Tennant Company — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014. Comparisons are with the three months ended March 31, 2013 unless otherwise noted. Dollar amounts are in millions, except per-share data.
Business context
Tennant designs, manufactures and sells equipment, technologies and coatings for maintaining and protecting nonresidential surfaces. It reports one aggregated segment, with sales across the Americas, Europe, Middle East and Africa (EMEA), and Asia Pacific.
Financial performance
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Net sales | $184.0 | $168.1 |
| Gross profit / margin | $76.9 / 41.8% | $72.5 / 43.1% |
| Operating profit / margin | $9.2 / 5.0% | $6.9 / 4.1% |
| Net earnings | $5.8 | $5.1 |
| Diluted EPS | $0.31 | $0.27 |
| Operating cash flow | $(3.9) | $7.3 |
| Capital expenditures, net of disposals | $3.5 | $4.0 |
Sales rose 9.5%: organic growth was 10.5% (volume +10.0%, price +0.5%), partly offset by a 1.0% unfavorable currency impact. Sales increased 8.1% in the Americas, 9.9% in EMEA and 18.3% in Asia Pacific. Gross margin fell 130 basis points, primarily from product and selling-channel mix. Selling and administrative expense increased to $60.2 million but declined as a share of sales, from 34.6% to 32.7%, reflecting cost controls and operating efficiencies.
The effective tax rate was 32.5%, versus 18.6%. Q1 2013 included a $0.6 million benefit from the retroactive federal R&D tax credit and a $0.4 million tax benefit related to a European restructuring charge. Tennant said the higher current-period rate, excluding those prior-year items, primarily reflected the expected geographic mix of taxable earnings and the absence of an R&D credit benefit pending formal reenactment.
Liquidity, debt and balance sheet
At March 31, 2014, cash and cash equivalents were $63.4 million, down from $81.0 million at December 31, 2013. Total debt was $28.2 million ($26.0 million long-term and $2.2 million current), versus $31.8 million at year-end; cash exceeded debt by approximately $35.2 million. Working capital was $183.0 million and the current ratio was 2.5. The debt-to-capital ratio was 9.6%.
Operating activities used $3.9 million, mainly reflecting higher inventory, receivables and payments of employee compensation and benefits. Financing activities used $10.2 million, including $3.6 million for share repurchases, $3.5 million in dividends and $2.0 million in long-term debt payments. The company had $125.0 million of committed and $87.8 million of uncommitted credit lines. It reported compliance with debt covenants; its indebtedness-to-EBITDA ratio was 0.36 versus a 3.00 maximum, and EBITDA-to-interest expense was 48.00 versus a 3.50 minimum.
Outlook, risks and contingencies
The filing provides no specific revenue, earnings or margin guidance. Management cited continued product innovation, strong equipment demand and growth through distribution and strategic accounts, while noting that product and channel mix pressured gross margin. Forward-looking uncertainties include global economic and geopolitical conditions, competition, personnel and IT execution, product development, regulatory compliance, raw-material availability and costs, product liability or quality issues, business interruptions, and currency movements. Management said market risks and risk factors had not materially changed since the 2013 Form 10-K.
There were no material pending legal proceedings other than routine litigation. The company disclosed $3.8 million of unrecognized tax benefits and approximately $0.6 million of accrued interest and penalties; state and foreign tax examinations covering 2007–2011 were underway, with settlement expected before year-end, and management believed reserves were adequate. Vehicle lease residual-value guarantees totaled $7.8 million of guaranteed residual value, with a recorded estimated-loss liability of $0.3 million. A supplier agreement had $1.2 million of commitments outstanding.
Unusual or period-specific items include the prior-year restructuring charge of $1.4 million; the Q4 2013 restructuring action had $1.0 million of severance liability remaining at March 31, 2014. Q1 2014 also included $0.4 million of net losses on foreign-currency forward contracts, compared with a $1.1 million net gain in Q1 2013.
Important facts for investors to verify
- Whether sales growth and volume gains persist, particularly in Asia Pacific, and how currency affects reported results.
- Whether gross margin recovers from the 130-basis-point year-over-year decline as product and channel mix changes.
- Whether operating cash flow improves: it was negative despite higher earnings, with inventory and receivables increasing.
- The tax-rate outlook, including the timing and effect of any federal R&D tax-credit reenactment and the outcome of tax examinations.
- Debt covenant compliance, liquidity availability, and the cash impact of dividends and share repurchases.