Tennant Company — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; comparative period is Q1 2015. Tennant designs, manufactures and sells equipment and related solutions for cleaning nonresidential surfaces. Unless noted otherwise, amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Net sales | $179.9 million | $185.7 million |
| Gross profit / margin | $77.5 million / 43.1% | $78.1 million / 42.0% |
| Operating profit / margin | $7.1 million / 3.9% | $8.3 million / 4.4% |
| Net earnings | $4.4 million | $5.0 million |
| Diluted EPS | $0.25 | $0.27 |
| Operating cash flow | $(6.5) million | $(2.1) million |
| Capital expenditures, net of disposals | $6.8 million | $4.0 million |
- Sales fell 3.2%. Reported drivers were foreign currency translation (negative 2.0%), the Green Machines divestiture (negative 1.2%), and flat organic growth: volume declined 0.5%, offset by 0.5% price growth.
- Gross margin improved 110 basis points, mainly from channel and product mix; currency reduced margin by about 40 basis points. Operating margin declined 50 basis points as operating expenses rose relative to sales.
- Foreign exchange reduced operating profit by approximately $1.1 million. R&D expense increased 2.5% to $7.9 million; selling and administrative expense rose 0.5% to $62.4 million, reflecting investment in key projects, partly offset by cost controls and efficiencies.
- At March 31, cash and cash equivalents were $26.9 million, down from $51.3 million at year-end 2015. Current assets were $259.4 million and current liabilities $115.8 million; the reported current ratio was 2.2 and working capital was $143.7 million.
- Total debt was $22.7 million, including $3.5 million current and $19.2 million long-term, down from $24.7 million at year-end. Debt-to-capital was 8.3%. Tennant reported covenant compliance; its indebtedness-to-EBITDA ratio was 0.37 versus a 3.25 maximum, and EBITDA-to-interest was 67.36 versus a 3.50 minimum.
- Operating cash use increased year over year, with outflows from employee compensation and benefits, other current liabilities, inventory, and accounts payable partly offset by receivables collections and earnings. Inventory days on hand rose to 103 from 89 at year-end; management attributed the increase mainly to inventory supporting expected sales and new product launches.
- Q1 comprehensive income was $7.8 million versus a comprehensive loss of $2.9 million in Q1 2015, mainly reflecting a $3.6 million foreign-currency translation gain versus an $8.1 million loss a year earlier.
Material changes, outlook and management commentary
- By geography, sales were $133.6 million in the Americas (down 0.3%), $30.7 million in EMEA (down 11.3%) and $15.6 million in APAC (down 8.8%). Americas organic growth was 1.7%; EMEA and APAC organic sales declined approximately 2.8% and 5.8%, respectively. Currency and the divestiture also weighed on reported regional sales.
- New products introduced within the prior three years accounted for 36% of equipment revenue, compared with 14% in Q1 2015. Management planned at least 13 product introductions in 2016; the M17 battery-powered sweeper-scrubber launched in late March and was expected to begin generating sales in Q2. The filing provides no specific full-year earnings or revenue guidance.
- Management did not anticipate material list-price increases in 2016 and expected an immaterial full-year sales benefit from pricing. It said the pricing increases taken previously were intended to offset inflation and had minimal gross-margin impact.
- The Green Machines sale closed January 31, 2016, for stated aggregate consideration of $5.7 million, subject to working-capital adjustments. Tennant received $0.3 million initially; $1.0 million was due after working-capital finalization, with the remaining $4.4 million financed in 13 quarterly installments beginning in Q3 2016. The sale generated a $62,000 pretax loss. Management expected the divestiture, net of ongoing distribution revenue, to reduce annual sales by about 1% with an immaterial earnings impact.
- Cash returned to shareholders included $7.1 million of share repurchases and $3.5 million of dividends. The quarterly dividend declared was $0.20 per share. The company repurchased 137,069 shares under its public program during the quarter; 504,454 shares remained authorized for repurchase at March 31.
- New commitments include purchasing $24 million of Green Machines products and parts over two years, and up to $8 million under a four-year software joint-development agreement, including $3 million in the first year and subject to time-and-materials billing and milestones.
Risks, contingencies and unusual items
- Management identified risks including global geopolitical and economic uncertainty, competition, U.S.-dollar strength, raw-material availability and cost, personnel and organizational changes, IT-system risks, product development and commercialization, product liability or quality issues, supply-chain disruption, business interruption, and regulatory compliance.
- Foreign-currency exposure remains material: the company reported a $1.1 million adverse operating-profit impact from currency in Q1 and held foreign-exchange derivatives. Management reported no material change in market risk since year-end 2015.
- Vehicle lease residual-value guarantees totaled $9.7 million; Tennant had recorded a $0.4 million estimated liability. The company also reported $2.5 million of unrecognized tax benefits and approximately $0.5 million of accrued interest and penalties, and said it believed tax reserves were adequate for ongoing examinations.
- No material pending legal proceedings or material changes to previously disclosed risk factors were reported. Disclosure controls were assessed as effective, with no material quarterly change in internal controls over financial reporting.
Important facts for investors to verify
- Whether sales, operating margins and earnings recover, particularly in EMEA and APAC, and how much reported performance continues to be affected by currency.
- Whether inventory elevated for anticipated sales and product launches converts into revenue without further working-capital pressure.
- Actual cash generation, capital spending and cash levels, given Q1 operating cash use and shareholder returns.
- Receipt and working-capital adjustment of the Green Machines proceeds, and fulfillment of the related purchase commitment and software-development milestones.
- Progress and returns from planned product launches and key-project spending; the filing gives no specific full-year financial guidance.
- Continued covenant compliance, foreign-exchange exposure, tax examination outcomes, and any changes in the disclosed operating risks.