Tennant Company — FY2016 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2016. Tennant designs, manufactures and sells commercial cleaning equipment and related parts, services, technologies and surface coatings. It reports one segment and sells through direct operations in 15 countries and distributors in more than 80.
Financial performance
- Sales: $808.6 million, down 0.4% from $811.8 million in 2015. Organic sales rose approximately 1.1%; foreign exchange reduced sales about 1.0%, and divestiture/acquisition effects reduced them a net 0.5%.
- Profitability: Gross margin improved to 43.5% from 43.0%. Operating profit was $68.5 million (8.5% margin), versus $53.2 million (6.6%). Net earnings were $46.6 million, or $2.59 diluted EPS, versus $32.1 million, or $1.74.
- Cash flow: Operating cash flow was $57.9 million, up from $45.2 million. Capital expenditures net of disposals were $25.9 million; reported free cash flow was $32.0 million. Cash and equivalents ended the year at $58.0 million, versus $51.3 million.
- Debt and liquidity: Total debt was $36.2 million, up from $24.7 million; current ratio was 2.2 and debt-to-capital was 11.5%. The company reported compliance with debt covenants; leverage was 0.49 times debt/EBITDA against a 3.25 maximum.
- Capital returns: Dividends were $0.81 per share. Tennant paid $14.3 million in dividends and repurchased $12.8 million of stock during 2016.
- Fourth quarter: Sales were $211.7 million versus $205.9 million in Q4 2015; net earnings were $15.4 million versus $13.2 million; diluted EPS was $0.85 versus $0.73.
Changes versus comparable periods
- Sales were nearly flat overall, with 2.6% growth in the Americas offset by declines in EMEA (7.7%) and APAC (10.0%). APAC weakness reflected regional economic slowdowns and fewer large deals.
- Industrial equipment and new products performed well, particularly in the Americas; commercial equipment sales were weaker, especially in APAC. Products launched within the prior three years represented 37% of equipment revenue, compared with 26% in 2015.
- Higher operating profit and earnings chiefly reflect the absence of 2015 charges: an $11.2 million noncash impairment related to Green Machines and $3.7 million of restructuring charges. 2016 also benefited from improved product mix and lower selling and administrative expense; North American manufacturing productivity challenges partly offset the margin improvement.
- Foreign exchange reduced 2016 operating profit by approximately $1.2 million, less than the approximately $13.0 million impact reported for 2015.
Outlook, risks and unusual items
- No broad financial forecast for 2017 is provided. Management warned that significant commodity-cost increases not offset by pricing could hurt 2017 results.
- In February 2017, Tennant announced a planned workforce reduction of approximately 3%, with an expected first-quarter 2017 charge of $7–8 million pre-tax; estimated savings were $7 million in 2017 and $10 million in 2018.
- Tennant signed an agreement to acquire IPC Group for approximately $350 million. Closing was expected in Q2 2017, subject to customary conditions and regulatory approvals; management anticipated the deal would be accretive to full-year 2018 EPS. IPC reported 2016 sales of approximately $203 million.
- The Green Machines outdoor-cleaning line was sold in January 2016. The company recorded a $149,000 loss on sale and is due to receive $5.489 million in installments beginning in 2018. A related $2 million non-interest-bearing advance to an affiliated distributor is repayable in installments beginning in 2017.
- Control weakness: Management concluded internal control over financial reporting and disclosure controls were ineffective at year-end due to material weaknesses involving staffing and risk assessment, service-system IT controls and service-revenue accounting, management reviews of certain estimates, and software-development cost capitalization. Identified preliminary misstatements were corrected before issuance. KPMG gave an adverse opinion on internal controls but an unqualified opinion on the financial statements.
- Key risks include economic and capital-spending weakness, competition and product innovation, foreign exchange, supply-chain and commodity costs, product quality and liability, cybersecurity and business interruption, acquisition integration, regulatory compliance, and remediation of control weaknesses. Ordinary-course legal matters were not expected to have a material adverse effect.
Important facts for investors to verify
- Progress in remediating the material weaknesses and whether disclosure and financial reporting controls become effective.
- Underlying sales and margin trends by region, particularly continuing APAC weakness and the durability of Americas growth.
- IPC acquisition financing, closing conditions, integration results and the stated 2018 EPS-accretion expectation.
- Execution and realized savings from the 2017 restructuring, including whether charges or operational disruption exceed expectations.
- Debt and liquidity after the planned acquisition, and exposure to foreign exchange, commodity costs and customer receivables.