Tennant Company — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Amounts are in millions of dollars except per-share data. Tennant designs, manufactures and markets commercial cleaning equipment, supplies and services.
Financial performance
| Metric | Q2 2021 | Q2 2020 | H1 2021 | H1 2020 |
|---|---|---|---|---|
| Net sales | $279.1 | $214.0 | $542.4 | $466.1 |
| Gross profit margin | 41.2% | 41.8% | 42.1% | 41.3% |
| Operating income | $20.4 | $22.9 | $56.7 | $37.3 |
| Net income attributable to Tennant | $9.8 | $14.3 | $35.5 | $19.5 |
| Diluted EPS | $0.51 | $0.77 | $1.88 | $1.05 |
| Operating cash flow | Not provided separately | Not provided separately | $37.8 | $48.5 |
- Q2 sales rose 30.4%; management attributed the increase to approximately 27.5% organic growth and 5.4% favorable foreign exchange, partly offset by a 2.5% impact from the Coatings divestiture. H1 sales grew 16.4%.
- Q2 operating income declined despite higher sales. Gross margin fell 60 basis points as freight, material and labor costs increased and prior-year government wage subsidies did not recur; pricing and cost savings partly offset these pressures.
- H1 gross margin improved 80 basis points. H1 operating income includes a $9.8 gain on the Coatings sale recorded in selling and administrative expense.
- Q2 net income included an $11.3 debt-extinguishment loss. The quarter also benefited from tax items, including a $3.4 benefit from reversal of a Netherlands valuation allowance; the reported effective tax rate was negative 37.0%.
Cash, liquidity and debt
- At June 30, cash, cash equivalents and restricted cash were $135.1, versus $141.0 at year-end 2020. Current assets were $522.4 and current liabilities $284.3; the reported current ratio was 1.8 and working capital was $238.1.
- Total debt was $269.2, down from $308.5 at December 31, 2020. The company redeemed $300.0 of 5.625% notes due 2025, funding the repayment through a new credit agreement; redemption costs included an $8.4 call premium and a $2.9 write-off of debt issuance costs.
- The new agreement matures in 2026 and includes a $100 term-loan facility and a $450 revolving facility, with potential expansion. At quarter-end, $168.0 was drawn on the revolver and approximately $278.8 of revolver capacity remained available. Management expects interest expense to be about $1.0 per month lower than before the refinancing.
- H1 investing cash flow was $16.7, including $24.7 net proceeds from the Coatings sale and $8.0 of capital expenditures. Financing cash flow used $58.6, principally reflecting debt repayment. Operating cash flow was pressured by inventory growth of $32.3 and receivables growth of $13.5. Operating cash flow less capital expenditures was $29.8, compared with $30.1 in H1 2020.
Changes, outlook and risks
- Sales increased across all geographic regions; EMEA had the largest reported Q2 growth, up 55.5%. Management noted that comparisons with 2020 reflect significant COVID-related disruption in the prior-year period.
- Supply constraints and labor shortages increased North American backlog and limited growth; parts shortages also affected China. Tennant reported that factories had the potential to operate at full capacity and said it had so far avoided major supply disruptions.
- Management expects higher freight, material and labor costs to negatively affect results in the second half of 2021 and potentially beyond, but could not estimate the duration or magnitude. The filing provides no formal revenue or earnings guidance.
- COVID-19, geopolitical and economic uncertainty, input availability and pricing, competition, product quality and liability, cybersecurity, business interruption, personnel and innovation execution are among the disclosed risks. The company says it cannot reasonably estimate the pandemic’s long-term financial impact.
- A $0.9 EMEA restructuring charge was recorded in Q2; no further charges are expected for that action. The company expects its savings to offset the charge in approximately one year. Management said ordinary-course litigation and other current matters are not expected to materially adversely affect financial position or results.
Investor verification priorities
- Assess how much reported sales growth reflects underlying volume versus foreign exchange and the prior-year COVID comparison, and track whether supply constraints ease.
- Monitor gross margins and the extent to which pricing and cost savings offset freight, materials and labor inflation.
- Separate recurring earnings from the debt-extinguishment charge, Coatings-sale gain and discrete tax benefits.
- Review working-capital cash use, particularly inventory and receivables, alongside operating cash flow.
- Confirm refinancing benefits, available borrowing capacity and compliance with credit-agreement leverage, interest-coverage and payment covenants.