Tennant Company — Q2 2023 Form 10-Q
Business context and period. Tennant designs, manufactures and markets cleaning equipment, parts and consumables, and service offerings. This unaudited filing covers the quarter and six months ended June 30, 2023, compared with the corresponding 2022 periods; balance-sheet comparisons are to December 31, 2022.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net sales | $321.7 million | $280.2 million | $627.5 million | $538.3 million |
| Gross profit / margin | $139.5 million / 43.4% | $106.1 million / 37.9% | $265.0 million / 42.2% | $205.0 million / 38.1% |
| Operating income / margin | $43.5 million / 13.5% | $22.8 million / 8.1% | $79.4 million / 12.7% | $37.4 million / 6.9% |
| Net income | $31.3 million | $16.6 million | $55.6 million | $26.9 million |
| Diluted EPS | $1.68 | $0.89 | $2.98 | $1.44 |
- Sales growth: Q2 sales rose 14.8% year over year, comprising 15.0% organic growth and a 0.2% foreign-exchange headwind. Six-month sales increased 16.6%, with 17.9% organic growth and a 1.3% FX headwind.
- Regional and product mix: Q2 Americas sales increased 21.4%; EMEA increased 3.5%; APAC increased 2.4%. Equipment sales were $203.2 million, parts and consumables $71.0 million, and service and other $47.5 million.
- Margins and expenses: Gross margin expanded 550 basis points in Q2 and 410 basis points for the first half. Management attributed the improvement to pricing realization, which more than offset multi-year materials and labor inflation. S&A expense rose in dollars but fell as a share of sales to 27.0% in Q2 and 26.9% for the first half.
- Interest and taxes: Net interest expense was $4.0 million in Q2 and $7.7 million for the first half, up from $1.2 million and $1.5 million, respectively, reflecting higher debt and rates. Effective tax rates were 21.6% for Q2 and 22.7% for the first half.
Cash flow, balance sheet and capital resources
- For the six months, operating cash flow was $70.2 million, versus cash used of $23.6 million in 2022. Investing used $12.0 million, including $11.8 million of capital expenditures; financing used $38.1 million.
- Cash, cash equivalents and restricted cash were $95.8 million at June 30, versus $77.4 million at year-end. Current assets were $589.8 million and current liabilities $257.8 million; the reported current ratio was 2.3.
- Total debt was $278.0 million, down from $300.3 million at year-end. Debt consisted mainly of $185.0 million in revolving borrowings and $92.5 million in term loans. Unused revolving capacity was approximately $261.9 million after letters of credit and bank guarantees. Weighted-average debt cost was approximately 6.3% (about 5.2% net of specified swaps).
- Debt-to-capital was 34.8%, compared with 38.9% at year-end. The credit agreement includes leverage and interest-coverage covenants, including maximum indebtedness-to-EBITDA of 3.50:1 and minimum EBITDA-to-interest of 3.00:1.
- The company repurchased 143,305 shares for $10.0 million and paid $9.8 million in dividends during the first half. Backlog was $255.2 million at June 30, down from $326.4 million at year-end.
Material changes, outlook and risks
- Management said fewer supply-chain disruptions improved access to key components, production and backlog during Q2. It cautioned that renewed disruption or shortages could adversely affect results.
- Backlog declined as component availability and production improved; orders may be cancelled or postponed by customers without penalty.
- Management described the global outlook as volatile, citing uncertainty around supply chains, inflation and business conditions. It is monitoring demand in EMEA and a slower-than-expected APAC recovery, while expressing confidence in long-term market growth. The filing provides no specific numerical earnings or sales guidance.
- Key stated risks include economic and geopolitical uncertainty, customer capital-spending sensitivity, demand and pricing pressures, input-cost and component availability, competition, product quality and liability, cybersecurity and IT risks, business interruption, personnel, acquisitions, and product innovation and commercialization.
- Unusual/comparative items: Q2 2022 included a $3.7 million gain on sale of assets; no such gain was recorded in 2023. LIFO accounting produced a $0.2 million benefit in Q2 2023 versus a $4.9 million charge in Q2 2022, and a $3.2 million benefit for the first half versus a $6.0 million charge. Restructuring charges were $1.2 million for both Q2 and the first half of 2023.
- The company reported no material change in risk factors or market risk from its 2022 Form 10-K, no material pending legal proceedings beyond routine matters, and effective disclosure controls as of June 30, 2023.
Important facts for investors to verify
- Whether organic growth, especially in the Americas, is sustained and whether EMEA and APAC demand improves.
- Whether pricing and easing inflation continue to support gross margins, and how input costs and LIFO effects evolve.
- Whether stronger operating cash flow persists as working-capital trends and backlog normalize.
- Interest-rate exposure, debt levels, covenant headroom and the effect of variable-rate borrowings despite interest-rate swaps.
- Whether supply-chain conditions, customer cancellations, and the slower APAC recovery affect sales and production.