Tennant Company — FY 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. Tennant designs, manufactures and sells commercial cleaning equipment, related parts and services, sustainable cleaning technologies, and specialty surface coatings. It reports one operating segment, with sales across the Americas, EMEA and Asia Pacific.
Financial performance
| Metric | FY 2014 | FY 2013 | Change |
|---|---|---|---|
| Net sales | $822.0 million | $752.0 million | +9.3% |
| Gross margin | 42.9% | 43.3% | -0.4 percentage points |
| Operating profit | $72.1 million | $62.4 million | +15.5% |
| Operating margin | 8.8% | 8.3% | +0.5 percentage points |
| Net earnings | $50.7 million | $40.2 million | +25.9% |
| Diluted EPS | $2.70 | $2.14 | +$0.56 |
| Operating cash flow | $59.4 million | $59.8 million | -$0.5 million |
| Capital expenditures, net | $19.3 million | $14.7 million | +$4.6 million |
| Free cash flow | $40.1 million | $45.2 million | -$5.1 million |
Fourth-quarter sales were $216.3 million versus $195.1 million a year earlier; net earnings were $17.5 million versus $10.3 million, and diluted EPS was $0.93 versus $0.55.
Liquidity, debt and capital
- Cash and cash equivalents were $93.0 million at year-end, up from $81.0 million; total debt was $28.1 million, down from $31.8 million.
- Current ratio was 2.4, unchanged year over year; working capital increased to $201.5 million from $183.8 million. Debt-to-capital declined to 9.1% from 10.8%.
- Credit agreement leverage was low: indebtedness-to-EBITDA of 0.34x and EBITDA-to-interest coverage of 52.86x. The company reported compliance with its debt covenants.
- Dividends were $0.78 per share for 2014, up $0.06; the company also repurchased 225,034 shares during the year.
Material changes and management commentary
- Organic sales growth was approximately 10.3%, with growth in all major geographic regions; foreign currency translation reduced reported sales growth by approximately 1.0%.
- Growth reflected strategic-account and distributor sales, new products including the T17 rider scrubber, gains in commercial, industrial and outdoor equipment, and price increases. New products introduced since late 2012 accounted for 12% of equipment sales.
- Americas sales rose 10.6%, EMEA 5.4%, and Asia Pacific 8.8%. EMEA improved from a prior-year decline, while Asia Pacific growth was partly offset by unfavorable currency effects.
- Gross margin fell due mainly to sales-channel mix and hiring and training costs to support higher production. Selling and administrative expense rose 7.7% in dollars but declined as a share of sales, reflecting operating efficiencies alongside investment in sales, distribution and marketing.
- The lower 2014 effective tax rate of 27.2%, versus 32.8%, reflected geographic earnings mix and favorable settlements on prior-year tax positions.
- Operating cash flow was nearly flat despite higher earnings, as increased receivables and inventory absorbed cash. DSO rose to 62 days from 61 and inventory days to 84 from 81.
Outlook, risks and unusual items
- The filing provides no specific 2015 revenue or earnings guidance. Management expected a larger unfavorable foreign-currency impact on 2015 results.
- Management noted that higher commodity costs could pressure results in 2015 if pricing, supplier negotiations and cost reductions do not offset them. The company does not use commodity derivatives.
- Principal risks include competition and premium pricing, currency movements, economic weakness and customer capital-spending declines, supplier concentration and component costs, talent retention, IT upgrades and security, organizational change, regulatory compliance, business interruptions, innovation execution, and product quality or liability claims.
- Foreign currency translation and pension and retiree-medical adjustments drove a $13.6 million other comprehensive loss; comprehensive income was $37.0 million, below net earnings of $50.7 million.
- There were no material pending legal proceedings reported beyond routine business litigation. Management and the independent auditor concluded internal control over financial reporting was effective; the auditor issued an unqualified opinion on the financial statements.
Key investor verification points
- Confirm whether 2015 foreign-exchange and commodity headwinds affected sales, margins and earnings as management anticipated.
- Track inventory, receivables, DSO and cash conversion following the working-capital increase.
- Assess whether new-product demand and sales growth can offset channel-mix and production costs that weighed on gross margin.
- Review the sustainability of the lower effective tax rate and the status of uncertain tax positions and examinations.
- Monitor pension and retiree-benefit assumptions, future contributions, and the impact of market and discount-rate changes.
- Review the full financial statements and notes for debt maturities, purchase commitments, warranty exposure and residual-value guarantees.