Tennant Company — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Tennant designs, manufactures and sells commercial cleaning equipment and related services, parts, consumables and coatings.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $280.7 million | $273.3 million | $842.8 million | $838.3 million |
| Gross profit / margin | $114.0 million / 40.6% | $106.6 million / 39.0% | $343.0 million / 40.7% | $332.9 million / 39.7% |
| Operating profit / margin | $21.5 million / 7.7% | $15.4 million / 5.6% | $52.2 million / 6.2% | $44.8 million / 5.3% |
| Net earnings attributable to Tennant | $14.6 million | $9.7 million | $34.8 million | $25.7 million |
| Diluted EPS | $0.79 | $0.52 | $1.89 | $1.40 |
- Q3 sales rose 2.7%; nine-month sales rose 0.5%. Organic sales grew 2.8% and 2.0%, respectively, while currency reduced growth by 1.5% and 2.6%; Gaomei contributed 1.4% and 1.1%.
- Q3 gross margin improved 160 basis points; nine-month margin improved 100 basis points. Management cited pricing, freight, mix and cost-reduction benefits, partly offset by material, labor and tariff costs. Nine-month results also reflected costs from discontinuing Green Machine and Orbio products.
- Nine-month operating cash flow was $46.2 million, versus $43.6 million. Inventory increases used $31.4 million of cash, compared with $19.5 million in the prior period. Investing used $37.5 million, including $28.3 million in property and equipment purchases and $8.9 million for Gaomei. Financing used $22.8 million; dividends paid were $12.0 million.
- Cash, cash equivalents and restricted cash were $71.7 million at September 30, down from $86.1 million at year-end 2018. Working capital was $209.6 million and the current ratio was 1.8, versus $219.7 million and 1.9 at year-end.
- Total debt was $342.4 million, including $20.2 million classified as current; year-end total debt was $355.1 million. The company had $152.7 million of unused revolving-facility capacity. Weighted-average debt cost was approximately 5.4%, or 4.4% net of a cross-currency swap. Debt-to-capital was 50.3%, versus 53.0% at year-end.
Material changes and unusual items
- Americas sales increased 6.2% in Q3 and 3.8% year to date. EMEA sales declined 6.2% and 8.7%, respectively, amid market weakness and currency headwinds. APAC sales rose 5.1% and 9.4%, helped by Gaomei, while underlying China distribution remained soft.
- Tennant acquired China-based Gaomei in January for a stated purchase price of $27.3 million. The agreement includes $11.3 million payable in January 2020 and contingent consideration estimated at $2.9 million at quarter-end; potential contingent payments range from zero to $42.4 million subject to gross-profit growth targets.
- 2019 items included a $4.3 million restructuring charge, a $2.7 million write-down of a note receivable related to the Green Machine divestiture, and $2.8 million of inventory charges related to discontinuing Green Machine and Orbio products. A $1.8 million acquisition-related indemnification settlement increased other income. Gaomei contingent-consideration adjustments benefited Q3 and year-to-date selling and administrative expense by $3.8 million and $1.8 million, respectively.
- The reported effective tax rate was 12.2% for Q3 and 12.5% year to date. Management attributed year-over-year rate changes primarily to geographic earnings mix and discrete tax items.
- Adoption of the lease standard added $44.8 million of operating lease assets and liabilities, with no reported impact on earnings or cash flows. The filing reports no material change in market risks or risk factors; management said disclosure controls were effective.
Outlook, risks and contingencies
- The filing provides no quantified full-year guidance. Management described continued investment in product innovation and identified regional differences in demand: Americas strength, EMEA market weakness, and soft Chinese distribution.
- Key stated risks include raw-material and component costs and availability, foreign-exchange movements, geopolitical and economic uncertainty, acquisition integration, competition, product quality or liability claims, cybersecurity, business interruptions, regulatory compliance, key-personnel retention, and the ability to generate cash to meet debt obligations.
- Management did not expect ordinary-course litigation, tax, environmental and other matters to have a material adverse effect. The IRS was examining 2016 and 2017 tax years, with additional state and foreign examinations; the company said it had adequate reserves. Unrecognized tax benefits were $5.1 million, plus approximately $0.5 million of accrued interest and penalties.
- The company reported compliance with its credit-facility covenants. Acquisition-related covenant relief raised applicable leverage limits during 2019; covenants may restrict dividends and share repurchases.
Investor verification priorities
- Assess whether inventory growth and cash conversion remain consistent with the company’s sales outlook.
- Track EMEA and China demand, organic growth, and whether Americas growth offsets regional weakness and currency effects.
- Separate recurring earnings from restructuring, discontinued-product charges, note write-downs, settlement income and acquisition-related contingent-consideration adjustments.
- Verify Gaomei’s performance against purchase assumptions, final purchase accounting, the 2020 payment and contingent-payment targets.
- Monitor debt, available revolver capacity, covenant headroom, planned repayments and restrictions on shareholder returns.