Tennant Company — Q1 2020 Form 10-Q
Business context and reporting period. Tennant designs, manufactures and markets commercial cleaning equipment, parts, services and related solutions. This unaudited filing covers the three months ended March 31, 2020, compared with the same period in 2019. The company reported significant operating disruption from COVID-19, especially during March.
Financial results and liquidity
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Net sales | $252.1 million | $262.5 million |
| Gross profit / margin | $104.1 million / 41.3% | $108.2 million / 41.2% |
| Operating profit / margin | $14.4 million / 5.7% | $10.8 million / 4.1% |
| Net earnings attributable to Tennant | $5.2 million | $5.4 million |
| Diluted earnings per share | $0.28 | $0.29 |
| Operating cash flow | $8.7 million | $(11.6) million |
| Capital expenditures | $12.4 million | $20.5 million |
Gross margin improved 10 basis points, while operating margin rose 160 basis points. Cash, cash equivalents and restricted cash were $192.1 million at March 31, versus $74.6 million at year-end 2019. The company drew $125 million on its revolving facility in March as a precaution amid the pandemic. Total debt was $463.6 million, including $300 million of senior notes and $165 million of revolving-facility borrowings; unused revolver capacity was approximately $31.8 million. The weighted average debt cost was approximately 4.8% (4.1% net of a cross-currency swap). Tennant was in compliance with its financial covenants. The current ratio was 2.6 and working capital was $360.1 million.
Operating cash flow reflected earnings and noncash items and a $15.9 million reduction in receivables, partly offset by increased inventories and lower employee compensation liabilities. Financing activities provided $123.0 million, primarily from the revolver draw; dividends paid were $4.0 million, or $0.22 per share.
Changes versus the prior comparable period
- Sales fell 4.0%: organic sales declined 2.4% and foreign currency reduced sales by 1.6%. Americas sales rose 1.1%; EMEA fell 7.8%; Asia Pacific fell 25.8%.
- Equipment sales decreased to $154.2 million from $163.0 million. Parts and consumables were $54.2 million versus $55.9 million; service and other were broadly stable at $37.6 million versus $37.4 million.
- Lower selling and administrative expense, including reduced restructuring and acquisition-related costs, supported higher operating profit. Gross-margin improvement reflected pricing, freight and cost reductions, partly offset by product-line discontinuance costs and higher material and labor costs.
- Net foreign-currency transaction results shifted to a $4.1 million loss from a $0.2 million gain, primarily due to U.S. dollar strengthening against the Brazilian real and Mexican peso. Foreign-currency translation adjustments contributed to a $7.6 million total other comprehensive loss.
- Debt increased from $338.8 million at December 31, 2019, chiefly due to the $125 million revolver borrowing.
Outlook, management commentary and risks
- COVID-19 caused temporary shutdowns at plants in China, Italy and the United States, customer-facility closures, softer demand and shipping delays. Management reported 6.7% organic sales growth in February, a 16.8% decline in March and an approximately 30% organic sales decline in April. Management said it could not reasonably estimate the pandemic’s future financial impact and expected a longer disruption to worsen adverse effects.
- Management described cost controls including reduced travel and discretionary spending, hiring and merit freezes, and salary reductions, reduced schedules or furloughs. It reported no major supply disruptions to date and said it was monitoring suppliers and transportation.
- No numerical full-year guidance was provided. Management said it was developing financial scenarios to protect liquidity and identify further actions if needed.
- In Q1, Tennant recorded $0.8 million of severance costs for a Japan restructuring and expects up to $2 million of total costs; estimated savings are expected to offset the pretax charge about one year after implementation. It also recorded $1.7 million in cost of sales for inventory expected not to sell following product-line discontinuations.
- COVID-19 heightened risks involving demand, manufacturing interruptions, supply availability, liquidity and strategic objectives. Other disclosed risks include foreign-exchange exposure, raw-material availability, acquisition integration, cybersecurity, competition and product liability. Management did not expect ordinary-course litigation to materially affect results or financial position.
- The company was under IRS examination for tax years 2016 and 2017 and stated it had adequate reserves. Unrecognized tax benefits were $7.5 million, with approximately $0.7 million of accrued interest and penalties.
- After quarter-end, CFO Keith Woodward gave notice of resignation effective July 31, 2020; he was to serve in a non-executive advisory capacity during the transition.
Important facts for investors to verify
- Subsequent quarterly filings: whether April’s approximately 30% organic sales decline persisted, and how pandemic conditions affected demand, production and shipments.
- Liquidity and covenant headroom after the precautionary revolver draw, as well as the company’s ability to generate operating cash flow during continuing disruption.
- Regional sales recovery, particularly in EMEA and Asia Pacific, and whether Americas growth continues.
- Progress and total costs of the Japan restructuring, product discontinuances and related inventory exposure.
- Foreign-currency impacts, debt balances and any material changes in tax examinations or contingencies.