Tennant Company — Q1 2012 Form 10-Q
Business context and reporting period. Tennant designs, manufactures and sells equipment and other solutions for cleaning and maintaining nonresidential surfaces. This unaudited report covers the three months ended March 31, 2012; comparisons are with Q1 2011 unless otherwise noted. The company reports one segment.
Financial performance
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Net sales | $173.7 million | $172.6 million |
| Gross profit / margin | $75.3 million / 43.4% | $71.9 million / 41.7% |
| Operating profit / margin | $8.3 million / 4.8% | $8.2 million / 4.7% |
| Net earnings | $5.3 million | $5.9 million |
| Diluted EPS | $0.28 | $0.30 |
| Operating cash flow | $(2.9) million | $(7.2) million |
| Capital expenditures, net | $(4.1) million | $(1.5) million |
Sales rose 0.6%; net earnings fell about 9% and diluted EPS fell about 7%. Gross margin improved 170 basis points, while operating margin was broadly steady. The effective tax rate was 31.2%, versus 30.2%.
Liquidity, debt and cash flow
- Cash and cash equivalents were $39.5 million at March 31, down from $52.3 million at December 31, 2011. Net cash decreased $12.8 million during the quarter.
- Current assets were $257.2 million and current liabilities $108.4 million; working capital was $148.8 million and the current ratio was 2.4.
- Total debt was $36.0 million, including $4.2 million current and $31.8 million long-term. The company had $30.0 million drawn under its credit facilities and $125.0 million of committed credit capacity. It reported a 13.8% debt-to-capital ratio.
- Operating cash use improved year over year but remained negative, mainly reflecting payments of employee compensation and benefits and changes in other assets and liabilities. Investing cash use was $4.1 million. Financing cash use was $6.0 million, including $4.1 million of share repurchases and $3.2 million of dividends.
- The company reported compliance with its debt covenants. Its indebtedness-to-EBITDA ratio was 0.54 to 1, against a maximum of 3.00 to 1; EBITDA-to-interest expense was 28.73 to 1, against a minimum of 3.50 to 1.
Material changes and management commentary
- Organic sales growth was 1.6%, comprising approximately 2.0% pricing and a 0.4% volume decline; currency reduced reported growth by about 1.0%.
- Americas sales increased 3.0%; EMEA sales declined 4.0%, including an approximately 3.5% adverse currency impact. Management cited the European debt crisis and customers’ difficulty obtaining equipment credit. Asia Pacific sales declined 1.8%, with organic sales down approximately 5.3%.
- Gross-margin improvement primarily reflected Americas product mix and production efficiencies. R&D expense increased 15.8% to $7.3 million, including increased investment in the core business and Orbio. Selling and administrative expense increased to $59.7 million, partly due to unusually high self-insured medical, workers’ compensation and auto claims, as well as process-improvement spending.
- Foreign-currency transaction results shifted from a $0.5 million gain to a $0.2 million loss. Interest expense increased $0.3 million, primarily due to a higher interest rate.
- Inventory days on hand rose to 93 from 87 a year earlier. Management attributed this mainly to inventory built for expected pre-price-increase orders, most of which it expected to ship in Q2 2012.
Outlook, risks and contingencies
The filing provides no specific revenue, earnings or cash-flow guidance. Management notes that interim results are not necessarily indicative of full-year results. Principal disclosed risks include global economic and geopolitical uncertainty, competition, foreign-exchange movements, raw-material availability and costs, product liability or quality issues, business interruption, information-system risks, and the ability to develop and protect innovative products and intellectual property. Market risk and risk factors were reported as having no material changes from the 2011 Form 10-K.
- Federal R&D tax credits were excluded from the Q1 tax rate because they had not been formally reenacted.
- The company was under IRS examination for 2009 and undergoing examinations in foreign jurisdictions; management stated that adequate reserves had been recorded. Unrecognized tax benefits were $3.5 million, including approximately $0.4 million of accrued interest and penalties.
- Vehicle lease residual-value guarantees were $6.0 million; a $1.0 million estimated liability had been recorded.
- No material pending legal proceedings beyond ordinary routine litigation were disclosed. A restructuring liability from the 2010 action stood at $0.1 million at quarter-end.
- On April 25, 2012, after quarter-end, the board authorized repurchases of an additional 1.0 million shares, in addition to 618,050 shares remaining under the existing authorization at March 31.
Most important facts for investors to verify
- Whether planned Q2 shipments of pre-price-increase orders convert the higher inventory into sales and cash collection as management anticipated.
- Whether sales weakness in EMEA and Asia Pacific persists, and whether currency movements continue to offset organic growth.
- Whether gross-margin gains are sustained while R&D, process-improvement and unusually high claims-related expenses remain elevated.
- Whether operating cash flow turns positive and cash balances remain adequate amid capital spending, dividends and share repurchases.
- Developments in tax examinations and the status of federal R&D tax credits.