Tennant Company — Q3 2022 Form 10-Q
Business context and reporting period. Tennant designs, manufactures and markets commercial cleaning equipment, parts and consumables, services and related solutions. This unaudited report covers the quarter and nine months ended September 30, 2022; comparisons are with the same 2021 periods unless otherwise noted. Amounts are in U.S. dollars.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $262.9 million | $272.0 million | $801.2 million | $814.4 million |
| Gross profit / margin | $100.7 million / 38.3% | $109.2 million / 40.1% | $305.7 million / 38.2% | $337.4 million / 41.4% |
| Operating income / margin | $21.4 million / 8.1% | $23.9 million / 8.8% | $58.8 million / 7.3% | $80.6 million / 9.9% |
| Net income | $15.6 million | $21.5 million | $42.5 million | $57.0 million |
| Diluted EPS | $0.83 | $1.14 | $2.27 | $3.02 |
- Revenue: Q3 sales declined 3.3%; nine-month sales declined 1.6%. In Q3, approximately 5.0% unfavorable currency impact outweighed 1.7% organic growth, driven mainly by pricing and partly offset by lower volumes. Nine-month organic growth was approximately 2.3%, offset by currency and the prior-year Coatings divestiture.
- Regions and products: Q3 Americas sales rose 4.4%, while EMEA declined 14.5% and APAC declined 19.1%. EMEA and APAC results were significantly affected by currency; APAC organic sales also fell amid China COVID-related shutdowns. Q3 equipment sales decreased to $153.8 million from $168.6 million; parts and consumables increased to $67.4 million from $62.8 million.
- Margins and expenses: Gross margin fell 180 basis points in Q3 and 320 basis points year to date, principally from inflation in materials, labor and freight, partly offset by price increases. Nine-month LIFO inventory charges rose to $8.1 million from $5.9 million. Lower selling and administrative expenses partly cushioned operating-income declines.
- Taxes and unusual items: Effective tax rates were 21.2% in Q3 and 22.4% year to date, versus 3.6% and 8.8% in 2021; the prior-year periods benefited from discrete tax items. The 2022 nine-month results included a $3.7 million gain on sale of a building; 2021 included a $9.8 million gain on sale of the Coatings business and an $11.3 million debt-extinguishment loss.
Cash flow, liquidity and debt
- Cash flow: Operating cash used was $38.8 million for the first nine months of 2022, versus $62.9 million provided in 2021. The company cited working-capital investment, including a $65.5 million inventory outflow and a $17.3 million receivables outflow. Investing cash used was $19.0 million; financing cash used was $1.2 million.
- Liquidity: Cash, cash equivalents and restricted cash totaled $59.2 million at September 30, down from $123.6 million at year-end 2021. Current assets were $522.0 million and current liabilities $244.2 million; the reported current ratio was 2.1. Revolver availability was approximately $261.9 million after letters of credit and bank guarantees.
- Debt: Total debt was $281.6 million, including $185.0 million of revolver borrowings and $96.3 million of term loans, compared with $267.6 million at year-end 2021. Weighted-average debt cost was approximately 3.5% (approximately 2.5% net of cross-currency swaps). The credit agreement includes leverage and interest-coverage covenants.
- Other balance-sheet items: Inventory increased to $199.6 million from $160.6 million at year-end. Shareholders’ equity was $425.2 million; accumulated other comprehensive loss widened, principally reflecting foreign-currency translation.
Outlook, commentary and risks
- No specific numerical revenue or earnings guidance is provided in the filing. Management expects backlog to remain elevated if supply constraints persist and anticipates inventory may begin to decline in Q4 as production increases, alongside greater receivables collection activity.
- Backlog was approximately $281.7 million at September 30, versus $288.7 million at June 30 and $169.7 million at December 31, 2021. Orders may be cancelled or postponed without penalty.
- Management describes ongoing component shortages, inflation, freight and labor cost pressure, volatile foreign exchange, and COVID-related operating disruption in China. The Russia-Ukraine conflict may add supply and inflation pressure; sales to Russia and Belarus had been suspended.
- The company says it remains confident in long-term market growth and will continue pricing actions and operational responses to cost and supply challenges. It cautions that demand could weaken if customers reduce capital spending.
- Routine litigation and other claims are not expected to materially adversely affect results or financial position. The filing reports no material changes to risk factors or market-risk disclosures and no material changes in internal controls.
Most important facts for investors to verify
- Whether supply constraints ease, backlog converts to shipments, and inventory and receivables release cash as management anticipates.
- Whether pricing offsets ongoing input-cost inflation and supports gross-margin recovery.
- Whether currency movements and China-related disruption continue to weigh on EMEA and APAC sales.
- Debt, variable-rate interest expense, liquidity, and compliance with credit-agreement covenants.
- Tax-rate normalization, foreign tax examinations and other disclosed contingencies; the filing does not quantify the ultimate outcomes of examinations or claims.