Tennant Company — Q3 2013 Form 10-Q
Business context and period. Tennant designs, manufactures and sells equipment and solutions for cleaning and maintaining commercial, industrial and outdoor surfaces. This unaudited filing covers the quarter and nine months ended September 30, 2013; financial amounts below are in millions of dollars unless noted.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $188.5 | $178.3 | $556.9 | $551.5 |
| Gross profit | $81.9 | $77.6 | $242.1 | $241.8 |
| Gross margin | 43.4% | 43.5% | 43.5% | 43.9% |
| Operating profit | $16.2 | $13.8 | $44.7 | $43.7 |
| Net earnings | $10.6 | $8.7 | $29.9 | $27.7 |
| Diluted EPS | $0.56 | $0.46 | $1.59 | $1.45 |
| Operating cash flow | — | — | $36.8 | $43.3 |
- Q3 sales rose 5.8% year over year, reflecting 6.8% organic growth (volume +5.8%, price +1.0%), partly offset by a 1.0% unfavorable currency impact. Nine-month sales increased 1.0%: 2.0% organic growth was offset by 1.0% unfavorable currency impact.
- Q3 operating margin increased to 8.6% from 7.7%; nine-month operating margin was 8.0% versus 7.9%. Lower selling and administrative costs as a share of sales supported improvement, while higher R&D spending and product/channel mix pressured margins.
- Q3 net earnings increased 21%; nine-month earnings increased 8%. Nine-month 2013 results included a $0.6 million tax benefit from retroactive enactment of the 2012 federal R&D tax credit.
- Regional sales: Americas increased 9.6% in Q3 and 4.7% year to date; EMEA declined 2.4% and 7.3%; Asia Pacific declined 1.0% and 4.4%, respectively. EMEA weakness reflected lower municipal spending and city-cleaning equipment sales.
Cash, liquidity and debt
- Cash and equivalents were $65.3 million at September 30, 2013, versus $53.9 million at December 31, 2012. Working capital was $169.5 million and the current ratio was 2.3, compared with $151.8 million and 2.2 at year-end.
- Nine-month operating cash flow was $36.8 million, down from $43.3 million. Higher earnings were more than offset by working-capital movements, notably inventory and receivables increases. Capital expenditures, net of disposals, were $11.3 million.
- Total debt was $32.0 million, including $3.9 million current and $28.0 million long-term; debt-to-capital was 11.3%. Credit facilities had $125.0 million in committed lines and $87.7 million in uncommitted lines. The company reported covenant compliance, with indebtedness/EBITDA of 0.41x against a 3.00x maximum.
- Financing included $16.6 million of share repurchases and $9.9 million of dividends during the first nine months. The quarterly dividend declared was $0.18 per share.
Changes, outlook and risks
- Gross margin declined 10 basis points in Q3 and 40 basis points year to date, primarily due to sales-channel and product mix. R&D expense increased 8.4% in Q3 and 8.1% year to date, reflecting investment in new products and the Orbio business.
- Management cited new-product demand, industrial equipment and strategic-account sales as growth drivers. It provided no specific forward revenue or earnings guidance in the supplied filing text.
- In April 2013, Tennant amended its JPMorgan credit agreement, extending maturity to March 1, 2018 and reducing pricing spreads. A $1.4 million restructuring charge was recorded in Q1 2013; related liability was $0.5 million at quarter-end.
- Risks identified include global economic and geopolitical uncertainty, competition, product quality or liability issues, execution of innovation and organizational changes, IT and business interruption risks, foreign currency movements, and raw-material and component costs. Management reported no material changes in market risk or risk factors, no material pending legal proceedings, and effective disclosure controls.
- Contingencies include vehicle lease residual-value guarantees: $9.5 million guaranteed against $12.2 million aggregate residual value, with a $0.5 million estimated-loss liability. Income-tax examinations were ongoing in certain jurisdictions; management stated it believed reserves were adequate.
Investor verification points
- Assess whether Q3 sales growth can persist, given the concentration in the Americas and continuing weakness in EMEA.
- Track gross-margin trends, product/channel mix, and whether increased R&D produces profitable growth.
- Review working-capital needs and operating cash conversion, especially inventory growth and receivables days.
- Confirm debt covenant headroom, planned repurchases and dividends, and the effect of currency exposure.
- Monitor tax examination outcomes, restructuring costs, and exposure under lease guarantees.