Tennant Company — Q1 2013 Form 10-Q
Business context and period. This unaudited filing covers the three months ended March 31, 2013, compared with the same period in 2012. Tennant designs, manufactures and sells equipment, technologies and coatings for cleaning and maintaining nonresidential surfaces. It reports one reportable segment.
Financial performance
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Net sales | $168.1 million | $173.7 million |
| Gross profit / margin | $72.5 million / 43.1% | $75.3 million / 43.4% |
| Operating profit / margin | $6.9 million / 4.1% | $8.3 million / 4.8% |
| Net earnings | $5.1 million | $5.3 million |
| Diluted earnings per share | $0.27 | $0.28 |
| Operating cash flow | $7.3 million | $(2.9) million |
Revenue and margins. Sales declined 3.2% year over year: organic sales fell 2.2% (volume down 3.2%, partly offset by 1.0% price growth) and foreign currency reduced sales by about 1.0%. Gross margin declined 30 basis points, primarily from lower volume and product mix. R&D expense rose to $7.5 million from $7.3 million; selling and administrative expense decreased to $58.1 million from $59.7 million, but increased as a share of sales to 34.6% from 34.4%.
Regional sales. Americas sales increased 1.6% to $113.2 million; EMEA sales declined 10.5% to $39.2 million; Asia Pacific sales declined 15.4% to $15.7 million. Management cited municipal spending constraints and lower city-cleaning-equipment sales in Europe, softer economies and the absence of a prior-year large China sale in Asia Pacific, and growth in Latin America and North American industrial equipment.
Taxes and unusual items. The effective tax rate was 18.6%, compared with 31.2%. Q1 2013 included a $0.6 million benefit from retroactive enactment of the 2012 federal R&D credit and a $0.4 million tax benefit related to a $1.4 million European restructuring expense. Excluding these items, management stated the effective tax rate would have been 28.1%. Net earnings also reflected lower sales, partly offset by cost controls and operating efficiencies.
Cash, debt and liquidity
- Cash and cash equivalents were $49.8 million at March 31, 2013, down from $53.9 million at year-end. Cash decreased $4.2 million during the quarter.
- Operating activities provided $7.3 million, compared with $2.9 million used in Q1 2012. Investing activities used $3.3 million, including $4.0 million of net capital expenditures, partly offset by $0.7 million of divestiture proceeds. Financing activities used $7.8 million, including $7.5 million for share repurchases and $3.3 million in dividends.
- Total debt was $31.8 million, including $30.0 million outstanding under credit facilities. The current ratio was 2.3 and working capital was $152.2 million. The debt-to-capital ratio was 12.0%.
- The company reported compliance with debt covenants. Its indebtedness-to-EBITDA ratio was 0.42 to 1 versus a maximum of 3.00 to 1; EBITDA-to-interest expense was 36.41 to 1 versus a minimum of 3.50 to 1.
- On April 25, 2013, after quarter-end, Tennant amended its $125 million JPMorgan credit facility, extending maturity to March 1, 2018 and revising fees and borrowing spreads.
Management commentary, outlook and risks
Management highlighted continued cost controls, operating-efficiency improvements, and investment in new products, including its Orbio business. Inventory was higher than at year-end, partly in preparation for product launches; days inventory on hand increased to 90 from 78 at December 31, 2012. Days sales outstanding rose to 65 from 60 at year-end, which management attributed largely to customer terms and business mix.
The filing gives no specific financial guidance or quantified forecast. Cited risks include global economic and geopolitical uncertainty, competition, organizational change, product development and funding, product liability and quality, systems and business interruption, currency movements, intellectual property, and raw-material or component costs. Management reported no material change in market risks or risk factors, no material pending legal proceedings beyond routine litigation, and effective disclosure controls.
Other notable items include a $1.4 million Q1 restructuring charge, primarily severance; a $784,000 gain recorded in 2012 on the sale of Central Eastern European operations and a joint-venture interest, with deferred sale proceeds still receivable; and vehicle lease residual-value guarantees, for which a $0.4 million estimated loss liability was recorded.
Key facts investors should verify
- Whether sales and operating margins recover, particularly in EMEA and Asia Pacific, and whether city-cleaning-equipment demand improves.
- Whether inventory growth tied to planned launches converts to sales, and whether receivables collection trends and cash generation remain sound.
- The recurring cost and benefit of restructuring and product-development investments, and the effect of tax benefits on comparisons with future periods.
- Debt-facility availability, covenant headroom, and the collection of deferred divestiture consideration from M&F, a related party and Tennant distributor.
- Exposure to foreign-exchange volatility, product and operational risks, and lease residual-value guarantees.