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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.
These 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 documents, 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 second quarter results reflected the overall business recovery we saw across our geographic markets despite widespread global supply chain constraints and commodity inflation that cut across a number of industries and which impacted our ability to fully meet the Q2 increase in customer demand.
While the demand increase exceeded our initial expectations for Q2, the impact of macro-level headwinds such as parts availability, material inflation, freight costs, and labor shortages was also greater than we had expected.
In response, we've taken steps wherever possible to help minimize the effects of these challenges to our customers.
In most cases, these actions build upon or otherwise benefit from the strategic improvements we have made to our operating model as part of our enterprise strategy.
I will now walk you through some of the actions our teams have and will continue to take to mitigate some of the macro challenges in the current environment while serving the needs of our customers.
To address the issue of parts availability, which is the result of our suppliers managing their own production, labor, and logistical challenges our supply chain teams are leveraging our strategic partnerships to manage component and material availability.
We are also developing design alternatives and identifying additional sources to keep our manufacturing lines running, all while maintaining strict product quality controls.
To ensure a smoother process in securing parts in the second half of the year, our teams have developed more robust sales and inventory operations plans to better align our supply and demand.
These plans not only help our manufacturing plants develop smarter strategies to meet increased customer demand but also allow us to provide longer-term demand forecast to our suppliers to secure the parts fully.
To address material inflation, our teams are working diligently to find additional partners and, where possible, consolidating vendors to drive leverage and scale.
At the same time, we continue to use value engineering to help reduce the parts and material that go into each machine.
Our R&D and operations teams are regularly finding ways to help address material inflation while maintaining our value proposition of quality and innovation.
Today's pressures in the steel, resin, and lead markets represent a significant challenge that is felt by industrial manufacturers around the world and one that we expect will persist for the foreseeable future.
To minimize the impact of higher freight costs, we are fortunate that as part of our enterprise strategy, we had already started to prioritize local-for-local supply chain and region-for-region manufacturing.
This allows us to manufacture our products closer to our customers, which helps to reduce freight costs.
This does not entirely offset current headwinds given the constrained transportation market, but we are making every effort to ensure that our manufacturing lines remain up and running and that we can deliver products with appropriate lead times.
Regarding labor shortages, specifically in our manufacturing areas, we are staying competitive in the market by adjusting wages and making every effort to attract new talent by providing a safe, rewarding and fulfilling work environment.
We are also investing in our equipment, processes, and systems to drive the increased productivity.
With respect to the overall challenges we're facing in our cost of goods sold, we are also carefully and thoughtfully managing our S&A to a level that allows us to invest in the business, serve the needs of our customers, and deliver on our enterprise strategy while also maintaining our ability to meet our full year financial targets.
At the same time, we are implementing price increases where appropriate that will benefit the fourth quarter of this year and help offset some of the costs that we're not able to absorb internally.
While a price increase at this time of the year is not a normal practice for Tennant, we are compelled to take this action in response to the current macro market challenges.
The key improvements we've made internally as part of our enterprise strategy have helped facilitate our response to current market dynamics.
These improvements include value engineering, plant optimization, simplifying our product portfolio, divesting non-core businesses, and adjusting our go-to-market approach in specific regions.
I continue to be extremely proud of our global teams for their efforts in addressing these various operational challenges as countries and markets navigate their post-pandemic recoveries.
We are taking decisive actions to safeguard the customer experience and deliver on our financial commitments while remaining focused on our longer-term business objectives.
As Fay will discuss, our full year guidance assumes our continued effective management of a challenging supply chain and operations environment and reflects our growing confidence that the long-term global recovery for commercial and industrial cleaning will continue.
While we remain vigilant in our overall cost management in the face of material inflation, parts availability issues, and higher freight costs, we will continue to execute against our enterprise strategy and stay focused on delivering the best possible customer experience.
For the second quarter of 2021, Tennant reported net sales of $279.1 million, up 30.4% year-over-year, including a favorable foreign currency effect of 5.4% and a divestiture impact related to the sale of the company's coatings business of negative 2.5%.
Organic sales, which exclude the impact of currency effects and divestitures, increased 27.5%.
Tennant Group sales into the three geographies: the Americas, which includes all of North American and Latin America; EMEA, which covers Europe, the Middle East, and Africa; and Asia-Pacific, which includes China, Japan, Australia, and other Asian markets.
In the first quarter, sales in the Americas increased 22.7% year-over-year with organic growth of 25.4%, including a foreign exchange effect of 1.1% and a divestiture impact of negative 3.8%.
Sales were strong, both in North America and Latin America, with growth across all channels and product categories despite a decline in the company's AMR robotics business, which lapped a large order in the year ago period.
Strong customer orders resulted in higher than normal backlog levels at the end of the quarter as the company managed parts availability related to global supply chain constraints and labor shortages.
Sales in EMEA increased 55.5% or 40.2% organically, including a foreign exchange effect of 15.3%, with growth across all countries and across all product categories as pandemic-related restrictions eased.
Sales in the Asia-Pacific region rose 16.6% or 9.6% organically, including a foreign exchange effect of 7%.
The results were driven primarily by strength in Australia across all product categories.
During the quarter, organic results in China were flat year-over-year, which was due to limited parts availability.
Reported and adjusted gross margin were both 41.2% compared with 41.8% in the year ago period, which included the impact of government credits received and cost-saving measures taken in response to the pandemic.
As previously discussed, the decline also reflects increased costs related to freight, materials, and labor, which were partially offset by favorable pricing and cost savings initiatives.
These headwinds are expected to continue for the foreseeable future, with added pressure in the third quarter.
Entering the fourth quarter of the year, we expect pricing and other actions to start driving a meaningful impact.
As for expenses during the second quarter, our adjusted S&A expenses were 30.3% of net sales compared with 28% in the year ago period.
The year-over-year deleverage is a direct result of the cost-saving actions taken in the second quarter of last year in response to the pandemic.
These actions include furloughs, reduced work schedules, adjusted to management incentives, government credits, and tighter project and travel spending.
Net income was $9.8 million or $0.51 per diluted share compared with $14.3 million or $0.77 per diluted share in the year ago period.
Adjusted diluted EPS, excluding non-operational items and amortization expense was $1.18 per share compared with $0.96 per share in the year ago period, which was primarily driven by lower interest expense.
Adjusted EBITDA in the second quarter of 2021 decreased slightly to $35.1 million or 12.6% of sales compared with $35.3 million or 16.5% of sales in the second quarter of 2020.
As mentioned in our Q2 2020 earnings call, we estimated that $15 million of savings occurred within the second quarter of 2020 due to the cost-saving measures and actions taken in response to the pandemic.
As for our tax rate in the second quarter, Tennant had an adjusted effective tax rate, excluding the amortization expense of 4% compared with 20.4% in the year ago period.
The decrease was primarily related to a discrete tax benefit for a valuation allowance release as a result of a recent law change impacting Dutch tax loss carryovers.
Turning to cash flow and balance sheet items.
Tennant generated $19.4 million in cash flow from operations in the second quarter of 2021, mainly due to strong business performance.
As of June 30, 2021, the company had $135.1 million in cash and cash equivalents while managing our leverage within the stated guidance of 1.5 to 2.5 times times.
In April, the company restructured its credit agreement to optimize the debt structure.
This change allows for greater flexibility with minimal covenants and no pre-payment penalties, while also reducing future interest expense by approximately $1 million per month, which was already reflected in our prior guidance.
Lastly, turning to guidance.
As Dave mentioned, our guidance reflects management's confidence in a broadening economic recovery, our ability to implement our long-term growth strategy, and our effective management of the current supply chain and operational challenges.
It also assumes there will be no significant pandemic-related restrictions in our major markets.
As included in today's earnings announcement, Tennant affirms its guidance for the full year 2021 as follows: net sales of $1.09 billion to $1.11 billion, with organic sales rising at 9% to 11%; GAAP earnings of $3.45 per share to $3.85 per share, adjusted earnings per share of $4.10 per share to $4.50 per diluted share, which excludes certain non-operational items and amortization expense, adjusted EBITDA in the range of $140 million to $150 million, capital expenditures of approximately $20 million and an adjusted effective tax rate of approximately 20%, which excludes the amortization expense adjustment.
With that, we will open the call to questions.

user
q2 adjusted earnings per share $1.18.
q2 earnings per share $0.51.
q2 sales $279.1 million versus refinitiv ibes estimate of $271.8 million.
affirms guidance for full-year 2021.

assistant