Tennant Company — 2012 Form 10-K
Business context and reporting period. Tennant designs, manufactures and sells floor-maintenance and outdoor-cleaning equipment, sustainable cleaning technologies, parts, service and surface coatings. This annual filing covers the year ended December 31, 2012; figures below are in U.S. dollars, generally millions. The company reports one reportable segment.
Financial performance
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Net sales | $739.0 | $754.0 |
| Gross profit / margin | $325.3 / 44.0% | $319.2 / 42.3% |
| Operating profit / margin | $62.7 / 8.5% | $49.6 / 6.6% |
| Net earnings | $41.6 | $32.7 |
| Diluted earnings per share | $2.18 | $1.69 |
| Cash from operations | $47.6 | $56.9 |
| Capital expenditures, net of disposals | $14.6 | $13.3 |
| Free cash flow, as presented in selected financial data | $33.0 | $43.6 |
At year-end, cash and cash equivalents were $53.9 million, total debt was $32.3 million, shareholders’ equity was $235.1 million, and the current ratio was 2.2. Debt-to-capital was 12.1%, down from 14.2%. Tennant had $125.0 million in committed credit lines, reported covenant compliance, and had substantial headroom against its leverage and interest-coverage limits.
Changes versus the prior comparable period
- Sales declined 2.0% year over year. Organic sales were essentially flat: a 1.0% volume decline was offset by 1.0% pricing; unfavorable currency translation reduced reported sales by 2.0%.
- Regional sales rose 2.1% in the Americas to $491.7 million, but fell 11.8% in EMEA to $166.2 million and 3.7% in Asia Pacific to $81.1 million. Management attributed the EMEA decrease mainly to weak conditions and lower equipment volumes.
- Gross margin improved 170 basis points, supported by favorable product mix, stable commodity costs and production efficiencies. Selling and administrative expense fell 3.1% to $234.1 million, reflecting cost controls and improved operating leverage.
- Operating profit increased 26%; net earnings rose $8.9 million despite lower sales. A $2.0 million international restructuring tax benefit contributed approximately $0.11 per diluted share.
- Operating cash flow decreased $9.3 million, primarily because Tennant made a discretionary $15.0 million U.S. pension contribution. Inventory declined, and days inventory on hand improved to 78 from 88; days sales outstanding increased to 60 from 58.
In fourth-quarter 2012, sales were $187.5 million versus $193.2 million in fourth-quarter 2011; net earnings were $13.8 million versus $11.3 million.
Outlook, commentary, risks and unusual items
- Outlook: The filing provides no specific numerical sales or earnings guidance. Management described continued investment in sustainable cleaning technologies and redesign of the large-equipment portfolio. It expected to recognize about $0.8 million of retroactive 2012 federal R&D tax-credit benefit in the first quarter of 2013 following enactment of legislation.
- Investment and capital allocation: R&D spending increased to $29.3 million, or 4.0% of sales. Tennant repurchased 621,340 shares during 2012 and increased its annual dividend for the 41st consecutive year, to $0.69 per share.
- Unusual items: The company recorded a $0.8 million pretax gain on the sale of its Central Eastern Europe subsidiary and minority joint-venture interest, partly financed through deferred sale proceeds. It also recorded a $0.8 million pretax restructuring charge, primarily severance. The international restructuring tax benefit was a significant contributor to earnings.
- Principal risks: Demand is sensitive to customers’ capital spending and global economic conditions. Other stated risks include competitive pressure, the ability to earn returns on innovation, commodity and foreign-exchange volatility, product quality and liability claims, supply disruption from sole-source vendors, personnel retention, organizational changes, IT-system upgrades and business interruptions.
- Legal and contingencies: Tennant said there were no material pending legal proceedings and did not expect ordinary claims to have a material adverse effect. It said outstanding challenges to ec-H2O advertising claims were not currently viewed as material. The filing also reports $3.5 million of gross unrecognized tax benefits and $0.5 million of accrued related interest and penalties; settlement timing is uncertain.
- Audit and controls: KPMG issued an unqualified opinion on the financial statements and concluded internal control over financial reporting was effective as of year-end.
Important facts for investors to verify
- Assess whether the EMEA sales decline and broader weak-market conditions continued after 2012, and how much reported growth depends on currency movements.
- Separate recurring operating improvement from the one-time international tax benefit, business-sale gain and restructuring charge.
- Monitor operating cash conversion, receivables and the effects of pension funding; 2012 operating cash flow was lower despite higher earnings.
- Review the deferred consideration from the divestiture, warranty reserves, pension obligations and contractual commitments, including $50.0 million of purchase obligations due within one year.
- Check the company’s ability to sustain margin gains while funding R&D, and its exposure to commodity costs, foreign exchange, product claims and unresolved tax positions.