Tennant Company — Q3 2015 Form 10-Q
Business and period. Tennant designs, manufactures and sells commercial cleaning equipment, technologies, parts and services. The filing covers the quarter and nine months ended September 30, 2015; amounts below are in U.S. dollars unless stated otherwise. The company reports one reportable segment.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net sales | $204.8 million | $202.6 million | $605.9 million | $605.7 million |
| Gross profit / margin | $88.7 million / 43.3% | $87.2 million / 43.0% | $261.8 million / 43.2% | $259.3 million / 42.8% |
| Operating profit / margin | $4.6 million / 2.2% | $17.1 million / 8.4% | $35.4 million / 5.8% | $49.5 million / 8.2% |
| Net earnings (loss) | $(1.0) million | $11.8 million | $18.9 million | $33.1 million |
| Diluted earnings (loss) per share | $(0.05) | $0.63 | $1.01 | $1.77 |
- Cash flow: Nine-month operating cash flow was $30.9 million, versus $36.8 million in 2014. Investing used $13.5 million and financing used $51.8 million. Cash declined $36.2 million to $56.8 million.
- Liquidity and debt: Current assets were $309.4 million and current liabilities $139.5 million; working capital was $169.9 million and the current ratio was 2.2. Total debt was $24.6 million, including $21.1 million long term. The company reported a 9.1% debt-to-capital ratio and compliance with debt covenants.
- Capital returns: Nine-month share repurchases used $39.1 million and dividends used $11.0 million. The quarterly dividend declared was $0.20 per share.
Changes versus comparable periods
- Q3 sales rose 1.1%; nine-month sales were essentially unchanged. Organic sales increased 7.6% in Q3 and 6.0% year to date, but unfavorable currency translation reduced reported sales by 6.5% and 6.0%, respectively.
- Regional sales were mixed: Americas increased 4.8% in Q3 and 6.3% year to date; EMEA decreased 15.0% and 17.6%; Asia Pacific increased 7.3% in Q3 but declined 6.2% year to date.
- Gross margin improved 30 basis points in Q3 and 40 basis points year to date, supported by operating efficiencies, despite foreign-exchange headwinds. Operating profit fell substantially, primarily reflecting the impairment and restructuring charge, higher R&D expense and currency effects.
- Nine-month net earnings fell to $18.9 million from $33.1 million. The company attributed the decline chiefly to the Green Machines impairment and related restructuring; currency also reduced operating profit by approximately $9.5 million year to date.
Management commentary, outlook and risks
- Following a decision to sell its Green Machines outdoor city-cleaning line, which represents approximately 2% of sales, Tennant recorded an $11.2 million non-cash impairment ($10.6 million of intangibles and $0.6 million of fixed assets). The company was identifying potential buyers and expected a sale within a year, but cautioned that a transaction was not assured.
- A Q3 restructuring charge of $1.8 million, primarily severance and largely in Europe, was intended to reduce infrastructure costs. Management expects the savings to offset the charge in approximately one year and does not expect further costs from this action.
- Management said 2015 list-price increases were expected to add approximately 1% to full-year sales, with minimal gross-margin impact. It planned to introduce three additional products in Q4. The filing provides no full-year earnings guidance.
- The Q3 effective tax rate was 124.1%, partly because Tennant could not recognize a tax benefit on the impairment until the assets are sold. Excluding the impairment and restructuring items, management reported an estimated Q3 rate of 28.3% and year-to-date rate of 30.7%.
- Key disclosed risks include foreign-exchange movements, competition, economic and geopolitical uncertainty, raw-material availability and cost, product development and quality, business interruption, personnel, and information-technology and regulatory challenges. A sale of Green Machines and its eventual financial and tax effects remain uncertain.
- The company renewed a U.K. facility lease for ten years, with a stated total commitment of $2.8 million. It reported no material pending legal proceedings beyond ordinary routine litigation and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether Green Machines is sold, the final sale price and tax consequences, and whether any further impairment or costs arise.
- Whether organic growth, particularly in the Americas, can continue to offset foreign-exchange pressure and weakness in EMEA.
- Whether restructuring savings materialize as expected and operating margins recover after the one-time charges.
- Cash conversion and working-capital trends, including the increase in days inventory on hand to 93 from 84 at year-end 2014.
- Capital allocation and liquidity after substantial share repurchases and dividends, including continued covenant compliance.