Tennant(TNC) - 2024 Q1 - Quarterly Results

First Quarter 2024 Financial Results Overview Executive Summary & Key Financial Highlights Tennant Company reported strong first-quarter 2024 results, with net sales increasing by 1.7% to $311.0 million and net income growing by 16.9% to $28.4 million, alongside significant adjusted EPS and EBITDA margin expansion Q1 2024 Key Financial Performance (YoY) | Metric | 2024 (Millions) | 2023 (Millions) | Increase (%) | | :---------------------- | :-------------- | :-------------- | :----------- | | Net sales | $311.0 | $305.8 | 1.7 % | | Net income | $28.4 | $24.3 | 16.9 % | | Diluted EPS | $1.49 | $1.30 | 14.6 % | | Adjusted diluted EPS | $1.81 | $1.45 | 24.8 % | | Adjusted EBITDA | $54.9 | $47.9 | 14.6 % | | Adjusted EBITDA margin % | 17.7 % | 15.7 % | 200 bps | Strategic & Operational Highlights The company delivered strong Q1 performance, driven by multi-year investments in core growth and innovative products, including two acquisitions and international expansion of new scrubber products - Net sales reached $311.0 million, a 1.7% increase (0.9% organic) driven by strong pricing realization[6] - Adjusted EBITDA increased by $7.0 million to $54.9 million, with a margin improvement of 200 basis points to 17.7%, primarily due to gross margin improvements[6] - Acquired TCS EMEA GmbH, Tennant Company's largest Central and Eastern Europe distributor, to accelerate growth and expand direct sales channels in the EMEA region[6] - Acquired a minority stake in Brain Corp and signed an exclusive technology agreement to fuel next-generation AI-enabled robotic cleaning technologies and accelerate Autonomous Mobile Robotic (AMR) revenue growth[6] - Launched Tennant-branded i-mop Lite and i-mop XL Plus scrubber products in Brazil, France, Portugal, and Spain, expanding accessibility of small-space micro-scrubbers[6] Detailed Financial Performance Net Sales Analysis Consolidated net sales for Q1 2024 increased by 1.7% year-over-year, primarily driven by price realization, with organic sales growing by 0.9% due to strong Americas performance offsetting EMEA and APAC declines Consolidated Net Sales Growth Components of Consolidated Net Sales Change (Q1 2024 vs. Q1 2023) | Component | Change (%) | | :-------------- | :--------- | | Price | 4.6% | | Volume | (3.7)% | | Organic growth | 0.9% | | Acquisitions | 0.3% | | Foreign currency | 0.5% | | Total growth | 1.7% | Organic Sales Growth by Region Organic Net Sales Growth by Region (Q1 2024) | Region | Organic Net Sales Growth (%) | | :------- | :--------------------------- | | Americas | 5.1% | | EMEA | (9.2)% | | APAC | (1.1)% | | Total | 0.9% | - Americas' 5.1% increase was driven by price realization and favorable product/channel mix, partially offset by unit volume decreases in North America's commercial-application machines[10] - EMEA's 9.2% decrease was due to volume declines in equipment and parts/consumables, impacted by weaker market conditions in France and Germany[11] - APAC's 1.1% decrease was primarily due to volume declines in China and Australia, partially offset by price realization in Australia[12] Operating Expenses and Profitability Gross profit margin improved significantly due to price realization and cost-out initiatives, leading to substantial growth in Adjusted EBITDA and Net Income despite increased S&A expenses Gross Profit Margin - Gross profit margin was 44.2% in Q1 2024, a 320 basis point increase compared to Q1 2023, driven by price realization, cost-out initiatives, favorable product mix, and increased direct sales[14] Selling and Administrative (S&A) Expense - S&A expense totaled $89.9 million in Q1 2024, an $8.2 million increase from Q1 2023, including $2.5 million for ERP modernization and $1.5 million for transaction costs[15] - Adjusted S&A as a percent of net sales was 27.6% in Q1 2024, up from 26.7% in Q1 2023, partly due to higher compensation expense from incremental headcount[15] Adjusted EBITDA - Adjusted EBITDA improved to $54.9 million in Q1 2024 from $47.9 million in the prior-year period, primarily due to gross margin expansion[16] - Adjusted EBITDA margin for Q1 2024 was 17.7%, a 200-basis-point increase over the prior-year period[16] Net Income - Net income was $28.4 million in Q1 2024, up from $24.3 million in Q1 2023[17] - Adjusted net income increased by $7.6 million to $34.7 million in Q1 2024, driven by operating performance, decreased interest expense, and a discrete tax benefit[17] Cash Flow, Liquidity, and Capital Allocation Cash flow from operations decreased due to higher variable compensation payouts and ERP modernization investments, yet liquidity remained strong as the company deployed capital for operations, shareholder returns, and strategic acquisitions - Cash flow from operations was $2.9 million in Q1 2024, a $28.2 million decrease from the prior year, mainly due to increased variable compensation payouts and $7.2 million in ERP modernization costs[18] - Liquidity remained strong with $88.8 million in cash and cash equivalents and approximately $321.8 million of unused borrowing capacity on its revolving credit facility[19] - The company invested $3.0 million in capital expenditures and returned $6.4 million to shareholders through dividends and share repurchases[20] - Strategic acquisitions included $32.1 million for a minority investment in Brain Corp and $25.5 million to acquire TCS[20] 2024 Financial Guidance 2024 Guidance Tennant Company reaffirms its full-year 2024 financial guidance, projecting net sales between $1,270 million and $1,295 million, with organic net sales growth of 2.0% to 4.0%, adjusted diluted EPS between $6.05 and $6.65, and Adjusted EBITDA between $198 million and $213 million 2024 Guidance Ranges | Metric | 2024 Guidance Ranges | | :---------------------------- | :------------------- | | Net sales ($ Millions) | $1,270 - $1,295 | | Organic net sales growth (%) | 2.0 % - 4.0 % | | Adjusted diluted net income per share* ($) | $6.05 - $6.65 | | Adjusted EBITDA* ($ Millions) | $198 - $213 | | Adjusted EBITDA margin (%) | 15.6 % - 16.4 % | | Capital expenditures ($ Millions) | $20 - $25 | | Adjusted effective tax rate* (%) | 22 % - 27 % | Company Information Company Profile Tennant Company, founded in 1870 and headquartered in Eden Prairie, Minnesota, is a global leader in cleaning solutions, offering equipment, sustainable cleaning technologies, and tools, with $1.24 billion in 2023 sales and approximately 4,500 employees operating globally - Founded in 1870, Tennant Company is a world leader in designing, manufacturing, and marketing solutions for cleaner, safer, and healthier environments[24] - Products include equipment for industrial, commercial, and outdoor surface maintenance; detergent-free and sustainable cleaning technologies; and cleaning tools/supplies[24] - Reported sales of $1.24 billion in 2023 and has approximately 4,500 employees, with manufacturing operations worldwide and sales in over 100 countries[24] Forward-Looking Statements This section contains forward-looking statements subject to various risks and uncertainties, including economic conditions, regulatory compliance, competition, supply chain fluctuations, and the ability to integrate acquisitions and innovate, cautioning readers against undue reliance - Statements are forward-looking and subject to factors affecting global businesses, as well as specific risks to Tennant and its markets[25] - Key risks include economic uncertainty, geopolitical tensions, compliance with global laws, pricing adaptation, competition, raw material costs, product liability, talent retention, strategic planning, IT system upgrades/cybersecurity, business interruptions, and the ability to integrate acquisitions and develop new products[25] - The company cautions that actual results may differ materially due to known and unknown risks and uncertainties, as detailed in its 2023 Form 10-K[26] Non-GAAP Financial Measures & Reconciliations Explanation of Non-GAAP Measures Tennant Company uses Non-GAAP financial measures to provide investors with a more meaningful understanding of its operating performance by excluding special items of a nonrecurring and/or nonoperational nature, such as ERP modernization costs, transaction-related costs, and amortization expense - Non-GAAP measures are used to provide useful information to investors by permitting a more meaningful comparison of operating performance, excluding special items of a nonrecurring and/or nonoperational nature[28] - The company adjusts for ERP modernization costs, transaction-related costs, and amortization expense when calculating Non-GAAP measures such as Adjusted S&A, Operating Income, Net Income, EPS, and EBITDA[29] Reconciliation of Reported to Adjusted Financials This section provides detailed reconciliations from GAAP reported figures to Non-GAAP adjusted figures for key financial metrics, including net income, EPS, EBITDA, S&A expense, operating income, income before taxes, and free cash flow, highlighting the impact of specific adjustments Net Income and Diluted EPS Reconciliation Reported to Adjusted Net Income and Net Income Per Share (Q1 2024 vs. Q1 2023) | (In millions, except per share data) | 2024 ($ Millions) | 2023 ($ Millions) | | :----------------------------------- | :---- | :---- | | Net income - as reported | $28.4 | $24.3 | | Adjustments: | | | | Amortization expense | 2.9 | 2.8 | | ERP modernization costs (S&A expense) | 1.9 | — | | Transaction-related costs (S&A expense) | 1.5 | — | | Net income - as adjusted | $34.7 | $27.1 | | Net income per share - as reported: | | | | Diluted ($) | $1.49 | $1.30 | | Adjustments: | | | | Amortization expense ($) | 0.15 | 0.15 | | ERP modernization costs (S&A expense) ($) | 0.10 | — | | Transaction-related costs (S&A expense) ($) | 0.08 | — | | Net income per diluted share - as adjusted ($) | $1.81 | $1.45 | EBITDA Reconciliation Reported Net Income to Adjusted EBITDA (Q1 2024 vs. Q1 2023) | (In millions) | 2024 ($ Millions) | 2023 ($ Millions) | | :-------------------------------- | :---- | :---- | | Net income - as reported | $28.4 | $24.3 | | Less: | | | | Interest expense, net | 2.3 | 3.7 | | Income tax expense | 6.7 | 7.7 | | Depreciation expense | 9.6 | 8.3 | | Amortization expense | 3.9 | 3.9 | | EBITDA | 50.9 | 47.9 | | Adjustments: | | | | ERP modernization costs (S&A expense) | 2.5 | — | | Transaction-related costs (S&A expense) | 1.5 | — | | EBITDA - as adjusted | $54.9 | $47.9 | | EBITDA margin - as adjusted (%) | 17.7 % | 15.7 % | S&A Expense and Operating Income Reconciliation Reported to Adjusted Selling and Administrative Expense and Operating Income (Q1 2024 vs. Q1 2023) | (In millions) | 2024 ($ Millions) | 2023 ($ Millions) | | :------------------------------------------ | :---- | :---- | | S&A expense - as reported | $89.9 | $81.7 | | S&A expense as a percent of net sales - as reported (%) | 28.9 % | 26.7 % | | Adjustments: | | | | ERP modernization costs (S&A expense) | (2.5) | — | | Transaction-related costs (S&A expense) | (1.5) | — | | S&A expense - as adjusted | $85.9 | $81.7 | | S&A expense as a percent of net sales - as adjusted (%) | 27.6 % | 26.7 % | | Operating income - as reported | $37.5 | $35.9 | | Operating margin - as reported (%) | 12.1 % | 11.7 % | | Adjustments: | | | | ERP modernization costs (S&A expense) | 2.5 | — | | Transaction-related costs (S&A expense) | 1.5 | — | | Operating income - as adjusted | $41.5 | $35.9 | | Operating margin - as adjusted (%) | 13.3 % | 11.7 % | Income Before Income Taxes and Income Tax Expense Reconciliation Reported to Adjusted Income Before Income Taxes and Income Tax Expense (Q1 2024 vs. Q1 2023) | (In millions) | 2024 ($ Millions) | 2023 ($ Millions) | | :------------------------------------------ | :---- | :---- | | Income before income taxes - as reported | $35.1 | $32.0 | | Adjustments: | | | | Amortization expense | 3.9 | 3.9 | | ERP modernization costs (S&A expense) | 2.5 | — | | Transaction-related costs (S&A expense) | 1.5 | — | | Income before income taxes - as adjusted | $43.0 | $35.9 | | Income tax expense - as reported | $6.7 | $7.7 | | Effective tax rate - as reported (%) | 19.1 % | 24.1 % | | Adjustments (1): | | | | Amortization expense | 1.0 | 1.1 | | ERP modernization costs (S&A expense) | 0.6 | — | | Income tax expense - as adjusted | $8.3 | $8.8 | | Effective tax rate - as adjusted (%) | 19.3 % | 24.5 % | Free Cash Flow Reconciliation Reported to Adjusted Free Cash Flows (Q1 2024 vs. Q1 2023) | (In millions) | 2024 ($ Millions) | 2023 ($ Millions) | | :-------------------------------------- | :---- | :---- | | Cash provided by operating activities - as reported | $2.9 | $31.1 | | Less: | | | | Capitalized expenditures | (3.0) | (6.8) | | Free cash flows | $(0.1) | $24.3 | | Adjustments: | | | | ERP modernization spend | 7.2 | — | | Free cash flows - as adjusted | $7.1 | $24.3 | Unaudited Consolidated Financial Statements Consolidated Statements of Income The unaudited consolidated statements of income show a 1.7% increase in net sales and a 16.9% increase in net income for Q1 2024 compared to Q1 2023, driven by higher gross profit and operating income Consolidated Statements of Income (Unaudited) - Three Months Ended March 31 | (In millions, except shares and per share data) | 2024 ($ Millions) | 2023 ($ Millions) | | :---------------------------------------------- | :---------- | :---------- | | Net sales | $311.0 | $305.8 | | Cost of sales | 173.5 | 180.3 | | Gross profit | 137.5 | 125.5 | | Selling and administrative expense | 89.9 | 81.7 | | Research and development expense | 10.1 | 7.9 | | Operating income | 37.5 | 35.9 | | Interest expense, net | (2.3) | (3.7) | | Net foreign currency transaction loss | (0.2) | (0.1) | | Other income (expense), net | 0.1 | (0.1) | | Income before income taxes | 35.1 | 32.0 | | Income tax expense | 6.7 | 7.7 | | Net income | $28.4 | $24.3 | | Net income per share | | | | Basic ($) | $1.52 | $1.32 | | Diluted ($) | $1.49 | $1.30 | | Weighted average shares outstanding | | | | Basic | 18,665,570 | 18,449,430 | | Diluted | 19,077,767 | 18,682,268 | Geographical Net Sales Geographical net sales for Q1 2024 show growth in the Americas region, while EMEA and Asia Pacific experienced declines compared to the prior year Geographical Net Sales (Unaudited) - Three Months Ended March 31 | Region | 2024 (Millions) | 2023 (Millions) | % Change | | :-------------------------- | :-------------- | :-------------- | :------- | | Americas | $215.6 | $204.4 | 5.5 % | | Europe, Middle East and Africa | 76.8 | 82.1 | (6.5)% | | Asia Pacific | 18.6 | 19.3 | (3.6)% | | Total | $311.0 | $305.8 | 1.7 % | Consolidated Balance Sheets As of March 31, 2024, total assets increased to $1,151.7 million from $1,113.4 million at December 31, 2023, primarily driven by increases in receivables, inventories, goodwill, and intangible assets, with total equity also increasing to $615.9 million Consolidated Balance Sheets (Unaudited) - As of March 31, 2024 and December 31, 2023 | (In millions, except shares and per share data) | March 31, 2024 ($ Millions) | December 31, 2023 ($ Millions) | | :---------------------------------------------- | :------------- | :---------------- | | ASSETS | | | | Cash, cash equivalents, and restricted cash | $88.8 | $117.1 | | Receivables, less allowances | 257.3 | 247.6 | | Inventories | 181.4 | 175.9 | | Prepaid and other current assets | 33.6 | 28.5 | | Total current assets | 561.1 | 569.1 | | Property, plant and equipment, net | 184.7 | 187.7 | | Operating lease assets | 40.4 | 41.7 | | Goodwill | 192.2 | 187.4 | | Intangible assets, net | 72.3 | 63.1 | | Other assets | 101.0 | 64.4 | | Total assets | $1,151.7 | $1,113.4 | | LIABILITIES AND EQUITY | | | | Current portion of long-term debt | $7.2 | $6.4 | | Accounts payable | 124.9 | 111.4 | | Employee compensation and benefits | 46.7 | 67.3 | | Other current liabilities | 81.6 | 88.6 | | Total current liabilities | 260.4 | 273.7 | | Long-term debt | 207.4 | 194.2 | | Long-term operating lease liabilities | 27.1 | 27.4 | | Employee benefits | 13.7 | 13.3 | | Deferred income taxes | 8.4 | 5.0 | | Other liabilities | 18.8 | 21.5 | | Total long-term liabilities | 275.4 | 261.4 | | Total liabilities | $535.8 | $535.1 | | Common Stock, $0.375 par value | 7.1 | 7.0 | | Additional paid-in capital | 86.5 | 64.9 | | Retained earnings | 570.5 | 547.4 | | Accumulated other comprehensive loss | (49.5) | (42.3) | | Total Tennant Company shareholders' equity | 614.6 | 577.0 | | Noncontrolling interest | 1.3 | 1.3 | | Total equity | 615.9 | 578.3 | | Total liabilities and total equity | $1,151.7 | $1,113.4 | Consolidated Statements of Cash Flows Net cash provided by operating activities significantly decreased in Q1 2024 compared to the prior year, while investing activities saw a substantial increase in cash usage due to strategic acquisitions, and financing activities provided net cash primarily from borrowings and stock option exercises Consolidated Statements of Cash Flows (Unaudited) - Three Months Ended March 31 | (In millions) | 2024 ($ Millions) | 2023 ($ Millions) | | :---------------------------------------------- | :---- | :---- | | OPERATING ACTIVITIES | | | | Net income | $28.4 | $24.3 | | Adjustments to reconcile net income to net cash provided by operating activities: | | | | Depreciation expense | 9.6 | 8.3 | | Amortization expense | 3.9 | 3.9 | | Deferred income tax benefit | (1.0) | (2.0) | | Share-based compensation expense | 3.2 | 1.2 | | Bad debt and returns expense | 0.3 | 1.0 | | Other, net | 0.1 | 0.2 | | Changes in operating assets and liabilities: | | | | Receivables | (10.1) | (2.5) | | Inventories | (9.2) | (1.5) | | Accounts payable | 13.9 | (6.6) | | Employee compensation and benefits | (20.3) | 0.5 | | Other assets and liabilities | (15.9) | 4.3 | | Net cash provided by operating activities | 2.9 | 31.1 | | INVESTING ACTIVITIES | | | | Purchases of property, plant and equipment | (3.0) | (6.8) | | Purchase of investment | (32.1) | — | | Payments made in connection with business acquisition, net of cash acquired | (25.5) | — | | Investment in leased assets | (0.2) | (0.2) | | Cash received from leased assets | 0.2 | 0.2 | | Net cash used in investing activities | (60.6) | (6.8) | | FINANCING ACTIVITIES | | | | Proceeds from borrowings | 40.0 | 20.0 | | Repayments of borrowings | (26.2) | (21.4) | | Change in finance lease obligations | — | 0.2 | | Proceeds from exercise of stock options, net of employee tax withholdings obligations | 19.5 | 0.8 | | Repurchases of common stock | (1.1) | (5.0) | | Dividends paid | (5.3) | (4.9) | | Net cash provided by (used) in financing activities | 26.9 | (10.3) | | Effect of exchange rate changes on cash, cash equivalents and restricted cash | 2.5 | — | | Net (decrease) increase in cash, cash equivalents and restricted cash | (28.3) | 14.0 | | Cash, cash equivalents and restricted cash at beginning of period | 117.1 | 77.4 | | Cash, cash equivalents and restricted cash at end of period | $88.8 | $91.4 | Investor Information Conference Call Details Tennant Company hosted a conference call on May 3, 2024, to discuss its first-quarter results, with a webcast and accompanying slides available on its investor website - Tennant hosted a conference call on May 3, 2024, at 10 a.m. Central Time (11 a.m. Eastern Time) to discuss Q1 2024 results[23] - The conference call and accompanying slides are available via webcast on Tennant's investor website (investors.tennantco.com)[23] Investor Relations Contact For investor relations inquiries, Lorenzo Bassi, Vice President of Finance and Investor Relations, can be contacted via email or phone - Investor Relations Contact: Lorenzo Bassi, Vice President, Finance and Investor Relations[30] - Contact information: investors@tennantco.com, 763-540-1242[30]