Tennant Company (NYSE: TNC) — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. This is an annual report; the provided filing text does not give standalone fourth-quarter results. Amounts are in U.S. dollars.
Business context
Tennant designs, manufactures and sells commercial cleaning equipment, parts and consumables, coatings, service and related solutions. It operates across the Americas, EMEA and APAC. The company attributed much of its 2020 sales decline to COVID-19 disruption and reduced activity at customer facilities.
Key financial metrics
| Metric | 2020 | 2019 |
|---|---|---|
| Net sales | $1,001.0 million | $1,137.6 million |
| Gross profit / margin | $407.8 million / 40.7% | $461.7 million / 40.6% |
| Operating income / margin | $63.7 million / 6.4% | $71.8 million / 6.3% |
| Net earnings attributable to Tennant | $33.7 million | $45.8 million |
| Diluted EPS | $1.81 | $2.48 |
| Cash from operating activities | $133.8 million | $71.9 million |
| Cash, cash equivalents and restricted cash | $141.0 million | $74.6 million |
| Total debt | $308.5 million | $338.8 million |
| Current ratio / working capital | 1.9 / $239.3 million | 1.7 / $206.1 million |
Material changes versus 2019
- Sales fell 12.0%: organic sales declined 11.8% and foreign exchange reduced sales by 0.2%. Sales decreased across all regions: Americas 12.7%, EMEA 9.6% and APAC 14.7%.
- Equipment sales declined to $629.7 million from $741.8 million. Tennant noted continued strong North American demand for autonomous cleaning machines as a partial offset.
- Net earnings declined 26.4% and diluted EPS fell from $2.48 to $1.81. Operating income declined, although operating margin edged up 0.1 percentage point and gross margin rose 0.1 point.
- Operating cash flow increased by $61.9 million, supported in part by lower receivables and inventories and higher accounts payable. Investing cash use was $29.9 million; financing cash use was $42.8 million.
- Debt declined by $30.3 million and debt-to-capital fell to 43.2% from 48.5%. Cash increased after Tennant drew $125 million on its revolving facility as a precaution in March 2020 and repaid it in full in the second quarter.
Outlook, commentary, risks and unusual items
- Management said it could not reasonably estimate COVID-19’s long-term financial impact and did not provide numerical 2021 guidance in the supplied filing text. It expected prolonged disruption to increase adverse effects on operations and performance.
- Cost controls included reduced travel and discretionary spending, hiring and merit freezes, furloughs, reduced work schedules and temporary pay reductions. Government wage-related subsidies of $7.9 million benefited 2020 gross profit and selling and administrative expense; the filing states these subsidies were not repayable.
- 2020 restructuring charges totaled $8.6 million across global reorganization, China consolidation and Japan operating-model changes. The company estimated savings from the China and Japan actions would offset their respective charges in about one year. An additional $1.7 million inventory charge related to product-line exits was recorded in 2020.
- On February 1, 2021, Tennant completed the sale of its Coatings business. The business was classified as held for sale at year-end; management expected to record a gain in first-quarter 2021, but the filing text does not provide a clear sale price or gain amount.
- Principal risks include ongoing pandemic effects, customer capital-spending weakness, supply-chain disruption and sole-source suppliers, semiconductor shortages, wage and input-cost inflation, tariffs, foreign exchange, competition, cybersecurity and execution of strategic changes. The 2017 credit agreement uses LIBOR without fallback language; the company flagged the phaseout transition risk.
- The $300 million senior notes mature in 2025 and bear 5.625% interest. The company reported covenant compliance at year-end and approximately $186.7 million of unused revolving borrowing capacity.
- EMEA goodwill had a 7% fair-value cushion over carrying value in the 2020 impairment test; no impairment was recorded. This was a critical audit matter. The auditor issued unqualified opinions on the financial statements and internal controls.
- CEO succession was planned for March 1, 2021: David Huml was to become CEO, with H. Chris Killingstad retiring and serving as a strategic advisor through year-end 2021.
Most important facts for investors to verify
- Whether sales and customer demand recovered after 2020, and whether COVID-related disruptions, shipping delays or component shortages persisted.
- How much of 2020 cash generation came from durable operating performance versus working-capital changes and non-repayable government assistance.
- The completed Coatings sale’s proceeds, realized gain and effect on ongoing revenue and earnings.
- EMEA reporting-unit performance and assumptions underlying its limited goodwill valuation cushion.
- Debt repayment plans, refinancing of the 2025 notes and the transition away from LIBOR in applicable credit arrangements.