Tennant Company — Q2 2013 Form 10-Q
Business and period: Tennant designs, manufactures and sells equipment, technologies and coatings for maintaining and protecting nonresidential surfaces. This unaudited report covers the three and six months ended June 30, 2013; financial amounts below are U.S. dollars in millions except per-share data.
Financial performance
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Net sales | $200.2 | $199.5 | $368.3 | $373.2 |
| Gross profit | $87.7 | $89.0 | $160.3 | $164.3 |
| Gross margin | 43.8% | 44.6% | 43.5% | 44.0% |
| Operating profit | $21.6 | $21.6 | $28.5 | $29.9 |
| Net earnings | $14.3 | $13.7 | $19.3 | $19.0 |
| Diluted EPS | $0.76 | $0.71 | $1.03 | $0.99 |
Q2 sales increased 0.4%; first-half sales declined 1.3%. Q2 operating margin was 10.8%, unchanged year over year; first-half operating margin was 7.7%, versus 8.0%. The lower gross margins primarily reflected selling-channel and product mix. Higher R&D spending was partly offset by lower selling and administrative costs, which management attributed to cost controls and improved efficiency. Lower diluted share counts also supported per-share earnings.
Geographic sales: Q2 Americas sales rose 2.9% to $139.6 million, EMEA fell 8.2% to $39.8 million, and Asia Pacific rose 2.0% to $20.8 million. First-half sales rose 2.3% in the Americas and declined 9.4% in EMEA and 6.2% in Asia Pacific. Management cited tight European municipal spending and weaker city-cleaning equipment demand; Americas growth included Latin America and scrubbers using ec-H2O technology.
Cash flow, liquidity and debt
- First-half operating cash flow was $15.2 million, compared with $12.5 million. Capital expenditures, net of disposals, were $7.1 million; investing cash outflow was $7.4 million.
- Financing used $12.7 million, including $12.1 million of share repurchases and $6.6 million of dividends, partly offset by share issuance proceeds and other items. Cash decreased $5.4 million to $48.6 million.
- At June 30, 2013, current assets were $281.4 million and current liabilities $121.4 million; working capital was $160.0 million and the current ratio was 2.3. Accounts receivable were $146.8 million and inventory $62.7 million.
- Total debt was $32.2 million, including $4.0 million classified as current. The company reported $125.0 million of committed and $87.6 million of uncommitted credit lines. Debt-to-capital was 11.8%.
- The company was compliant with debt covenants. Its indebtedness-to-EBITDA ratio was 0.42x against a 3.00x maximum, and EBITDA-to-interest was 41.20x against a 3.50x minimum. An April amendment extended the JPMorgan credit facility maturity to March 1, 2018 and reduced certain pricing spreads.
Management commentary, outlook and risks
Management attributed Q2 organic sales growth mainly to price, strategic accounts, Americas scrubbers and new products; currency translation reduced reported sales. First-half organic sales were slightly lower, with volume weakness in city-cleaning equipment partly offset by price increases. The filing provides no specific forward revenue or earnings guidance.
- First-half results included a $1.4 million restructuring charge, primarily severance, and a $0.6 million tax benefit from retroactive enactment of the 2012 federal R&D tax credit. Management also cited a $0.4 million tax benefit associated with the restructuring charge.
- Tax examinations in state and foreign jurisdictions covering 2007–2010 were expected to settle before year-end; management stated reserves were adequate. Unrecognized tax benefits were $3.5 million, with about $0.5 million of accrued interest and penalties.
- Vehicle lease residual-value guarantees totaled $8.9 million; the company recorded a $0.5 million estimated-loss liability. A renewed Louisville facility lease carries a five-year commitment of $4.7 million.
- Risks identified include global economic and geopolitical uncertainty, competition, product quality and liability, innovation and intellectual-property execution, systems and business interruption, currency movements, and raw-material or component costs. Management reported no material changes to risk factors or market risk and no material pending legal proceedings beyond routine matters.
- Disclosure controls were judged effective, with no material quarterly change in internal control over financial reporting.
Most important facts for investors to verify
- Whether the Q2 sales stabilization can persist, particularly given continuing EMEA weakness and first-half volume declines.
- Whether gross-margin pressure from product and channel mix continues, and whether cost controls can offset R&D investment.
- How much of first-half EPS improvement reflects ongoing operations versus tax benefits and lower weighted-average shares.
- Cash conversion and working-capital trends, including receivables growth, inventory levels and payment timing.
- Debt covenant headroom, planned share repurchases and dividends, and realization of deferred proceeds from the 2012 divestiture.
- Outcomes of tax examinations and exposure under lease guarantees and other commitments.