Tennant Company — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. Tennant designs, manufactures and sells equipment and related products and services for maintaining nonresidential surfaces. Unless otherwise stated, amounts below are in U.S. dollars.
Financial performance
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Net sales | $216.8 million | $215.4 million | $396.7 million | $401.1 million |
| Gross profit / margin | $95.3 million / 43.9% | $95.0 million / 44.1% | $172.8 million / 43.6% | $173.1 million / 43.2% |
| Operating profit / margin | $22.6 million / 10.4% | $22.6 million / 10.5% | $29.7 million / 7.5% | $30.8 million / 7.7% |
| Net earnings | $15.3 million | $14.8 million | $19.8 million | $19.8 million |
| Diluted EPS | $0.85 | $0.79 | $1.10 | $1.06 |
- Q2 sales rose 0.7%: organic growth of 2.4% was partly offset by unfavorable currency translation of 1.0% and the Green Machines divestiture of 0.7%. First-half sales fell 1.1%, reflecting organic growth of 1.3% offset by currency of 1.5% and divestiture of 0.9%.
- Geographic sales were mixed. Q2 Americas and EMEA sales increased 1.5% and 1.9%, respectively; APAC declined 8.2%. First-half changes were +0.7% in the Americas, -4.8% in EMEA and -8.5% in APAC.
- Q2 gross margin declined 20 basis points, mainly from foreign exchange. First-half gross margin improved 40 basis points, primarily from product mix, partly offset by currency headwinds.
- Q2 operating profit was essentially flat year over year; first-half operating profit declined $1.2 million. Management estimated currency reduced operating profit by approximately $1.1 million in Q2 and $2.2 million in the first half.
Cash flow, balance sheet and debt
- First-half operating cash flow was $12.4 million, versus $6.6 million a year earlier. Capital expenditures, net of disposals, were $14.3 million; investing cash use was $13.9 million.
- Financing activities used $21.8 million, including $12.8 million of share repurchases, $7.1 million of dividends and $3.4 million of debt repayments. Cash declined $23.4 million to $27.9 million from year-end 2015.
- At June 30, 2016, total debt was $21.2 million, down from $24.7 million at December 31, 2015. Current assets were $277.7 million and current liabilities $128.2 million; the company reported a 2.2 current ratio and $149.5 million of working capital.
- Committed credit lines totaled $125.0 million, with $10.0 million drawn under the JPMorgan facility; additional uncommitted facilities totaled $87.2 million. The company reported compliance with debt covenants. Its indebtedness-to-EBITDA ratio was 0.34 versus a maximum of 3.25, and EBITDA-to-interest was 76.03 versus a minimum of 3.50.
Outlook, commentary and notable items
- Management did not provide specific full-year revenue or earnings guidance in the filing. It expected no significant inflation, no material selling-price increases in 2016 and only an immaterial full-year sales benefit from pricing. It planned to introduce at least 14 new products during 2016; five products or variants had launched in the first half.
- New products introduced in the prior three years represented 34% of Q2 equipment revenue and 35% of first-half equipment revenue, versus 16% and 15%, respectively, in the comparable 2015 periods.
- The January 2016 sale of the Green Machines outdoor cleaning line resulted in a first-half pretax loss of $149,000. The sale is expected to reduce annual revenue by approximately 1%, net of continuing distribution revenue, with an immaterial earnings impact. Part of the $5.7 million consideration remains subject to working-capital adjustment and installment payments.
- Commitments include purchasing $24 million of Green Machines products over two years and spending up to $8 million over four years on a software joint-development agreement, subject to billing and milestones.
- On July 28, 2016, after quarter-end, Tennant completed the acquisition of selected assets and liabilities of Crawford Laboratories’ commercial floor coatings business for $12.07 million, subject to customary working-capital adjustments.
- Key disclosed risks include foreign-exchange movements, global economic and geopolitical uncertainty, competition, raw-material availability and cost, product development and quality, supply-chain disruption, cybersecurity and information-technology execution, and regulatory compliance. Management reported no material changes to risk factors, market risk, internal controls or material legal proceedings.
Investor verification priorities
- Confirm whether organic growth and strategic-account demand continue, particularly given the ongoing APAC declines.
- Track foreign-exchange effects on sales, margins and operating profit, and assess whether product mix can offset currency pressure.
- Review cash conversion, receivables and inventory trends alongside elevated first-half capital spending and share repurchases.
- Verify final Green Machines working-capital proceeds, remaining installment collections and performance of related purchase commitments.
- Assess the Crawford Laboratories acquisition’s final purchase-price adjustment, integration and financial contribution.