Tennant Company — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Unless stated otherwise, amounts are in U.S. dollars; financial figures are in millions.
Business context and results
Tennant designs, manufactures and markets commercial cleaning equipment and related parts, service and technologies. COVID-19 disruption and customer-site closures substantially reduced demand during the quarter.
| Metric | Q2 2020 | Q2 2019 | H1 2020 | H1 2019 |
|---|---|---|---|---|
| Net sales | $214.0 | $299.7 | $466.1 | $562.1 |
| Gross profit | $90.6 | $120.8 | $194.7 | $229.0 |
| Gross margin | 42.3% | 40.3% | 41.8% | 40.7% |
| Operating profit | $22.9 | $19.9 | $37.3 | $30.7 |
| Net earnings attributable to Tennant | $14.3 | $14.8 | $19.5 | $20.2 |
| Diluted earnings per share | $0.77 | $0.81 | $1.05 | $1.10 |
Q2 sales decreased 28.6% year over year, comprising a 27.2% organic decline and a 1.4% foreign-exchange headwind. H1 sales declined 17.1% (15.6% organic; 1.5% foreign exchange). Q2 operating margin rose to 10.7% from 6.6%, while net earnings fell 3.4%. For H1, operating margin increased to 8.0% from 5.5%, but net earnings declined 3.5%.
Cash flow, debt and liquidity
- H1 operating cash flow was $48.5, compared with $10.9 in 2019. Net capital expenditures were $18.4, versus $25.4; operating cash flow less capital expenditures was $30.1.
- Cash and restricted cash were $99.3 at June 30, up from $74.6 at year-end. Working capital was $209.4 and the current ratio was 1.8.
- Total debt was $340.0, compared with $338.8 at year-end; cash less total debt was approximately $240.7 net debt. The company reported $40.0 of revolving-facility borrowings and approximately $156.7 of unused revolving capacity.
- Tennant borrowed $125.0 from its revolving line in March as a precaution and repaid that borrowing in Q2, stating existing cash and cash flows were sufficient for business needs. The company was in compliance with its financial covenants at June 30.
- H1 dividends paid were $8.1; the declared/paid quarterly dividend was $0.22 per share.
Material changes, outlook and risks
- COVID-19 and demand: Management attributed most of Q2’s organic decline to the pandemic. Organic sales were down 31.6% in April, 38.5% in May and 12.4% in June versus prior-year months. July order rates were consistent with June, but the company could not predict whether the decline or monthly trend would continue. It could not reasonably estimate the pandemic’s future financial impact and warned a longer disruption could have a more material adverse effect.
- Geography: Q2 sales declined 28.1% in the Americas, 32.3% in EMEA and 21.8% in Asia Pacific. Autonomous cleaning-machine demand in North America partially offset declines.
- Margins and cost actions: Higher gross margin reflected pricing and cost-out initiatives, government-program benefits, furloughs and reduced work hours; volume deleverage and higher tariffs partly offset the gains. Lower selling and administrative expense reflected travel and discretionary-spending cuts, temporary pay reductions, furloughs, government-program benefits and lower management incentives. These actions may not be recurring.
- Other unusual items: H1 included a $1.7 charge for inventory expected not to sell following product-line discontinuations. Japan restructuring charges were $1.5 in H1, with up to $2.0 of total costs expected; management estimated savings would offset the charge about one year after the action. Q2 also benefited from the absence of certain 2019 acquisition/integration costs and a prior-year indemnification settlement.
- Debt and other exposures: $300.0 of senior unsecured notes mature in 2025; the credit agreement expires in April 2022. $42.5 of debt was classified current, including an anticipated $40.0 credit-facility repayment. The company disclosed $7.2 of unrecognized tax benefits and an IRS examination of tax years 2016 and 2017; it believes adequate reserves are recorded. Ordinary-course litigation and other claims were not expected to materially affect results or financial position.
- Guidance: The filing provides no numerical earnings or sales guidance. Management cited uncertainty around pandemic duration, customer demand, supply-chain disruption and recovery.
Important facts for investors to verify
- Whether July and subsequent order trends translated into sustained sales recovery, and the degree of continuing COVID-19 impact.
- How much margin improvement came from durable pricing/productivity measures versus temporary furloughs, government support and spending reductions.
- Debt repayment plans, covenant headroom, available revolver capacity and cash generation if demand remains weak.
- Results of the IRS examination and any changes to uncertain-tax-position reserves.
- Actual restructuring costs and savings, and whether discontinued-product inventory charges or other unusual items recur.