Tennant Company — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Amounts below are in U.S. dollars; financial figures are in millions unless otherwise noted. Tennant designs, manufactures and sells cleaning equipment, parts, consumables, services and related products.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net sales | $292.2 | $270.8 | $565.0 | $461.9 |
| Gross profit / margin | $118.8 / 40.7% | $104.6 / 38.6% | $229.4 / 40.6% | $184.3 / 39.9% |
| Operating profit / margin | $19.0 / 6.5% | $9.3 / 3.4% | $29.4 / 5.2% | $6.7 / 1.4% |
| Net earnings (loss) attributable to Tennant | $12.7 | $(2.6) | $16.0 | $(6.5) |
| Diluted earnings (loss) per share | $0.69 | $(0.15) | $0.88 | $(0.37) |
| Operating cash flow | Not separately reported for the quarter | $26.0 | $(2.5) |
- Q2 sales increased 7.9%; management attributed the increase to 5.2% organic growth and a 2.7% favorable currency impact. For the first half, sales rose 22.3%, including 13.7% from the IPC acquisition, 5.8% organic growth and 2.8% favorable currency impact.
- Q2 diluted EPS improved to $0.69 from a loss of $0.15. The first-half comparison also moved from a loss to profit. Higher sales, improved gross margin and lower selling and administrative expense as a share of sales supported the improvement.
- Q2 gross margin increased 210 basis points year over year; first-half margin increased 70 basis points. Comparisons benefited from the $6.2 million IPC inventory fair-value step-up charge recorded in 2017, which did not recur. Operational improvements also helped; strategic-account sales mix, raw-material and labor shortages, higher freight and logistics costs, and a Coatings inventory write-down were offsets.
- First-half operating cash flow was $26.0 million, versus cash used of $2.5 million in 2017. Inventory growth used $17.0 million and receivables growth used $6.8 million, partly offset by higher payables and employee-related liabilities. Investing activities used $8.1 million; financing activities used $21.9 million. Cash, cash equivalents and restricted cash ended at $54.4 million.
Liquidity and debt
- At June 30, 2018, cash and cash equivalents were $53.9 million; current assets were $445.3 million and current liabilities $245.4 million. Working capital was $199.8 million and the current ratio was 1.8.
- Balance-sheet debt was $359.7 million, comprising $31.0 million current and $328.7 million long-term debt. Outstanding principal included $300 million of 5.625% senior notes due 2025, $42 million under the term loan and $20 million under the revolver. The company reported a 5.2% weighted-average debt cost, or approximately 4.4% net of a cross-currency swap.
- Approximately $174.1 million of revolving capacity remained available after letters of credit and bank guarantees. The company was in compliance with its debt covenants at quarter-end. It reported a 54.5% debt-to-capital ratio, down from 56.0% at year-end 2017.
Outlook, management commentary and notable items
- Management expected full-year gross margin of approximately 41% of sales and R&D spending of approximately 3% of sales. Price increases were expected to add 1%–2% to full-year sales, with minimal gross-margin effect because they were intended to offset inflation. The filing does not provide a full-year revenue or earnings forecast.
- Tennant planned to introduce its first autonomous floor-care machine later in 2018 and continued investment in autonomous cleaning technology through its strategic relationship with Brain Corp. New products launched in the first half included the T600 scrubber series.
- Q2 income tax expense was $0.4 million, a 2.8% effective rate. The quarter included $3.3 million of discrete tax benefits from the exercise of soon-to-expire stock options and a favorable Italian tax ruling. First-half tax expense was $1.4 million, an 8.2% effective rate.
- At June 30, restructuring liabilities from prior actions were $2.3 million. On July 31, 2018, Tennant sold Water Star, Inc. assets for $4.0 million; management said the sale had no material effect on results.
- Key disclosed risks include raw-material and component cost or availability, competition, product innovation and quality, acquisition integration, foreign exchange, cybersecurity and IT systems, business interruptions, ability to generate cash for debt service, and geopolitical and economic uncertainty. The company reported no material changes to its risk factors, no material pending litigation beyond routine matters, and no material changes in market risk.
Important facts for investors to verify
- Whether sales growth and margin improvement persist after separating organic growth, currency effects and IPC acquisition contributions.
- How much of reported earnings improvement reflects recurring operations versus the nonrecurring 2017 inventory step-up comparison and 2018 discrete tax benefits.
- Whether manufacturing constraints, input and freight costs, sales mix, and inventory levels affect the approximately 41% full-year gross-margin outlook.
- Debt repayment capacity, covenant headroom, and the impact of working-capital needs and planned investments on cash generation.
- Execution and commercial adoption of the planned autonomous floor-care product, and the ongoing integration and controls risks related to IPC.