Tennant Company — Q2 2015 Form 10-Q
Business context and period. Tennant designs, manufactures and sells cleaning equipment, technologies, parts, consumables and services, primarily for nonresidential surfaces. This unaudited report covers the quarter and six months ended June 30, 2015. The company reports one segment; geographic sales are presented for the Americas, EMEA, and Asia Pacific.
Financial performance
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Net sales | $215.4m | $219.1m | $401.1m | $403.1m |
| Gross profit / margin | $95.0m / 44.1% | $95.3m / 43.5% | $173.1m / 43.2% | $172.2m / 42.7% |
| Operating profit / margin | $22.6m / 10.5% | $23.1m / 10.6% | $30.8m / 7.7% | $32.4m / 8.0% |
| Net earnings | $14.8m | $15.5m | $19.8m | $21.3m |
| Diluted EPS | $0.79 | $0.83 | $1.06 | $1.14 |
Amounts are in U.S. dollars. Q2 sales declined 1.7%, while first-half sales declined 0.5%. Organic growth was 3.8% in Q2 and 5.0% in the first half, offset by a 5.5% unfavorable currency impact in both periods. Gross margin improved year over year, but operating profit and earnings declined.
Cash flow, liquidity and debt
- First-half operating cash flow was $6.6m, down from $10.5m. Capital expenditures were $7.6m; investing activities used $7.4m.
- Financing activities used $23.5m, including $14.2m of share repurchases, $7.3m of dividends and $3.4m of debt payments. Cash declined $25.3m to $67.6m from December 31, 2014.
- At June 30, cash was $67.6m, total debt $24.6m, and working capital $191.8m. The current ratio was 2.4 and debt-to-capital was 8.1%.
- Committed credit lines totaled $125.0m, with $10.0m drawn under the JPMorgan facility and $14.6m under the Prudential facility. Tennant reported compliance with its debt covenants; leverage was 0.31x debt/EBITDA against a 3.25x maximum.
Material changes and management commentary
- Americas sales rose 5.0% in Q2 and 7.0% in the first half; EMEA sales fell 18.2% and 18.9%, respectively, and Asia Pacific sales fell 16.1% and 12.5%.
- Management attributed organic growth mainly to strategic-account demand in North America and new products, including T12 and T17 rider scrubbers. New products introduced within the prior three years contributed 16% of Q2 equipment revenue, versus 10% a year earlier.
- Currency reduced operating profit by approximately $3.4m in Q2 and $5.3m in the first half. Management cited improved service and manufacturing efficiencies and favorable business mix as gross-margin supports; higher R&D spending and, in the first half, higher selling and administrative costs weighed on operating profit.
- List-price increases, generally 2%–4% in most geographies and effective February 1, were expected to add 1%–2% to full-year sales, with minimal gross-margin impact as they were intended to offset inflation. No full-year earnings or sales forecast is stated in the provided filing text.
Outlook, risks and other notable items
- Management planned three additional product introductions in the second half of 2015, following 33 new products and variants launched in the first half. R&D investment includes the Orbio sustainable-cleaning technology group.
- The June 30 amended JPMorgan credit agreement extends maturity to June 30, 2020; the Prudential shelf issuance period was extended to June 30, 2018. Covenants restrict dividends and repurchases if leverage exceeds specified thresholds.
- Key risks cited include foreign-exchange movements, competition, global economic and geopolitical uncertainty, raw-material availability and cost, product development and quality, business interruptions, personnel, IT systems, organizational change, and regulatory compliance.
- There were no material pending legal proceedings beyond routine litigation and no material changes to previously disclosed risk factors. The company had $2.9m of unrecognized tax benefits and approximately $0.6m of accrued interest and penalties; tax examinations were ongoing in certain jurisdictions, with management stating reserves were adequate.
- Vehicle lease residual-value guarantees totaled $9.4m; the recorded estimated loss liability was $0.2m. A $1.2m remaining divestiture installment was due July 31, 2015.
Important facts for investors to verify
- Whether organic growth and new-product demand continue to offset currency pressure, particularly in EMEA and Asia Pacific.
- Whether inventory growth and weaker operating cash generation reverse; days inventory on hand rose to 89 from 79 a year earlier.
- How currency movements, pricing and cost controls affect margins and earnings in subsequent periods.
- Debt covenant capacity and the company’s use of cash for dividends and share repurchases; the board authorized repurchase of an additional 1,000,000 shares in June 2015.
- Outcome of open tax examinations and collection of the remaining divestiture installment.