Tennant Company — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Financial amounts are in U.S. dollars and millions, except per-share data and percentages. Tennant designs, manufactures and markets commercial cleaning equipment, parts and consumables, and related services.
Financial performance and position
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $272.0 | $261.9 | $814.4 | $728.0 |
| Gross profit / margin | $109.2 / 40.1% | $103.6 / 39.6% | $337.4 / 41.4% | $296.0 / 40.7% |
| Operating income / margin | $23.9 / 8.8% | $18.4 / 7.0% | $80.6 / 9.9% | $55.7 / 7.7% |
| Net income | $21.5 | $11.7 | $57.0 | $31.2 |
| Diluted EPS | $1.14 | $0.63 | $3.02 | $1.68 |
- Cash flow: Nine-month operating cash flow was $62.9, versus $97.5 in 2020. Investing activities provided $12.6, including $24.7 net proceeds from the Coatings business sale, partly offset by $12.0 of capital expenditures. Financing activities used $72.3. Cash, cash equivalents and restricted cash ended at $140.6, compared with $141.0 at December 31, 2020.
- Liquidity: Working capital was $250.1, versus $239.3 at year-end 2020; the current ratio was 1.9 at both dates. The company reported approximately $279.1 of unused revolving-credit capacity.
- Debt: Total debt was $268.4, down from $308.5 at year-end 2020. Debt-to-capital was 37.7%, versus 43.2%. The company reported a 1.3% weighted-average cost of debt, or approximately 0.4% net of a related cross-currency swap.
Changes versus the comparable periods
- Sales increased 3.9% in Q3 and 11.9% for the first nine months. Management attributed growth mainly to post-pandemic recovery and volume; foreign exchange helped, while the Coatings divestiture reduced reported sales. Q3 organic sales rose approximately 4.7%; nine-month organic sales rose approximately 10.9%.
- Q3 sales grew 16.1% in EMEA, while Americas and Asia Pacific sales were down 0.6% and 0.4%. For the first nine months, sales rose 25.7% in EMEA, 5.4% in the Americas and 16.6% in Asia Pacific.
- Gross margin improved 50 basis points in Q3 and 70 basis points year to date. Management cited pricing and cost savings in the year-to-date comparison, partly offset by higher freight, material and labor costs and the absence of government wage subsidies received in 2020.
- Operating income and earnings increased in both periods. Year-to-date results included a $9.8 gain on the Coatings sale, while the second-quarter refinancing generated an $11.3 debt-extinguishment loss. The refinancing also reduced interest expense: nine-month net interest expense was $6.6, versus $13.4.
- Operating cash flow fell by $34.6 year over year; the cash flow statement shows a $48.9 use of cash from inventory changes in 2021, compared with a $13.1 source in 2020.
Outlook, commentary and risks
- The filing provides no specific revenue or earnings guidance. Management expects elevated freight, materials and labor costs to continue to pressure gross profit and operating results in Q4 2021, early 2022, and potentially beyond. Some factories could operate at full capacity, but labor shortages and supply-chain constraints persisted and contributed to higher backlog and revenue below expectations in the Americas.
- The April 2021 credit agreement runs to April 2026 and includes a $100.0 term-loan facility and a $450.0 revolving facility, with a potential $275.0 expansion subject to lender consent. Covenants include maximum indebtedness-to-EBITDA of 3.50-to-1 and minimum EBITDA-to-interest of 3.00-to-1; the agreement also restricts certain dividends and repurchases.
- The company cited uncertainty from COVID-19 and broader economic and geopolitical conditions, input-cost and component availability, pricing, competition, labor, product quality and liability, cybersecurity, business interruption, regulatory compliance, and product development and commercialization.
- Foreign tax examinations were ongoing; management said reserves were adequate. The filing states routine litigation and other claims are not expected to materially adversely affect financial position or results. No material changes to reported market risks or risk factors were identified.
Important facts for investors to verify
- Whether supply-chain, labor and cost pressures persist and how they affect backlog, sales conversion and gross margins.
- How much reported earnings growth reflects ongoing operations versus the $9.8 Coatings-sale gain, refinancing effects and the Italian tax-basis election.
- Inventory levels and operating cash-flow conversion, given the large year-to-date inventory cash outflow.
- Debt covenant headroom, refinancing terms and availability under the revolving facility; verify that dividends and repurchases remain within credit-agreement restrictions.
- The outcome of foreign tax examinations and the assumptions underlying warranty, sales-incentive and other estimates.