Tennant Company — Q2 2012 Form 10-Q
Business context and period: Tennant designs, manufactures and sells equipment, technologies and products for maintaining and protecting nonresidential surfaces. This unaudited report covers the quarter and six months ended June 30, 2012; financial amounts below are in millions except per-share data.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net sales | $199.5 | $201.3 | $373.2 | $373.8 |
| Gross profit / margin | $89.0 / 44.6% | $83.5 / 41.5% | $164.3 / 44.0% | $155.4 / 41.6% |
| Operating profit / margin | $21.6 / 10.8% | $10.2 / 5.1% | $29.9 / 8.0% | $18.4 / 4.9% |
| Net earnings | $13.7 | $5.9 | $19.0 | $11.7 |
| Diluted EPS | $0.71 | $0.30 | $0.99 | $0.60 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $12.5 | $12.7 |
Cash, debt and liquidity: At June 30, cash and cash equivalents were $38.4, versus $52.3 at year-end 2011. Total debt was $34.3, including $3.2 current and $31.0 long-term; restricted cash was $1.6. The company reported a 2.3 current ratio and $148.6 of working capital. It had $30.0 outstanding under its JPMorgan and Prudential facilities, alongside $125.0 of committed and $87.5 of uncommitted credit lines. The company was in compliance with debt covenants; leverage was 0.47x debt/EBITDA against a 3.00x maximum.
Cash flows and capital allocation: First-half investing activities used $6.0, including $6.9 net capital expenditures and $0.8 for the Water Star acquisition installment, partly offset by a $1.7 decrease in restricted cash. Financing activities used $20.4, including $15.3 of share repurchases, $6.4 of dividends and $1.8 of debt payments. Cash declined $13.9 during the half. The declared dividend was $0.17 per share for the quarter.
Changes versus prior period
- Q2 sales fell 0.9%; first-half sales declined 0.2%. Organic growth was 2.6% in Q2 and 2.3% in the half, more than offset by unfavorable currency effects of 3.5% and 2.5%, respectively.
- Gross margin expanded 310 basis points in Q2 and 240 basis points year to date, attributed to product mix, stable commodity costs and production efficiencies. Lower selling and administrative costs also supported operating profit.
- Americas sales grew 4.8% in Q2 and 4.0% year to date, while EMEA fell 12.1% and 8.2%, and Asia Pacific fell 8.9% and 5.7%, respectively. EMEA faced weak economic conditions and tight customer credit; Asia Pacific’s China growth did not offset declines in mature markets.
- Q2 2011 included a $3.8 after-tax charge for discontinuing two Hofmans products and a $1.2 after-tax international executive severance charge. These unusual prior-year expenses contributed to the year-over-year earnings comparison. The Hofmans action also included inventory and fixed-asset write-offs, an intangible-asset impairment and severance.
Outlook, risks and other notable items
- The filing provides no quantified earnings, revenue or margin guidance. Management cited continued product development and cost control; R&D spending increased, including investment in core products and the Orbio business.
- Management identified global economic and geopolitical uncertainty, competition, raw-material availability and costs, foreign exchange, product liability and quality, innovation and intellectual-property risks, and information-system and business-interruption risks. European customer financing constraints were a current sales headwind.
- Q2 included $0.9 of foreign-currency transaction losses, compared with $0.9 of gains a year earlier; first-half results included losses of $1.1 versus gains of $1.4. Management attributed the swing to currency-rate volatility.
- Unrecognized tax benefits were $3.5, with approximately $0.5 of accrued interest and penalties. The IRS was examining tax year 2009, and state and foreign examinations covered 2004–2010; management stated it had adequate reserves.
- A three-year supplier agreement commencing January 1, 2013 carries a $2.1 commitment. Vehicle leases included $3.8 of guaranteed residual values; a $0.6 estimated-loss liability was recorded. No material pending legal proceedings or material changes to reported risk factors were disclosed.
- After quarter-end, Tennant amended its Prudential shelf agreement, extending the issuance period through July 24, 2015. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Investor verification points
- Assess whether organic growth and margin gains can persist, especially given currency headwinds and regional weakness outside the Americas.
- Reconcile the earnings improvement against the unusual Hofmans and severance charges in the 2011 comparison.
- Monitor cash conversion, receivables and inventory, and the effects of ongoing capital spending, dividends and repurchases on cash balances.
- Review foreign-exchange exposure, tax examination outcomes and the company’s continued compliance with debt covenants.