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Text: I'm William Prate, Senior Director of Global Financial Planning and Analysis and Investor Relations.
Dave will brief you on our operations and enterprise strategy, and Fay will cover the financials.
After their remarks, we will open the call to questions.
The risks and uncertainties are described in today's news release and the documents we filed with the Securities and Exchange Commission.
We encourage you to review those, particularly our Safe Harbor statement, for a description of the risks and uncertainties that may affect our results.
Additionally, on this conference call, we will discuss non-GAAP measures that include or exclude certain items.
Our third quarter results reflect the returns of pre-pandemic demand across the majority of our geographic markets and verticals.
Our comprehensive and innovative product offerings are resonating with customers during this broad-based market recovery, and we expect this demand environment to continue for the foreseeable future.
While we are certainly encouraged by these positive trends, our financial performance continued to be impacted by the unexpected and prolonged global supply disruptions, inflation and labor constraints that have affected virtually every industry and geographic markets.
The increased demand for our products combined with the effect of macro level constraints on our production capabilities contributed to a record order backlog that varies by product category or region and is now 3 to 5 times our historical averages.
In response, we've taken actions wherever possible to minimize the impact on our operations.
Our plants continue to remain open and operate due to the significant efforts by our global teams to maximize output and to safeguard our customers' experience.
While we expect that these macro headwinds will continue well into 2022, we remain confident in our ability to drive long-term sustainable growth and improve our operational efficiencies to generate long-term value for our shareholders.
We are doing so not only through short-term mitigation actions, but also to the changes we've made and continue to make as part of our enterprise strategy.
To minimize the impact of higher freight costs and related supply disruptions, we continue to prioritize local-for-local and region-for-region manufacturing and sourcing to allow us to manufacture our products closer to our customers.
As an example, we are making the necessary investments to add production of our T16 line to our China plants mid next year.
The T16 is a highly maneuverable battery-operated ride-on scrubber that has proven to be very popular with our customers within the APAC region.
By adding production to the local market, we can help minimize freight costs, improve lead times and better leverage our global production capacity.
We have continued to make capital investments to drive greater efficiency and capacity in all of our plants.
As just one example, we have invested in the new lays in our Minneapolis plant that will improve production flow, reduce the amount of labor spent machining parts and will allow us to in-source items that we would have otherwise purchased from vendors.
New tooling, specifically tooling related to our rotational molding machines, is another example of how we are investing in our business to support our local-for-local initiatives.
This lets us manufacture key components at the point of assembly, meaning, we can avoid situations where we manufacture in one location before shipping to a second location for final assembly.
These actions help avoid unnecessary shipping delays, freight costs, added time to manufacture and inventory carrying costs.
While our teams are taking every opportunity to find creative solutions to address the current supply chain environment, each day brings new challenges in terms of parts availability.
Right now, the lack of availability of hydraulic pumps, chips and other electronic components, which are critical parts within our machines, are main drivers of our increased backlog and are directly affecting our ability to deliver on our full year potential.
However, we will continue to control everything we can control and work diligently to capitalize on the strong demand environment.
An important component of our enterprise strategy is a long-term move toward platform design.
In the current environment, our engineering teams are taking a balanced approach to this initiative as they weigh the long-term benefits of platform design with the near-term need to adjust our designs to allow for available parts and to increase our sourcing flexibility.
Of course, our commitment to quality and safety and meeting the needs of our customers will not waiver.
Regarding labor shortage, specifically in manufacturing, we are staying competitive with wages and are making every effort to attract new talent by providing a safe, rewarding and fulfilling work environment.
We are also supplementing and strengthening our talent acquisition teams by partnering with third-party vendors to assist with our employment outreach through targeted marketing campaigns and professionally staged hiring events.
We are encouraged by these actions which are having a positive effect on our recruiting and helping to mitigate the ongoing labor challenges.
As Fay will discuss, while our revised full year guidance reflects what continues to be a challenging operating environment, our team remains committed to meeting the needs of our customers and executing against our enterprise strategy to deliver on our long-term financial commitments.
In particular, we continue to innovate for profitable growth, which is the third pillar of our enterprise strategy.
Over the past year, we've announced the introduction of new products to help address the evolving needs of our customers.
Earlier this year, we introduced new mid-tier products, which leverage our IPC product portfolio, to meet the needs of a broader segment of customers by offering a wider range of performance and price points.
Our mid-tier products have been well received by our customers and distributors.
While they leverage the same IPC platform, these Tennant-branded products benefit from the broader customer experience associated with the Tennant brand, including the full ecosystem of application expertise, technological innovations and best-in-class sales and service support.
During the past year, we've also introduced two key new products to our AMR portfolio, including the T380AMR and the T16AMR. Together with the T7AMR, these products have created a comprehensive robotic portfolio to meet all of our customers' needs.
With the addition of these new products, we have been able to strategically enter new verticals outside of just retail, including manufacturing, logistics and warehousing and education, among others.
Our AMR portfolio continues to be well received by an expanding number of customers, and we look forward to updating you on a number of other AMR innovations as they materialize.
The one strategic pillar I haven't yet touched on is winning where we have a competitive advantage.
For example, we recently launched a value realization exercise in Australia building on our successful North American execution back in 2019 where we assessed all of our strategic accounts and distributor partners.
In Australia, this allowed us to realign over 40% of our strategic account customers and 80% of our distributor partnerships, ensuring that we have an optimized channel structure in place to serve this highly competitive market.
By adjusting our customer segmentation appropriately, we can better adjust lead times, pricing and sales support across our customer base.
In doing so, we are aligning the customer experience with our profitability goals.
Moreover, we are relentlessly focused on providing our customers with high quality products and exceptional service as we execute on our enterprise strategy.
With that goal in mind, we will continue to take decisive and appropriate actions to maintain our customer experience, while remaining focused on our business objectives.
For the third quarter of 2021, Tennant reported net sales of $272 million, an increase of 3.9% over the prior year, which included a favorable foreign currency effect of 1.2% and a divestiture impact of negative 2% related to the sale of our Coatings business in the first quarter of 2021.
Organic sales, which exclude the impact of these currency effects and divestitures, increased 4.7%.
As Dave mentioned, our revenue results were tempered by the continued global supply chain disruptions and labor constraints, with North America being the most affected.
Tennant groups its sales into three geographies.
The Americas, which include all of North America and Latin America.
EMEA, which covers Europe, the Middle East and Africa.
And Asia Pacific, which includes China, Japan, Australia and other Asian market.
In the third quarter, sales in the Americas decreased 0.6% year-over-year, which included a negative divestiture impact of 3.1%, organic growth of 2% and a favorable foreign exchange effect of 0.5%.
Strong customer demand in Brazil and Mexico drove a year-over-year increase in sales in Latin America.
North America delivered modest organic growth as compared to the prior year, due to the previously mentioned supply chain and labor challenges as well as the lapping of the significant AMR order in the prior year.
Additionally, the current year period benefited from an increase in our service, parts and consumables businesses.
Sales in EMEA increased 16.1% or 14% organically, including a favorable foreign exchange effect of 2.1%.
The results which were impacted by global supply chain challenges reflected growth across all countries and product categories in the region as demand returned to pre-pandemic levels.
Sales in APAC decreased 0.4% or 2.9% on an organic basis and included a positive foreign exchange effect of 2.7% and a negative revenue impact of 0.2% related to the sale of the Coatings business.
The sales decline was partially attributed to pandemic-related lockdowns in some regional markets during the third quarter of 2021.
Supply chain disruptions and labor constraints impacting North America plants that supply APAC also limited our ability to meet orders across the region with the largest impact experienced in China and Japan.
Even so, the region experienced strong results for parts and consumables and service with strength in the Australian market across all product categories.
Reported and adjusted gross margin in the third quarter were both 40.1% compared to a reported gross margin of 39.6% and adjusted gross margin of 39.8% in this year ago period.
Although the comparison to the prior year was favorable, the year ago period was unfavorably impacted by certain strategic investments and pandemic-related productivity challenges.
As we highlighted during our last conference call, our third quarter adjusted gross margin was lower than the adjusted gross margin in the first half of 2021.
This decrease was primarily due to increased material and freight costs and productivity challenges caused by parts availability.
As for expenses, during the third quarter, our adjusted S&A expenses were 28.3% of net sales compared to 29.3% in the year ago period.
The year-over-year improvement in leverage was a direct result of the cost saving actions as well as the adjustment of management incentives in Q3 of 2021 to better reflect current expectations.
Net income in the third quarter was $21.5 million or $1.14 per diluted share compared to $11.7 million or $0.63 per diluted share in the year ago period.
Adjusted diluted EPS, which exclude non-operational items and amortization expense was $1.33 per share compared to $0.90 per share in the year ago period.
The increase year-over-year was primarily driven by lower interest expense and increased business performance.
Adjusted EBITDA in the third quarter increased to $36 million or 13.2% of sales compared to $32.6 million or 12.4% of sales in Q3 of last year.
The year-over-year improvement was driven primarily by increased revenues based on strong demand as we continue to lap the pandemic-related slowdown of 2020 as well as improved gross margins and an adjustment of management incentives previously mentioned.
As for our tax rate, in the third quarter, Tennant had an adjusted effective tax rate excluding non-recurring expenses of 3.8% compared to 11.3% for the third quarter of 2020.
The decrease in the effective tax rate was driven primarily by a tax benefit resulting from an election to step-up the tax basis of certain assets in Italy.
Turning to cash flow and balance sheet items.
Our long-term capital allocation strategy is to first fund operations and investment in growth, appropriately managed leverage, pursue strategic and accretive M&A and then to return excess free cash flow over time to shareholders through dividends and share repurchases.
We ended the quarter with $140.6 million in cash and cash equivalents and our net leverage of 0.93 times adjusted EBITDA is lower than our stated goal of 1.5 to 2.5 times.
Cash flow from operations was strong with $25.1 million generated in the third quarter and $62.9 million generated on a year-to-date basis.
Additionally, capex is approximately $12 million for the first nine months of the year.
Our strong free cash flow generation allowed us to return capital to shareholders through the following actions.
First, and as previously announced, Tennant's Board of Directors has authorized a 9% increase in the company's quarterly cash dividend to $0.25 per share.
The increased dividend is payable on December 15, 2021 to shareholders of record at the close of business on November 30, 2021, marking the 50th consecutive year that the company has increased its annual cash dividend.
Secondly, during the third quarter, Tennant repurchased approximately 102,000 shares of its common stock for $7.5 million under its existing share repurchase program.
The increase in the dividend and our share repurchase activities are aligned with our long-term capital allocation priorities and display continued confidence in our ongoing business performance and future cash flow generation.
Lastly, turning to guidance.
As included in today's earnings announcement, Tennant adjust its full year guidance for 2021 as follows.
Net sales of $1.09 billion to $1.1 billion, reflecting organic sales growth of 9% to 10%.
Full year reported GAAP earnings in the range of $3.50 to $3.70 per diluted share.
Adjusted earnings per share of $4.20 to $4.40 per diluted share.
Adjusted EBITDA of $137 million to $142 million.
Capital expenditures of approximately $20 million.
And an adjusted effective tax rate of approximately 15%.
The challenges we're facing with global supply chain and labor shortages are not unique to Tennant and are likely to remain for the foreseeable future.
These challenges did have a direct impact on our Q3 results and our ability to meet our full potential in 2021.
However, we are encouraged by the strong response to our innovative suite of products and the market recovery that is now at pre-pandemic levels of demand.
Our continued execution of our enterprise strategy has enabled us to better navigate to continued macro challenges facing the overall economy.
But more importantly, the strategic actions we've taken over the past couple of years will ultimately drive long-term growth and profitability and enhance shareholder value.
We will now open the call to questions.

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q3 adjusted earnings per share $1.33.
q3 earnings per share $1.14.
sees fy gaap earnings per share $3.50 to $3.70.
q3 sales rose 4.7 percent to $272 million.

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