Tennant Company — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; unaudited. Tennant designs, manufactures and markets commercial cleaning equipment, products and services, selling through direct sales and distributor channels.
Financial performance
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Net sales | $262.5 million | $272.8 million |
| Gross profit / margin | $108.2 million / 41.2% | $109.1 million / 40.0% |
| Operating profit / margin | $10.8 million / 4.1% | $10.4 million / 3.8% |
| Net earnings | $5.4 million | $3.3 million |
| Diluted EPS | $0.29 | $0.18 |
| Cash from operating activities | $(11.6) million | $5.5 million |
- Sales declined 3.8% year over year: organic sales fell 0.8%, foreign currency reduced sales by approximately 3.4%, and acquisitions and divestitures contributed a net 0.4%.
- Gross margin improved 120 basis points, primarily on pricing and favorable product mix; tariffs, freight costs and lower productivity partly offset those benefits.
- Cash and restricted cash were $46.9 million at quarter-end, down from $86.1 million at year-end 2018. Working capital was $185.2 million and the current ratio was 1.7.
- Total debt was $360.2 million, compared with $355.1 million at December 31, 2018; debt-to-capital was 53.1%. Unused revolving credit capacity was approximately $152.7 million. The weighted average cost of debt was approximately 5.3% (about 4.5% net of a cross-currency swap).
- Investing activities used $29.6 million, including $20.5 million of capital expenditures, primarily for a new administrative building, and $9.0 million for Gaomei, net of cash acquired. Operating cash use reflected inventory growth of $20.3 million and a $13.6 million decrease in employee compensation and benefit liabilities.
Material changes and notable items
- EMEA sales fell 12.0%, including a 7.1% unfavorable currency impact and approximately 5.0% organic decline, attributed to difficult comparisons, market softness and declines in several markets. Americas sales declined 1.1%; APAC sales grew 10.3%, including Gaomei acquisition contribution, with organic growth of approximately 8.4%.
- Net earnings increased despite lower sales, supported by improved gross margin, lower interest expense and a favorable foreign-currency transaction result. The effective tax rate was 17.7%, versus 24.6% a year earlier; management attributed the decrease primarily to the expected mix of taxable earnings by country.
- A $4.3 million severance restructuring charge was recorded in selling and administrative expense for IPC integration efforts in EMEA. Management estimated savings would offset the charge approximately one year after the action.
- Tennant acquired China-based Gaomei on January 4 for a preliminary purchase price of $26.9 million, including $4.3 million of estimated contingent consideration. The contingent payment could range from zero to $42.4 million, depending on gross-profit growth targets. The purchase-price allocation is preliminary.
- Adoption of the lease standard on January 1, 2019 recognized $44.8 million of operating lease assets and liabilities, with no impact on earnings or cash flows. The company reported compliance with its debt covenants and elected an acquisition holiday that temporarily increased specified leverage limits during 2019.
Outlook, risks and contingencies
The filing provides no specific revenue, earnings or other numerical guidance. Management said it continues investing in product and technology development and emphasized disciplined spending and integration efforts. Forward-looking risks include raw-material and component costs and availability, foreign exchange, geopolitical and economic uncertainty, competition, acquisition integration, product quality and liability, cybersecurity, business interruption, regulatory compliance, innovation and generating sufficient cash to service debt.
Management did not expect pending ordinary-course litigation, tax, environmental or other matters to materially adversely affect consolidated financial position or results. The company reported tax examinations in state and foreign jurisdictions for 2014–2017 and stated it had adequate reserves. It reported $5.5 million of unrecognized tax benefits and approximately $0.4 million of accrued interest and penalties.
Important facts for investors to verify
- Whether sales trends improve in EMEA and whether APAC growth persists after separating organic growth from Gaomei and currency effects.
- Whether pricing and product mix continue to offset tariffs, freight costs and productivity pressures.
- Whether operating cash flow recovers after the inventory and compensation-related outflows, and how capital spending develops after the administrative-building investment.
- Debt repayment plans, covenant headroom, and the potential effect of acquisition-related contingent consideration on cash needs.
- Whether restructuring savings materialize on the stated timetable and whether the Gaomei purchase-price allocation or expected earn-out changes.