Tennant Company — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. Unaudited results; dollar amounts below are in millions unless noted. Tennant designs, manufactures and sells equipment and other solutions for maintaining and protecting nonresidential surfaces.
Financial performance
| Metric | Q3 2012 | Q3 2011 | 9M 2012 | 9M 2011 |
|---|---|---|---|---|
| Net sales | $178.3 | $187.0 | $551.5 | $560.8 |
| Gross margin | 43.5% | 42.9% | 43.9% | 42.0% |
| Operating profit | $13.8 | $15.8 | $43.7 | $34.2 |
| Net earnings | $8.7 | $9.7 | $27.7 | $21.4 |
| Diluted EPS | $0.46 | $0.50 | $1.45 | $1.10 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $43.3 | $36.0 |
Q3 sales fell 4.7% year over year: organic sales declined 1.7% and currency reduced sales by about 3.0%. Nine-month sales fell 1.7%, despite 0.8% organic growth, as currency reduced sales by about 2.5%. Management attributed stronger gross margins to product mix, stable commodity costs and production efficiencies. Q3 operating profit and earnings declined despite the margin improvement; nine-month earnings increased.
For the nine months, operating cash flow was $43.3 million; investing activities used $7.5 million and financing activities used $26.5 million. Cash and cash equivalents were $62.7 million at September 30, versus $52.3 million at December 31, 2011. Current assets were $270.2 million and current liabilities $117.4 million; the reported current ratio was 2.3.
Total debt was $33.6 million, including $30.0 million under credit facilities. The filing reports a 12.8% debt-to-capital ratio and covenant ratios of 0.46 debt/EBITDA and 30.47 EBITDA/interest; Tennant said it complied with its debt covenants. Nine-month capital expenditures, net of disposals, were $10.8 million. The company paid $9.5 million in dividends and repurchased $18.6 million of stock.
Material changes and management commentary
- Q3 sales declined in the Americas and especially EMEA; EMEA sales were down 14.0%, reflecting currency headwinds, economic uncertainty and tight customer credit. Asia Pacific sales rose 0.8% in the quarter.
- For the first nine months, Americas sales increased 1.9%, while EMEA declined 10.0% and Asia Pacific declined 3.5%. Large industrial equipment volume was a source of weakness; management cited strategic-account and ec-H2O scrubber sales and pricing as offsets in the Americas.
- Gross margin improved 60 basis points in Q3 and 190 basis points for the first nine months. Nine-month S&A expense decreased to $177.3 million from $181.2 million, while R&D expense rose to $21.6 million from $20.2 million.
- Q3 and nine-month 2012 results included a $0.8 million pretax gain on the sale of Tennant CEE GmbH and a minority interest in OOO Tennant. The sale included deferred consideration: €2.126 million payable in 2013 and €3.225 million in installments over three years. M&F, the buyer, became a master distributor and is a related party; Tennant concluded it was not the primary beneficiary of M&F.
- Q3 2012 included a $0.8 million restructuring charge, primarily severance. Stock-based compensation expense increased to $7.2 million for the first nine months from $3.6 million a year earlier.
- Nine-month 2011 earnings included substantial special charges related to discontinuing two Hofmans products and international executive severance. Management cited a $3.8 million after-tax Hofmans-related charge and a $1.2 million after-tax executive-severance charge; the filing also describes related 2011 operating charges.
Outlook, risks and contingencies
The filing provides no specific revenue or earnings guidance. Management described ongoing product-development investment, including in its Orbio business, but highlighted uncertain global economic conditions, competition, product development and quality risks, raw-material availability and cost, foreign-exchange fluctuations, and dependence on systems, personnel and intellectual property. Management reported no material change in market risks or risk factors from the 2011 Form 10-K.
Other disclosed exposures include a $578,000 estimated liability for vehicle lease residual-value guarantees; a $2.1 million supplier commitment commencing January 1, 2013; and $3.4 million of unrecognized tax benefits plus approximately $0.5 million of accrued interest and penalties. State and foreign tax examinations were ongoing, with settlement expected before year-end; management said reserves were adequate. No material pending legal proceedings beyond ordinary routine litigation were reported.
Important facts for investors to verify
- Whether the deferred sale proceeds from M&F are collected as scheduled, and how the related-party distributor arrangement develops.
- Whether sales weakness in large industrial equipment and EMEA persists, and whether currency movements continue to weigh on reported revenue.
- Cash conversion and working-capital trends, including inventory, receivables and the timing-related tax cash-flow benefit.
- Debt covenant headroom and planned capital allocation, including buybacks and dividends.
- The MD&A tax discussion contains an apparent amount inconsistency: it refers to a $0.02 million one-time gain in connection with tax expense, while the financial statements report a $0.784 million gain on sale. The filing text does not clearly reconcile these amounts.