Tennant Company — Q1 2015 Form 10-Q
Business context and reporting period. Tennant designs, manufactures and sells cleaning equipment, technologies, parts, consumables and services for nonresidential surfaces. This unaudited report covers the three months ended March 31, 2015, compared with Q1 2014. The company reports one consolidated segment.
Key financial results
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Net sales | $185.7 million | $184.0 million |
| Gross profit / margin | $78.1 million / 42.0% | $76.9 million / 41.8% |
| Operating profit / margin | $8.3 million / 4.4% | $9.2 million / 5.0% |
| Net earnings | $5.0 million | $5.8 million |
| Diluted EPS | $0.27 | $0.31 |
| Net cash used in operating activities | $2.1 million | $3.9 million |
- Sales increased 1.0% overall, comprising 6.0% organic growth (5.0% volume and 1.0% price) offset by a 5.0% unfavorable currency impact.
- Operating expenses rose to $69.8 million from $67.7 million, primarily reflecting higher selling and administrative costs and R&D spending. The effective tax rate was 32.4%, versus 32.5%.
- Cash and cash equivalents were $76.8 million at March 31, 2015, down from $93.0 million at year-end. Working capital was $195.3 million and the current ratio was 2.6.
- Total debt was $26.1 million, including $22.6 million long-term debt. Debt-to-capital was 8.7%. The company reported compliance with its debt covenants; leverage and EBITDA-to-interest ratios were 0.32:1 and 55.41:1, respectively.
- Capital expenditures were $4.1 million. Financing activities used $8.6 million, including $4.1 million of share repurchases, $3.7 million of dividends and $2.0 million of debt repayment. The declared dividend was $0.20 per share, compared with $0.18 a year earlier.
Material changes versus Q1 2014
- Operating profit declined 10.6% and net earnings declined 13.3%, despite slightly higher sales and gross margin. Operating margin fell 60 basis points.
- Foreign exchange reduced operating profit by approximately $1.9 million, according to management. Gross margin also faced an estimated 60-basis-point currency headwind.
- Regional sales varied: Americas increased 9.5% to $134.0 million; EMEA declined 19.5% to $34.6 million; and Asia Pacific declined 7.8% to $17.1 million. EMEA and Asia Pacific declines included substantial currency effects.
- Comprehensive loss was $2.9 million versus comprehensive income of $6.9 million, largely reflecting an $8.1 million foreign-currency translation loss in Q1 2015.
- Operating cash use improved from $3.9 million to $2.1 million, but remained negative. Inventory increased $9.5 million during the quarter; days inventory on hand rose to 97 from 88 a year earlier.
Outlook, commentary, risks and contingencies
- Management expected 2015 price increases to add 1%–2% to full-year sales, with minimal gross-margin effect because increases were intended to offset inflation. It planned 32 additional product introductions during the remaining three quarters of 2015; new products introduced in the prior three years represented 14% of Q1 equipment revenue, up from 10%.
- The filing provides no full-year earnings or revenue guidance. Management cited strategic-account sales and new products as growth drivers, while noting fragile European conditions, economic weakness in Australia and slower sales growth in China.
- Key stated risks include foreign-exchange movements, economic and geopolitical uncertainty, competition, raw-material availability and cost, product development and quality, business interruption, personnel, information technology and regulatory compliance.
- At March 31, the company had $2.8 million of unrecognized tax benefits and approximately $0.6 million of related accrued interest and penalties; it was undergoing state and foreign tax examinations and said reserves were adequate. Management reported no material pending legal proceedings beyond routine litigation.
- Vehicle leases carried $9.2 million of guaranteed residual value exposure; the recorded estimated loss liability was $0.2 million. The company expected to receive the remaining $1.2 million divestiture payment on July 31, 2015. A prior European restructuring had a $0.2 million remaining liability, with no further costs expected.
Important facts for investors to verify
- Whether organic sales growth persists and whether the strong U.S. dollar continues to materially affect reported sales and operating profit.
- Whether operating expenses, especially selling and administrative costs, convert sales growth into improved operating margins.
- Whether inventory levels and days on hand normalize, and whether operating cash flow turns positive.
- Debt covenant headroom, scheduled debt maturities and the company’s continued ability to fund dividends and repurchases.
- Execution of planned product launches and realization of the expected sales contribution from 2015 price increases.
- Outcomes of tax examinations, collection of the remaining divestiture payment and actual costs under vehicle residual-value guarantees.
Unless otherwise noted, dollar amounts are rounded to millions; the filing presents financial statements in thousands.