarter 2020 revenue declined 2.1%, compared to 69.1% -- $69.1 million in fourth quarter and were down 11.5% as compared to $76.5 million in the first quarter a year ago, which was also a historical high quarter for VPG. Foreign exchange negatively affected revenues by $600,000 for the first quarter of 2020 compared to a year ago and had no impact as compared to the Q4 of 2019. Our gross margin in the first quarter was 37%. Our gross margin on an adjusted basis was 37.8%, which improved from 36.8% in the fourth quarter of 2019. Our operating margin was 6.9% for the first quarter of 2020. Excluding the above-mentioned purchase accounting adjustments and restructuring charges, our first-quarter adjusted operating margin was 7.8%, which increased from 7.5% we reported in the fourth quarter of 2019. Selling, general and administrative expenses for the first-quarter 2020 were $20.3 million or 30% of revenues. This compares to $20.4 million or 26.7% for the first quarter of last year and $20.2 million or 29.2% in the fourth quarter of 2019. The sequential SG&A in the first quarter reflected the inclusion of a full quarter of SG&A expenses for DSI. The adjusted net earnings for the first quarter of 2020 were $3.9 million or $0.29 per diluted share, improved from $3.7 million or $0.27 per diluted share in the fourth quarter of 2019. The impact of foreign exchange rates for the first quarter of 2020 was positive compared to the first quarter of 2019 by approximately $400,000 or $0.03 per diluted share. We generated adjusted free cash flow of $3 million for the first quarter of 2020 as compared to $4.8 million for the first quarter in 2019. We define free cash flow as cash from operating activities with less capital expenditures plus any sale of fixed assets. The GAAP tax rate in the first quarter was 32.3%. We are assuming an operational tax rate in the range of 27% to 29% for 2020 planning purposes. We ended the first quarter with $82.7 million of cash and cash equivalents and total long-term debt of $40.6 million. As Ziv mentioned, in March, we put in place a new revolving credit facility that gives us greater flexibility and lower interest expense as well as less restricted covenants. With a net leverage ratio of about one time, we believe that we have a strong balance sheet and ample liquidity to support our business requirements and to fund additional M&A opportunities. Turning to our outlook, given the expected impacts resulting from the COVID-19 pandemic, we now currently expect net revenues in the range of $56 million to $62 million for the second quarter of 2020, which assumes constant first-quarter 2020 exchange rates. In summary, while the COVID-19 pandemic continues to create uncertainty around the world, we are prepared to meet these challenges as we remain diligent in protecting our employees and our customers. Our strong operating model, financial position, diverse set of markets, combined with the commitment to our strategic initiatives, gives us confidence in our ability to not only successfully navigate these challenging times, but to accelerate our performance as conditions return to normal.	compname reports q1 earnings per share of $0.24. q1 adjusted earnings per share $0.29. q1 earnings per share $0.24. q1 revenue fell 11.5 percent to $67.7 million. sees q2 2020 revenue $56 million to $62 million. vishay precision group - expect financial results in q2 of 2020 will be negatively impacted by covid-19 pandemic. majority of co's operations have been able to maintain full or partial operations. vishay precision group - received approval from indian government to resume partial operations at co's manufacturing facility on may 4, 2020. expects reduction in its india operations to reduce force sensors revenues by $5 million to $7 million in q2. vishay precision - if operating restrictions on indian facility not lifted on may 17, anticipate additional negative impact on results of operation. vishay precision group - as of may 5, 2020, all of co's facilities, with exception of facility in india, are operating fully.
An audio recording of today's call will be available on the internet for a limited time and can also be accessed on the VPG website. Turning to Slide 2. Today's remarks are governed by the safe harbor provisions of the 1995 Private Securities Litigation Reform Act. For a discussion of the risks associated with VPG's operations, we encourage you to refer to our SEC filings and the Form 10-K for the year ended December 31, 2018, and our other recent SEC filings. On the call today are Ziv Shoshani, CEO and president; and Bill Clancy, CFO. I will begin with some commentary on VPG's consolidated results and our sales trends and operational highlights by segment. Bill will provide financial details and then our Q1 2020 outlook. Moving to Slide 3. The fourth quarter capped the second best year in VPG's history in terms of revenue and profitability. In spite of some macro headwinds after beginning the year in Q1 with one of our strongest quarters ever, business trends and our revenue slowed in the second half of the year reflecting a global economic slowdown that impacted many of our end markets. Despite the headwinds, we achieved solid results for fiscal 2019 with sales of $284 million and adjusted operating margin of 11.7% and adjusted earnings per share of $1.69 and $20.4 million of adjusted free cash flow. Moving to Slide 4. For the fourth quarter, sales of $69.1 million were at the high end of our expectations and grew 2.6% sequentially. Bookings were strong as total orders for the fourth quarter of $79.8 million grew 24% from the third quarter and reflected growth in all three segments. The result was an overall book-to-bill of 1.15 in the fourth quarter, an improvement from 0.96 in Q3. Looking at our fourth-quarter business trends by market. In test and measurement, demand for our precision resistors in semiconductor test applications rebounded. In the general industrial market, we saw continuous softness in oil and gas and in industrial process applications. In transportation, where we focus on track in one market orders for our VPG onboard weighing solutions were solid in both the avionics, military and space market or AMS and steel market trends continue to be directionally positive, but our orders reflected the project-driven nature of our products. In the industrial wing and other markets which includes precision, agriculture, construction and medical applications, we saw signs of bottoming as customers replenished their inventories. From an operation and financial perspective, our profits in the fourth quarter were impacted by a number of factors. First, our results include -- included $1.7 million of an acquisition-related charges and costs associated with the addition of Dynamic Systems, Inc. or DSI in November of 2019. Second, we recorded a restructuring charge of $1.7 million which primarily relates to the closing and downsizing of facilities as part of our ongoing strategic initiative to align and consolidate our manufacturing operations. Third, our margins were further affected by approximately $1.1 million related to inventory reductions as well as one-time inventory adjustments, mainly for manufacturing relocations and system implementations. The results of these factors was an operating income in the fourth quarter of $1.8 million or 2.5% of revenues, and adjusted operating income was $5.2 million or 7.5% of revenues. Fourth-quarter earnings per diluted share was $0.28. And adjusted net earnings per diluted share was $0.27. Moving to Slide 5. Looking at our reporting segments in detail. Sales of foil technology products of $29.6 million declined 7.7% sequentially and were 19.3% lower than the fourth quarter a year ago. The quarter-to-quarter decline was due to lower sales of precision resistors in the test and measurement market. However orders for these products grew robustly in the fourth quarter of 2019 for both test and measurements and AMS customers as they place their semi-annual and annual orders. The result was a book-to-bill ratio of 1.18 for foil technology products in the fourth quarter which was up significantly from 0.91 in the third quarter. Gross margin for foil technology products of 34.9% declined from 37.3% for the third quarter due to lower sales volume of $1.5 million, unfavorable product mix of $300,000 and the one-time inventory adjustment of $200,000 which was partially offset by a reduction in manufacturing costs of $700,000. Looking at the force sensors segment, sales in the fourth quarter of $15.1 million declined 7.1% sequentially and were down 11.4% from the fourth quarter of 2018. The sequential decline was primarily due to OEM destocking in the precision weighing and force measurement markets. Book-to-bill for force sensors was 1.11 which grew from 0.94 in the third quarter of 2019. Fourth-quarter gross profit margin for force sensors of 24.2% decreased from 30.4% in the third quarter of 2019. The lower sequential gross profit reflected lower volume of $600,000, approximately $400,000 related to inventory reductions and $200,000 of one-time inventory adjustments. For the Weighing and Control Systems segment, fourth-quarter sales of $24.4 million increased 28.1% from the third quarter and were 5.2% higher than the fourth quarter a year ago. The sequential growth in revenue was primarily attributable to the addition of two months of BSI sales and continued good performance in both our process weighing business in Europe and our legacy steel business. Book-to-bill for weighing and controls was 1.15 which compared to 1.04 in the third quarter of 2019. The fourth-quarter gross profit margin for WCS segment of 41.6% or 46.8% excluding the purchase accounting adjustments of $1.3 million for the DSI acquisition, was in line with prior quarter's profit margins. Moving to Slide 6. Before turning the call to Bill for some additional financial details for the quarter, I would like to provide an update on a few of our -- of the strategic initiatives that are key elements of value-creation strategy. Turning to Slide 6. First, I would like to elaborate on the progress we are making to realign our manufacturing footprint. I already referenced facility closure and downsizing in the fourth quarter of 2019 which relate to transition of manufacturing of force sensors to India and China. We expect these moves to yield approximately $1.6 million of cost savings in 2020 excluding normal inflation and wage increases. In addition, our consolidation project in Modi'in, Israel is on track and we expect to start the relocation in the third quarter of 2020 and to complete the transition as we enter 2021. As we have discussed before, this is a major initiative that not only gives us an additional capacity we need to support the future growth of our advanced sensor business, but also consolidate certain legacy operations which will provide manufacturing efficiencies as the facility ramps production in 2021. We expect to incur approximately $2 million of start-up costs in the second half of this year as we complete the transition. Second, we are pushing forward on a number of VPG-specific growth initiatives. We continue to have a good customer engagement with respect to our advanced sensors as we grew sales of these products, 20% in 2019 compared to 2018. As we have described before, the unique design capabilities and cost-effective manufacturing platform of the advanced sensor business are enabling us to pursue higher volume opportunities which we were not able to address before. Another key initiative relates to our TruckWeigh and VanWeigh overload protection technology which grew 30% in 2019 from the prior year. We expect demand for this product to be further driven by adoption of new regulations in the EU that will require all trucks and vans with load capacities of more than three and a half tons to have this capability. While the regulation are still being finalized, they are expected to go into effect in the first half of 2021. We believe we are in the leading position in terms of our products capability, reliability and robustness, and we are already working with all the large OEMs to develop solutions that meet the new regulations. Third, among the strategic highlights for the quarter was the acquisition of Dynamic Systems, Inc. which was accretive in the fourth quarter. DSI is a great example of a bolt-on M&A opportunity. We believe we'll create value for VPG shareholders. It is an established, highly profitable company with a great novel technology that complements our existing footprint in the steel industry. We believe we have a great platform and a solid balance sheet to support value creating M&A, and we hope to make additional acquisitions in 2020. On Slide 7 of the slide deck. In the fourth quarter of 2019, we achieved revenues of $69.1 million, operating income of $1.8 million or 2.5% of revenues and net earnings per diluted share of $0.28. On an adjusted basis which exclude $1.7 million of costs and purchase accounting adjustments related to the DSI acquisition and $1.7 million of restructuring costs, our adjusted operating margin was $5.2 million or 7.5% of sales and adjusted net earnings per diluted share was $0.27. Continuing on Slide 7. Our fourth-quarter 2019 revenue of $69.1 million increased by 2.6% as compared to $67.4 million in the third quarter, and we were down 10.2% as compared to $77.0 million in the fourth quarter a year ago. Foreign exchange negatively impacted revenues by $500,000 for the fourth quarter of 2019 as compared to a year ago and had no impact as compared to the third quarter of 2019. Our gross margin in the fourth quarter was 35%. Excluding $1.3 million related to purchase accounting adjustments for the DSI acquisition, our gross margin on adjusted basis was 36.8% which declined from 38.3% in the third quarter. Our operating margin was 2.5% for the fourth quarter of 2019. If we exclude the above-mentioned purchase accounting adjustments, acquisition cost of $400,000 and restructuring expense of $1.7 million related to the facility closures and downsizing, as Ziv mentioned, our fourth-quarter adjusted operating margin was 7.5% as comparted to 10% in the third quarter of 2019. The adjusted gross margin for the fourth quarter of 2019 included approximately $1.1 million of inventory reductions and inventory-related adjustments which are not expected to reoccur. Excluding these inventory-related factors, adjusted gross margin would have been 38.5%, above the 38.3% we reported in the third quarter of 2019. Selling, general and administrative expenses for the fourth quarter of 2019 were $20.2 million or 29.2% of revenues. This compared to $20.9 million or 27.2% for the fourth quarter last year and $19.1 million or 28.3% in the third quarter. The higher sequential SG&A in the fourth quarter reflected the inclusion of two months of SG&A expenses for DSI which were partially offset by a reduction in bonus accrual reserves. The adjusted net earnings for the fourth quarter of 2019 were $3.7 million or $0.27 per diluted share compared to $5.0 million or $0.37 per diluted share in the third quarter of 2019. While impact of foreign exchange rates for the fourth quarter was modest compared to the third quarter, they had a much bigger effect compared to the fourth quarter a year ago, impacting net earnings by $900,000 or $0.07 per diluted share. We generated adjusted free cash flow of $4.1 million for the fourth quarter of 2019 as compared to $4.8 million for the third quarter of 2019. We define free cash flow as cash generated from operations which was $6.3 million for the fourth quarter of 2019, less capital expenditures of $2.6 million and sales of fixed assets of $400,000. We recorded a tax benefit of $3.4 million in the fourth quarter of 2019 related to the acquisition of DSI, utilizing our deferred tax liabilities against deferred tax assets. We are assuming an operational tax rate in the range of 27% to 29% for our 2020 planning purposes. Reflecting the $40.5 million paid for DSI, we ended the fourth quarter with $86.9 million of cash and cash equivalents and total long-term debt of $44.5 million. With a net leverage ratio of about one time, we believe that our balance sheet remains very strong and we have ample liquidity to support our business requirements and to fund additional M&A opportunities. Turning to our outlook. While we see signs of bottoming in some of our industrial markets, there continues to be a number of uncertainties in the macroeconomic environment including the potential spread of the coronavirus. We currently expect net revenues in the range of $63 million to $70 million for the first fiscal quarter of 2020 which reflect the portions of our project-driven business and customers longer lead time orders that are expected to ship in the quarter and assumes constant fourth-quarter 2019 exchange rates. In summary, our sales for the fourth quarter were at the high end of our expectations, and we ended the quarter with a very strong book-to-bill. Our manufacturing consolidation projects are on track for on-schedule completion. And we believe we have the long-term growth and cost strategies in place to achieve our three-year financial targets.	compname reports q4 earnings per share of $0.28. q4 adjusted earnings per share $0.27. q4 earnings per share $0.28. q4 revenue fell 10.2 percent to $69.1 million. sees q1 2020 revenue $63 million to $70 million. vishay precision - operating results for q4 2019 versus q3 2019 were primarily impacted by inventory reductions & negative impact of foreign exchange rates. vishay precision group- projected revenue range excludes any potential impact of coronavirus on business, which co is continuing to monitor closely.
As usual, we'll start today's call with the Chief Financial Officer, who will review Vishay's third quarter 2021 financial results. Dr. Gerald Paul will then give an overview of our business and discuss operational performance as well as segment results in more detail. We use non-GAAP measures because we believe they provide useful information about the operating performance of our businesses and should be considered by investors in conjunction with GAAP measures that we also provide. I will focus on some highlights and key metrics. Vishay reported revenues for Q3 of $814 million. EPS was $0.67 for the quarter. Adjusted earnings per share was $0.63 for the quarter. The only reconciling items between GAAP earnings per share and adjusted earnings per share are tax related. There were no reconciling items impacting gross or operating margins. Revenues in the quarter were $814 million, down by 0.7% from previous quarter and up by 27.1% compared to prior year. Gross margin was 27.7%. Operating margin was 15.2%. There were no reconciling items to arrive at adjusted operating margin. EPS was $0.67, adjusted earnings per share was $0.63. EBITDA was $162 million or 19.9%. There were no reconciling items to arrive at adjusted EBITDA. Reconciling versus prior quarter, operating income quarter three 2021 compared to operating income for prior quarter based on $5 million lower sales or flat sales, excluding exchange rate impacts, operating income decreased by $2 million to $124 million in Q3 2021 from $125 million in Q2 2021. The main elements were: Average selling prices had a positive impact of $10 million, representing a 1.3% ASP increase; volume decreased with a negative impact of $4 million, equivalent to a 1.3% decrease in volume. Variable costs increased with a negative impact of $12 million, primarily due to increases in metal prices as well as materials and services and not completely offset by cost reductions. Fixed costs decreased with a positive impact of $4 million, in line with our guidance. Reconciling versus prior year, operating income quarter three 2021 compared to adjusted operating income in quarter three 2020, based on $174 million higher sales, or $172 million excluding exchange rate impacts, adjusted operating income increased by $62 million to $124 million in Q3 2021, from $61 million in Q3 2020. The main elements were: Average selling prices had a positive impact of $18 million, representing a 2.2% ASP increase; volume increased with a positive impact of $70 million, representing a 23.2% increase. Variable costs increased with a negative impact of $8 million. Volume-related manufacturing efficiencies and cost reduction efforts did not completely offset higher metal prices, annual wage increases and higher tariffs. Fixed cost increased with a negative impact of $17 million, primarily due to annual wage increases and higher incentive compensation costs, only partially offset by our restructuring programs. Inventory impacts had a positive impact of $9 million. Exchange rates had a negative effect of $9 million. Selling, general and administrative expenses for the quarter were $102 million, in line with our guidance, excluding exchange rate impacts. For quarter four 2021, our expectations are approximately $104 million of SG&A expenses at current exchange rates. The debt shown on the face of our balance sheet at quarter end is comprised of the convertible notes due 2025 net of debt issuance costs. There were no amounts outstanding on our revolving credit facility at the end of the quarter. However, we did use the revolver from time to time during Q3 to meet short-term financing needs and expect to continue to do so in the future. No principal payments are due until 2025, and the revolving credit facility expires in June 2024. We had total liquidity of $1.7 billion at quarter end. Cash and short-term investments comprised $916 million, and there are no amounts outstanding on our $750 million credit facility. Total shares outstanding at quarter end were 145 million. The expected share count for earnings per share purposes for the fourth quarter 2021 is approximately 145.6 million. Our convertible debt repurchase activity over the past three years, together with the adoption of the new convertible debt standard significantly reduces the variability of our earnings per share to share count. Our U.S. GAAP tax rate year-to-date was approximately 18%, which mathematically yields a rate of 17% for quarter three. In quarter three, we recorded a tax benefit of $5.7 million due to the reversal of deferred tax valuation allowances in certain jurisdictions. We also recorded benefits of $8.3 million year-to-date due to changes in tax regulations. Our normalized effective tax rate, which excludes the unusual tax items, was approximately 22% for the quarter, and 23% for the year-to-date period. We expect our normalized effective tax rate for full year 2021 to be between 22% and 24%. Our consolidated effective tax rate is based on an assumed level and mix of income among our various taxing jurisdictions. A shift in income could result in significantly different results. Also a significant change in U.S. tax laws or regulations could result in significantly different results. Cash from operations for the quarter was $136 million. Capital expenditures for the quarter were $57 million. Free cash for the quarter was $79 million. For the trailing 12 months, cash from operations was $436 million, capital expenditures were $171 million, split approximately for expansion, $113 million; for cost reduction, $9 million; for maintenance of business, $49 million. Free cash generation for the trailing 12-month period was $267 million. The trailing 12-month period includes $15 million cash taxes paid for the 2021 installment of the U.S. tax reform transition tax. Vishay has consistently generated in excess of $100 million cash flows from operations in each of the past 26 years and greater than $200 million for the past 19 years. Backlog at the end of quarter three was at $2.244 billion or 8.3 months of sales. Inventories increased quarter-over-quarter by $30 million excluding exchange rate impacts. Days of inventory outstanding were 81 days. Days of sales outstanding for the quarter were 43 days. Days of payables outstanding for the quarter were 35 days, resulting in a cash conversion cycle of 89 days. Also in the third quarter, we operated under quite excellent economic conditions characterized by extremely high backlogs. We continue to expand critical manufacturing capacities in order to prepare ourselves for further growth. During the quarter, we did experience some localized shortages of labor impacting the manufacturing output. There were strong financial third quarter results. We had a gross margin of 27.7% of sales and operating margin of 15.2% of sales. Earnings per share were $0.67 and adjusted earnings per share, $0.63. Vishay in the third quarter generated $79 million of free cash, and we do expect another good year of cash generation. As I said, the economic environment for electronic components remains exceptionally good with backlogs at a historical high. Except for automotive, all markets continue to be in excellent shape and sales are basically limited by the manufacturing capacities. The automotive sector is expected to accelerate again over the next quarters with current supply problems getting resolved step by step. The supply chain continues to be rather depleted in general. We see extremely long lead times and shortages of supply. Price increases are being implemented in general also to offset increased inflationary costs for metals and for transportation. Concerning the various regions, not so many differences. All regions remained exceptionally strong. POS in all regions remains close or above all-time highs, and distribution in all regions remains hungry for products every year, no change. Global distribution continues to get overwhelmed with orders. POS in the third quarter continued on a record level of the second quarter, running 34% over prior year. POS increased versus Q2 by 5% in the Americas and by 3% in Europe. Asia was slightly down by 2%. Americas and Europe are at an all-time high. Inventory turns of global distribution in quarter three turns was at 4.2 turns, started to normalize from quite extreme 4.4 turns in the second quarter. In the Americas, 2.2 turns after 2.1 turns in the second quarter and 1.5 turns in prior year. In Asia, 6.1 turns after 7.4 turns in Q2 and 4.3 turns in prior year. And in Europe, 4.5 turns in the quarter after 4.6 turns in the second quarter and 3.2 turns in prior year. Coming to the various industry segments we serve. Sales to the automotive market remains dampened by customers' inability to secure ICs. The situation is expected to improve step by step. And as the demand for cars remains on a very high level, you can see that there's money in the bank for 2022. Industrial markets continued strong in all regions, factory automation, alternative energy, power transmission are driving the growth. After record levels in 2020, personal computing shows signs of normalization, but server markets continue growing. Proliferation of 5G technology continues to drive sales in fixed telecom. Military spending remains stable. Commercial aerospace starts to recover slowly. Medical markets are steady, with focus being more and more shifted back to normal hospital procedures. White goods, air conditioning and gaming remains strong and profitable. Coming to Vishay's business development in Q3. Due to local labor shortages, third quarter sales, excluding exchange rate impacts came in below the midpoint of our guidance. We achieved sales of $814 million versus $819 million in prior quarter and versus $640 million in prior year. Excluding exchange rate effects, sales in Q3 were flat versus prior quarter and up by $172 million or by 27% versus prior year. Book-to-bill in the quarter has remained on an extraordinarily high level of 1.26 after 1.38 in prior quarter. 1.29 book-to-bill for distribution after 1.41 in quarter two; 1.23 for OEMs after 1.34 in the second quarter; 1.27 for semis after 1.41 in Q2; 1.26 for passives after 1.35; 1.30 for the Americas after 1.33 in Q2; 1.14 for Asia after 1.29; 1.41 for Europe after 1.54, I think we can speak of a broad continuation of an excellent economical environment. Our backlog in the third quarter has climbed to another record high of 8.3 months after 7.5 in the second quarter, 8.9 months in semis after 8.4 months in Q2 and 7.6 months in passives after 6.7 months in Q2. Price increases become visible in our broad form. We have seen 1.3% prices up versus prior quarter and 2.2% versus prior year. For the semiconductors, it was 2.2% up versus prior quarter and 3.8% up versus prior year. For the passives, 0.3% up versus prior quarter and 0.5% up versus prior year. Some highlights of operations. Despite the continued good level of plant efficiencies, our contributive margin in the third quarter has suffered from inflationary impacts, in particular as it relates to metals and to transportation. SG&A costs in Q3 came in at $102 million according to expectations when excluding exchange rate impacts. And manufacturing fixed costs in the quarter came in at $137 million, below our expectations when excluding exchange rate impacts. Total employment at the end of the third quarter was 22,730, 1% up from prior quarter. Excluding exchange rate impacts, inventories in the quarter increased. By $30 million, $13 million in raw materials and $17 million in WIP and finished goods. Inventory turns in the third quarter remained at a very high level of 4.5 after 4.8 in Q2. Capital spending in the quarter was $57 million versus $22 million in prior year, $41 million for expansion, $2 million for cost reduction and $14 million for the maintenance of business. We continue to expect for the year 2021 capex of approximately $250 million for the most part, of course, for expansion projects. We, in the third quarter generated cash from operations of $436 million on a trailing 12-month basis. And also, on a 12-month basis, we generated $267 million free cash. Despite increased capex, we also for the current year, expect a solid generation of free cash, quite in line with our provision. Coming to our main product lines, starting with resistors. With resistors, we enjoy a very strong position in the auto industrial, mill and medical market segments. We offer virtually all resistor technologies and are globally known as a reliable high-quality supplier of the broadest product range. Vishay's traditional and historically growing business has returned to record levels. Sales in the quarter were $181 million, down by $12 million or 6% from previous quarter, but up by $35 million or 24% versus prior year, all excluding exchange rate impacts. In the third quarter, in particular, some shortages of labor and limited sales. The book-to-bill ratio in the quarter continued strong, 1.26 after 1.39 in the second quarter. The backlog increased further to 7.8 months from 6.6 months in the prior quarter. Gross margin in the quarter decreased to 27% of sales, down from a peak of 30% in Q2. Main reasons were lower volume and higher metal and logistics costs. Inventory turns in the quarter remained on a very high level of 4.7 after 5.1 in the second quarter. Selling prices continued to increase, plus 0.5% versus prior quarter and plus 0.7% versus prior year. We are in process to raise critical manufacturing capacities mainly for resistor chips and for power wirewounds. And of course, we focus on hiring in the critical places. We expect a very successful year for resistors. The business consists of power inductors and magnetics. Since years, our fast-growing business with inductors represents one of the greatest success stories of our company. Exploiting the growing need for inductors in general, which had developed a platform of robust and efficient power inductors and leads the market technically. With magnetics, we are very well positioned in specialty businesses, demonstrating steady growth there. Sales of inductors in the third quarter were $85 million, flat versus prior quarter and up by $5 million or by 7% versus prior year, excluding exchange rate effects. The book-to-bill ratio in the third quarter was 1.11 after 1.21 in prior quarter. The backlog for inductors grew further to 5.4 months from 5.1 in the second quarter. Gross margin continued to run at an excellent level of 32% of sales, slightly down from a peak of 34% in prior quarter. Inventory turns were at 4.6, practically flat versus prior quarter. There is a substantially reduced price decline at inductors, a slight price increase of 0.2% versus prior quarter and minus 1% versus prior year. We are accelerating the next steps of capacity expansion for power inductors in order to get ahead of the demand curve. Our business with capacitors is based on a broad range of technologies with a strong position in American and European market niches. We enjoy increasing opportunities in the fields of power transmission and of ECAs, namely in Asia and China. Sales in the third quarter were $116 million, 3% below prior quarter but 25% above prior year, which excludes exchange rate impacts. Shortages of labor, also in the case of capacitors, limited manufacturing output and sales. Book-to-bill in the third quarter for capacitors remained at very strong 1.7 on the level of the prior quarter. Backlog increased to an absolute record of 8.9 months, up from 7.7 months in the second quarter. Gross margin in the third quarter reduced to 21% of sales from 24% in the second quarter. Lower volume meant further increased cost for metals, in particular, worsen the results. Inventory turns in the quarter remained on a healthy level of 3.5 after 3.9 in prior quarter. We are steadily increasing selling prices, 0.1%-plus versus prior quarter and 1.3%-plus versus prior year. We expect a solid year for capacitors with growing opportunities in the future. We remain confident for capacitors for the midterm in the light of increasing designed wins that we see. Coming to Opto products. Vishay's business with Opto products consists of infrared emitters, receivers, sensors and couplers. Also in Opto, we see a strong acceleration of demand. Sales in the quarter were $71 million, 6% below prior quarter, but 9% above prior year, which excludes exchange rate impacts. We experienced quite substantial losses of manufacturing output due to COVID-related restrictions in Malaysia. This situation should be resolved, for its resolved after all by all the workforce now has been vaccinated, will not repeat itself therefore. Book-to-bill in the third quarter continued strong at 1.36 after extreme 1.69 in the second quarter. Backlog continued to grow to another record high of 10.9 months after 9.3 months in prior quarter. Gross margin in the third quarter improved further to 34% of sales after 32% in prior quarter. I think we can say Opto continues to perform exceptionally well. We have seen now more normal inventory turns of 5.0 in the quarter after 5.8 in the second quarter. The selling prices are going up, plus 1.9% versus prior quarter and plus 5% versus prior year. We modernized and expand our Heilbronn wafer fab and the production should start in the course of Q4, partially Q1 next year. Opto products continue to be a very relevant factor for Vishay's growth. Diodes for Vishay represents a broad commodity business where we are largest supplier worldwide. Vishay offers virtually all technologies as well as the most complete product portfolio. The business has a very strong position in the automotive and industrial market segments and keeps growing steadily and profitably since years. Sales in the quarter were $185 million, up by $12 million or by 7% versus prior quarter, and up by $61 million or 49% versus prior year without exchange rate effects. We see a continued strong book-to-bill ratio of 1.31 in the quarter after 1.45 in Q2. Backlog climbed to an extreme high of 8.9 months from 8.5 months in prior quarter. With growing volume, gross margin continued to improve to 25% of sales as compared to 24% in Q2. Inventory turns were at 4.5 after 4.7 in prior quarter. Selling prices keep increasing by 2.9% versus prior quarter and by 5.1% versus prior year. We have started to expand our fab in Taipei introducing the 8-inch technology there. The business with diode starts to exceed pre-pandemic levels. Vishay is one of the market leaders in MOSFET transistors. With MOSFETs, we enjoy a strong and growing market position, in particular, in automotive, which in view of an increasing use of MOSFETs will provide a very successful future for this product line. The demand has reached quite extreme levels and increases further. Sales in the quarter were $176 million, 5% above prior quarter and 31% above prior year, excluding exchange rate impacts. Book-to-bill ratio in Q3 was 1.19 after 1.26 in the second quarter. Backlog has grown further to an extreme level of 8.1 months as compared to 7.9 in the second quarter. Higher volume, better selling prices and good efficiencies allowed gross margin to increase further to 31% of sales, up from 28% in the second quarter. Inventory turns in the quarter were at 5.1, virtually flat versus prior quarter. We are implementing price increases plus 1.5% versus prior quarter and plus 2.2% versus prior year. MOSFETs remain absolute key for Vishay's growth going forward. We intend to keep a proper balance between in-house manufacturing of wafers and purchases from foundries. And this in mind, we decided to build a 12-inch wafer fab in Itzehoe in Germany, adjacent to our existing eight-inch fab, which will increase our in-house wafer capacity by 70%, 7-0 percent, within three to four years. Let me summarize and let me emphasize the following: Clearly we, since a few years, enjoy very favorable economic conditions, and the end of the positive phase of the current cycle is not in sight. But, I think much more important beyond all short-term speculations, the longer-term outlook for electronics and also for components is remarkably bright. We expect noticeably higher growth rates for our products going forward than we have seen them in the past. Vishay definitely is in a good position to benefit from this favorable trend. We enjoy a very broad and strong market position. We are a broad liner, and we are financially solid and therefore, in the position to take the right steps. Results also for the fourth quarter look promising. We guide to a sales range between $805 million and $845 million at a gross margin of 27.7%. Over to you, Peter. Vic, please take the first question.	compname reports q3 adjusted earnings per share of $0.63. q3 adjusted earnings per share $0.63. q3 earnings per share $0.67. q3 revenue $814 million. sees q4 2021 revenues of $805 to $845 million.
As usual, we start today's call with the CFO, who will review Vishay's fourth quarter and year 2020 financial results. Dr. Gerald Paul will then give an overview of our business and discuss operational performance, as well as segment results in more detail. We use non-GAAP measures, because we believe they provide useful information about the operating performance of our businesses and should be considered by investors in conjunction with GAAP measures that we also provide. I will focus on some highlights and key metrics. Vishay reported revenues for Q4 of $667 million, higher than our original expectations, partially due to foreign currency effects. EPS was $0.26 for the quarter, adjusted earnings per share was $0.28 for the quarter. During the quarter, we repurchased 2.6 million principal amount of our convertible debentures due 2041 and recognized the US GAAP loss on extinguishment. I will elaborate on these transactions in a few minutes. COVID-19 continues to have an impact on our business. We see strong signs of recovery during Q4. Similar to the first three quarters 2020, we have identified certain COVID-19 related charges, net of certain subsidies, which are directly attributable to the COVID-19 outbreak. These items were insignificant to Q2, Q3, and Q4 results, but are added back when calculating our non-GAAP adjusted earnings per share for comparability. Such measures exclude indirect impacts such as general macroeconomic effects of COVID-19 on our business and higher shipping costs due to reduced shipping capacity. Revenues in the quarter were $667 million, up by 4.2% from previous quarter and up by 9.4% compared to prior year. Gross margin was 22.8%, adjusted gross margin excluding COVID cost was 22.9%. Operating margin was 9%, adjusted operating margin excluding COVID cost was 8.9%. EPS was $0.26, adjusted earnings per share was $0.28. EBITDA was $95.0 million or 14.4%, adjusted EBITDA was $96.2 million or 14.4%. Revenues in 2020 were $2,502 million, down by 6.2% from previous year. Gross margin was 23.3%, adjusted gross margin excluding COVID costs was 23.4%. Operating margin was 8.4%, adjusted operating margin excluding corporate costs was 8.5%. EPS was $0.85, adjusted earnings per share was $0.92. EBITDA was $352 million or 14.1%, adjusted EBITDA was $364 million or 14.6%. Reconciling versus prior quarter, adjusted operating income quarter four 2020 compared to adjusted operating income for prior quarter based on $27 million higher sales or $23 million higher excluding exchange rate impact, adjusted operating income decreased by $2 million to $60 million in Q4 2020 from $61 million in Q3 2020. The main elements were average selling prices had a negative impact of $2 million, representing a 0.3% ASP decline. Volume increased for the positive impact of $10 million, equivalent to a 4% increase in volume. Variable cost increased with a negative impact of $4 million, primarily due to increased costs for freight duties and metal. Fixed cost increased with a negative impact of $5 million, primarily due to the acquisition, and higher year-end repair and maintenance costs. Inventory impact had a positive effect of $5 million. Exchange rates had a negative effect of $4 million. Versus prior year, adjusted operating income Q4 2020 compared to adjusted operating income in quarter four 2019, based on $58 million higher sales or $44 million excluding the exchange rate impact, adjusted operating income increased by $19 million to $60 million in Q4 2020 from $41 million in Q4 2019. The main elements were average selling prices had a negative impact of $19 million representing a 2.8% ASP decline. Volume increased with a positive impact of $27 million, representing 10.3% increase. Variable cost decreased with a positive impact of $9 million. Cost reductions, lower material prices, as well as improved manufacturing efficiencies more than offset increases in labor and freight costs as well as metal prices. Fixed cost decreased with a positive impact of $2 million, primarily due to lower travel cost which more than offset inflation. Inventory impacts had a positive effect of $4 million, exchange rates had a negative effect of $5 million. 2020 versus 2019, adjusted operating income for the year 2020 compared to adjusted operating income for the year 2019. Based on $166 million lower sales or $180 million lower excluding exchange rate impact, adjusted operating income decreased by $73 million to $214 million -- from $287 million in 2019. Average selling prices had a negative impact of $71 million, representing a 2.8% ASP decline. Volume decreased with a negative impact of $53 million, representing 4.2% decrease. Variable cost decreased with the positive impact of $32 million, cost reductions and lower material prices as well as improved manufacturing efficiencies more than offset increases in labor and freight cost and metal prices. Fixed cost decreased with the positive impact of $15 million, primarily due to lower travel costs and general belt tightening, which more than offset wage inflation. Inventory impact had a positive effect of $8 million, exchange rates had a negative effect of $5 million. Selling, general and administrative expenses for the quarter were $92 million, which includes a net benefits of $0.6 million of subsidies in excess of identified COVID cost. Selling, general and administrative expenses for 2020 was $371 million, which includes a net benefit of $1.5 million of subsidies in excess of identified COVID costs. For Q1 2021, our expectations are approximately $103 million of SG&A expenses. The increase was primarily due to uneven attribution of stock compensation expense, incentive compensation accruals, and wage inflation, which are not completely offset by the impact of our restructuring program. For the full year, our expectations are slightly above $400 million at the exchange rates of quarter four. This increase year-over-year is primarily due to the weakening of the US dollar versus our relevant currencies, increased travel cost anticipated in the second half of the year and incentive compensation accruals and wage increases not completely offset by the impact of our restructuring program. Based on our cost cycle, our SG&A expenses will be at the highest recorded level in Q1. During the quarter, we were able to repurchase the final $3 million principal amount of our convertible debentures due 2041. Last Thursday, we completed the redemption of our convertible debentures due 2040, of which only $300,000 principal amount is outstanding. These actions complete the programs we have undertaken over the past three years to retire the convertible debentures due 2040, 2041, and 2042, which had certain tax attributes, which were no longer efficient after US tax reforms. We continue to have a series of convertible notes outstanding, which are due in 2025, while we did not be purchase any of our convertible notes due 2025 during quarter four. During 2020, we opportunistically repurchased $135 million principal amount of the convertible notes due 2025. The average repurchase price for the notes was 95.3% of face value. By reducing our fixed term debt, repurchase of the convertible notes provides us with future flexibility to better utilize our revolver and to adjust our debt levels as necessary. We continue to be authorized by our Board of Directors to repurchase up to an additional $65 million of convertible due 2025, subject to market and business conditions, legal requirements, and other factors. We had total liquidity of $1.5 billion at quarter end. Cash and short-term investments comprised $778 million and the useful capacity on our credit facility is approximately $730 million. Our debt at year-end is comprised primarily of the convertible notes due 2025. The principal amount or face value of the convert is $466 million. The carrying value of $395 million net of unamortized discount and debt issuance costs. There were no amounts outstanding on our revolving credit facility at the end of the year. However, we did utilize revolver from time to time during Q4 to meet short-term financing needs and expect to continue to do so in the future. No principal payments are due until 2025 and the revolving credit facility expires in June 2024. Vishay will early adopt the new accounting standard for convertible debts, effective January 1, 2021. First on to the new standard, our convertible debt will no longer be bifurcated into debt and equity components and we will no longer be required to amortize the related debt discounts as non-cash interest expense. This means that our reported debt balance will increase to approximately the face value of the convert. It also means that our US GAAP interest expense will decrease to approximate the cash coupon. We expect interest expense for Q1 to be approximately $4.4 million. The new standard also requires application of the if-converted method for earnings per share share count, which would have added 14 million shares to our diluted earnings per share share count. In response to this and consistent with our previously stated intention to net share settle, we amended the indenture for the convertible notes due 2025, requiring Vishay to pay the principal amount of any converted note in cash with any additional conversion value settled in shares of common stock. This results in a similar impact on the diluted share count to that which was achieved under the old standard when assuming net share settlement. Total shares outstanding at quarter end were 145 million. The expected share count for earnings per share purposes for the first quarter 2021 is approximately 145 million. Our global cost reduction programs that were announced in mid 2019 have now been fully implemented with lower cost of approximately $15 million annually. The full-year effective tax rate on a GAAP basis was approximately 22%. The full year normalized tax rate was approximately 21%. Both the quarters mathematically yield the tax rate of approximately 19% for GAAP and approximately 11% normalized. Our year-to-date GAAP tax rate includes the unusual tax benefits related to the settlement, some of the convertible debentures from Q1 and Q4 and an adjustment to uncertain tax positions $4 million in Q4. Our year-to-date normalized rate excludes the unusual tax items as well as the tax effects of the pre-tax loss and extinguishment of debt, the identified COVID costs and the Q2 restructuring charge. Our effective tax rate for the full year was lower than we expected at the end of Q3 due to changes in certain processes and business practices, as we continue to adapt our financial and capital structure in response to US tax reform. We expect our normalized effective tax rate for 2021 to be between 22% and 24%. Our consolidated effective tax rate is based on an assumed level of mixed income among our various taxing jurisdictions. A shift in income could result in significantly different result. Also a significant change in tax laws or regulations could result in significantly different result. Cash from operations for the quarter was $126 million, capital expenditures for the quarter was $53 million, free cash for the quarter was $73 million. For the year, cash from operations was $315 million, capital expenditures were $124 million, but approximately for expansion $83 million, for cost reduction $9 million, for maintenance of business $32 million. Free cash generation for the year was $192 million. The year includes $60 million cash taxes paid related to cash repatriation plus $15 million cash taxes paid for the current year instalment of the US tax reform transition tax. Vishay has consistently generated in excess of $100 million cash flows from operations in each of the past now 26 years and greater than $200 million for the last now 19 years. Backlog at the end of quarter four was at $1,240 million or 5.6 months of sales. Inventories increased quarter-over-quarter by $1 million, including an exchange rate impact. Days of inventory outstanding were 79 days. Days of sales outstanding for the quarter were 45 days. Days with payables outstanding for the quarter were 31 days, resulting in a cash conversion cycle 94 days. The year 2020 for Vishay and its business partners has been overshadowed by a completely new experience, a global pandemic. During the year, there were several phases of the pandemic impacting our business in very different ways. From numerous plant shutdowns mainly in Asia and temporary shortages of supply in the early part of the year over drastic negative reactions of many customers in particular in the automotive segment in the second quarter to an extremely steep and broad recovery of orders since October. Vishay managed to adapt to a fast-changing economic environment fairly well, keeping up efficiencies, minimizing fixed costs, controlling inventories, and capex. Vishay in 2020 achieved a gross margin of 23.3% of sales versus 25.2% in 2019, and adjusted gross margin of 23.4% of sales versus 25.2%. Operating margin of 8.4% of sales versus 9.8% in 2019, and adjusted operating margin of 8.5% versus 10.7% in 2019. Earnings per share of $0.85 versus $1.19 in 2019 and adjusted earnings per share of $0.92 versus $1.26 in 2019. The generation of free cash also in 2020 remained on a quite excellent level. We in 2020 generated free cash of $192 million, which includes taxes paid for cash repatriation of $16 million. The fourth quarter, while benefiting from an accelerated economic recovery, suffered from higher than expected freight costs and metal prices. Additionally, the US dollar weakened versus practically all currencies in which we just incurred costs, but achieved no sales. Vishay in the fourth quarter achieved gross margin of 22.8% of sales versus 23.7% in Q3, adjusted gross margin of 22.9% versus 23.7% in Q3. Operating margin of 9% of sales versus 9.6% in the third quarter, adjusted operating margin of 8.9% versus 9.6% in Q3. Earnings per share of $0.26 versus $0.23 in quarter three and adjusted earnings per share of $0.28 versus $0.25 in Q3. Currently, the economic environment for electronics in general can be expressed as friendly to booming. The pandemic even raised its consumption in several market segments and automotive came back to the full extent. There is some economic -- some economic recovery was already seen in the third quarter, but now it has developed quite drastically in the course of the fourth quarter. In particular, distribution contributed and continues to do so, also driven by some anxieties, concerning potentially upcoming shortages of supply. We have realized reduced price pressure across the board and lead times in general are stretching out. All regions enjoyed growth in the quarter, lead by automotive and distribution in Europe. There is a strong continued broad performance in Asia, and growth is also in the Americas to be seen, despite the weakness of oil and gas and commercial avionics. Global distribution currently is very confident, concerning the short and mid-term business outlook. In fact, there is growing nervousness concerning the availability of components in particular of semiconductors. In the year 2020, POS of global distribution was 3% below 2019, mainly due to a very weak second quarter. POS in quarter four 2020 on the other hand was 4% over prior quarter and 9% over prior year. POS in quarter four was strong in particularly in Asia, with 9% above prior quarter, whereas in Europe and in Americas, POS remains virtually on the levels of the third quarter. Distribution inventories in the fourth quarter came down again by $24 million. Inventory turns of global distribution increased to 3.1 from 2.8 in prior quarter. In the Americas, 1.6 turns after 1.5 in Q3 and 1.4 in prior year. In Asia, 5.0 after 4.3 in Q3 and 3.3 in prior year. In Europe, 3.2 after 3.0 in Q3 and 2.8 in prior year. What can be stated is that Asian distribution has a very low inventory level currently. Coming to the industry segments, continued strong orders come from automotive, as OEMs attempt to recoup volume lost during the second quarter closures. Production volumes of light vehicles are approaching pre-Corona levels, but the electronic content has grown and continues to do so. Advanced driver-assist systems, 48V hybrid systems, autonomous driving and in particular electric vehicle charging programs boost the volume. Industrial continues to provide major growth opportunities, despite the present weakness of the oil and gas sector. Industrial automation, new power generation and transmission systems as well as increased residential development propel growth. The market for computers and related products remains remarkably strong, driven by continued demand for tools to support global work from home trends. The AMS sector continues to be burdened by an extremely weak market for commercial avionics, will remain. For Telecom, we for the mid-term continue to expect the major upstream in the context of the introduction of 5G, more short-term 4G systems will continue to grow. Quarantine restrictions favor consumer products in general and medical continues to show stable growth. Let me comment on our business in the fourth quarter in particular, mostly due to a high demand from distribution Q4 sales, excluding exchange rate impact came in slightly above the upper end of our guidance. We achieved sales of $667 million versus $640 million in prior quarter and $610 million in prior year. Excluding exchange rate effects, sales in the fourth quarter were up by $23 million or by 4% versus prior quarter and up versus prior year by $44 million or by 7%. Sales in the year 2020 were $2,502 million versus $2,668 million in 2019, a decrease of 7%, excluding exchange rate effects. The book-to-bill ratio in the fourth quarter, may I say jumped really to 1.44 from 0.99 in Q3, mainly driven by Asian distribution; 1.89 book-to-bill for distribution after 0.99 in Q3, 0.96 for OEMs after 1.01 in Q3. 1.61 for semiconductors after 0.98, 1.27 for passives after 1.0. 1.15 for the Americas after 0.92 in Q3. 1.75 for Asia after 1.04 in Q3. And finally, 1.27 for Europe after 1.01 in Q3. Backlog in the fourth quarter climbed to an extreme high of 5.6 months after 4.3 in quarter three, 6 months in semis after 4.3 in the third quarter and 5.2 months in passives after 4.4. There is further decrease in price pressure 0.3% prices down versus prior quarter and 2.8% down versus prior year. In semis, there's less price pressure due to the current high demand minus 0.2% prices versus prior quarter, minus 3.9 versus prior year. Passives price decline is on normal levels 0.5 down versus prior quarter and minus 1.7% versus prior year. Some comments on operations. In 2020, we were not completely able to offset the normal negative impacts on the contributive margin by cost reduction and by innovation, despite good manufacturing efficiencies. During the year, we suffered from increasing transportation costs, increasing metal prices and in particular in the fourth quarter from the impact of a weakening US dollar. Adjusted SG&A costs in the fourth quarter came in at $93 million, $2 million below expectations, when excluding exchange rate effects. Adjusted SG&A costs for the year 2020 were at $373 million, 15 million or 4% below prior year at constant exchange rates, mainly due to less traveling and general belt-tightening. Manufacturing fixed cost in the fourth quarter came in at $133 million, in line with expectations when excluding exchange rate effects. Manufacturing fixed cost for the year 2020 were $513 million flat versus prior year at constant exchange rates. Total employment at the end of 2020 was 21,555, 4% down from prior year. Excluding exchange impacts, inventories in the quarter remained virtually flat. Inventory turns in the fourth quarter improved to 4.6 from 4.4 in the prior quarter. In the year 2020, inventories were flat versus prior year. Inventory turns for the entire year 2020 were at a very satisfactory level of 4.3. No change to prior year. Capital spending in 2020 was $124 million versus $157 million in prior year, $83 million for expansion, $9 million for cost reduction, and $32 million for maintenance of business, some acceleration vis-a-vis previous expectations of programs had been required in view of the sharply increasing orders. For 2021, we expect increased capex of about $175 million, required to fulfill a strong demand. Concerning cash flow generated, we generated in 2020 cash from operations of $315 million, including $16 million cash taxes for cash repatriation compared to $296 million cash from operations in 2019, including $38 million cash taxes for cash repatriation. We generated in 2020 free cash of $192 million including $16 million cash taxes for cash repatriation, compared to a free cash generation of $140 million in 2019, including $38 million cash taxes for cash repatriation. I think we can say that Vishay also in a year of an unprecedented economic destabilization has continued to live up to its reputation as an excellent and variables producer of free cash. Let me go to our main product lines and as that is always with Resistors. The Resistors, we enjoy a very strong position in the auto, industrial, mill and medical market segments. We offer virtually all Resistor technologies. Vishay's traditional and historically growing business in the second quarter had suffered substantially from the weakness, especially in automotive, but now is in process of a fast recovery. Sales in the fourth quarter were $161 million, up by $15 million or by 10% versus prior quarter and up by $8 million or 5% versus prior year, all excluding exchange rate impacts. Sales in 2020 of $606 million were down by $56 million or by 8% versus prior year again, excluding exchange rate impacts. Book-to-bill in the fourth quarter for Resistors was 1.24 after 1.06 in prior quarter and backlog for Resistors increased from 4.5 months to 4.9 months. Due to higher volume, gross margin in the quarter increased to 26% of sales from 24% in prior quarter. Gross margin for the year 2020 was at 25% of sales down from 28% in 2019 due to still lower volume. Inventory turns in the fourth quarter were at 4.5. Inventory turns for the full year were at a good level of 4.1. Low price decline for Resistors minus 0.1% versus prior quarter and minus 2% versus prior year. The acquisition ATP is in process to be integrated and we do expect a successful year 2021, based on more volume and on an even higher focus on specialty products. Coming to Inductors, the business consists of power inductors and magnetics since years our fast growing business with Inductors represents one of the greatest success stories of Vishay. Exploiting the growing need for investors in general, Vishay developed the platform of robust and efficient power inductors and leads the market technically. With the Magnetics, we are very well positioned in specialty businesses, demonstrating steady growth. Sales of inductors in Q4 were at $75 million, down by $4 million or 6% versus prior quarter and down by $2 million or 3% versus prior year, excluding exchange rate impact. Sales in 2020 of $294 million were slightly down versus prior year by $6 million or by 2%, again excluding exchange rate impacts. The temporary slowdown of automotive in 2020 also had an impact on the growth of Inductors. Book-to-bill in quarter four for Inductors was 1.03 after 0.96 in prior quarter. The backlog is at 4.6 months after 4.3 months in prior quarter. Gross margin in the quarter was at 30% of sales, down versus prior quarter, which was at 34% of sales, but this has been a record. The exchange rate and higher transportation cost burdened to performance in the fourth quarter to a degree. Gross margin for the year 2020 was at excellent 32% of sales, virtually on the same level as in prior year. Inventory turns in the quarter were at a very high level of 5.0 as compared to 4.6 for the whole year. We planned for some inventory additions for supporting service. There is some price pressure predominantly at power inductors minus 1.7% versus prior quarter at minus 3.6% versus prior year. We continuously expand our manufacturing capacitors for power inductors and we do expect to return to traditional growth rates in 2021 and ongoing financial success in our Inductor lines. Coming to Capacitors, our business with Capacitors is based on a broad range of technologies with a strong position in the American and European market niches. We enjoy increasing opportunities in the field of power transmission and of electric cars namely in Asia, especially in China. Sales in Q4 were $92 million, 2% below prior quarter and 6% below prior year, which excludes exchange rate effects. Year-over-year Capacitor sales decreased from $423 million in 2019 to $362 million in 2020 or by 15% at constant exchange rates. This was strongly impacted by delays of governmental projects and by a non-repetition of a specific 2019 program, two things came together. Book-to-bill ratio in quarter four was 1.54 after 0.95 in the previous quarter. We received now a large order or large orders for power capacitors from China. The backlog increased substantially to 6.2 months from 4.4 months in Q3. Gross margin in the quarter was at 18% of sales, down from 20% mostly due to a less favorable mix. Gross margin for the year 2020 was at 19% of sales, down from 22% in 2019 due to lower volume. Inventory turns in the quarter increased to 3.8 as compared to 3.6 for the whole year. Prices were stable minus 0.2% versus prior quarter and plus 0.4% versus prior year. We do expect increased volume and better profitability in 2021. Vishay's business with Opto products consists of infrared emitters, receivers, sensors and couplers as well as of LEDs for automotive applications. The business in 2020 experienced a significant recovery from disappointing results in prior year that had been burdened by major corrections in the supply chain. Currently, we see a really sharp increase in demand. Sales in the quarter were $68 million, 5% above prior quarter and 29% above prior year at constant exchange rates. Year-over-year sales with Opto products went up from $223 million to $237 million or by 5% when excluding exchange rate effects. Book-to-bill in the fourth quarter was 1.46 after 0.97 in the prior quarter and the backlog increased substantially to 5.9 months after 4.6 months in the third quarter. Gross margin in the quarter came in at satisfactory 28% of sales after 33% in the third quarter, which had been a spike. Gross margin for the year 2020 recovered to a level of 28% of sales as compared to 24% in prior year, which had been depressed primarily due to low volume. Very high inventory turns of 6.0 for Opto products in Q4 as compared to 5.5 in the year 2020. Prices were fairly stable, in fact 1.2% up versus prior quarter and minus 1.1% versus prior year. We remain confident that Opto products going forward will contribute noticeably to our growth and we are in process to modernize and expand our higher growth in Germany. Diodes for Vishay represents a broad commodity business, where we are largest supplier worldwide. Vishay offers virtually all technologies as well as the most complete product portfolio. The business is in very strong position in the automotive and industrial market segments and keeps growing steadily and profitably since years. Diodes for a few quarters had suffered from too high inventory levels in the supply chain and from the weakness of its main markets. Now the business has entered the phase of strong recovery. We currently see a fairly dramatic upturn in demand. Sales in the quarter were $139 million up by $15 million or about 12% versus prior quarter and up by $14 million or 11% versus prior year, which excludes exchange rate effects. Year-over-year sales with Diodes decreased still from $557 million to $503 million, a decline of 10% at constant exchange rates. Book-to-bill ratio in Q4 climbed abruptly to 1.65 after 1.05 in the third quarter. Backlog increased to 6.2 months from 4.7 months in prior quarter. Gross margin in the quarter improved to 18% of sales as compared to 17% in the third quarter. Gross margin in the year 2020 was at 18% of sales, down from 20% in prior -- down from 20% in prior year due to substantially lower volume. Inventory turns increased to 4.8, as compared to 4.4 for the whole year. We see a reduced price pressure, stable prices plus 0.2 really versus prior quarter at minus 3.7% versus prior year. We expect profitability of Diodes to return to more historic levels with increasing volume. Vishay is one of the market leaders in MOSFETs transistors. With MOSFETs, we enjoy a strong and growing market position in automotive, which in view of an increased use of MOSFETs and automotive will provide a successful future. We currently experience like in Diodes, a quite dramatic increase in demand. Sales in the quarter were $132 million, 2% below prior quarter, but 12% above prior year at constant exchange rates. Year-over-year sales with MOSFETs decreased slightly from $509 million to $501 million by 2% excluding exchange rate impacts. Book-to-bill went up sharply to 1.64 in the quarter after 0.93 in quarter three. Backlogs climbed to 5.7 months as compared to 3.7 months in the third quarter. Gross margin in the quarter was at 22% of sales. No change from prior quarter. Gross margin in the year 2020 came in at 23% of sales, a reduction from 25% in 2019 due to a combination of higher metal prices and inventory reduction. Inventory turns in the quarter were 4.3 as compared to 4.0 for the entire year. Price decline is relatively normal minus 1.2% versus prior quarter, minus 5.6% versus prior year. But given the high market demand, we expect prices to stabilize going forward. MOSFETs in general remain key for Vishay's growth going forward. I think there is no need to emphasize that 2020 has been a year of unprecedented challenges for the people globally, for the economy in general, and naturally also for Vishay. Nevertheless, the following should be highlighted. Electronic components continue to be a success story, also during difficult times. Vishay is a remarkably stable enterprise that reacts quickly and professionally to changes that has a viable business model and pursues its strategies also during times of severe challenges. We remain excited about the fairly overwhelming opportunities electronics increasingly will enjoy in the future. Vishay is prepared to participate to the full extent. Fortunately, concerning the pandemic, there is light at the end of the tunnel and we, despite still existing obstacles, expect the strong year 2021. For the first quarter, we at quarter four exchange rates guide to a sales range between $705 million and $745 million at the gross margin of 25% of sales, plus/minus 60 basis points. We will now open the call to questions. Shelby, please take the first question.	q4 earnings per share $0.26. q4 adjusted earnings per share $0.28. sees q1 2021 revenues $705 to $745 million.
These materials are available on the Ventas website at ir. This earnings call does not constitute an offer to buy or sell or the solicitation of an offer to buy or sell any securities, also with depletion of any vote or approval in connection with the proposed acquisition of New Senior Ventas filed with the SEC a registration statement on Form S-4 that includes a preliminary prospectus for the Ventas common stock that will be issued in the proposed acquisition and that also constitutes the preliminary proxy statement for a special meeting of New Senior stockholders to approve the proposed acquisition. The proxy statement prospectus and other documents filed by Ventas and New Senior with the SEC may be obtained free of charge at Ventas' Investor Relations website at ir. ventasreit.com or in New Senior's Investor Relations website at ir. You should review such material filed with the SEC carefully because they contain or will contain important information about the proposed transaction, including information about Ventas and New Senior and the respective Directors, executive officers and other employees who may be deemed to be participants in the solicitation of proxies in respect of their proposed acquisition and a description of their direct and indirect interests by security holdings or otherwise. Sarah, well done, your first public company merger. Ventas has delivered an outstanding second quarter and we have strong momentum across the board, in health and safety, capital deployment and access, realization of the benefits of prior successful investments, financial strength and most importantly in portfolio growth led by our high quality SHOP business with significant contributions from office and stability in our triple-net lease business. We see a clear path to growth in our demographically driven diversified enterprise, capturing the embedded upside in our senior housing business, the benefit of external investments, reliable cash flow from our office and triple-net businesses and delivery and stabilization of ongoing developments, primarily in the life sciences research and innovation and Canadian senior housing areas. Our experienced team is committed to winning the recovery for all of our stakeholders. Let me first turn to our second quarter results. We posted $0.73 of normalized FFO per share, which is above the high end of our previously provided guidance. I'm delighted that our same-store property portfolio grew 3.6%, sequentially. Our outperformance was driven by SHOP, which produced a $111 million in quarterly NOI, a recovery of $50 million of annualized NOI, representing industry-leading growth in same-store cash NOI and occupancy. July continued these positive SHOP trends for the fifth consecutive month of occupancy growth. Importantly, by the end of July, lease reached their highest levels since the pandemic began. Justin will unpack these trends, more fully in his remarks. As a result, we've never been more confident that the senior living business is supported by powerful demand that is growing and resilient, while supply remains constrained. That said, given the macro uncertainty in the COVID-19 environment, particularly the national and regional rise in cases and the measures that have been taken or may be taken to contain COVID spread, the path to full recovery may not be a straight line, but we believe that will point inexorably upward. In our third quarter outlook, we have assumed the increase in COVID cases throughout the US may have some impact on the velocity of leasing and expenses. Rounding out our portfolio performance, office grew nicely in the quarter and our triple-net portfolio continued to stability. Pete's efforts to increase leasing, keep high retention rates, improved customer relationships and grow NOI are showing results. Our on-campus and affiliated MLP strategy with leading health system continues to shine. Turning to health systems, our investment in Ardent also continues to deliver benefit. In addition to strong cash flow coverage on our $1.3 billion leasehold position, our 10% equity stake in the Ardent enterprise is benefiting from excellent Ardent results and our prior purchase of $200 million of Ardent senior notes recently paid off with a $15 million prepayment fees, providing us with a 13% unlevered return on our investment in the Ardent notes. With all is said and done I believe and hope that our Ardent investment in real estate, equity and debt will prove to be one of our best risk adjusted return investments. Turning to other capital allocation priorities. We certainly are on our front foot regarding external investments. In total, in 2021, we have over $3.5 billion in investments completed, pending or underway with another $1 billion life science research and innovation pipeline with our exclusive development partner Wexford, right behind that. Our team is also busy evaluating attractive deals across our asset classes. This year-to-date, we have already reviewed about as many investment opportunities as we saw in all of 2019. We will pursue those that meet our multi-factor investment philosophy, which is focused on growing reliable cash flow and favorable risk adjusted returns, taking into account factors such as cost per square footer unit, downside protection and ultimate potential for cash flow growth and asset appreciation. Our $2.3 billion pending investment in New Senior, announced in the second quarter is a great example. In this deal, we are acquiring over a 100 high-quality independent living communities that are well invested and located in advantaged market, at compelling pricing. The per unit cost is estimated to be 20% to 30% below replacement cost. The 5% cash going in cap rate is expected to grow to a 6% cap rate on expected 2022 NOI with upside as the senior housing recovery continues, and the FFO multiple of less than 12 times post synergize 2022 estimated FFO are all attractive valuation metrics. I commend Susan Givens and her team for doing a tremendous job creating and realizing value for their stakeholders. We are also confident that Ventas shareholders will receive immediate and long-term accretion and upside from the deal as senior housing recovers and the large middle market demographic expands significantly in the near term. As Justin will describe, the new senior portfolio also fits in with our senior housing strategy and framework. New senior also performed well in Q2 and into July, with occupancy increasing in the same-store portfolio for five straight. A unique strategic advantage of the New Senior transaction is a long-standing relationship we have with the principal managers of the portfolio, Atria and Holiday, two leading operators who recently combined to form the second largest senior housing manager. Congratulations to Atria for pulling together this industry changing transaction. Switching to our attractive life science research and innovation business, it continues to provide us with value-creating opportunities to invest capital. The Ventas life science portfolio now exceeds 9 million square feet. It's located in three of the top five cluster market, includes three ongoing development projects and is affiliated with over 16 of the nation's top research universities. We also have an incremental $1 billion in potential projects we are working on with Wexford. The first and largest new life science project in the pipeline totaling about $0.5 billion in costs is gaining steam. Expected to be 60% pre-leased to a major public research university that rank in the top 5% of NIH funding, this project will be located on the West Coast and should break ground in the first half of 2022. Wexford with this exceptional reputation among universities is also exploring significant additional life science potential projects beyond those in our existing pipeline. North of the border, we continue to invest capital in high-end large scale independent living communities with our partner, Le Groupe Maurice in Quebec. We have always tried to create value through both internal and external growth, and we're pleased that we've returned to being a net acquirer in 2021. Our team is active and engaged beyond our announced deals and our pipeline of potential investments across asset classes. To fund new investments, we have access to significant liquidity and a wide array of capital sources, including the asset dispositions and receipt of loan repayments, as Bob will describe in greater detail. The demand for senior housing has been robust and sustainable, proving out the value proposition of communities and care providers offered to seniors in their families. The sharp recovery has begun and we've started capturing the significant upside embedded in our existing senior housing portfolio from both pandemic recovery and the 17.5% growth in the senior population projected over the next few years. Our diversified business model continues to provide uplift and stability to our enterprise. We are investing nearly $4 billion and announced deals and development projects and our access to and pricing up capital are positive. In closing, the US is in the midst of an impressive economic recovery that together with demographic demand for all our asset classes will benefit our business. We embrace the opportunity to take on any near-term challenges that are temporarily caused by the strength and speed of this recovery, especially because now unlike last year and the beginning of 2021, our employees, residents, tenants and caregivers are largely safe and healthy. As a team at Ventas, we're incredibly pleased about the results we've delivered and the strength and momentum we've demonstrated. Justin, over to you. We remain excited about delivering industry-leading occupancy and NOI growth, and we are encouraged about recent trends in the senior housing portfolio. Although we are still in the early stages of the recovery, we are off to a very strong start. Ventas is well positioned to benefit from significant senior housing tailwinds, including the sector recovery upside, supportive demand fundamentals and continued improvement in leading indicators. I'll review three topics today. First, our second quarter performance. Second, our perspective on the senior housing operating environment. And third, our continued execution of our senior housing strategy. I'll start by covering our second quarter performance. In SHOP, leading indicators continue to trend favorably and accelerated during the quarter, as leads and move-ins each surpassed 100% of 2019 levels, while move-outs remain steady. June marked the best month for leads and move-ins since the start of the pandemic and July has sustained a strong momentum. Strong sales activity has now driven five consecutive months of occupancy growth, inclusive of July. In the second quarter approximate spot occupancy from March 31 to June 30 increased 229 basis points, led by the US with growth of 313 basis points and accelerating leads and move-ins. In Canada, the transfer more muted due to a slower vaccine rollout, for the approximate spot occupancy still increased during the second quarter, driven by 33 basis points of growth in June. Leading indicators remain strong in our portfolio as the digital footprint of our operators has significantly expanded over the past year, casting a wider net as traditional high converting lead sources such as personal referrals, respite and professional referrals continue recovery. Turning to SHOP operating results. Same-store revenue in the second quarter increased sequentially by $3.5 million as strong occupancy growth was partially offset by the impact of a new resident move-in incentives on pricing, specifically at Atria. I will touch on that more in a minute. Operating expenses declined sequentially by $9.2 million or 2.3% excluding the impact of HHS grants received in the first quarter, driven by a better than expected reduction of COVID-19 operating costs, partially offset by a modest increase in routine operating expenses. For the sequential same-store pool, SHOP generated approximately $111 million of NOI received in the first quarter, which represents a sequential increase of $12.4 million or 12.6% when excluding the impact of HHS grants. This marks the first quarter of sequential underlying NOI growth since the onset of COVID-19 and approximates a nearly $15 million NOI improvement on an annualized basis. During the quarter, we saw solid contribution to sequential NOI growth in both revenue and operating expenses as average occupancy increased 110 basis points and COVID-19 costs declined substantially and ahead of expectations. Sequential same-store cash NOI was largely stable in the second quarter and 98% of all contractual triple net rent was received from the Company's tenants. Our trailing 12 month cash flow coverage for senior housing, which is reported one quarter in arrears is 1.2 times and down versus the prior quarter, reflecting the timing associated with coverage reporting which now includes effectively four full quarters of operations impacted by COVID. Moving onto the current operating environment, which is full of green shoots. Our market leading operators continue to demonstrate their strong market position through broad occupancy gains. Sunrise led the way with 627 basis points of spot occupancy growth in the low point in mid-March to the end of July, benefiting from a rejuvenated management team, significantly well invested communities and a balanced approach demonstrating very strong occupancy gains and pricing power. We would like to congratulate Sunrise's CEO, Jack Callison for adding experience and depth to his management team with this recently announced hires. Atria which benefits from a higher absolute occupancy of 81.8% at July end continues to deliver solid volume growth. Spot occupancy in July increased 529 basis points since the low point in mid-March, resulting from the combination of their industry-leading vaccine mandate and strategic price incentives to capture movements. Atria anticipates tightening incentives moving forward as pricing power recovers and occupancy stabilizes. Supporting all of this is Atria's industry leading vaccination rates, which are impressively high at nearly a 100% of both residents and employees. Looking ahead, as Debbie mentioned, the third quarter is off to a strong start with July spot occupancy increasing 74 basis points versus June and lease continuing to stand strong at 105% of pre-pandemic levels. Our operators have been prioritizing resident safety and weathering several near term headwinds, including the Delta variant and transitory wage pressures from staffing shortages in select markets. Underpinning our leading operating partner relationships and recent sales momentum is our attractive market footprint, which positions us to benefit from the compelling supply and demand outlook in the senior housing sector. Our communities in the US are poised for improving performance over time due to our strong presence in submarkets that outpaced the US national average in aging population growth and wealth demographics, but with significantly lower exposure to new construction starts and construction as a percentage of inventory. Approximately 30% of our SHOP portfolio on a stabilized basis is located in Canada. The senior housing sector in Canada has performed exceptionally well, with occupancy exceeding 90% every year from 2010 to 2020 and demand outpacing new supply in eight of that last 11 years. As a foundation to these attractive fundamentals, the 75-plus population in Canada is projected to grow more than 20% over the next five years about twice the pace of the US. The Ventas team has been busy executing our senior housing strategy, driven by our experiential operating expertise and underpinned by our analytical capabilities to further strengthen our senior housing business. The underlying goal of our strategy is simply to execute portfolio actions that ensure we are located in the right markets, with the right operator, with assets, with strong local market positioning. A notable example of our strategy execution is the New Senior transaction. New Senior has a track record of strong operating performance, benefits from a geographically diverse footprint with favorable exposure to compelling market fundamentals and demographics, and represents a well invested high quality portfolio catering to an attractive market segment. The acquisition also represents an excellent opportunity to further expand our relationships with two long-standing operators in Holiday Retirement and Atria Senior Living and with new relationships such as Hawthorne Senior Living. New Senior will strengthen our existing senior housing business from several strategic perspectives. Operationally, New Senior will enhance Ventas' cash flow generation profile. Its margin has remained resilient in the 35% plus range during the COVID-19 and occupancy has weathered the pandemic, headwinds of approximately 80 basis points better than the NIC industry average. Most recently, New Senior has seen strong sales trends as we progress through the early stages of the senior housing recovery with powerful upside as the portfolio occupancy grew 100 basis points in June. Geographically, New Senior has a diverse presence across 36 states, which includes exposure to markets with high home values and high household income levels, ideal proximity to premium retail in high visibility locations and favorable supply outlooks versus industry averages. This transaction is a reflection of our focus on adding high-quality assets to our senior housing platform and maintaining balance across independent living and assisted living product types. We see New Senior's independent living assets is complementary to our existing high end major market portfolio as it provides a lower average resident age and longer length of stay at an accessible price point, with RevPOR of approximately $2700. The purpose-built nature of these communities, which include consistent layout with 120 units per building also will strengthen our ability to effectively and efficiently redevelopment -- redevelop and invest in these assets over time. Moving on to new developments. We continue to drive value from our development pipeline through our relationship with Le Groupe Maurice, where we have opened three communities, with more than 1,000 units over the past year. Two of the three developments were delivered in the fourth quarter of 2020. Both projects had substantial pre-leasing activity and have already stabilized at approximately 95% occupancy. The third project, a 287 unit expansion of an existing Le Groupe Maurice community in Montreal, was delivered in June of this year. Initial leasing activity has been strong with more than half of the new units occupied as of the end of July. Our plans across our broader SHOP portfolio includes significant deployment of refresh and redevelopment capital, strengthening our market leading position, where we expect to realize occupancy growth and pricing upside over the next few years. We continue to actively manage our portfolio with the disposition of non-strategic assets, and the transition of operators in select markets to position our senior housing business for long-term success. In summary, our recovery is off to a strong start. We are well positioned in markets that benefit from outsized aging and wealth demographic, with rapid use of [Technical Issues] we are executing our senior housing strategy to help ensure success in the near and long term. I will now hand over to Pete. I'll cover the office and healthcare triple-net segments. Together these segments represent over 50% of Ventas' NOI. We continue to produce positive and reliable results. Within these segments, we're seeing a changing business climate. Health system and university business confidence is rising, leading to longer-term commitments and strategic growth investments. During the pandemic, we kept our business confidence. We remain focused on growth and we continue to invest in incremental leasing resources and in creating a leasing center of excellence, led by an industry veteran. She is now two years in. We've built a technical engineering team to assist our local property teams and running our buildings more efficiently. Also led by an industry veteran. He is now 18 months in. We doubled our capital invested in our MOBs to ensure their competitiveness, including major redevelopments in Phoenix, Atlanta and Austin, Texas. We expanded our tenant satisfaction programs under the leadership of our new property management leader. He is also 18 months in. Because of this focus, I'm proud to say that our MOBs now rank in the top quartile of tenant overall satisfaction as surveyed by Kingsley, the national real estate survey leader, happy tenants equals higher occupancy. Our focus on the fundamentals and growth is showing results, let me describe them now. Office, which includes our medical office and research and innovation segments performed well, delivering 10.5% sequential same-store growth. Office quarterly same-store growth was 12.6% year-on-year. The R&I portfolio benefited from a $12 million termination fee from a large tenant in the Winston-Salem innovation center anchored by Wake Forest. Adjusted for the termination fee, office sequential same-store growth was 90 basis points and 2.8% per year-on-year same-store quarterly growth, a strong quarter. Medical office same-store sequential growth was 80 basis points and year-on-year quarterly same store growth was 2.4%. For the quarter, we executed 230,000 square feet in Office new leasing and 460,000 square feet year-to-date, a 78% improvement from prior year. Medical office had strong same-store retention of 94% for the quarter and 85% for the trailing 12 months. The result is the total MOB occupancy increased 20 basis points sequentially. Total office leasing was 750,000 square feet for the quarter and 1.8 million square feet year-to-date. We are also pleased that our annual escalators for the new MOB leases, averaged 2.9% for the quarter, which caused MOB same-store portfolio, annual rent escalators to increase from 2.4% to 2.6%. Our R&I business continues to excel as it strives to provide effective facilities to support the record level of investment into life sciences research. Same-store sequential growth was 38.9%. Adjusted for the termination fee, same store sequential growth was 1.1%. Year-on-year quarterly same-store growth was 42.6%. Adjusted for the termination fee, year-on-year quarterly same store growth was a strong 3.9%. Quarterly same-store occupancy was now standing 94% with sequential occupancy increasing by 10 basis points. Looking forward, we have three R&I buildings comprising of 1.2 million square feet of space under construction. Collectively, they are 78% leased or committed. Of the two buildings in our uCity complex, Philadelphia, the Drexel building is 100% leased, while one uCity Square is over 55% leased or committed. We are oversubscribed for the remaining space with 11 above pro forma proposals currently outstanding. In Pittsburgh, our new building is 70% pre-leased, University of Pittsburgh and UPMC was significant activity on the remaining space. At our recently opened project with Arizona State University in Phoenix, we are 86% leased or committed and expect to be 100% leased shortly. These performance numbers reflect the quality of our well located R&I assets. Now let's turn to healthcare triple-net. During the second quarter, our healthcare triple net assets showed continued strength and reliability with 100% rent collections. Second quarter same store cash NOI growth was 2.5% year-on-year. Trailing 12 month EBITDARM cash flow coverage through June 30 was strong across the portfolio. Health systems trailing 12 month coverage was an excellent 3.6 times in the first quarter, a 10 basis point sequential improvement. As Debbie mentioned, Ardent continues to perform extremely well in this dynamic market. IRF and LTAC coverage improved 20 basis points to 1.9 times in the first quarter, buoyed by strong business results. Although skilled nursing declined 10 basis points to 1.8 times as the pandemic continued to impact centers, total post-acute coverage increased sequentially by 20 basis points to 1.9 times in the first quarter of '21. Finally, several of our partners have an approach for M&A opportunities. Kindred is expected to merge with LifePoint, and Spire recently entertained multiple offers by Ramsay. It is a testament to the underlying value of our healthcare operators and the associated real estate. In my remarks today, I'll cover our second quarter results, our recent liquidity balance sheet and capital activities and finally, our expectations for the third quarter of '21. Starting with our results in the second quarter. Ventas recorded strong second quarter net income of $0.23 per share, normalized funds from operations of $0.73 per share. Normalized FFO per share with $0.02 pennies above the high end of our initial guidance range of $0.67 to $0.71 for the quarter and is consistent with our June update to be at the high end or better than that original range. The Q2 outperformance was driven by growth in Office, continued stable performance from triple-net, strong results from Ardent and better than expected NOI in our SHOP portfolio. Turning to capital, we've been busy proactively managing our capital structure, duration of debt and liquidity since our last earnings call. First, following the announcement of the New Senior agreement, we raised $300 million of equity at an average gross price of approximately $58.60 per share under our ATM program. The $300 million equity raise together with the $100 million of new equity to be issued New Senior shareholders for the fixed exchange ratio, and $1.2 billion of New Senior debt to be assumed or refinance constitutes the overall $2.3 billion funding of the New Senior transaction. Second, through August 5th, we received $450 million of disposition proceeds through receipt of loan receivable. Included in the $450 million received today, this repayment of two well structured loans in July, part of the investment of $200 million of 9.75% Senior Notes due 2026 and Holiday's repayment of $66 million or 9.4% notes due in 2025. Medical office fully sold in the second quarter also resulted in proceeds to approximately $107 million. Using proceeds from this division, in the third quarter, Ventas will improve its near-term debt maturity profile further by fully repaying as little as $664 million and 3.25% Senior Notes due August 2022, and 3.13% notes due June of 2023. As a result of recovery senior housing NOI capital structure actions we're seeing strengthening credit metrics. Reported Q2 net EBITDA was better than expectations improving 10 basis points sequentially to 7 times. Within SMB point improvement underlying SHOP annualized EBITDA improved nearly $50 million or 25 basis point beneficial impact of the ratio in just one quarter. This organic improvement was offset by the elimination of SHOP we did experience, we did experienced in Q2. This provides a proof point of the anticipated material improving leverage resulting from the underlying recovery in senior housing over time. Pro forma for announced ATM issuance of capital activities since of Q2 net debt to EBITDA on lower from 7 times to 6.8 times. I would highlight that the New Senior transaction is expected to be 30 basis point level, are projected here 2020 NOI supported by the forecasted growth in cash flows from the New Senior portfolio. Since assets liquidity totaling $3.3 billion as of our finished the Company at $2.7 billion of undrawn revolver capacity $600 million cash and no commercial paper outstanding. Let's finish with our future guidance. Third quarter net income was estimate range from flat to $0.05 per fully diluted share. Our guidance range for normalized FFO for Q3 is $0.70 to $0.74 per share. Q3 FFO $0.72 can be bridged from Q2 of $0.73 by $0.02 benefit from the loan prepayment fee in Q3. [indecipherable] in Q2, offset by $0.02 from lost interest income on the loan repayments and the July equity raise. Third quarter assumptions underlying our guidance as follows. SHOP Q3 spot occupancy from June 30 to September 30 is forecast to increase between 150 to 250 basis points with the midpoint roughly continuation of occupancy growth trends there in July. Third quarter is expected to be roughly flat sequentially. And move in incentives are expected to narrow in the quarter. SHOP strong revenue growth is expected to be offset by increase in operating costs. Additional day in the quarter. Higher occupancy, labor and retain seasonal items including repair deficiency utility costs. Now we can test for interesting to you're seeing in the third quarter sales performance is expected in the office and triple-net segments we continue to expect $1 billion in asset sales and move-in payments for the full year 2021 with line of sight for the remaining balance in the second half of this year. Fully diluted share count is now 383 million shares reflecting in anticipation of New Senior. Guidance does not include any other announced capital markets activity. Our Q3 guidance excludes any impact from the pending acquisition of New Senior. New Senior transaction is expected to close in the second half of 2021 and the close is forecast to be between $0.09 to $0.11 accretive to normalized FFO per share in 2022. I'd like to underscore that we're still in a highly uncertain environment, growth trends in SHOP are positive the pandemic impact on our business very difficult to predict. As I'm excited about our business in the future and we believe we have the well-diversified portfolio, best in class operators and experienced team to win the recovery that is now underway. Before we start with Q&A, we are limiting each caller to two questions to be respectful to everyone on the line.	sees q3 normalized ffo per share $0.70-$0.74. qtrly normalized ffo per share $0.73.
These materials are available on the Ventas website at ir. Ventas delivered positive results in the third quarter, saw outstanding sequential SHOP average occupancy growth, benefited from its large medical office, life science and healthcare triple-net businesses, and executed on its investment priorities. Delivering $0.73 of normalized FFO per share, which is in the upper half of our guidance range. Our same-store SHOP portfolio increased rate and grew occupancy at record levels in Q3 despite the high incidents of COVID-19 in the broader environment. Occupancy in this portfolio has now increased for eight consecutive months through October. Demonstrating powerful demand, our U.S. same-store SHOP portfolio has increased occupancy 750 basis points since mid March 2021, lifting the entire same-store SHOP portfolio nearly 600 basis points during the same period. I'm also encouraged that our year-over-year SHOP occupancy turned positive for the first time since the onset of the pandemic, so a robust senior housing recovery is well underway. But as we stated, it may not progress in a straight line. Consistent with macro trends and as we anticipated in our last call with you, the pandemic has created a tight labor market, resulting in labor cost pressures that accelerated in September. Looking ahead, we expect to see meaningful revenue increases in the first quarter of 2022 and improving pricing power. At a macro level, many economists forecast that labor force participation will expand from its current low rate for a variety of reasons. These factors should cause current conditions to ease considerably over time. Even more importantly, Dr. Scott Gottlieb, who has been consistently the most accurate expert throughout the pandemic stated today that the COVID-19 pandemic is effectively behind us in the U.S., given all the tools we now have to combat it, including Pfizer's new treatment. If Scott continues to be right, it is a momentous day for all of us. We continue to be delighted that one-third of our business consists of medical office outpatient and life science research and innovation. Our operational initiatives in medical office and aggressive capital deployment in life science are providing reliable growth and value creation for our enterprise and stakeholders. Turning to capital allocation, we have been highly active with $3.7 billion of investments announced or closed year-to-date. Our current capital allocation focus remains senior living, selective private medical office building opportunities and life science R&I. Let me highlight a few new investments we've made. We've completed $2.5 billion in independent living investments, including our accretive acquisition of New Senior's hundred plus independent living communities at an attractive valuation well below replacement costs and a six community Canadian Senior Living portfolio with one of the New Senior operators, Hawthorne. In medical office we've completed or announced $300 million of investments. First, establishing a new relationship with industry leader Eating Recovery Center, we acquired a Class A asset under a long-term lease in this rapidly growing sector. Second, by acquiring our partner PMB's interest in this Sutter Van Ness Trophy MOB in downtown San Francisco, we now own a 100% of this asset at a 6% yield. With 92% of the MOB already leased, we intend to capture additional NOI growth and value. Finally, we intend to expand our relationship with Ardent Healthcare by acquiring 18 of their 100% leased medical office buildings for $200 million by year-end. On our third capital allocation priority, we are delighted to announce that we have commenced development of a 1 million square foot life science project anchored by Premier Research University, UC Davis with our exclusive partner Wexford. Purpose-built for clinical research, this project will be 60% pre-leased to UC Davis, and total project cost are expected to be $0.5 billion. Turning to our robust investment pipeline, our team remains busy evaluating attractive opportunities. In fact, we've now reviewed more deal volume this year than we saw in all of 2019, over $40 billion and we continue to pursue those that meet our multi-factor investment framework. Capital continues to flow into our sectors as global institutional investors agree with our thesis on the favorable trend benefiting all of our asset classes. These strong capital flows are also supporting our intention to recycle $1 billion of capital this year to enhance both our balance sheet and our portfolio. Our diversified business model continues to provide significant benefit. Our early and aggressive investments into medical office and life science are creating significant value. We are also proud to be associated with so many leading care providers, operators and developers in all our business lines and to be establishing new platforms for growth through both our investment and our portfolio actions. In closing, the U.S. is in the midst of an impressive economic recovery that together with demographic demand for our asset classes gives us confidence and optimism in our future. We believe that the more widespread administration of vaccines and new efficacious treatments for COVID-19 will benefit both the broader economic recovery and our company. Our aligned and experienced team continues to be focused on capturing the double upside in senior housing from both pandemic recovery and the projected growth in the senior population and also to continuing our long track record of external growth. I'll start by saying it is a very exciting to see the strong supply demand fundamentals supporting occupancy growth in the senior housing sector. We have been busy taking actions through acquisitions, dispositions and transitions to ensure we are strongly positioned during this period of sector recovery. Our industry-leading operators are successfully driving revenue growth in the early stages of the recovery and taking actions to address elevated labor costs, driven by the macro backdrop. Moving on to third quarter performance; in SHOP, leading indicators continue to trend favorably during the quarter as leads and move-ins each surpassed a 100% of 2019 levels while move-outs remain steady. Strong sales activity has now driven eight consecutive months of occupancy growth inclusive of October. In the third quarter, average occupancy grew by 230 basis points over the second quarter, led by the U.S. with growth of 290 basis points and a 110 basis points in Canada, which is over 93% occupied. October leading indicators remain solid as leads and move-ins continue to perform above pre-pandemic levels and move-outs remained relatively stable. Turning to SHOP operating results, same-store revenue in the third quarter increased sequentially by $13.6 million or 3.1% driven by strong occupancy growth and slight rate growth. Regarding rate growth, our operators have proposed rent increases to the residents of 8% in the U.S. and 4% in Canada, which on a blended basis is approximately 200 basis points higher than the historical levels. We also continue to see improvement in our releasing spreads, which are trending close to pre-pandemic levels. Operating expenses increased sequentially by $16.7 million or 5.4% of which approximately half is due to overtime and agency costs. Although we largely anticipated the additional labor costs September spike represented approximately half of the sequential agency expense increase. We carried the elevated September cost forward in our Q4 guidance, which Bob will cover shortly. Despite the higher agency and overtime costs, our operators are now witnessing net positive hiring and are actively addressing labor challenges through a number of initiatives. These include centralized recruitment of line staff, implementation of applicant tracking systems, delivering on the increased demand by employees for flexible schedules and other workplace improvements to become more competitive. For the sequential same-store pool SHOP generated $106.7 million of NOI in the third quarter, which represents a sequential decrease of $3.7 million or 3.4%. Moving on to portfolio actions; our New Senior acquisition closed on September 21. The portfolio consists of 103 independent living communities located in attractive markets with favorable demand characteristics. Integration efforts have gone extremely smoothly and we are on track to realize our expected synergies. We are pleased with the performance and operating trends of the portfolio. Its third quarter spot occupancy grew 110 basis points sequentially. The same-store pool, which excludes the 33 communities that transitioned to new operators this year, grew 180 basis points in the third quarter and then another 10 basis points in October, marking occupancy growth in six out of the past seven months. We have also recently closed on an acquisition in Canada, which includes five independent living and one assisted living communities. These acquisitions expand our independent living exposure to 59% of NOI on a stabilized basis. We believe the structural benefits of the independent living model present attractive opportunities to further strengthen our senior housing NOI margin through less intensive staffing requirements, longer resident length of stays and accessible price points, all underpinned by exposure to a large and growing middle market. This is in combination with our existing portfolio positions us well to capture demographic demand with the 80-plus population expected to grow over 17% over the next five years, while facing less new supply versus historical levels. I'd also like to note our previously announced transition of 90 assisted living and Memory Care communities is off to a solid start as 65 communities have already transitioned and the rest are planned by year-end. We believe the enhanced oversight provided by the experienced mid-market, mid-size assisted living operators will improve the execution of local market strategy and with increased accountability. I have long-standing relationships and familiarity with the incoming CEOs and I can say they are really fired up about the new portfolios. They are actively engaged with personal site visits to the communities and transition planning. Ventas has 37 operator relationships including seven of the top 10 largest operators in the sector and 8 new relationships added this year. We look forward to the opportunity to grow our relationships with these companies over time. In summary, the senior housing sector is benefiting from a strong macro supply demand backdrop. We are actively positioning ourselves for success through portfolio actions and our operators are driving revenue and managing the elevated labor situation. We look forward to forging ahead during a very exciting time of sector recovery. Our life science and MOB businesses led by Pete Bulgarelli and which represent nearly one-third of our company's NOI once again delivered robust and reliable growth in the third quarter. These businesses taken together increased same-store NOI by 4.2% year-over-year and increased 1.2% sequentially on an adjusted basis. MOB NOI grew 3.2% year-over-year and R&I increased 7.1%. Some stats of interest that underpin this strong performance. MOB occupancy is up 130 basis points year-to-date. Same-store MOB occupancy of 91.3% is at its highest point since the first quarter of 2018. MOB tenant retention was 91% in the third quarter and MOB new leasing increased 43% versus prior year. R&I occupancy remains outstanding at 94.4% and improved 50 basis points sequentially due to exciting demand for lab space. MOB expenses increased less than 1% year-on-year as a result of completed energy conservation projects and sourcing initiatives. And for the second year in a row, we ranked in the top quartile of our peer group for tenant satisfaction as measured by Kingsley Associates. 2021 rankings for each major key performance indicator increased when compared to 2020. At the enterprise level, we delivered $0.73 of FFO per share in the third quarter. This result is at the higher end of our $0.70 to $0.74 guidance range and benefited from the stable performance of our diversified portfolio as well as a $0.04 Ardent bond prepayment fee that was included in our guidance. We were also very active in the third quarter managing our balance sheet and capital structure. Consistent with our prior $1 billion disposition guidance, we now have $875 million of disposition proceeds in the bank with $170 million of senior housing and MOB portfolios under contract and expected to close in the fourth quarter. These dispositions have enhanced and reshaped our portfolio and we view these proceeds to reduce $1.1 billion of near-term debt so far this year. We also issued $1.4 billion of equity in the third quarter including $800 million for New Senior and $600 million in ATM issuance at $58 a share. As a result, our net-debt-to-EBITDA ratio, excluding New Senior improved sequentially to 6.9 times, while including New Senior Q3 leverage was better than forecast at 7.2 times. As an administrative side note, we plan to enter into a new ATM program replacing our 2018 program, which is nearly complete. Turning to Q4 guidance, we expect fourth quarter net income will range from a $0.01 to $0.05 per fully diluted share. Q4 normalized FFO is expected to range from $0.67 to $0.71 per share. Our SHOP portfolio NOI is estimated to be flat sequentially. Key fourth quarter assumptions underlying our guidance are as follows. Starting with our SHOP same-store expectations, SHOP Q4 average occupancy is forecast to increase between 80 basis points and 120 basis points versus the Q3 average growing ahead of pre-pandemic levels while following seasonal trends. At the guidance midpoint spot occupancy, September 30 to December the 31 is expected to be approximately flat. The resulting sequential SHOP revenue growth is expected to be offset by increased operating expenses due to continued elevated labor costs. No HHS grants are assumed to be received in the fourth quarter though our license assisted living communities have applied for qualified grants under Phase 4 of the Provider Relief Fund for COVID losses incurred at the communities. Outside of SHOP continued stable performance is expected in the office and triple-net segments. We expect to receive an M&A fee in Q4 of $0.03 for the announced Kindred sale, which Kindred communicated is expected to be completed in the fourth quarter subject to customary closing conditions. We continue to expect a $1 billion in asset sales and loan repayments for the full year 2021 at a blended yield in the high fives. And our fully diluted share count is now 403 million shares reflecting the equity raised today. I'd like to underscore that we are still in a highly uncertain environment and the pandemic's impact on our business remains very difficult to predict. To close, my colleagues and I are excited for the future of Ventas given expected robust recovery in senior housing and the external growth opportunities both under our belt and that lie ahead.	qtrly normalized ffo $0.73 per share. sees q4 normalized ffo per share $0.67 - $0.71.
These materials are available on the Ventas website at ir. I will now turn over the call to Debra A. Cafaro, Chairman and CEO. Let me begin by expressing my deep gratitude and optimism borne of the strength, resilience, and innovation so many have demonstrated over the past year and the positive developments we are seeing on the ground in our portfolio virtually every day. Our results in the fourth quarter demonstrated Ventas' resilience with normalized FFO reported at $0.83 a share and $0.74 ex much appreciated funding from HHS to our senior living communities that have been affected by COVID-19. I've reflected on the grueling year we've all had. I couldn't be prouder of our productive and skilled team, our enterprise, and our capable dedicated partners. After a fast and positive start to 2020, the last year has been dominated by the COVID-19 pandemic and punctuated by extreme weather disruptions, both of which have continued into the first quarter of 2021. Throughout, we've put the full force of our firm's resources and energy behind keeping people safe, demonstrating remarkable resilience and becoming part of the solution whether in employee testing, advocacy or assistance to tenants and operators who needed it. Financially, through our foresight, our long-standing diversification strategy, and our decisive action, we've kept our enterprise strong and stable, generating almost the same EBITDA in 2020 as we did in 2019 and benefiting from our investments in people, systems, and preparedness, our balance sheet flexibility, and our embedded relationships with best-in-class partners. And we found ways to grow and advance our strategic objectives, including building value through acquisition and development in life sciences, investing in Le Groupe Maurice's attractive senior housing development pipeline, creating new partnerships, and establishing a third-party investment management platform that will provide more options for future growth. We remain committed to our core values of respect and integrity and accelerated our actions to promote sustainability, diversity, and social justice in our company, our communities, and our country. Finally, we were very fortunate to recently add two top notch directors to the company. One, a leader in healthcare and the other in real estate and REITs. My gratitude and optimism also flow from the life-saving COVID-19 vaccine discovery by doctors and scientists in record time and the recent acceleration of vaccine delivery by the Biden administration. Nationally, ending COVID-19 is foundational to spur sustained economic recovery and restore vitality to so many businesses, households, and workers. At Ventas, we're proud that 100% of our U.S. SHOP, AL, and memory care communities have already received the vaccine and nearly 90% of them will complete their second dose by the end of this month. Notably, senior housing vaccine delivery represents one of the shining successes in our fight against COVID-19. In our SHOP communities, it is wonderful to know that about 30,000 vulnerable residents have already been vaccinated and are one step closer to feeling safe, seeing loved ones, and enjoying a richer life. From our real-time data, we also know that confirmed COVID-19 cases in our communities have recently begun to improve significantly creating an enhanced sense of well-being and enabling more operators to open communities to new move-ins and leads at our communities built to their highest level since the pandemic began in January once again demonstrating the strength of the value proposition of senior housing and the resilient demand for the services our care providers deliver. While we expect SHOP first quarter NOI and occupancy, which are lagging indicators to decline sequentially as a result of November to January extreme COVID-19 conditions, we are encouraged by the breadth and consistency of all positive leading indicators. Conditions remain dynamic and it is too early to declare a definitive trend, but we like the picture we are starting to see. Post-pandemic senior housing growth represents an incredibly significant value creation opportunity for our shareholders. Turning to our investment outlook, our diversified asset base with five verticals has given us the ability to continue successfully allocating capital over time and through cycles. For example, we've created tremendous value since our early cycle investments in our research and innovation business in 2016. We continue to find meaningful opportunities to drive that business forward in both ground-up development and asset acquisitions with university and in cluster markets alike. Our decision to add life sciences to our enterprise has provided uplift to our results, our investment activity, and our value. Here are a couple of current examples. Our $280 million life sciences project known as One uCity in this rising research sub-market of Philadelphia, which is book ended by tenant Drexel is attracting significant leasing interest. In addition to the nearly $1 billion ground-up development projects already under way, our university based development pipeline continues to hold about another $1 billion in active potential projects with both new and existing university relationships. In particular with Wexford, we are in the design development phase of a nearly $0.5 billion project with a major research university on the West Coast that is substantially pre-leased. We look forward to sharing more information with you later this year. Outside of research and innovation, we continue to allocate capital to develop large Class A independent living communities with our partner LGM in Quebec. We've had five projects under way with investment also totaling nearly $0.5 billion and two of the projects were delivered in the fourth quarter. We are pleased to report that the two open communities have leased up quickly and occupancy is already nearly 80%. In addition, our pipeline of potential acquisitions and all five of our verticals is active and growing. We continue to invest with an eye toward growing reliable cash flow and favorable risk adjusted return. We will also continue to evaluate and execute opportunities to recycle capital as well. Both Justin and Pete have been working with our deal team to target about $1 billion of disposition during the year to optimize our portfolio. Finally, our institutional investment capital management platform continues to grow and succeed with well over $3 billion in assets under management. Bringing together our pre-existing and new third-party capital vehicles under one umbrella, the Ventas Investment Management business includes our life sciences and healthcare fund. The Ventas fund stands out as one of the most successful launches of a first-time real estate fund in any asset class. Our investment management platform provides a significant competitive advantage to Ventas. It broadens our capital sources, augments our investment capacity, expands our footprint, leverages our team and industry expertise, improves our financial flexibility and liquidity, and adds an incremental source of earnings. There is tremendous market opportunity within life science, medical office, and senior housing real estate and we are well positioned to capitalize on it in multiple ways. In closing, let me reiterate that demographically driven demand is right in front of us. The leading indicators in senior housing are improving rapidly, vaccine delivery is accelerating, and the long-term thesis for all of our asset classes and for Ventas remains firmly positive. All of us at Ventas have an abiding commitment to staying strong and steady and winning the recovery on behalf of all of our stakeholders. I'd like to begin by highlighting the fourth quarter performance and first quarter performance expectations. First, I would like to mention that we are humbled and grateful that HHS continues to recognize the crucial role senior living plays in protecting vulnerable older Americans. Through the CARES Act, HHS has provided several rounds of funding to assisted living communities to partially mitigate losses directly suffered because of the COVID-19 pandemic. Through this program, applicable to sequential same-store SHOP assets, our communities have received $34 million in the fourth quarter and $13 million to date in the first quarter, which has been applied as a contra expense to offset COVID-19 related expenses incurred. After a challenging fourth quarter and January in which the national spread of COVID-19 hit all-time highs, our communities experienced an increase in resident cases and we had more communities close to move-ins. Leading indicators have followed a similar pattern. Leads and move-ins drifted down throughout November and December while at the same time move-outs were elevated. Although the fourth quarter was a challenging quarter, we are pleased our occupancy hung in there with a 90 basis point decline. Looking ahead to the remainder of the first quarter, for the forecast Q1 sequential same-store SHOP portfolio, we expect cash NOI to decline from the fourth quarter to the first quarter excluding HHS grants of $34 million and $13 million to date in each respective period. This NOI deterioration is driven by 250 basis point to 325 basis point expected occupancy decline partially offset by modest rate increase. We expect to see continued elevated operating expenses into the first quarter. And while we are seeing continued high levels of COVID related costs, these are partially mitigated by $13 million of Phase 3 HHS grant money received to date in the first quarter. I'll add that recent severe winter weather across the country could cause additional expenses as well as delays in move-ins. We haven't included any impacts, if any, in our guidance. While we are experiencing choppy waters at this stage of the pandemic, I would like to highlight green shoots that support a more optimistic outlook ahead. I'll start by highlighting our improving clinical trends. Consistent with the U.S. COVID case trends, our SHOP communities are experiencing a significant decline in new COVID cases. In the most recent week, we are averaging nine cases per day, which is the lowest since October and down from 92 cases per day at the peak in January. We couldn't be more relieved about this improvement knowing this means less illness and less people potentially dying from COVID. This positive clinical trend is also important to local health departments support of our communities' ability to accept new move-ins and to offer a more robust living experience for our residents. I'd like to comment on the early success our operators have had deploying the vaccine to residents and employees within our SHOP portfolio. As Debbie mentioned, 100% of our assisted living and memory care communities have hosted their first vaccine clinic. In other good news related to the vaccine, two studies from Spain and Israel have come out showing favorable data that people who are vaccinated and still contract COVID-19 are far less likely to spread the illness to others than if they were not vaccinated. The execution of the vaccine is a massively important step toward the stabilization and growth in our senior housing platform. I'll note that 95% of our communities are already open to move-ins, which is near pandemic high. I'll remind you of the importance of the segments mentioned in our business update. Currently, 80% of our communities are operating in Segment 3. This is up from 64% a month ago. Segment 3 is the least restrictive operating environment. The communities in this segment offer a more robust living experience, includes a more open dining experience and small group activities. Most importantly, it allows for less restrictive visitation between residents and their loved ones. As more communities expand their service offering, demand for our services should improve. Leads and move-ins started to pick up again in January with the highest number of leads we have witnessed since the beginning of the pandemic. We have seen broad based strength in lead volume across regions and the initial indication is that this momentum has continued into February. To summarize our optimism, new COVID cases down, vaccine distribution on track leading to a more robust living experience and all combining to support higher leads. We continue to monitor these positive trends on a real-time basis and remain focused on supporting our operating partners as they get in position to win the recovery. Moving on to triple-net senior housing, in the fourth quarter and through January, Ventas received all of it's expected triple-net senior housing cash rent. Our underlying triple-net senior housing portfolio performance continues to be impacted by COVID-19. However, due to a mix of lease resolutions executed in 2020, government subsidies including PPP loans and HHS funds and other tenant resources, our tenants have continued to pay as expected. Our trailing 12 month cash flow coverage for senior housing is 1.3 times respectively. I'll comment on the senior housing industry outlook. Our competitive outlook has continued to evolve amid the pandemic. In 2020, construction starts nationally were down 50% year-over-year and deliveries were at their lowest levels since 2013. Our SHOP markets witnessed particularly favorable supply trends with starts down 66% versus the prior year and deliveries down over 40%. We are optimistic about the long-term impact from lower construction starts. Fewer starts today combined with a compelling aging demographic trends where the 80-plus population is expected to grow nearly 15% between now and 2024, which is 5 times faster than the broader population, will provide a potent tailwind over the next few years. Moving on to final comments. I'd like to comment on the tremendous job well done our operator partners and front line staff have done prioritizing the health and safety of our residents and employees throughout a very challenging period. We couldn't be more proud of their focus, determination, courage, and perseverance throughout the pandemic. I'd also like to note our excitement and support for Jack Callison, the new CEO of Sunrise Senior Living. We know Jack to be an accomplished and charismatic leader who is extremely qualified to lead Sunrise. I'll finish by reiterating our optimistic outlook as we consider the improving clinical trends, vaccine roll out, communities opening for move-ins with a more robust living experience and post-pandemic supply/demand tailwinds that give us continued confidence in a very strong positive growth trajectory in senior housing. With that, I'll hand the call to Pete. Together, these segments represent 47% of Ventas' NOI. They continue to produce strong results showcasing their value proposition and financial strength among the pandemic. In fact, for the full year 2020, these segments combined to generate same-store cash NOI growth of 3%. First, I'll cover office. MOBs and research and innovation centers, the two lines of business within our office portfolio, they play a key role in the delivery of crucial healthcare services and research for life-saving vaccines and therapeutics. The office portfolio continues to provide steady growth, delivering $128 million of same-store cash NOI in the fourth quarter. This represents a 1.5% sequential growth led by our R&I portfolio which generated 3.6% same-store cash NOI growth. Moreover, full year office same-store cash NOI grew 3.3% versus 2019, near the midpoint of original 2020 office guidance of 3% to 4% despite the impacts of COVID-19. Normalizing for a paid parking shortfall and increased cleaning costs due to COVID, same-store cash NOI grew 4.5%, surpassing our pre-COVID guidance range. In terms of rent receipts, office tenants paid an industry-leading 99.2% of contractual rents in the fourth quarter. For the entire period from April through December, tenants paid 99.4% of contractual rent. This is without deducts or deferrals which were de minimis. Substantially all granted deferrals have been repaid and new deferrals were negligible during the fourth quarter. Continuing the trend, we have collected 98% of January contractual rents, on track to meet or exceed the fourth quarter collection rate. February to date collection results are also strong and are on a consistent pace when compared to the fourth quarter. This strong performance is enabled by the mission critical nature of our portfolio and by our high-quality credit-worthy tenancy. In our medical office portfolio, nearly 85% of our NOI comes from investment grade rated tenants and HCA. In our R&I portfolio, 76% of our revenues come directly from investment grade rated organizations and publicly traded companies. Medical office had a record level of retention of 88% for the fourth quarter and 87% for the trailing 12 months. Driven by this retention, total office leasing was 700,000 square feet for the quarter and 3.4 million square feet for the full year of 2020. This includes 540,000 square feet of new leasing. Total leasing far exceeded our pre-COVID 2020 plan. All of our MOB properties are in elective surgery restriction free locations. As a result, we are seeing positive utilization trends that mirror increased admissions and surgery volumes being reported by the health systems. As an example, paid parking receipts during the second quarter of 2020 were only 46% of normal. During the fourth quarter, however, paid parking recovered to 71% of normal. As Debbie mentioned, we continue to be excited with the office business and particularly investment opportunities in the R&I space. In the fourth quarter, we closed our acquisition of the three-asset, 800,000 square foot Trophy Life Sciences Portfolio in San Francisco. Since last quarter's announcement, we have renewed a large tenant and signed two new leases, bringing the building to a 100% leased, a clear demonstration of the attractiveness of these buildings to the marketplace. We also opened our $80 million R&I development on the campus of Arizona State located within the Phoenix Biomedical Campus, a 30-acre innovation district established by the City of Phoenix in the heart of downtown. The building is over 50% pre-leased and is ahead of pro forma. Now let's turn to healthcare triple-net. During the fourth quarter, our healthcare triple-net assets showed continued strength. We have received 100% of fourth quarter rents as well as 100% of January and 100% of February rents. Trailing 12-month EBITDARM cash flow coverage improved sequentially for all our healthcare triple-net asset classes except skilled nursing despite COVID-19. Acute and post-acute providers had early access to significant government funding to create liquidity and mitigate pandemic-related losses. Acute care hospitals trailing 12-month coverage was a strong 3.3 [Phonetic] in the third quarter, a 20 basis point sequential improvement driven by a rebound in elective surgical procedures, prudent expense management as well as government funding. Ardent continues to perform extremely well in this dynamic market condition and all of Ardent's hospitals reside in jurisdictions that are open for elective procedures. We are excited to continue growing with Ardent. During the fourth quarter, Ardent opened a new outpatient cancer center on the campus of their hospital in Amarillo, Texas. The cancer center features best-in-class equipment and facilities for radiation therapy, chemotherapy, and cancer care. We invested approximately $30 million at a near 8% stabilized yield. IRF and LTAC coverage improved 10 basis points to 1.6 times in the third quarter buoyed by strong business results and government funding. In particular, Kindred has demonstrated its core competency in treating complex patient cases. Census levels continued to be very high. And finally, within our loan portfolio, our Colony, Holiday, and Brookdale loans are all fully current. You are all heroes. In my remarks today, I'll cover our 2020 enterprise fourth quarter results, our expectations for the first quarter of 2021, and our recent liquidity, balance sheet, and capital activities. Let's start with our fourth quarter financial performance. Ventas reported fourth quarter net income attributable to common stockholders of $0.29 per share and normalized funds from operations of $0.83 per share or $0.74 excluding the $0.09 in HHS grants received in SHOP in Q4. Other sequential fourth quarter drivers to highlight include $0.04 of income recorded in our unconsolidated entities offset by a $0.05 Q4 sequential decline in NOI principally in SHOP. Meanwhile, office and triple-net healthcare was stable on a sequential basis in the fourth quarter. That's a good segue to our Q1 guidance as Q4 is an appropriate start point for our first quarter 2021 expectations. The key components of our Q1 guidance are as follows: net income attributable to common stockholders is estimated to range between minus $0.07 and minus $0.01 per fully diluted share; normalized FFO is forecast to range from $0.66 to $0.71 per share. The midpoint of our FFO guidance $0.68 per share represents $0.15 sequential decline from the fourth quarter. This change can be largely explained by $0.09 reduction in HHS grant income and income from unconsolidated entities. The balance is driven by a $0.05 reduction in organic SHOP NOI performance. A few of the key SHOP Q1 assumptions include Q1 2021 average occupancy ranging from 250 basis points to 325 basis points lower versus the fourth quarter average, sequential growth in RevPOR as a result of the annual in-place rent increases implemented at the start of 2021, and continued elevated levels of operating expenses driven by COVID labor and testing. Outside of SHOP, we expect our property NOI to be stable on a sequential basis in the first quarter. I'll close with our balance sheet and capital activity. I am proud of the actions the Ventas team has taken to manage our balance sheet leverage and liquidity. We have navigated the disruption created by COVID and kept Ventas strong and stable while protecting shareholder capital. I'd highlight a few of our most recent actions and results. First, some key stats from 2020. We finished 2020 with full year net debt-to-EBITDA of 6.1 times, maintained a strong maturity profile with duration exceeding six years, held total debt to gross asset value at 37%, reduced our net debt at year-end by over $500 million year-over-year, and retained robust liquidity exceeding $3 billion. In 2020, we also took advantage of the strong bid for healthcare real estate and realized over $1 billion in asset sales at a blended 5.3% cash yield. In 2021, we're targeting an additional $1 billion in asset sales across our verticals in the second half of the year. Proceeds from dispositions are expected to be used to reduce debt and to fund future growth through development and redevelopment capital spend. In January 2021, we closed on a new four-year $2.75 billion unsecured credit facility. We had great demand from 24 new and incumbent financial institutions and we're able to realize better pricing. They are critical to our success. And finally, in March 2021, Ventas will use cash on hand from recent dispositions to reduce our near-term maturities by fully repaying $400 million of our 3.1% Senior Notes due January 2023. As a result of these and other actions, we're positioned to capitalize on the powerful upside across our business once the pandemic is finally in the rear view mirror. Before we start with Q&A, we're limiting each caller to two questions to be respectful to everyone on the line.	sees q1 adjusted normalized ffo $0.66-$0.71 per share. qtrly attributable net income per share $0.29. qtrly normalized ffo per share $0.83.
During the call, you'll be hearing from Steve Moster, our president and CEO; David Barry, our president of Pursuit; and Ellen Ingersoll, our chief financial officer. During the call, we'll be referring to certain non-GAAP measures, including loss before other items, adjusted segment EBITDA, and adjusted segment operating income or loss. I hope you all are staying safe and healthy. Following my opening comments, I'll hand the call over to David Barry to discuss our Pursuit business, and then I'll come back on to cover the GES business. Before turning to the business, I, first and foremost, want to commend our team members at Viad for their resiliency, positivity, and dedication during these challenging times. Like many businesses, we've had to make tough decisions by way of employee furloughs and wage reductions in order to protect our financial position in this unprecedented operating environment. Nevertheless, our team members have not missed a beat in acting quickly to help maintain the health and safety of our clients, guests, and the communities we operate in as our No. Now moving into our business. The first two months of the quarter were largely in line with our expectations. In March, we began to experience some operational impacts as the spread of COVID-19 began to reach all corners of the world, including some event postponement and cancellations. There were some signs of reprieve as CONEXPO-CON/AGG took place in early March with less than 3% of the floor space affected by exhibitor cancellations and attendee registrations of more than 100,000. However, by the end of March, travel and live event activity had essentially halted and with continued travel restrictions and social distancing guidelines in place, we are anticipating a very weak second quarter for 2020. In response, we took swift and effective steps to bolster our company's liquidity and financial position. We drew on our revolving line of credit to increase our cash position, and we've obtained a waiver of our financial covenants for the second quarter. We implemented aggressive cost-reduction actions, including furloughs, mandatory unpaid time off, and salary reductions for all employees across the company. Our executive management team voluntarily reduced its base salaries by 20% to 50%, and each of our nonemployee members of our Board of Directors has agreed to reduce his or her cash retainer by 50% for payments typically made to them in second quarter of 2020. We have limited all nonessential capital expenditures and discretionary spending. We have suspended future dividend payments and share repurchases. And finally, we've made changes to our executive management team to reduce costs and prioritize client-facing team members. In addition to some other terminations, Jay Altizer, president of GES, will be leaving the company, and I will be taking over the leadership of GES. As many of you know, this is a position I know well, having led GES before bringing Jay on board about two years ago. During the last two years, GES has undergone significant streamlining to improve the cost structure and create a more nimble organization, putting us in a much better position today to navigate the current environment. While these are extremely difficult steps to take, these actions are necessary to ensure that Viad and GES can outlast the challenging road ahead. I firmly believe the management team that's in place today is the right one to steer the company through these challenging times. We have successfully navigated past periods of disruption with a strict focus on cash flow and liquidity, a proven playbook that we are once again turning to. And as with other prior macro shocks, we believe this one presents us with an opportunity, if not a mandate, to rethink and reimagine how we run our business so that we can emerge in a stronger, more flexible position. So Pursuit came into the year with lots of momentum, and we saw a very strong start to 2020. At the end of February, revenue and EBITDA were well ahead of plan, with revenue up significantly from the prior year. And that's largely due to our acquisition of a controlling stake in the Mountain Park Lodges and outstanding results at FlyOver Iceland. By the middle of March, though, the effects of the global health crisis and pandemic were becoming more clear. So working with regional health authorities in three countries, we moved quickly to both facilities and organized teams into two workstreams, one being shutdown mode and the other being post-crisis recovery. More than anything, this decision to organize our teams along multiple workflows has given us the bandwidth to move quickly in a crisis and make good decisions. In the past 61 days, we've supported our communities through the donation of PP&E to regional health authorities, and we fed literally thousands of team and community members through a volunteer-driven meal program. Like all of you, we stand strongly behind emergency responders, doctors and especially nurses who are working bravely to help those who are sick, and we offer our sympathies to those who have lost loved ones. And It's obvious to point out that most of our second quarter bookings were impacted by governmental stay-at-home orders and the overall reduction in domestic and international travel, resulting in large numbers of cancellations. We're not isolated from the global impact on travel and hospitality, we find ourselves among many fine brands and companies that are facing these same challenges. Safety first is and always has been our No. It was never a question of if we would be reopening, but more importantly, how? Last week, we launched Pursuit Safety Promise, which was constructed using material from the CDC and regional health authorities. As guests return to our iconic locations and our team members are present to host them, we've taken steps to ensure that we can do that safely. And you can see all about that on the specifics on the Pursuit website. So fast forward 60 days, looking to our iconic locations and FlyOver experiences, we're seeing the world begin to open back up. FlyOver Iceland reopened last week in Reykjavik, and we expect to benefit from the over 30,000 units of presold product already in the hands of our Icelandic guests in that market. And for our first weekend of operation, we handily surpassed our visit projection while maintaining a safe environment for visitors. We appreciate the support of the Icelandic government as they've moved quickly to support both workers and businesses in this unprecedented global pandemic. As travel restarts, we believe Iceland's thoughtful management of this public health crisis and renowned reputation as a safe destination, will position the country and our FlyOver Iceland experience well. So let's travel to Canada, Western Canada, and we expect to begin safely opening facilities in Banff National Park and Jasper National Park at the beginning of June. We expect visitation to be below 2019 levels with less international visitors. However, we do anticipate more Canadians traveling within the country than usual. To date, we have bookings in late June, and well into the third and fourth quarters of 2020. We continue to take more every day. For the week ending May 10, we were net positive for bookings, meaning we took more new reservations than cancellations at both the Mount Royal Hotel and the Glacier View Lodge. Canadian government has been very industry-focused, has enacted several programs that have been super helpful, including wage subsidies of up to 75% for team members, and that's called the CEWS program. And this has been extended to August, as well as everything from rent abatements within National Parks. We head north to the great state of Alaska, we expect the National Parks in Denali and Kenai Fjords will open for summer 2020. When they do, we'll be there to safely host guests and staff. Our properties and attractions will open in Alaska on a staggered basis beginning mid-June, because we expect business levels to be impacted by the partial cancellation of many cruise departures from the lower 48. We'll be prepared to adapt our properties and attractions accordingly. So that means we'll shrink and expand the operating capacity of our experiences based on demand. Down the West Coast of Vancouver, talk about Vancouver for a second. Vancouver obviously expects that international visitation will be down from historical levels, but we do expect more Canadians will visit Vancouver and enjoy the culture and beauty of that amazing city, including FlyOver Canada. And next, south of Montana, we expect to begin opening our facilities around Glacier National Park in June. Over 90% of guests to this area are self-driving Americans, and so with record low gas prices and the overall safety allure of a family road trip, we anticipate attendance in Glacier will be less impacted than other locations. In terms of future projects, we've made great progress on Sky Lagoon in Iceland and are on track for a late spring 2021 opening. The team has been working hard on FlyOver Las Vegas. And we've made great strides on the development of the creative product that will be shown in 2021. But finally, we believe that the power of iconic locations will not be dimmed. And looking back throughout history and now looking ahead into 2021, Pursuit is well-positioned to benefit from the pent-up perennial demand for iconic, unforgettable and inspiring experiences. So back over to Steve to talk about GES. Through February, GES performed well with overall results tracking slightly ahead of forecast. We were looking forward to a tremendous year with strong momentum on the corporate side and an incremental $100 million of revenue from three nonannual events all set to take place this year. Fortunately, the first of the major nonannual events, CONEXPO-CON/AGG took place as scheduled in early March before wide-sweeping stay-at-home orders and other restrictions went into place as a result of COVID-19. As event activity essentially halted, we drew upon our logistical capabilities to help our communities in the battle against COVID. We partnered with facilities, other contractors and members of the trade to convert four large exhibition centers in Chicago, London, New York City and Edmonton, Canada into temporary hospitals or shelters. This was around the clockwork completed in a very short time, and we're proud of our employees for their drive and commitment to this important work. Where we sit today, event activity has largely been canceled or postponed through July. Exactly when large-scale events will resume remains unclear and will ultimately be determined by the lifting of restrictions by local authorities and at the discretion of the event organizers. Just yesterday, MINExpo, one of our three major nonannual events that was scheduled to take place in Las Vegas in September, officially announced that it was postponing until September 2021. And based on a reopening plan recently announced in Illinois, it appears unlikely that IMTS will be able to take place as previously scheduled for this September in Chicago. That said, we do still have events on the books for the third and fourth quarter, including the International Woodworking Fair, a biannual event that is set to take place in Atlanta this August. And we continue to receive and win RFPs for client work in late 2020 and 2021. So there are definite signs that the live event industry is ready for a comeback as circumstances permit. We are closely monitoring commentary and decisions made by local governments to understand how they intend to handle the reintroduction of exhibitions and conventions in their economic reopening plans. While we wait for those decisions, we have effectively hibernated GES by leveraging its high variable cost model to minimize operating costs, while retaining the ability to reactivate parts of the company as business returns. We expect certain sectors will return faster than others, including pharma and technology, which are two of our strongest verticals on the corporate side of our business. We are taking this opportunity to design and build a better business, one that's more profitable, less asset-intensive, and more focused on our clients' future needs. Our focus continues to be on transforming our exhibition business, which is the largest part of our revenue today and driving share gains in our corporate business, while smaller competitors struggle to stay alive during this challenging time. When we begin to restart GES, we will do so with the future in mind and expect to emerge leaner, more nimble and more client-focused. As a service business, we have a highly variable, largely labor-based cost structure, which allowed us to act very quickly when the COVID-19 restrictions began occurring. Both business segments were able to flex down very quickly as conditions weakened. At Pursuit, we immediately reduced more than half of our costs and still have additional cost levers to pull if conditions do not begin to improve in the coming months. We can expand and contract the operating capacity of our experiences based on fluctuating business levels, which is a core competency for us, given the normal seasonal demand patterns of this business. At GES, more than two-thirds of our costs are entirely variable with an even larger percentage able to be quickly adjusted based on business demand. We essentially entered a hibernation mode until events return, reducing our semi-variable cost by approximately 70%, and we stand ready to quickly turn the faucet back on as events return. In addition to reducing our costs, we took a variety of other steps to preserve cash. We significantly reduced or eliminated planned capital expenditures, including both nonessential maintenance and small growth capital projects, and we slowed the pace of the two Pursuit FlyOver projects in development. We amplified our focus on working capital management, we engaged in productive dialogues with landlords and local tax jurisdictions to eliminate or defer spending where possible and we received some benefits from various government relief programs, including wage subsidies offered in Canada, the U.K. and the Netherlands, as well as U.S. payroll tax deferrals available under the CARES Act. We believe we have an adequate cash position and balance sheet to weather the near-term impacts of COVID-19. At March 31, our cash balance was $130.5 million, and in early April, we drew the remaining $33 million down on our revolver, bringing our total cash at the beginning of the second quarter to approximately $163 million. Given the swift and deep cost savings actions we've taken, we have significantly reduced our operating costs and expect our cash outflow during the second quarter will approximate $40 million. This assumes continued collection of outstanding receivables, minimal new revenue, and no postponed events coming back in the quarter. As it relates to our revolving credit facility, we were in compliance with all financial covenants at the end of the first quarter, and we have already received a waiver of financial covenants for the second quarter. This waiver, combined with our cash position, gives us important breathing room to negotiate longer-term covenant relief and line up additional sources of capital as we prepare for COVID impacts to persist into the third quarter and perhaps beyond. We are working closely with our lender group and outside advisors to ensure that Viad is sufficiently capitalized to withstand the downturn and emerge in a position of strength, with Pursuit poised to continue its pre-COVID growth trajectory. As David mentioned, we believe experiential trips will rebound more quickly than large events, and this economic downturn may ultimately bring interesting investment opportunities we hope to be able to pursue. Now switching over to our preliminary first-quarter results, which were in line with our pre-announcement in mid-March. First, let me comment on the preliminary nature of these results. The impact of COVID-19 has necessitated additional asset impairment testing, which we are currently working through. We do not expect the noncash impairment charges to impact cash flow, debt covenants or ongoing operations. However, we do expect the impairment charges to have a material impact on the final GAAP financial results presented in our Form 10-Q, which we expect to file no later than June 15, 2020. Preliminary revenue was $306 million, up 7.1% from the 2019 first quarter primarily due to positive share rotation of approximately $57 million at GES, partially offset by show postponements and cancellations due to the COVID-19 pandemic. January and February were in line with our original expectations, while March was impacted by postponements and cancellations resulting from virus concerns, causing us to reduce our original guidance for the first quarter and withdraw our full-year guidance. GES revenue was $292.5 million, up $17.6 million or 6.4%. This growth was largely due to the occurrence of a nonannual CONEXPO-CON/AGG trade show in early March before the COVID effects were fully felt. Pursuit revenue was $13.5 million, up $2.9 million or 26.8%. This is a seasonally slow quarter for Pursuit and although we began to feel the effects of COVID-19 during late March, Pursuit finished the quarter with higher revenue than 2019, largely due to strong pre-COVID results from our acquisition of Mountain Park Lodges and our new FlyOver Iceland attraction. Preliminary net loss attributable to Viad was $10.6 million versus $17.8 million in the 2019 first quarter. And preliminary net loss before other items was $8.5 million versus a loss of $10.2 million in the 2019 first quarter. This non-GAAP measure excludes impairment and restructuring charges, acquisition, integration and transaction-related costs, and attraction start-up costs, as well as a legal settlement recorded in the 2019 first quarter. Preliminary adjusted segment operating loss was $8.4 million versus a loss of $11 million in the 2019 first quarter, and adjusted segment EBITDA was $6.9 million, up $4.7 million from the 2019 first quarter. The increase in adjusted segment EBITDA was primarily due to higher revenue at GES and the elimination of performance-based incentives partially offset by increased seasonal operating losses at Pursuit driven by the June 2019 acquisition of Mountain Park Lodges and the opening of FlyOver Iceland. GES adjusted segment EBITDA was $19.1 million, up from $10.9 million in the 2019 first quarter. And Pursuit adjusted segment EBITDA was negative $12.2 million versus negative $8.8 million in the 2019 first quarter. The second quarter will be extremely difficult, but our quick move to reduce variable expenses into increased liquidity will help protect our financial position. We've essentially been in hibernation mode since early in second quarter, maintaining the lowest level of expenses we prudently can, while we wait for the slow resumption of travel and events. At Pursuit, as you know, the seasonally strongest period is June through September. And as David said, we believe the business will be the first to recover and are beginning to see signs of this. GES is expected to take longer, although we are hopeful that as certain locations begin to lift restrictions, events will start to take place again during the third quarter. We've controlled the factors we can control. We've reduced expenses, prudently managed our balance sheet and maintained very close contact with our lending partners. We are in a good financial footing to manage through a brutal second quarter and hope to emerge in the third quarter with growing visitation and bookings at Pursuit and the cessation of cancellations for future events at GES. And now I'll hand the call back to you, Steve, for your concluding remarks. In closing, the spread of COVID-19 affected our overall results for first quarter and we anticipate continued impact in the near term as planned events further unfold, air travel remains at a bare minimum for the time being, and the state-by-state regulations continue to shift. We expect GES will experience a patient Rebound, whereas Pursuit will see more benefit in the short term as stay-at-home orders are lifted and domestic regional travel resumes. As Ellen shared previously, we have taken swift steps to bolster our near term liquidity, and we are prepared to take other prudent steps to ensure we weather the storm. We have an experienced management team that has navigated through previous downturns and are more than capable of leading this company through this uncertain time. We see the current environment as an opportunity to reimagine the demand side of our two business segments and map out where we believe to be the most profitable pockets of opportunity and growth as we exit this downturn. We anticipate making some strategic changes to the business in order to better facilitate the evolving needs of our clients, better serve our guests and provide significant value for our stakeholders as we improve our competitive position in a post-COVID-19 universe. And we believe in the longevity and resiliency of our business, exhibitions, conferences and corporate events are a vital part of the economic engine, facilitating sales, networking and education and a relatively low-cost and high-impact way. The replacement of live events by virtual events has been tested in the past and will likely be tested again. But even in the most productive of virtual worlds, we do not believe that face-to-face meetings will go away. They may change and our industry will change along with it. In our GES business, we will focus on shrinking our footprint and choosing which markets we want to be in and which ones we don't. On the Pursuit side, iconic location and experiences cannot be replaced, and people will not choose to stay at home indefinitely. We will once again venture out to explore the world in its amazing places perhaps with pent-up demand. More than ever, we believe that experiences will be more valuable than things.	viad q1 revenue rose 7.1 percent to $306 million. q1 revenue rose 7.1 percent to $306 million. suspended future dividend payments and share repurchases. executive management team voluntarily reduced its base salaries by 20% to 50%. eliminated all non-essential capital expenditures and discretionary spending. fully drawn on our revolving line of credit to increase our cash position. obtained a waiver of our financial covenants for q2. implemented aggressive cost reduction actions, including furloughs, mandatory unpaid time off, and salary reductions for all employees.
This is Brady Connor, and I'm here with our Chairman and Chief Executive Officer, Hans Vestberg; and Matt Ellis, our Chief Financial Officer. Before we get started, I'd like to draw your attention to our Safe Harbor statement on Slide 2. Discussion of factors that may affect future results is contained in Verizon's filings with the SEC, which are available on our website. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are included in the financial materials posted on our website. As a reminder, we've entered the quiet period for the 3.45 gigahertz spectrum auction. So we will not be able to comment on our spectrum holdings or strategy. Now let's take a look at the consolidated earnings for the third quarter. In the third quarter, we reported earnings of $1.55 per share on a GAAP basis. Reported results include a net pre-tax gain on the sale of Verizon Media of $706 million and a net pre-tax charge of approximately $247 million, which includes a net charge of $144 million related to a mark-to-market adjustment for our pension liabilities and $103 million related to a severance charge for voluntary separations under our existing plans. Excluding the effect of these special items, adjusted earnings per share was $1.41 in the third quarter compared to $1.25 a year ago. Please note, our results include two months of Verizon Media as the sale to Apollo funds closed on September 1. We had a solid performance in the third quarter, growing total wireless service revenue by 3.9% year-over-year with earnings growth. This was supported by a strong net additions in wireless and broadband, which are both translated to bottom line growth. This definitely confirms our strategy to grow our business with high quality offerings. As I said throughout the year, we have all the assets we need to extend our number one position in the market. Our strategy remains unchanged, and we're delivering on everything we promised. And we're gaining momentum on all of five vectors of growth. We are more passive to grow than antibody else and we're confident with our growth targets for outer years based on our third quarter and continued momentum into the fourth quarter. As an evidence, we're updating financial guidance for the full year. We now expect total wireless service revenue growth of around 4%, which is on the high-end of our prior guidance. And adjusted earnings per share or $5.35 to $5.40, up from $5.25 to $5.35. We remain on track to achieve our targeted capex levels in 2021, assuming no further disruption into the supply chain. Our team is working diligently and doing a fantastic work with vendors and suppliers to ensure we have adequate equipment to meet our C-Band build and that we have devices that our customer wants. Our operational excellence and our partnership strategy is the best in industry, which I've been so impressed by since I joined Verizon. And in times like these, it matters. Let's talk about business. We continue to provide a best-in-class experience across the board. On the network front, third-parties continue to recognize us as the best network experience. This includes RootMetrics for the 16th consecutive time and JD Power for the 27th consecutive time. Our network team is doing a great job. On the commercial front, we've got great momentum in the 5G adoption with over 25% of our consumer phone base using a 5G capable device. This is tracking well ahead of the 4G adoption, as I've said before. For context, 12 months of the 4G launched, 10% of the devices were on 4G. Less than 12 months after 5G DSS launch, more than the double were on 5G devices, and it's growing at the rapid pace. This combined with our millimeter wave strategy is an important combination, and that is paying off. In the third quarter, the total millimeter wave usage more than double sequentially. We're doing more gigabit of usage in a month now than we did in all the first quarter. In some or more established build outs, we're seeing more than 20% of usage of millimeter wave. And we are on track to have 5% to 10% of all traffic in the urban millimeter wave polygons by year end. For Business segment, we continue to add wireless subscribers and take broadband share in our ILEC footprint with Fios. And finally, we delivered significant value creation and strategy refinement with the sale of the Verizon Media Group in September depending TracFone acquisition and also the issuance of our third green bonds, which is a vital step toward our net-zero goal in 2035. All this was accomplished in tandem with a strong quarter results. When it comes to the finances, we are on track to meet and exceed all our 2021 guidance. We expect to have a strong finish of the year as we approach the launch of C-Band. We continued to deliver excellent revenue performance in wireless service and within Fios. We have a diversified path to revenue growth with all five vectors contributing. EBITDA was up 3.3% year-over-year. And on an adjusted basis, earnings per share was up 12.8%. Our capital allocation stands firm. We invest in our business to create shareholder value. We continued to increase our dividend, which we did for the 15th consecutive year. And Matt and team are working diligently on our debt reduction. As we said last quarter, our guidance raise is broad-based and across all our five vectors of growth. Consumer segment EBITDA increased by 2% driven by positive trends in customer acquisition, premium plan adoption, products and services and content as well as prepaid and reseller growth. The service revenue momentum in the third quarter was driven by continued execution of our migration strategy to higher valued price plans as well as high quality net adds, but our growth is more than that. Much of our long-term growth is in fixed wireless access and Mobile Edge Compute. Our strategy is becoming a national broadband provider with the best access to detect for our customers includes Fios, fixed wireless access on 5G, 4G, millimeter wave and C-Band. When it comes to the Mobile Edge Compute, we are the Mobile Edge Compute leader, both in public and private. And we just announced a private Mobile Edge Compute partnership with Amazon that we're pleased with. And this just scratches the surface on how we'll continue to utilize our assets. We're confident in our growth opportunities as we move into the investment cycle with C-Band. Before I hand it over to Matt, I want to briefly touch on our broadband expansion. We are on track to meet our fixed wireless access household coverage targets with an expected 15 million homes passed by the end of the year between 4G and 5G. To date, 5G Home is in 57 markets and the 4G LTE Home in over 200 markets across all 50 states. In addition to fixed wireless access, we're pleased with the great performance of Fios and continue to grow the open for sales volumes within our footprint. We are on track on exceeding all the commitments for 2021 and on track for long-term growth expectations outlined in our Investor Day earlier this year. You can expect us to provide 2022 guidance during our Q4 '21 earnings call. And now, Matt, over to you. I'm pleased to be with you today to share our Q3 results, another quarter in which we delivered strong financial and operating performance. As we have said previously, our focus is not solely on volume growth as a goal in itself, but on a high value volume growth that will yield sustainable increases in revenue and profitability going forward. By delivering the best-in-class network experiences to customers with additional services and products like Disney+ that others can't provide, our strategy is focused on increasing the value we receive from every connection. As you can see from our results, our disciplined approach is driving profitability and strong earnings results. In the third quarter, consolidated total revenue was $32.9 billion, up 4.3% from prior year. Our results are inclusive of two months of Media revenue, which approximated $1.4 billion on a segment basis. Excluding Verizon Media, total revenue grew 5.5%. Our service and other revenue growth rate was 0.5% and 1.6% without Verizon Media. Equipment revenue growth was approximately 30% compared to the prior year, mainly due to the timing of iconic device launches and the continued pandemic recovery. Fios revenue was $3.2 billion, up 4.7% year-over-year, driven by continued growth in customers as well as our efforts to increase the value of each customer by encouraging them to step-up in speed test. Total wireless service revenue, which is the sum of consumer and business, was $17.1 billion, an increase of 3.9% over the prior year. The results were driven by higher access revenue, volume growth and products. We are creating more positive growth with connectivity and non-connectivity services. Adjusted EBITDA in the third quarter was $12.3 billion, up 3.3% from prior year. Top-line growth and a reduction in non-equipment-related expenses contributed to the year-over-year EBITDA growth. Our net EBITDA growth is helping us drive earnings per share growth. For the quarter, adjusted earnings per share was $1.41, up year-over-year by 12.8%. Now, let's take a look at our consolidated metrics. Throughout the quarter, we remain focused on bringing in high quality net adds, a key component in helping us continue to deliver strong quarter-over-quarter revenue growth. We are seeing strong demand for connectivity across our consumer and business units. Our Mix and Match value propositions, network quality and unique partnerships are resonating with both new and existing customers. For the quarter, we delivered 429,000 wireless retail postpaid phone net adds, up more than 50% from prior year and in line with 2019 levels. We're seeing growth in new accounts as well as high retention levels, allowing us to grow our base with high quality net adds. Phone churn for the quarter was 0.74%, well below pre-pandemic levels. Churn continues to benefit from a number of sustainable factors, including our best-in-class network with unmatched reliability and coverage and overall value propositions within our Consumer and Business unlimited plans. Additionally, consumer payment patterns continue to be better than pre-pandemic norms. Total broadband net adds, defined here as Fios, DSL and fixed wireless, were 129,000. Fios Internet net adds were 104,000 compared to 144,000 last year. As a reminder, last year's 3Q Fios results included a benefit from a higher backlog entering the quarter, as we had largely paused installs in Q2 2020 due to COVID. Fios has continued momentum driven by our best-in-class value proposition built on network quality and our Mix and Match pricing structure. This combination is helping us to take share and deliver historically low churn rates. For the first time, we are providing fixed wireless net adds, which include both Consumer and Business fixed wireless products. We are building momentum and our pre-C-Band success in Q3 demonstrates there is demand for the product from consumers and businesses. Both our 5G and LTE fixed wireless products are performing very well. We're pleased with what we're seeing around the install process as well as the quality and reliability of the product. Now, let's turn to our Consumer Group results. Our Consumer Group had another strong quarter, continuing the momentum that we've been seeing in wireless and FIos. Total revenue was $23.3 billion, up 7.3% year-over-year. Service and other revenue was $18.8 billion, an improvement of 2.5% versus prior year. These results include strong wireless revenue as well as growth in Fios. Fios revenue was $2.9 billion, up 4.3% year-over-year, mainly driven by growth in our Internet base of approximately 400,000 or 6.2% over the past year and migration to higher speeds. Our actions around Mix and Match, which include a broadband first approach, is helping us to grow Fios revenue and Consumer EBITDA. We're still seeing plenty of room for additional growth within Fios as we continue to increase our share Mix and Match penetration rates and our open for sale locations. Wireless service revenue was $14 billion, up 4% from the prior year. We have been driving access gains both in growing accounts and phone net adds as well as by continuing to execute on our migration strategy. As a result of migrations and step-ups, over 30% of our account base is now on premium unlimited plans. Our growth in access is being complemented by product revenue, which includes items such as protection plans, content and others. Our wide range of product offerings helps us to not only grow revenue, but provides differentiated experiences and more value to our customers. For the quarter, EBITDA was $10.5 billion, up 2% year-over-year or more than $200 million, driven by a high quality service and other revenue gains coming from multiple growth vectors. These results show the impact of our strategy to enhance the value of each connection, which we believe will drive continued growth into the future. The Mix and Match pricing structure for both wireless and Fios provides tremendous opportunity to migrate customers to higher value tiers and bringing customers in the higher value plans. We are very pleased with how this strategy is working to help us increase value from our base and from new customers. You can see the impact of this strategy throughout our results. Postpaid phone net adds were 267,000, above our Q3 performance in 2019 and 2020. The performance was consistent during the period as we were able to grow accounts and deliver sustainably low churn throughout the quarter. Most importantly, we continue to be very pleased with the quality of customers we're adding with approximately 66% of new accounts taking a premium unlimited plan. And Q3 was another quarter in which we saw a strong acceleration in our 5G penetration, exiting the quarter with over 25% of our phone base now equipped with a 5G capable device, which is great progress in advance of our launch of 5G service on C-Band spectrum in the coming months. Fios Internet net adds were 98,000 for the quarter, up slightly from the prior quarter. We continue to be pleased with the results we're seeing, especially on retention. Now let's move to Slide 11 to review the Business Group results. Our Business segment continues to see strong demand for wireless services across multiple verticals. We are continuing to focus on what we believe will be the highest growth portions of the Business segment; our small and medium business unit, private wireless and the MEC space or enterprise customers as well as building momentum for fixed wireless access to serve multiple customer groups. Total revenues for the Business segment was $7.7 billion. We continue to see growth in wireless revenue, being offset by ongoing legacy wireline declines. Wireless service revenue was $3.1 billion, up 3.6% year-over-year. We saw quarter-over-quarter expansion driven by small and medium business, which was partially offset by distance learning process in public sector. Wireline revenues continue to be pressured by secular trends, while also facing elevated year-over-year comps due to 2020 COVID spending. Consistent with our focus on driving high value business in the wholesale space, we continue to rationalize our international voice traffic, which is contributing to the revenue decline, as shown on the slide. Business segment EBITDA was $1.9 billion, down 2.4% from the same quarter last year, and Business segment EBITDA margin was 24.8% in the quarter. While secular trends within wireline will continue to put pressure on margins in the near-term, we're encouraged by the growth opportunities associated with our business transformation efforts as they start to gain traction. Our market leadership in wireless across all customer groups and our continued investment in primary growth areas for Verizon Business Group will position us to take advantage of the growth opportunities in the future. We are encouraged by the results we delivered for the highest value portions of the segment in 3Q. Phone gross add volumes were above pre-pandemic levels, up 11.4% year-over-year and up 3% versus the same quarter in 2019. Total postpaid net adds for the quarter were 276,000. To better highlight some of the trends, on this slide we've broken out the net adds by public sector and our higher growth commercial businesses, which includes small and medium business and enterprise. During 3Q 2020, the commercial space, primarily within small and medium business, was depressed, while public sector buoyed by distance learning programs saw elevated net adds. In 3Q '21, we've seen a rebound in the commercial space, while distance learning disconnects have driven public sector volumes to lower levels. We expect these trends to continue into the fourth quarter. A portion of distance learning disconnects also impacted our phone churn and net add performance. Despite this, we delivered postpaid phone net adds of 162,000. Now, let's move to our consolidated cash flow summary. The business continues to generate strong cash flow. Year-to-date cash flow from operating activities totaled $31.2 billion. The year-over-year change was primarily driven by lower cash taxes last year from a one-time benefit and higher working capital requirements this year due to greater volumes. Year-to-date capital spending totaled $13.9 billion as we continue to support traffic growth on our 4G LTE network, while expanding the reach and capacity of our 5G Ultra Wideband network. C-Band capex was more than $1 billion through the third quarter. And we have placed orders for approximately $2 billion of related equipment year-to-date, giving us confidence that we will be within the previously guided incremental capex range of $2 billion to $3 billion for the year as we accelerate our C-Band deployment. The net result of cash flow from operations and capital spending is $17.3 billion of free cash flow for the nine month period. Net unsecured debt at quarter end was $131.6 billion, a $5.2 billion decrease versus the prior quarter. In addition to our third green bond issuance, we extended over $4.6 billion of near-term debt into a new 2032 maturity as we continue to optimize borrowing costs and our debt profile. Our net unsecured debt to adjusted EBITDA ratio was approximately 2.7 times. Our cash balance at the end of the quarter was $9.9 billion, which included the proceeds associated with our sale of Verizon Media Group. We expect lower levels of cash on hand as we progress through the fourth quarter and approach to close of the TracFone acquisition, while continuing to execute on our business strategy within our capital allocation framework. Let's move on to Slide 14 for an update on guidance for the remainder of the year. We continued our strong first half performance momentum in the third quarter. Hans and I are very pleased with the hard work our team is putting forth, and we are excited about the opportunities that lie ahead as we prepare for the C-Band launch. Our strong year-to-date results and momentum heading into the fourth quarter are allowing us to update guidance on both wireless service revenue growth and EPS. Wireless service revenue growth is now expected to be around 4%, the high-end of the prior guidance. Adjusted earnings per share guidance is being increased to $5.35 to $5.40, up from the prior range of $5.25 to $5.35. Our guidance for the effective tax rate is unchanged. Capex guidance is also unchanged, though I'd note that our assumption for our BAU spend of $17.5 billion to $18.5 billion is dependent upon no material changes in the current state of our supply chain. Our team continues to execute on our strategy and deliver strong operational and financial results. We are attracting high quality customers that see value in our products and services, evidenced by growth in accounts, migrations and step-ups. I look forward to continued momentum as we wrap up the year and position our base to take full advantage of all the things 5G built ride has to offer. As you heard, we delivered solid third quarter results and we are on track to meet or exceed all our 2021 commitments to the investment community. Our strategy is working. And I'm confident in the strategy will help to deliver both strong results and premium experiences going forward. As we look ahead, we'll continue to focus on expanding our 5G leadership, capitalizing on wireless momentum and work toward our C-Band launch, deploying differentiating experiences for our customers and execute our Network-as-a-Service strategy delivering all five vectors of growth. I will look forward to delivering on all fronts and sharing our results in the coming months. With that I hand it back to Brady. Brad, we're ready to take questions.	compname posts q3 earnings per share $1.55. q3 adjusted earnings per share $1.41 excluding items. q3 earnings per share $1.55. verizon - qtrly operating revenue of $32.9 billion, up 4.3 percent from third-quarter 2020. verizon - qtrly total wireless retail postpaid churn of 0.94 percent, and retail postpaid phone churn of 0.74 percent. verizon - now expects full year 2021 total wireless service revenue growth of around 4 percent. verizon - now expects full year 2021 adjusted eps* of $5.35 to $5.40, an update from prior guidance of $5.25 to $5.35. verizon - capital spending to be in range of $17.5 billion to $18.5 billion in full year 2021. verizon - excluding verizon media, qtrly operating revenues increased 5.5%. verizon - capex guidance includes expansion of 5g mmwave in new and existing markets, densification of 4g lte wireless network to manage future traffic demands. verizon - q3 earnings per share included net pre-tax gain on sale of verizon media to apollo funds of $706 million, a net pre-tax charge of about $247 million. verizon - q3 2021 results also included two months of verizon media, as sale closed on september 1.
We will also discuss non-GAAP financial metrics and encourage you to read our disclosures and reconciliation tables carefully as you consider these metrics. We appreciate you joining us today. Turning to slide three. We continue to see a recovery across the global freight and transit rail markets, with North American freight volumes and equipment utilization sequentially improving in the first quarter and investments in transit infrastructure continuing. These directional trends, along with the focused performance of our team and execution against our strategic plan are reflected in our first quarter results. Total sales for the quarter were $1.8 billion. This was largely driven by international freight markets, services and our recovery in transit, but offset by continued weakness in the North America OEM market. Adjusted operating margin was 15.1%, driven by lean initiatives, cost actions and favorable mix from mining and mods. Cash conversion was strong with cash flow from operations of $292 million, cash generation was due in large part to good working capital management, allowing us to deliver on our financial priorities, including the strategic acquisition of Nordco, which I'll touch up on more in a moment. Total multiyear backlog was $21.7 billion, up sequentially over the prior quarter, providing us better visibility into 2021 and beyond. Overall, we ended the quarter with adjusted earnings per share of $0.89, a strong reinforcement that our teams are continuing to take the necessary steps to control what we can, deliver long-term growth of the company and increased shareholder value. In the area of synergies, we're on track to deliver the full run rate of $250 million in synergies this year, and we have positioned the company for long-term profitable growth. In the first quarter, we exited all shared service agreements stemming from the GE Transportation merger ahead of schedule. This was a tremendous execution by the team on a complex transaction. In addition, we continue to take aggressive actions on structural cost. This includes reducing total operational square footage by 5% since January of last year, and we will further reduce our square footage by an additional 2% for the remainder of 2021. Moving forward, we'll continue to drive additional cost reductions through lean initiatives and balance our focus on execution with strategic investments in high-return opportunities that drive long-term profitable growth. You saw that with our recent acquisition of Nordco, which is a leader in the maintenance of waste space, with 60% of its revenues coming from aftermarket services and a significant installed base of over 5,000 units. We really like this business, and it's leading edge technologies. It opens up significant opportunities to expand domestically and internationally in the growing maintenance waste segment while driving long-term profitable growth. Integration activities are already under way, and we expect this strategic acquisition to be accretive to earnings, cash flow and return on invested capital in 2021. On the commercial front, we're also focused on driving growth and won some key orders in the quarter despite a challenging environment. This included a significant deal for our FDL Advantage product, which is a fuel upgrade cash. As we have shared before, there are more than 10,000 FDL locomotives running globally. With this next-gen technology, we're opening up a multimillion-dollar pipeline of opportunity that is helping customers drive down fuel consumption by up to 5% as well as drive down emissions. That means for a single locomotive burning 250,000 gallons of fuel, it can translate into a $25,000 in savings per year. Also, when it comes to technology differentiation, and sustainable transportation, we completed a significant operational milestone with our flex drive battery electric locomotive, testing it in revenue services with BNSF across more than 13,000 miles of track. Through this demonstration, the flex drive was able to reduce both fuel consumption and emissions by more than 11%, a game changer in decarbonizing rail. We continue to see growing interest in this next-gen technology from customers in both North America and internationally, and we expect our battery electric locomotive to become an important area of growth for the company over the long term. In digital and electronics, we're also leading the way in rail, safety and utilization. We closed the key order for positive train control internationally, and we are encouraged by the strong order pipeline for international PTC expansion. Finally, we had a solid quarter in transit, winning new brakes, doors, and HVAC contracts in India, Taiwan and France, including a significant order for platform doors and gates at over 30 train stations in Marcel. Overall, our order pipeline continues to strengthen, driven by multiyear orders in freight services, equipment and digital electronics. Based on this factor and orders, Wabtec is in a strong position to drive profitable growth and perform for our shareholders, for our customers and for our employees. We had a solid operational start to the year, despite the challenges in our North America OEM markets and ongoing disruption from the pandemic. We demonstrated our ability to deliver on synergies, generate cash flow invest for the future and position Wabtec for profitable growth. Turning to slide four. I'll review the first quarter in more detail. Sales for the first quarter were $1.8 billion, which reflects a 5% decrease versus the prior year, driven by lower North America OE freight markets as a result of the disruption caused by the pandemic. For the quarter, operating income was $192 million, and adjusted operating income was $277 million, which was down 9% year-over-year. Adjusted operating income excluded pre-tax expenses of $85 million of which $70 million was for noncash amortization and $16 million of restructuring and transaction costs related to the acquisition of Nordco, along with restructuring due to the 2021 locomotive volumes and restructuring in our U.K. operations. Adjusted operating margin was 60 basis points lower than the first quarter last year, but up 110 basis points from the fourth quarter versus last year, adjusted operating margin was impacted by under absorption costs at our manufacturing facilities, stemming from fewer locomotive deliveries as well as sales mix impacted from lower digital electronics and a higher level of transit sales. At March 31, our multiyear backlog was $21.7 billion, up quarter-over-quarter, our rolling 12-month backlog, which is a subset of the multi-year was $5.7 billion and continues to provide good visibility into the year. Looking at some of the detailed line items for the first quarter, adjusted SG&A declined 2% year-over-year to $224 million. This was the result of cost actions during the downturn and excludes $11 million of restructuring and transaction expenses. SG&A expense benefited from headcount reductions and the realization of synergies. For the full year, we expect SG&A to be up about 5% versus 2020, driven by the normalization of costs following the COVID disruption. That said, we will continue to aggressively manage headcount and structural costs. Engineering expenses decreased from last year. This was largely due to the lower locomotive volume outlook for the year as well as some changes in project timing. Overall, our investment in technology is still expected to be about 6% to 7% of sales. Amortization expense were $70 million. For 2021, we expect noncash amortization expense to be about $285 million and depreciation expense of about $195 million. Our adjusted effective tax rate was 27.5%, which was higher than year-over-year due to certain discrete items during the quarter. We expect a full year 2021 effective tax rate to be about 26%. And the first quarter GAAP earnings per diluted share were $0.59 and adjusted earnings per diluted share were $0.89. Now let's take a look at the segment results on slide five. Across the freight segment, total sales decreased 9% from last year to $1.2 billion, primarily driven by North America OEM markets but partially offset by strong services and aftermarket growth. In terms of our product lines, equipment sales were down 36% year-over-year, mainly due to zero deliveries in North America, which resulted in roughly 50% fewer locomotive deliveries versus last year, a dynamic that unfortunately persists. However, mining was a bright spot with units and revenues up double digits during the quarter. In line with improving freight traffic, our services sales improved a solid 13% versus last year and was up 3% sequentially. This was largely driven by strong modernization deliveries, and higher aftermarket sales from un-parking of locomotives due to the extreme weather in the quarter. I'd note that the timing of mod deliveries vary from quarter-to-quarter, but we expect our services sales to improve with the gradual recovery in freight volumes. Digital electronics sales were down 10% year-over-year as orders shifted to the right in North America due to the COVID disruption. Yet, we had another quarter of strong momentum for multiyear orders and continue to see a significant pipeline of opportunities in our digital electronics product line as customers focus on safety and improved productivity. Component sales were down 8% year-over-year. This is compared to a 45% lower railcar build year-over-year, demonstrating the diversification within our Components business. We continue to see signs of improvement in demand for aftermarket components as more railcars come out of storage. Freight segment adjusted operating income was $214 million for an adjusted margin of 18.1% versus last year, the benefit of synergies and cost actions were offset by sales mix as well as under absorption due to lower locomotive deliveries. We will continue to execute on our synergy plans and further improve costs to drive margin improvement. Finally, Freight segment backlog was $18 billion, up from the prior quarter on broad multiyear order momentum across the segment. Turning to slide six. Across our Transit segment, sales increased 3% year-over-year to $647 million, driven largely by steady aftermarket sales and favorable foreign exchange rates, offset somewhat by the disruption from the COVID-19 pandemic. OE sales were roughly flat year-over-year, demonstrating continued investments and green infrastructure. Aftermarket sales were up about 5% from last year. We expect aftermarket sales to continue to improve as transit ridership and services increase globally. Adjusted segment operating income was $79 million, which was up 6% year-over-year for an adjusted operating margin of 12.2%. Across the segment, we continue to drive down cost, and improved project execution, demonstrated by our good operating performance despite a challenging environment due to the pandemic. We are pleased with the momentum under way, and the teams are committed to execute on more actions to drive 100 basis points of margin improvement for this segment in 2021. Finally, Transit segment backlog was $3.7 billion. Now let's turn to our financial position on slide seven. Despite a seasonally challenging quarter, we generated $292 million of operating cash flow, demonstrating the resiliency and quality of our business portfolio. Cash flow was driven largely by good conversion of net income and focused working capital management, including a $93 million incremental benefit from accounts receivable securitization, which provides attractive financing and provides liquidity. During the quarter, total capex was $27 million. 2021, we expect capex to be about $180 million or about 2% of our expected sales. Overall, our strong cash generation allowed us to execute on strategic plans and capital allocation priorities, including the strategic acquisition of Nordco, which will drive profitable growth for Wabtec. Our adjusted net leverage ratio at the end of the first quarter was 2.7 times, and our liquidity is robust at $1.7 billion. As you can see in these results, our balance sheet remains strong, and we are confident we can continue to drive solid cash flow generation, giving us the liquidity and flexibility to allocate capital to grow shareholder value. Turning to slide eight. Let's look at some of the market dynamics by segment. Overall, we're seeing a gradual recovery across most end markets as global economic activity improves. And we're continuing to monitor the evolving COVID situation in regions like India. This aligns with what you've heard from our customers as well. While we continue to work through the trough in the OEM North American market, where new local orders remain stagnant, we are encouraged by the sequential improvement in freight volumes and a broad recovery across agriculture, intermodal, in the industrial markets. Locomotive parkings, after peaking to a record high in 2020, are improving as a result of the increased freight traffic and demand is stemming from weather disruptions during the quarter. We expect demand for reliability and productivity to improve as railroads continue to recover. This will put us in a position of strength across our freight portfolio. When it comes to North America railcar built, railcars are coming back into use, more than 20% of the North American railcar fleet remains in storage, but it's back to pre-COVID levels. Industry orders for new railcars remain weak. And forecast, estimate the railcar build this year to be below 30,000 cars. We have a strong order pipeline internationally, and we expect long-term revenue growth in several of these markets going forward. And in mining, market conditions are also improving. Transitioning to the transit sector, rider shift is uneven, but recovering as economies open up. We are watching short-term dynamics as the pandemic evolves in several geographies, including India and Europe. Overall, the long-term market drivers for passenger transport remains strong in infrastructure spending for green initiatives continue to be a focus, especially as governments globally churn to rail for clean, safe and efficient transport. Turning to guidance for the year. We are updating our sales guidance to $7.7 billion to $7.9 billion and updating adjusted earnings per share guidance to a range of $4.05 to $4.3. This largely reflects upside from the acquisition of Nordco, our operational execution to date and visibility to backlog. Consistent with our initial forecast for 2021, with more growth weighted to the second half of the year we expect second quarter earnings only slightly higher than the first quarter. This is in line with the positive and gradual trends in our freight markets. That said, we are seeing disruption from the resurgence of COVID, especially in a key region for us like India, and we will continue to take swift and necessary action as conditions evolve. Finally, we remain confident in delivering strong cash generation for the year as well as margin expansion to prioritize cost actions. Turning to slide nine and to conclude, I'm proud of the strong execution by the team in the first quarter despite a challenging environment. As we go forward, we will continue to lean into the strong long-term fundamentals of the company and remain committed to executing on our strategic plan. This includes reducing costs and executing on synergies, driving margin expansion across our Freight and Transit segments generating strong cash flow and delivering long-term profitable growth. As we've said before, Wabtec's mission holds a larger purpose to move and to improve the world and our teams globally leave up to this mission every day. After demonstrating a strong performance in 2020 and in the first quarter of '21, I'm confident that this company will drive profitable long-term growth and be a leader in transitioning our customers and the industry to a more sustainable future. We will now move on to questions. But before we do and out of consideration for others on the call, I ask that you limit yourself to one question and one follow-up question. If you have additional questions, please rejoin the queue. Operator, we are now ready for our first question.	q1 adjusted earnings per share $0.89. q1 gaap earnings per share $0.59. sees fy adjusted earnings per share $4.05 to $4.30. sees fy sales $7.7 billion to $7.9 billion. q1 sales $1.8 billion. wabtec corp - on-track to deliver $250 million run-rate of synergies from ge transportation merger in 2021. wabtec corp - at march 31, 2021, wabtec's total multi-year backlog was $21.7 billion.
We will also discuss non-GAAP financial metrics and encourage you to read our disclosures and reconciliation tables carefully as you consider these metrics. John is a well-respected leader with broad operational and financial experience. He is already bringing a great perspective to our business and long-term strategy with a clear focus on growing shareholder value. We are thrilled to have him on the team. I also want to take a moment to tank Pat Dugan for his nearly 20 years of service to Wabtec. We're grateful for all that he has contributed to the company. I will start with an update on our business, my perspective on the quarter and our long-term value framework and then John will cover the financials. Overall, we made significant progress against our strategy and delivered a strong third quarter as noted by our sales growth, adjusted margin and adjusted earnings per share each of which were up year-over-year. Total sales for the quarter were $1.9 billion driven by growing demand in freight services and components but offset by continued weakness in the North America OE end market. Adjusted operating margin was 17% driven by strong mix and productivity, ongoing lean initiatives and cost actions. Total cash flow from operations was $244 million this takes year-to-date cash from operations to $759 million versus $458 million a year ago. This is a solid illustration of how the team is driving good operational performance. Cash conversion for the year is at 103%. Finally, we ended third quarter with adjusted earnings per share of $1.14 up 20% year-over-year. Today, we're also pleased to share that we have achieved our $250 million synergy run rate, a full-year earlier than expected at the time of the GE Transportation acquisition. We have consolidated and optimized our operations reduced costs to drive stronger profitability, accelerated lean across the enterprise and created additional capabilities in best cost countries. We're already feeling the benefit of these efforts which will continue to improve our competitiveness. So overall, really strong execution by the team as we continue to deliver on our long-term strategy. Shifting our focus to Slide 5 let's talk about our end market conditions in more detail. Internationally, freight activity continued to improve in the third quarter, across our major markets and our order pipeline remains strong. We expect long-term revenue growth in Russia/CIS Brazil, Africa, Asia and Australia. Rate trends in North America weakened slightly year-over-year in the third quarter, not driven by lack of demand but by global supply chain disruption that has impacted intermodal volumes and auto production. Consumer and industrial activity continue to spur volume growth in chemicals, metals and materials. Locomotive parkings continue to decline despite weaker freight traffic in the quarter. We expect demand for reliability, productivity and fuel efficiency to continue to increase placing our services business in a position of strength. When it comes to the North America railcar build, demand for railcars is improving. About 21% of the North American railcar fleet remains in storage a slight improvement from the previous quarter and in line with pre-COVID levels. As a result, industry orders for new railcars are starting to improve. We forecast the railcar built this year will be in the neighborhood of 30,000 cars. Transitioning to the transit sector, ridership remains a bit uneven in some markets, however infrastructure spending for green initiatives continues to be a bright spot, especially as governments globally turn to rail for clean, safe and efficient transportation. Overall, the long-term market drivers for passenger transport remain strong. Shifting to Slide 6, we are developing innovative solutions that address the main cost drivers for our customers, including fuel efficiency and increased velocity in the transportation sector. Our commitment to succeed in these efforts is underscored by our focused on continuing to position rail transportation as the safest and most sustainable way to move freight and people overland. Today, we have the capability and expertise to transition diesel-powered locomotives to battery power and drastically reduce emissions as we're doing with our FLXdrive locomotive. We expect to extend this technology further to hydrogen fuel cells and help lead the industry to a zero emission rail networks of the future. And we're not stopping there; we have extended battery technology to other areas of our business as well and we are driving several technology breakthroughs to boost transit efficiency and reduce emissions and pollutants. An example of this is our Green Friction technology which drastically reduces brake emissions by up to 90% an incredible milestone and significantly improving the quality of the air in our metros. We're also leading the change to create a safer and more efficient rail network; a great example of this and a solution of growing interest among Class 1 customers is Trip Optimizer Zero-to-Zero. These advanced technology allows an operator to autonomously start a train from 0 miles per hour and stop it using software integrated with positive train control. It builds on Trip Optimizer's proven performance which has saved railroads more than 400 million gallons of fuel since inception and reduces emissions by over 500,000 tons per year. Looking forward, we will continue to advance efforts toward cleaner, more energy efficient transport and will share our progress on this front as well as our broader environmental social and governance priorities in our next sustainability report which will be released in a couple of weeks. In the third quarter, we secured new orders for our FLXdrive locomotive. We also closed a significant order for international locomotive kits and one additional contract in Asia to help our customers improve asset utilization and reduce emissions. In Freight Services, we want a significant long-term service contract as well as an order for 100 locomotive modernizations in North America. Overall, mods backlog remains strong and we are showing good momentum on deliveries. Finally in transit we won new power collection, HVAC and service contracts in Germany, Switzerland and the UK. Looking ahead, we are confident Wabtec will continue to capture growth with innovative and scalable technologies that address our customers' most pressing needs. We also will continue to control while we can and leverage the strength to combat the current challenges that we are facing due to supply change disruptions, increasing metal and commodity costs and labor shortages. These dynamic have adversely impacted our third quarter results and have resulted in significant cost increases. Across the board, our team's working hard to mitigate the impact of these pressures by triggering price escalations and surcharges as well as driving operational efficiencies wherever we can. We anticipate our costs will continue to increase over the next few quarters and we will continue to aggressively manage these challenges. It's great to be with you and I'm very excited to join the team at Wabtec. It is a storied company with incredible talent, deep innovation and best-in-class differentiated technologies that is well positioned to deliver the future of rail while growing shareholder value and I look forward to meeting with many of you in the coming months. Now, turning to Slide 8 before getting into the financials, we would like to discuss the dynamic cost environment and supply chain challenges that we face. During the third quarter, we experienced delays in production and deliveries of our products as well as significant increases in many key input costs. On the revenue side, we are experiencing adverse impacts to our sales results due to shortages across many component parts, including computer chips, which are causing delays in production and customer delivery. We believe that our enterprise revenues were to 2% to 3% lower than they would have been without the supply chain disruptions and that the majority of these lower revenues represent delayed sales, not lost sales. The impacts to Wabtec's cost structure come in four areas. First, commodity inflation; where markets year-over-year are up more than 200% for steel, 94% for aluminum and roughly 40% for copper. The second area of impact is elevated freight and logistics costs, which in many cases are up over 3 times to 4 times from pre-COVID levels. Third is wage inflation and labor availability, which are adversely impacting the business and finally, we are experiencing loss manufacturing efficiencies, largely due to component and chip shortages. Our costs have increased during the quarter and have impacted both our Freight and Transit segments. We estimate that cost increases in the third quarter are in the range of $15 million to $20 million. Having said that, we expect these headwinds to intensify as the full cost of rising metals and lower manufacturing efficiencies work their way through our inventories and purchase contracts. We anticipate cost to continue to increase over the next few quarters. Our team is working hard to mitigate the impact of these cost pressures and supply chain disruptions by triggering price escalation clauses that are included in many of our long-term contracts, implementing price surcharges, driving operational productivity, and lean initiatives and finally through higher realization of synergies. Turning to Slide 9, I'll review our third quarter results in more detail. We had good operational and financial performance during the quarter, sales for the third quarter were $1.91 billion, which reflects a 2.2% increase versus the prior year. Sales were positively impacted by the continued broad-based recovery we are experiencing across much of our portfolio. The acquisition of Nordco and favorable currency exchange, partially offset by continued weakness in the North America OE locomotive market and lower year-over-year sales in Transit. For the quarter adjusted operating income was $325 million which was up 10.6% versus the prior year. Most notably, we delivered margin expansion in both our segments, up 1.3 percentage points on a consolidated basis. Margins were aided by strong mix favorability, improved productivity and better than expected realization of synergies. As Rafael stated during the quarter, we achieved our goal of $50 million of synergy run rate a significant milestone delivered a full year earlier than originally forecasted. What makes this quarter's margin expansion even more impressive is the fact that our margin gains were achieved in the face of an incredibly dynamic supply chain and inflationary environment. Looking at some of the detailed line items for the third quarter; adjusted SG&A was $257 million which was up $16.1 million from the prior year due to the normalization of certain expenses, higher incentive compensation and employee benefit costs and the acquisition of Nordco. For the full year, we expect SG&A to be about 12.25% of sales, adjusted SG&A excludes $12 million of restructuring and transition expenses, of which most was allocated to further optimize our European footprint. Engineering expense increased from last year, we continue to invest engineering resources and current business opportunities but more importantly, we are investing, our future as an industry leader in decarbonization and digital technologies that improve safety, productivity and capacity utilization. Our 2021 investment in technology, which includes engineering expense remains at 67% of sales. Amortization expense was $72.5 million and our adjusted effective tax rate during the quarter was 24.8%, bringing our year-to-date adjusted effective tax rate to 25.8%. For the full year, we still expect an effective tax rate of about 26% excluding discrete items. In the third quarter, GAAP earnings per diluted share were $0.69 and adjusted earnings per diluted share were $1.14 up 20% versus prior year. We are pleased with our Q3 results. In particular, our sales growth in the face of supply chain disruptions, our margin growth in the face of sharp cost increases. We remain diligent and proactive as we work to minimize these challenges. Now, let's take a look at segment results on slide 10 starting with the Freight segment. Across the Freight segment, total sales increased 4.7% from last year to $1.3 billion, primarily driven by continued strong growth at our services and component businesses. In terms of product lines, equipment sales were down 5.7% year-over-year due to fewer locomotive deliveries this quarter versus last year and no new locomotive deliveries in North America, partially offset by strong mining sales. This year-over-year performance demonstrates the resiliency of our equipment portfolio. In line with an improved outlook for rail, our services sales grew a robust 13.6% versus last year. The year-over-year sales increase was largely driven by higher aftermarket sales from our customers modernizing their fleets, the unparking of locomotives and the acquisition of Nordco. The performance, reliability and availability of our fleet continues to drive customer demand as railroads increasingly look for predictable outcomes across their fleet. Excluding Nordco, organic sales for the third quarter were up 6.1%. Digital Electronics sales were down 3.6% year-over-year driven by delays in purchase decisions due to economic and cost uncertainties as well as chip shortages. We continue to see a significant pipeline of opportunities in our digital electronics product line as customers globally focus on safety, improved productivity, increased capacity and utilization. Component sales continued to show recovery and were up 6.7% year-over-year driven by demand for railcar components and recovery in industrial end markets. We remain encouraged by the continuing trend of railcars coming out of storage higher order rates of new railcars and accelerated recovery across industrial end markets. Shifting to operating income for the segment; Freight segment adjusted operating income was $266 million for an adjusted margin of 20.6%, up 1.7 percentage points versus the prior year. The benefit of higher volumes, improved mix across our portfolio and increased synergies and productivity were partially offset by significantly higher input costs. Finally, segment backlog was $18.2 billion, up $375 million from the prior quarter and the broad multiyear order momentum that Rafael discussed across the segment. Turning to Slide 11, across our Transit segment sales decreased 2.5% year-over-year to $612 million. Sales were down versus last year, due in large part to supply chain issues and COVID related disruptions. This was partially offset by positive ridership trends. Excluding near term supply chain challenges, we estimate that Transit sales would have been up slightly on a year-over-year basis. We believe the medium and long-term outlook for this segment remains positive as infrastructure spending for green initiatives continues. Adjusted segment operating income was $77 million, which resulted in an adjusted operating margin of 12.5%, up 50 basis points versus prior year. Across the segment, we continue to drive down cost and improve project execution despite the volatile cost environment. For the year, we remain committed to deliver about 100 basis points of margin improvement for the segment and the team continues to take aggressive action to mitigate rising costs and supply chain disruption, which will pressure the pace of near term margin improvement. As we execute in the fourth quarter, we expect significantly improved operating margin driven by strong productivity gains, improved project mix and more favorable comps versus the prior year's fourth quarter. Finally Transit segment backlog for the quarter was $3.6 billion, which was flat with the prior quarter after adjusting for the negative effect of foreign exchange. Now, let's turn to our financial position on Slide 12. We had another strong quarter for cash generation. We generated $244 million of operating cash flow during the quarter, bringing year-to-date cash flow generated to over $759 million. This performance, clearly demonstrates the quality of our business portfolio. During the quarter, total capex was $23 million bringing year-to-date capex to $78.5 million. In 2021, we now expect capex to be approximately $120 million. This is $20 million lower than our previous guidance as the team judiciously manages every dollar of spend. Our adjusted net leverage ratio at the end of the third quarter was 2.6 times and our liquidity is robust at $1.62 billion. Also during the quarter we returned capital to shareholders, repurchasing $199 million of shares. As you can see in these results, our balance sheet continues to strengthen and we are confident we can continue to drive solid cash generation, giving us the liquidity and flexibility to allocate capital toward the highest return opportunities and to grow shareholder value. Let's flip to Slide 13 to discuss our updated 2021 financial guidance. We believe that the underlying customer demand for our products and the end market momentum remains strong. As John indicated, we do expect continued headwinds from a more challenging sales and cost environment into the fourth quarter. Taking into consideration this market backdrop and volatile cost environment combined with our solid performance in the first three quarters we are narrowing our full year revenue and earnings per share guidance. We expect sales of $7.9 billion to $8.05 billion and adjusted earnings per share to be between $4.20 and $4.30 per share. We expect cash flow conversion to remain greater than 90% resulting in strong cash generation of about $1 billion for the full year. Now, let's turn to our final slide; everything we've outlined today reinforces that we have a clear strategy to accelerate long-term profitable growth. Our strategy is built on our expansive installed base and deep industry expertise grounded in innovation, breakthrough initiatives and scalable technologies that drive value for our customers and accelerated by our lean continuous improvement culture and disciplined capital allocation. I'm proud of the strong execution by the team in the third quarter despite a challenging supply chain, cost and market environment. You are seeing their efforts in the strength of the company and our financial results. As we go forward the rail sector is well positioned to increase share and address the critical issues facing the world's freight and logistics sector. We will continue to lean into the strong fundamentals of this industry and our company to deliver long-term profitable growth. As we've said before, Wabtec's mission holds a larger purpose to move and improve the world. After demonstrating strong performance in the first three quarters of 2021, I'm confident that this company will continue to deliver and lead the transition to a more sustainable future. We will now move on to questions. But before we do and out of consideration for others on the call, I ask that you limit yourself to one question and one follow-up question. If you have additional questions, please rejoin the queue. Operator, we are now ready for our first question.	compname reports q3 adjusted earnings per share $1.14. q3 adjusted earnings per share $1.14. q3 gaap earnings per share $0.69. q3 sales rose 2.2 percent to $1.91 billion. compname says tightened its 2021 sales guidance to a range of $7.90 billion to $8.05 billion. sees fy 2021 adjusted earnings per share $4.20 to $4.30.
And joining me on the call today are Dale Gibbons, our -- and our Chief Credit Officer, Tim Bruckner. I'll begin by laying out Western Alliance's approach to the COVID, an economic crisis. First and most importantly, I hope that everyone on the line is doing well, and that your families and loved ones are safe and healthy. These wishes are especially extended to all the care and safety workers actively putting themselves in harm's way to protect our communities. At Western Alliance Bank, our people remain healthy and engaged, and despite the vast majority working-from-home for the last month, continue to go above and beyond the call of duty to serve our customers and the communities we operate to navigate this challenging time. Our business continuity plans have been working as anticipated, and I am proud of the entrepreneurial spirit our people continue to demonstrate to get the job done and develop unique solutions for our clients. First, I'd like to lay out the business actions Western Alliance has taken in light of the evolving environment. Although we did not anticipate the widespread severity and likely duration of the virus, we did start assessing potential risks and mitigants as early as mid-January. And as the breadth of the pandemic became apparent, we accelerated implementing plans in mid-February to prioritize asset quality, capital and liquidity management. We have since divided the business into appropriate risk segments led by senior managers with deep credit and workout experience to monitor and force the early engagement with our borrowers and begin the necessary credit triage process. For example, Robert Sarver is leading the hotel franchise group, while I am leading the warehouse lending and gaming groups, Dale has corporate finance; and Tim Bruckner coordinates overseas and directs' all credit activities. Our overall risk management approach is focused on establishing individual borrower level strategies in which we are proactively engaging in customer conversations to evaluate and agree upon financial plans focused on liquidity management to conserve resources in anticipation of an elongated economic downturn. Today, we have had direct dialogue with all borrowers with over $3 million in exposure or 86% of our portfolio, and substantial dialogue below this level. We assume that all borrowers will have some level of COVID-19 impact and are focused on evaluating our borrowers' remediation efforts, access to capital and contingency plans. We're also very pleased that Congress and the entire federal government came together to expeditiously pass the CARES Act and stimulus measures a few weeks ago. Additionally, we applaud the Fed's actions to reduce interest rates to support liquidity in the financial markets to quantitative easing for a wide variety of asset classes and provide support for small and medium-sized businesses through its innovative new lending programs. We recognize that the SBA has a large task in front of them, and I'm extremely proud to say that our people work tirelessly with them so that we could successfully process the PPP program loans on the first day. We have dedicated over a quarter of our workforce to avail our clients of this important program and have successfully approved over 2,600 applications totaling $1.5 billion today. We anticipate funding approximately $150 million per day. As part of our broader risk management strategy, we have prioritized implementing the PPP program as the most expedient method to quickly get incremental liquidity to our clients. Furthermore, we believe that the newly initiated mainstream lending program when implemented provides incremental liquidity for our large clients as well as PPP participants. Our approach to loan modifications and deferment request is to look for resourceful ways to partner with our clients along with assessing their willingness and capacity to support their business interests. We are asking our clients to work hand-in-hand with us for a long-term solutions to hopefully short-term challenging environment, whereby our clients contribute liquidity, capital or equity as an integral component to loan modifications. Our longer term solutions-based approach distinguishes us from industry standardized 90-day deferral programs. Our approach collectively uses the resources of the borrower, government and the banks' balance sheets to develop solutions that extend beyond six-month window provided for in the CARES Act. This negotiation process has likely slowed our modification pipeline as approximately $400 million has been processed today. We learned during the last downturn when both the borrower and the bank use their resources to bridge the gap, it generates a mutually favorable outcome. With all of this as the backdrop, I'd like to walk through our financial performance for the quarter. Despite a uniquely challenging operating and rate environment, I am proud to report that in the first quarter, Western Alliance generated $163.4 million of operating pre-provision net revenue, up 10% year-over-year and 3% quarter-to-quarter. We continued with the adoption of CECL accounting changes this quarter, which resulted in a provision for credit losses of $51.2 million for the quarter, 47% of which was driven by our robust balance sheet growth. Dale will go into more detail in a bit on how the unique features of CECL drove our provisions, but our ACL to funded loan ratio now stands at 1.14%. WAL generated net income of $84 million or $0.83 per share and tangible book value per share was $26.73. This quarter, we produced a NIM of a 4.22% and had net recoveries of $3.2 million and continue to improve our operating leverage. Even with our increased vigilance, organic balance sheet continue to be healthy in Q1 for both loans and deposits. Deposits grew $2 billion to $24.8 billion as we gained market share in several of our key business lines as well as traction in one of our recently launched deposit initiatives, which added over $400 million. This highlights the continued strength of our diversified funding channel and overall deposit franchise to generate stable low-cost liquidity irrespective of the macroeconomic environment. Continuing on our strong momentum from 2019, total loans increased $2 billion to $23.1 billion. Approximately $1.5 billion of this was through organic loan growth from new client projects and another $500 million was credit line drawdowns, of which approximately half was redeposited into the bank. Let me take a moment now to make a few high level comments on Western Alliance's loan portfolio. We believe that our well-diversified business model and purposeful decisions made over the past decade regarding conservative underwriting criteria and sector allocations positioned the portfolio to withstand the current economic environment. At quarter end, asset quality was stable with a decline in totally adverse graded loans and OREO to assets of 1.2% from 1.27% in Q4. Western Alliance has no direct energy or large retail mall exposure. We stopped making loans to the quick service restaurants sector several years ago with current exposure of only $150 million. Our construction and land and development portfolio is now under 9% of our loan book. In our institutional lot banking business, which makes up 30% of the CLD portfolio, we have not received any deferral request at this time. Single family residential construction, which composes another 27%, were still experiencing positive absorption trends through March. However, April's traffic has fallen off. Our portfolio is extremely well positioned coming into the pandemic and right now is performing as expected. We are especially focused on monitoring and engaging with our clients in our hotel franchise finance and technology and innovation segments, which will be reviewed in more detail later in the call. During the quarter, we repurchased 1.8 million shares at an average price of $35.30. Additionally, consistent with our 10b5 plan, we repurchased 270,000 shares thus far in Q2. However, given the rapidly changing environment, we have now paused our share repurchase activity. Finally, Western Alliance arrives at this crisis in a position of strength uniquely prepared to address what's ahead. We remain well capitalized and highly liquid with the CET1 ratio of 9.7% and ample liquidity -- total liquidity resources of over $10 billion. Dale will now take you through our financial performance. For the first quarter, Western Alliance generated net income of $84 million or $0.83 earnings per share. Net income was reduced by a $51.2 million provision for credit losses driven by the adoption of CECL, balance sheet growth as well as the change in the economic outlook due to pandemic. Strong ongoing balance sheet momentum, coupled with diligent expense management, drove operating pre-provision net revenue to $163.4 million, up 10% from a year ago, which we believe is the most relevant metric to evaluate the ongoing earnings power of the company. Net interest income and fee income remain relatively stable producing net operating revenue of $285.3 million, primarily a result of lower yields on loans, which was partially offset by lower rates on deposits and borrowings. Non-interest income declined $10.9 million to $5.1 million from the prior quarter due to mark-to-market of preferred stock holdings of primarily large money center banks of $11.3 million, partially offset by $3.8 million equity investment gain. To-date, of the $11.3 million mark, $3.5 million has been recovered. As credit spreads widened during the last quarter, the yield on preferred stocks followed impacting valuations. We do not believe this represents a premanently reduced valuation and that preferred stock values will continue to recover over time. Finally, non-interest expense declined $9.3 million as compensation and other operating expenses declined by $7 million. Regarding implementing CECL in our allowance for credit losses, in our 10-K, we disclosed the adoption impact of $37 million, $19 million of which was attributable to funded loans, $15 million for unfunded commitments and $2.6 million for held-to-maturity securities. This resulted in a combined January 1st allowance of $214 million. During Q1, loan growth drove an additional $24 million of required reserves and another $30 million was driven by changes in the economic outlook as a result of the pandemic. In total, reserve availed during the first quarter was $91 million, an increase of 50% from the year-end reserve. The quarter end ACL of $268 million was 1.14% of funded loans, up 30 basis points. Provision expense for the quarter was $51.2 million, which is over 10 times the average quarterly provision during 2019. As of March 31st, the reserve bill reflects our best estimate of the future economic environment, including the impact of government stimulus programs. We utilized an assimilation of various Moody's macroeconomic outlook scenarios to capture the most likely economic outcomes in a more severe scenario for potential tail risks. As the economy continues to change, we will adjust our ACL modeling accordingly. Turning now to net interest drivers. Net interest income for the quarter declined a modest $3 million from the prior quarter to $269 million as there was one less day during the quarter compared to Q4 and margin compression was offset by loan to deposit growth. Investment yield showed a modest improvement of 2 basis points from the prior quarter to 2.98%. However, on a linked quarter basis, loan yields increased 31 basis points due to the lower rate environment. The average yield of our portfolio at quarter end or the spot rate was 5.02%. Interest bearing deposit cost increased 18 basis points in Q1 to 90 basis points as a result of immediate steps taken to reduce our deposit costs after the FOMC cut rates twice in March. The spot rate of total deposits at quarter end was 29 basis points. Total funding costs decreased 11 when all of the company's funding sources are considered, including non-interest bearing and borrowings. Through the transition to a substantially lower rate environment during the quarter, net interest income was $269 million, a decline of 1.1% from Q4. Continued strong balance sheet growth and immediate steps taken to reduce the cost of interest bearing deposits counteracted the decline in Prime and LIBOR. Net interest margin declined 17 basis points to 4.22% during the quarter as their earning asset yield fell 28 basis points, partially offset by 19 basis points funding cost decrease. With regards to our asset sensitivity, our rate risk profile has declined notably as the majority of our variable rate loan portfolio has flipped to fixed rate as floors have been triggered in the declining rate environment. Presently, 82% or $8.1 billion of variable rate loans with floors are at the floors. With the addition of our mix shift primarily to fixed rate residential loans, $16.2 million or 70% of loans are now behaving as a fixed rate portfolio. This has reduced our interest rate risk on a 100 basis point parallel shock lower scenario to 3% at March 31st from 6.5% one year ago and assumes that rates are held flat at zero across the term structure. Turning now to operating efficiency. On a linked quarter basis, our efficiency ratio decreased 200 basis points to 41.8%. As mentioned earlier, the improvement was attributed to decreases in compensation and other operating expenses while our revenues increased modestly. As a core component of our strategy, we continue disciplined expense management to sustain industry-leading operating leverage and profitability. Our core underlying earnings power remains strong as pre-provision net revenue ROA was 2.38%, flat from the prior quarter, while return on assets was down 70 basis points to 1.22% directly related to our provision expense in excessive charge-offs of $54.4 million. As Kim mentioned earlier, our strong balance sheet momentum from 2019 continued into Q1. During the quarter, loans increased $2 billion to $23.2 billion and deposits also grew $2 billion to $24.8 billion. Loan to deposit ratio increased to 93.2% from 92.7% in the fourth quarter. Our strong liquidity position continues to provide us with balance sheet capacity to meet funding needs. Shareholders equity declined by $17 million as dividends and share repurchases were matched by net income. Tangible book value per share increased $0.19 over the prior quarter to $26.73 per share as our share count declined. We continue to believe our ability to profitably grow deposits is both a key differentiator and a core value driver to our platform's long-term value creation. Q1 is a seasonally strong deposit quarter, and coupled with the roll out of our deposit initiatives, deposits grew $2 billion. The increase was driven by growth of $1.3 billion in non-interest bearing DDA primarily from market share gains in our mortgage warehouse operations. Additionally, HOA continues to perform well and contributed $330 million of low cost deposits. During the quarter, the relative proportion of non-interest bearing DDA grew to nearly 40% of deposits from 37.5% on a linked quarter basis. Turning to loan growth. In line with the industry, the vast majority of growth was driven by increases in C&I loans totaling $1.8 billion, followed by $107 million in construction and land development, and $92 million in residential. Residential homes now comprise 9.7% of our portfolio, while construction loans decreased as a relative proportion of the portfolio to 8.9% from 9.2% in the fourth. At the segment level, Tech & Innovation loans grew $626 million, with $124 million from capital call and subscription lines and $176 million from existing technology loan draws, in turn bolstering technology-related deposits by $383 million. Corporate finance loans grew $408 million, which was primarily due to line draws, two-thirds of which were from investment grade borrowers bringing utilization rates to 38% from 13% during the prior quarter. Mortgage warehouse also contributed to loan growth of $550 million, approximately 50% of which was due to line draws. Across the bank, one quarter or about $500 million of our net new loan growth was driven by drawdowns on existing loan commitments from the beginning of the quarter. In all, total loan growth of $2.2 million for the quarter was fully funded by deposit growth for the same amount. Overall, asset quality was stable during the quarter with total adversely graded assets increasing $10 million during the quarter to $351 million, while non-performing assets comprised of loans on non-accrual and repossessed real estate increased $27 million to $97 million or 0.33% of total assets, and is now held-for-sale. Within these categories, we had migration from special mention to substandard and some of the normal investor funding was delayed in tech and innovation. As a precaution, when remaining liquidity declines below six months, repaying those loans into either special mention or sub for enhanced monitoring and engagement. This quarter, we also -- we saw the cumulative impact of our efforts of managing certain special mention and substandard loans as several resolved in our favor with no losses, a $100 million of adversely graded loans resolved during the past quarter, 37 loans or $50 million paid-off in full, while the other $50 million were upgraded to pass. As Ken mentioned in his introduction, we're well positioned entering this economic cycle. We only incurred $100,000 of gross credit losses during the quarter, which was more than offset by $3.3 million in recoveries, resulting in net recoveries of $3.2 million. We typically have one or two one-off credit charges every quarter. However, highlighting the strength of our loan book, we didn't experience any of these in Q1. We believe early indication in identification and conservative management helps mitigate losses on these assets. In all, the ACL-to-funded loans increased 30 basis points to 1.14% in Q1 as a result of CECL adoption and the result in provision expense related to Q1 loan growth and changes in the economic outlook. We continue to generate capital and maintain strong regulatory capital ratios with tangible common equity, the total assets of 9.4% and a CET1 ratio of 9.7%. In Q1, a reduction of TCE-to-total assets was mainly driven by $2.3 billion increase in tangible assets due to our significant loan growth, while the tangible common equity was affected by $15.4 million of provisions in excess of charge-offs due to CECL adoption. In spite of reduced quarterly earnings and the payment of quarterly cash dividends of $0.25 per share, our tangible book value per share rose $0.19 in the quarter to $26.73 and is up 15.2% in the past year. Our diversified deposit generation platform and access to significant liquidity resources is critical in times of economic stress. Overall, we have access to over $10 billion in liquidity, primarily through our $4.7 billion investment portfolio, of which $2.7 billion are investment grade readily marketable and not pledged on any borrowing base. Additionally, we have $7 billion in unused borrowing capacity with the Fed, Federal Home Loan Bank and Correspondent. Our strong capital base, access to liquidity and diversified business model will allow us to address any credit demands in the future. I'll now hand back the call to Ken to conclude with comments on a few of our specific portfolios. Regarding our Hotel Franchise Finance business, we believe our focus on the Select Service subsegment, conservative loan to cost underwriting discipline and strong operating partners sets us up for a maximum financial flexibility to weather the duration of the crisis. Like most hotels in the country, our clients have seen a dramatic reduction in occupancy rates over the last month, and senior management is involved in active dialogue with each borrower to evaluate remediation efforts and contingency plans. Going into the pandemic, 75% of the portfolio had an LTV under 65% and more than 73% had a debt service coverage ratio of 1.3 times. Additionally, we only partner with experienced hotel operators with significant invested equity and resources to support ongoing operations. Fully 66% of the portfolio is with large sponsors who operate more than 25 hotels and 90% operate 10 or more properties with top franchises or flags. Based on our ongoing constructive dialogue, we believe that sponsors view this as a temporary event and want to continue to maintain and support these properties over the long-term, given their significant equity investments. We are actively working with them to appropriately utilize the PPP program and the Main Street lending programs, along with their own liquidity as a helpful financial bridge to arrive at a longer-term solution. Based on the mutually developed financial action plans, we will selectively implement loan modifications along the lines we previously discussed. This is a prime example where both parties contribute to a comprehensive solution. Now, regarding our Tech & Innovation business, we primarily financed established growth technology firms with a strong risk profile, mainly companies classified as Stage 2 with an established business model, validated product, multiple rounds of investment, and a path to profitability. This provides greater operating and financial flexibility in times of stress. 99% of the borrowers have revenues greater than $5 million and have strong institutional backing with 86% backed by one or more DC or PE firms. During the quarter the portfolio grew $495 million to $2 billion or 8.8% of the total portfolio, which was attributed to $175 million of existing line drawdowns in the technology division and an additional $124 million from capital call lines, a product that historically has had zero losses. Tech & Innovation commitments grew $284 million in Q1 and utilization rates increased to 60% from 49% in Q4 2019. The portfolio is fairly granular with average loan size of $6 million and these borrowers are generally liquid with more than 2:1 deposit coverage ratio. Additionally, since 2007, warrant income has covered cumulative net charge-offs 2 times over. Currently 14% of technology loans or $164 million has less than six months remaining liquidity, which is in line with historical trends. Although some fund raising has been delayed, we were pleased to see several investment rounds closed over the last several weeks and days with strong continued sponsored support. In conclusion, we see increased cash generation driven by our balance sheet momentum going into the quarter-end as well as continued loan growth from the PPP distributions. We expect pre-provision net revenue to continue to grow to Q2 with the ability to absorb any necessary future provisions. Given uncertainty surrounding the likely duration of the virus and evolving economic environment, we will continue to reassess our outlook as health and economic facts warrant. Regarding asset quality, our proactive risk management approach is institutionalized throughout the Company. We are actively working with our borrowers to develop mutually agreed upon financial plans assuming an elongated economic downturn that leads to long-term solutions. Our strong collateral positions and little unsecured or consumer lending should serve us well in mitigating potential risk of loss as we navigate these uncertain times. We stand ready to implement the likely next phase of PPP and the Main Street Lending Program to assist our clients and communities. Finally, Western Alliance has assembled a seasoned management team that has weathered several economic downturns and is applying the lessons learned from the Great Recession to face these uncertain economic times. And with that we'll open up the line, operator, and we'll take everyone's questions.	q1 earnings per share $0.83. will pause its stock repurchase program for remainder of q2. western alliance - q1 results were affected by current economic environment resulting from covid-19, contributing to $51.2 million provision for credit losses. offering flexible repayment options to current customers and a streamlined loan modification process, when appropriate.
Joining me on the call today are Dale Gibbons and Tim Bruckner, our Chief Financial Officer and Chief Credit Officer. I will first provide an overview of our quarterly results and how we are managing the business in this current economic environment, and then Dale will walk you through the bank's financial performance. The continued growth in Western Alliance's national commercial business strategy drove financial results and balance sheet growth through record quarterly highs to kick off 2021. Barring the company's strong fourth quarter performance and underlying fundamental trends, WAL earned net income of $192.5 million and earnings per share of $1.90 for the quarter, up $108 million year-over-year and nearly flat to Q4. Net revenue expanded 4.5 times the rate of expense as improvement in asset quality and economic conditions drove a $32.4 million relief in loan loss reserve this quarter. Our focus continues to be on PPNR growth, which rose approximately 31% year-over-year to $202 million while marginally lower than last quarter due to two fewer days. Regarding the acquisition of AmeriHome, I am pleased that the closing took place approximately three weeks ahead of schedule. While personnel and technology integrations are minimal, we have begun to focus on balance sheet and funding synergies with the paydown of external credit lines. Additionally, we signed agreements with the sale of approximately $750 million of mortgage servicing rights to strong counterparties that will allow Western Alliance to retain substantially all the custodial deposits. We expect this to be completed in early May. AmeriHome was an attractive strategic acquisition, expanding Western Alliance's fee income and lowering the company's reliance on spread income while providing growth optionality to our commercial portfolio of businesses. Turning to the first quarter balance sheet trends, outstating quarterly loan and deposit growth of $1.7 billion and $6.5 billion respectively, lifted total assets to $43.4 billion, up 49% from the prior year. Our near-term focus on growing loans in low-risk asset classes was on display as loan growth was primarily driven by warehouse funding, residential loan purchases and increased activity throughout our traditional banking and regional footprint. Our deposit growth was broad-based across our franchise, which pushed down our loan-to-deposit ratio of 75% and creates a strong funding foundation for ongoing loan and earnings growth from our commercial loan pipeline and the AmeriHome acquisition. The continued excess liquidity from our improving deposit franchise is at the expense of short-term NIM compression, but it's a trade-off we are willing to accept for long-term value creation. This impressive loan growth drove net interest income of $317.3 million, or $2.5 million higher than last quarter and up 18% on a year-over-year basis. Quarterly net interest margin was 3.37%, down 47% from the fourth quarter as we continued to deploy excess liquidity into loans and investment securities. Non-interest income totaled $19.7 million for the quarter, aided by $7.3 million of warrant income from Bridge Bank. Asset quality remained stable this quarter as the economic recovery gained steam. For the quarter, net loan charge-offs were $1.4 million or 2 basis points on an annualized basis. Credit losses may not appear in any meaningful way as prior and proposed stimulus packages continue to positively impact consumer spending habits and many businesses were provided the liquidity to weather the pandemic. Finally, Western Alliance continues to generate significant excess capital, which grew tangible book value per share to $33.02, or 23.5% year-over-year -- or 23.5% year-over-year growth. We remain one of the most profitable banks in the industry with return on average assets and return on average tangible common equity of 1.93% and 24.2%, respectively. This strong momentum, coupled with economic reopening, positions Western Alliance well for an industry-leading 2021. At this time, I'll let Dale take you through the financial performance. For the quarter, Western Alliance generated net income of $192.5 million or $1.90 per share, each down about 1% from the prior quarter. This is inclusive of a reversal of credit loss provisions of $32.4 million due to continued improvement in economic forecasts relative to year-end 2020 and continued loan [Phonetic] -- in [Phonetic] loan segments with historically very low loss rates. Additionally, merger expenses related to the AmeriHome acquisition of $400,000 were recognized. We expect total merger charges to be approximately $15 million, preponderance of which will be incurred in Q2 as integration continues. Net interest income grew $2.5 million during the quarter to $317.3 million, an increase of 18% year-over-year, primarily as a result of our significant balance sheet growth. However, while average earning assets grew $5.7 billion, the relative proportion held in cash and lower-yielding securities increased to approximately 32% in Q1 from 22% in Q4, which temporarily muted our interest income growth as we prepare to deploy excess liquidity into AmeriHome-generated assets and higher-yielding commercial loans. Quarter-over-quarter, our loan-to-deposit ratio fell to 75% from 85% in Q4 as we proactively look to grow low-cost deposits as dry powder for future loan growth. Non-interest income fell $4.1 million to $19.7 million from the prior quarter, mainly driven by smaller fair value gain adjustments in our securities measured at fair value, but partially offset by $7.3 million in the warrant income. Non-interest expense increased $2.8 million, mainly due to higher deposit costs as lower rates were offset by higher average balances. Continued balance sheet growth generating superior net interest income drove pre-provision net revenue of $202 million, up over 30% from a year ago. Turning now to net interest drivers. As our strong core deposit growth continued throughout the quarter, we look to redeploy excess liquidity into the investment portfolio and loans. Total investments grew $2.4 billion for the quarter or 43% to $7.9 billion compared to an average balance of $6.5 billion. Investment yields declined 24 basis points from the prior quarter to 2.37% due to lower reinvestment rates in the current environment. Similarly, on a linked-quarter basis, linked -- loan yields declined 8 basis points following ongoing mix shift toward residential loans and asset class with generally lower yields than the remainder of the portfolio and lower credit risk. This was partially offset by modestly higher PPP fees, strong loan growth and liquidity deployment toward the end of the quarter. Significantly, quarter-end balances for loans and investments were $3.3 billion higher than the average balances and yielded 3.5% more than our Fed account. Higher income from this already-deployed liquidity positions us well for Q2. Interest-bearing deposit costs were reduced by 3 basis points in Q1 to 22 basis points, due to ongoing repricing efforts and maturities of higher cost CDs. The spot rate for total deposits, which includes non-interest-bearing, was 11 basis points. We expect funding costs have generally stabilized at these levels. Net interest income increased $2.5 million to $317.3 million during the quarter or 18% year-over-year as higher loan and investment balances offset net interest margin compression. NIM declined 47 basis points to 337 basis points as our purposeful strong deposit growth in advance of closing the AmeriHome acquisition negatively impacted the margin by 43 basis points. To put this in perspective, average securities and cash balances to interest-earning assets increased meaningfully in Q1 32% from 22%. Given our higher end of quarter loan balances, healthy loan pipeline and ability to deploy this excess liquidity over the coming quarters into higher-yielding earning assets, we expect this margin drag to moderate while net interest income declines [Phonetic]. Additionally, a PPP loan yield of 4.9% benefited the NIM by 8 basis points, which was similar to the fourth quarter benefit. Cumulatively, over the remainder of 2021, we expect to recognize $15.4 million of BBB fees. Our efficiency ratio rose 90 basis points to 39.1%, an increase from 38.2% in Q4. This higher efficiency ratio was driven by a modest decline in non-interest income and an increase in expenses, partially offset by increased net interest income. Non-interest expense linked quarter growth increased by 2.1%, driven by higher deposit fees related to the 82% annualized rise in deposit balances. Excluding PPP, net loan fees and interest, the efficiency ratio for the quarter would have been 41%. Inclusive of AmeriHome, we expect the efficiency ratio to rise to the mid-40s this quarter. Pre-provision net revenue declined $4.4 million or 2.1% from the prior quarter, but increased 31% from the same period last year. This results in PPNR and our ROA of 2.03% for the quarter, a decrease of 21 basis points compared to 2.24% for the year-ago period, partially impacted by a much larger asset base. This continued strong performance in capital generation provides us significant flexibility to fund ongoing balance sheet growth, capital management actions or meet credit demands. Balance sheet momentum continued during the quarter as loans increased $1.7 billion or 6.1% to $28.7 billion and deposit growth of $6.5 billion brought balances to $38.4 billion at quarter end. Inclusive of the second round of PPP funding, loans grew 24% year-over-year, while deposits grew approximately 55% year-over-year, with our focus on low loan loss segments and DDA. In all, total assets have grown 49% year-over-year as we approach the $50 billion asset level, including AmeriHome. Finally, tangible book value per share increased $2.12 over the prior quarter to $33.02, an increase of $6.29 or 23.5% over the prior year, attributable to both net income and the common stock offering of 2.3 million shares completed during Q1 in anticipation of the AmeriHome acquisition. Our strong loan growth continues to benefit from flexible national commercial business strategy. The majority of the $1.7 billion in growth was driven by an increase in C&I loans of $746 million. Loan growth was also strong in residential real estate loans of $675 million, supplemented by construction loans of $337 million and CRE non-owner-occupied loans of $27 million. Residential and consumer loans now comprise 10.9% of our loan portfolio, an increase from 9.9% a year ago. Within the C&I growth for the quarter and highlighting our focus on low-risk assets, mortgage warehouse loans grew $562 million and Round 2 3P [Phonetic] loans, originations were $560 million, which were nearly offset by $479 million from Round 1 of payoffs. We continue to believe our ability to grow core deposits from diversified funding channels is our key to firm's long-term value creation. Given the ability to deploy funds into attractive assets in the near term, we purposefully looked to expand balance sheet liquidity in Q1. Deposits grew $6.5 billion or 20% in the first quarter driven by increases in non-interest-bearing DDA of $4.1 billion, which now comprise 46% of our deposit base and the savings in money market of $2.9 billion. Market share gains in mortgage warehouse continued to be a significant driver of deposit growth during the quarter, along with robust activity in tech and innovation and seasonal inflows from HOA banking relationships developed during 2020. Our asset quality remains strong, and borrowers are stable, liquid and supported by strong sponsors. Total classified assets increased $57 million in Q1 to $281 million due to migration of a few borrowers and COVID-impacted industries, such as travel, leisure and entertainment as reopening continues but at an uneven pace. We see the potential for these credits to be upgraded as travel and events increase in the coming quarters. Our non-performing loans plus OREO ratio declined to 27 basis points to total assets and total classified assets rose 4 basis points to total assets up to 0.65% compared to the ratio at the end of 2020. Special mention loans increased $23 million during the quarter to 1.65% of funded loans. As we've discussed before, SM loans are a result of our credit [Indecipherable] litigation strategy to early identify, elevate and apply heightened monitoring to loans or segments impacted by the current COVID environment and fluctuate as credits migrate in and out. We do not see credit losses emerging from special mention volatility. Regarding loan deferrals, as of quarter end, we had $68.5 million of deferrals, all of which are in low LTV residential loans. Quarterly net credit losses were modest to $1.4 million or 2 basis points of average loans compared to $3.9 million in the fourth quarter. Our loan ACL fell $36 million from the prior quarter to $280 million due to improvement in macroeconomic forecast loan growth in portfolio segments with low expected loss rates. In all, total loan ACL to funded loans declined 20 basis points to 97 basis points or 1.03% when excluding PPP loans. For comparison purposes, the loan ACL to funded levels was 84 basis points at year-end 2019 before CECL adoption. We continue to generate capital and maintain strong regulatory ratios with tangible common equity to total assets of 7.9% weighed down this quarter by strong asset growth, and the common equity Tier 1 ratio of 10.3%, an increase of 40 basis points during the quarter, mainly driven by our common stock offering and growth in low-risk assets. Inclusive of our quarterly cash dividend payment of $0.25 a share, our tangible book value per share rose $2.12 in the quarter to $33.02, an increase of 23% in the past year. I'll now hand the call back over to Ken. Western Alliance is one of only a handful growth banks in the industry with double-digit loan growth, liquidity to fund the growth, strong improving net interest income that generates consistent peer-leading ROA and return on average tangible common equity with steady asset quality and low net charge-offs. Going forward, based on our current pipelines, we expect loan and deposit growth of $1 billion to $1.5 billion per quarter, which will drive higher net interest income and PPNR growth. We expect NIM pressure to subside through the deployment of liquidity into attractive asset classes. One of the characteristics of AmeriHome that we found very attractive is that it provides a natural solution to WAL's excess liquidity. AmeriHome will be expanding its product ray to include higher-yielding non-QM and jumbo loans that fit our established credit box. Placing and holding these loans on our balance sheet enhances our existing residential mortgage purchase program, and is a worthy credit solution for the swift deployment of excess liquidity. To keep pace with balance sheet performance, our risk management programs and technology platforms are evolving and expenses will rise, but will be offset by the revenue generated from excess liquidity deployment. There will be no drag on PPNR or earnings per share from these investments. Inclusive of AmeriHome, the efficiency ratio will rise to the mid-place [Phonetic]. Finally, our long-term asset quality and loan loss reserves are informed by the economic consensus forecast incorporating risk for tail economic events, which is consistent going forward, could imply a steady reserve balance. Depending on the timing and pace of the recovery, there could be some loan migration into the special mention category, but we do not expect material migrations into substandard. We believe the provisions in excess of charge-offs since the pandemic began are more than sufficient to cover charge-offs through the cycle as we do not see any indicators that have implied material losses are on the horizon. To conclude, Western Alliance is well positioned for balance sheet growth with steady asset quality. PPNR should continue its upward trajectory from Q1, along with industry-leading return on assets and equity.	western alliance bancorp q1 earnings per share $1.90. q1 earnings per share $1.90. q1 revenue fell 0.5 percent to $337 million. net interest income was $317.3 million in q1 2021, an increase of $2.5 million from $314.8 million in q4 2020.
Joining me on the call today are Dale Gibbons and Tim Bruckner, our Chief Financial Officer and Chief Credit Officer. I will provide an overview of our quarterly results and how we are managing the business in this current economic environment and then Dale, will walk you through the Bank's financial performance. I like to focus on three trends that define our third quarter results and will continue into the future; robust balance sheet growth, provision reflecting asset quality and consensus outlook and strong net interest income and PPNR that continue to build capital. The combination of these variables generated record net income of $135.8 million and earnings per share of $1.36, each up more than 45% versus the prior quarter and exceeding our pre-pandemic performance in 2019. The flexibility of Western Alliance's diversified business model was again demonstrated this quarter as our deep segment and product expertise enable us to actively adapt our business in response to the changing environment and continue to achieve industry-leading profitability and growth, while maintaining prudent credit risk management. Total loans grew $985 million for the quarter to $26 billion and deposits increased $1.3 billion to $29 billion, reducing our loan to deposit ratio to 90.2%. Our loan growth continues to be concentrated in low-loss asset classes such as warehousing lending, which accounted for over 100% of the loan growth and 56% of the deposit growth and $267 million in capital call lines where the risk-reward equation is heavily skewed in our favor. The impact of this strategy will be seen near term in our reduced provisioning expense and longer term in lower net charge-offs. We are encouraged by our expanding pipeline as clients have applied lessons learned from prior recessions to right-size cost structures and to begin to plan for future opportunities. In the quarter, high average interest earning assets of $1.9 billion were offset by lower rates, substantial liquidity build and a one-time adjustment to PPP loan fee recognition to reflect modification and extension of the CARES Act forgiveness timeframe, which pushed our net interest margin downward to 3.71%, as net interest income declined $13.7 million from the second quarter to $285 million, but improved $18.3 million from a year ago period. Excluding the impact of PPP loans, net interest income would have only fallen by $4 million, which was largely the impact of interest expense on our new subordinated debt issued in middle of the second quarter. We believe approximately 21 basis points of this compression is transitory in nature and NIM is expected to rise as excess liquidities put to work through balance sheet growth, deposit seasonality and warehouse lending, driving balances lower and PPP loan forgiveness assumptions normalize. Given these margin trends and balance sheet growth, we believe Q4's net interest income performance returns to Q2 levels and PPNR rises above Q3. Provision for credit losses was $14.7 million in the third quarter considerably less than the $92 million in the second quarter, which was primarily attributable to stable to modest improvements in macroeconomic forecast assumptions, loan growth in low-risk asset classes and limited net charge-offs of $8.2 million or 13 basis points of average assets. Dale, will go into more detail on the specific drivers of our provision but our total loan ACL to funded loans ratio now stands at 1.37% or $355 million and 1.46%, excluding PPP loans, which are guaranteed by the CARES Act. If macroeconomic trends remain stable or begin to improve, future provision expense will likely mirror net charge-offs and reserve levels could decline. Loan deferrals trended lower for the quarter as many of our clients have returned to paying as agreed following their deferral period. As of Q3, $1.3 billion of loans are on deferral or 5% of the total portfolio, which represents a 55% decline from Q2. We expect $1.1 billion of loan deferrals will expire next quarter, which will continue to drive down our outstanding modifications. Our quarterly efficiency ratio improved to 39.7% compared to 43.2% from the year ago period, becoming more efficient during the economic uncertainty provides the incremental flexibility to maintain PPNR. Finally, Western Alliance continues to generate significant excess capital, which grew tangible book value per share to $29.03, or 4.3% over the previous quarter and 13.4% year-over-year. Supported by our robust PPNR generation, capital rose $121.6 million with a CET1 ratio of 10%, supporting 15.6% annualized loan growth. Dale, will now take you through our financial performance. Over the last three months Western Alliance generated record net income of $135.8 million or $1.36 per share, which was up 46% on a linked-quarter basis. As Ken mentioned, net income benefited reduction in provision expense for credit losses to $14.7 million, primarily driven by stability and the economic outlook during the quarter in a release of specific reserves associated with the fully resolved credit. Net interest income grew 1$8.3 million year-over-year to $284.7 million but declined $13.7 million during the quarter, primarily result of changes in prepayment assumptions on PPP loans that impacted fee accretion recognition. The SBA's interim final rule published in August more than doubled the amount of time that people have to receive forgiveness on their loans and coupled with the systems delay in forgiving -- forgiveness request processing, we now expect that forgiveness processes to be elongated and the average time the loans will be outstanding is projected to double as well. As a result, using the effective interest method, we reversed out $6.4 million of the fees recognized in Q2 and overall PPP fee recognition has been extended. This is purely a change in timing, impacting NIM but with no change to cumulative fee revenue ultimately recognized from this program. The $43 million, we are to receive will be simply be booked to income more slowly than our original expectations. Net interest income was impacted in Q3, as a result of this timing change by $10.6 million. Non-interest income fell $700,000 to $20.6 million from the prior quarter. We benefited from a recovery of an additional $5 million mark-to-market loss on preferred stocks that we recognized in the first quarter. Over the last two quarters, we recovered 80% of that $11 million original loss. Finally, non-interest expense increased $9.3 million, as the deferral of loan origination cost fell, as PPP loan originations dropped, as well as an increase in incentive accruals as our third quarter pandemic -- as our third quarter performance exceeded our original third quarter budget, which was established before the pandemic. Strong ongoing balance sheet momentum coupled with diligent expense management drove pre-provision net revenue to $181.3 million, up 13.5% year-over-year and consistent with our overall growth trend from the first quarter, as the second quarter benefited from one-time PPP recognition of BOLI restructuring in FAS 91 loan cost deferrals. Turning now to net interest drivers. Investment yields decreased 23 basis points from the prior quarter to 2.79% and fell 29 basis points from the prior year due to the lower rate environment. Loan yields decreased 35 basis points following declines across most loan types, mainly driven by changing loan mix and in the reduction of PPP loan fees, resulted in lower PPP loan yield during the quarter. Notably, for both investments and loans, spot rates as of September 30, are higher than the third quarter average yields. Costs of interest bearing deposits was reduced by 9 basis points in Q3 to 31 basis points with an end of quarter spot rate of 0.27% [Phonetic], as we continue to lower posted deposit rates and push out higher cost exception price funds. The spot rate for total deposits, which includes non-interest bearing deposits was 15 basis points. When all of the company's funding sources are considered, total funding costs declined by 2 basis points with an end of quarter spot rate of 0.25%. Unlike last quarter where spot rates indicated a likely margin compression in the third quarter, these rates appear to demonstrate that the margin will improve as both earning asset yields will rise and funding cost will fall in the fourth quarter. Additionally, in October, we called $75 million of subordinated debt that has diminishing capital treatment with the current rate of 3.4%. Despite the transition to a substantially lower rate environment during 2020, net interest income increased 6.9% year-over-year to $284.7 million. As mentioned earlier, during Q3, our extraordinary build and liquidity and adjustments to PPP loan fee recognition compressed our net interest margin of 3.71%, as net interest income declined $13.7 million. However, the majority of these reduction drivers are transitory. PPP loans reduced our NIM during the quarter by 13 basis points. This changes to prepayment assumptions, reduced SBA fees recognized resulting in PPP loan yield of 1.76%. Excluding this timing difference, net interest income declined only $4 million quarter-over-quarter, primarily due to interest expense on the new subordinated debt that we issued last May, resulting in a net interest margin of 3.84%. Referring to the bar chart on the lower left section of the page, of the $43 million in total PPP loan fees net origination costs that we received, only $3.3 million was recognized in the third quarter. The recognized reversal of PPP was $6.1 million in Q3 and expect fee recognition to be approximately $6.9 million in the fourth quarter and taper off as prepayments and forgiveness are realized. In reality, these assumptions are dependent on actual forgiveness from the SBA. Additionally, average excess liquidity relative to loans increased $1.3 million in the quarter, the majority of which are held at the Federal Reserve Bank earning minimal returns, which impacted NIM by approximately 21 basis points in aggregate. Given our healthy loan pipeline and ability to deploy these funds to higher yielding earning assets, we expect this margin drag to dissipate in the coming quarters. Regarding efficiency, on a linked-quarter basis, our efficiency ratio increased to 39.7%, as we continue to invest in our business to support future growth opportunities. As described earlier, the non-interest expense increase was largely related to a net increase in compensation costs, as we now have greater confidence in our ability to execute on our pre-pandemic budget and are no longer benefiting from deferred costs for PPP loan originations. Excluding PPP, net loan fees and interest, the efficiency ratio for the quarter would have been 40.7%, which as we indicated last quarter should be moving closer to our historical levels in the low-40s. Return on assets increased 44 basis points from the prior quarter to 1.66%, while provisions fell. PPNR ROA decreased 47 basis points to 2.22%, as attractive decline in margin from the prior quarter. This continued strong performance in capital generation provides us significant flexibility to fund ongoing balance sheet growth, capital management actions or meet our credit demands. Our strong balance sheet momentum continued during the quarter as loans increased $985 million to $26 billion and deposit growth of $1.3 billion brought our deposit balance to $22.8 billion at quarter-end. Inclusive of PPP, both loans and deposits grew approximately 29% year-over-year with our focus on loan loss segments and DDA. The loan to deposit ratio decreased to 90.2% from 90.9% in Q2, as our strong liquidity position continues to provide us with balance sheet capacity to meet funding needs. Our cash position remains elevated at $1.4 billion at quarter-end compared to $2.1 billion quarterly average, as deposit growth continues to outpace loan originations. While this does impair margin near term, we believe it provides us inventory for selective credit growth this demand resumes. Finally, tangible book value per share increased to $1.19 over the prior quarter to $29.03, an increase of $3.43, or 13.4% over the past 12 months. The vast majority of the $985 million in loan growth was driven by increases in C&I loans of $892 million, supplemented by construction loan increases of $103 million. Residential and consumer loans now comprise 9.3% of our portfolio, while construction loan concentration remains flat at 8.8% of total loans. Within the C&I growth for the quarter and highlighting our focus on low-risk assets that Ken mentioned, capital call lines grew $267 million, mortgage warehouse loans grew over $1 billion and corporate finance loans decreased $141 million this quarter. Residential loan originations were offset by higher prepayment activity leaving the balanced fairly flat. We continue to believe our ability to profitably grow deposits as both a key differentiator and a core value driver to our firm's long-term value creation. Notably, year-over-year deposit growth of $6.4 million is higher than the annual deposit growth in any previous calendar year. Deposits grew $1.3 billion or 4.7% in the third quarter, driven by increases in non-interest bearing DDA of $777 million, which now comprise over 45% of our deposit base plus growth in savings in money market accounts of $752 million. Market share gains and mortgage warehouse and robust activity in tech and innovation continue to be significant drivers of deposit growth. As we initially described on our Q1 earnings call, while unique credit risk management strategy is focused on establishing individual borrower level strategies and direct customer dialog to develop long-term financial plans. Our approach to payment deferral requests is to look for resourceful ways to partner with our clients along with assessing their willingness in capacity to support their business interests. We ask our clients to work with us hand-in-hand whereby our clients contribute liquidity, capital or equity as an inaugural component to modified prepayment plans. Our approach collectively uses the resources of the borrower, government and the bank's balance sheet to develop solutions that extend beyond the six-month window provided for in the CARES Act. By quarter-end, deferrals had declined by $1.6 billion or 55%, reducing total loan deferrals from 11.5% in Q2 to 5%. Excluding the hotel franchise finance segment in which we executed a unique sector specific to hurdle strategy, the bank wide deferral rate is approximately 1.6%. We have received minimal additional request for further deferrals and 98% of clients with expired deferrals are now current in payments. We expect $1.1 billion of loan deferrals will expire in the current quarter, which will substantially drive down outstanding modifications. Consistent with this trend, as of yesterday deferrals are down $420 million in October, bringing the current total to $880 million. Regarding asset quality, our non-performing assets and OREO to loan ratio remained flat at 47 basis points to total assets, while total classified assets increased to $28 million or 4 basis points to 98 basis points to total assets. Classified accruing loans rose by $21 million, explainable by a few loans 90 days past due as of September 30. All of these loans are now current. Special Mention loans increased $81 million during the quarter to 1.83% of funded loans, which is a result of our credit mitigation strategy to early identify, elevate and apply heightened monitoring to loans and segments impacted by the current COVID environment. Over 60% of the increase in Special Mention loans are from previously identified segments uniquely impacted by the pandemic, such as the hotel portfolio and a component of our corporate finance division credits determined to have some level of repayment dependency on travel, leisure or entertainment. As we have discussed in the past, Special Mention loans are not predictive of future migration to classified or loss, since over the past five years, less than 1% has moved through charge-offs. If borrowers do not have through cycle liquidity and cash and capital plans, we downgrade to substandard immediately to remediate. Our total allowance for credit losses rose a modest $7 million from the prior quarter due to improvement in macroeconomic forecasts and loan growth in portfolio segments with lower expected loss rates. Additionally, we covered $8.2 million of net charge-offs. The ending allowance related to loan losses was $355 million. For CECL, we are using a consensus economic forecast outlook of blue chip -- blue chip forecasters as it tracks management's view of the recession and recovery. The economic forecast improved during the quarter, which would have implied a reserve release. However, given the still unknown time horizon of COVID impacts, political uncertainty and the unknown status of further stimulus, we adjusted our scenario weightings to a less optimistic outlook. In all, total loan allowance for credit losses to funded loans declined a modest 2 basis points to 1.37% or 1.46%, when excluding PPP loans. On a more granular level, our loan loss segments account for approximately one-third of our portfolio and includes mortgage warehouse, residential and HOA lending, capital call lines and resort lending. When we exclude these segments, the ACL to funded loans on the remainder of the portfolio is 2%. Provision expense decreased to $14.7 million for Q3, driven by loan growth in lower loss segments and improved macroeconomic factors, while fully covering charge-offs. Net credit losses of $8.2 million or 13 basis points of average loans were recognized during the quarter compared to $5.5 million in Q2. Relative to other banking companies our lower consumer exposure continues to result in much lower total loan losses. We continue to generate significant capital and maintain strong regulatory capital ratios with tangible common equity to total assets of 8.9% and a Common Equity Tier 1 ratio of 10, a decrease of 20 basis points during the quarter due to our strong loan growth. Excluding PPP loans, TCE to tangible assets is 9.3%, a modest decline of 10 basis points from the first quarter. Inclusive of our quarterly cash dividend payments of $0.25 per share, our tangible book value per share rose $1.19 in the quarter to $29.03, up 13.4% in the past year. We continue to grow our tangible book value per share rapidly as it has increased three times that of the peers over the last 5.5 years. I would now like to briefly update you on our credit risk mitigation efforts and the current status of a few exposures to industries generally considered to be the most impacted by COVID- 19 pandemic. Throughout the quarter, Tim Bruckner and the credit administration team led ongoing focus portfolio reviews by risk segments to monitor credit exposures and performance against cash budgets, operating plans through the liquidity trough. We are not waiting for deferrals to run out to make great changes or effect remediation strategies. If borrowers are non-performing against defined operating plans or determined to not have a sufficient through cycle liquidity, we downgrade them now to substandard and enact remediation strategies to ensure the best outcomes. We do not hold loans in SM, the Special Mention for a time to eventually downgrade. And as a result, Special Mention graded loans slowly migrate to classified or substandard. These facts and daily conversations with our people and our clients help me feel confident that our credit mitigation strategy and early approach to proactively manage our risk segments is bearing fruit and puts Western Alliance in a strong position to come out on the other side of the pandemic in better shape than our peers. In our $500 million gaming book focused on all strip, middle market gaming-linked companies, total deferrals were reduced from 37% of the portfolio to only 4% and as of today, it's zero, as our clients are now open for business and are performing at or above their reopening plans. The $1.3 billion investor dependent portion of our Technology and Innovation segment has continued to benefit from significant sponsor support for technology firms best positioned to succeed in this COVID environment and an active fund raising environment as well. Since March 2020, 65 of our clients have raised over $1.7 billion in capital, resulting in 87% of borrowers with greater than six months remaining liquidity, up from 77% in Q1. Our CRE retail book of $674 million focus on local personal services based retail centers with no destination mall exposure, continues to modestly exceed national trends that shows rent collections rising from 50% in May to 80% in August. Similarly, the portfolio's deferrals have fallen from $176 million to $31 million. Lastly, our $2.1 billion Hotel Franchise Finance business focused on select service hotels with greater financial flexibility and LTVs at origination of approximately 60% continues to trend toward stabilization. Occupancy rates are tracking national averages, currently around 50%, which have tripled from April lows. At approximately 55% occupancy, select service hotels are estimated to cover amortizing debt service, so a typical hotel is operating at break even. Furthermore, we have seen deferrals declined from 83% of the portfolio to 44% of the portfolio and currently, we do not anticipate granting any additional deferrals in the hotel portfolio. We are proactively engaging with hotel sponsors to validate ongoing support and hotel performance against operating plants. As mentioned earlier, we are not waiting for deferrals to end before migrating to ensure remediation options. With strong sponsor support the worst a great hotel typically receives is SM or Special Mention. Let me just finish up with our management outlook. We believe that our third quarter performance is the baseline for future balance sheet and earnings growth. With this record quarter, we beat our quarterly budget that was established pre-pandemic. Our pipelines are strong and we expect loan growth to return to previously anticipated levels of $600 million to $800 million for the next several quarters in low risk asset classes. However, there will be some offsets as PPP loans pay-off or are forgiven. Depending on the timing of the realized PPP forgiveness, organic loan growth should be -- should more than offset PPP run-off. In Q4, we expect to see the seasonal declines associated with our mortgage warehouse clients. Therefore, deposit growth will be at the lower end of the target range, reducing our excess liquidity. To supplement our residential lending initiative, we acquired Galton Funding, a residential mortgage platform that specializes in the acquisition of prime non-agency residential home loans. The acquisition is a low risk, low cost entry point to build a meaningful residential mortgage business line at an accelerated timeframe with over 100 additional mortgage originator relationships. We anticipate that the Galton team will be fully integrated by the end of October and be contributing to loan growth by the end of the year. As Dale mentioned, our current spot rates indicate that the net interest margin pressure experienced this quarter will subside and net interest margin will trend upwards toward 3.9% in Q4. We expect net interest income to rise in Q4, aided by both an increased NIM and higher end of quarter loan balances compared to the quarterly average. Additionally, it is expected that PPP fee income will pick up next quarter as forgiveness is granted. This will however, abate during 2021 PPNR is expected to increase as net interest income growth will more than offset any increase in non-interest expense. Looking ahead, we will continue to invest in new product offerings and infrastructure to maintain operational efficiency but Q2 and Q3 efficiency ratios are temporary and will eventually return to sustainable level in the low-40s. Our long-term asset quality and loan loss reserves are informed by economic consensus forecast, which is consistent going forward, could imply reserve releases in the coming quarters. We believe that the provisions in excess of charge-offs year-to-date are more than sufficient to cover charge-offs through the cycle as we do not see any indicators that imply material losses are on the horizon. Finally, Western Alliance is one of the most prolific capital generators in the industry. Our strong capital base and access to ample liquidity will allow us to take advantage of any market dislocations to maintain leading risk adjusted returns to address any future credit demands, all while maintaining flexibility to improve shareholder returns. Operator, if you want to open up the line.	compname posts q3 earnings per share $1.36. q3 earnings per share $1.36.
Also joining us here today is Tim Bruckner, our Chief Credit Officer. This quarter's results continue to demonstrate the unique benefits of Western Alliance's national commercial business strategy to position WAL as one of the country's premier growth commercial banks that consistently generates leading balance sheet and earnings growth with superior asset quality across economic cycles. As a company, we are proud of our thoughtful, safe, sustainable growth and are excited to have passed the $50 billion asset milestone. Validating our strategy during the quarter, we raised $300 million in inaugural preferred offering, achieving the lowest ever preferred dividend rate for a US bank under $100 billion in assets at 4.25%. In the third quarter, exceptional balance sheet expansion continued with our highest ever quarterly loan growth of $4.8 billion or 63% on a linked quarter annualized basis and deposits rose by $3.4 billion or 32% annualized as we continue to effectively deploy liquidity. Loan demand continued to broaden across our business lines, with C&I loans increasing by $2.2 billion, inclusive of $240 million of PPP runoff, along with $2.3 billion of growth in our residential portfolio. Notably, capital call lines drove $1.9 billion of growth within C&I as deal activity continues to be strong and utilization rates rose. Additionally, resort lending and hotel franchise finance contributed approximately $114 million to loan growth as well as $148 million increase in CRE investors. For the third quarter, WAL generated record total net revenues of $548.5 million, a 57% annualized rise, in PPNR to $317.1 million and adjusted earnings per share of $2.30. Adjusted earnings per share quarter-to-quarter rose by $0.01 as the company recorded a provision for credit losses, totaling $12.3 million, an increase of $26.8 million from the $14.5 million provision release in the second quarter. We remain one of the most profitable banks in the industry with return on average assets and return on average tangible common equity of 1.83% and 26.6%, respectively, which will continue to support capital accumulation and strong capital levels in the quarters to come. I would like to reiterate that AmeriHome is now integrated into the strategic fabric of Western Alliance and is thoughtfully managed to maximize value for the entire bank through loan, deposit and net interest income growth. A $5.2 billion increase in average earning assets drove net interest income growth of $39.9 million or 10.8% for the quarter or 43% annualized to $410.4 million of excess liquidity deployment into loans and loans held-for-sale contributed significantly to earnings. Fee income increased $2.1 million to $138.1 million and now represents over 25% of total net revenue. Asset quality continues to remain stable as total nonperforming assets declined to $10 million to 17 basis points of total assets and net charge-offs were $3 million or 4 basis points. Finally, what excites me most is the diverse set of growth opportunities in front of us. We will continue to do what we do best and support our clients in attractive markets nationally where they do business. I believe we have exited the pandemic as an employer of choice for leading specialized commercial lenders, which positions us well or extremely well to attract and retain uniquely qualified talent to thoughtfully sustain growth with superior risk-adjusted returns. For example, during the quarter, we hired two seasoned teams. We added 11 people based in Texas to our single-family home construction CRE national business line and brought on the leading national restaurant franchise finance team with the hire of six loan and credit professionals. Both teams join us from larger commercial banks where they improved their business plans and built robust multibillion-dollar books of business. The Texas CRE team has $10 million in outstandings and an additional $110 million approved to be funded and a $400 million pipeline. Likewise, the restaurant franchise finance team has $90 million in outstandings and $54 million approved to be funded and a pipeline of $300 million. Dale will now take you through the details of our quarterly financial performance. For the quarter, Western Alliance generated record net revenue of $548.5 million, up 8.3% quarter-over-quarter or 33% annualized. Net interest income grew $39.9 million during the quarter to $410.4 million, an increase of 44% year-over-year, primarily a result of our significant balance sheet growth and deployment of liquidity into higher-yielding assets. PPNR rose 57% on an annualized linked quarter basis to $317.1 million excluding acquisition and restructuring expenses. Noninterest income increased $2.1 million to $138 million from the prior quarter as mortgage banking-related income rose $12 million for the quarter and totaled $123.2 million. Servicing revenue increased $23 million in the quarter as refinance activity slowed, despite a smaller servicing portfolio of $47.2 billion in unpaid principal balance. Gain on sale margin was 51 basis points for the quarter as we extended the time from funding to sale, which positively impacted net interest income. With these evolving mortgage sector fundamentals, AmeriHome continues to meet our pro forma acquisition expectations, contributing $0.58 during the quarter, which is inclusive of $0.20 in net interest income from AmeriHome using our balance sheet, an opportunity most stand-alone correspondent lenders don't have. Finally, adjusted net income for the quarter was $238.8 million or $2.30 in adjusted EPS, which is inclusive of a credit loss provision of $12.3 million, but excludes pre-tax merger and restructuring charges of $2.4 million. Turning to net interest drivers. During the quarter, deployment of our excess liquidity into higher-yielding assets drove both loan growth and net interest income growth. Loans held-for-sale increased $2.1 billion and are yielding 3.35%. On a linked-quarter basis, yields on loans held-for-investment declined 20 basis points to 4.28%, which is fully explained by the continued strong growth of low to no loss asset categories, namely residential loans and capital call lines. Interest-bearing deposits remained relatively stable from the prior quarter at 21 basis points as were total cost of funds at 28 basis points. Consistent with our previous comments, we believe that in the current rate environment, funding costs have stabilized. Net interest income grew $39.9 million during the quarter to $410 million or 44% year-over-year as balance sheet growth and optimization of earning asset mix generated robust spread income. Average earning assets increased $5.2 billion or 12% during the quarter to $48.4 billion. Additionally, we successfully deployed liquidity into loans and have held the investment portfolio relatively flat in favor of loans held for sale, which we view as a higher-yielding cash-like alternative. Despite our successful liquidity deployment in Q3, we still have meaningful dry powder of $1 billion in cash and the opportunity to further fund loans through continued deposit growth. As a result of loan growth in lower yielding categories, NIM declined 8 basis points to 3.43%. We expect continued strong net interest income growth as we're well positioned to take advantage of a rising rate environment as 71% of our commercial loan portfolio is variable rate, and we have 47% noninterest-bearing deposit funding. Our efficiency ratio improved to 41.5% from 44.5% during the quarter, while we continue to make investments to support risk management and sustained growth. The inherent operating efficiency of deploying excess liquidity has helped push our efficiency ratio to the lower 40s. Pre-provision net revenue increased $39.7 million or 14% from the prior quarter and 75% from the same period last year. This resulted in a PPNR ROA of 2.45% for the quarter, an increase of 14 basis points compared to 2.31% from the last quarter. This continued strong performance and leading capital generation provides us significant flexibility to fund ongoing balance sheet growth, support infrastructure and capital -- other capital management actions as well as meet credit demand. Balance sheet momentum continued during the quarter as loans increased $4.8 billion or 15.9% to $34.8 billion. Strong deposit growth of $3.4 billion brought balances to $45.3 billion at quarter end, and all total assets have grown 58% year-over-year to $52.8 billion. Total deposits increased $313 million over the prior quarter to $2.1 billion, primarily due to overnight borrowings of $400 million, partially offset by redemption of $75 million in subordinated debt. As Ken described, we experienced record quarterly loan growth this quarter with growth evenly split between residential and C&I loans. In all, loans grew $4.8 billion during the quarter and were up $5 billion ex PPP runoff and 34% year-over-year. Residential real estate and C&I loans grew $2.3 billion and $2.2 billion, respectively. We continue to see broad-based core deposit growth across our business channels. Deposits grew $3.4 billion or 8% in the third quarter, with the strongest growth in savings and money market accounts of $1.6 billion. Noninterest-bearing DDA accounts contributed $950 million and represents 47% of total deposits. Strong performance from commercial clients, robust fundraising activity and tech and innovation and seasonal inflows in HOA banking relationships were all significant drivers of deposit growth during the quarter. We are confident in the stickiness of deposits that we've generated in recent quarters, particularly as our newer initiatives are finally taking root. Our asset quality remains strong and stable. Special Mention loans continue to decline to $364 million or 105 basis points of funded loans. Total classified assets rose $26 million in the third quarter to $265 million or 50 basis points in total assets, but are down more than 40% from a year ago on a ratio basis. Total nonperforming assets declined $10 million to 17 basis points in total assets. Quarterly credit losses continue to be nominal. In the third quarter, net charge-offs were $3 million or 4 basis points of average loans annualized compared to $100,000 in the second quarter. Our loan allowance for credit losses increased $15 million from the prior quarter to $275 million due to robust loan growth. In all, total loan ACL to funded loans is 80 basis points or 82 basis points when excluding PPP loans. As mentioned in prior quarters, the strategic focus of the bank is to source a significant portion of loan growth from low to mid last [Phonetic] segments to achieve a diversified risk -- risk-diversified portfolio. With the third quarter loan growth, our low to no loss segments now comprise over half of total loans. Given our industry-leading return on equity and assets, we generate sufficient capital to fund about 25% to 35% annual loan growth depending on the mix and this is after dividend service. Our tangible common equity to total asset ratio of 6.9% and common equity Tier 1 of 8.7%, were weighed down this quarter by robust asset growth in excess of these levels. As you have seen throughout the year, we took several capital actions to enhance our capital staff and support ongoing growth. During Q3, we issued $300 million of preferred equity, which was slightly offset in total capital as we redeemed $75 million of subordinated debt. We are also redeeming $175 million of 6.25% subordinated debt this quarter, which we anticipate to be completed in November. We will recognize a $6 million pre-tax nonrecurring charge associated with this redemption as we accelerate amortization of origination costs on net debt. Inclusive of our quarterly cash dividend payment, which we increased to $0.35, our tangible book value per share rose $1.81 in the quarter to $34.67 or 19% growth from the past year. Our tangible book value per share growth is industry-leading and has grown 2.5 times that of the peers over the past five years or at a compound annual rate of over 19%. I'll now hand the call back to Ken to conclude. The third quarter really was an exceptional quarter from an earnings and loan growth perspective as our distinctive national business strategy model continues to hit on all cylinders. Impressively, end-of-period loan balances were $3.3 billion greater than the average balance, which provides a strong jump-off point for the fourth quarter, net interest income in addition to the $1 billion in excess liquidity that we are gradually deploying in the coming quarters. We're very excited about the diverse set of growth opportunities in front of us as we enter the fourth quarter. Looking forward, for full year 2022, you can expect loan held for investments to continue robust growth with a quarterly minimum of $1.5 billion to $2 billion, an increase from the prior guidance of $1 billion to $1.5 billion or a low to mid-20s percent growth rate for the year with flexible origination mix designed to maximize net interest income. Today, approximately half of our growth was generated from low to no loss residential mortgages. Deposits are expected to grow in line with loans as we work to deploy excess liquidity and normalize the loan-to-deposit ratio, which today stands at 77%. We expect to maintain our efficiency ratio in the lower 40s as we continue to invest in risk management and technology and work to bring new business lines, products and services to market. Total revenue and PPNR growth will track balance sheet growth as we benefit from operational leverage. Regarding capital, we are targeting a CET1 ratio of 9%, which our robust quarter-end loan growth impacted. We have several mechanisms to address our capital levels. Most importantly, we generate significant capital through earnings growth and have historically demonstrated our success in accessing the capital markets. In conclusion, we continue to see strong pipelines and have the operating flexibility to both execute on near-term opportunities while investing for the long-term growth.	q3 revenue rose 8.3 percent to $548.5 million. net interest income was $410.4 million in q3 2021.
Joining me on the call today is Dale Gibbons and Tim Bruckner, our Chief Financial Officer and Chief Credit Officer. I will first provide an overview of our quarterly results and how we are managing the business in this current economic environment. And then Dale will walk you through the bank's financial performance. And in 2020, Western Alliance broke many of our own records for balance sheet growth, net interest income, and earnings. All the while fortifying our balance sheet position. Our strategy to align the company with strong borrowers nationwide provided us the strength and flexibility to navigate the economic volatility as we grew our balance sheet and income, while simultaneously managing asset quality. Despite external challenges, financially 2020 was a strong year and was our 11th consecutive of rising earnings. For the year, we produced record net revenues of $1.2 billion, net income of $506.6 million and earnings per share of $5.04, 4% greater than 2019 despite increasing the provision expense by $124 million. Our focus continues to be on PPNR growth, which rose approximately 20% to $746 million and net interest income increased $126.5 million or 12%, while total expenses increased a modest $9.6 million. To put this in perspective, 2020 revenue expanded 13 times the rate of expenses in a difficult, uneven and complex operating environment. Given all these actions, tangible book value per share grew 16.4% year-over-year to $30.90. Turning to the fourth quarter results. We achieved a record $193.6 million of net income and earnings per share of $1.93 for the quarter, an increase of 54% from prior year. These results benefited from a $34.2 million reversal of credit loss provision consistent with our strong asset following results and improved go forward consensus economic outlook. Outstanding quarterly loan and deposit growth of $1 billion and $3.1 billion, respectively, lifted total assets to $36.5 billion, which was driven by broad based growth throughout our business lines and geographies as clients delayed [Indecipherable] under investment for future opportunities. Additionally, several of our internal business initiatives gained traction. For the full year, loans increased $4.5 billion, excluding PPP program or 21% and deposits grew a record shattering, $9.1 billion, which we believe created a strong funding foundation for ongoing loan and earnings growth as the economy continues to heal from COVID shutdowns. This balance sheet growth propelled net interest income decline of $315 million for the quarter or 16% on a year-over-year basis. Quarterly NIM was 3.84%, up 13 basis points of the third quarter as PPP income improved and costs, CET costs fell. Fee income increased to $23.8 million for the quarter, aided by $6.4 million of equity and warrant income. On a full year basis, fee income grew a healthy 8.8% to $70.8 million. Full year operating non-interest expense grew $9.6 million to $491.6 million, producing an efficiency ratio of 38.8%. In the fourth quarter, our efficiency ratio improved to 38.2% as revenue growth was 4 times non-interest expense growth and continues to provide [Indecipherable] flexibility to grow PPNR. Asset quality continued to improve this quarter as our COVID remediation strategy produce increasingly positive results for our clients. Total classified assets declined $102 million in Q4 to 61 basis points of total assets, which was lower than Q1 '20 levels on both a relative and absolute dollar amount. Just as the pandemic impact was being felt. At quarter-end total deferrals had fallen to $190 million or 70 basis points of total loans, including $77 million for low LTV and residential loans. As of today there are less than $10 million of deferrals excluding the residential portfolio and all of our hotel franchise findings loans are paid as agreed. These noticeably positive credit trends, the improved consensus economic outlook and amount of loan growth of low risk asset financials drove our $34.2 million release in loan loss reserves this quarter. Dale will go into more details on specific drivers of our provision, but our total loan to ACL to funded loans ratio excluding PPP loans now stands at 1.24% or $316 million. And total loan ACL to total classified assets is 142%. Charge-offs were $3.9 million in Q4 and full-year charge-offs were 6 basis points of loans. Our robust PPNR generation continues to drive strong capital levels for the CET 1 ratio of 9.9%, supporting 28% year-over-year loan growth. Return on average assets and return on average tangible common equity were 161 basis points and 17.8% respectively. We remain one of the most profitable banks in the industry. As we demonstrated throughout 2020, we will continue to support our clients and are encouraged by their participation in PPP program as the second round is rolling out. We have begun processing application and are seeing steady volumes. But given the size constraints and other factors, we don't expect the total amount to rise to levels we saw in round one. Finally, and most importantly, all of our accomplishments cannot be achieved without the [Indecipherable] made by the people of Western Alliance, to successfully respond to the challenging COVID-19 environment. We had strong position and prepare the company [Indecipherable] long way as we enter 2021. We take pride in our peer leading performance in good times, but above all during the challenging events. Dale will now take you through our financial report. For the quarter, Western Alliance generated net income of $193.6 million or $1.93 EPS, each up more than 40% on a link quarter basis. As mentioned, net income, benefited from a release in provision expense of $34.2 million, primarily driven by improvement in the economic outlook during the quarter and loan growth in lower risk asset classes. Net interest income grew $30.1 million during the quarter to $314.8 million, an increase of 10.6% quarter-over-quarter and significantly above Q2 performance as -- to which we guided. Non-interest income increased $3.2 million to $23.8 million from the prior quarter, supported by $5.1 million of warrant gains related to technology lending. Non-interest expense increased $8.1 million, mainly driven by an increase in incentive accruals and our fourth quarter performance exceeding the original budget targets, which were established pre-pandemic. Continued balance sheet growth generating superior net interest income, grow pre-provision net revenue of $206.4 million, up 30.4% year-over-year and up substantially from the first and third quarters of 2020 as the second quarter benefited from one-time items of PPP loan fee recognition and bank-owned life insurance restructuring. For the year, Western Alliance generated record net income of $506.6 million or $5.04 per share, an increase over full-year 2019 even when considering elevated provision expense of $124 million for the year. Net interest income grew $126.5 million during the year to $1.2 billion, an increase of 12.2% year-over-year mainly attributable to increased loan balances, PPP loan fees, and 49% reduction in interest expense. Non-interest income increased $5.7 million to $70.8 million from the prior year. We recognized a one-time benefit of fully restructuring during Q2 of $5.6 million. Finally, non-interest expense increased $9.6 million or just 2% year-over-year as increases in short-term incentive accruals and technology costs were offset by lower deposit costs. Turning now to our net interest drivers. Investment yields decreased 18 basis points from the prior quarter to 2.61 [Phonetic] and fell 35 basis points from the prior year due to a lower rate environment. On a link quarter basis, loan yields rose 20 basis points following increased yields across most loan types, mainly driven by a changing loan mix and higher PPP yields related to prepayment assumptions on forgivable amounts. PPP yield for the quarter was 3.67% compared to 1.76% for the third quarter. Interest-bearing deposit costs were reduced by 6 basis points in Q4 to 25 basis points, with an end of the quarter spot rate of 23 basis points as higher cost CD roll off. Spot rate for total deposits, which includes non-interest bearing deposits was 13 basis points. We expect funding costs have essentially stabilized at these levels. However, there could be marginal benefits as higher cost CDs continue to mature and are in place at lower rates. Current spot rates indicate a relatively stable margin as we enter 2021. Some decline in loan yields is expected as the mix has changed to lower risk segments. With regards to our asset sensitivity, our rate risk profile has declined notably since the beginning of 2019, with 82% of our loans now behaving as fixed due to floors for variable rate loans and mix shift toward fixed rate residential loans. We continue to be asymmetrically positioned to benefit from any future rate increases, with an estimated increase in net interest income of 5.7% from 100 basis point rate increase in a parallel [Phonetic] shock scenario versus 0.9% contraction in net interest income, if rates fell and flat line at zero. As Ken, mentioned this year we demonstrated our ability to grow net interest income by 15.7% year-over-year despite the transition to a substantially lower rate environment. Net interest income increased $30.1 million or 10.6% during the quarter as net interest margin increased 3.84%. Margin benefited from both a true-up related to PPP fee recognition, favorable deposit mix shift, and improved deposit rates. As mentioned earlier, during the fourth quarter of our extraordinary deposit growth and build liquidity continues to weigh on the margin and had a negative impact of 9 basis points this quarter. Adjusting for this, the margin would have been slightly above the 3.9% guidance we gave during the last quarterly call. PPP loans increased our NIM during Q4 by 11 basis points as we trued up changes to prepayment assumptions made during Q3. Resulting in PPP loan yield of 3.67%. Notice the gold line on the bar chart showing NIM, excluding volatility related to PPP, NIM was 3.8% for Q4 and essentially flat from the third quarter. Average excess liquidity relative to loans increased $467 million in the quarter, the majority of which is held at the FRB or a minimal returns, which reduced NIM by approximately 9 basis points in aggregate. Given our healthy loan pipeline and ability to deploy these funds to higher yielding earning assets, we expect margin drag to dissipate in coming quarters. Referring to the chart on the lower left section of the page, from the $43 million in total PPP loan fees, net of origination costs, $11 million was recognized in the fourth quarter. We recognized a reversal of PPP loan fees in the third quarter and it is up $6.4 million and expect fee recognition to be approximately $6.6 million in Q1 and taper off as prepayments and forgiveness are realized. As the second round of PPP is just under way, these fee accretion assumptions only apply to the initial round of funding. Turning now to the efficiency. Our efficiency ratio improved to 38.2% in Q4, as the increase in expenses was outweighed by revenue growth and only rose 2% from the fourth quarter of 2019. Excluding PPP net loan fees and interest, the efficiency ratio for the quarter would have been 39.9%. And as we indicated last quarter, should be returning to historical levels in the low 40s [Phonetic]. Pre-provision net revenue increased $25.2 million or 13.9% from the prior quarter and 30.4% from the same period last year. This resulted in pre-provision net revenue ROA of 2.37 for the quarter, an increase of 15 basis points from Q3 and equal to the year-ago period. This strong performance in capital generation provides us significant flexibility to fund ongoing balance sheet growth, capital management actions to meet credit demands from our clients. Our strong balance sheet momentum continued during the quarter as loans increased $1 billion, net of $271 million of PPP loan payoffs to $27.1 billion and deposit growth of $3.1 billion, broader deposit balances of $31.9 billion at year-end. Inclusive of PPP, loans grew 28% year-over-year while deposits grew approximately 40% year-over-year, with a focus on -- focus on loan loss -- loan segments in DDA. Loan to deposit ratio decreased 84.7% from 90.2% in Q3 as our strong liquidity position continues to ride with balance sheet capacity, with [Indecipherable] needs. As deposit growth continues to outpace loan origination, our cash position remains elevated at $2.7 billion at year-end. However, we believe it provides inventory for selective credit growth as demand resumes. Finally, tangible book value per share increased $1.87 over the prior quarter to $30.90, with an increase of $4.36 or 16.4% over the prior year. Our strong loan growth is a direct result of our flexible business model, which combines national commercial banking relationships with our regional footprint and enables thoughtful growth throughout economic cycles. The vast majority of the $1 billion growth was driven by increases in C&I loans of $655 million supplemented by CRE non-owner occupied loans of $248 million. Residential and consumer loans now comprise 9.2% of our loan portfolio. While construction loan concentration increased modestly to 9% of total loans. Within the C&I growth for the quarter and highlighting our focus on low-risk assets, capital call lines grew $408 million, mortgage workout lines grew $413 million and corporate finance loans decreased to $122 million this quarter. Residential loan originations added $56 million in balances by quarter end, net of repayment activity. We continue to believe our ability to profitably grow deposits is both a key differentiator and a core value driver to our firm's long-term value creation. Notably, year-over-year deposit growth of $9.1 million is more than double the annual deposit growth of any previous calendar year. Deposits grew $3.1 billion or 10.7% in the fourth quarter, driven by increases in savings and money market of $1.8 billion, interest-bearing DDA of $842 million and non-interest bearing DDA of $450 million, which comprises 42% of our deposit base. Robust activity in tech and innovation and market share gains in mortgage warehouse continue to be significant drivers of deposit growth during the quarter. Additionally, one of our core deposit -- one of our deposit initiatives that is pulling online contributed over $1 billion in deposit growth in 2020. Looking at asset quality, total classified assets decreased to $102 million in Q4 due to credit upgrades, payoffs, and refinance activity away from [Indecipherable]. Our non-performing loans and ORE ratio decreased to 32 basis points to total assets and total classified assets fell to 61 basis points of total assets at year-end, which was below the ratio at the end of 2019. Special mentioned loans decreased $26 million during the quarter to 1.67% of funded loans. As we've discussed before, special mentioned loans are result of our credit mitigation strategy too early identify, elevate, and apply heightened monitoring to loans or segments impacted by the current COVID environment and fluctuate as credit migrates in and out. We do not see a risk of material losses coming from these credits. Regarding loan deferrals, as Ken mentioned, as of today, we have less than $10 million of deferrals. Excluding approximately $77 million in low LTV residential loans, with weighted average loan to value of under 67%. All of our hotels franchise finance loans are paying as agreed and our sophisticated hotel sponsors continue to confirm support for their project. Net credit losses of $3.9 million or 6 basis points in average loans were recognized during the quarter compared of $8.2 million in Q3. Our loan allowance for credit losses decreased $39 million from the prior quarter to $316 million due to improvement in economic forecasts and loan growth in portfolio segments with low expected loss rate. In all, the total ACL to funded loans declined 20 basis points to 1.17% or 1.24% when excluding PPP loans. On a more granular level, our low [Phonetic] less assets account for approximately 40% of our portfolio and include mortgage warehouse, residential and HRA lending, capital call lines, public finance and resort lending. When excluding these components, the ACL for funded loans on the remainder of the portfolio is 1.7%. We continue to generate significant capital and maintain strong regulatory capital ratios with tangible common equity to tangible assets of 8.6% and a common equity Tier 1 ratio of 9.9%, the decrease of 10 basis points during the quarter due to our strong loan growth. Inclusive of our quarterly cash dividend, payment of $0.25 per share, our tangible book value per share rose $1.87 in the quarter to $30.90, an increase of 16% in the past year. We continue to grow our tangible book value per share rapidly has it increased at 3 times that of the peer group the past six years. I'll now hand the call back over to Ken. We believe that our fourth quarter performance was a baseline for future balance sheet and earnings growth, building off a robust growth we had in the fourth quarter. Our pipelines are strong and we expect loan and deposit growth of $600 million to $800 million for the next several quarters. Both loan and deposits each have their own cyclical and seasonal behavior that are not aligned on a quarterly basis. As Dale mentioned, given our deposit growth and liquidity, we expect there to be some downward pressure on these related to mix changes and the deployment of liquidity into attractive asset class. Additionally, we will continue to see influence on a quarterly basis by the wave of PPP loans being forgiven and the second round of PPP loans coming online. Strong PPNR growth will continue, down momentum will drive higher net interest income, which more than offset the planned increase in non-interest expense. Looking ahead, we will continue to invest in new product offering and infrastructure to maintain operational efficiency, which we will eventually push our efficiency ratio back to sustainable levels in the low 40s. Our long-term asset quality and loan loss reserves are formed by the economic forecast, which is consistent going forward, could imply a steady reserve ratio. Depending on the timing and pace of the recovery, it could be some long migration into the special mentioned category, but we do not expect material migration fee to sub-standard. We believe that the provision that [Indecipherable] since pandemic began are more than sufficient to cover charge-offs through the cycle as we do not see any indicators that imply material losses are on the horizon. Finally, [Indecipherable] one of the most prolific capital generators in the industry. Our strong capital base and access to ample liquidity allows to take advantage of any market dislocation we take, leading risk-adjusted returns and to the trust any future credit demands, all while maintaining flexibility to improve shareholder returns.	compname posts q4 earnings per share $1.93. q4 earnings per share $1.93.
I would like to start by expressing how grateful I am to our colleagues for their continued hard work and commitment, especially to those who are continuing to experience the devastating effects of the pandemic. We have not yet seen a uniform recovery as there are still many regions around the world that have been ravaged by the pandemic. As many of you are aware, India is facing a particularly dire situation at the moment. Our colleagues and customers that are very much on our minds and we are working closely with our team in India to ensure safety of our employees and their families, and we're doing all we can to support our customers. During today's call, I will provide you a brief overview of our first quarter operating results as well as an update on our three phase transformation plan focused on; Number 1, beginning our commercial momentum; Number 2, further strengthening our organization with leadership and performance management; and Number 3, aligning our portfolio with growth areas. Next, I will provide some thoughts on how our business is positioned to drive sustainable growth. Mike will then review our financial results in detail and provide comments on our updated second quarter and full-year financial outlook. Briefly reviewing our operating results, for the first quarter revenue grew 31% as reported, 27% on a constant currency basis, and non-GAAP adjusted earnings per share grew 99% year-over-year. This strong start for the year was driven by growth across all end markets as we saw continued strength in pharma and earlier-than-expected recovery in non-pharma spending by our customers, new product traction and strong commercial execution by our team. Looking more closely at our top-line results. First, from a customer end market perspective, all our end markets grew double-digits during the first quarter. Our largest market category pharma grew 28% in constant currency, industrial grew 24%, and academic and government grew 29%. Moving now to our sales performance by geography. On a constant currency basis; sales in Asia grew 41%, with China up 109%; sales in Americas grew 14%, with US growing 13%; and sales in Europe grew 25%. From an operating segment perspective, our Waters division grew 26%, while TA grew by 28% on a constant currency basis. Customer activity continued to improve in the first quarter with pharma leading the way driving better-than-expected trends in recurring revenues and a significant growth in instrument revenue. Recurring revenues grew 15%, with services growing 14% and chemistry consumables revenue growing 18%, driven by combined pharma strength and improved industrial demand. LC instruments grew across all of our major geographies and market categories with more than 40% growth. It's encouraging to see both HPLC and UPLC instrument units grow double-digits, driven by pent-up demand, integration of the Arc HPLC and strong execution of our LC replacement initiative. The success of the launch of the Arc HPLC in the general purpose HPLC space cannot be understated and the ACQUITY PREMIER has been received very well by customers since its February launch. Mass spec sales were also strong in the first quarter with growth in excess of 50% as demand in the pharma market remains robust. In addition to rebound, we saw in other markets, including clinical, food and environmental and biomedical research. Demand was solid for our tandem quads in Europe and China, particularly in pharma and in food. Revenue grew 28% as demand rebounded in the core industrial business and strength continued in pharma medical devices and semiconductors. Growth was robust across all major geographies and product lines with particular strength in thermal and electrophoresis. Looking deeper at our sales performance by geography. All major regions grew double-digits. China built further on last quarter's strength, more than doubling sales year-over-year, results were strong across all end markets as China continued its recovery from last year's COVID disruptions. Pharma was particularly strong in China, driven by triple-digit growth in both contract labs and traditional Chinese medicine. Our food business in China also saw meaningful growth, driven by a significant rebound in contract testing organizations to the level that were above those we saw in 2018 and in 2019. This is just one quarter and not indicative of a trend, but it demonstrates that the market is recovering and our execution has improved. India sales grew double-digits for the third consecutive quarter, despite worsening conditions and continued pandemic challenges throughout the country. Europe experienced broad-based strength across all customer end markets, including meaningful sequential improvements in both industrial and academic and government markets. In the US, both pharma and industrial markets had strong growth in the quarter, while demand in our academic and government market remained soft as it lags behind other markets in reopening. In summary, we had a great start for the year with strong year-on-year growth that was broadly based than last quarter. With impressive performance across all our regions, end markets and product categories. Pharma demand has not subsided and many of our non-pharma markets are now in the process of recovering, which gives us greater confidence as we look to the remainder of the year. Now I would like to talk more broadly about our business and its overall direction moving forward, including the strength of the Company, the effectiveness of the markets that we serve, and our deep commitment to innovation as we look beyond this quarter into the longer term. Our three-phase transformation plan is; Number 1, beginning our commercial momentum; Number 2, strengthening our organization with leadership and performance management; and Number 3, aligning our portfolio with growth areas. Looking at our first priority of beginning our commercial momentum, let me review some initiatives I mentioned previously. First, our instrument replacement initiative. We delivered a significant acceleration in instrument revenue growth to 45%. In February, we launched the ACQUITY PREMIER system augmenting the already solid placement of Arc HPLC launched in June of 2020, creating new opportunities for instrument replacements. Additionally, we have gained traction with customers to replace aging tandem quad mass spec instruments with newer instruments. Second, as part of our CROs CDMO expansion initiative, we've seen revenue growth accelerate to strong double digits in both these customer segments. Customers continue to perceive us as a strong technical partner as they transfer methods from originators and they see us as a strong collaborator rather than a competitor. Third, our e-commerce initiative has begun to deliver tangible results, search engine optimization and paid search had lead to search impressions that are up more than 40% year-on-year. While not every click translates to immediate revenue increasing traffic is an important first step in our e-commerce efforts. Fourth, driving launch excellence. Let me start with liquid chromatography. While the Arc HPLC is a leader in general purpose HPLC space, I want to focus on the ACQUITY PREMIER. Last year we launched the ACQUITY PREMIER Columns and follow that up with the ACQUITY PREMIER System last quarter. Though, we are still in the early stages of the revenue ramp up for both the Columns and the System sales of ACQUITY PREMIER Columns are significantly outpacing prior successful chemistry launches, including the original ACQUITY Columns. Turning to mass spec. In 2019, we launched the BioAccord, Cyclic IMS, SYNAPT XS, TQ-S cronos and a next generation version of our TQ-S micro. Pairing our tandem quad with ACQUITY PREMIER creates industry-leading reproducibility and sensitivity for challenging assays. With expanding applications of the BioAccord, we've maintained our focus on bringing a versatile, easy to use and robust LCMs system to the QA-QC space. During Q1, we launched a full workflow for peptide multi-attribute method on the new Waters Connect platform to enable the monitoring of quality attributes at the peptide level. This adds to already existing simple use applications of peptide mapping impacts of unit mass analysis, released glycan profiling and oligonucleotide mass confirmation. Over the last year, we established the BioAccord into the workflows for characterizing mRNA molecules that have since become vaccines. In fact, BioNTech recognized Waters for our support of its COVID-19 vaccine development and relief efforts. Lastly, Cyclic was launched in September of 2019 and is targeted at the most advanced high resolution mass spec users. Augmenting traditional LCMs with high-resolution ion mobility allows us to separate molecules with additional -- with identical molecular weight based on their different shapes. This is now especially relevant from one of the structural changes in the sugar pattern of the spike protein of the SARS-CoV-2 virus. We do recognize that we still have a bit of work to do on our mass spec informatics applications and we are addressing this through the development and rollout of our Waters Connect software platform across our full mass spec portfolio. Today, Waters Connect support biopharma characterization and monitoring workflows with a range of capabilities on the BioAccord, Xevo QTof and [Indecipherable]. And with the launch of our RDa Benchtop -- Benchtop Tof in Q1, Waters Connect also enables small molecule workflows. We're grateful that we've earned the trust and partnership with our customers as we develop further applications and beta test upcoming products and software. Next from our TA Instrument division. Last year we launched the X3 DSC, which offers unique advantages for routimg high throughput labs and R&D, especially in pharma, electronics and advanced materials. The ability of the X3 DSC to deliver high sensitivity measurements of physical properties more quickly than comparable products is enabling these measurements to be more broadly deployed in manufacturing processes, where scientists can evaluate multiple combinations in parallel, reducing time to market. The more time I spend with my R&D colleagues together with our customers the more impressed I am with the strength of our deeply, deeply technical culture. Moving on to our second priority. You've already seen the plan leadership transitions we announced last month. Amol Chaubal will join as the CFO on May 12th, Amol has deep experience in pharma and diagnostics and has led many transformations in his prior roles through both organic and inorganic growth. Mike will continue to serve as our Corporate Controller and I'm pleased to add that Mike will also assume the role of Chief Accounting Officer. Secondly, we have established a dedicated Innovation Board, which I will share that includes leaders from R&D, Business Development and Marketing. The Innovation Board will review unmet needs in markets we serve, assess technology proof of concepts and monitor the execution of top R&D programs. Though their retirements are effective July 2, they've graciously which we offer to service consultants for a period of time to ensure a smooth transition. Both Jon and Jianqing have deep commercial and transformation experience in global leadership roles in fast growing markets such as molecular diagnostics and bioprocessing. I'm really pleased with our new team and I look forward to introducing them to you in the coming months. That brings us to our third priority aligning our portfolio with high growth areas. While we won't take our eye off commercial execution, which remains our top priority, we have recently started our strategic planning process. And I'd like to share you -- share with you some high-level thoughts on where we are today. Our number one priority is to continue strengthening the core meaning LCMs, and materials characterization instruments, informatics, service and consumables. Second, is staffing into faster growing adjacencies where we can bring our strength of managing compliant data without competing directly with our customers. These adjacencies include opportunities to increase our exposure to biologics, be it in reagents, other instrument technologies or bioprocessing, all in accelerating LCMs into diagnostics or other high-growth markets. Lastly, we will maintain our long-standing disciplined approach to financial management, capital structure and capital deployment as we are focused on maintaining a top-tier ROIC. Over the coming year, I look forward to sharing more with you on our strategy, as well as the data points that give us confidence that we have the foundation in place to sustainably grow in this attractive market. With that, I'd like to pass the call over to Mike Silveira for a deeper review of the first quarter financials and our outlook for the remainder of 2021. In the first quarter, we recorded net sales of $609 million, an increase of approximately 27% in constant currency. Currency translation increased sales growth by approximately 4%, resulting in sales growth of 31% as reported. Looking at product line growth. Our revenue -- our reoccurring revenue, which represents the combination of precision chemistry products and service revenue increased by 15% for the quarter, while instrument sales increased 45%. Chemistry revenues were up 18% for the quarter, driven by strong pharma market growth and improving industrial demand. On the service side of our business, revenues were up 14% as customers continue to reopen labs and catch up on performance maintenance, professional services and repair visits. As we noted on our last earnings call, reoccurring sales were impacted by five additional calendar days in the quarter, which primarily impacted service revenues. Looking ahead, compared to 2020, there is no year-over-year difference in the number of calendar days for this year's second or third quarter. However, there are six fewer calendar days in the fourth quarter of this year. Breaking first quarter operating segment sales down further, sales related to Waters Division sales grew 26%, while TA Instrument sales grew 28%. Combined LC and LCMs instrument sales were up 47%, while TA system sales grew 34%. Now I'd like to comment on our first quarter non-GAAP financial performance versus the prior year. Gross margin for the quarter was 58.2%, a 350 basis point increase compared to 54.7% in the first quarter of 2020, primarily due to an increase in sales volume and favorable effects. Moving down to first quarter P&L. Operating expenses increased by approximately 9% on a constant currency basis and 11% on a reported basis. The increase was primarily attributed to higher labor incentive compensation costs and higher depreciation from IT investments we made over the last few years. In the first quarter, our effective operating tax rate was 14% an increase from last year, as compared to the comparable period included some favorable discrete items in the prior year. Net interest expense was $7 million for the quarter, a decrease of about $3 million, as anticipated on lower average outstanding debt balances. Our average share count came in at 62.6 million shares, flat with the first quarter of last year. Our non-GAAP earnings per fully diluted share for the first quarter increased 99% to $2.29 in comparison to the $1.15 last year. On a GAAP basis, our earnings per fully diluted share increased to $2.37 compared to $0.86 last year. Turning to free cash flow, capital deployment and our balance sheet, I would like to summarize our first quarter results and activities. We define free cash flow as cash flow from operations less capital expenditures and excluding certain special items. In the first quarter of 2021, free cash flow grew 60% year-over-year to $193 million, after funding $40 million of capital expenditures. Excluded from free cash flow was $14 million related to the investment in our Taunton precision chemistry operation. In the first quarter, this resulted in $0.32 of each dollar of sales converted into free cash flow. Our increased free cash flow was primarily a result of sales growth and better operating margins compared to the prior year. In the quarter, accounts receivable days sales outstanding came in at 84 days, down 15 days compared to the first quarter of last year. Inventory decreased by $16 million in comparison to the prior year quarter on higher sales volumes. Waters maintains a strong balance sheet, access to liquidity and a well-structured debt maturity profile. In terms of returning capital to shareholders, we repurchased approximately 600,000 shares of common stock for $173 million in the first quarter. These capital allocation activities along with our free cash flow results in cash and short-term investments of $810 million in debt of $1.7 billion on our balance sheet at the end of the quarter. This resulted in a net debt position of $893 million and a net debt to EBITDA ratio of about 1 times at the end of the first quarter. Our capital deployment priorities remain consistent, invest for growth, maintain balance sheet strength and flexibility, and return capital to shareholders. We remain committed to deploying capital against these priorities and as Udit commented earlier, we have begun a new strategic planning process. As we continue to execute against our priorities, we will evaluate deploying capital to open up attractive and adjacent markets. As we look forward to the remainder of the year ahead, I would like to provide some updated context on our thoughts for 2021. One, while the business environment remains subject to volatility, we are seeing good momentum in our market segments, which will help us exceed the 2019 levels. Two, we believe this momentum will continue into the second quarter, but that the strong double-digit growth will mostly occur in the first half of the year due to more challenging comparisons in the second half of the year and the six fewer calendar days that we will have in the fourth quarter. Three, we continue to expect that all major geographies will perform better this year than they did in 2020 led by growth in China. Four, our near-term growth initiatives are expected to continue to ramp, led by our LC replacement initiative, which we expect to contribute increasingly to our performance. These dynamics support updated full-year 2021 guidance for constant currency sales growth up 8% to 11%. At current rates, the positive currency translation to 2021 sales growth is expected to be approximately 1 percentage points to 2 percentage points. Gross margin for the full year is expected to be between 57.5% and 58%. Every year we look to balance growth, investment and profitability. Accordingly, we expect 2021 operating margins of between 28% and 29% based on a combination of investments, the normalization of COVID-related cost, and disciplined expense controls. Moving now below the operating income line, other key assumptions for the full year guidance are as follows; net interest expense of $35 million to $38 million; a full year tax rate in the range of 14.5% to 15.5%; the net impact of our share repurchase program in 2021 that will result in an average diluted 2021 share count of 61.5 million to 62.0 million shares outstanding. Over the course of the year, we will evaluate our share repurchase program and provide quarterly update as appropriate. Rolling all this together, and on a non-GAAP basis, full-year 2021 earnings per fully diluted share are now projected in the range of $9.85 to $10.05, which assumes a positive currency impact on full year earnings-per-share growth of approximately 3 percentage points. Looking at the second quarter of 2021. We expect constant currency sales growth to be 14% to 16%. At today's rates, currency translation is expected to increase second quarter sales growth by approximately 3 percentage points. Second quarter non-GAAP earnings per fully diluted share are estimated to be in the range of $2.15 to $2.25 as the significant prior year COVID cost savings actions start to normalize. At current rates, the positive currency impact on second quarter earnings-per-share growth is expected to be approximately 1 percentage point. Like in summary, there is much to be pleased about -- with our first quarter results, driven by strong growth across each of the major end markets with pharma leading the way. Our transformation plan is well under way with commercial momentum and a strong leadership team in place. We now turn toward developing a new strategy as we work more closely to align our portfolio with higher growth areas of the market.	compname reports non gaap earnings per share $2.29. q1 non-gaap earnings per share $2.29. q1 sales rose 31 percent to $609 million. sees q2 non-gaap earnings per share $2.15 to $2.25. sees fy non-gaap earnings per share $9.85 to $10.05. q1 gaap earnings per share $2.37. expects full-year 2021 constant-currency sales growth in range of 8% to 11%. expects q2 2021 constant-currency sales growth in range of 14% to 16%.
Over the course of the last few months, which have been particularly challenging against the background of a global pandemic, Chris has kept the team focused on execution. Throughout his tenure, Chris has demonstrated a clear commitment to advancing a new product cycle that has in part helped us establish a strong foundation for growth. As you know, on July 15th, we announced that Udit will be joining us on September 1st. Udit is a highly accomplished executive with more than two decades of leadership and operational expertise in our industry. He has demonstrated a proven track record of delivering tangible financial, and operational results as evidenced by his prior roles at Merck KGaA, headquartered in Darmstadt, Germany. Importantly, he also has a strong appreciation for our purpose, culture and people. We are confident he will help Waters build on our foundation and usher in our next chapter of innovation, growth and shareholder value. I know Udit is eager to get going and we look forward to introducing him when he officially joins us in September. I hope that you and your loved ones are doing well as the world continues to manage through this truly extraordinary time of the global COVID-19 pandemic. It's amazing how much is happening on a daily basis, and I wish you peace and fortitude as we all work hard to improve both health and economic conditions for everyone. During today's call, I will provide an overview of our second quarter operating results as well as some broader commentary on our business in the context of COVID-19 and describe the actions we are taking to emerge from this period stronger than ever. Sherry will then review our financial results in detail, and update you on our financial actions as it relates to the balance sheet and cost structure. To briefly review our operating results for the quarter, Q2 sales declined 12%, and adjusted earnings per share declined 2%. While Q2 was expectedly a bit softer than Q1 in terms of year-over-year growth, our revenue results reflected modestly better market conditions than we had anticipated, an increasing impact of new products as well as strong execution by our global sales, service and operational teams. During the quarter, we also executed well on our plans to achieve meaningful near-term cost savings to ensure our financial strength and flexibility under a variety of recovery scenarios. This combination of higher-than-expected revenue and the timing of our near-term cost actions enabled us to exceed our margin and earnings per share expectations. As we enter the second half of the year, we are focused on our recovery trajectory and normalizing our operating spend and investment in the business. I am very proud of our team's execution across the business in this dynamic environment. Looking ahead, while risks and uncertainties in our operating environment remain as a result of the COVID-19 pandemic, we believe that our end markets and geographies will see modestly better conditions in the second half of 2020 than they did in the first half. I will provide some additional color on this later in my remarks. As we navigate the COVID-19 global pandemic, we continue to execute against our five point value creation model which emphasizes our unique specialty positioning, organic innovation, operating excellence, disciplined capital deployment, and a sharp focus on people and culture. That said, I'd like to focus my comments today on our near-term operating priorities relating to the COVID-19 period that I outlined on our last earnings call. We are making great progress against each of them. First, our top priority remains the health, safety and well-being of our employees and our customers. The deliberate actions and cautions we have taken during the pandemic have minimized the infection rate within our employee population, while still enabling the organization to operate efficiently and effectively. Our multi-phased safe return to workplace process is well under way with teams returning to our major facilities in several stages. Our second priority is to ensure business continuity. Our service engineers have consistent access to customer sites globally in order to maintain, service and install instruments, while our sales reps have less consistent access given the varied pace of recovery across our geographies. Salesforce access has been improving however, as customers continue to ramp up their laboratory operations. That said, our strategic technology investments over the last several years are paying off, and have enabled us to effectively serve the vast majority of sales, service and scientific activities with a hybrid in-person and digital effort. We have been successful getting our experts in front of customers through virtual events and we are restoring normal interactions with sales reps and regional specialists where possible. Operationally, we have confidence in the continuing stability of our supply chain, manufacturing and distribution processes. Our third priority is maintaining our financial strength, flexibility and liquidity even in our most conservative forward looking scenarios. Exiting the second quarter, we are on track to achieve our $100 million cost savings plan for the year relative to our prior internal forecast. We are nearly complete, returning those employees on temporary 90-day furlough to work, we have restored full hours and salaries and we have now reoriented our focus toward investment in the business in the second half to enable our return to growth. Sherry will provide more details on these measures during her remarks. Our fourth priority is to accelerate our recovery, by focusing on actions we can control. In particular, we are taking direct action to a, maximize the impact of our strong new product cycle, b, target our R&D efforts on near-term product introductions, c, service our installed base either remotely or in person as customer labs allow, and d, focus our sales efforts on customer labs that are open to operation. In Q2, we saw an increased contribution from our recently launched mass spec products while launching an important new LC instrument. More on this in a few minutes. Finally, we are continuing to contribute our expertise and capabilities in the global fight against COVID-19. Our customers have responded enthusiastically to our offers of deep scientific and technical expertise across a range of COVID-19 therapy and vaccine candidates under development. In particular, our unique system solutions have been very useful in critical workflows including peptide mapping, glycans analysis and oligonucleotide analysis. While the short-term revenue impact is minimal, these efforts have been deeply appreciated and have greatly advanced relationships across our customer base while also advancing the fight against COVID-19. Now, I would like to make a few comments on our outlook. As we outlined last quarter, our planning scenarios are based on a categorization of each geography into one of three phases of the COVID-19 pandemic: Containment, Recovery, and Return to growth. We currently believe that all of our major geographies have now transitioned to the recovery phase. As a result, and as I mentioned before, we believe the second half will be modestly better than the first half. However, we don't anticipate that quarterly revenue growth will turn positive until 2021. From an end market perspective, our largest market, pharmaceutical is leading the recovery. Encouragingly, our top global pharma accounts grew in the second quarter and year-to-date. In addition, CXOs and large molecule pharma customers are recovering nicely, while generic and specialty pharmaceutical customers are still operating with more constrained capital budgets. Looking ahead, though we expect most pharma customers to return to normalized operations this fall, risks and uncertainties certainly remain, particularly in Q4 around meaningful year-end budget releases that we typically see. Our industrial markets are recovering more slowly with customers generally operating under tighter capital budgeting restrictions than in pharma. Notably, because these customers provide less recurring revenue than our pharma customers returning to normal operations doesn't immediately result in a corresponding return of spending in the form of capital equipment. Within the industrial category material, science labs are operating at higher activity levels than food and environmental labs and we expect them to return to normal levels more quickly. Lastly, academic and governmental markets are lagging corporate customers, and are expected to be the slowest to recover. Many academic labs remain closed or only partially open, while governmental business has been significantly impacted by delayed tender activity. Turning now to our geographies, all major regions have transitioned from containment to recovery phase with each seeing steadily increasing customer activity throughout the quarter. A number of countries including China, other countries in Asia and parts of Europe are moving through the recovery phase more rapidly. On the other hand, the United States, India and remaining parts of Europe are progressing more cautiously through these various stages of easing restriction. In aggregate, as we look to the second half of the year, we are expecting improved demand across the business, in particular for instruments as we expect a gradual easing of capital spending with constraints in all of our end markets. Looking specifically at China, the pharma market is leading the recovery with solid growth in large molecule pharma and CXOs. Generic pharma remains under pressure as customers remain cautious on capital spending in the context of both the GPO program implementation and the COVID-19 pandemic. That said, China's pharma recurring revenues grew in the quarter across both large and small molecule which we expect to continue bolstering our confidence that we will see increasing instrument demand over time. China's food and environmental markets were down in the second quarter, reflecting the continued funding pressure that is impacting government labs, partially offset by growth within independent labs. Elsewhere in Asia, recovery is a mixed picture with strength in certain geographies such as Korea and slower recoveries in other regions such as Japan and India. Turning to the US, we are seeing a dynamic and somewhat uncertain environment with various states experiencing increasing COVID-19 cases over the past several weeks. And therefore, are seeing rollbacks of previously implemented reopening plans. The pharma market is leading the recovery, driven by large molecule customers. Capital spending is slowly, but steadily improving, and we are seeing strong customer support for our new products. Elsewhere in the Americas, Latin America remains very soft. Lastly in Europe, recoveries in the countries of Southern Europe and Northern Europe are lagging those in Eastern Europe and Central Europe. Pharmaceutical markets are recovering more quickly than other markets with QA/QC reporting growth in the second quarter. Our recent European performance has been stronger compared to the Americas, because many European countries have been more effective managing COVID-19 containment efforts and European customers are adopting some of our new mass spec technology at a faster rate than other geographies as we typically see. Aside from these current market dynamics, we remain sharply focused on our primary growth strategy of organic innovation. We believe we are well positioned to leverage our robust and growing new product pipeline as demand normalizes and we expect continuing increases in contribution from new products. Looking at the Waters product line, there is increasing evidence of traction of new products throughout the quarter particularly BioAccord and Cyclic IMS. In addition, we launched six new instruments year-to-date and have received very positive initial feedback. These new product launches were highlighted by the Arc HPLC, a rugged, reliable and modern HPLC system that is a significant advancement, and enhances our strong technology leadership position in the core, liquid chromatography market. In our TA Instruments product line, the three new products launched last quarter at PittCon have received strong customer interest. Material science markets have been challenged, but these products are poised to support future growth and market share gains. In summary, the sales in our second quarter continued to be impacted by the COVID-19 pandemic. Our revenue results reflected modestly better market conditions than we had anticipated, and increasing impact from our new products as well as strong execution by our global sales, service and operations teams. We also took decisive actions to manage our cost to ensure the largest portion of our 2020 savings plan in the second quarter, which as expected was a more challenging environment than the first quarter. This combination of better than expected top line performance with the benefits of our cost containment efforts enabled us to exceed our margin and earnings per share expectations. Although risks remain with the uncertain trajectory of the global COVID-19 pandemic, we expect market conditions to improve modestly in the second half versus the first half of the year, and therefore have accelerated our growth investments to take advantage of opportunities as demand recovers. With that, I'd like to pass the call over to Sherry Buck for a deeper review of our second quarter financials. In the second quarter, we recorded net sales of $520 million, a decrease of approximately 12% in constant currency. Currency translation decreased sales growth by approximately 1% resulting in a sales decline of 13% as reported. In the quarter, sales into our pharmaceutical market declined 10%, sales into our industrial market declined 13% while academic and governmental markets declined 21%. Looking at our product line growth, our recurring revenue, which represents the combination of precision chemistry products and service revenue declined 3% in the quarter while instrument sales declined 23%. As we noted last quarter, there was no year-over-year difference in the number of calendar days during the second or third quarters, but there are two additional calendar days in the fourth quarter of 2020 compared to 2019. Chemistry revenues were down 4% in the quarter, driven mostly by weakness in academic and governmental. On the service side of our business, revenues were down 2% as mid single digit growth in service contract revenues were offset by a decline in on-demand service revenues and spare parts. Breaking second quarter product sales down further, sales related to Waters branded products and services declined 12%, while sales of TA-branded products and services declined 20%. Combined, LC and LCMS instrument platform sales declined 24% and TA's instrumentation system sales declined 20%. Looking at our growth rates in the second quarter geographically, and on a constant currency basis, sales in Asia declined 12% with China down 20%. Sales in Americas declined 15%, including a 14% decline in the US and European sales were down 9%. Before I comment on our second quarter non-GAAP financial performance versus the prior year, I would like to update you on the progress of our cost actions in response to the COVID-19 pandemic that we shared with you during our last quarterly earnings call. We are on track to achieve cost savings of approximately $100 million for the year relative to our prior pre-COVID internal plan. We achieved about 60% of our planned annual savings in the first half of the year, which was better than expected, as we focused on aligning our operations and investments with our growth challenge in the second quarter. This result flow through our P&L and is the primary driver for favorable performance in gross and operating margins versus the second quarter of 2019. Looking ahead, while we plan to maintain strong operating discipline through the end of the year, a significant portion of our cost actions were enacted for a 90-day period and are nearly complete. Employees are returning from temporary 90-day furloughs, and we have restored reduced work hours and salaries to normal levels. As a result, the second half of the year will not reflect the same level of savings reported during the second quarter, as we reorient our focus toward growth investment in the business in the second half. We anticipate the remaining 40% of our cost savings to be achieved in the second half of the year. This plan reflects our core assumption that the business moves to the recovery phase and business conditions improve in the second half. We're monitoring our business conditions and we will adjust our plans as appropriate based on the pace of the recovery. Returning to our second quarter's non-GAAP financial performance, gross margin for the quarter was 59% compared to 58.4% in the second quarter of 2019, primarily as a result of our cost savings actions. Moving down the second quarter P&L, operating expenses decreased by approximately 13% on a constant currency basis, and foreign currency translation decreased operating expense growth by approximately 1% on a reported basis. In the quarter, our effective operating tax rate was 15.4% compared to 15.7% in the prior year. Net interest expense was $9 million, an increase of about $3 million as anticipated. Our average share count came in at 62.2 million shares, a share count reduction of approximately 11% or about 7 million shares lower than in the second quarter of last year as a result of shares repurchased through the end of the first quarter of 2020, subsequent to which we paused the share repurchase program. Our non-GAAP earnings per fully diluted share for the second quarter decreased to $2.10 in comparison to $2.14 last year. On a GAAP basis, our earnings per fully diluted share decreased to $1.98 compared to $2.08 last year. Turning to free cash flow, capital deployment and our balance sheet, I'd like to summarize our second quarter results and activities. We define free cash flow as cash from operations, less capital expenditures and excluding special items. We made good progress in the quarter on our capital expenditure and working capital improvement plans shared during the last quarterly earnings call, and we also remain on track for the full year. In the second quarter of 2020, our free cash flow came in at $175 million after funding $46 million of capital expenditures. Excluded from free cash flow was $23 million related to the investment in our Taunton precision chemistry operation. In the second quarter, this resulted in $0.34 of each dollar of sales converted into free cash flow, and $0.30 year to date. Our strong free cash flow was primarily a result of cost savings actions implemented in the second quarter. Turning to working capital, accounts receivable days sales outstanding came in at 87 days this quarter, up 8 days compared to the second quarter of last year and inventories decreased by $8 million in comparison to the prior year quarter, reflecting revised production schedules. Waters maintains a strong balance sheet, access to liquidity and a well structured debt maturity profile. We ended the quarter with cash and short-term investments of $356 million and debt of $1.7 billion on our balance sheet at the end of the quarter. This resulted in a net debt position of $1.3 billion, and a net debt to EBITDA ratio of about 1.8 times at the end of the second quarter. We also have $1 billion available on our bank revolver for a total available liquidity of $1.4 billion at the end of the second quarter. In terms of returning capital to shareholders, while our future capital structure target of approximately 2.5 times net debt to EBITDA remains unchanged, our near-term focus is maintaining financial flexibility and preserving liquidity. As a result, our share repurchase program remains on hold, and so we see a more stable and predictable business environment. We expect the actions we've taken will continue to provide us with adequate flexibility under a variety of potential recovery scenarios. Given the uncertainty surrounding the magnitude and duration of the COVID-19 pandemic, and its impacts on our customers, we're not providing full year guidance. However, there are a few data points that will be helpful for modeling purposes. Due to the timing of our cost actions, as discussed earlier, we expect full-year operating expense growth in the range of negative 1% to positive 1% year-over-year in constant currency. For the full year at current rates, currency translation is expected to decrease sales growth by about one percentage point and to negatively impact earnings per share by about 3 percentage points. For the full year, net interest expense is expected to be in the range of $40 million to $42 million primarily due to lower interest rates. In summary, while the second quarter was challenging as we expected, we were very pleased with our results, which were driven by a modestly better market conditions than we anticipated, increasing impact from new products and the strong execution by our team. We are looking forward to the back half of the year, and we are optimistic that the Company is well positioned to return to growth in 2021. Before we take questions, I would like to add a few brief comments on our upcoming CEO transition. It has been the honor and privilege of my career to serve as the CEO of Waters Corporation. I have loved every single day working with such inspiring customers and an incredibly talented and committed group of colleagues. Together, we have significantly advanced Waters over the course of the last five years, including, we have transformed our organic innovation engine and established an unprecedented new product pipeline and supplemented our technology portfolio through external investments and tuck-in acquisitions. We have implemented a new capital deployment framework with increasing emphasis on growth investments while also returning capital to shareholders. And we have significantly advanced the Company's talent organizational capability and technology infrastructure. I will pass the reins to Udit Batra on September 1st knowing that Waters is moving forward from a strong foundation.	compname reports q2 earnings per share of $1.98. q2 non-gaap earnings per share $2.10. q2 gaap earnings per share $1.98. q2 sales $520 million versus refinitiv ibes estimate of $496.9 million.
It has been a very busy eight weeks. Along with Bryan, our CFO, Sherry Buck, is joining me in today's call. During the call, I will provide a brief overview of our third quarter operating results and then share some of my early impressions of the company and the opportunities that I see. Sherry will then review our financial results in detail and provide comments on our fourth quarter financial outlook. Let's start with the third quarter. Our teams have worked tirelessly during the pandemic to stay close to our customers. We've seen a cautious return to work by our customers and this is reflected in our results. After steep declines in the second quarter, third quarter sales were up 2% year-over-year on a constant currency basis and adjusted earnings per share grew 1%. First, from a customer perspective, our largest segment, Pharma, was the primary growth driver in the quarter with 4% organic growth, followed by Industrial, which grew 3% and Academic and Government, which declined 7%. From a product perspective, our Waters branded products and services grew 3% organically, while TA declined by 8% on a constant currency basis. Improving access to labs, especially in pharma, continued to help drive growth in the recurring revenues. Services grew 4%, while consumables business grew approximately 7% organically, driven largely by pharma. Consumables remained a growth area for us. In fact, earlier this month, we introduced our ACQUITY PREMIER Columns, which reduce variability risks and save time when analyzing metal-loving analytes, ranging from oligonucleotides, peptides, glycans and phospholipids. The chemistry on the surface reduces unwanted analyte to surface interactions to produce real improvements in sensitivity, peak shape and recovery. The third quarter was strong for our mass spec systems with double-digit growth. We were encouraged by the demand of our high-resolution mass spec systems in pharma and biomedical research, particularly in the U.S. and Europe and the demand for our tandem quad systems in food safety in China. BioAccord also grew nicely in the quarter. However, it still does not represent a material portion of our revenue. With its simplicity and dedicated workflows in peptide mapping, glycan analysis, intact mass and oligonucleotide analysis, we believe it is the right instrument to bring LC-MS into the manufacturing in QA/QC space. I have spent time with several of our customers who are using BioAccord instruments and many of them highlighted its ease of use and a robust feature set that can be utilized across multiple lab applications. So, I think BioAccord has a good future, but I also think it will take longer than originally anticipated to significantly impact our core growth. This is a dynamic Waters has seen with prior new product launches, such as ACQUITY, which took almost four years to reach its peak sales. LC Instruments also saw a better quarter after double-digit declines in the first half of the year with a modest decline in Q3. Some of this improvement can be directly attributed to Arc HPLC, which was launched in June. Finally, to TA, revenues continued to decline in the high-single digits due to constraint capital spending at our industrial customers. Pharma and electronics revenue saw a nice double-digit increase, but this was not enough to offset the industrial declines. Turning to our key geographies, both the Americas and Europe grew mid-single digits, while Asia was flat. In the U.S., the growth was driven by pharma, food and academia, partially offset by declines in material science and clinical. We saw especially strong engagement with customers who are assisting the fight against the pandemic. Latin America remained soft, mostly due to the continued impact of closures due to COVID-19. Europe also experienced a recovery with mid-single digit growth, largely driven by biologics, CROs and genetics, including strong growth at large pharma accounts. After very significant declines in the first half, China grew at low-single digits, driven by an acceleration in food and pharma as well as strength in TA Instruments driven by investments in 5G networks across the country. This was partially offset by continued weakness in academia and government. India also recovered with double-digit growth. The third quarter benefited from some catch-up of revenues, which was delayed from the first half of the year. And looking ahead, while customer activity and access are improving, we remain cautious. We continue to face variability in our end markets and macroeconomic concerns prior to COVID-19, and academic customer trends remain depressed. Moreover, we are uncertain on the level of capital spending in the fourth quarter, particularly by our pharma and industrial customers. Now, let me share with you some of my early thoughts on the company. As a former researcher who have used Waters products in the lab, as an engineer who has modified rheometers and DSCs, and as a former customer, I believe my 25-year experience at pharma and tools has prepared me well to work with my colleagues to transform Waters. Indeed, it is a transformation to return a champion to where it belongs. Since the announcement in mid-July, I spent most of my time listening and learning. I met with investors and shareholders, including many of you; talked with and visited customers; read and researched and conducted many deep dives with my colleagues around the globe. My learning is far from done. But today, I can share with you few ideas that resulted from this deep transparency phase. First, Waters has built a solid foundation with exposure to a number of attractive end markets. Second, despite the strong foundation, our momentum has stalled in the last few years. Third and finally, we are already developing a transformation plan with tangible short-term actions. Let's take each of these in turn. First, we have a solid foundation in attractive markets. Our largest end market, pharma, is benefiting from growth of biologics and continued development of novel modalities. Moreover, our strong base of small molecules, which represents approximately 75% to 80% of pharmaceutical industry sales will benefit from the growth of CROs, oligonucleotides and mRNA therapeutics, as well as the increasing potential for repatriation of small molecule manufacturing. We have a global footprint with 25% of our sales coming from China and India. We have a solid base in these markets that is characterized by trusted brands, deep customer relationships and a culture that is rooted in science and engineering. In my customer meetings, Waters' employees are acutely aware of the issues facing our customers and are so tightly integrated with them that I often had a tough time distinguishing between our employees and that of our customers. Second, despite the strong foundation, we have underperformed both our historical growth and that of the market for the last few years. Our performance has trailed the market in LC, mass spec and thermal analysis. We were slow to respond to the transition of food testing from government labs to contract testing labs in China. Our product launches have not met expectations that we set. BioAccord, while a product that clearly meets the need, has been slower on the uptake than anticipated. Our culture is one that appreciates deep scientific insights, but one that has lacked focus and urgency. Strategically, the focus on our portfolio on LC, LC-MS and thermal analysis has limited our ability to keep up with the emerging trends like bioprocessing, contract manufacturing and testing or diagnostics. This is evident in our lack of exposure to tailwinds from COVID-19 as compared to some of our peers. Third, where to from here? While we are still continuing an in-depth analysis and developing our transformation strategies, some teams are already emerging. And let me break these into three. First, in the near term, we're focused on making changes to regain commercial momentum. Second, in the mid-term, the focus is on the pipeline and organic growth with intense focus and urgency. And finally, as we strengthen our organic growth, we will start to examine strategic investments. Let me give you some concrete examples in the near term. First, we are squarely focused on regaining our footing in healthy instrumentation. For instance, we've identified all the units in both our installed base and in the larger and power network and implemented a specific program to upgrade and replace older systems with Waters HPLC instrument portfolio, including with the new Arc HPLC. For example, there are thousands of Alliance Systems in service that are more than 20 years old and in need of an upgrade. Second, approximately 20% of our consumable sales go through the e-commerce channel. For many of our competitors, this number is over 50%. In the near term, we're implementing actions to increase traffic to these channels, such as increasing paid search and improving search engine optimization. Third, our penetration in CRO channel trails our competition. We will increase our commercial presence to penetrate this growing channel at a level that better aligns with our peers. Fourth, as I mentioned earlier, we still have a lot of faith in the success of BioAccord. Customers in QA/QC are conservative, and we need to spend a lot more time developing methods in collaboration with them and further developing enterprise-level software to help them deploy the system seamlessly. As you can see, they are near-term actions that are backed by detailed targets and KPIs. However, I want to be clear, these changes will take time and will not significantly impact our results overnight, especially as we implement these initiatives on the background of COVID-19. However, I can assure you the team is very engaged and have seen an impressive increase in drive and ambition in the eight weeks that I've been here. With that, I'd like to pass the call over to Sherry Buck, for a deeper review of the third quarter financials. In the third quarter, we recorded net sales of $594 million, an increase of approximately 2% in constant currency. Currency translation increased sales growth by approximately 1%, resulting in sales growth of 3%, as reported. In the quarter, sales into our pharmaceutical market increased 4%, sales into our industrial market increased 3%, while academic and governmental markets declined 7%. Looking at our product line growth, our recurring revenue, which represents the combination of precision chemistry products and service revenue, increased by 5% in the quarter, but instrument sales declined 1%. As we noted last quarter, there was no year-over-year difference in the number of calendar days during the third quarter. Industry revenues were up 7% in the third quarter, driven by strong pharma market growth. On the service side of our business, revenues were up 4% as on-demand service bounced back to mid-single digit growth along with continued growth in service plan revenues within the Waters product line, bringing third quarter product sales down further. Sales related to Waters branded products and services grew 3%, while sales of TA branded products and services declined 8%. Combined LC Instrument platform sales and LC-MS Instrument platform sales were flat and TA's instrumentation system sales declined 10%. Looking at our growth rates in the third quarter geographically and on a constant currency basis, sales in Asia were flat with China up 3%, sales in Americas grew 2% with U.S. growing 5%, and European sales grew 5%. Before I comment on our third quarter non-GAAP financial performance versus the prior year, I'd like to update you on the progress of our cost actions in response to the COVID-19 pandemic. We are on-track to achieve cost savings of approximately $100 million for the year relative to our pre-COVID internal plan. We achieved approximately 25% of our planned annual savings in the third quarter, bringing our year-to-date savings against our internal plan to 85%, with the majority recognized in the second quarter. We expect to realize remaining 15% in the fourth quarter. Returning to our third quarter non-GAAP financial performance, gross margin for the quarter was 55.8% compared to 58.2% in the third quarter of 2019, primarily as a result of unfavorable FX as well as fixed cost absorption and sales mix. Moving down the third quarter P&L, operating expenses increased by approximately 1% on a constant currency basis and foreign currency translation increased operating expense growth by approximately 2% on a reported basis. The increase was primarily attributable to the timing of variable costs in the prior year quarter and FX. In the quarter, our effective operating tax rate was 15.8%, which was about flat for the prior year. Net interest expense was $7 million, a decrease of about $1 million. Our average share count came in at 62.3 million shares, a share count reduction of approximately 7% or about 4 million shares lower than in the third quarter of last year as a result of shares repurchased through the end of the first quarter of 2020, subsequent to which we paused the share repurchase program. Our non-GAAP earnings per fully diluted share for the third quarter increased to $2.16 in comparison to $2.13 last year. On a GAAP basis, our earnings per fully diluted share decreased to $2.03 compared to $2.07 last year. Turning to free cash flow, capital deployment and our balance sheet, I'd like to summarize our third quarter results and activities. We define free cash flow as cash from operations, less capital expenditures and excluding special items. In the third quarter of 2020, free cash flow grew 53% year-over-year to $190 million, after funding $28 million of capital expenditures. Excluded from free cash flow was $7 million related to the investment in our Taunton precision chemistry operation and a $38 million transition tax payment related to 2017 U.S. Tax Reform. In the third quarter, this resulted in $0.32 of each dollar of sales converted into free cash flow and $0.31 year-to-date. Our increased free cash flow is primarily a result of our cost savings actions and improvements in our cash conversion cycle. We continue to make good progress on our working capital improvement plans. Accounts receivable days sales outstanding came in at 76 days this quarter, down four days compared to the third quarter of last year and down 11 days from the second quarter. Inventories decreased by $42 million in comparison to the prior year quarter, reflecting stronger revenue growth and revised production schedules. Waters maintains a strong balance sheet, access to liquidity and a well-structured debt maturity profile. We ended the quarter with cash and short-term investments of $397 million and debt of $1.6 billion on our balance sheet at the end of the quarter. This resulted in a net debt position of $1.2 billion and a net debt-to-EBITDA ratio of about 1.6 times at the end of the third quarter. We also have $1.2 billion available on our bank revolver for total available liquidity of $1.6 billion at the end of third quarter. Our capital deployment priorities remain consistent: invest for growth, balance sheet strength and flexibility and return of capital to shareholders. We remain committed to deploying capital against these priorities. Our future capital structure target of approximately 2.5 times net debt-to-EBITDA remains unchanged, while our near-term focus is maintaining financial flexibility and variability in the macro environment. While our share repurchase program is paused during the fourth quarter, it still remains an important part of our capital deployment priority. We will provide an update on our capital deployment plans during our Q4 earnings call in February of 2021. Lastly, I would like to make a few comments on our outlook. Market conditions remain variable, largely due to the COVID-19 pandemic. As a result, we're not in a position to provide detailed guidance. However, I'd like to provide you with color on how we're viewing market conditions in the fourth quarter. We assume similar levels of customer access as we saw in the third quarter, which reflects the challenging macro environment. Our outlook does not anticipate a return to lockdowns seen earlier in the year at the height of the pandemic. And in addition, we believe that some delayed purchases from the first half of the year were realized during the third quarter and there is limited visibility into year-end capital budgeting plans for both pharma and industrial customers in the fourth quarter. In light of these dynamics, we anticipate that fourth quarter revenue, on a constant currency basis, will most likely decline at a low- to- mid-single digit range. In addition, I'd like to provide a few other assumptions that will be helpful for modeling purposes. Recurring revenue benefits from two additional calendar days in the fourth quarter of 2020 compared to 2019, which is factored into our outlook. We now expect full year operating expenses to be in the range of down 1% to flat year-over-year in constant currency. For the full year, at current rates, currency translation is expected to be about neutral to sales growth to positively impact operating expense growth by less than 1 percentage point and to negatively impact earnings per share by about 3 percentage points. For the full year, net interest expense is expected to be in the range of $38 million to $40 million primarily due to lower debt levels. In summary, we're pleased with the third quarter results, but market conditions remain variable amid ongoing macroeconomic uncertainty, lingering concerns around fourth quarter capital spending by both pharma and industrial customers and academic customer trends. Overall, I believe that we have a solid foundation. But to return to our deserved place in the tools industry, we need to improve our operational execution in the short-term and focus our teams on what matters. And then in the mid-term, our focus will return to strategically building our portfolio.	compname reports q3 non-gaap earnings per share $2.16. q3 non-gaap earnings per share $2.16. q3 gaap earnings per share $2.03. q3 sales $594 million versus refinitiv ibes estimate of $546.5 million.
We have reported another quarter of strong broad-based momentum across our portfolio and geographies. Our teams have remained focused on supporting our customers and developing and delivering exciting new products despite the continuing impact of the pandemic. September 1 marked one year since I joined the company and what a year it has been. I'm often asked what is different. I would first like to talk about what is the same because that is what is giving us the ability to compete more effectively. Our brand stands for deep scientific expertise, a clear understanding of our customers' challenges and courage to invest in game-changing innovation; this remains the same. What we have injected with our new leadership team is a stronger focus on execution, a sense of urgency and accountability. We are a work in progress but the trend is positive. Now moving to Slide 3 which summarizes where we are on our journey. Firstly, we're sustaining our commercial momentum with another strong quarter delivering flat sales growth of 6%, showing solid business performance with minimal COVID tailwinds. Meanwhile, our commercial initiatives and strong traction of new products like premier columns and instruments and Arc HPLC were well-positioned to deliver market cost growth through 2022. Finally, preparing on this momentum by taking decisive steps and solving key problems that are present in higher growth adjacencies like biologics manufacturing. I will now provide a brief overview of our third quarter operating results, as well as commentary on our end markets, geographies and technologies. Amol will then review our financial results in detail and provide comments on our updated financial outlook. Moving now to Slide 4. In the third quarter, our revenue grew 11% as reported and on a constant currency basis, reflecting continued strength in our pharma and industrial end markets, with balanced demand for our instruments and recurring revenue products. This translates to a 6% stack CAGR for the quarter versus 2019 on a constant currency basis. Year-to-date, revenue has increased 21% with a constant currency tax CAGR versus 2019 also above 6%. Our top line growth resulted in Q3 non-GAAP adjusted earnings per share of $2.66, growing 23% year-over-year. Year-to-date, non-GAAP adjusted earnings per share have grown 39% to $7.54. Looking more closely at our top-line results for the quarter on Slide 5 in constant currency, first, by operating segment. The Water division grew 9% while DA grew by 27%. By end market, our largest market category, pharma, grew 16%, industrial grew 9%, while academic and government declined by 11%. In Pharma, we saw a broad-based continued strength in sales across customer segments, geographies and applications. Specced [Phonetic] was both in small molecule and large molecule applications which both grew in mid-teens for the quarter. Industrial growth was regionally broad and led by our TA business which saw strong growth globally in thermal, microcalorimetry and theology. Turning to academic and government which is about 10% of our business, continued strength in Europe was offset by softer performance in China and other regions. Moving now to our sales performance by geography, on a constant currency basis, sales in the Americas grew 16%, with the U.S. growing 13%. Sales in Europe grew 8%. Sales in Asia grew 8%, with India over 40% and China sales were down 3%. Now to a bit of clarification on China; demand remains very healthy as does the execution of our initiatives. A shipment of approximately $12 million got delayed at an airport in the last few days of the quarter due to a third-party shipping issue and has been delivered in the first few days of the fourth quarter. Looking therefore at China orders for the quarter, this was up mid-teens year-over-year. So really no challenge from a demand perspective. In the U.S., growth was led by a broad-based continued strength in our pharma and industrial end markets. In pharma, we saw strength across our instrument and chemistry portfolios. In Industrial, our Waters and TA businesses both saw strong growth. Europe demand remains robust across all end markets with continued strength in pharma, industrial and academic and government. For the quarter, India was our fastest-growing market, driven by very strong growth in instrument sales to our pharma customers. As you know, India is primarily a small molecule and generic market for export and this is indicative of continued strength in global pharmaceutical demand for small molecule drugs. At products and services, customer demand for our instruments remain strong after an impressive first half of the year, while recurring revenues also continued to see sustained growth. Overall, instrument sales grew 10% for the quarter, driven by robust demand, our improved commercial execution, new product contribution and instrument replacement. In LC, the newly released Arc HPLC continued to see strong growth and uptake of our premier instruments, both Arc and acuity, especially for applications in novel modalities like mRNA and Biologics remain solid. The strength we are seeing in our LC instrument portfolio remains a positive indicator for sustainable future growth in consumables and service. In mass spec, demand strength from pharma customers continued with strong demand for our single quad led by users for oligo and biologics purification as well as strength in our tandem quad used in late-stage product development. We're also encouraged by early interest in our Select Series MRT Time-of-Flight platform which delivered highest quality resolution at fast speeds. Now for our recurring revenues, chemistry sales grew 13%, driven by an increase in utilization of our pharma customers, as well as strength in our industrial end markets. Demand for our new premier columns remains strong, while our e-commerce initiative is progressing and making it easier for our customers to do business with us. So far this year, our chemistry consumables have grown almost double digits when compared to our 2019 base. We're pleased that our premier technology is continuing to provide important benefits in separation and purification of mRNA and oligonucleotide molecules, given it's unique ability to reduce selective binding of plasmids and mRNA to various services. Service also grew double digits again this quarter even as last year's comps have become tougher. On a two year stack basis, service grew 7% in constant currency for the quarter and 6% year-to-date. By focusing on our value proposition and commercial execution, we have seen an increase in service plan attachment rates and plan renewals. Finally, TA had a great quarter, with sales up almost 30% as demand has rebounded with strong growth across all regions. TA instrument sales have grown at 8% on a two year stack basis so far this year driven by strong demand for our thermal instruments used in the analysis of advanced materials, as well as microcalorimetry instrument demand for our pharma and academic customers. Moving now to Slide 6. Let me now focus on why we believe that we will continue to deliver market class growth. I think you're used to seeing these initiatives, so let me use the same trend starting from the left-hand side of the slide. In 2021, we expect our instrument replacement initiative to deliver over $30 million in revenue. In 2022, we expect this to become over $40 million which means an incremental $10 million over 2021. Our focus on commercial execution is positively impacting our service business with planned coverage rates having increased by 2% so far this year compared to the first three quarters of 2019. In 2022, we think a further 100 basis points of expansion in service plan adoption is attainable. Growth in e-commerce adoption also remains strong with chemistry sales through our e-commerce channels approaching roughly 30% versus the 21% we saw in 2019. We expect this to continue reaching over 35% by the end of next year. So far, this year, revenue from contract organizations has grown over 40% versus the comparable period in 2019. Next year, we expect the expect this to grow low double digits for the year versus 2021. And new products continue to do well. We are just taking the example of Arc HPLC and Premier to illustrate the point here. Both Arc HPLC and Premier continue to be strong drivers with over $45 million revenue expected from these sources of this year in and separate to the replacement initiative. In 2022, we are expecting this number to be over $60 million. So in all, these initiatives alone should give us approximately 1% over our base business growth for 2022 which reaffirm our belief in market plus growth rates. Moving now to Slide 7, we operate a strong core business in healthy and durable end markets. This strong foundation provides us a platform for solving critical problems facing our industry, where we can bring our scientific expertise and product portfolio capabilities. I would like to say, there are three areas of focus which also happen to be in high-growth end markets. First, in the biologics arena on the reagent side and bioseparations. We believe there are significant problems to solve in separating and purifying these newer modalities, having a deeper understanding of reagents coupled with our chemistry expertise will allow us to solve these problems. Second, in bioprocessing, the largest challenge I felt as an engineer in bioprocessing versus small molecule processing was that once you define the process, you got stuck with it because it was in a drug master file. We have to decouple the process from the product. Separately, the process development time scales are longer versus small molecules, given the sheer complexity of attributes you need to measure. A simple and robust tool that can measure multiple attributes as a potential solution. We believe that the bio cohort is the right LCMS tool that can begin to address this challenge. Third area is diagnostics, where we need a fast unbiased detection of multiple biomarkers to enable early disease detection. We believe, again, mass spec has a significant role to play here. Moving now on to Slide 8. Let me illustrate what I mean by sharing what we are doing to solve some of the key problems in bioprocessing. Last week, we announced a partnership with Sartorius, a leader in bioprocessing. We will combine our water Biocare system as a bioprocess analyzers with Sartorius amber bioreactors, giving scientists both faster and at line direct access to advanced quality characterization information. Scientists across Sartorius, Waters and some of our customers have already shown that the combined offering will shorten product development timelines considerably, taking what currently takes six weeks to analyze down to only two days. It also lays the foundation for using the BioCore as a bioprocess analyzer for process control and quality testing in the future. BioAccord is both versatile and easy to use and we expect that process engineers will be able to master it's operation within one to two weeks. In fact, one of our customers had summer interns use the BioAccord and gave raving reviews on how simple it is to use. I'm also an engineer who have been out of the last for many years and I was able to learn quickly. Resulting configuration will allow direct analysis of bulk substance not just cell culture media, while targeting over 250 cell culture media analytics. Separately, we also announced a multiyear collaboration with the University of Delaware to develop technology for analytical characterization of manufacturing processes for biologics and normal modality. Through these partnerships, researchers from both Waters and the University of Delaware will identify and develop solutions that can provide better aseptic sampling, make sensor and analytical instrument improvements and develop data analytics and process control. This partnership will help us expand our capabilities to characterize biological manufacturing processes in order to drive improvements in quality, yield, efficiency and process control. In summary, 2021 so far has been a very successful year for Waters. We are laser focused on our commercial execution. The markets we serve are in a healthy state and our geographic regions have rebounded solidly from pandemic lows. Meanwhile, I'm convinced of the great opportunity that lies ahead of us higher growth adjacencies to impact and deliver value by extending our scientific expertise and product portfolio toward helping customers solve the most complex problems in our industry. With that, I'd like to pass the call over to Amol for a deeper review of third quarter financials and our outlook for the remainder of 2021. As Udit outlined, we recorded net sales of $659 million [Phonetic] in the third quarter, an increase of 11% in constant currency. Reported sales growth was also 11%. Looking at product line growth, our recurring revenue which represents the combination of chemistry and service revenue increased by 11% for the quarter, while instrument sales increased 10%. Chemistry revenues were up 13% and service revenues were up 10%. As we noted in our last earnings call, recurring revenues were not impacted by a difference in calendar days this quarter. Looking ahead, there are six fewer days in fourth quarter of this year compared to 2020. Now, I would like to comment on our third quarter non-GAAP financial performance versus the prior year. Gross margin for the quarter was 58.9%, as compared to 55.8% in the third quarter of 2020. Improvement was driven primarily by volume leverage and revenue mix. The foreign exchange benefit in the quarter was about 1%. Moving down the P&L, operating expenses increased by approximately 17% on a constant currency basis and on a reported basis. The increase was primarily attributable to higher labor cost due to the normalization of prior year cost actions, as well as higher variable compensation on the higher sales volume. In the quarter, our effective operating tax rate was 11.7%, a decrease from last year due to some favorable quarter specific discrete items. Excluding the impact of these discrete items, our year-to-date tax rate is consistent with the prior year. Our average share count came in at 61.9 million shares or about 400,000 less than the third quarter of last year as a result of our share repurchase program. Our non-GAAP earnings per fully diluted share for the third quarter increased 23% to $2.66 in comparison to $2.16 last year. On a GAAP basis, our earnings per fully diluted share increased to $2.60 compared to $2.03 last year. Turning to free cash flow, capital deployment in our balance sheet. We define free cash flow as cash from operations less capital expenditures and exclude special items. In the third quarter of 2021, free cash flow was $140 million after funding $40 million of capital expenditures. Excluded from the free cash flow was $12 million relating to investment in our Taunton precision chemistry. Year-to-date free cash flow has increased to $488 million and at approximately $0.25 of each dollar of sales converted into free cash flow. In the third quarter, accounts receivable DSO came in at 71 days, down five days compared to the third quarter of last year and down two days compared to the last quarter. Inventory DIO decreased by 13 days compared to the third quarter of last year. Given the higher sales volume and our proactive measures to secure supply, inventory increased by 62 million in comparison to the prior year. We maintain a strong balance sheet, access to liquidity and well-structured debt maturity profile. In terms of returning capital to shareholders, we repurchased approximately 369,000 shares of our common stock for $151 million in Q3. At the end of the quarter, our net debt position was $958 million, with net debt-to-EBITDA ratio about one. Our capital deployment priorities are to invest in growth, maintain balance sheet strength and flexibility, return capital to shareholders and to deploy capital to well thought out, attractive and adjacent growth opportunities. As we look forward to the remainder of the year, I would like to provide you with some update on our thoughts for 2021 on Slide 11. Throughout this year, we've seen good momentum driven by robust end market demand and strong commercial execution. We believe that this momentum will continue and expect our near-term growth initiatives to continue to contribute meaningfully to our performance. Looking at the fourth quarter, the comparison is more challenging as it was the first quarter in our transformation journey and was further favorably impacted by post lockdown elevated year-end budget plus spending. In addition, we have six fewer calendar days in the fourth quarter of this year. This dynamic supports raising full year 2021 guidance to 15% to 16% constant currency sales growth. At current exchange rates, the positive currency translation is expected to add approximately one percentage point, resulting in full year reported sales growth guidance of 16% to 17%. Gross margin for the full year is expected to be approximately 58% to 59% and operating margin is expected to be approximately 29% to 30%. We expect our full year net interest expense to be $34 million and full year tax rate to be 14% to 15%. Average diluted 2021 share count is expected to be approximately $62 million. Our share repurchase program will also continue into Q4 and we'll provide quarterly updates as appropriate. Rolling all this together on a non-GAAP basis, full year 2021 earnings per fully diluted share are now projected in the range of $10.94 to $11.04. This includes a positive currency impact of approximately two percentage points at today's rate and assumes no material adverse supply impact from COVID. Looking at the fourth quarter of 2021, we expect constant currency sales growth to be 5% to 7%. At today's rates, currency translation is expected to subtract approximately two percentage points resulting in fourth quarter reported sales growth guidance of 3% to 5%. Fourth quarter non-GAAP earnings per fully diluted share are estimated to be in the range $3.40 to $3.50. This includes a negative currency impact of approximately three percentage points at today's rates and assumes no material adverse supply impact from COVID. Before I wrap things up, I would like to make a few comments on our ESG efforts and our core principles to fuel innovation and make a positive impact. This includes doing our part to reduce our environmental footprint and leave the world better than we found it, being representative of the diverse society we live in and providing effective governance that enhances long-term shareholder value. You will see more of our progress in each of these areas in our 2021 sustainability report coming out later this month. Turning to Slide 10, I was particularly moved recently by the new internship program we developed with Team New England designed to increase access to STEM education for students of all backgrounds. Over the course of six weeks, we gave high school students a hands-on learning experience with a mix of science, business and soft skills. Over 70 Waters employees were involved, who gave practical exposure and mentorship. We look forward to continuing these efforts in the future. In summary, we continue to be pleased with our performance this year, we're sustaining our commercial momentum with our initiatives which continue to perform well and should provide a multiyear benefit as we continue to strengthen our core. We are continuing to track 6% on a two year CAGR [Phonetic] 6% on a two year CAGR for our revenue in constant currency, showing that our core is strong. We are focused on accelerating innovation to our portfolio and reaching these higher growth rate areas in adjacent markets.	q3 non-gaap earnings per share $2.66. q3 sales rose 11 percent to $659 million. sees q4 non-gaap earnings per share $3.40 to $3.50. sees fy non-gaap earnings per share $10.94 to $11.04. q3 gaap earnings per share $2.60. sees fy21 constant currency sales growth in range of 15-16%.
It is one that has brought significant change and sacrifices. From navigating the pandemic and resulting short-term cost-saving initiatives earlier this year to changes in leadership, the Waters team has responded with drive, determination, and an indomitable spirit. I am impressed by and grateful for our team's resilience and commitment to our customers and to each other. During today's call, I will provide a brief overview of our 4th quarter and full-year operating results as well as an update on the, on the stabilization that we have seen in the LC market and a few factors influencing our thinking for 2021. Mike will then review our financial results in detail and provide comments on our first quarter and full-year financial outlook. Briefly reviewing our operating results for the 4th quarter, revenue grew 10% as reported, 7% on a constant currency basis and adjusted, adjusted earnings per share grew 14%. For the full year, revenue declined 2% and adjusted earnings per share was up 1%. The strong finish to the end of a challenging year was driven by the pharmaceutical market improvement, capital spending recovery in the second half of the year, strong -- strong execution and early contributions from our near-term growth initiatives. Looking more closely at our top line results, first from a customer perspective. Our largest market category pharma was the primary growth driver in the quarter with 15% growth. Our industrial market grew 5% while academia and government declined 15%. On a constant currency basis, sales in Asia were up 12% with China, up 19%. Meanwhile, sales in the Americas grew 3% for the US growing 4% and European sales grew at 6%. From a product perspective, our Waters branded products and services grew approximately 8% while TA declined by around 1% on a constant currency basis. While still navigating the global pandemic, we are seeing clear signs of improving customer activity, positive growth trends in our recurring revenues, and an evidence of stabilization in LC instrument demand. Services grew 10% while consumables business grew approximately 14% driven largely by global pharma strength, including sales of our recently launched PREMIER Columns, which performed exceedingly well in the first quarter on the market. LC Instruments grew most -- grew across most of our major geographies with high single-digit growth. This improvement in capital equipment purchasing reflects the combination of the return of some of the planned capital spending that was delayed from the first half of the year, a normal pharma year end budget flush, and early contributions from our LC replacement initiatives. Following last June's release of the Arc HPLC System in the core HPLC market with a particular focus on the small molecule development and QA-QC space, we look forward to the continued expansion of our liquid chromatography portfolio. On February 10, we will launch ACQUITY PREMIER, a next generation UPLC system that offers customers an extraordinary breakthrough in efficiency, sensitivity, and overall capability. This new system will benefit both large and small molecule discovery and development as well as biomedical research. This new system has even more profound benefits when paired with our ACQUITY PREMIER Columns, which I mentioned earlier and were launched in the 4th quarter. The combined solution will alleviate non-specific binding absorption losses and provide a significant leap forward with enhanced reproducibility, reduced passivation, and an increased confidence in analytical results. After a very strong 3rd quarter, mass spec sales were about flat in Q4. As you know, the mass spec business can be lumpy, which we saw with biomedical research. There was also a general softness in clinical diagnostics as budgets were diverted to COVID-19 testing. Notably, however, mass spec sales to pharma customers grew double-digits, driven by the strong double-digit growth of both BioAccord and the QDA. Finally, to TA, revenues declined low single digits, which was -- which was much improved from earlier in the year. We saw the core thermal business start to pick up driven by market improvement in Asia. In particular, life sciences including pharma and medical devices grew double-digits. Combined these, comprised approximately 10% to 15% of TA's total revenues. However, this was not enough to offset declines from TA's industrial customers. Looking now, at our geographies, all major regions grew. The Americas grew low single digits, Europe grew mid-single digits, and Asia grew double-digits. In the US, the growth was driven by pharma, which was partially offset by declines in material science, environmental, academic, and government. Though Latin America continued to decline, it improved meaningfully relative to earlier in the year. Europe also experienced strong pharma performance, partially offset by material science, food, and academic and government. In both US and Europe, pharma growth was broad-based including strength in big pharma, large molecule customers, genetics, and contract labs. China had an impressive quarter with strong double-digit growth driven by continuing acceleration in pharma as well as strong environmental growth. The pharma growth was driven by both small and large molecule customers including particularly strong growth at contract labs. India also continued to grow double-digits. In summary, overall in the 4th quarter, we saw further relative strength in the market and benefited from strong year end spending trends. Now for the year, our pharmaceutical market category achieved 1% growth with the US, Europe, and India all seeing positive growth. Industrial declined 3% for the full year and academic and government declined 16%. Notably, our pharma market category grew 10% in the second half compared to the first half decline of 8% owed in part to strength in small molecules, the industry recovered from lock-downs. Industrial also grew in the second half at 4% while academic and government declined 12% compared to the first half declines of 10% and 22% respectively. Geographically for the year, Asia sales were down 4% with China -- China sales down 8%. Sales in Americas were down 4%; for the US, down 2%. Europe sales were up 2%. Notably, all our major geographies grew in the second half of the year with the US up 4% and Europe up 6% following first half declines of 9% and 3% respectively. China market grew in the second half, up 11%, reversing much of its sharp 31% decline in the first half of the year. Now, I would like to share some of the progress we've made in our transformation program, as several of the initiatives we're putting interaction are starting to contribute to growth. First, I would talk about our instrument replacement initiative, then our progress in contract lab expansion followed by e-commerce and lastly, I'll give you a BioAccord update. First, as it relates to our instrument replacement initiative, which is the most advanced initiative under way, we delivered our first quarterly LC Instrument revenue growth in two years and our LC Instrument win-loss was the highest it has been in three years. Initial customer feedback has been very positive on the Arc HPLC as well. Second, as part of our contract lab expansion initiatives, we have made important progress in targeting this high growth customer group. We have contacted a number of customers globally, particularly in China and have strengthened our value proposition with expanded alternative revenue and service offerings, which have -- which have been well received by the segment. It is still early days, but we're pleased with the progress we're making. Third, our e-commerce initiative is still in the early stages, but waters.com traffic is up double digits, driven by search engine optimization and paid search. While there isn't a one-to-one relationship between traffic and revenue, increased traffic is an important first step in driving revenue growth through the e-commerce channel. In tandem with our e-commerce actions, we've also enhanced our e-procurement platform on which we have expanded our coverage of customers leveraging this channel. This supported strong e-procurement growth indicating that it's now easier to work with Waters. Fourth, driving launch excellence. BioAccord sales exceeded expectations in the quarter as our market development efforts and our specialty sales model have started to take effect, particularly in the US and Europe. Many customers are increasingly adopting BioAccord for manufacturing and several have placed follow-on orders. Once we get BioAccord applications on an enterprise software platform, we believe we will be, we will be seeing more follow-on orders. More importantly, customer activity continues to be encouraging, which makes us optimistic about 2021. Lastly, I'd like to highlight our efforts to help mitigate the public health crisis. In addition to the significant efforts by our innovation response team, we are encouraged to see Waters consumable specked in on QA-QC methods for COVID vaccines and therapeutics. We're also seeing an uptick in COVID driven demand for our instruments and consumables. This peaked in the 4th quarter were COVID revenues contributed an estimated 1 to 2 percentage points to the growth, driven by those pharmaceutical customers developing COVID vaccines and therapeutics who saw meaningfully higher growth than manufacturers that don't have COVID-related programs. In summary, as a wrap up to 2020, we've done a great job at keeping our employees safe and our operations running. Our teams have focused not only on getting products out the door, but we have also assisted our customers engaged in COVID-related efforts. Meanwhile, our base business is showing signs of recovery, and our transformation is well under way. Turning to 2021, while the business environment remains uncertain, we look forward to building on the 4th quarter momentum. Mike will provide further details on our outlook for 2021, which is based on three key factors. One, we're assuming a gradual improvement in customer activity led by the pharma market. Two, we expect all major geographies to perform better than they did in 2020, led by growth in China. Lastly, our near-term growth initiatives are expected to continue to ramp up, led by our LC replacement initiative, which we expect to increasingly contribute to performance. In the 4th quarter, we recorded net sales of $787 million, an increase of approximately 7% in constant currency. Currency translation increased sales growth by approximately 3% resulting in sales growth of 10% as reported. For the full year, sales declined about 2% in constant currency and as reported. Looking at product line growth, our reoccurring revenue, which represents the combination of precision chemistry products and service revenue increased by 11% in the quarter while instrument sales increased 4%. For the full year, reoccurring revenue grew 3% while instrument sales declined 9%. Chemistry revenue were up 14% in the quarter, driven by strong pharma growth. On the service side of our business, revenues were up 10%, as customers continue to reopen labs, catch up on performance maintenance in professional services, and repair visits. As we noted last quarter, recurring sales were impacted by two additional calendar days in the quarter, which resulted in a slight increase in service revenue sales. Looking ahead, there are five additional calendar days in the first quarter and six fewer calendar days in the 4th quarter of 2021 compared to 2020. Breaking 4th quarter product sales down further, sales related to Waters' branded products and services grew 8% while sales of TA-branded products and services declined 1%. Combined LC and LCMs instrument sales were up 5% while TA system sales declined 4%. Now, I'd like to comment on our 4th quarter and full year non-GAAP financial performance versus the prior year. Gross margin for the quarter was 59.2%, an increase compared to the 58.2% in the 4th quarter of 2019, primarily due to the higher sales volume in FX. On non -- on a full year basis, gross margin was 57.4% compared to 58% in the prior year on lower overall sales volumes in 2020. Moving down the 4th quarter P&L, operating expenses increased by approximately 6% on a constant currency basis and 8% on a reported basis. The increase was primarily attributed to variable expenses related to the strong sales performance. For the year, operating expenses were 1% lower before currency translation and flat after. In the quarter and for the full year, our effective operating tax rate was 14.9% and 14.8% respectively, an increase from last year at the comparable period included some favorable discrete items. Net interest expense was $7 million for the quarter, a decrease of about 3 million, as anticipated on lower outstanding debt balances. Our average share count came in at 62.5 million shares, a reduction of approximately 3% or about 2 million shares lower than in the 4th quarter of last year. This is a result of shares repurchased through the end of the first quarter of 2020 subsequent to which we paused our share repurchase program. Our non-GAAP earnings per fully diluted share for the 4th quarter increased 40% to $3.65 in comparison to the $3.20 last year. On a GAAP basis, our earnings per fully diluted share increased to $3.49 compared to $3.12 last year. For the full year, our non-GAAP earnings per fully diluted share were up 1% at $9.05 per share versus $8.99 last year. On a GAAP basis, full year earnings per share were $8.36 versus $8.69 in 2019. Turning to free cash flow, capital deployment in our balance sheet, I would like to summarize our 4th quarter results and activities. We define free cash flow as cash from operations less capital expenditures and excluding special items. In the 4th quarter of 2020, free cash flow grew 52% year-over-year to $240 million after funding $47 million of capital expenditures. Excluded from free cash flow was $19 million related to the investment in our Taunton precision chemistry operation. In the 4th quarter, this resulted in $0.30 of each dollar of sales converted into free cash flow. For the full year in 2020, free cash flow generation was $726 million after funding $172 million of capital expenditures. This represents a 26% increase and $0.31 per dollar of sales converted into free cash flow. Excluded from free cash flow was $70 million related to our investment in our Taunton chemistry operations and a $38 million transition tax payment related to the 2017 US tax reform. Our increased free cash flow is primarily a result of our cost actions -- cost saving actions and improvements in our cash conversion cycle. In the 4th quarter, accounts receivables days sales outstanding came in at 70 days, down seven days compared to the 4th quarter of last year. Inventories decreased by 16 million in comparison to the prior quarter -- prior year quarter, reflecting stronger revenue growth in revised production schedules. Waters maintains a strong balance sheet, access to liquidity, and a well structured debt maturity profile. We ended the quarter with cash and short-term investments of $443 million and debt of 1.4 billion on our balance sheet at the end of the quarter. This resulted in a net debt position of $913 million and a net debt to EBITDA ratio of about 1.1 times at the end of the 4th quarter. Our capital deployment priorities remain consistent and better growth, balance sheet strength and flexibility, and return of capital to shareholders. We remain committed to deploying capital against these priorities. As such, our Board of Directors has approved a two-year extension of our January 2019 share repurchase authorization that was set to expire last month. As of today, we have 1.5 billion remains available credit program for share repurchases. As we look forward to the year ahead, I'd like to provide some broader context on our thoughts for 2021. The business environment remains uncertain, and we are assuming a gradual improvement in customer activity led by the pharma market. We expect all major geographies to perform better than they did in 2020 led by growth in China. Our outlook does not anticipate a return to lock down seen in 2020. We had a 1% tailwind from COVID-related revenue in 2000, three-quarters of which was in the second half of the year. We expect a similar revenue impact in 2021, including a 1% to 2% growth tailwind in Q1. We anticipate the first-half growth tailwind will moderate through the remainder of the year. Improved execution on our near-term growth initiatives contributed to our 4th quarter growth, but the quarter also benefited from capital spending that were delayed from the first half into the second half of the year, which we don't expect to continue in 2021. The second half of 2021, we'll have to content with a challenging comp resulting from the revenue shift that took place in 2020. These dynamics support full-year 2021 guidance for constant currency sales growth of 5% to 8%. At current rates, the positive currency translation to 2021 sales growth is expected to be 1 to 2 percentage points. Gross margin for the full year is expected to be in the range of 57, 5% to 58.9%. Every year, we look to balance growth, investment, and profitability. Accordingly, we expect 2021 operating margins of 28% to 29% based on a combination of growth investments, normalization of COVID-related cost actions, and disciplined expense controls. Moving now below the operating income line, other key assumptions for full-year guidance are net interest expense of 35 million to 38 million, a full year tax rate of between 15% and 16%, which includes our new five-year tax agreement with Singapore that will expire in March 2026, a restart of our share repurchase program in 2021 that will result in an average diluted 2021 share count of 61 to 61.5 million shares outstanding. Over the course of the year, we will evaluate share repurchase program and provide quarterly updates as appropriate. Rolling all of this together and on a non-GAAP basis, full year 2021 earnings per fully diluted share are projected in the range of $9.32 to $9.57, which assumes a positive currency impact on full year earnings-per-share growth of approximately 3 percentage points. Looking at the first quarter of 2021, we expect constant currency sales growth to be 7% to 10%. At today's rate, currency translation is expected to increase first quarter sales growth by approximately 3 percentage points. First quarter non-GAAP earnings per fully diluted share are estimated to be in the range of $1.50 to $1.60. At current rates, the positive currency impact on first quarter earnings-per-share growth is expected to be approximately 15 percentage points. In summary, we're pleased with our resilience in the second half of 2020 and the strong finish to the year, which is a true testament to the determination of this team. Though the environment remains variable, pharma markets have shown resilience and our transformation program is already demonstrating results and contributing to growth. Despite the challenging environment, the progress we've made as an organization over the last five months is nothing short of extraordinary. I remain ever more confident in the team, our portfolio, and our market position. There remains a lot of work to do, but we have a tremendous opportunity in front of us to turn the business around.	compname reports q4 non-gaap earnings per share of $3.65. q4 non-gaap earnings per share $3.65. q4 gaap earnings per share $3.49. q4 sales $787 million versus refinitiv ibes estimate of $713.7 million. sees q1 non-gaap earnings per share $1.50 to $1.60. sees fy 2021 non-gaap earnings per share $9.32 to $9.57. expects q1 2021 constant-currency sales growth in range of 7% to 10%. currency translation is expected to increase full-year sales growth by one to two percentage points. expects full-year 2021 constant-currency sales growth in range of 5% to 8%. currency translation is expected to increase q1 sales growth by approximately three percentage points.
This conference is being recorded. I'll now introduce Webster's Chairman and CEO, John Ciulla. CFO, Glenn MacInnes, and I, will review business, financial and credit performance for the quarter after which, HSA Bank President, Chad Wilkins; and Jason Soto, our Chief Credit Officer, will join us for Q&A. We remain focused on managing capital, credit and liquidity as we continue to deliver for our customers, communities and shareholders. We're positioning ourselves for growth and outperformance. Our differentiated businesses and our engaged bankers, who I'm so proud of, help us win in the marketplace every day. In a challenging environment, we generated meaningful business activity in the third quarter. Our bankers are working with our customers and prospects and we are generating new relationships, loans and deposits. Loan originations were higher than a year ago and our pipelines are solid. HSA Bank is winning more direct-to-employer relationships than a year ago. Our operational execution remains strong and we continue to manage credit and enterprise risk effectively. Turning to Slide 2. Pre-provision net revenue of $110.4 million increased 2% from Q2 as revenue grew in excess of expenses. Earnings per share in the quarter were $0.75 compared to $0.57 in Q2 and $1 in the prior year's third quarter. Our $23 million provision resulted in a reserve build of $11 million. Glenn will walk you through the assumptions underlying the CECL process and resulting provision for the quarter. Our third quarter return on common equity was 9% and the return on tangible common equity was 11%. As I mentioned last quarter, we remain confident in our ability to again sustainably generate economic profit even in this more economically challenging and lower interest rate environment. I'll provide further perspective in a few minutes. Loans grew 12% from a year ago on Slide 3 or 5% when excluding $1.4 billion in PPP loans. Commercial loans grew more than 10% from a year ago or by almost $1.2 billion, led by growth of more than $900 million in high-quality commercial real estate loans. The decline in floating and periodic rate loans to total loans compared to a year ago reflects the $1.3 billion of fixed rate PPP loans added in the second quarter. Deposits grew 16% year-over-year driven across all business lines. Core deposits exceeded $4.3 billion and represent 90% of total deposits compared to 86% a year ago, while CDs declined $685 million from a year ago. Slide 4 through 6 set forth key performance statistics for our three lines of business. Commercial Banking is on Slide 4. Loan balances increased to almost 10% from a year ago, excluding PPP loans. Both investor CRE and C&I businesses in middle market banking and sponsor and specialty saw a double-digit loan growth year-over-year. Deposits, up 32% from a year ago, are nearly $6 billion at September 30th as our commercial clients maintain liquidity on their balance sheets. Commercial deposits were up 11% linked quarter on seasonal strength in our treasury and payments solutions business, which includes government banking. HSA Bank is on Slide 5. Core deposit growth was 15% year-over-year or 12.6%, excluding the impact of the State Farm transaction, which closed in the third quarter and added 22,000 accounts and $132 million in deposit balances. We continued to see strong increases in new direct-to-employer business opportunities throughout the quarter, winning more new HSA RFPs than we did last year, specifically in the large employer space. COVID-19 has impacted the HSA business with new account openings 28% lower from prior year when adjusting for the State Farm acquisition. This is consistent with the industry and is due to slower hiring trends across our employer customers. HSA consumer spending increased in the quarter, a trend we expect to continue as elective medical services continue to open up across the country. This spending rebound had a favorable impact on interchange revenue when compared to Q2. TPA accounts and balances declined 41,000 and 64,000,000, respectively linked quarter, continuing the outmigration of accounts that we disclosed a year ago. In the quarter, we recognized approximately $3 million of account closure fees related to the outmigration. Performance fundamentals of HSA Bank and the broader HSA market remains strong with ample opportunity for continued growth. And while it's too early to forecast the upcoming January 1 enrollment season, we're pleased with the large direct-to-employer wins we recorded in this challenging 2020 selling season. I'm now on Slide 6. Community banking loans grew almost 10% year-over-year and declined slightly excluding PPP. Business banking loans grew 5% from a year ago when excluding PPP. Personal banking loans decreased 3% from a year ago as an increase in residential mortgages was offset by declines in home equity and other consumer loans. Community banking deposits grew 12% year-over-year with consumer and business deposits growing 6% and 32% respectively. The total cost of community banking deposits was 24 basis points in the quarter, that's down 48 basis points from a year ago. Net interest and non-interest income both improved 3% from prior year driven by increased loan and deposit balances and by mortgage banking and swap fees, respectively. Self-service transactions declined slightly linked quarter as we expanded and opened banking centers with enhanced safety protocols but grew year-over-year, reflecting the continued shift in consumer preference to digital channels. The next two slides address credit metrics and trends. Our September 30th reported credit metrics remained favorable and actually improved modestly, which Glenn will review in more detail. While pleased with the reported metrics, we, nonetheless, remain appropriately cautious on credit as we continue to operate through the considerable uncertainties presented by the pandemic. On Slide 7, we've updated our disclosure on the commercial loan sector as most directly impacted by COVID including payment deferral information. The key points on this slide are that overall loan outstandings to these sectors have declined 5% from June 30th and the payment deferrals have declined $282 million or 57%. On Slide 8, we provide more detail across our entire $20 billion commercial and consumer loan portfolio. The key takeaway here is that payment deferrals declined by 65% to $482 million at September 30th and now represent 2% of total loans compared to 7% at June 30th. Consistent with industry trends, we have had meaningful declines in payment deferrals in every loan category from June 30th to September 30th. Of the $482 million of payment deferrals at September 30th, $251 million or 52% are first time deferrals. CARES Act and Interagency Statement payment deferrals, which are included in the $482 million of total payment deferrals at September 30th, decreased to 62% from June 30th and now total just $283 million. While pandemic-related challenges remain, we are pleased to have been able to provide considerable support to our customers and communities under our mission to help individuals, families and businesses achieve their financial goal. As I stated last quarter, we are actively monitoring risk, we are making real-time credit rating decisions and addressing potential credit issues proactively. We continue to feel good about the quality of our risk selection, our underwriting, our portfolio management capabilities and the strength of our capital and credit allowance positions. I'll begin with our average balance sheet on Slide 9. Average securities grew $184 million or 2.1% linked quarter and represented 27% of total assets at September 30th, largely in line with levels over the past year. Average loans grew $262 million or 1.2% linked quarter. PPP loans average $1.3 billion in Q3 and grew $403 million from Q2, reflecting the full quarter impact of loans funded last quarter. We had no forgiveness activity on PPP loans during the quarter and therefore no acceleration of deferred fees. During the quarter, we had $5.5 million of PPP fee accretion and the remaining deferred fees totaled $35 million. Apart from PPP loans, commercial real estate loans increased $124 million or 2%, while asset-based and other commercial loans decreased $108 million and $38 million, respectively. The $119 million decline in consumer loans include $62 million in home equity and $32 million of residential mortgages. Deposits increased $1 billion linked quarter, well in excess of the combined growth of $446 million in loans and securities. We saw increases across all deposit categories except CDs, which declined $280 million or nearly 10%. The cost of CDs declined 36 basis points and was a significant driver of our reduction in deposit cost. Public funds increased $599 million in a seasonally strong third quarter, while the cost of these deposits declined from 35 basis points to 18 basis points. Borrowings declined $744 million from Q2 and now represent 7% of total assets compared to 8.5% at June 30th and 10.5% in prior year. Regulatory risk-weighted capital ratios increased due to growth in equity. The tangible common equity ratio increased to 7.75% and would be 34 basis points higher, excluding the $1.4 billion in 0% risk-weighted PPP loans. Tangible book value per share at quarter end was $27.86, an increase of 1.7% from June 30th and 4.8% from prior year. Slide 10 summarizes our income statement and drivers of quarterly earnings. Net interest income declined $5.1 million from prior quarter. Lower rates resulted in a quarter-over-quarter decline of $16.7 million in interest income from earning asset. This was partially offset by $7.9 million due to lower deposit and borrowing costs and $3.7 million as a result of loan and security balanced growth. As a result, our net interest margin was 11 basis points lower linked quarter. Core loan yields and balances contributed 14 basis points to the decline with PPP loans contributing another 2 basis points to the NIM decline. Lower reinvestment rates on our securities portfolio resulted in 3 basis points of NIM compression, while higher premium amortization resulted in an additional 4 basis points of NIM compression. This was partially offset by a 10 basis point reduction in deposit cost, reflective of reduced rates across all categories, which benefited NIM by 10 basis points and fewer borrowings contributed another 2 basis points of NIM benefit. As compared to prior year, net interest income declined $21 million, $65 million of the decline was the net result of lower market rates, which were partially offset by $44 million in earning asset growth. Non-interest income increased $15 million linked quarter and $5.2 million from prior year. HSA fee income increased $4.1 million linked quarter. Interchange revenue increased $1 million, driven by a 12% linked quarter increase in debit transaction volume. We also recognized $3.2 million of exit fees on TPA accounts during the quarter. The mortgage banking revenue increase of $2.9 million linked quarter was split between increased origination activity and higher spread. Deposit service fees increased $1.5 million quarter-over-quarter driven by overdraft and interchange fees. Consumer and business debit transactions increased 16% linked quarter. Other income increased $5.7 million, primarily due to a discrete fair value adjustment on our customer hedging book recorded last quarter. The increase in non-interest income from prior year reflects higher mortgage banking revenue and HSA fee income, partially offset by lower deposit service and loan-related fees. Reported non-interest expense of $184 million included $4.8 million of professional fees driven by our strategic initiatives, which John will review in more detail. We also saw a linked quarter increase of $4.3 million from higher medical costs due to an increase in utilization. Non-interest expense increased $4.1 million or 2.3% from prior year. The efficiency ratio remained at 60%. Pre-provision net revenue was $110 million in Q3, this compares to $108 million in Q2 and $131 million in prior year. The provision for credit loss for the quarter was $22.8 million, which I will discuss in more detail on the next slide. And our effective tax rate was 20.9% compared to 21.8% in Q2. Turning to Slide 11, I'll review the results of our third quarter allowance for loan losses under CECL. As highlighted, the allowance for credit losses to loans increased to 1.69% or 1.8%, excluding PPP loans. We have summarized the key aspects of our macroeconomic scenario, which reflect the gradual improvement in employment with real GDP returning to pre-COVID levels in 2022. The forecast improved slightly from prior quarter, but was offset by commercial risk rating migration resulting in a provision of $23 million. The $370 million allowance reflects our estimate of life of loan losses as of September 30th. We will continue to assess the effects of credit quality, loan modifications and the macroeconomic conditions as we move through the pandemic. Slide 12 highlights our key asset quality metrics as of September 30th. Nonperforming loans in the upper left, decreased $10 million from Q2. Commercial real estate, residential mortgage and consumer each saw linked quarter decline, while commercial increased $3 million. Net charge-offs in the upper right decreased from second quarter and totaled $11.5 million after $4.3 million in recoveries. C&I gross charge-offs declined slightly and totaled $12 million, primarily reflecting credits that were already experiencing difficulty prior to the onset of the pandemic. Commercial classified in the lower left represented 332 basis points of total commercial loans, this compares to a 20-quarter average of 315 basis points and the allowance for credit losses increased to $370 million as discussed on the prior slide. Slide 13 highlights our liquidity metrics. Our diverse deposit gathering sources continue to provide us with considerable flexibility. Deposit growth of $565 million exceeded total asset growth and lowered the loan-to-deposit ratio to 81%. Our sources of secured borrowing capacity increased further and totaled $11.7 billion at September 30th. Slide 14 highlights our strong capital metrics. Regulatory capital ratios exceeded well capitalized levels by substantial amounts. Our common equity Tier 1 ratio of 11.23% exceeds well capitalized by more than $1 billion. Likewise, Tier 1 risk-based capital exceeds well capitalized levels by $870 million. Looking to the fourth quarter, we expect stable loan balances with modest PPP forgiveness. Assuming a flat rate environment with an average one-month LIBOR in the range of 15 basis points and an average 10-year treasury swap rate around 70 basis points, we believe we are near the bottom of core NIM compression. Non-interest income will likely be lower linked quarter due to reduction in mortgage banking income and lower HSA fees on TPA account. Core non-interest expense will remain in the range of Q3 and our tax rate will be around 21%. With that, I'll turn things back over to John for a review of our strategic initiatives. I'm now on Slide 15 and 16. As I've mentioned on recent earnings calls, we have been and remain focused on revenue enhancements and operational efficiencies across the organization. Well before the onset of the pandemic, our management team recognized that we would be operating in a low interest rate and more challenging business environment for an extended period of time. In January, we began an enterprisewide assessment of our organization to identify revenue opportunities and cost savings using a very thorough and systematic process. The onset of the pandemic in March further impacted the operating environment and accelerated changes in customer preferences and shifting workplace dynamics. This not only made our commitment to this process that much stronger, but it also expanded the opportunities we have to rationalize and align our expenses with our business line execution. We've identified and begun to implement dozens of initiatives across the bank, a handful of which are set forth on Slide 16, that will result in driving incremental revenue, reducing our overall cost structure and enhancing our digital capabilities to meet our customers' needs and to reduce our cost of delivery of products and services. Our focus remains, first, on key revenue and asset growth drivers, including accelerating growth in commercial bank by building on our proven track record in select specialized industries, driving HSA Bank growth through improved sales productivity and customer retention and continuing to grow in community core markets through product enhancements. We are also focused on efficiency and organizational alignment, simplifying our org structure, capturing targeted back office synergies and redesigning and automating critical processes. We also are rationalizing and consolidating our retail and corporate real estate footprint. Through this process, we will continue to improve the customer experience by enhancing digital capabilities, modernizing foundational systems and improving analytical capabilities. We've begun executing on many of these initiatives and we recently made a series of organizational changes to position us for success over the next year and well beyond. We plan to provide more detailed information on these initiatives, including additional financial details and timing on realization on our fourth quarter earnings call in January, as we are continuing to work through all of the final decision. What I will say is that with respect to efficiency opportunities, we anticipate reducing our current expense base by 8% to 10% fully realized on a run rate basis by the fourth quarter of next year. We see considerable opportunity above and beyond that as revenue initiatives and further efficiency gains are realized late in 2021 and in 2022. As we stated last quarter, we remain confident that even if the current operating environment persists with low interest rates and economic uncertainty that execution on our identified revenue enhancements and efficiency opportunities will allow us to sustainably generate returns in excess of our estimated 10% cost of capital by the end of 2021. Our vision remains consistent and is to strengthen our position as a major regional bank in the Northeast that leads with a distinctive and expanding commercial business and aggressively growing and winning national HSA Bank business, a strong community bank franchise in our core markets, all supported by an efficient and scalable operating model. With that, Maria, Glenn, Chad, Jason and I are prepared to take questions.	compname reports q3 earnings per share $0.75. compname reports third quarter 2020 earnings of $0.75 per diluted share. q3 earnings per share $0.75. provision for credit losses was $22.8 million in the quarter.
This conference is being recorded. I'll now introduce Webster's Chairman and CEO, John Ciulla. CFO, Glenn Maclnnes, and I will review business, financial and credit performance for the quarter, after which HSA Bank President, Chad Wilkins; and Jason Soto, our Chief Credit Officer, will join us for Q&A. As we look back on 2020, a challenging year for all of us in so many different ways, my first thought is how proud I am of Webster bankers as they found a way to deliver for each other, our customers, our communities and for our shareholders. While increasing COVID cases continue to present real challenges, we are optimistic that 2021 will bring a level of normalization. As the distribution of vaccines dramatically changes the path of the pandemic, the broader economy, including COVID impacted sectors continue to recover and the peaceful transition of power that occurred yesterday hopefully represents the beginning of a less divisive political environment. We remain focused on prudently managing capital, credit and liquidity as we also position ourselves for growth and outperformance as the macro environment improves in 2021 and beyond. Turning to Slide 2. I'm really pleased with our strong business performance in the quarter. We originated $1.9 billion in loans, generated strong loan-related fees, continue to grow deposits and HSA total footings approached $10 billion. Credit trends are favorable and the net interest margin has stabilized. Our adjusted earnings per share in Q4 were $0.99, up from $0.96 a year ago. Our fourth quarter performance includes $42 million of pre-tax charges related to the strategic initiatives we announced last quarter. Glenn will provide additional perspective on these charges in his remarks. An improved economic outlook with continued uncertainty, along with a flat quarter-over-quarter loan portfolio, supported a $1 million CECL allowance release in the quarter. Our fourth quarter adjusted return on common equity was 11.5% and the adjusted return on tangible common equity in the quarter was 14.2%. On Slide 3, loans grew 8% from a year ago or 2% when excluding $1.3 billion in PPP loans. Commercial loans grew 6% from a year ago or more than $800 million. Deposits grew 17% year-over-year, driven across all business lines. Loan yield increased 4 basis points linked quarter, while deposit costs continue to decline. Slides 4 through 6 set forth key performance statistics for our three lines of business. I'm on Slide 4. This is a very strong quarter for Commercial Banking with more than $1.2 billion of loan originations, up solidly from Q3 and down only slightly from a strong 4Q 2019. Loan fundings of $825 million were also up solidly from Q3. We continue to benefit from our industry expertise and deep relationships in select sectors, including technology that have not been adversely impacted during the pandemic. Commercial bank deposits are at record levels, up more than 35% from the prior year's fourth quarter. The Commercial Banking loan portfolio yield increased 9 basis points in the quarter, driven by better spreads and enhanced by a higher level of acceleration of deferred fees as we saw payoff activity return to more normalized levels. Non-interest income in Commercial Banking was up linked-quarter due to higher syndication and other fees tied to the strong origination activity. Now turning to HSA Bank on Slide 5. HSA Bank total footings increased 17% from a year ago and now total nearly $10 billion. Core deposits were up 15% and 13%, excluding the State Farm acquisition, which closed in 2020. The year-over-year increase in balances was driven by continued contributions as well as reduced account holders spending due to COVID-19 restrictions. The TPA accounts declined from a year ago, reflecting the expected departures that occurred in Q3. We added 668,000 accounts in 2020, 10% fewer than we added in 2019, consistent with industry trends and due primarily to lower enrollments with existing employers as COVID-19 impacted the overall employment environment. We expect this trend to continue into the first half of the New Year. HSA deposit costs continue to decline as we remain disciplined in this low interest rate environment and totaled 9% in the quarter -- 9 basis points, excuse me, in the quarter. I'm now on Slide 6. Community Banking loans grew 5% year-over-year and declined 5% excluding PPP. As indicated on the slide, PPP loans decreased $63 million as we saw repayment and forgiveness activity begin in the quarter. Community Banking deposits grew 14% year-over-year with consumer and business deposits growing 9% and 31% respectively. Deposit costs continue to decline and totaled 16 basis points in the quarter. Net interest income grew $8.3 million from a year ago, driven by overall loan and deposit growth. The next two slides address credit metrics and trends which continue to be surprisingly stable given all the challenges in the macro environment. On Slide 7, we show our commercial loan sectors most directly impacted by COVID, overall loan outstandings to these sectors have declined 10% from September 30th and payment deferrals have declined $64 million or 31%. On Slide 8, we provide more detail across our $20 billion commercial and consumer loan portfolio. The key takeaway here is the payment deferrals declined by 35% to $315 million at December 31st and now represent 1.6% of total loans compared to 2.4% of total loans at September 30th. At year-end, $100 million or 32% of the $315 million in payment deferrals are first time deferrals. And CARES Act and Interagency Statement defined payment deferrals, which are included in the $315 million of total payment deferrals at December 31st, decreased 29% from September 30th and now stand at $201 million. While challenges related to the pandemic and the overall economy remain, I am pleased with the considerable support we have been able to provide to our customers as they work through these challenging times. We continue to actively monitor risk, make real-time credit rating decisions and address potential credit issues proactively. We remain confident about the quality of our risk selection and the underwriting processes, our portfolio management capabilities and our capital position. I will focus on the key aspects of performance in the quarter, including stable adjusted net interest margin, an increase in non-interest income, ongoing expense control and a favorable credit profile. I'll begin with our average balance sheet on Slide 9. Average securities grew $160 million or 1.8% linked-quarter. Securities represented 27% of total assets at December 31st. Average loans declined $142 million or 0.6% linked-quarter, primarily driven by a $176 million decline in consumer loans, reflecting higher pay down rates in mortgage and home equity portfolios. Prepayment and forgiveness on PPP loans during the quarter totaled $98 million. In Q4, we recognized $7.3 million of PPP deferred fee accretion and the remaining deferred fee balance totaled $27 million at December 31st. Deposits increased $276 million linked-quarter, primarily driven by growth in Community Banking and HSA. This was partially offset by a reduction in CDs. The strong growth in deposits allowed us to pay down borrowings, which were lower by $289 million from Q3. At $1.9 billion, borrowings represent 5.2% of total assets compared to 7% at September 30th and 11.6% in prior year. The tangible common equity ratio increased to 7.9% and will be 32 basis points higher, excluding the $1.3 billion and zero percent risk-weighted PDP loans. Tangible book value per share at quarter end was $28.04, an increase of about 1% from September 30th and 3% from prior year. Slide 10 highlights adjustments to reported net income. Aggregate adjustments totaled $42 million pre-tax or $31.2 million after tax, representing $0.35 per share. Of the $42 million in adjustments, $38 million is related to our strategic initiatives, which John will discuss further. The remaining $4.1 million is associated with the debt prepayment. The prepayment expense adversely impacted current quarter net interest income and impacted net interest margin by 5 basis points. However, we will benefit by approximately $1.3 million in net interest income per quarter and NIM will benefit by 2 basis points. On Slide 11, we provide our reported and adjusted income statement. As highlighted on the previous page, the adjustments total $42 million pre-tax. On an adjusted basis, net interest income increased by $1.3 million from prior quarter. This was a result of a $4.5 million reduction in deposit and borrowing costs, along with $1 million in additional loan income, which was partially offset by a $4 million decline in securities income primarily as a result of elevated prepayments. Taken together, our adjusted net interest margin of 2.8% was flat to third quarter. As compared to prior year, net interest income declined by $11 million. $47 million of the decline was the net result of lower market rates and was partially offset by interest income of $29 million from earning asset growth and $8 million from a reduction in borrowings. Non-interest income increased $1.7 million linked-quarter and $5.9 million from prior year. Loan fees increased $2.5 million from prior quarter as a result of higher syndication, pre-payment and line usage fees. Other income increased $4.4 million reflecting higher direct investment income and swap fees. HSA fee income decreased $3.1 million linked-quarter as Q3 included $3.2 million of exit fees on TPA accounts. Mortgage banking revenues decreased $3 million linked quarter as a result of lower volume on loans originated for sale. The $5.9 million increase in non-interest income from prior year reflects additional loan fees, higher mortgage banking revenue and HSA fee income, partially offset by lower deposit service fees. Non-interest expense of $181 million reflects an increase of $2 million primarily due to technology and seasonal increases in temporary staffing to support the HSA annual enrollment. Non-interest expense decreased $1.5 million or 1% from prior year and our efficiency ratio was 60% in the quarter. Pre-provision net revenue was $116 million in Q4. This compares to $115 million in Q3 and $122 million in prior year. Our CECL provision in the quarter reflects the credit of $1 million, which I'll discuss in more detail on the next slide. And our adjusted tax rate was 22.1%. Turning to Slide 12, I will review the results of our fourth quarter allowance for loan losses under CECL. The allowance coverage ratio, excluding PPP loans, declined from 1.8% to 1.76%, with total reserves of $359 million. The reserve balance reflects our lifetime estimate of credit losses. A small decline from prior quarter is the net effect of an improvement in the macroeconomic forecast partially offset by additional qualitative reserves. The increase in qualitative reserves is driven by uncertainty around the resolution of a pandemic and the pace of the recovery. The total reserves provide a more adverse scenario than shown in the baseline assumptions at the bottom of the page. Slide 13 highlights our key asset quality metrics as of December 31st. Non-performing loans in the upper left increased $3 million from Q3. Commercial, residential mortgage and consumer each saw linked quarter declined, while commercial real estate increased. Net charge-offs in the upper right decreased from the third quarter and totaled $9.4 million after $1.9 million in recoveries. The net charge-off rate was 17 basis points in the quarter. Commercial classified loans in the lower left increased $30 million from Q3 and represented 352 basis points of total commercial loans. Slide 14 highlights our liquidity metrics. Our diverse deposit gathering sources continue to provide us with considerable flexibility. Deposit growth of $414 million exceeded total asset growth and lowered the loan-to-deposit ratio to 79%. Our sources of secured borrowing capacity increased further and totaled $12 billion at December 31st. Slide 15 highlights our strong capital metrics. Regulatory capital ratios exceed well-capitalized levels by substantial amounts. Our common equity Tier 1 ratio of 11.35% exceeds well capitalized by $1.1 billion. Likewise, Tier 1 risk-based capital of 11.99% exceeds well-capitalized levels by $895 million. Our guidance will continue to be impacted by the pace and duration of the pandemic over the next few quarters. That being said, we anticipate modest loan growth, excluding the timing of PPP forgiveness and Round 2 originations. NIM will also be influenced by the rate environment and PPP forgiveness. Assuming today's rates, we would expect net interest income to be around Q4's level. Non-interest income will be modestly lower linked quarter, driven by lower loan-related and mortgage banking fees. The provision for credit losses will continue to be impacted by credit trends, the macroeconomic environment, government stimulus and the duration of the pandemic. Core operating expenses will be lower as we begin to recognize the benefits of our strategic initiatives. With that, I'll turn things back over to John for a review of our strategic initiatives. I'm on Slide 16. As we discussed on the October earnings call, we've been working through a comprehensive, strategic and organizational review since before the onset of the pandemic. And while today we'll provide more detail on our progress in some shorter-term financial targets, I want to stress that the work we've done over the last year and the actions we are taking are transforming our company and the way we do business. We believe that we will continue delivering incremental value to our customers and shareholders for years to come, consistent with our overarching objectives of maximizing economic profits and creating long-term franchise value. Importantly, these actions afford us the capacity to invest in the future and provide better customer experiences through improved products, services and digital offerings, all in the furtherance of our mission to help individuals, families and businesses achieve their financial goals. We are investing in revenue growth drivers that leverage our differentiated businesses. These include accelerating growth in new and existing commercial banking segments, improving sales productivity, enhancing non-interest income through treasury and commercial card products and driving deeper relationships across all lines of business. While we anticipate short-term benefits from these initiatives, they will contribute meaningfully to our financial performance in 2022 and beyond. Additionally, we continue to invest in technology to provide better digital experiences for our customers and bankers to further improve customer acquisition and retention rates. As shown on Slide 17, we have made significant progress on our efficiency opportunities. We remain on track to deliver an 8% to 10% reduction in core non-interest expense. We expect this to be fully realized on a run rate basis by the end of the fourth quarter of 2021. Our efficiency initiatives fall into three areas of focus that we discussed last quarter: rationalizing retail and commercial estate, simplifying the structure of the organization and optimizing our ancillary spend. We've taken actions to simplify our organizational structure, including combining like functions, automating manual processes and selectively outsourcing commoditized activities. A portion of the project-related expense adjustments that Glenn discussed relate to these actions and the associated severance costs result from a targeted reduction in the overall workforce. We announced in December the consolidation of 27 banking centers and we have targeted actions aimed at reducing corporate office square footage over time. The real estate optimization plan reflects our response to changes in customer preferences and the shift in workplace dynamics that have only accelerated during the pandemic. The remaining quarterly cost benefits will be driven by a more disciplined approach to ancillary spend, redesigning and automating internal critical processes and leveraging back office synergies. Slide 18 provides an overview of the cost savings and an expense walk to our fourth quarter target run rate. Achieving these efficiencies will allow us to continue to invest in our franchise and improve the customer experience. The last slide for me is an important one. We've updated it from prior quarters. It aggregates our activities during 2020 related to helping our employees, our consumer and business customers and the communities we serve navigate an extraordinarily challenging time. This is what the Webster Way is all about. The commitment to our customers, our shareholders and to each other has enabled Webster to continue to differentiate itself. And before we go to Q&A, I'd like to take a moment to share with you all that today is Terry Mangan's last earnings call as he will be retiring on March 31st. Many of us and many of you have had the pleasure of working with Terry over his 18-year career at Webster. Terry's efforts have been recognized at the national level by institutional investor as a top investor relations professional. With that, Daryl, Glenn, Chad, Jason and I are prepared to take questions.	q4 adjusted earnings per share $0.99.
Actual results may differ materially. Today, we'll use certain non-GAAP financial measures. It's great to have you on the team. I'll start out with a summary of 2020 and some of our most notable accomplishments. Dave will take you through at that point an update on our rapid progress that we're making on integrating Anixter. And I'll take you through our fourth quarter and full year results and then give you an overview of our outlook for 2021. So starting up, 2020 was an extraordinary year for WESCO. We completed a transformational acquisition of Anixter, doubling our size of the Company and changing our trajectory for years to come. We're off to an excellent start, and I'm more bullish than ever on delivering against our substantial value creation potential. As most of you know, we announced our agreement to acquire Anixter International last January, and we were very pleased to close the transaction a little more than five months later. The first six months of the integration have gone exceptionally well. Our synergy capture has exceeded our expectations, both in terms of size of the opportunities as well as the rapid pace of our execution. You'll recall, last quarter we increased our three year post merger cost synergy target from $200 million to $250 million. In addition, the highly complementary nature of WESCO and Anixter, and our substantially larger scale has enabled us to build a cross-sell pipeline that's starting to show up in our top line results, and this is very encouraging. At the same time that we're working toward closing the transaction and beginning integration, we're managing through an incredibly challenging macro environment driven by the COVID-19 global pandemic. In response to this, we took quick and decisive actions centered really on three priorities, and we've talked about this in the past: first, protecting our employees; second, ensuring that our customer experience service and support was seamless and exceptional; and number three, taking the necessary actions to reduce our cost and efficiently manage our operations. The diversity of our end markets, our differentiated service offerings, our global footprint and the attractive secular trends we support help temper the effects of COVID-19 on our business last year. On the right-hand side of this page, you can see the attractive secular growth trends that are driving demand for electrical, communication, security and utility solutions, all of which will continue to drive demand in the years ahead. All three of our strategic business units have the scale and capabilities to deliver growth associated with the increasing use of automation, machine-to-machine connections, the electrification of our infrastructure and the demand for faster bandwidth and data center capacity. Emerging growth trends such as the relocation of supply chains back to North America and increased remote connectivity also drive additional growth opportunities. In combining WESCO and Anixter, we have created the industry leader in electrical, communications and utility distribution and supply chain services just as these secular trends are poised to drive strong growth in all the markets we serve. Now moving to page 5. During our second quarter earnings call in August, we highlighted our priorities for the second half of 2020. They were to take share, deliver synergies and focus on free cash flow generation and debt reduction. In the fourth quarter, we saw improving sales momentum coming out of the COVID-19 trough and are successfully utilizing our increased scaling capabilities to take share. Sales were up 4% sequentially in Q4 on a workday adjusted basis when typically our sales declined sequentially in the fourth quarter. We closed the year with a record year-end backlog, which sets us up well to continue building on this positive momentum in 2021. Even more importantly, January sales reflected return to year-over-year sales growth, with sales up low single digits on a comparable workday basis. We've made great progress across the board on our synergy capture efforts. Our team is laser-focused on driving synergies. As we have combined into one organization, we've made great progress in recognizing the savings from duplicative corporate overhead and functional integration. Adjusted gross margin was up versus -- pro forma prior year for the second consecutive quarter. Our management team is now in place, and we've been able to streamline roles across functions for greater efficiency. We're on track to meet the higher synergy targets that we announced last quarter, and have very high confidence in delivering upside to these targets. Free cash flow was another major highlight for us in 2020. We generated $586 million of free cash flow last year, close to the $600 million target that we set for three years out, and more than 250% of our adjusted net income. This enabled us to reduce net debt by almost $400 million and leverage by 0.4 times in just the first six months since the Anixter closed. And last month, we completed a debt refinancing of our 2021 notes that reduces our interest expense by $20 million per year, which will further enhance cash flow and support achieving our 2023 debt reduction and debt repayment target. Overall, we are very pleased with the results we're delivering on all fronts. We're entering 2021 from a position of strength, with an unwavering commitment to our strategies and growth plan and an extraordinary team of associates and outside partners. Coupled with our strong execution and accelerating progress on the integration, we have very high confidence in our ability to deliver sustainable, long-term value creation. 2021 will be another positive and important stepping stone in our transformational journey. Before getting into the results for the fourth quarter, I'd like to address where we are with cost synergies from the integration with Anixter. When we announced the merger with Anixter back in January of 2020, we anticipated a mid-2020 close and provided investors with our view on synergies for the first three years post close. On slide 7, you'll see that we've converted our synergy timeline to align with our fiscal year-end. This chart on the left side of the slide shows the cumulative realized cost synergies that we expect to generate by fiscal year. Realized synergies are those that are reflected in our income statement. In the first six months post close, we have realized $39 million of cost synergies, $15 million in Q3 and $24 million in Q4. In 2021, we expect to realize an additional $90 million of synergies, bringing our total to $130 million by the end of the year. Consistent with the expectation we provided on our last earnings call, we still anticipate realizing $100 million of cost synergies in the first 12 months of the merger through June of 2021, with a cumulative cost synergies of $130 million by December. In addition to the cumulative cost synergies, we have shown the cumulative one-time operating expenses to achieve the synergies below the bar chart. As you can see, we have spent $37 million in one-time operating costs in the first six months, and expect to spend an incremental $78 million on one-time operating expenses to generate the incremental $90 million of synergies in 2021. By June of 2023, we expect to generate $250 million of realized cost synergies on a trailing 12 month basis. In total, this $250 million target is comprised of initiatives that are approximately 20% related to cost of goods sold and approximately 80% related to reducing operating expenses. This is consistent with the sources of synergies we previously discussed, and we expect the synergies related to corporate overhead, G&A and field operations will drive the SG&A synergies, with the majority of the supply chain synergies impacting cost of goods sold. Turning to slide 8. In Q4, we delivered another quarter of strong free cash flow that represented more than 160% of net income. For the full year, free cash flow was $586 million or more than 250% of adjusted net income. This level of free cash flow generation highlights WESCO's ability to generate strong cash flow throughout the economic cycle, and especially during down cycles like the one related to COVID-19. This resilient model, coupled with our execution on the integration with Anixter gives us very high confidence that we will successfully reduce leverage below 3.5 times adjusted EBITDA over the next two and a half years, consistent with our commitment when we announced the merger. Our capital allocation priority remains unchanged. We will allocate capital to support the integration, invest in our business and rapidly delever the balance sheet. We made substantial progress on this goal in 2020 as we reduced net debt by $389 million and leverage by 0.4 times trailing 12-months adjusted EBITDA since closing the Anixter acquisition in June. Net debt was reduced by $109 million [Technical Issues] 2028 notes. Liquidity, which is comprised of invested cash and borrowing availability on our bank credit facilities, is exceptionally strong and totalled $1.1 billion at the end of the fourth quarter. In early January, we increased the size of two bank credit facilities by a combined $275 million. We utilized this higher capacity and existing availability to retire our $500 million 2021 notes. Turning to page 9. This summary table compares our fourth quarter adjusted income statement results to the pro forma for the prior year period and our adjusted results in the third quarter. Because Anixter and WESCO had different fiscal reporting periods, there was an extra week of Anixter sales in the fourth quarter of 2019, making comparisons to that period less meaningful. For that reason, most of my comments today will be on the sequential comparison against the third quarter. On a reported basis, sales were flat versus the third quarter. It is important to note that the fourth quarter had three fewer workdays compared to the third quarter. When adjusting the results to a comparable workday basis, sales were up more than 4%. The momentum has continued into January with workday adjusted sales up low single digits versus the prior year. Adjusted gross margin, which excludes the effect of merger related fair value adjustments to inventory and an out of period adjustment related to inventory absorption accounting was 19.6%, in line with the prior quarter and up 10 basis points versus the prior year. We are seeing continued traction from our margin improvement initiatives, including early results from deploying Anixter's proven gross margin improvement programs across the combined business. Note that the out of period adjustment relates to the cumulative effect of the adjustment to inventory since WESCO was spun out of Westinghouse. In no period was the adjustment material to our reported results. Adjusted income from operations was $172 million in the quarter, after adjusting to remove the effect of merger related costs of $40 million, merger related fair value adjustments on inventory of $16 million and the out of period adjustment of $23 million related to inventory absorption accounting. Adjusted income from operations was $28 million lower than the third quarter, which primarily reflects an increase in SG&A related to the discontinuance of temporary cost reduction measures we had taken in response to COVID-19. As we had highlighted in our Q3 earnings call and reiterated in the 8-K that we filed on December 15, we reinstated the full salaries of legacy WESCO employees, instituted 2020 merit adjustments and resumed the retirement savings plan employer matching contributions effective October 1, 2020. These measures, along with certain other actions, had generated more than $50 [Phonetic] million of savings during the second and third quarters of 2020 relative to WESCO's Q1 SG&A run rate before the merger. In total, adjusted income from operations was $13 million lower than prior year pro forma, on sales that were $223 million lower, representing a decremental margin of approximately 6%. Adjusted EBITDA, which excludes the effect of the adjustments I just mentioned, as well as stock based compensation and other net adjustments was $216 million or 5.2% of sales, lower than the third quarter due to the higher SG&A I just discussed and approximately in line with the prior year. Adjusted diluted earnings per share for the quarter was $1.22. First, electrical and electronic systems, or EES, which is approximately 40% of our Company's total business. Second, communications and security solutions or CSS, which is roughly one-third of the Company's revenue. And then third, utility and broadband solutions or UBS, which represents the remaining 27% of the overall sales across the enterprise. As we have said previously, one of the most meaningful and positive discoveries post close is how complimentary the WESCO and Anixter portfolios are. The pie charts on this page depict the legacy WESCO and legacy Anixter composition for each of the three businesses. It is this very highly complementary suite of products and solutions that enables us to offer even more end-to-end solutions for our customers and supports the cross-sell programs John mentioned. Additionally, we found that customer overlap between the legacy companies was more favorable than expected. Turning to slide 11. Reported sales in our EES segment were up 1% versus the third quarter on a reported basis and up 6% on a comparable workday basis. This growth reflects improving construction demand in North America in the second half of the year as well as the first sales from our cross-sell initiatives and our ability to offer a complete electrical package to our customers. We have continued to see some project delays, primarily driven by COVID-19, but still no cancellations. EES backlog was a fourth quarter record, consistent with the trend we have observed since last March as some projects are delayed, and we continue to be awarded new projects. We also continue to see increasing momentum in our industrial and OEM business. In the fourth quarter, MRO and project activity levels improved in all of the verticals we serve. Adjusted EBITDA of $94 million represented 5.6% of sales, about $14 million lower than the third quarter. The decrease primarily reflects higher SG&A due to the reinstatement of the temporary COVID-19 cost reductions discussed earlier. Turning to slide 12. Our CSS segment closed out a strong year, in part driven by an increased focus on bandwidth needs stemming from COVID-19 as well as our global scale, which offers greater value to our customers. On a reported basis, sales were 1% lower than the prior quarter, but were up 3% on a comparable workday basis. We are taking share in all geographic regions and especially in areas outside the United States. As with EES, we saw continued positive momentum throughout the quarter. Specifically, we experienced growth in our network infrastructure markets that was driven by increasing global accounts and continued strong demand in data centers, including [Phonetic] wireless and professional audiovisual applications. Sequentially, security sales were up low single digits on a comparable workday basis, driven by expanding demand for secure network and IP security applications. CSS is uniquely well-positioned to benefit from several of the secular growth trends that we have highlighted as the pace of technological innovation, demand for data and reliance on security are all driving an accelerated pace of both new installations and upgrades to existing systems. Adjusted EBITDA was $112 million or 8.2% of sales. This was 50 basis points higher than the prior year, but down sequentially from the third quarter, primarily reflecting the reinstatement of temporary cost reductions. Turning to slide 13. Sales in our UBS segment were down slightly versus the third quarter on a reported basis, but up 4% on a comparable workday basis. Strong utility demand continued this quarter as our utility customers continued to invest in grid hardening and modernization projects as well as LED lighting and automation projects. The broadband business was also resilient to COVID-19, driven by 5G deployments, last mile fiber installations and increasing broadband projects. The global demand for data and high-speed connectivity has never been greater due to the step change in requirements driven by remote work and school environments. Adjusted EBITDA of $79 million was in line with the prior year and up 10 basis points as a percentage of sales. Adjusted EBITDA margin was down sequentially on slightly lower sales and the restoration of COVID-related cost actions. Turning to slide 14, I'll walk you through our outlook for 2021. On a pro forma basis, sales were $16 billion in 2020. In 2021, we estimate market growth of roughly 3% to 5%. We recognize that COVID and the timing of broad scale vaccinations may create volatility and influence the overall demand pattern of our business. We are encouraged by the economic indicators and expect the demand environment to continue to improve as we progress through 2021. On top of that, we expect that the combination of the continued outperformance and our cross-sell programs will grow sales 1% to 2% above the market. Lastly, keep in mind that 2021 has one fewer workday than 2020, and we will have the impact of the US brand sale completed in Q3 of 2020 as well as the expected completion of the Canadian divestitures in the first quarter. [Technical Issues] are approximately $125 million. The impact of these will be a headwind of approximately 1%. So in total, we expect sales to grow 3% to 6%. We expect differences in foreign exchange rates to be neutral to slightly favorable for the full year. On the right-hand side of the page, we have provided a bridge for our 2020 pro forma adjusted EBITDA margin of 5.3% to our outlook for adjusted EBITDA margin of 5.4% to 5.7%. We expect to benefit from improving mix, market outperformance and operating leverage, which we expect to collectively drive about 50 to 80 basis points of margin expansion. In addition, as you saw on the prior page, we expect to generate an incremental $90 million of realized cost synergies in 2021, which will contribute approximately 55 basis points of additional EBITDA margin. Partially offsetting these two margin drivers will be the restoration of the employee compensation benefit costs discussed previously and the restoration of a full accrual for incentive compensation, the aggregate amount of which is approximately 90 basis points. Continuing down the income statement, we expect our effective tax rate to be approximately 23% and adjusted diluted earnings per share in the range of $5.50 to $6. We assume a diluted share count of approximately 51.5 million shares. We expect to spend between $100 million to $120 million on capital expenditures in 2021, much of which will be invested in the early stages of aligning our systems and investing in digital tools. We expect to continue generating substantial free cash flow, which we're forecasting to be at least 100% of adjusted net income. As we look at the drivers of the first quarter of 2021, we expect to benefit from $28 million of realized cost synergies in the quarter. Please keep in mind that the first quarter has two fewer workdays than the first quarter of 2020, as shown in the table. Before opening your call to questions I'd like to walk you through a quick summary. Again, 2020 was a transformational year for WESCO and highlighted many of the Company's strengths. First, we responded with quick and decisive actions, as I mentioned earlier, in response to the global COVID-19 pandemic and delivered excellent performance through the downturn. Number two, our integration with Anixter is off to an excellent start and it is accelerating. We made substantial progress on the integration in just the first six months, and we're very pleased to be able to increase our synergy targets. Our new leadership team is the strongest management team in our history and is driving our high performance culture. We have launched our cross-sell programs in all three of our business units and are already seeing positive results. And three, and most importantly, the business is uniquely well-positioned to capitalize on the highlighted secular growth trends that will drive demand for our full spectrum of end-to-end solutions for years to come. 2020 marked a watershed year and the beginning of a new era for WESCO. As the industry leader, we are now larger and more diversified with differentiated scale and capabilities in what remains a highly fragmented industry. We're exceptionally well-positioned and intend to lead not only a digital transformation of our business, but also of our industry.	compname posts q4 adjusted earnings per share $1.22. q4 adjusted earnings per share $1.22.
Revenue and adjusted EBITDA in Q2 increased 17.5% and 23%, respectively, over the prior year period, primarily as a result of continued improvement in solid waste pricing volume growth and strength in recovered commodity values. These trends drove year-to-date adjusted EBITDA margin expansion of 110 basis points and adjusted free cash flow of over $585 million, up 18.5% year-over-year, and given expected continuing momentum and margin expansion from these trends position us to raise our full year outlook for revenue, adjusted EBITDA, adjusted EBITDA margin and adjusted free cash flow. 2021 also has the potential to be another outsized year of acquisition activity. Year-to-date, we have signed or closed 14 acquisitions with total annualized revenue of approximately $115 million, including $75 million of franchise operations in California, Nevada and Oregon expected to close later this year. We continue to see record amounts of seller interest driving elevated acquisition dialogue, and as communicated throughout the year, expect closings related to most of this activity to be more weighted to the second half of the year, which will provide further upside to our increased outlook for the year and strong rollover growth into 2022. On the call, we will discuss non-GAAP measures such as adjusted EBITDA, adjusted net income attributable to Waste Connections on both a dollar basis and per diluted share and adjusted free cash flow. Management uses certain non-GAAP measures to evaluate and monitor the ongoing financial performance of our operations. Other companies may calculate these non-GAAP measures differently. In the second quarter, solid waste price plus volume growth of 11.4% exceeded our expectations by almost 150 basis points, primarily as a result of higher-than-expected volumes as the recovery trends that began in Q1 continued throughout the quarter, with landfill tons and roll-off pulls returning to levels about in line with or above prepandemic levels. Total price of 4.9%, up 70 basis points sequentially, was above our outlook on higher core pricing of 4.7%, once again reflecting the strength of pricing retention we noted in Q1, plus about 20 basis points in fuel and material surcharges. Our Q2 pricing ranged from 2.6% in our mostly exclusive Western region to a range of about 4.5% to 7% in our more competitive regions. Looking ahead, we are positioned for higher sequential pricing growth during the second half of the year as a result of incremental price increases we have already put in place to offset certain cost pressures. Reported volume growth of 6.5% in Q2 reflected sequential improvement of approximately 1,000 basis points from Q1 and was led by those regions where markets were hardest hit during the pandemic including the Northeast U.S. and Canada. All regions showed sequential improvement from Q1 and all reported positive volumes in Q2. Volumes range from about 4% in our Central region, where comparisons to the prior year were tougher as many markets were relatively less impacted by the COVID-19 pandemic, to almost 10.5% in Canada, one of our most impacted regions where the volume recovery have been remarkably strong, arguably outpacing the reopening activity particularly when considering that many restrictions in Canada extended through Q2 of this year. Also noteworthy is our Western region, where volumes led our other regions going into the pandemic and continue to be the strongest in the U.S. at about 8.5% in Q2. Looking at year-over-year results in the second quarter on a same-store basis, all lines of business increased by double digits Commercial collection revenue was up 16% year-over-year. Roll-off pulls increased by over 11% year-over-year, led by Canada, up almost 20% and back to above pre-COVID-19 levels. In the U.S., pulls were up about 10%, and all regions showed year-over-year improvement, most notably in our more impacted markets, including in the Northeast. Landfill tons were up 17% year-over-year on MSW tons up 11%, C&D tons up 20% and special waste tons up 33%. As a result, landfill tons have returned to above pre-pandemic levels in all of our regions, except the Eastern region, which was slightly below prior levels as a result of the delayed reopening activity in markets in the Northeast. Looking more closely at results. As noted, all waste types were up double-digit percentages year-over-year. However, the outsized amount of special waste activity was particularly noteworthy as Q2 activity propelled tons back to 13% above pre-pandemic levels with all regions up year-over-year, perhaps due to a little pull forward from Q3. Looking at Q2 revenues from recovery commodities, that is recycled commodities, landfill gas and renewable energy credits, or RINs. Excluding acquisitions, collectively, they were up about 95% year-over-year resulting in a combined margin tailwind of about 130 basis points, 90 basis points of which was from recycling and 40 basis points from landfill gas and RINs. Recycling revenue increases were driven by both higher commodity values, including old corrugated containers or OCC, up 25%; and plastics and metals, both up over 100%. Higher volumes also contributed year-over-year, again, reflecting the pandemic impact. Prices for OCC averaged about $135 per ton in Q2 and our RIN pricing averaged about $2.72. And finally, on to E&P waste activity. We reported $31.2 million of E&P waste revenue in the second quarter, up 26% sequentially from Q1, reflecting increased activity across multiple basins. Looking at acquisition activity. As noted earlier, we've already signed or closed 14 acquisitions with annualized revenue of approximately $115 million, approaching what we would consider an average amount of activity for the full year. These transactions include multiple West Coast franchise markets, which are core to our strategy and provide unique opportunities to expand our exclusive contract portfolio. Moreover, our pipeline still reflects record levels of seller interest driving the potential for outsized activity in 2021, primarily given tax-related considerations. That said, we continue to be selective and disciplined in our approach to acquisitions as we recognize the importance of value creation for our shareholders as well as market selection and asset positioning. Now I'd like to pass the call to Mary Anne to review more in depth the financial highlights of the second quarter and our increased outlook for the year and to provide a detailed outlook for Q3. I will then wrap up before heading into Q&A. In the second quarter, revenue was $1.534 billion, about $44 million above our outlook due primarily to higher-than-expected solid waste growth and recovered commodity values. Revenue on a reported basis was up $228 million or 17.5% year-over-year, including acquisitions completed since the year ago period which contributed about $47.6 million of revenue in the quarter or about $44.1 million net of divestitures. Commodity-driven impacts account for about 100 basis points of margin expansion, net of a 30 basis point impact from higher fuel on diesel rates up almost 20% year-over-year. Ex fuel solid waste collection transfer and disposal margins expanded by 50 basis points as we more than offset a 60 basis points increase in incentive compensation costs, 50 basis points from higher medical and 50 basis points from increased discretionary expenses. And finally, acquisitions completed since the year ago period accounted for about 10 basis points of margin dilution. Regarding discretionary expenses, we've begun the process of returning to a more normalized operating environment, including in-person training, meetings and other activities we consider integral to sustaining our culture and expanding our bench strength ahead of future growth. Given the challenging labor environment, we have also proactively implemented supplemental wage adjustments in many markets as we anticipate or combat labor constraints. These purposeful wage and discretionary cost additions, along with higher incentives, medical and other costs resulting from more typical activity levels, largely replaced last year's COVID-19-related frontline support costs, the majority of which did not repeat this year. As noted earlier, we've already implemented incremental price increases to address these higher costs, resulting in full year 2021 price of approximately 5%, up from 4% in our original outlook. We delivered adjusted free cash flow up 18.5% year-over-year through Q2 at $585 million or 20% of revenue, putting us on track to achieve our revised adjusted free cash flow outlook of approximately $1 billion. I will now review our outlook for the third quarter 2021 and our updated outlook for the full year. Before I do, we'd like to remind everyone once again that actual results may vary significantly based on risks and uncertainties outlined in our safe harbor statement and filings we've made with the SEC and the Securities Commissions or similar regulatory authorities in Canada. We encourage investors to review these factors carefully. Our outlook assumes no significant change in underlying economic trends, including as a result of or related to impacts from the COVID-19 pandemic or the delta variant of the coronavirus. It also excludes any impact from additional acquisitions that may close during the remainder of the year and expensing of transaction-related items during the period. Looking first at Q3. Revenue in Q3 is estimated to be approximately $1.56 billion. We expect solid waste price plus volume growth of about 7% in Q3 with pricing of about 5%. Recovered commodity values and E&P waste revenue are expected to remain in line with current levels, with RINs generally in line with Q2 levels and OCC trending slightly higher. Adjusted EBITDA in Q3 is estimated to be approximately $495 million or 31.7% of revenue, up 60 basis points year-over-year and up sequentially from Q2. Depreciation and amortization expense for the third quarter is estimated to be about 13.3% of revenue, including amortization of intangibles of about $33.8 million or a rounded $0.10 per diluted share net of taxes. Interest expense, net of interest income, is estimated at approximately $40 million. And finally, our effective tax rate in Q3 is estimated to be about 21.5%, subject to some variability. Revenue for 2021 is now estimated to be approximately $5.975 billion or $175 million above our initial outlook, with the primary drivers being an additional 150 basis points of solid waste price plus volume growth and higher recovered commodity values as compared to our initial outlook, plus $25 million from acquisitions completed year-to-date. Adjusted EBITDA for the full year is now estimated to be approximately $1.875 billion or about 31.4% of revenue and up about $75 million over our initial outlook. Moreover, full year adjusted EBITDA margin guidance is 40 basis points above our initial outlook, up 90 basis points year-over-year. At 31.4%, our adjusted EBITDA margin outlook reflects continued year-over-year margin expansion in the second half of 2021 in spite of wage and inflationary pressures and tougher year-over-year comparisons. Adjusted free cash flow in 2021 is now expected to be approximately $1 billion or over 53% of EBITDA and up $15 million from our initial outlook despite capex up $50 million from our original outlook. Last week, we closed our new $2.5 billion credit facility, which increased borrowing capacity by almost $300 million, reduced borrowing spreads and enhanced flexibility for continued growth. Our balance sheet strength, together with this increased capacity, positions us for potential above-average acquisition activity and an increasing return of capital to shareholders. We have already returned over $400 million to shareholders in 2021 through share repurchases and dividends. And we are in the process of renewing our normal course issuer bid, authorizing the repurchase of up to 5% of our outstanding shares per annum. We will continue to approach share repurchases opportunistically and anticipate announcing another double-digit percentage per share increase in our cash dividend in October. Again, broad-based strength continues to drive results ahead of expectations as we benefit from reopening activity in a supportive macro environment, including tailwinds from recovered commodity values. We've once again demonstrated the importance of being selective about markets and intentional about driving results. Quality of revenue and comparative price retention across markets matter. We're extremely pleased to be in a position to raise our outlook for the full year. We are set up for continuing margin expansion through the second half of 2021 as proactive unbudgeted price increases offset wage and inflationary pressures. We are on track for adjusted free cash flow of approximately $1 billion and adjusted EBITDA margins back above pre-COVID-19 levels. Finally, we expect to announce another double-digit percentage increase in our regular quarterly cash dividend in October and remain well positioned for potential significant increase in acquisition outlays to drive further growth in 2021 and beyond. We appreciate your time today.	qtrly revenue of $1.534 billion, up 17.5% year over year. waste connections inc - provides full year 2021 outlook for revenue of approximately $5.975 billion. q2 revenue rose 17.5 percent to $1.534 billion. sees fy revenue is estimated to be about $5.975 billion. compname says for q3 of year, estimate revenue to be about $1.56 bln. for q3, estimate expect solid waste price plus volume growth to be about 7%, with price growth of about 5%.
I'm Kelsey Duffey, Vice President of Investor Relations at Walker & Dunlop. Hosting the call today is Willy Walker, Walker & Dunlop Chairman and CEO. He is joined by Steve Theobald, Chief Financial Officer. These slides serve as a reference point for some of what Willy and Steve will touch on during the call. More detailed information about risk factors can be found in our annual and quarterly reports filed with the SEC. We started off 2021 with strong first quarter financial performance, with the combination of our people brand and technology, continuing to differentiate us in the marketplace, enhance our competitive positioning, and drive terrific financial performance. First Quarter revenues of $224 million generated diluted earnings per share of $1.79 up 20% over q1 2020 on total transaction volume of $9 billion. This is a very strong start to the year that appears to be accelerating by the day. We laid out our five year strategic growth plan in December of last year, with one of the objectives being to move from the number five multifamily lender in the United States to number one. We plan to build a small loan lending business that rival JP Morgan chases, and amazingly property sales business that rival CBR s two firms ahead of us in the 2019 league tables. Due to the use of technology, growth of our brand and truly fantastic execution by our team. We vaulted to the number one position as the largest provider of capital to the multifamily industry. My father gave me a T shirt when I was in college that read unless you are the lead dog, the scenery never changes. Well, the scenery can now change and we will use our market leadership position to win more clients continue investing in technology and benefit from the fantastic branding that this accomplishment establishes our vision to be the premier commercial real estate finance company in the United States was established in 2010 when Walker and Dunlop Lync $2.7 billion on commercial properties, or 7%. of the $37 billion that Wells Fargo lent that year as the largest lender in the country, and over the last decade due to hiring great people investing in technology and building our brand. by executing for our clients each and every day. We moved up to the number four spot in the league tables after lending $24.7 billion on commercial real estate in 2020. Number four, right behind Key Bank, Wells Fargo and JPMorgan Chase. And while that accomplishment by our team is amazing. What is even more exciting is how we are positioned to grow going forward. The use of technology and financial services and commercial real estate expands every day, and will continue to accelerate over the coming decades. Walker no ops use of technology in 2020 allowed us to vault to the top of the league tables. By making our bankers and brokers more insightful to their clients. More efficient in the business they processed and more productive. We are a company of only 1000 people with a very real opportunity to grow to three to 5000 people by investing in technology and entering new markets. Our largest competitors have 10s of 1000s and in some instances hundreds of 1000s of employees and will constantly be challenged over the coming years with how technology is going to disintermediate their existing employee base, and businesses. Our technology investments will continue to focus on actionable technology that enhances the capabilities of our people, as we grow Walker and Dunlop and expand into new markets. The fact that we ended 2020 with 1000 employees, and over $1 billion in revenues allowed us to maintain our metric of over $1 million of revenue per employee. As this slide shows, revenue per employee of over $1 million places Walker and Dunlop in line with VSA and just behind the global tech giants, Facebook, Google and Apple. We believe that over the coming years as we continue to implement more technology and expand our brand, that our revenue per employee can move closer and closer to the tech giants. The numbers behind our brand strategy are stunning. This has not only expanded the web brand dramatically, but generated new business. Just last week, we closed on a $37 million financing. This transaction brought us brought to us through the combination of digital marketing, branding, technology and flawless execution by our team. This part of the 27% of our total transaction volume in q1 coming from new clients to Walker and Dunlop. That is up from 23% for all of 2020. The other technology proof point we introduced in 2020. new loans to our servicing portfolio increased to 79% in q1 of 2020, up from 66% for all of 2020 so rather than simply refinancing the loans in Walker and daube sizable $110 billion servicing portfolio. Almost 80% of the loans we refinanced in q1 were new loans to Walker and Dunlop, generating finance financing fees, and adding mortgage servicing rights to our loan portfolio. The amount of capital targeting commercial real estate investments continues to fuel the acquisitions market. According to pre Quinn, commercial real estate focused funds began 2021 with a record $324 billion of dry powder. A robust investment and acquisition market, combined with a wave of loan maturities will drive healthy transaction volumes over the coming years. With banks life insurance companies and debt funds coming back into the market and $105 billion of capital for Fannie and Freddie left to lend in 2021. We expect the financing markets to be very active over the remainder of the year. And as you can see on this slide, over $320 billion of multifamily loans mature over the next five years. And since our technology can tell us exactly who holds those loans, there is a massive opportunity for us to capture significant refinancing volume in 2021 and beyond. And then I'll come back to talk about the terrific accomplishments we weighed in q1 toward our long term strategic growth objectives. We entered 2021 with momentum from the unique combination of our people brand and technology. And that momentum contributed to both strong financial results and good progress toward the achievement of our drive to 25 long term strategic objectives in the quarter. For the first quarter, we generated diluted earnings per share of $1.79 of 20% year over year on 224 million of total revenues. earnings in the quarter included the positive benefit of reducing our allowance for credit risk by $11.3 million, which added 25 cents to ups. One personnel expense as a percentage of total revenues was 43%, which is elevated compared to a typical first quarter due to recent investments in people as we continue to scale our business and support our future growth. During the quarter, we grew our team of bankers and brokers to 214 from 205 at the start of the year, further increase in both our geographic reach with hires in Ohio, California, Texas and Maryland, and our investment sales product capabilities with the acquisition of student housing focused four point even with the increase in compensation expense, operating margin was 33%, inclusive of the reserve release, and 28% without within our typical range of 28 to 30%. As non personnel expenses continue to grow at a slower rate. We manage operating margin very closely and are confident that it will remain within our expected range over the course of the year. Return On Equity was 19% in the quarter, consistent with last year and within our expected range of 18 to 20%. Total transaction volume of $9 billion was down 20% from the first quarter of 2020. as anticipated, given that we originated the largest portfolio in our company's history, a $2.1 billion Fannie Mae transaction last q1. Notably, we saw strong debt brokerage volumes of $4.3 billion in a quarter of a percent from last year has very strong values indicative of an active market for commercial real estate financing is attracting significant amounts of capital as we continue to progress toward a post COVID environment. 72% of our debt brokerage volumes were multifamily compared to 94% in the year ago quarter, reflecting the pickup in London on other asset classes. A mix of our $7.6 billion of debt financing volume in q1 21 was skewed more heavily toward debt brokerage originations as compared to the first quarter of last year. primarily due to the large portfolio that I just mentioned. Our hot volumes at 622 million, we're up 75% from q1 20, continuing the strong performance off of 2020s record year. In addition, our interim lending program was very active in the quarter with $178 million of multifamily bridge loans originated through our JV with Blackstone, and on our own balance sheet. The GSE has had a relatively slow start to the year, they carried over a lot of deliveries from 2020 into 2021. Our market share with Fannie and Freddie remained above 11%. And we expect that our overall volumes will pick up over the next three quarters, as the GSE has managed their deal flow to ensure that they use all of their remaining $105 billion of lending capacity for the year. We also expect broker debt volumes for the remainder of the year to rebound strongly from last year's COVID impacted markets. As life insurance companies, banks, and debt funds are all very competitive capital providers in the market today. Invest in sales volume of 1.4 billion was down 19% from last year's first quarter. However, the pipeline of deals entering q2 is extremely robust, and we expect significant growth and investment sales volumes over the remainder of the year, as our recruiting efforts continue to build out both the geographic and product capabilities of the team. The increase in investment sales activity will also contribute to additional debt financing opportunities over the next three quarters. q1 adjusted EBIT da $61 million is down slightly from q1 of last year, but it's the highest quarter of the EBIT da since the start of a pandemic. As we are seeing the benefit of the strong mortgage servicing rights that we booked during 2020 translate into cash servicing fees, which were up 19% in the quarter. As you can see on this slide, the servicing portfolio ended the quarter at $110 billion with a weighted average servicing fee of 24.3 basis points of one fold basis point from the first quarter of last year, which is huge given the overall size of the book, and the fact that we have added over $15 billion of net new loans to the portfolio in the last 12 months. With 85% of the portfolio's future servicing fees being prepayment protected, the portfolio will continue to fuel meaningful stable cash servicing fees, approaching $275 million on an annual basis. Additionally, this should be the last quarter of significant year over year declines in escrow interest and short term rates which drive the pricing of our escrow deposits collapsed at the end of first quarter of 2020 due to the pandemic. During the quarter we lowered the loss forecast used to determine the allowance for risk sharing obligations. As I mentioned earlier, this resulted in an $11.3 million recapture of provision for credit losses in q1 of 2021. Compared to an expansive $23.6 million in the first quarter of 2020 when the pandemic was declared one year later, we have very few loans in forbearance. Our portfolio has had no defaults related to the pandemic, reflecting the resiliency of multifamily. And the quality of our underwriting and servicing teams have done an expert job of managing our credit risk, both before and during the pandemic further Evidence of the strong performance of our portfolio. The debt service coverage ratio of the $50 billion of loans we have risk on, remained above two times at the end of 2020, consistent with the end of 2019, while unemployment rates are still relatively elevated at 6%, this is a significant improvement from the higher 14.7% that we saw in April of 2020. Reflecting the return of jobs across the Academy, the most recent stimulus bill, combined with an anticipated full reopening of the economy by the fall in forecast and strong economic growth over the next year, gives us confidence that the fantastic credit metrics we are seeing in the portfolio today will persist into the future. We feel that the current level of the allowance at $64.6 million is sufficient to cover any future losses that could arise in the portfolio over its expected remaining life. We ended the quarter with over $277 million of cash on our balance sheet, and another $62 million funding loans held for sale, bringing our total cash available to $339 million. We are currently exploring a number of strategic acquisition opportunities that are in line with our drive to 25 objectives, investing in revenue generating technology and initiatives and continuing to bring on banking and brokerage talent, all of which is supported by our strong cash position today. Yesterday we announced the acquisition of 75% of Zelman and Associates, the leading housing focused research firm in the country. The transaction is expected to close sometime in the third quarter, pending regulatory approval. We expect the Zellman platform to contribute between 15 and 20 cents in earnings per share in its first year. Our focus remains reinvesting our capital back into the business through acquisitions like Zelman our strong financial position, and the steady cash generation of our business enables us also to return a portion of our capital to shareholders. Yesterday, our board of directors approved the quarterly dividend at 50 cents per share payable to shareholders of record as of May 20. Quarter ago, we laid out ambitious goals for double digit growth and earnings per share, and adjusted EBIT da for 2021. Strong start to the year in terms of our financial performance, credit, quality, and cash position, and our expectations for the market opportunity ahead, give us confidence that we will achieve both of those goals. Along with delivering strong financial results. During q1, we made significant progress toward our strategic objective of our five year growth plan to drive to 25. The overarching goal of the drive to 25 is to grow revenues from $1 billion in 2020 to $2 billion in 2025. By continuing to invest in people brand and technology in our core businesses, and building three new businesses in small balance lending, appraisals and investment banking. As I previously mentioned, to become the largest provider of capital to the multifamily industry, we thought we needed to enter and grow dramatically our small balance lending business. Roughly half the multifamily loans originated every year are considered small balanced loans. Most of the small balance lending is done by banks, where a property owner may use the bank for checking and savings accounts and asked for a small balanced multifamily loan. We see this market where local, regional and national banks are the incumbent lenders as ripe for disintermediation, using our brand technology and people. If you enter a bank branch office and ask for a small multifamily loan, your loan officers a generalist who could just as easily provide you with a boat loan as an apartment building loan. We think our focus and brand is the largest provider of capital, the multifamily industry can win this customer over. We have data and visibility into who owns these properties. And we are building digital marketing strategies to capture clients attention. We are also investing in technology to drive down the cost of underwriting a small balance loan. We are acquiring a technology company that allows us to quote a small balance loan in just over a minute and also streamline the loan application, underwriting and closing process. We've also completely revamped our small loan origination team, bringing in new leadership and establishing a regional origination model that we believe will allow us to originate higher volumes of loans with fewer people. Through our multifamily appraisal business uprise we have quietly built out our licensed appraisers across the country, and are now capable of producing by Ria compliant appraisals using more technology and fewer people than any competitor in the market. A year ago, a prize produced 55 appraisals in q1 this year, we did 5x that volume and we intend to continue growing that number by multiples. The use of technology in our appraisal business has broad applications in our lending and investment and sales businesses as well. The final growth area that we made significant progress on in q1 is investment banking. As our brand is expanded and our relationships with our clients have deepened, the need for investment banking capabilities to meet all our clients needs has become more pressing. Many of our bankers and brokers serve their clients in advisory capacities today. But as part of our drive to 25 objectives, we set a goal to formalize and expand our investment banking services. To that end, yesterday, we announced the acquisition of Zelman and Associates, a wonderful boutique, real estate focused search and investment banking firm IV Zelman, Dennis McGill and their team have built out what one of the most well respected housing research and analytics teams in the industry. gentleman's research team covers both single family and multifamily housing. And as these two industries collide in the single family homes for rent market, Zelman and WD will be perfectly positioned to provide expert coverage of these markets, gentleman's research and analytical capabilities, coupled with Walker and dunlops vast data from our 100 and $10 billion servicing portfolio, and technology investments provide the bankers and brokers at Walker and Dunlop with the very best insight into micro and macro markets across the country to enable their sales efforts. It is our expectation that w Andy's proprietary research and market insights will make us more relevant and valuable to our clients than ever before. Gentlemen, is a registered broker dealer. And as a housing focused investment banking team that has an incredible track record in the m&a debt and equity transaction markets, including advising in the IPOs of firms such as Rocket Mortgage and invitation homes. The broker dealer and investment banking capabilities inside Zelman provide a fantastic launching pad for W Andy's investment banking business in the commercial real estate arena. If you add to that equation, being the largest provider of capital to the multifamily industry, and fourth largest lender on commercial real estate in the United States, the opportunities for new recruits is vast. But there is one point about our brand and digital marketing that is very important to underscore. We have just begun to capitalize on what we have created. That is one of many examples where our brand has generated new opportunities for Walker and Dunlop. We will figure this out. But we are just scratching the surface on how to identify and convert these new client touchpoints into new business and opportunities for growth. As we make significant strides toward the strategic and financial components of the drive to 25. We remain focused on the environmental, social and governance elements of our 2025 goals, with significant attention being given to our diversity, equity and inclusion efforts. We recently launched a diversity initiative called care united in partnership with some of the largest players in the commercial real estate industry, including Fannie, Freddie greystar KKR, Kayne Anderson and Pacific life. The Alliance is working to identify the obstacles that minority care owners and operators face and implement real changes across the industry to break down these barriers. Internally, Walker and Dunlop is also setting ambitious DNI goals, including increasing the proportion of women and minorities among management and top company earners by 2025. as outlined in our recent proxy statement, our compensation committee will oversee our progress toward these ambitious long term goals, which will be directly tied to executive compensation. I've watched this wonderful company grow from one office and just over 40 employees into the national powerhouse it is today and I must say I've never been prouder, nor more excited about all we are currently doing. We established another ambitious five year growth plan at the end of 2020. And in just a few months, we have made real and exciting progress toward our goals. We remain a great place to work due to the incredible people that that make W and D what it is, we continue to invest in technology to enable our people to be more insightful, more efficient, and more productive than the competition.	compname reports 20% growth in diluted earnings per share to $1.79. q1 earnings per share $1.79.
I'm Kelsey Duffey, Vice President of Investor Relations at Walker & Dunlop. Hosting the call today is Willy Walker, Walker & Dunlop, Chairman and CEO. He is joined by Steve Theobald, Chief Financial Officer. These slides serve as a reference point for some of what Willy and Steve will touch on during the call. We expressly disclaim any obligation to do so. More detailed information about risk factors can be found in our annual and quarterly reports filed with the SEC. But before I dive in comments about second quarter for Walker & Dunlop, I want to reiterate our condolences to those who lost loved ones due to the COVID-19 virus and express our concern and support to the millions of Americans, who have been adversely affected by the economic downturn. While Walker & Dunlop's last Q2 financial results are exceptional. Many individuals and businesses have been hit extremely hard, and it is our great hope and wish, that we can control of the virus, so that jobs and businesses can be restored. As we've seen since the advent of the pandemic, certain businesses have benefited from the forced changes through the way we live and work, and others have been badley damage. Fortunately for Walker & Dunlop, we have benefited and generated record revenues of $253 million during the quarter, on the back of exceedingly strong loan origination and property sales volume of $7.1 billion. Our recorded loan and origination volume of $6.7 billion coupled with our Q1 lending volume of $9.6 billion, catapulted Walker & Dunlop's market share, total commercial real estate lending in the United States for the first half of 2020% to 13.2%, nearly tripling our market share from last year. All these investments in people, technology and branding, came together in Q2 2020 to generate 26% year-over-year growth in revenues, and 47% year-over-year growth in diluted earnings per share to $1.95, in the midst of the global pandemic, when our entire team was working remotely. And if record revenue growth explosive earnings were not enough, we added a record net $5.2 billion of servicing from loan originations to our portfolio during the quarter, pushing our servicing portfolio to $100 billion at the end of July, and officially achieving the first pillar of our highly ambitious five-year strategic growth plan entitled Vision 2020. Revenue growth of 26% during the quarter and our debt brokerage and property brokerage businesses were significantly curtailed, highlights the volume of lending we did with the GSEs and HUD. We originated $4.5 billion of financing with Fannie Mae and Freddie Mac in the second quarter, increasing our market share with the GSEs from 10% last year, up to 14% through the first half of 2020. Our partnership with Fannie Mae, which dates back to 1988, has had an incredible year, with Walker & Dunlop representing 20% of Fannie Mae's total multifamily lending volume for the first half of the year. We've been Fannie Mae's largest lending partner for four the last seven years, and our performance this year leaves little doubt, that we are not only Fannie Mae's largest partner, but their very best. $5.2 billion of new loans into our servicing portfolio, during a quarter when we originated $6.7 billion in total financing; means, we were not simply refinancing loans that already existed in our servicing portfolio, but rather taking business from our competition and bringing in new clients into Walker & Dunlop. These new mortgage servicing rights and client relationships will add huge long-term value to Walker & Dunlop. As slide 6 shows, we had strong growth in our Fannie and Freddie origination volumes in Q2, and as the middle column shows, we had explosive growth with HUD this quarter, growing from $190 million of loan originations in Q2 of 2019, to $640 million loan originations this quarter, by far our largest HUD quarter ever. There are several items of note in our HUD origination numbers. First, Sheri Thompson joined Walker & Dunlop 18 months ago to lead our HUD business, and has done an absolutely magnificent job, taking our team from being a market leader to being the leader in HUD financing. Second, as anyone who has ever done HUD financing will tell you; HUD business takes a long time to originated process and nothing ever happens in the quarter. So our fantastic Q2 was due to our team's incredible work over the past year, not due to rates dropping and HUD becoming wildly more competitive in Q2. But that has happened, and rates in HUD's countercyclical role should benefit our HUD volumes in future quarters. Finally, as you can see just to the right of the HUD volumes, we've brokered $1.5 billion of debt to third parties during Q2. That number is down 23% from Q2 2019, but still very strong, given the dislocation in place in the markets. It is noteworthy, that the New York-based debt brokerage team we added in Q1 was responsible for 26% of our total brokered volume in Q2, quite an accomplishment for first quarter at Walker & Dunlop, particularly considering they are based in the epicenter of the early COVID crisis. Similar to our debt brokerage business, our multifamily property sales business slowed dramatically in Q2 due to the pandemic. We closed $447 million of sales volume in Q2, a slow quarter for our team, but we were seeing the market pick back up and currently have 33 properties worth $1.4 billion under contracts for closing in Q3 and Q4. So with very robust GSE and HUD pipelines, our debt brokerage business rebuilding nicely, as capital begins to return of the broader market and our multifamily property sales business rebounding nicely, we feel extremely well positioned to continue outperforming the market for the remainder of 2020. Vision 2020 was established in 2016 with very ambitious five-year goals, $30 billion of annual debt financing, $8 billion of annual investment sales, $8 billion in assets under management and $100 billion of loans in our servicing portfolio, which if achieved, would drive $1 billion in annual revenues. As the left hand side of this next slide shows, we established the debt financing goal of $30 billion after originating $16.2 billion of debt financing in 2015 and on a trailing 12 month basis, as you can see in the last column of this chart, we have achieved our Vision 2020 debt financing goal by originating $31.4 billion of loans, which is a five-year compound annual growth rate on loan originations of 14%. Similarly in the right side of this slide shows the growth in property sales, from established goal selling $8 billion in multifamily properties, after selling $1.5 billion in 2015, to selling $5.8 billion over the last 12 months. While the pandemic has clearly slowed down our property sales business, we have grown this business at a compound annual growth rate of 31% over the past five years and have, built an absolutely incredible team. I mentioned previously, the growth in our servicing portfolio to $100 billion and as this slide shows, over the past five years, we have grown the portfolio from $50.2 billion in 2015 to $100 billion today, at a compound annual growth rate of 15%. The dramatic growth in loan originations, property sales, and servicing, have grown revenues, as you can see on the right side of this slide, from $468 million in $2015 to $916 million over the past 12 months, or at a compound annual growth rate of 14%. So all of this brings us close, but not quite to our Vision 2020 goal of $1 billion in annual revenues, which we will continue chasing for the remainder of this year. We announced twice during the second quarter, that the number of forbearance requests in our at-risk portfolio have been extremely low. As seen on this slide, for various requests on office, retail and hospitality loans in our portfolio are dramatically higher than multifamily, but we have zero credit risk on any office, retail, industrial or hospitality loan we have originated and serviced today, zero. Our only credit risk is on multifamily, and that portfolio continues to perform exceedingly well. As Steve will discuss, we took a large loan loss reserve in Q1 to incorporate the expected impacts recorded and added another $5 million to that reserve in Q2. The additional reserves added in this quarter, were due entirely to growth in our servicing portfolio, and not due to any specific reserves or degradation in the credit quality in our at-risk portfolio. While it is still early days in the COVID-induced economic crisis, given the extremely small number of forbearance requests we've received in Q2, we feel extremely good about the long-standing reputation for outstanding credit discipline at Walker & Dunlop, showing itself once again. There are two other topics I'd like to focus on, before turning the call over to Steve. First, when the pandemic hit, we decided we needed to communicate with our employees and customers on a direct and consistent basis. I started filming daily videos to all Walker & Dunlop employees, that helped every one in the team know what was going on inside and outside of the company. The videos also helped maintain the exceptional corporate culture, that defines Walker & Dunlop, during a time when everyone was working from home. For example, our client email database was 19,000 people prior to the COVID pandemic. Today, it is over 120,000 email addresses. Our media outreach has exploded, having Walker & Dunlop mentioned in 129 press articles in target publications during Q2, an all-time record by over 55%. The second topic is racial justice and diversity. It is time for real action. Walker & Dunlop has consistently been a leader in the commercial real estate and mortgage industries, with regard to racial diversity, and we will continue to do so. We've been a major sponsor of Project Destined, Management Leadership for Tomorrow, GEAR UP, and Future Housing Leaders, and we will continue to invest our capital in time, to make these important programs to have greater impact. We have reinforced our commitment to building a robust diversity and inclusion program, driven in large part by our minority employee resource group, and our women's initiative. And we have put diversity and inclusion at the center of our environmental, social and governance goals, and are in the process of tying the accomplishment of these goals to long term executive compensation. As I wrote to all Walker & Dunlop clients two weeks ago, the commercial real estate industry is premised on the concept of community; communities to work, communities to shop and communities to live. We must as an industry, do all we can to promote community and equality across our country during these challenging times, and most importantly, over the coming years to ensure systemic chain actually happens. Our second quarter results once again demonstrated the power of our business model, as we delivered exceptional top and bottom line growth and continue to strengthen our balance sheet, all while operating with a fully remote workforce. Q2 total transaction volume of $7.1 billion, included a significant year-over-year increase in our Fannie Mae loan originations, which drove the 26% year-over-year increase in total revenues, to a quarterly record of $253 million. Second quarter net income of $62 million and diluted earnings per share of $1.95, were both up 47% from Q2 '19. Second quarter total debt financing volume of $6.7 billion was led by $2.8 billion of Fannie Mae originations. For the second consecutive quarter, Fannie Mae originations comprised over 40% of debt financing volume, which along with our robust HUD originations, pushed gain on sale margin to 252 basis points, well above our forecast range of 170 basis points to 200 basis points. The first half of the year has been characterized by our dominant market share with Fannie Mae. Looking at our current pipeline of GSE business, we expect to see an increase in our Freddie Mac originations in the second half, particularly in Q3. Our HUD business is poised for a breakout year in 2020, having originated $640 million in the quarter and with a strong pipeline for the rest of the year, while debt brokerage volumes will likely continue to be constrained by the current economic environment. Anticipating the shift to more Freddie Mac originations in Q3, we expect gain on sale margin to be in the range of 190 basis points to 210 basis points for the quarter. Our scaled business model continues to produce healthy key financial metrics, with second quarter operating margin of 33% and return on equity of 23%, both well above the top end of our target ranges of 30% and 20% respectively. Personnel expense as a percentage of revenue was 42%, due to an increase in variable expenses for commissions and bonus, driven by the strong performance during the quarter. Variable compensation expense was 60% of our total personnel costs during the quarter. And finally, year-to-date revenue per employee has increased to over $1.1 million, as revenue growth has outpaced the hiring of new employees. Our strong debt financing volumes in the first half of the year have enabled us to grow our servicing portfolio by more than $6.5 billion in the last six months and our servicing portfolio ended the quarter at just $12 million below the $100 billion mark. As Willy, mentioned we have since crossed over $100 billion, successfully achieving an important pillar of our Vision 2020 goals. The portfolio continues to fuel strong cash revenues, with record servicing fees totaling $57 million in Q2. Additionally, the record mortgage servicing rights revenues of $90 million in the quarter, which were more than double those of Q2 '19, will translate into higher cash servicing fees in the future. Turning now to liquidity, we continue to strengthen the balance sheet, increasing our available cash on hand, from $205 million at the end of Q1 to $275 million at the end of June. The increase in cash was driven by strong operating cash flows and continued payouts in our interim loan portfolio. Adjusted EBITDA in the quarter was $48.4 million, down from $62.6 million in the year ago quarter. The decline was driven primarily by the impact of low short-term interest rates on our escrow earnings, which declined by $12 million year-over-year. Our average escrow balances at the end of June were $2.2 billion, which will drive significant upside to earnings and adjusted EBITDA, if interest rates start to rise. During the quarter, we also finalized the servicing advance line mentioned in our last call, to facilitate the advancing the principal and interest payments on our Fannie Mae portfolio. The advanced line is structured as a $100 million supplement to an existing agency warehouse line, and may be used to fund advances of principal and interest payments on loans that are in forbearance or are delinquent within our Fannie Mae DUS portfolio. The facility provides 90% of the principal in interest advance payment, at a rate of LIBOR plus 175, and is collateralized by Fannie Mae's commitment to repay the advances. To date, we have had very few requests for forbearance. Through the end of July, we had only nine Fannie Mae loans, totaling $261 million that took forbearance, which is less than 60 basis points of our Fannie Mae portfolio and we have granted no new requests since May. In addition, the three loans that took forbearance in April, all made their first post forbearance period payments in July, a really good sign as the initial three month forbearance periods come to an end. During the quarter, we took an additional $5 million provision expense, to increase our allowance for credit obligations related to our at-risk Fannie Mae portfolio. The provision expense was driven by the growth in our portfolio during the quarter, and was not related to any change in our forecast for future losses. Since we established our loss forecast in the first quarter, our portfolio has continued to perform very well. As demonstrated by the de minimis number of forbearance requests to date, and with those who requested forbearance in April, all making their required post forbearance payment in July. Unemployment rates are at the levels we expected, and it seems likely that additional government stimulus will be provided, while the economy remains burdened by COVID-19. Our allowance now stands at just over $69 million or 17 basis points of our at-risk portfolio. We fully expect that there will be defaults in the portfolio over the next year, but that is baked into our forecast. With respect to our interim loan portfolio, we reduced our allowance by $200,000 during the quarter, due to the overall decrease in the size of the portfolio, which declined from $458 million at March 31, to $408 million at the end of June. So far this year, we've reduced the portfolio by 25%. Inclusive of the interim loans in the Blackstone JV, we've had 12 loans, totaling $240 million, either rate lock or pay-offs so far this, year reducing the risk profile significantly. And of those 12 loans at rate locked or paid off, we refinanced 10 of them with third party capital, mostly Fannie and Freddie, for over $290 million in permanent loan financing, achieving exactly the objective we have always had for the interim lending program. We expect to restart our interim lending in Q3. Cautiously at first, given the opportunities we see in the market to originate high quality loans from our very best sponsors. Overall, we feel really good about the performance of our entire portfolio to date, and the strong performance of the multifamily market through this crisis. Last quarter, in light of the massive uncertainty we faced at the time, we backed off of our goal for double-digit earnings-per-share growth in 2020. Our strong financial results for the first half of the year and the pipeline of business we see for Q3, have put us back on track to achieving our annual operating margin and return on equity goals of 28% to 30%% and 18% to 20% respectively, and we believe double-digit earnings per share growth for 2020 is now achievable. In addition, our robust capital and liquidity position give us great confidence in maintaining our dividend, as the Board approved a $0.36 dividend per share for the quarter, payable to shareholders of record as of August 21. We had an amazing first half of 2020, on the face of uncertain economic environment. This is all due to our resilient business model and exceptional team, which continues to deliver for our clients, shareholders and each other quarter-after-quarter and year-after-year. We have been using Zoom to conduct our weekly Executive sales calls, long before the COVID pandemic hit, as well as Salesforce and Box to manage our client outreach and collaboration. And our team of 900 employees took it upon themselves, to figure out how to inspect properties, receive appraisals, close loans and continue providing the exceptional service to our customers, this is expected to Walker & Dunlop each and every day. The seamless transition to remote working, low interest rates and tight Investor spreads on agency backed commercial mortgage debt has created a terrific environment for refinancing activity in the multifamily sector. And as I mentioned previously, W&D has been refinancing new loans, not [Phonetic] our own portfolio, which has dramatically expanded our market shift. And with multifamily comprising close to 80% of total commercial real estate financing volumes so far this year, we are extremely well positioned to be one of the largest providers of capital to the commercial real estate industry over the coming years. A strong macroeconomic environment coming out of the pandemic, should drive continued financing volumes in our core multifamily business, and as the multifamily property sales business rebounds, so should our capital markets business, as non-multifamily asset classes, such as office, retail and hospitality stabilize. As I ran through Vision 2020 on a trailing 12 month basis, I did not discuss our asset management business, which as we started at the end of -- to as we stated at the end of 2019, is not going to achieve the 2020 Vision goal of $8 billion of AUM. There are however several noteworthy accomplishments during the quarter, that I'd like to underscore. First our AUM of $1.9 billion comprises three components; equity capital, invested in a broad array of commercial property types by JCR Capital; debt capital we lend on behalf of life insurance companies through separate accounts; and multifamily bridge loans we originate into our joint venture with Blackstone Mortgage Trust. During Q2, we reached an agreement with a large Canadian pension fund to provide up to $250 million of preferred equity capital on multifamily deals, where we are originating first trust mortgage financing with Fannie Mae or Freddie Mac. We also rebranded JCR Capital to Walker & Dunlop Investment Partners, and reorganize the business going forward. Finally, during the quarter, we began efforts to raise our sixth fund, an Opportunity Fund. So while our management business has not grown as rapidly as Vision 2020 had outlined, we were extremely pleased with the progress made during the quarter and its outlook going forward. Steve made a point during his comments that I'd like to underscore, as we think about the new business we are originating today and how it will play out in future quarters. The loans we are currently originating, carry with them significant servicing fees, demonstrated by our 252 basis point gain on sale margin in Q2. As you can see in our net income and EBITDA numbers, we are generating a huge amount of non-cash revenue in mortgage servicing rights, that will convert into cash revenues over the next seven, 10 and even 40 years, depending on the life of the loan. So non-cash revenues today convert to cash tomorrow. We also expect our debt and property brokerage volumes to be significantly higher in Q3 and going forward into next year, which will add cash origination fees. And finally, at some point, interest rates will begin to rise, and we will generate substantial cash interest income off our $2.2 billion in escrow deposits. So while we have had an exceedingly successful quarter by any measure, it is truly exciting to think about the future cash generation of the platform we have built. Walker & Dunlop went public in Q4 of 2010, just as the economy was emerging from the great financial crisis. That quarter and our IPO were seminal moments in our company's long history, and set us up for dramatic growth we have generated over the past decade. Q2 2020 is another seminal quarter for our company. Where the team, scale brand and culture we have built, immediately differentiated us from the competition. Walker & Dunlop has proven time and again, that we can weather commercial real estate cycles and emerge as the very best in the industry. And during times of market uncertainty, borrowers want to work with the very best. We use the momentum gained during the quarter to add property sales talent in Los Angeles and Nashville, acquire a debt and equity placement team in New York, and bring on a HUD team in Dallas. We just became a Freddie Mac small balance lender, which gives our team, the ability to originate small loans for both Fannie Mae and Freddie Mac. And we hired one of the top small balance loan originators in the industry, to help us grow this area of our business. Finally, we continue to invest heavily in our appraisal joint venture. Apprise and other technology initiatives. Even during a period of market stress, our strong market position and financial stability have allowed us to remain focused on our long-term growth strategy initiatives, and continue to invest in our people and platform, to drive growth in future years. I've been proud of our teams since the day I joined Walker & Dunlop. But never in my 17 years at the company, have I seen how good we truly are, demonstrated so dramatically. All while continuing to invest in future growth. There are plenty of challenges that we will face in the coming months and years, but as we have shown time and again, Walker & Dunlop is not only up for the challenge, but will emerge the winner. I know working remotely has its challenges and its benefits, but we are blessed to have an incredible company, with an outstanding corporate culture and if our performance in Q2 is any indicator, we have plenty of exciting times ahead.	walker & dunlop q2 revenue rose 26 percent to $252.8 million. compname reports record revenues of $253 million as diluted earnings per share grows 47% to $1.95. q2 revenue rose 26 percent to $252.8 million. q2 earnings per share $1.95. total transaction volume of $7.1 billion, down 2% from q2'19.