Tennant Company — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Financial statements are unaudited; amounts below are in millions except per-share data.
Business context and results
Tennant designs, manufactures and markets commercial cleaning equipment, parts and consumables, services, and related solutions. It sells through direct channels and distributors across the Americas, EMEA, and Asia Pacific.
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net sales | $280.2 | $279.1 | $538.3 | $542.4 |
| Gross profit | $106.1 | $114.9 | $205.0 | $228.2 |
| Gross margin | 37.9% | 41.2% | 38.1% | 42.1% |
| Operating income | $22.8 | $20.4 | $37.4 | $56.7 |
| Net income | $16.6 | $9.8 | $26.9 | $35.5 |
| Diluted EPS | $0.89 | $0.51 | $1.44 | $1.88 |
| Operating cash flow | Not provided for quarter | $(23.6) | $37.8 |
Financial position and liquidity
- At June 30, 2022, cash, cash equivalents and restricted cash were $73.8, down from $123.6 at year-end 2021. Current assets were $521.1 and current liabilities $264.9; the reported current ratio was 2.0.
- Total debt was $265.8, including $5.2 current and $260.6 long-term, compared with $267.6 at December 31, 2021. The company reported $279.1 of unused revolving-credit capacity, after $2.9 of letters of credit and guarantees.
- Debt-to-capital was 38.0%, versus 38.1% at year-end. Weighted-average debt cost was approximately 2.0%, or 0.9% net of related cross-currency swaps.
- Six-month investing cash flow was $(10.1), including $10.5 of capital expenditures; financing cash flow was $(12.2), including $9.2 of dividends paid.
Changes versus comparable periods
- Q2 sales increased 0.4%; six-month sales declined 0.8%. Q2 organic sales grew approximately 4.4%, offset by an approximately 4.0% unfavorable currency impact. For the first half, organic sales grew approximately 2.6%, while currency and the prior-year Coatings divestiture reduced reported sales.
- Regional Q2 sales changed: Americas +6.7%, EMEA −9.3%, and APAC −8.2%. Americas growth reflected pricing and Latin American volume; EMEA and APAC reported sales were pressured by currency, while China COVID-related shutdowns hurt APAC demand and deliveries.
- Gross margin contracted 330 basis points in Q2 and 400 basis points for the first half, primarily from inflation in materials, labor and freight, partly offset by price increases. LIFO charges were $4.9 in Q2 and $6.0 for the first half, versus $2.4 and $2.2, respectively, in 2021.
- Q2 operating income rose despite lower gross profit, with lower selling and administrative expense and a $3.7 gain on a building sale contributing. First-half operating income fell, in part because the prior-year period included a $9.8 Coatings-business sale gain versus $3.7 from the 2022 building sale.
- First-half operating cash flow shifted from $37.8 provided to $23.6 used, mainly due to higher working capital, inflation and investment in constrained components. Inventories rose to $188.6 from $160.6 at year-end.
Outlook, risks and unusual items
- Management gave no quantified revenue or earnings guidance in the provided filing text. It expects supply-chain challenges and inflation to continue in the second half of 2022, describes global conditions as volatile, and expects backlog to remain high through 2022 if current conditions persist.
- Management cited strong demand and strategic investments, but said component shortages constrain production and have increased backlog. Backlog was approximately three times its June 30, 2021 level and rose about 11% during Q2; orders may be cancelled or postponed without penalty.
- Risks highlighted include raw-material and component availability and cost, freight and inflation, customer demand and capital spending, COVID-19 effects (including China shutdowns), geopolitical uncertainty related to Russia and Ukraine, currency movements, pricing sensitivity, product quality/liability, cybersecurity, business interruption, and execution of strategic plans. Sales to Russia and Belarus had been suspended; those markets represented less than 1% of 2021 consolidated sales.
- Unusual items include the $3.7 Q2 building-sale gain; the 2021 comparison includes the $9.8 Coatings divestiture gain and an $11.3 debt-extinguishment loss. The company reported routine litigation and other claims, but does not expect them to materially adversely affect financial position or results. It reported no material changes to risk factors or market risk and said disclosure controls were effective.
Important facts for investors to verify
- Whether pricing can continue to offset materials, labor and freight inflation without materially weakening demand or margins.
- Whether supply constraints ease, backlog converts into shipments, and the cancellable backlog provides a reliable indicator of future sales.
- Whether working-capital needs, especially inventory, continue to pressure operating cash flow and reduce cash balances.
- Available revolver capacity, variable-rate exposure, and compliance with credit-agreement leverage and interest-coverage covenants.
- How currency movements, China restrictions, and geopolitical developments affect regional sales and reported results.