Tennant Company — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2011. Tennant designs, manufactures and sells equipment and other solutions for maintaining nonresidential surfaces, including sustainable cleaning technologies. It reports one operating segment, with sales across the Americas, EMEA and Asia Pacific. Financial amounts below are in millions, except per-share data and ratios.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net sales | $187.0 | $168.6 | $560.8 | $484.9 |
| Gross profit margin | 42.9% | 42.6% | 42.0% | 42.7% |
| Operating income | $15.8 | $10.5 | $34.2 | $27.6 |
| Operating margin | 8.4% | 6.2% | 6.1% | 5.7% |
| Net earnings | $9.7 | $7.5 | $21.4 | $17.8 |
| Diluted EPS | $0.50 | $0.39 | $1.10 | $0.92 |
- Sales growth: 10.9% in Q3 and 15.7% year to date. Management attributed growth to organic increases and favorable foreign currency translation. Organic growth was 7.4% and 12.2%, respectively; volume drove most of the organic increase, with smaller contributions from pricing.
- Regional sales: Q3 growth was 8.5% in the Americas, 15.1% in EMEA and 16.4% in Asia Pacific. For the nine months, growth was 15.0%, 13.2% and 25.9%, respectively. Currency contributed materially to reported growth, particularly in Asia Pacific.
- Cash flow: Nine-month operating cash flow was $36.0, versus $30.2 a year earlier. Investing used $10.1, including $7.2 of net capital expenditures and $2.9 for the Water Star acquisition. Financing used $20.9, including $17.1 of share repurchases and $9.7 of dividends. Cash increased $4.7 to $44.3.
- Liquidity and debt: Current assets were $268.5 and current liabilities $127.9; the reported current ratio was 2.1. Total debt was $36.9, including $4.2 current debt, compared with $30.8 at year-end 2010. The debt-to-capital ratio rose to 14.5% from 12.5%. The company had $30.0 borrowed against committed credit lines totaling $125.0, plus $82.7 in uncommitted lines.
- Other: The quarterly dividend declared was $0.17 per share, versus $0.14 in Q3 2010. The filing does not provide quantified forward earnings or sales guidance.
Material changes and management commentary
- Q3 net earnings increased 29% year over year, with higher equipment sales—particularly scrubbers using ec-H2O technology—and improved operating efficiency contributing to results. Q3 diluted EPS also included a $1.4 foreign-currency transaction loss, partly offset by approximately $0.5 of favorable discrete tax items.
- Gross margin increased 30 basis points in Q3, reflecting sales volume and pricing gains partly offset by raw-material inflation. Nine-month gross margin fell 70 basis points; inflation and $1.5 of Hofmans-related inventory reserves and fixed-asset write-offs weighed on results.
- Nine-month selling and administrative expense included $4.0 of charges related to discontinuing the Hofmans outdoor city-cleaning products and international executive severance. Management reported these items reduced nine-month diluted EPS by $0.20 and $0.06, respectively.
- The company acquired Water Star, an electrochemistry business, for $4.456, including $1.5 of future installment payments. It also recorded a $1.805 impairment of customer-list and technology intangibles after deciding to discontinue the two Hofmans products.
- Inventory increased to $77.4 from $61.7 at year-end. Management linked the increase to higher production and inventory to support sales initiatives in emerging markets. Days inventory on hand rose to 92 from 83 at year-end; days sales outstanding was 63, versus 59 at year-end.
Outlook, risks and contingencies
- The filing gives no specific financial forecast. Management cited raw-material cost and availability, global economic and geopolitical uncertainty, competition, innovation and product-development execution, foreign-exchange movements, and the ability to retain key personnel among relevant risks.
- Competitors initiated legal and regulatory challenges in multiple jurisdictions regarding advertising claims for ec-H2O technology. Tennant said it did not view the proceedings as material and did not expect a material adverse effect, but noted that defense costs and customer perceptions could affect the business.
- Debt covenants require leverage of no more than 3.00-to-1 and EBITDA-to-interest coverage of at least 3.50-to-1. At quarter-end, the reported ratios were 0.61-to-1 and 32.33-to-1, and the company said it was in compliance.
- Vehicle lease residual-value guarantees covered $6.319 of an $8.202 aggregate residual value; Tennant had recorded a $0.999 estimated liability. Unrecognized tax benefits totaled $4.804, including interest and penalties; foreign tax examinations were ongoing, with settlement expected before year-end, and management said reserves were adequate.
Important facts for investors to verify
- How much sales and earnings growth persists after separating organic volume and pricing from favorable currency effects, especially in Asia Pacific.
- Whether raw-material inflation, higher inventory and working-capital needs affect future margins and cash conversion.
- The continuing costs and commercial effects of the Hofmans discontinuance, and whether the ec-H2O claims challenges expand or affect customer demand.
- Future capital allocation, including share repurchases, dividends and debt levels, relative to credit-agreement limits.
- Outcomes of foreign tax examinations and whether lease guarantees or other contingencies require additional reserves.