Tennant Company — 2018 Form 10-K Summary
Business context and reporting period
Fiscal year ended December 31, 2018; the filing was dated February 28, 2019. Tennant designs and sells commercial cleaning equipment, parts and consumables, service, surface coatings and related solutions. It reports one segment, with sales across the Americas, EMEA and Asia Pacific. The 2017 IPC acquisition materially expanded the business, particularly in EMEA.
Key financial metrics
| Metric | 2018 | 2017 |
|---|---|---|
| Net sales | $1,123.5 million | $1,003.1 million |
| Gross profit / margin | $445.0 million / 39.6% | $399.8 million / 39.9% |
| Operating profit / margin | $58.0 million / 5.2% | $33.0 million / 3.3% |
| Net earnings (loss) attributable to Tennant | $33.4 million | $(6.2) million |
| Diluted earnings (loss) per share | $1.82 | $(0.35) |
| Cash provided by operating activities | $80.0 million | $54.2 million |
| Capital expenditures, net of disposals | $18.7 million | $17.9 million |
| Free cash flow, as reported | $61.3 million | $36.2 million |
| Cash and cash equivalents at year-end | $85.6 million | $58.4 million |
| Total debt at year-end | $355.1 million | $376.8 million |
| Current ratio / debt-to-capital | 1.9 / 53.0% | 1.8 / 56.0% |
2018 sales grew 12.0%: organic growth was 5.5% (volume +3.9%, price +1.6%), acquisition contribution 6.2%, and foreign currency 0.3%. Sales increased in all regions; EMEA growth was substantially acquisition-driven. The 2018 fourth quarter reported sales of $285.2 million and net earnings of $7.7 million, versus $279.3 million and a net loss of $3.2 million in fourth-quarter 2017.
Gross margin declined as raw-material and labor shortages, tariffs, freight costs and sales mix weighed on results; pricing and improved manufacturing and service performance partly offset these pressures. Operating profit improved year over year, while the 2017 comparison included significant acquisition, restructuring, financing and pension charges. 2018 net earnings included a 6.4% effective tax rate, affected by the Tax Act, geographic earnings mix and discrete tax items.
Material changes, outlook and risks
- Debt declined year over year, and operating cash flow rose. The company had $53.0 million outstanding under its credit facility and $300.0 million of 5.625% senior notes due 2025; approximately $165.7 million of revolving-facility capacity remained available. It reported compliance with debt covenants at year-end.
- The annual dividend rose to $0.85 per share, the 47th consecutive annual increase. The company announced a quarterly dividend of $0.22 per share in February 2019.
- Management gave no quantified 2019 sales or earnings guidance in the provided filing text. It said commodity inflation could continue to pressure 2019 results if price increases and cost actions do not offset it, and noted potential for additional restructuring charges.
- Key risks include integration and realization of IPC benefits, supply-chain concentration and sole-source vendors, labor and material cost inflation and tariffs, economic sensitivity of customers’ capital spending, competition, foreign-exchange exposure, cybersecurity and IT-system upgrades, product quality and liability, and the ability to service debt. An investor holding approximately 5% of shares had advocated a strategic review involving a potential third-party consolidation transaction.
- The company sold its Waterstar business in 2018 for $4.0 million and recorded an approximately $1.0 million gain. Its acquisition of Gaomei, completed January 4, 2019, was described as not significant to consolidated financial statements. A $5.36 million note receivable had some collectability uncertainty; management could not determine an appropriate allowance.
- The company adopted the revenue-recognition standard in 2018; the opening retained-earnings impact was not material. It revised prior-period classifications between cost of sales and selling and administrative expense; the revisions were deemed immaterial and did not change pretax profit. The 2019 lease-accounting standard was expected to materially increase reported balance-sheet assets and liabilities, with no material income-statement impact expected.
- KPMG gave unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective. The filing reports no material pending legal proceeding beyond routine matters.
Important facts for investors to verify
- How much future organic growth and margin performance depends on successful IPC integration, particularly in EMEA.
- Whether manufacturing productivity, labor availability, tariffs, freight and raw-material inflation improve or continue to weigh on gross margin.
- Debt repayment, covenant headroom, interest costs and cash available after dividends and investment needs.
- The drivers and sustainability of 2018 earnings, including the low effective tax rate and nonrecurring gains, charges and acquisition-related costs.
- The amount and balance-sheet effect of operating lease liabilities upon 2019 adoption, and developments in the note receivable’s collectability.