Tennant Company — FY2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. The filing also reports unaudited fourth-quarter results. Tennant designs, manufactures and sells commercial, industrial and outdoor cleaning equipment, parts, service, coatings and sustainable cleaning technologies. It reports one business segment, with sales across the Americas, EMEA and Asia Pacific.
Financial results and position
| Metric | FY2013 | FY2012 | Change |
|---|---|---|---|
| Net sales | $752.0 million | $739.0 million | +1.8% |
| Gross margin | 43.3% | 44.0% | -0.7 percentage point |
| Operating profit | $62.4 million | $62.7 million | -0.5% |
| Operating margin | 8.3% | 8.5% | -0.2 percentage point |
| Net earnings | $40.2 million | $41.6 million | -3.3% |
| Diluted EPS | $2.14 | $2.18 | -1.8% |
| Operating cash flow | $59.8 million | $47.6 million | +$12.2 million |
- FY2013 net sales growth comprised 2.8% organic growth (1.8% volume and 1.0% price), partly offset by a 1.0% foreign-currency impact. Americas sales rose 4.7%; EMEA fell 5.4%; Asia Pacific fell 1.1%.
- Gross margin pressure reflected selling-channel and product mix. Lower S&A expense as a share of sales, tight cost control and improved operating leverage partly offset this pressure. R&D expense increased to $30.5 million, or 4.1% of sales.
- FY2013 free cash flow was $45.2 million, defined in selected financial data as operating cash flow less capital expenditures net of disposals. Capital expenditures net of disposals were $14.7 million.
- At year-end, cash and cash equivalents were $81.0 million, total debt $31.8 million, shareholders’ equity $263.8 million, current ratio 2.4 and debt-to-capital ratio 10.8%. The prior-year figures were $53.9 million, $32.3 million, $235.1 million, 2.2 and 12.1%, respectively.
- The company reported $125.0 million in committed credit lines and approximately $87.8 million in uncommitted lines. It was in compliance with debt covenants; year-end indebtedness-to-EBITDA was 0.41x versus a maximum of 3.00x.
Fourth-quarter comparison
Q4 2013 net sales were $195.1 million versus $187.5 million in Q4 2012, up 4.1%. Gross profit was $83.8 million versus $83.5 million; gross margin was approximately 42.9% versus 44.5%. Net earnings declined to $10.3 million from $13.8 million, and diluted EPS to $0.55 from $0.73. A $1.6 million pretax restructuring charge was recorded in Q4 2013.
Material changes, outlook and risks
- Management attributed annual sales growth primarily to industrial equipment and demand for newly introduced products; lower city-cleaning equipment sales weighed on results. EMEA weakness reflected challenging conditions and constrained municipal spending.
- Two 2013 restructuring actions generated $3.0 million in pretax charges, primarily severance. A $0.6 million tax benefit related to the retroactive 2012 U.S. R&D tax credit benefited FY2013 earnings. FY2012 had included a $2.0 million tax benefit from an international entity restructuring and a $0.8 million pretax gain on a divestiture.
- No specific revenue or earnings guidance is provided. Management said higher raw-material costs could adversely affect 2014 results if significant increases cannot be offset through pricing or cost reductions. It also cited ongoing investment in core-product and Orbio technology development.
- Key risks include economic downturns and reduced customer capital spending; competition and customers’ willingness to pay for innovation; product quality, warranty and liability claims; raw-material supply and cost volatility, including reliance on some sole-source suppliers; foreign-exchange movements; cybersecurity and IT-system upgrades; and execution of organizational changes and global compliance requirements.
- The filing states that ordinary-course legal matters are not expected to have a material adverse effect. Earlier challenges to ec-H2O advertising claims were mostly closed; the company did not consider outstanding proceedings material. It also disclosed $3.7 million of unrecognized tax benefits and $0.5 million of accrued interest and penalties, with settlement timing uncertain.
- KPMG issued an unqualified opinion on the financial statements and concluded internal control over financial reporting was effective as of December 31, 2013.
Investor verification priorities
- Assess whether sales growth can continue and whether EMEA weakness, product mix and foreign exchange will persist.
- Verify whether margin recovery can offset continued R&D spending, restructuring costs and raw-material inflation.
- Review Q4’s year-over-year earnings and diluted EPS decline despite higher sales, including the restructuring charge and other period-specific effects.
- Monitor inventory and receivables: inventories increased to $66.9 million from $58.1 million, while DIOH rose to 81 days from 78 and DSO to 61 days from 60.
- Review debt maturities, credit-facility covenants, pension obligations, operating leases and purchase commitments; total contractual obligations were $126.0 million at year-end.