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Text: With me on the call today is Jeff Powell, our President and Chief Executive Officer.
Before we begin, let me read our safe harbor statement.
These non-GAAP measures are not prepared in accordance with generally accepted accounting principles.
Following Jeff's remarks, I'll give an overview of our financial results for the quarter, and we will then have a Q&A session.
We had another quarter of record revenue and bookings, along with strong EBITDA margin performance and free cash flow, positioning us well for a strong finish to the year.
I'd like to begin by reviewing our operational highlights for the third quarter.
The robust demand for aftermarket parts and a high level of capital project activity in the third quarter led to an all-time high for revenue and bookings.
Our aftermarket parts and consumable business was exceptionally strong in most regions of the world, and new order activity was driven by solid demand across all of our operating segments.
In the third quarter, we announced the closing of two acquisitions, one in our Flow Control segment and another in our Material Handling segment.
The integration of these businesses is going well and their financial results contributed to our third quarter performance.
Just after the third quarter closed, we completed an acquisition of a small manufacturing business in India.
It is a well-established manufacturer of engineered stock preparation and equipment used to process recycle and virgin fiber for paper packaging and tissue production.
Our acquisition of this business will create a new manufacturing base for us in India, where we have leading market position and have been active for more than 20 years.
It also provides a strategic platform to accelerate new business opportunities in the fast-growing and in packaging petition markets.
Before moving on to our Q3 financial performance, I want to comment on the global supply chain and how we are managing in this complex environment.
The headwinds found within the global supply chain continued to be a challenge, pushing out expected deliveries and materials and creating a significant amount of work, to keep our delivery promises to our customers.
I'm pleased to say it is a challenge that our operations teams around the globe are managing successfully.
Our employees are doing a great job in navigating through a highly dynamic and uncertain environment that looks to be with us for some time.
While there is little expectation for a sudden return to normalcy, I am confident we will work through these immediate supply chain challenges and continue to meet our customers' needs.
Turning now to slide six and our Q3 financial performance.
You can see we had significant increases across all of these financial metrics compared to Q3 of last year.
Q3 revenue was up 29% compared to the third quarter of 2020 to a record $200 million.
Excluding acquisitions and the favorable impact of FX, revenue was up 18% compared to the same period last year.
Our aftermarket parts consumables revenue was up 28% to a record $131 million in Q3.
The consistently high operating rates of our customers and strong end-market demand contributed to our record aftermarket performance.
Solid execution contributed to boosting our adjusted EBITDA margin to 20.5%, which led to our excellent operating cash flow of $38 million in Q3.
All of our operating segments delivered excellent adjusted EBITDA margin performance despite the continuing inflationary pressures for materials and the ongoing supply chain constraints.
Bookings were exceptional in the quarter, up 71% to a record $245 million.
Excluding acquisitions and FX, bookings were up 57%, with contributions from all three of our operating segments.
I'll review the performance of these segments next, beginning with our Flow Control Group.
Flow Control segment achieved its fifth consecutive increase in quarterly revenue, reaching a record $76 million in the third quarter, up 34% compared to Q3 of last year.
Aftermarket parts revenue was exceptionally strong and made up 72% of total Q3 revenue.
Bookings were also a record at $77 million, up 55% compared to last year.
Organic bookings, which excludes acquisitions and FX, were up 32% compared to the same period.
Strong performance in Europe and North America led our bookings growth in Q3.
Improved operating leverage led to record adjusted our adjusted EBITDA margin of 29.1%.
While our recent acquisition at Clouth contributed to our overall performance, organic growth within our Flow Control Group continued to demonstrate the strength of this segment.
Our Industrial Processing segment continued to experience strong demand with bookings nearly doubling from the same period last year to a record $119 million.
New orders for our fiber processing systems in the U.S. and Europe led this increase in the third quarter.
Overall demand for housing and wood products remained high, and our wood processing product line capitalized on strong end market demand.
Revenue in this segment increased 31% to $82 million with strong performance in aftermarket parts and capital business.
Adjusted EBITDA was up 24%, while adjusted EBITDA margin declined compared to Q3 of last year when we received employee retention benefits related to the pandemic.
As you may have read in the press, China is experiencing power supply issues.
This has created a challenge for us with production schedules, and it is uncertain how long this will impact our operations.
We are also seeing an increasing number of requests from our customers to delay shipments as they manage supply chain constraints.
In spite of these headwinds, we entered the quarter with another record backlog that positions us well for the remainder of the year.
Moving to our material handling segment, we experienced healthy demand for our capital equipment and aftermarket parts.
Revenue was up 17% to $42 million with parts revenue, making up 59% of total revenue in the quarter.
Bookings in this segment were up compared to same period last year to a record $49 million in Q3.
We saw increased order activity and strong demand for high-performance pillars, which contributed to our record bookings in the third quarter.
Our recent acquisition, Balemaster, is also experiencing record demand and the integration of that business and the cadence is proceeding well.
Solid execution of our buying businesses, including our recent acquisition, helped boost adjusted EBITDA by 26% and adjusted EBITDA margin by 120 basis points compared to the same period last year.
Despite the supply chain issues I mentioned earlier, we remain optimistic for improved capital investment environment as infrastructure spending and industrial demand for raw bulk materials grow.
As we look ahead to the remainder of 2021, we continue to see signs of healthy project activity.
Our decentralized structure continues to serve us well during these rapidly evolving times, allowing us to respond quickly to local and regional developments.
Our record backlog has us well positioned for the remainder of the year.
However, delays in shipments and the timing of orders have shifted some expected revenue bookings from Q4 into 2022, which Mike will comment on in his remarks.
With that, I'd like to pass the call over to Mike to review our Q4 -- Q3 performance.
I'll start with some key financial metrics from our third quarter.
Consolidated gross margins were 44.9% in the third quarter of 2021 compared to 44.2% in the third quarter 2020.
Our consolidated gross margins in the third quarter of 2021 were negatively affected by the amortization of acquired profit and inventory related to the Clouth and Balemaster acquisitions, which lowered consolidated gross margins by 110 basis points.
In the third quarter of 2020, government assistance benefits increased consolidated gross margins by 110 basis points.
Excluding the impact from both of these consolidated gross margins were approximately 43% in both periods.
Our parts and consumables revenue represented 66% of revenue in both periods.
SG&A expenses were $52.3 million in the third quarter of 2021, an increase of $8.5 million compared to $43.9 million in the third quarter 2020.
Third quarter of 2021 SG&A includes $3.4 million in SG&A from our acquisitions.
There was an unfavorable foreign currency translation effect of $0.9 million in the quarter and a reduction in government assistance benefits of $0.7 million.
We also incurred acquisition-related costs of $1.3 million in the third quarter of 2021 compared to $0.4 million in the third quarter 2020.
The remaining increase in SG&A expenses is primarily associated with increased incentive compensation and travel-related costs due to improved business conditions.
As a percentage of revenue, SG&A expenses decreased to 26.2% in the third quarter of 2021 compared to 28.4% in the prior year period.
Our effective tax rate was 24.6% in the third quarter of 2021, lower than we anticipated, primarily due to tax benefits from acquisition-related expenses, employee equity awards and the reversal of tax reserves associated with uncertain tax positions.
Our GAAP diluted earnings per share was $1.75 in the third quarter, up 37% compared to $1.28 in the third quarter 2020, and our adjusted diluted earnings per share increased 50% to $1.97.
Adjusted EBITDA increased 36% to $40.9 million or 20.5% of revenue compared to $30 million or 19.4% of revenue in the third quarter of 2020 due to strong performance in our Flow Control segment, which was up 42% with a large portion attributable to organic growth.
This is the second quarter in a row that our consolidated adjusted EBITDA, as a percentage of revenue, has exceeded 20% and we expect to also achieve this for full year 2021.
Operating cash flow increased 56% to $37.9 million in the third quarter of 2021 compared to $24.4 million in the third quarter 2020.
Free cash flow increased 53% to $34.6 million in the third quarter of 2021 compared to $22.6 million in the third quarter of 2020.
We had several notable nonoperating sources and uses of cash in the third quarter of 2021.
We paid $141.4 million for the acquisitions of Clouth and Balemaster and we borrowed $63.1 million related to these acquisitions.
Despite the significant acquisition activity in the quarter, we were able to utilize our strong cash flows to pay down our debt by $26 million.
We also paid $3.4 million for capital expenditures and paid a $2.9 million dividend on our common stock.
Let me turn next to our earnings per share results for the quarter.
In the third quarter of 2021, our GAAP diluted earnings per share was $1.75.
And after adding back acquisition-related costs of $0.22, our adjusted diluted earnings per share was $1.97.
In the third quarter of 2020, our GAAP diluted earnings per share was $1.28, and our adjusted diluted earnings per share was $1.31.
As shown in the chart, the increase of $0.66 in adjusted diluted earnings per share in the third quarter of 2021 compared to the third quarter 2020 consists of the following: $0.90 due to higher revenue; $0.09 from acquisitions, net of interest expense and acquisition borrowings; and $0.05 due to lower interest expense.
These increases were partially offset by $0.21 due to higher operating expenses, $0.15 due to a decrease in the amounts received from government assistance programs.
$0.01 from higher noncontrolling interest expense and $0.01 due to higher weighted average shares outstanding.
Collectively, included in all the categories I just mentioned, was a favorable foreign currency translation effect of $0.07 in the third quarter of 2021 compared to the third quarter of last year due to the weakening of the U.S. dollar.
Looking at our liquidity metrics on slide 15.
Our cash conversion days, which we calculate by taking days in receivables plus days in inventory and subtracting days in accounts payable, decreased to 113 at the end of the third quarter of 2021 compared to 140 at the end of the third quarter of 2020.
This decrease was primarily driven by a lower number of days in inventory.
Working capital, as a percentage of revenue, was 13.5% in the third quarter of 2021 compared to 15.6% in the third quarter 2020.
Our net debt, that is debt less cash, increased $115 million sequentially to $231 million at the end of the third quarter of 2021.
We borrowed $63 million in the quarter to fund our acquisitions, and we were able to pay down $26 million of debt in the quarter.
Our leverage ratio, calculated in accordance with our credit agreement, was 1.69 at the end of the third quarter 2021 compared to 1.71 at the end of the second quarter of 2021.
Our net interest expense decreased $0.3 million to $1.3 million in the third quarter of 2021 compared to $1.6 million in the third quarter of 2020.
At the end of the third quarter of 2021, we had $105 million of borrowing capacity available under our revolving credit facility, which matures in December of 2023.
I would like to update our revenue range for the fourth quarter and full year 2021.
Although we had record bookings of $245 million in the third quarter, which is the fourth record quarter in a row.
We ended the third quarter with a record backlog of $299 million, the current headwinds from supply chain and logistical constraints have caused us to reduce our revenue expectations for the fourth quarter.
We now anticipate revenue of $210 million to $215 million, down from $220 million to $225 million that we noted in the July call.
For the full year 2021, we now anticipate revenue of $778 million to $783 million revised from $783 million to $793 million.
This change in the revenue range includes $13 million of revenue that has been moved into 2022 and as a result of supply chain issues or customer requested changes to the shipping dates.
In addition, the timing of capital orders also had an impact.
As Jeff mentioned, the China power supply issue, which came to light during September, has also had an impact on our production schedule.
The Chinese government has imposed varying power restrictions from time to time, which are outside of our control.
Our current revenue expectation is based on the current power use guidelines we have been given holding throughout the quarter.
Our guideline and gross margins essentially remains the same.
We anticipate fourth quarter gross margins will be 42%, which includes the impact of amortizing the acquired profit and inventory.
Our current estimate for the amortization of acquired profit and inventory in the fourth quarter is $2.1 million or $0.13.
We anticipate SG&A expenses will be approximately $55 million to $56 million, and R&D will be a little over $3 million in the fourth quarter.
The SG&A expense includes backlog amortization of approximately $600,000 or $0.04.
We anticipate our net interest expense will be approximately $1.4 million in the fourth quarter of 2021, and we anticipate the tax rate for the quarter will be 27% to 28%.
We hope these directional comments are helpful.

user
q3 adjusted earnings per share $1.97.
q3 gaap earnings per share $1.75.
q3 revenue rose 29 percent to $200 million.
quarter end backlog was a record $299 million.
qtrly bookings increased 71% to a record $245 million.
sees fy 2021 revenue $778 million to $783 million.

assistant