Tennant Company — Q2 2011 Form 10-Q
Business context and reporting period
For the quarter and six months ended June 30, 2011. Tennant designs, manufactures and sells equipment and other solutions for cleaning and maintaining nonresidential surfaces. It reports one operating segment, with sales across the Americas, EMEA and Asia Pacific.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net sales | $201.3m | $166.1m | $373.8m | $316.2m |
| Gross profit / margin | $83.5m / 41.5% | $71.5m / 43.1% | $155.4m / 41.6% | $135.3m / 42.8% |
| Operating profit / margin | $10.2m / 5.1% | $10.6m / 6.4% | $18.4m / 4.9% | $17.1m / 5.4% |
| Net earnings | $5.9m | $6.2m | $11.7m | $10.3m |
| Diluted EPS | $0.30 | $0.32 | $0.60 | $0.53 |
| Operating cash flow | Six-month figure: $12.7m | 2010 six-month comparison: $24.4m |
Q2 sales grew 21.1% year over year; first-half sales rose 18.2%. Management attributed growth principally to equipment volume, including scrubbers using ec-water technology, pricing and favorable currency translation. First-half net earnings increased 14.2%, while Q2 net earnings declined 5.2%. Q2 gross margin fell 160 basis points, primarily from raw-material inflation, weaker city-cleaning product volumes in EMEA and charges related to discontinuing Hofmans products.
At June 30, cash was $41.5m, current assets $276.1m and current liabilities $126.6m; the reported current ratio was 2.2. Total debt was $41.3m, including $4.0m current debt, versus $30.8m at year-end 2010. The debt-to-capital ratio was 15.6%, compared with 12.5% at year-end. Operating cash flow decreased year over year, principally reflecting higher receivables and inventory, partly offset by higher payables. First-half investing used $6.7m, including $3.8m net capital expenditures and $2.9m for the Water Star acquisition. Financing used $5.4m, including $9.2m of share repurchases and $6.5m of dividends; cash increased $1.9m.
Material changes, outlook and risks
- Unusual charges: Discontinuing two Hofmans outdoor city-cleaning products resulted in an approximately $3.8m after-tax Q2 charge, or $0.20 per diluted share, including inventory and fixed-asset write-offs, an intangible impairment and severance. A separate international executive departure settlement caused a $1.2m after-tax charge, or $0.06 per diluted share. Management said the product decision redirects resources to Green Machines products.
- Acquisition and financing: Tennant acquired Water Star, an electrochemistry business, on May 31 for $4.456m, including $1.5m in installment payments. A new $125m unsecured credit facility runs to May 2016, with an option to expand; the company also issued $20m of fixed-rate Prudential notes. It reported compliance with debt covenants and substantial headroom: leverage of 0.72x against a 3.00x maximum and EBITDA-to-interest of 35.29x against a 3.50x minimum.
- Management commentary and guidance: The filing attributes demand gains to equipment sales and ec-water technology and cites ongoing investment in sustainable cleaning. It provides no specific full-year earnings or sales guidance.
- Risks and contingencies: Risks cited include global economic and geopolitical uncertainty, competition, raw-material availability and costs, product liability and quality, innovation and intellectual-property protection, key-personnel retention, regulatory compliance, business interruption, IT systems and currency movements. Vehicle lease residual-value guarantees totaled $5.7m, with a $1.0m recorded liability. A three-year software agreement carries a $2.9m commitment. Unrecognized tax benefits were $5.7m; tax examinations were ongoing, with settlements expected before year-end and reserves considered adequate by management. No material change in legal proceedings or market risk was reported.
Most important facts for investors to verify
- Whether sales growth and ec-water demand persist, particularly when favorable foreign-exchange effects are excluded.
- Whether raw-material inflation and the shift away from Hofmans products continue to pressure gross margins, and whether the stated one-off charges recur.
- Whether cash conversion improves after the working-capital-driven decline in operating cash flow.
- Debt balances, covenant headroom, and the impact of repurchases and dividends on liquidity.
- Final Water Star purchase-price allocation, tax-examination outcomes and the adequacy of recorded contingency reserves.