Tennant Company — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; compared with Q1 2020. Tennant designs, manufactures and markets commercial cleaning equipment, parts, consumables and services. Amounts below are in millions of dollars, except per-share data and percentages.
Financial performance
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Net sales | $263.3 | $252.1 |
| Gross profit / margin | $113.3 / 43.0% | $102.8 / 40.8% |
| Operating income / margin | $36.3 / 13.8% | $14.4 / 5.7% |
| Net income attributable to Tennant | $25.7 | $5.2 |
| Diluted EPS | $1.37 | $0.28 |
| Cash from operating activities | $18.4 | $8.7 |
- Sales rose 4.4% year over year. Management reported organic growth of approximately 3.1%, a favorable foreign-exchange impact of 3.0%, and a 1.7% unfavorable impact from the Coatings divestiture.
- Gross margin improved 220 basis points, reflecting productivity, product mix, pricing and cost-reduction actions; higher freight and materials costs partly offset the improvement.
- Operating income and earnings increased substantially, but results include a $9.8 gain on the Coatings sale recorded as a reduction of selling and administrative expense. Lower selling and administrative costs also reflected restructuring charges in 2020 that did not recur and temporary travel and event savings.
- Net foreign-currency transaction results improved to a $0.5 gain from a $4.1 loss. Interest expense declined to $4.6 from $5.1. The effective tax rate was 22.1%, versus 18.0%.
- Operating cash flow was $18.4. Investing activities provided $19.8, including $24.7 net proceeds from the Coatings sale, offset by $4.8 of capital expenditures. Financing activities used $1.8; dividends were $4.2.
Balance sheet, debt and liquidity
- At March 31, cash, cash equivalents and restricted cash totaled $175.2, up from $141.0 at year-end 2020. Current assets were $530.5 and current liabilities $277.2; the reported current ratio was 1.9 and working capital was $253.3.
- Total debt was $308.3, compared with $308.5 at December 31, 2020; the debt-to-capital ratio was 42.3%, versus 43.2%. The company had $300.0 of senior unsecured notes and $10.0 drawn on its revolving facility, with approximately $186.8 of unused revolver capacity. Tennant reported compliance with its existing financial covenants.
- Operating cash flow was partly offset by an $18.3 inventory build. Inventory increased to $137.5 from $127.7 at year-end.
Material changes and outlook
- Regional sales: Americas declined 3.0% to $157.8; EMEA increased 12.4% to $80.9; APAC increased 40.6% to $24.6. Foreign exchange materially benefited EMEA and APAC. APAC organic growth was particularly strong in China against pandemic-affected prior-year comparisons.
- Tennant sold its Coatings business on February 1, 2021, recognizing a $9.8 pretax gain and receiving $24.7 net cash proceeds. Specialty surface coatings sales fell to $1.5 from $6.1.
- On April 5, 2021, after quarter-end, the company entered a new credit agreement extending to April 2026, with a $100.0 term-loan facility and a $450.0 revolving facility, plus an option to increase capacity. It planned to use borrowings and cash to redeem $300.0 of 5.625% senior notes in May 2021, pay an $8.4 call premium and write off $2.8 of unamortized debt issuance costs. Management said the refinancing would provide greater flexibility and more favorable interest rates and stated that future interest expense was expected to be lower by approximately $1.0 million per month.
- No specific full-year sales or earnings guidance is provided in the supplied filing text. Management said it could not reasonably estimate the pandemic’s long-term financial impact. It reported factories able to operate at full capacity and said it had so far avoided major supply disruptions, while continuing to monitor suppliers, transportation and pandemic conditions.
Risks, contingencies and unusual items
- Key cited risks include COVID-19 duration and economic effects, geopolitical uncertainty, raw-material and freight costs and availability, pricing pressure, competition, product quality or liability claims, cybersecurity, business interruption, and execution of innovation, growth and acquisition strategies.
- The company said ordinary-course litigation, tax, environmental and other matters were not expected to materially adversely affect its financial position or results. It reported ongoing foreign tax examinations and stated it had adequate reserves.
- Foreign-currency translation reduced comprehensive income by $10.7 in Q1 2021. The filing reported no material change in market risk or risk factors during the quarter.
Investor verification points
- Separate recurring operating performance from the $9.8 Coatings-sale gain, nonrecurring prior-year restructuring and product-discontinuance costs, and temporary expense savings.
- Verify the refinancing’s completion, note redemption, call premium and debt-cost write-off, and clarify the stated estimate of approximately $1.0 million in monthly interest savings.
- Monitor whether organic growth persists across regions, particularly after pandemic-affected comparisons, and assess the effects of currency movements and the Coatings divestiture.
- Track inventory, working-capital cash use, freight and material costs, and continued access to liquidity under the new credit agreement and its covenants.
- Assess the pandemic’s evolving effect on customer demand and supply chains; management stated that the long-term impact could not yet be reasonably estimated.