Tennant(TNC) - 2021 Q3 - Quarterly Report

PART I - FINANCIAL INFORMATION Financial Statements This section presents Tennant Company's unaudited consolidated financial statements as of September 30, 2021, showing increased net income and a stable balance sheet Consolidated Statements of Income Net sales and income significantly increased for both the three and nine months ended September 30, 2021, driven by higher gross profit Consolidated Statements of Income Highlights (In millions, except per share data) | Metric | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :--- | :--- | :--- | :--- | :--- | | Net sales | $272.0 | $261.9 | $814.4 | $728.0 | | Gross profit | $109.2 | $103.6 | $337.4 | $296.0 | | Operating income | $23.9 | $18.4 | $80.6 | $55.7 | | Net income attributable to Tennant Company | $21.5 | $11.7 | $57.0 | $31.2 | | Diluted EPS | $1.14 | $0.63 | $3.02 | $1.68 | Consolidated Balance Sheets As of September 30, 2021, total assets slightly decreased, while inventories increased and total equity grew to $443.1 million Consolidated Balance Sheet Highlights (In millions) | Account | Sep 30, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Total current assets | $526.3 | $493.6 | | Inventories | $158.3 | $127.7 | | Total assets | $1,067.1 | $1,082.6 | | Total current liabilities | $276.2 | $254.3 | | Long-term debt | $264.7 | $297.6 | | Total liabilities | $624.0 | $676.5 | | Total equity | $443.1 | $406.1 | Consolidated Statements of Cash Flows Operating cash flow decreased to $62.9 million due to inventory increases, while investing activities provided cash and financing used cash for debt repayment Cash Flow Summary (Nine Months Ended Sep 30, In millions) | Cash Flow Activity | 2021 | 2020 | | :--- | :--- | :--- | | Net cash provided by operating activities | $62.9 | $97.5 | | Net cash provided by (used in) investing activities | $12.6 | $(25.5) | | Net cash used in financing activities | $(72.3) | $(24.5) | | Net (decrease) increase in cash | $(0.4) | $50.1 | | Cash at end of period | $140.6 | $124.7 | - The decrease in operating cash flow was significantly impacted by a $48.9 million increase in inventories, compared to a $13.1 million decrease in the prior year period[16] - Investing activities were positively impacted by $24.7 million in proceeds from the sale of a business, net of cash divested[16] Notes to Consolidated Financial Statements Notes detail accounting policies, the Coatings business sale, a major debt restructuring, and revenue growth, particularly in EMEA Net Sales by Geographic Area (Nine Months Ended Sep 30, In millions) | Region | 2021 | 2020 | | :--- | :--- | :--- | | Americas | $491.7 | $466.6 | | Europe, Middle East and Africa | $246.8 | $196.3 | | Asia Pacific | $75.9 | $65.1 | | Total | $814.4 | $728.0 | - On February 1, 2021, the company sold its Coatings business, resulting in a pre-tax gain of $9.8 million, which was included in selling and administrative expense[32][47] - In April 2021, the company entered a new $550 million credit facility ($100M term loan, $450M revolver) and used the proceeds to redeem its $300 million 5.625% Senior Notes, resulting in an $11.3 million loss on debt extinguishment[54][58] - The company repurchased 102,229 shares of its common stock for $7.5 million during the nine months ended September 30, 2021[81] Management's Discussion and Analysis (MD&A) MD&A highlights increased net sales and improved gross profit margin, driven by organic growth and debt restructuring, despite ongoing COVID-19 cost pressures Q3 2021 vs Q3 2020 Performance Summary (In millions) | Metric | Q3 2021 | Q3 2020 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Net Sales | $272.0 | $261.9 | $10.1 | 3.9% | | Gross Profit | $109.2 | $103.6 | $5.6 | 5.4% | | Operating Income | $23.9 | $18.4 | $5.5 | 29.9% | | Net Income | $21.5 | $11.7 | $9.8 | 83.8% | - The company continues to actively manage the impacts of the COVID-19 pandemic, but expects increased costs for freight, materials, and labor to affect results in Q4 2021 and early 2022[91] Results of Operations Q3 2021 net sales grew 3.9% organically, with EMEA leading, gross profit margin expanding, and a lower effective tax rate Net Sales Growth Drivers (Q3 2021 vs Q3 2020) | Driver | Impact on Sales Growth | | :--- | :--- | | Organic Sales | +4.7% | | Divestiture of Coatings Business | -2.0% | | Foreign Currency Exchange | +1.2% | | Total Net Sales Growth | +3.9% | - Gross profit margin increased by 50 basis points YoY to 40.1% in Q3 2021, despite supply and labor constraints, reflecting the lapping of prior-year strategic investments and productivity challenges[101] - S&A expense decreased by $0.9 million in Q3 2021, primarily due to adjustments to management incentives, partially offset by more normalized spending compared to the prior year[106] - Interest expense decreased to $0.6 million in Q3 2021 from $4.4 million in Q3 2020 due to the debt restructuring completed in Q2 2021[108] Liquidity and Capital Resources The company maintains strong liquidity with $140.6 million cash, an improved debt-to-capital ratio, and significant unused borrowing capacity Key Liquidity Metrics | Metric | Sep 30, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Cash, cash equivalents and restricted cash | $140.6M | $141.0M | | Working Capital | $250.1M | $239.3M | | Current Ratio | 1.9 | 1.9 | | Debt-to-Capital Ratio | 37.7% | 43.2% | - In Q2 2021, the company restructured its debt with a new credit agreement, providing greater flexibility and more favorable interest rates. As of September 30, 2021, unused borrowing capacity was approximately $279.1 million[116] - The Board of Directors authorized a quarterly cash dividend of $0.25 per share, payable in December 2021[117] Quantitative and Qualitative Disclosures About Market Risk No material changes in market risk have occurred since December 31, 2020, with further details available in the annual 10-K report - There have been no material changes in the company's market risk since December 31, 2020[127] Controls and Procedures Management concluded disclosure controls and procedures were effective as of September 30, 2021, with no material changes to internal controls - The CEO and Principal Financial and Accounting Officer concluded that the company's disclosure controls and procedures were effective as of September 30, 2021[128] - No material changes were made to the company's internal controls over financial reporting during the most recently completed fiscal quarter[129] PART II - OTHER INFORMATION Legal Proceedings The company is not involved in any material pending legal proceedings beyond ordinary routine litigation incidental to its business - The company is not involved in any material pending legal proceedings outside of ordinary routine litigation[130] Risk Factors No material changes to the company's risk factors have occurred since the December 31, 2020 annual report on Form 10-K - No material changes to the company's risk factors have occurred since the filing of the 2020 Form 10-K[131] Unregistered Sales of Equity Securities and Use of Proceeds In Q3 2021, the company repurchased 102,229 shares for $7.5 million, with 1,288,167 shares remaining for repurchase Share Repurchases (Quarter Ended Sep 30, 2021) | Period | Total Shares Purchased | Average Price Paid Per Share | Total Cost (approx.) | | :--- | :--- | :--- | :--- | | July 2021 | 18 | $79.85 | $1,437 | | August 2021 | 43,731 | $72.69 | $3.18M | | September 2021 | 58,498 | $73.84 | $4.32M | | Total | 102,247 | $73.35 | $7.5M | - As of September 30, 2021, 1,288,167 shares were still available for repurchase under the company's publicly announced plans[133] Exhibits Exhibits filed with Form 10-Q include CEO/CFO certifications and financial statements in iXBRL format - Exhibits filed include CEO and CFO certifications (Rule 13a-14(a)/15d-14(a) and Section 1350) and financial data in iXBRL format[134]