Tennant Company (TENNANT CO) - 10-Q Summary
Business Context and Reporting Period
This report covers the quarterly period ended June 30, 2009. Tennant Company designs, manufactures, and markets cleaning equipment, parts, and consumables for commercial and industrial use. The company operates globally with significant exposure to North America, Europe, the Middle East, Africa (EMEA), and other international markets. The reporting period was heavily influenced by the global recession, resulting in reduced sales volumes and a significant non-cash goodwill impairment charge.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2009 | Six Months Ended June 30, 2009 |
|---|---|---|
| Net Sales | $148.6 million | $277.2 million |
| Gross Profit | $60.1 million (40.4% margin) | $112.8 million (40.7% margin) |
| Net Earnings (Loss) | $3.0 million | $(38.7) million |
| Diluted EPS | $0.16 | $(2.10) |
| Operating Cash Flow (6mo) | $42.6 million | |
| Cash and Equivalents | $16.1 million (as of June 30, 2009) | |
| Total Debt | $56.2 million ($4.8m current, $51.5m long-term) |
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 23.2% in Q2 2009 and 23.5% in the first six months of 2009 compared to the same periods in 2008. This was driven by a 17-19% organic volume decline due to the global recession and a 6% unfavorable foreign currency impact.
- Goodwill Impairment: The company recorded a non-cash pretax goodwill impairment charge of $43.4 million in the first quarter of 2009 related to the EMEA reporting unit. This charge was the primary driver of the net loss for the six-month period.
- Profitability: While Q2 2009 returned to profitability ($3.0 million net earnings), the six-month period resulted in a significant loss due to the impairment charge. Gross margins declined slightly (120 basis points for the six months) but were better than expected due to commodity price deflation and cost reductions.
- Expense Reduction: Selling and Administrative expenses decreased by 18.4% year-over-year for the six-month period, reflecting the impact of a workforce reduction program announced in late 2008.
Outlook, Risks, and Management Commentary
- Workforce Reduction: A program to reduce the workforce by approximately 8% (240 people) was completed. Management estimates this will achieve savings of at least $15 million in 2009 and $20 million in 2010.
- Liquidity and Debt Covenants: On March 4, 2009, the company amended its Credit Agreement to provide relief on financial covenants (increasing allowable debt-to-EBITDA ratios) and to exclude certain non-cash charges from EBITDA calculations. The amendment prohibits share repurchases during fiscal 2009 and limits dividends based on leverage ratios.
- Capital Resources: The company maintains $134.7 million in lines of credit with $47.5 million outstanding. A shelf loan agreement was established in July 2009 to access up to $80 million in additional debt capital if needed.
- Risks: Key risks include continued global economic uncertainty, customer credit availability, foreign currency fluctuations, and the potential for further impairment of intangible assets if market conditions deteriorate.
Investor Verification Checklist
- Goodwill Impairment: Verify the sustainability of the remaining goodwill balance and the assumptions used in the EMEA impairment test.
- Debt Covenants: Monitor compliance with the amended debt covenants, specifically the debt-to-EBITDA and interest coverage ratios, given the current economic environment.
- Cost Savings Realization: Track the actual realization of the estimated $15 million in annual savings from the workforce reduction program.
- Foreign Currency Exposure: Assess the impact of currency fluctuations on future earnings, as the company has significant international operations.
- Inventory Levels: Review Days Inventory on Hand (DIOH), which increased to 98 days, to ensure inventory levels align with reduced sales volumes.