Tennant(TNC) - 2022 Q2 - Quarterly Report

PART I - FINANCIAL INFORMATION Financial Statements Unaudited statements show slightly lower YTD sales and net income, with negative operating cash flow due to inventory increases Consolidated Statements of Income YTD net sales slightly decreased while net income fell due to lower gross profit, though Q2 net income rose year-over-year Consolidated Statements of Income Highlights (in millions, except EPS) | Metric | Q2 2022 | Q2 2021 | YTD 2022 | YTD 2021 | | :--- | :--- | :--- | :--- | :--- | | Net Sales | $280.2 | $279.1 | $538.3 | $542.4 | | Gross Profit | $106.1 | $114.9 | $205.0 | $228.2 | | 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 | Consolidated Balance Sheets Total assets decreased slightly as cash declined significantly while inventories rose, with total debt remaining stable Key Balance Sheet Items (in millions) | Account | June 30, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Cash, cash equivalents, and restricted cash | $73.8 | $123.6 | | Inventories | $188.6 | $160.6 | | Total Assets | $1,025.2 | $1,061.7 | | Total Debt (Current + Long-term) | $265.8 | $267.6 | | Total Equity | $434.0 | $435.1 | Consolidated Statements of Cash Flows Operating activities generated a significant cash outflow, reversing a prior-year inflow, driven by a large inventory increase Six Months Ended June 30 Cash Flow Summary (in millions) | Activity | 2022 | 2021 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | $(23.6) | $37.8 | | Net cash (used in) provided by investing activities | $(10.1) | $16.7 | | Net cash used in financing activities | $(12.2) | $(58.6) | | Net (decrease) in cash | $(49.8) | $(5.9) | - The primary reason for the negative operating cash flow was a significant increase in inventories ($44.7 million) and unfavorable changes in other operating assets and liabilities[16] Notes to Consolidated Financial Statements Notes detail geographic sales performance, significant inflationary impacts on inventory, and the company's debt structure Net Sales by Geographic Area (Six Months Ended June 30, in millions) | Region | 2022 | 2021 | | :--- | :--- | :--- | | Americas | $338.7 | $325.0 | | Europe, Middle East and Africa | $156.0 | $166.1 | | Asia Pacific | $43.6 | $51.3 | | Total | $538.3 | $542.4 | - The LIFO charge for the first six months of 2022 was $6.0 million, a substantial increase from $2.2 million in the same period of 2021, attributed to the broad effects of inflation on materials[46] - As of June 30, 2022, the company had $265.8 million in total debt outstanding and approximately $279.1 million of unused borrowing capacity on its revolving credit facility[55][57] - In Q2 2022, the company sold a building in Minnesota, resulting in a pre-tax gain of $3.7 million, compared to a $9.8 million gain from the sale of its Coatings business in Q1 2021[41][42] Management's Discussion and Analysis of Financial Condition and Results of Operations Macroeconomic pressures, including inflation and supply chain issues, impacted results despite a slight sales increase Macroeconomic Events and Outlook The company navigates ongoing supply chain disruptions, inflation, and geopolitical conflicts impacting operations - The company is experiencing disruptions in raw material and component supply, price inflation, and inefficiencies due to supply chain issues[83] - Sales to Russia and Belarus, which have been suspended, represented less than 1% of 2021 consolidated net sales[84] - Management anticipates that supply chain challenges and inflationary trends will continue in the second half of 2022[86] Results of Operations Q2 organic sales growth from pricing was offset by currency headwinds, while gross margin fell due to inflation Q2 2022 vs Q2 2021 Net Sales Change Drivers | Driver | Impact on Net Sales | | :--- | :--- | | Organic Sales Growth | +4.4% | | Foreign Currency Exchange | -4.0% | | Total Net Sales Change | +0.4% | Q2 2022 Net Sales Growth by Region | Region | % Change vs Q2 2021 | | :--- | :--- | | Americas | +6.7% | | EMEA | -9.3% | | APAC | -8.2% | - Gross profit margin decreased by 330 basis points in Q2 2022 compared to Q2 2021, primarily due to inflation on materials, labor, and freight costs[96] - The order backlog at June 30, 2022, was approximately three times larger than the prior year, indicating strong demand but also persistent supply chain challenges[106] Liquidity and Capital Resources Cash decreased due to negative operating cash flow from working capital investments, but liquidity remains sufficient - Net cash used in operating activities was $23.6 million for H1 2022, compared to net cash provided of $37.8 million in H1 2021, driven by investments in working capital[110] - The company's debt-to-capital ratio was stable at 38.0% as of June 30, 2022[108] - On August 3, 2022, the Board of Directors authorized a quarterly cash dividend of $0.25 per share[109] Quantitative and Qualitative Disclosures About Market Risk No material changes in market risk were reported since the previous fiscal year-end - There have been no material changes in the company's market risk since December 31, 2021[117] Controls and Procedures Disclosure controls and procedures were deemed effective with no material changes to internal controls during the quarter - Management concluded that disclosure controls and procedures are effective as of June 30, 2022[118] - No changes in internal controls over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, these controls[119] PART II - OTHER INFORMATION Legal Proceedings No material pending legal proceedings are reported outside of ordinary business litigation - There are no material pending legal proceedings other than ordinary routine litigation incidental to the business[120] Risk Factors No material changes to risk factors have occurred since the last annual report - No material changes have occurred in the company's risk factors since the last annual report filing[121] Unregistered Sales of Equity Securities and Use of Proceeds No shares were repurchased under the public program, though some were acquired to satisfy employee tax obligations Share Repurchase Activity (Q2 2022) | Month | Total Shares Purchased | Average Price Paid | Purchased as Part of Plan | | :--- | :--- | :--- | :--- | | April 2022 | 18 | $78.80 | — | | May 2022 | 2,018 | $60.54 | — | | June 2022 | 35 | $56.31 | — | | Total | 2,071 | $60.63 | — | - The 2,071 shares purchased were delivered to satisfy tax withholding obligations by employees, not open market repurchases under the formal plan[123] - There are 1,192,089 shares that may yet be purchased under the company's authorized share repurchase programs[122][123] Exhibits Filed exhibits include required CEO and CFO certifications under the Sarbanes-Oxley Act - Key exhibits filed include CEO and CFO certifications under Rule 13a-14(a)/15d-14(a) and Section 1350[124]