Tennant Company — Q1 2022 Form 10-Q
Business context and period. Tennant designs, manufactures and markets commercial cleaning equipment, parts and consumables, services, and related solutions. This unaudited report covers the three months ended March 31, 2022; comparisons are with Q1 2021 unless otherwise noted. Amounts are in millions except per-share data.
Financial results
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Net sales | $258.1 | $263.3 |
| Gross profit / margin | $98.9 / 38.3% | $113.3 / 43.0% |
| Operating income / margin | $14.6 / 5.7% | $36.3 / 13.8% |
| Net income | $10.3 | $25.7 |
| Diluted EPS | $0.55 | $1.37 |
| Operating cash flow | $(10.1) | $18.4 |
| Capital expenditures | $5.0 | $4.8 |
Revenue and margins. Sales declined 2.0%. Organic sales increased approximately 0.8%, primarily from higher prices, but were offset by a 2.2% unfavorable foreign-exchange effect and a 0.6% impact from the prior-year Coatings divestiture. Gross margin fell 470 basis points, principally from material inflation and higher freight costs, partly offset by price increases. Q1 2021 operating income included a $9.8 gain on the Coatings sale; there was no comparable gain in 2022.
Regional sales. Americas sales rose 1.6% to $160.3; EMEA declined 2.7% to $78.7; APAC fell 22.4% to $19.1, mainly reflecting COVID-related shutdowns in China and softer demand in some markets. Sales by product were $158.1 equipment, $60.6 parts and consumables, and $39.4 service and other.
Cash flow and liquidity. Operating cash use was driven chiefly by a $29.0 inventory increase and a $12.6 decrease in employee compensation and benefits, partly offset by a $10.1 receivables decrease. Cash, cash equivalents and restricted cash were $110.4 at quarter-end, down from $123.6 at year-end. Current assets were $524.8 and current liabilities $266.4; the company reported a 2.0 current ratio. Investing cash use was $8.6, including $5.0 of capital expenditures and $3.7 invested in leased assets. Financing provided $8.3, including $15.0 of borrowings; dividends paid were $4.6.
Debt. Total debt was $281.6, compared with $267.6 at December 31, 2021; cash less total debt implies net debt of approximately $171.2. The company had $264.1 of unused revolving-facility capacity after letters of credit and guarantees. Weighted-average debt cost was approximately 1.4% (approximately 0.3% net of a cross-currency swap). The credit agreement includes leverage and interest-coverage covenants; the filing describes limits but does not state actual covenant ratios in this text.
Changes, outlook and risks
- Sales declined modestly, but profitability and operating cash flow weakened substantially year over year. Lower S&A expense and interest expense partly offset margin pressure; the prior-year divestiture gain also makes the operating-income comparison less favorable.
- Management expects supply-chain challenges and inflationary trends to continue through 2022 and says global economic conditions remain volatile. It reports strong overall demand returned to pre-pandemic levels and confidence in long-term growth, but provides no quantified full-year financial guidance in the filing text.
- Order backlog was approximately five times the level a year earlier, driven by higher orders and supply constraints; management expects it to remain high through 2022 if conditions persist. Orders may be cancelled or postponed without penalty.
- COVID-related restrictions, particularly in China, have reduced activity and may continue to affect results. Russia and Ukraine conflict-related supply constraints and inflation may also weigh on results; Tennant suspended sales to Russia and Belarus. Those countries represented less than 1% of 2021 consolidated sales.
- Management cites risks including raw-material and component availability and cost, freight, pricing sensitivity, foreign exchange, geopolitical and economic uncertainty, competition, product quality and liability, cybersecurity, business interruption, and execution of innovation and growth plans.
- The company recorded $0.8 of restructuring severance charges in Q1 2022 as part of a continuing productivity and reorganization strategy. It expects an approximately $3.7 gain in Q2 2022 from an April 14 sale of a Minnesota building for $4.1.
- Management does not expect pending ordinary-course litigation, investigations or claims to materially adversely affect financial position or results. It reports no material changes in risk factors or market risk from its 2021 Form 10-K.
Important facts for investors to verify
- Whether pricing can continue to offset inflation and freight costs without further volume loss, and whether gross margins recover.
- Whether supply constraints ease, inventory converts to sales and backlog translates into shipments; assess the backlog’s cancellation and postponement exposure.
- Whether COVID-related disruptions in China and broader geopolitical and supply-chain pressures materially affect APAC and consolidated results.
- Operating cash flow, working-capital needs, debt growth, available revolver capacity, covenant headroom and the April 2022 cross-currency swap renewal due in 2027.
- The effect of the Q2 building-sale gain and other unusual items on comparisons with recurring operating performance.