Tennant Company — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; comparisons are to Q1 2016 unless otherwise noted. Tennant designs, manufactures and sells commercial cleaning equipment and related products and services.
Financial performance and position
| Metric | Q1 2017 | Q1 2016 / comparison |
|---|---|---|
| Net sales | $191.1 million | $179.9 million; up 6.2% |
| Gross profit / margin | $79.7 million / 41.7% | $77.5 million / 43.1% |
| Operating income (loss) | $(2.6) million; (1.4)% of sales | $7.1 million; 3.9% of sales |
| Net income (loss) / diluted EPS | $(4.0) million / $(0.22) | $4.4 million / $0.25 |
| Operating cash flow | $(11.1) million | $(6.5) million |
| Cash and cash equivalents | $45.0 million at March 31 | $58.0 million at December 31, 2016 |
| Debt | $45.0 million credit-facility borrowings; $45.0 million total debt, including leases | $36.2 million total debt at December 31, 2016 |
| Liquidity | Current assets $287.8 million; current liabilities $120.2 million; current ratio 2.4 | Working capital $167.6 million |
Investing activities used $9.0 million, including $4.6 million of net capital expenditures, $2.5 million for i-mop distribution rights and a $1.5 million loan to the i-team joint venture. Financing activities provided $6.8 million; dividends paid were $3.7 million. The declared quarterly dividend was $0.21 per share, versus $0.20 a year earlier.
Changes and operating drivers
- Sales growth comprised 5.0% organic growth (4.0% volume and 1.0% price), a 1.2% net acquisition/divestiture contribution, and no material foreign-currency translation impact. New products introduced in the prior three years accounted for 42% of equipment revenue, up from 36%.
- Americas sales rose 6.9% to $142.8 million; EMEA rose 8.3% to $33.3 million; APAC fell 3.6% to $15.0 million. Management cited scrubber demand and strategic-account sales as growth drivers, partly offset by weakness in APAC.
- Gross margin declined 140 basis points, attributed primarily to temporary service inefficiencies related to restructuring, less favorable geographic and customer mix, and raw-material inflation.
- Selling and administrative expense increased 18.4% to $73.9 million. It included an $8.0 million restructuring charge and $2.9 million of IPC acquisition costs; R&D expense was $8.4 million, up 6.9%.
- Other expense included $1.2 million of foreign-currency transaction losses, versus $0.3 million, primarily due to a mark-to-market loss on an FX call option connected with the IPC acquisition. Interest expense increased to $0.8 million from $0.3 million.
Outlook, transactions and risks
- Management said 2017 price increases were expected to add 1%–2% to full-year sales, with minimal gross-margin impact because they were intended to offset inflation. It planned at least 31 new products or variants for 2017. No full-year earnings or sales guidance was provided in the supplied filing text.
- The restructuring was intended to align resources and expenses with a lower-growth global economy. Management expected savings to offset the $8.0 million pre-tax charge in approximately one year and did not expect further costs for this action.
- After quarter-end, Tennant completed the IPC Group acquisition on April 6 for $353 million, funded through the new credit agreement. On April 18 it issued $300 million of 5.625% senior notes due 2025 to refinance a $300 million acquisition term loan. The filing did not yet include the acquisition’s preliminary purchase-price allocation.
- The new April 4 senior secured facility provided up to $400 million in term loans and a $200 million revolving facility, with an option to increase the revolver by $150 million subject to lender consent. These post-quarter transactions materially changed the company’s financing profile; they are not reflected in March 31 reported debt.
- At March 31, the company reported compliance with its then-current credit covenants, with a 0.64-to-1 indebtedness-to-EBITDA ratio against a maximum of 3.25-to-1. The filing warns that higher indebtedness may constrain cash available for operations, dividends, repurchases and other needs, and that future covenant compliance is not assured.
- Disclosure controls were deemed ineffective at March 31 because of material weaknesses in internal control over financial reporting. Remediation was underway, with a goal of addressing the weaknesses by year-end 2017; management said they were not yet remediated.
- Other risks cited include economic and geopolitical uncertainty, competition, execution of acquisitions and organizational changes, innovation and product quality, input costs, foreign exchange, business interruptions, compliance, and information-technology and control risks. The company reported no material pending legal proceedings beyond ordinary routine litigation.
- Contingencies include vehicle operating-lease residual-value guarantees of $11.8 million, with a recorded estimated-loss liability of $0.5 million, and uncertain tax positions, for which $2.6 million of unrecognized tax benefits and approximately $0.5 million of accrued interest and penalties were recorded.
Important facts for investors to verify
- Whether sales growth and planned pricing translate into sustained operating-margin recovery after restructuring, inflation and mix effects.
- The final IPC purchase-price allocation, acquisition integration results, and actual debt, interest and covenant position following the acquisition and financing transactions.
- Whether operating cash flow improves, given the Q1 cash use, inventory increase and working-capital movements.
- Progress and effectiveness of internal-control remediation, particularly for service revenue accounting and software-development cost capitalization.
- Whether expected restructuring savings materialize on schedule and whether further acquisition-related or integration costs arise.