Tennant Company — Q3 2023 Form 10-Q
Business context and reporting period. Tennant designs, manufactures and markets commercial cleaning equipment, parts and consumables, services, and related solutions. This unaudited filing covers the quarter and nine months ended September 30, 2023; balance-sheet comparisons are against December 31, 2022.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net sales | $304.7 million | $262.9 million | $932.2 million | $801.2 million |
| Gross profit / margin | $132.0 million / 43.3% | $100.7 million / 38.3% | $397.0 million / 42.6% | $305.7 million / 38.2% |
| Operating income / margin | $34.7 million / 11.4% | $21.4 million / 8.1% | $114.1 million / 12.2% | $58.8 million / 7.3% |
| Net income / margin | $22.9 million / 7.5% | $15.6 million / 5.9% | $78.5 million / 8.4% | $42.5 million / 5.3% |
| Diluted EPS | $1.21 | $0.83 | $4.19 | $2.27 |
Q3 sales increased 15.9% year over year: organic growth was 13.9% (price 8.9%, volume 5.0%) and foreign exchange added about 2.0%. Nine-month sales rose 16.4%, with 16.6% organic growth partly offset by a 0.2% foreign-exchange headwind. The Americas led growth; EMEA had a 2.8% organic sales decline in Q3, while APAC organic sales grew 11.8%.
Gross margin improved substantially as pricing realization more than offset multi-year inflation. Q3 S&A expense rose to $88.2 million from $71.4 million, and its share of sales increased to 28.9% from 27.2%; the nine-month ratio declined to 27.6% from 28.3%, reflecting sales growth and cost-containment efforts. Interest expense increased with higher rates and, year to date, higher average borrowings. Nine-month 2022 results included a $3.7 million gain on sale of assets; no such gain was recorded in 2023.
Cash flow, balance sheet and debt
- Cash flow, nine months: Operating activities provided $124.6 million versus $38.8 million used in 2022. Investing activities used $15.2 million, including $15.3 million of property and equipment purchases. Financing activities used $87.1 million, including $98.7 million of debt repayments, $11.7 million of share repurchases and $14.8 million of dividends.
- Liquidity: Cash, cash equivalents and restricted cash were $97.0 million, up from $77.4 million at year-end. Current assets were $554.6 million and current liabilities $244.8 million; the reported current ratio was 2.3. Working capital in receivables, inventory and accounts payable was $328.0 million.
- Debt: Total debt was $221.8 million versus $300.3 million at year-end, including $130.0 million drawn on the revolving facility and $91.3 million of term loans. About $316.9 million of revolving capacity remained available after letters of credit and guarantees. Weighted-average debt cost was approximately 6.5% (about 5.1% net of specified swaps); the debt-to-capital ratio was 28.9%, down from 38.9%.
- Other balance-sheet movements: Inventories declined to $184.6 million from $206.6 million; total equity increased to $546.3 million from $472.1 million.
Outlook, risks and other notable items
Management described Q3 sales and net income growth as strong and expressed confidence in long-term market growth, but gave no specific numerical earnings or sales guidance in the supplied filing text. It cited volatile economic conditions and continued uncertainty around supply chains, inflation and overall business conditions. Improved component availability enabled higher production and reduced backlog; backlog fell to $213.9 million from $326.4 million at year-end, and orders may be cancelled or postponed without penalty.
Risks highlighted include geopolitical and economic uncertainty, customer capital-spending sensitivity, supply and input-cost disruptions, pricing pressure, product quality or liability claims, competition, cybersecurity and other IT risks, business interruptions, personnel needs, acquisition integration, and execution of innovation and growth plans. The company reported no material change to previously disclosed risk factors, no material pending legal proceedings beyond routine matters, and effective disclosure controls. It reported no material changes in market risk.
Q3 comprehensive income was $12.5 million, below net income of $22.9 million, primarily reflecting a $10.6 million foreign-currency translation loss. The company had $1.3 million of severance-related restructuring liabilities at quarter-end. It reported compliance with credit-facility covenants in the supplied text; the agreement includes leverage and interest-coverage tests and restrictions on dividends and repurchases.
Important facts for investors to verify
- Whether sales growth and gross-margin gains are sustainable, particularly as pricing, inflation and product volumes change.
- Whether EMEA’s Q3 organic sales decline persists and how regional demand and foreign-exchange movements affect results.
- Whether higher interest rates and variable-rate debt materially pressure future earnings despite debt reduction and interest-rate swaps.
- How backlog, component availability and customer order cancellations evolve; backlog is not a firm measure of future sales.
- Future operating cash conversion, capital requirements, share repurchases and dividend capacity under credit-agreement restrictions.