Tennant Company (TNC) — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Tennant designs, manufactures and markets commercial cleaning equipment, parts and consumables, services, coatings and related solutions.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $261.9 million | $280.7 million | $728.0 million | $842.8 million |
| Gross profit / margin | $104.8 million / 40.0% | $114.0 million / 40.6% | $299.5 million / 41.1% | $343.0 million / 40.7% |
| Operating profit / margin | $18.4 million / 7.0% | $21.5 million / 7.7% | $55.7 million / 7.7% | $52.2 million / 6.2% |
| Net earnings | $11.7 million | $14.6 million | $31.2 million | $34.8 million |
| Diluted EPS | $0.63 | $0.79 | $1.68 | $1.89 |
Q3 sales fell 6.7% year over year, including a 7.1% organic decline and a 0.4% favorable currency effect. Nine-month sales declined 13.6%, including a 12.8% organic decline and a 0.8% unfavorable currency effect. Management attributed the volume declines across regions primarily to COVID-19-related customer closures and weaker demand. Autonomous cleaning machines continued to see strong demand in North America.
For the first nine months, operating profit rose despite lower sales, supported by lower selling and administrative costs and improved gross margin. Q3 gross margin declined as volume deleverage and strategic investments outweighed cost-out benefits. Nine-month results included $5.4 million of government wage subsidies, substantially received in Q2 ($3.8 million in cost of sales and $1.6 million in selling and administrative expense). These subsidies were not required to be repaid.
Cash, debt and liquidity
- Operating cash flow was $97.5 million for the first nine months, versus $46.2 million in 2019. Cash benefited from earnings and working-capital reductions, including lower receivables and inventory.
- Capital expenditures were $25.5 million; investing activities used $25.5 million. Financing activities used $24.5 million, including $12.1 million of dividends.
- Cash and restricted cash totaled $124.7 million at September 30, 2020, up from $74.6 million at December 31, 2019. Working capital was $247.0 million; the current ratio was 2.0.
- Total debt was $323.6 million, including $300.0 million of senior unsecured notes and $25.0 million drawn on the revolving facility. Approximately $171.7 million of revolver capacity remained available. Debt-to-capital was 45.1%; the reported weighted average debt cost was approximately 5.3% (approximately 4.3% net of a cross-currency swap).
- The company drew $125 million on its revolver in March as a precaution and repaid it in Q2. It reported compliance with its financial covenants at quarter-end.
Material changes, outlook and risks
- COVID-19 remained the principal business uncertainty. Organic sales declined 7.1% in Q3, versus 27.2% in Q2; management said it could not predict whether the decline or sequential trend would continue and could not reasonably estimate the pandemic’s long-term financial impact. Factories generally had capacity to operate at full levels, and major supply disruptions had been avoided to date.
- Management described cost controls, reduced discretionary spending and travel, hiring and merit freezes, furloughs, reduced work schedules and temporary pay reductions, alongside supplier monitoring and alternative sourcing actions. No formal financial guidance was provided in the supplied filing text.
- Two 2020 restructuring actions affected Asia Pacific: consolidation of Gaomei and China operations, with $1.6 million recorded and up to $2.9 million of total costs expected; and a Japan operating-model streamlining, with $1.6 million recorded and up to $2.0 million expected. Management estimated savings would offset each action’s charges approximately one year after implementation.
- The company recorded a further $1.7 million inventory charge in Q1 for discontinued product lines. Foreign-currency transaction losses were $5.0 million year to date, compared with $0.6 million in 2019, primarily reflecting U.S. dollar strengthening against the Brazilian real and Mexican peso.
- Other disclosed risks include uncertain customer demand and supply-chain effects from COVID-19, foreign exchange, raw-material availability and cost, acquisition integration, cybersecurity, product liability and the ability to generate cash to service debt. The credit agreement expires in April 2022; the company reported no material pending legal proceedings and did not expect ordinary-course claims to materially affect results or financial position.
Important facts for investors to verify
- Whether sales volumes and organic demand recover, and whether pandemic-related disruption, customer delays or supply constraints worsen.
- How margins and earnings perform as wage subsidies and temporary cost controls roll off, and whether restructuring savings meet management’s estimates.
- Cash generation, revolving-facility availability, covenant headroom and refinancing plans ahead of the April 2022 credit-agreement expiry.
- Exposure to currency movements and the assumptions underlying contingent consideration for the Gaomei acquisition.