Tennant Company — FY2011 Form 10-K
Business context and reporting period. Tennant designs and sells commercial and industrial floor-care and outdoor-cleaning equipment, related parts and services, coatings, and sustainable cleaning technologies. This annual filing covers the fiscal year ended December 31, 2011; quarterly figures below are unaudited. Tennant reports one business segment.
Financial performance
| Metric | FY2011 | FY2010 |
|---|---|---|
| Net sales | $754.0 million | $667.7 million |
| Gross profit margin | 42.3% | 42.6% |
| Operating profit | $49.6 million; 6.6% margin | $37.1 million; 5.6% margin |
| Net earnings | $32.7 million | $34.8 million |
| Diluted EPS | $1.69 | $1.80 |
| Cash from operations | $56.9 million | $42.5 million |
| Capital expenditures, net | $13.3 million | $9.9 million |
| Cash and cash equivalents at year-end | $52.3 million | $39.5 million |
| Total debt at year-end | $36.5 million | $30.8 million |
| Current ratio | 2.2 | 2.1 |
Sales rose 12.9%, mainly on higher equipment volumes, with 8.9% volume growth, 1.5% price contribution, and 2.5% favorable currency impact. Scrubbers equipped with ec-H2O technology were a notable growth driver. Gross margin declined 30 basis points amid cost inflation and an unfavorable LIFO inventory adjustment; pricing, productivity, and higher production partly mitigated costs. Selling and administrative expense increased in dollars but declined to 32.0% of sales from 33.1%, reflecting cost control and operating efficiencies. Free cash flow, as defined in the filing as operating cash flow less net capital expenditures, was $43.6 million, up from $32.6 million.
Fourth quarter: Net sales were $193.2 million versus $182.8 million in Q4 2010. Net earnings were $11.3 million versus $17.0 million, and diluted EPS was $0.59 versus $0.89. The filing attributes the much higher FY2010 comparison in part to a $10.9 million tax benefit from an international restructuring.
Changes, liquidity and capital
- Regional sales increased in FY2011: Americas $481.4 million (+13.4%), EMEA $188.3 million (+9.1%), and Asia Pacific $84.2 million (+19.3%). EMEA growth included a 4.5% favorable currency effect; Asia Pacific growth included a 9.0% favorable currency effect.
- Cash from operations increased by $14.4 million year over year. Working-capital movements included higher inventories to support sales and service initiatives; days inventory on hand rose to 88 from 83.
- Debt-to-capital was 14.2%, compared with 12.5%. Tennant had $30.0 million outstanding under its JPMorgan and Prudential facilities and reported compliance with all debt covenants. Its leverage ratio was 0.54 to 1 against a maximum of 3.00 to 1.
- The company paid $0.68 per share in dividends, up from $0.59, and repurchased 469,304 shares during the year. A $125 million revolving credit facility runs through May 2016, with an option to increase it to $187.5 million.
Outlook, commentary, risks and unusual items
The filing provides no quantified FY2012 revenue or earnings guidance. Management said commodity-cost increases could pressure 2012 results if selling-price increases and cost savings do not offset them. It also highlighted global economic uncertainty and customers’ sensitivity to capital spending, competitive pricing, foreign exchange, supply disruptions, product quality and liability, information-technology changes, and the ability to retain talent and execute organizational changes.
- FY2011 included a $4.3 million pretax product-line obsolescence charge and a $1.217 million international executive severance charge. The Hofmans outdoor-cleaning product obsolescence also resulted in a $1.805 million impairment of intangible assets.
- FY2010 earnings benefited from a $10.9 million tax benefit from international entity restructuring; excluding that benefit, management reported the 2010 effective tax rate would have been 31.3%, versus 30.4% for 2011 excluding the identified one-time charges.
- Competitors challenged advertising claims about ec-H2O in legal and regulatory proceedings in multiple jurisdictions. Tennant did not consider these matters material and did not expect a material adverse effect, while noting that defense costs or customer concerns could still affect the business.
- Defined-benefit and postretirement plans were underfunded; the filing reported a $30.8 million total plan obligation and expected 2012 contributions across plans. Other disclosed commitments included $116.0 million of contractual obligations and a $6.2 million guaranteed residual value on leased vehicles; a related estimated liability of $0.9 million was recorded.
- Management and KPMG concluded that internal control over financial reporting was effective as of year-end. KPMG issued an unqualified opinion on the financial statements and internal controls.
Important facts for investors to verify
- Whether equipment volume and ec-H2O-related demand remain strong, and whether growth persists across regions after adjusting for currency effects.
- Whether pricing and productivity can offset raw-material, freight, and other cost inflation without further gross-margin pressure.
- How much FY2010’s restructuring tax benefit distorts year-over-year earnings comparisons, and whether 2011’s obsolescence and severance charges recur.
- Whether inventory growth, pension funding needs, dividends, repurchases, and debt service remain supportable by operating cash flow.
- Developments in ec-H2O advertising challenges, product warranty and quality claims, and tax examinations or uncertain tax positions.