Q2 2021 Circor International Inc Earnings Call

August 10, 2021

[music].

Greetings and welcome to circle on International second quarter 2021 earnings Conference call.

At this time all participants are in a listen only mode.

A brief question and answer session will follow the formal presentation.

If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.

As a reminder, this conference is being reported.

I will now turn the conference over to Alex Mackie, Vice President financial planning and analysis and Investor Relations. Thank you Sir you may begin.

Good morning, and welcome to the third quarters second quarter 2021 earnings call I'm joined today by Scott Blackout, certain quarters, President and CEO and I'll be kind of all the company's chief financial Officer.

Before we start I'd like to remind you that today's presentation and press release are available on <unk> website at investors that certain core dot com.

Today's discussion contains forward looking statements and only represent the company's views as of today.

These expectations are subject to known and unknown risks uncertainties and other factors and actual results could differ materially from those anticipated or implied by today's remarks.

While circle or may choose to update these forward looking statements at a later date the company specifically disclaims any duty to do so you.

You can find a full discussion of these factors in the third quarter form 10-K, 10, Qs and other SEC filings also located on our website.

On today's call management will refer to GAAP and non-GAAP financial measures. The reconciliation of certain non-GAAP measures to comparable GAAP measures are available in our earnings press release and slides with that I'll turn the call over to Scott.

Thanks, Alex and good morning, everyone.

Circle delivered another solid quarter and we're entering the back half of the year with high confidence that we'll achieve our 2021guidance.

Our Q2 performance was highlighted by 27% organic orders growth in our industrial business as both short and long cycle demand remains strong.

We saw continued recovery across virtually all industrial regions and end markets with orders exceeding pre COVID-19 levels.

Book to Bill on industrial or was 1.2% consistent with the first quarter.

Despite some headwinds from inflation and COVID-19 related supplier issues, we delivered revenue and earnings in line with guidance.

Our free cash flow conversion was 115% a sign that our efforts to improve working capital or taking hold.

Based on our strong orders performance in the first half or $436 million backlog and all the work we've done to streamline our operations, we are well positioned for a very strong second half.

And finally, we made significant progress on our strategic priorities.

I'll talk more about this later on I'm excited about the momentum the team is building, especially around growth and margin expansion.

Now, let me turn the call over to Obi.

Thank you Scott and good morning, everyone.

Let's start with the financial highlights on slide 2.

Organic orders of $210 million on the quarter were up 4% versus prior year.

We saw strong year over year increase of 27 percentage of industrial.

Driven by improvements in virtually all of our end markets.

As expected.

Orders were down 31% in aerospace and defense.

Due to the timing of large defense orders are.

Our backlog remains strong at $436 million up 4% sequentially.

Our backlog in the industrial is $248 million up 26% since the end of last year.

Organic revenue was $190 million down 2% versus prior year and up 5% sequentially.

Revenue came in as expected given the timing of orders and lead times across our portfolio sequentially.

Sequentially.

Industrial was up 7% as revenue starts to ramp from strong orders in Q1 and Q2.

A&D was in line with prior quarter.

Driven by timing of defense deliveries and a slowly improving commercial market.

<unk> operating income was $14.6 million.

Representing a margin of 7.7% up 80 basis points from previous quarter and down 80 basis points from prior year finally, we.

We delivered 35 of adjusted earnings per share.

And generate free cash flow of $8 million.

As the team continues to drive working capital improvements across the company.

Moving to slide 3.

Industrial organic orders were up 27% versus last year and 1% sequentially.

Regionally order growth was led by North America on Asia.

And we saw improved project orders as customers start to increase cap ex spending.

Our book to Bill ratio for the quarter and for the first half was 1.2.

Which will support double digit second half revenue growth.

And represents a revenue inflection point post COVID-19.

As expected.

Industrial organic revenue was down 1% versus last year.

And up 7% sequentially.

By region.

We saw year over year strength in both EMEA and China.

Partially offset by lower revenue in North America.

By end markets, our downstream business was negatively impacted by Covid related supply chain issues in India and customer driven aftermarket project delays in the U S.

Outside of these isolated issues revenue was in line or better than expectations across our end markets.

Adjusted operating margin was 8% down 200 basis points versus last year.

Which reflects the downstream volume on aftermarket mix challenges in the quarter.

Operating leverage.

Simplification and continuous strategic pricing will drive strong second half margin expansion.

Turning to slide 4.

Aerospace and defense orders of $54 million were down 31% versus last year and 26% sequentially.

Orders were lower versus prior year due to a large multiyear defense order for the Virginia class submarine.

Versus prior quarter, the lower orders were driven by the timing of large orders for the joint strike fighter and Cvs 80, and 81 aircraft carriers.

Lumpy defense orders were partially offset by a modest sequential and year over year improvement in commercial aerospace.

As expected.

Revenue in the quarter was $61 million.

Down 5% year over year.

And up 1% from prior quarter.

Looking to the back half, we're expecting double digit organic revenue growth as we ramp deliveries on key defense programs.

Finally.

Operating margin was 19, 9% per quarter.

Down 120 basis points year over year.

The margin decline was driven by lower aftermarket revenue.

Sequentially.

Margins expanded 210 basis points due to pricing actions and material productivity.

We remain confident in our ability to expand margins through the remainder of the year with higher defense on aftermarket volume.

Turning to slide 5.

Free cash flow in the quarter was $8 million.

A significant improvement versus prior year.

Working capital was a source of cash.

Primarily driven by improved collections through the quarter and the timing of customer down payments.

We paid down $40 million of debt in Q2 with free cash flow and the proceeds from the sale of a non core industrial product line.

We ended the quarter with $451 million on net debt and we are on track to improve our leverage by greater than 1 turn this year.

Please turn to slide 6 where we will discuss our <unk> and full year outlook.

In the third quarter, we expect revenue to be up 8% to 10% organically.

Industrial deliveries will be heavily weighted to Q3 and Q4.

As we shipped the backlog that we built on the first half.

And Andy the growth in the back half is driven by the ramp in defense program deliveries and a modest recovery in commercial aerospace.

Scott will cover this in more detail in the upcoming slides.

We're expecting adjusted earnings per share of <unk> 55 to 60 in the third quarter up 53% to 67% increase versus prior year.

<unk> free cash flow conversion is expected to be between 120 on 140%.

Inflation will be a headwind in the third quarter and second half.

But we expect material productivity to offset any cost increases.

For the year.

We are reaffirming the guidance that we provided during the first quarter earnings call.

Organic revenue growth is expected to be in the range of 2% to 4% with adjusted earnings per share of $2.10 to $2.30.

Free cash flow conversion remains at 85% to 95%.

We have high confidence in our second half margin outlook, and we expect to exited the year with <unk> operating margin of 13% to 15% from the company.

As we head into the back half of the year. We are closely monitoring the impact of COVID-19 variance on our global end markets and operations.

Now I'll hand, it back to Scott to discuss our market outlook.

Thanks Debbie.

Let's start with our industrial outlook on slide 7.

As we mentioned in the second quarter, we saw continued recovery across virtually all industrial end markets with orders exceeding pre COVID-19 levels.

In Q3, we expect double digit order growth versus prior year with a seasonal sequential decline.

For Q3 industrial revenue, we expect solid improvement year over year with growth between 7% to 11% Inc.

Improvement across our short cycle end markets is expected to lead revenue growth as shorter lead time products in our backlog shipped in Q3.

Aftermarket remained strong with a double digit increase expected in the third quarter.

Our longer cycle end markets are expected to be up 5% to 9%.

In downstream, we're expecting revenue more or less in line with last year.

We're encouraged by the orders and quoting activity, we saw through July and we've addressed the supplier issues that impacted us in Q2.

And commercial marine orders and revenue are increasing as shipbuilding activity picks up from historically low levels.

Finally pricing is expected to net roughly 1% consistent with prior quarters.

Moving to aerospace and defense.

Orders in the second quarter were down sequentially and versus prior year, driven by the timing of large defense program orders.

Q3 orders are expected to be in line with prior year and were expecting a significant increase in Q4.

Revenue in the third quarter is expected to be up 12% to 15% versus prior year.

Growth in defense revenue was primarily driven by strong volume on smaller OEM programs, such as the Boeing P..8 Poseidon and various missile switch programs.

Revenue from our top OEM programs is expected to be up low to mid single digits with growth across nearly all of our major platforms.

Year to date aftermarket revenue has been trending below our expectations driven by delayed government spending.

Looking forward, we expect sequential growth in spares and MRO activity in both Q3 and Q4.

Commercial aerospace is expected to be up between 15% and 20% in the third quarter.

Revenue from commercial air Framers will be up roughly 50%, mostly driven by increased <unk> hundred 20 volume and favorable comparisons to last year.

Aftermarket is expected to be up roughly 30% in line with increased aircraft utilization.

In both cases narrow body volume continues to lead the recovery.

Finally pricing is expected to be a net benefit of 3% for defense and 5% for commercial due to price increases secured earlier in the year, a higher level of spot orders and an increase in commercial aftermarket volume.

Our full year pricing outlook remains in line with last year.

As we did last quarter I'd like to provide an update on our previously shared strategic priorities.

These priorities continue to guide what our team works on every day.

We're investing in growth.

We launched 21, new products through the first half of the year and remain on track to deliver 45, new products in 2021 on.

On the aerospace and defense side, we launched a new brushless DC motor on break Assembly, which actuate the vertical stabilizers and alar on flight control surfaces on our high altitude long endurance surveillance drone operated by the U S Air Force.

On the industrial side, we introduced a new control valve that was entirely designed sourced and manufactured in India. The first of its kind for <unk>.

This flue gas <unk> authorization valve is not only compliant with the new clean air regulations for Indian power plants, but also position <unk> as the sole local partner, providing a total solution.

Next our regional expansion strategy is gaining traction our industrial team recently won a large multi product pump order with day, we shipbuilding in Korea.

By providing a complete solution, we were able to secure a position on a long term submarine program and strengthen our relationship with the Korean Navy.

On margin expansion, we're building on our core operating system and simplification program by kicking off 80.20 at 3 of our largest industrial businesses.

We're still early in the process, but we're excited about the structured approach to accelerate margin expansion at <unk>.

Finally, as a b covered earlier, we made progress in reducing our total debt will continue to use free cash flow to pay down debt for the remainder of 2021.

Before we move to Q&A I want to highlight a recent customer perception study for our industrial business.

It was an independent global survey with participation from roughly 70 of our largest customers.

The results confirm that our strategic priorities are aligned with our customers.

Our net promoter score of 67 is exceptional and as a testament to our product quality and technical customer support.

Given the mission critical nature of our products and the high cost of failure, our customers have a strong preference to buy OEM spare parts and.

And price is 1 of the least important buying criteria.

This study illustrates the power of our differentiated product portfolio and confirms that our strength are aligned with our customers' top priorities.

With that being I will be happy to take your questions.

Thank you we will now be conducting a question and answer session.

I would like to ask a question. Please press star 1 on your telephone keypad.

A confirmation tone will indicate your line is on the question queue.

You May press Star 2 if you would like to remove your question from the queue.

For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys, 1 moment, please while we poll for questions.

Thank you. Our first question comes from the line of Nathan Jones with Stifel. Please proceed with your question.

Good morning, everyone.

Good morning, Nathan how are you.

Great. Thanks, I wanted to start off on with critical flow solutions, you guys mentioned from supply chain challenges out of India.

Demand challenges in the U S, which I assume is related to Dodd access on Covid.

Explain a little bit more on what the supply chain challenges, where I think you said you've addressed that is.

How you've got at random and if youre, saying that side access improved for installations to pick up in the back half of the year.

Yes. Thanks for your question Nathan So yes.

On the 1 place where we did experienced disruption in the quarter related to Covid was in our downstream business and we have a pretty significant portion of our supply chain for this business is in India and as you May know, we have 1 of our factories for this business in India as well so what ended up happening in the quarter was we had a number of our critical suppliers essentially.

Down in the quarter and stop shipping product in the last month of the quarter. So that prevented us from in turn taking their product turning it into an end product for our customers and shipping and recognizing revenue.

That was the first challenge in the business. The second was in North America related to aftermarket projects that we're doing at refineries in North America, we had several of our customers in this part of the business who delayed the projects that were expected to be executed in the quarter those are probably going to happen.

<unk> Q4, 1 of them will happen in Q3, and the rest are scheduled to happen again in Q4. So so we haven't lost any revenue as part of this but we experienced.

Delays in both cases.

You want to know the impact of of the issues.

It's roughly $3 million of income and about $5 million of revenue in the quarter.

And then we.

Site access issues with that.

The increase in North America.

Yeah call Covid related not something else.

Yes, they were COVID-19 related.

Great.

I wanted to then maybe asked a little bit about the.

80, 20 deployment that Youre doing at circle.

Maybe you could talk about.

188 debt to tackle what are the primary initial focus areas that you're looking at with an 80.20 land.

Just any more detail on on what Youre doing that.

Yeah. Thanks, Thanks, Nathan So we're really excited about this.

We view it as an extension of the simplification mission that we have been on <unk> for some time.

We've kicked it off at 3 of our largest businesses in industrial we brought in a consulting firm to help us.

On the process trained the team build the core competence internally.

We're in the diagnostic phase and the results are very interesting.

We're able to segment our customers segment, our products segment, our channels and really understand where we make money and where we don't make money and where we have complexity that we really shouldnt have so we're viewing 80.20 as a way of accelerating simplification prioritizing resources prioritizing customers, who we serve how.

We serve them, which channels, which product lines are most profitable and.

And ultimately we'll guide new products will guide our pricing initiatives.

It's a fairly holistic process, that's what we're ultimately going to integrate into the <unk> operating system. So we're excited about it it's still early days, but the initial initial data that we're seeing is very promising no net.

This will be the only thing I'd add is look up gone toward on a prior life and ive seen the benefit of it as Scott mentioned, we are in the early phases, we're still doing a cordon quartile analysis.

Like Scott mentioned, we're looking at with a profitable customers that are on the profit product lines are and how do we take our best people on deploy them on dose and we can grow faster and oversaw over serve a profitable customers still early but I think by the end of the year. Early Q1, we should have a good understanding of what the impact is and as we start to make progress in the 3 sites that Scott mentioned.

On the starter deployed across the company.

Okay. So it's pretty early in the process here in between.

We could potentially that really drive some upside through the business is on the next few years, Inc.

Yes, I think we'll start talking about results next year Nathan I think this year, we won't be talking about at this point.

Yes, I know it needs a lot of planning to do this kind of stuff.

Having followed at base volume a lot.

Thank you very much for taking my question I'll pass it on.

Yeah.

Our next question comes from the line of Jeff Hammond with Keybanc. Please proceed with your question.

Hey, good morning, guys.

Good morning, Jeff.

Just back on the.

The some of the delays as this Indian supplier 1 back up and then just as you think about.

Being able to kind of get back on track and ship.

This order growth and backlog in the second half what are some of the risks and upsides.

So it was actually 3 suppliers in India that gave us issues in the second quarter. They are all back up and running.

Including our own factory is back up and running in India. So we.

We rescheduled the aftermarket projects that we were expecting to do in Q2 for later this year as I mentioned earlier. So we are.

We're being very proactive right now with the supply base in India related to this business.

If there is a risk.

It is going to be COVID-19 related.

But we're minimizing that to the degree to agree that we can we have a significant ramp in the back half as you know in Q3, and then again in Q4.

We've.

We've instituted.

A process if you will production readiness reviews, where we're going through all of the critical sites that are ramping up for us in the back half of the year, and we're evaluating risk and addressing it and so we're looking at supply chain. We're looking at manpower, we're looking at critical machines and shifts.

So we're taking a pretty holistic view of this to mitigate risk as we go into the back half of the year to directly answer your question on downstream.

We are expecting a revenue increased sequentially from Q3 to Q4, and then we're expecting another sequential increase into I'm, sorry from Q2 to Q3 and another sequential increase in Q3 to Q4.

And that's in the current outlook, we're being pretty proactive here about managing supply chain on this.

Okay, and then just on <unk>.

Can you just talk about like margins in your industrial order book or whats on your backlog I know theres been a lot of inflation I think youre only calling out 1 point of price and it just seems like.

On a lot of companies are going for a second and third bite at the Apple.

Okay.

Sure so.

So the margin in backlog is I will let me, let me answer the dual differently and I'll come back to that.

The expectation of margins as we go into the back half is fairly substantial increase in Q3, and Q4 and it's driven by.

It's driven by the things that we've been talking about Theres of course price, but as you said that's not the biggest part operating leverages as fairly.

A big component of this we took out a lot of costs last year and we've continued to do that into this year. So we should see good good drop through and the 30% to 35% range as we enter Q3 and then go again into Q4.

Those are 2 big ones were seeing some favorable mix as well as in the backlog aftermarket and short cycle of some of our more profitable end markets are leading the recovery. So we should have some favorable mix as we go into the back half. So there is nothing special about the margin and backlog.

I think it's mostly around the things that we've done from an execution standpoint, as we go into Q3 and Q4 Theyre going to drive the bottom line Hey, Jeff. This is Andy the only thing I'd add to that and I think Scott touched about I'd like to spend a couple of seconds on it is as you look at the back half rather than look at the revenue expectations that we've laid out you're starting to see an inflection point on the top line, whereas we stuck.

To deliver that top line the operating leverage the volume leverage on that.

Our P&L start to really flush through so if you think about the back half back half of the year on the margin expectations that we have volume plays a big oil the net above in addition to what Scott just mentioned.

Okay, and then just last 1.

I think you gave some color on on aerospace and defense order trends and just.

I'm, just wondering with kind of on the moving pieces of defense programs and commercial coming back in.

Kind of looking at the orders and backlog how that kind of frames.

Think like a 2022 trajectory would look like for for Aero and defense.

Okay.

So.

So 2022, so we have.

We've said in the past and it hasn't really changed around the growth and I'll talk about the pieces separately.

Jeff it's easier for us to explain it that way on the defense side.

We've been saying mid to high single revenue growth over the next several years mid to high single digit topline revenue growth, we still expect that those numbers. So you should see over the next several years.

Top line growth in the mid to high single digit range.

Our our orders.

In the business and our order expectation for the rest of the year supports that a lot of the new products that you hear me talking about our on the defense side of the business as well. So we're layering new products on top of growing platforms. So we feel pretty good about that so you'll see some noise quarter to quarter, but as you look look over on annual timely.

Line, you should see mid to high single digit growth on the commercial side.

We we were expecting commercial to recover to 2019 levels in 2024.

We most recently have changed that to believing that commercial will recover by 2023.

We're seeing strong recovery on narrow body much faster than wide body I think the whole industry is seeing that as well.

So we're seeing moderate growth off of a relatively low base here in the back half of the year, So Q3, and Q4 and it's accelerating and then we expect to see similar moderate levels of growth.

In 2022, so we're tightly linked to aircraft production rates and so it's.

You can you can kind of back into our business by looking at production rates and Thats largely what you should expect from us.

Okay. Thanks, so much.

Okay.

Yes.

Our next question comes from the line of Andy Kaplowitz with Citigroup. Please proceed with your question.

Hey, good morning, guys.

Andy.

So I wanted to follow up on Jeff's question in the sense that.

Just to talk about pricing.

You mentioned the good drop through that you expect in industrial 30% to 35%, but it's hard for us to understand sort of the 1% in.

In Q3, when that's what we saw on Q2, I mean as inflation similar because it doesn't seem like it would be similar for you guys. So any help you can give us on sort of the pieces around that would be helpful.

So sure so on the.

On the inflation side, we are seeing increased inflation through the year. So if you. If you look at what happened to us in the first half and you compare it to our forecast on the back half.

But expecting the inflation impact on industrial to double.

So so so so it's not insignificant having said that we.

Our material productivity.

We're expecting to fully offset inflation in the back half of the year. We were generating we were still generating material productivity in the first half and the back half, it's a lot less but we're still not going backwards from inflation I think it's maybe important to understand a few things about this we have a decent amount of our spend is on long term contract.

It's rare that we're buying raw material, we're usually buying components or parts from suppliers and the lead times are pretty long. We as you know we don't make standard product everything we make is either engineered designed to a customer specification.

So what we have on our backlog that were shipped shipping in the range of what we're shipping the remainder of the year a lot of it is already in our backlog and the supply base is already committed.

So we're feeling pretty good about inflation and where we are from a productivity standpoint for the rest of the year.

Next year it could it could get worse.

Anticipating that it will but we feel like we've got it in hand for this year.

So Scott when you're trying to do that and as you're trying to offset inflation with productivity right just to be clear versus yes, your pricing strategically, but it's more productivity that offsets and to your point on long term contracts and then for next year is the goal to either raise prices or offset productivity or use productivity to offset if you do.

You have higher inflation net to go.

Well the goal the goal is always to generate as much productivity as we can.

Independently, we are trying to maximize price based on the value that we're delivering to customers. So we.

Thank you.

Okay I can extrapolate from your question a little bit here is can we and are we using inflation as a reason for raising prices because regardless of productivity, we're still incurring more inflation and yes. That's the case, we are doing that and we're doing that right now in the back half and we'll continue to do that to do that net.

First year.

So what we're absorbing we're offsetting with productivity, but that's not stopping us from from raising prices and the rationale being inflation because it certainly is still affecting us.

That's helpful. And then I wanted to follow up off on the comments that you made about the defense side. You know you still expect mid to high single digit growth in defense.

You also mentioned these aftermarket delay is where you're seeing do you need to see those resolved to sort of hit that sort of mid to high single digit sort of medium term growth.

On non stop there.

Yes so.

Aftermarket.

Aftermarket revenue surprisingly lumpy.

Look last year in Q2, I think it was up 30% to 35% for aftermarket defense revenue. This year, we're showing it's it's off.

I'm sorry for Q3 this year, we're showing it to our 5% to 10% so it tends to be a little bit lumpy.

We have seen delays this year versus what we expected coming into the year and so we.

We will be at the lower end of the range. This year, when we say mid to high single digit growth as a result of the delayed spend in aftermarket. So so for defense overall this year, we'll be at the low end of the range and its aftermarket driven it's.

Scott that's helpful. On 1 for a beat like you had a nice uptick in free cash flow, we know youre still guiding to that 85%, 90%, but maybe you can talk about where you're seeing the most improvement on working capital on sort of what to expect moving forward.

Yeah, absolutely. Thanks for the question. So as you mentioned, if you look at second quarter free cash flow.

Part of the first quarter earnings call, we had guided flat flat to slightly better or flat to slightly negative and we ended up with a positive $8 million. If you take a step back on the 2 things in Q2 and I'll talk about what is the expectation where do we see this continued continuing to improve first of all we had great performance on the receivable side.

We've kind of volume bolstered our receivable or receivable collection process. If you will and we saw a big pickup in the quarter better than what we'd expected and secondly, we have timing of some down payments from our customers WSI on Q2 W. Expect in Q3 that said if you think about it.

Go back to what we've said is our goal long term is to get to the low 20% working capital improvement and we continue to work towards it around.

Around our sales process and making sure we're thinking through the inventory buys intelligently, making sure. We continue to build on our receivable process and do the best we can to collect on time. So that we can we can improve our working capital.

Working capital performance, if you will.

Appreciate it guys.

Thanks, Andy.

Thank you we have reached the end of the question and answer session and with that the conclusion of today's call. You may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.

Okay.

Yeah.

[music].

Greetings and welcome to circle or International second quarter 2021 earnings Conference call.

At this time all participants are in a listen only mode.

A brief question and answer session will follow the formal presentation.

If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.

As a reminder, this conference is being reported.

I will now turn the conference over to Alex Becky Vice President financial planning and analysis and Investor Relations. Thank you Sir you may begin.

Good morning, and welcome to third quarter second quarter 2021 earnings call I'm joined today by Scott Blackout, certain quarters, President and CEO and I'll be kind of all the company's chief financial Officer.

Before we start I'd like to remind you that today's presentation and press release are available on <unk> website at investors, that's third quarter Dot com.

Today's discussion contains forward looking statements and only represent the company's views as of today.

These expectations are subject to known and unknown risks uncertainties and other factors and actual results could differ materially from those anticipated or implied by today's remarks.

While third quarter may choose to update these forward looking statements at a later date the company specifically disclaims any duty to do so.

You can find a full discussion of these factors and at certain quarters form 10-K, 10, Qs and other SEC filings also located on our website.

On today's call management will refer to GAAP and non-GAAP financial measures. The reconciliation of third quarter's non-GAAP measures to the comparable GAAP measures are available in our earnings press release and slides with that I'll turn the call over to Scott.

Thanks, Alex and good morning, everyone.

Circle delivered another solid quarter and we're entering the back half of the year with high confidence that we'll achieve our 2021 guidance.

Our Q2 performance was highlighted by 27% organic orders growth in our industrial business as both short and long cycle demand remains strong.

We saw continued recovery across virtually all industrial regions and end markets with orders exceeding pre COVID-19 levels.

Book to Bill on industrial was $1.2 consistent with the first quarter.

Despite some headwinds from inflation and COVID-19 related to supplier issues, we delivered revenue and earnings in line with guidance.

Our free cash flow conversion was 115% a sign that our efforts to improve working capital or taking hold.

Based on our strong orders performance in the first half or $436 million backlog and all the work we've done to streamline our operations, we are well positioned for a very strong second half.

And finally, we made significant progress on our strategic priorities.

I'll talk more about this later on I'm excited about the momentum the team is building, especially around growth and margin expansion.

Now, let me turn the call over to Obi.

Thank you Scott and good morning, everyone.

Let's start with the financial highlights on slide 2.

Organic orders of $210 million on the quarter were up 4% versus prior year.

We saw strong year over year increase of 27% on industrial.

Driven by improvements in virtually all of our end markets.

As expected.

Orders were down 31% in aerospace and defense.

Due to the timing of large defense orders are.

Our backlog remains strong at $436 million up 4% sequentially.

Our backlog in the industrial is $248 million up 26% since the end of last year.

Organic revenue was $190 million down 2% versus prior year and up 5% sequentially.

Revenue came in as expected given the timing of orders and lead times across our portfolio <unk>.

Sequentially.

Industrial was up 7% as revenue starts to ramp from strong orders in Q1 and Q2.

A&D was in line with prior quarter.

Driven by timing of defense deliveries and a slowly improving commercial market.

<unk> operating income was $14.6 million, representing a margin of 7.7% up 80 basis points from previous quarter and down 80 basis points from prior year. Finally, we delivered <unk> 35 of adjusted earnings per share.

And generate free cash flow of $8 million.

As the team continues to drive working capital improvements across the company.

Moving to slide 3.

Industrial organic orders were up 27% versus last year and 1% sequentially.

Regionally order growth was led by North America on Asia.

And we saw improved project orders as customers start to increased capex spending.

Our book to Bill ratio for the quarter and for the first half was 1.2.

Which will support double digit second half revenue growth.

And represents a revenue inflection point post COVID-19.

As expected.

Industrial organic revenue was down 1% versus last year and.

And up 7% sequentially.

By region.

We saw year over year stint in both EMEA and China.

Partially offset by lower revenue in North America.

By end markets, our downstream business was negatively impacted by Covid related supply chain issues in India and customer driven aftermarket project delays in the U S.

Net of these isolated issues revenue was in line or better than expectations across our end markets.

Adjusted operating margin was 8% down 200 basis points versus last year.

Which reflects the downstream volume and aftermarket mix challenges in the quarter.

Operating leverage simple.

Simplification and continuous strategic pricing will drive strong second half margin expansion.

Turning to slide 4.

Aerospace and defense orders of $54 million were down 31% versus last year and 26% sequentially.

Orders were lower versus prior year due to a large multiyear defense order for the Virginia class submarine.

Versus prior quarter, the lower orders were driven by the timing of large orders for the joint strike fighter and CV on 80, and 81 aircraft carriers.

Lumpy defense orders were partially offset by a modest sequential and year over year improvement in commercial aerospace.

As expected.

Revenue in the quarter was $61 million.

Down 5% year over year.

And up 1% from prior quarter.

Looking to the back half, we're expecting double digit organic revenue growth as we ramp deliveries on key defense programs.

Finally.

Operating margin was 19, 9% per quarter.

Down 120 basis points year over year.

The margin decline was driven by lower aftermarket revenue.

Sequentially.

Margins expanded 210 basis points due to pricing actions and material productivity.

We remain confident in our ability to expand margins through the remainder of the year with higher defense and aftermarket volume.

Turning to slide 5.

Free cash flow in the quarter was $8 million.

Difficult improvement versus prior year.

Working capital was a source of cash.

Primarily driven by improved air collection through the quarter and the timing of customer down payments.

We paid down $40 million of debt in Q2 with free cash flow and the proceeds from the sale of a non core industrial product line.

We ended the quarter with $451 million of net debt and we are on track to improve our leverage by greater than 1 turn this year.

Please turn to slide 6 where we will discuss our <unk> and full year outlook.

In the third quarter, we expect revenue to be up 8% to 10% organically.

Industrial deliveries will be heavily weighted to Q3 and Q4.

As we shipped the backlog that we built in the first half.

And Andy the growth in the back half is driven by the ramp in defense program deliveries and a modest recovery in commercial aerospace.

Scott will cover this in more detail in the upcoming slides.

We're expecting adjusted earnings per share of <unk> 55 to 60 in the third quarter up 53% to 67% increase versus prior year.

<unk> free cash flow conversion is expected to be between 120 on 140%.

Inflation will be a headwind in the third quarter on second half.

But we expect material productivity to offset any cost increases.

For the year.

We are reaffirming the guidance that we provided during the first quarter earnings call.

Organic revenue growth is expected to be in the range of 2% to 4% with adjusted earnings per share of $2.10 to $2.30.

Free cash flow conversion remains at 85% to 95%.

We have high confidence in our second half margin outlook, and we expect to exit the year with 4 key operating margin of 13% to 15% from the company.

As we head into the back half of the year. We are closely monitoring the impact of COVID-19 variance on our global end markets and operations now.

Now I'll hand, it back to Scott to discuss our market outlook.

Thanks Debbie.

Let's start with our industrial outlook on slide 7.

As <unk> mentioned in the second quarter, we saw continued recovery across virtually all industrial end markets with orders exceeding pre COVID-19 levels.

In Q3, we expect double digit order growth versus prior year with a seasonal sequential decline.

For Q3 industrial revenue, we expect solid improvement year over year with growth between 7% 11%.