Tennant Company — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; unaudited. Tennant designs, manufactures and sells floor-cleaning equipment, parts and consumables, services, and related solutions through direct sales and distributors.
Financial performance
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Net sales | $305.8 million | $258.1 million |
| Gross profit / margin | $125.5 million / 41.0% | $98.9 million / 38.3% |
| Operating income / margin | $35.9 million / 11.7% | $14.6 million / 5.7% |
| Net income | $24.3 million | $10.3 million |
| Diluted EPS | $1.30 | $0.55 |
| Operating cash flow | $31.1 million | $(10.1) million |
| Capital expenditures | $6.8 million | $5.0 million |
Sales rose 18.5% year over year: organic growth was 21.0% (price +10.7%, volume +10.3%), partly offset by a 2.5% unfavorable foreign-exchange impact. Americas sales increased 27.5%; EMEA increased 4.3%; Asia Pacific increased 1.4%. By product, equipment sales were $186.4 million, parts and consumables $73.4 million, and service and other $46.0 million.
Gross margin expanded 270 basis points, primarily from pricing that helped offset multi-year materials and labor inflation. S&A expense increased $5.1 million to $81.7 million, mainly from higher warranty and employee costs, but declined as a share of sales to 26.7% from 29.7%. R&D expense was $7.9 million. Net interest expense increased to $3.7 million from $0.3 million, reflecting higher debt and rates on variable-rate borrowings. The effective tax rate was 24.1%, down from 29.9%.
Liquidity, debt and capital
Cash, cash equivalents and restricted cash were $91.4 million at March 31, 2023, versus $77.4 million at year-end. Current assets were $582.4 million and current liabilities $256.8 million; the reported current ratio was 2.3. Operating cash flow improved by $41.2 million year over year, attributed to stronger operating performance and moderating working-capital investment.
Total debt was $299.1 million, including $293.8 million long-term debt; unused revolving borrowing capacity was approximately $242.3 million after $2.7 million of letters of credit and bank guarantees. Weighted-average debt cost was approximately 5.8% (approximately 4.9% net of cross-currency swaps). Debt-to-capital was 37.8%, down from 38.9% at year-end. The company paid $4.9 million in dividends and repurchased 73,525 shares for $5.0 million during the quarter.
Changes, outlook and risks
Management said supply-chain disruptions eased in Q1, allowing improved component availability and higher production; backlog declined to approximately $298.5 million from $326.4 million at December 31, 2022. Management expects backlog to remain elevated amid supply-chain uncertainty. Orders may be cancelled or postponed without penalty.
No quantified earnings or sales guidance was provided. Management described global economic conditions as volatile, citing continuing uncertainty around supply constraints, inflation and near-term demand. It intends to monitor conditions and take pricing and other actions as appropriate, while expressing confidence in long-term market growth.
Risks highlighted include renewed supply shortages or disruption, input-cost inflation, weaker customer capital spending, pricing sensitivity, foreign-exchange movements, and geopolitical and economic uncertainty. The company uses interest-rate swaps to hedge $120 million of floating-rate exposure. It reported no material change in market risks and no material change to previously disclosed risk factors.
Ordinary-course litigation, tax, environmental and other matters were not expected by management to materially adversely affect financial position or results. The company was undergoing foreign tax examinations; it reported $4.1 million of unrecognized tax benefits and approximately $0.6 million of accrued interest and penalties. Disclosure controls were assessed as effective, with no material internal-control changes reported.
Key facts for investors to verify
- Whether pricing and volume growth persist, and whether pricing continues to offset materials and labor inflation.
- Whether supply availability improves further and backlog converts to sales; backlog includes cancellable or postponable orders.
- How variable-rate borrowing costs affect interest expense and whether swap protection sufficiently limits rate exposure.
- Whether working-capital trends sustain positive operating cash flow after the unusually weak prior-year comparison.
- Developments in foreign tax examinations, unrecognized tax benefits, and any litigation or other contingencies.