<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Quarterly Report Under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For Quarter Ended June 30, 1999
Commission File No. 04804
TENNANT COMPANY
Incorporated in Minnesota IRS Emp Id No. 410572550
701 North Lilac Drive
P.O. Box 1452
Minneapolis, Minnesota 55440
Telephone No. 612-540-1200
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
The number of shares outstanding of Registrant's common stock, par value $.375
on June 30, 1999, was 9,019,491.
<PAGE>
Page 2 of 15
TENNANT COMPANY
Quarterly Report - Form 10-Q
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
TENNANT COMPANY AND SUBSIDIARIES - CONSOLIDATED STATEMENTS OF EARNINGS AND
COMPREHENSIVE EARNINGS (UNAUDITED)
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30 Ended June 30
--------------------------- ---------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 106,410 $ 99,220 $ 206,125 $ 187,941
Less:
Cost of sales 63,465 57,782 122,616 109,759
Selling and administrative 33,594 31,470 66,339 60,831
----------- ----------- --------- ----------
Profit from operations 9,351 9,968 17,170 17,351
Other income (expense)
Net foreign currency loss 41 (43) (57) (171)
Interest income 657 1,167 1,427 2,309
Interest expense (755) (742) (1,340) (1,306)
Miscellaneous income (expense), net (44) 40 (348) 379
----------- ----------- --------- ----------
Total other income (expense) (101) 422 (318) 1,211
----------- ----------- --------- ----------
Earnings before income taxes 9,250 10,390 16,852 18,562
Taxes on income 3,266 3,672 5,982 6,601
----------- ----------- --------- ----------
Net earnings $ 5,984 $ 6,718 $ 10,870 $ 11,961
----------- ----------- --------- ----------
----------- ----------- --------- ----------
Comprehensive earnings adjustment for
foreign currency translation, net of tax (1,207) 341 (2,835) (333)
----------- ----------- --------- ----------
Comprehensive earnings $ 4,777 $ 7,059 $ 8,035 $ 11,628
----------- ----------- --------- ----------
----------- ----------- --------- ----------
PER SHARE:
Basic net earnings $ .66 $ .70 $ 1.19 $ 1.24
Diluted net earnings $ .66 $ .70 $ 1.19 $ 1.24
Dividends $ .19 $ .18 $ .38 $ .36
Weighted average number of shares
(basic) 9,081,000 9,546,000 9,126,000 9,636,000
Weighted average number of shares
(diluted) 9,117,000 9,574,000 9,165,000 9,666,000
</TABLE>
<PAGE>
Page 3 of 15
TENNANT COMPANY
Quarterly Report - Form 10-Q
ITEM 1 - FINANCIAL STATEMENTS (continued)
TENNANT COMPANY AND SUBSIDIARIES - CONSOLIDATED STATEMENTS
(Dollars in thousands)
BALANCE SHEET
<TABLE>
<CAPTION>
(Condensed from Audited
(Unaudited) Financial Statements)
ASSETS June 30, 1999 December 31, 1998
------------- -----------------
<S> <C> <C>
Cash and cash equivalents $ 4,794 $ 17,693
Receivables 87,588 81,145
Less deferred income from sales finance charges (453) (954)
Less allowance for doubtful accounts (3,598) (2,956)
---------- -----------
Net receivables 83,537 77,235
Inventories 48,221 46,162
Prepaid expenses 1,905 878
Deferred income taxes, current portion 8,924 8,900
---------- -----------
Total current assets 147,381 150,868
Property, plant, and equipment 176,961 169,515
Less allowance for depreciation (107,858) (102,875)
---------- -----------
Net property, plant, and equipment 69,103 66,640
Net noncurrent installment accounts receivable 1,660 2,843
Deferred income taxes, long-term portion 2,822 2,657
Intangible assets, net 19,019 15,631
Other assets 287 459
---------- -----------
Total assets $ 240,272 $ 239,098
---------- -----------
---------- -----------
LIABILITIES & SHAREHOLDERS' EQUITY
(Condensed from Audited
(Unaudited) Financial Statements)
LIABILITIES June 30, 1999 December 31, 1998
------------- -----------------
Current debt $ 6,822 $ 7,302
Accounts payable 17,845 19,042
Accrued expenses 31,359 30,647
---------- -----------
Total current liabilities 56,026 56,991
Long-term debt 23,952 23,038
Long-term employee retirement-related benefits 29,140 27,802
---------- -----------
Total liabilities 109,118 107,831
SHAREHOLDERS' EQUITY
Common stock 3,384 3,421
Common stock subscribed 152 425
Unearned restricted shares (1,146) (307)
Retained earnings 139,856 136,730
Receivable from ESOP (9,844) (10,589)
Accumulated other comprehensive income (equity
Adjustment from foreign currency translation) (1,248) 1,587
---------- -----------
Total shareholders' equity 131,154 131,267
Total liabilities and shareholders' equity $ 240,272 $ 239,098
---------- -----------
---------- -----------
</TABLE>
Page 4 of 15
TENNANT COMPANY
Quarterly Report - Form 10-Q
ITEM 1 - FINANCIAL STATEMENTS (continued)
TENNANT COMPANY AND SUBSIDIARIES - CONSOLIDATED STATEMENTS (UNAUDITED)
(Dollars in thousands)
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS Six Months Ended June 30
-------------------------
1999 1998
---- ----
<S> <C> <C>
Net cash flow provided by operating activities $ 14,612 $ 15,903
Cash flow used in investing activities:
Acquisition of property, plant, and equipment (10,244) (10,726)
Acquisition of Paul Andra KG, less cash acquired (note 7) (6,943) --
Proceeds from disposals of property, plant, and equipment 769 3,565
---------------- ---------------
Net cash flow used in investing activities (16,418) (7,161)
Cash flow related to financing activities:
Net changes in current debt (299) 4,709
Issuance of long-term debt (1,621) 5,782
Payments to settle long-term debt (28) (6)
Principal payment from ESOP 660 600
Proceeds from employee stock issues 1,145 903
Repurchase of common stock (7,500) (17,404)
Dividends paid (3,438) (3,427)
---------------- ---------------
Net cash flow provided by (used in) financing activities (11,081) (8,843)
Effect of exchange rate changes on cash (12) (21)
---------------- ---------------
Net increase (decrease) in cash and cash equivalents (12,899) (122)
Cash and cash equivalents at beginning of year 17,693 16,279
---------------- ---------------
Cash and cash equivalents at end of second quarter $ 4,794 $ 16,157
---------------- ---------------
---------------- ---------------
</TABLE>
<PAGE>
Page 5 of 15
TENNANT COMPANY
Quarterly Report - Form 10-Q
ITEM 1 - FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of management, the accompanying financial statements include all
adjustments, consisting of normal recurring accruals, necessary for a fair
presentation of the interim periods presented.
The results of operations for interim periods are not necessarily indicative of
results which will be realized for the full fiscal year.
(1) Information Incorporated by Reference from 10-K
The Company's Summary of Significant Accounting Policies and other
Related Data and Summary of Stock Plans, Bonuses, and Profit Sharing are
included in the Company's 1998 Annual Report filed as Exhibit 13.1 to the
Company's annual filing on Form 10-K and are incorporated in this Form
10-Q by reference.
(2) Expenses
Engineering, research and development, maintenance and repairs, warranty,
and bad debt expenses were charged to operations for the three and six
months ended June 30, 1999 and 1998, as follows:
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30 Ended June 30
------------- -------------
1999 1998 1999 1998
---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C>
Engineering, research and development $3,811 $4,013 $ 7,527 $ 6,520
------ ------ -------- --------
------ ------ -------- --------
Maintenance and repairs $1,428 $1,459 $ 2,799 $ 3,019
------ ------ -------- --------
------ ------ -------- --------
Warranty $1,792 $1,216 $ 3,178 $ 2,324
------ ------ -------- --------
------ ------ -------- --------
Bad debts $ 554 $ 309 $ 890 $ 498
------ ------ -------- --------
------ ------ -------- --------
</TABLE>
The Company also makes accrual adjustments on a regular monthly basis for
bonus and profit sharing expenses which are settled at year-end. This
allows for a fair statement of the results for the interim periods
presented.
(3) Inventories
Inventories are valued at the lower of cost (principally on a last-in,
first-out basis) or market. The composition of inventories at June 30,
1999, and December 31, 1998, is as follows:
<TABLE>
<CAPTION>
June 30 December 31
1999 1998
---- ----
(In Thousands)
FIFO Inventories:
<S> <C> <C>
Finished goods $ 30,957 $ 32,895
All other 35,845 32,162
LIFO Adjustment (18,581) (18,895)
-------- --------
LIFO Inventories $ 48,221 $ 46,162
-------- --------
-------- --------
</TABLE>
<PAGE>
Page 6 of 15
TENNANT COMPANY
Quarterly Report - Form 10-Q
ITEM 1 - FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(4) Cash Flow
Income taxes paid during the six months ended June 30, 1999 and 1998,
were $7,112,000 and $9,081,000, respectively. Interest costs paid
during the six months ended June 30, 1999 and 1998, were $1,152,213 and
$1,291,958 respectively.
(5) Earning Per Share
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
For the Quarter Ended June 30, 1999
--------------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
---------- ------------ ------
<S> <C> <C> <C>
Basic EPS
Income available to
common shareholders $5,984 9,126 $ .66
Effect of dilutive securities
Fixed stock options 39
Diluted EPS
Income available to
common shareholders
+ assumed conversions $5,984 9,165 $ .66
</TABLE>
<TABLE>
<CAPTION>
For the Quarter Ended June 30, 1998
--------------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
---------- ------------ ------
<S> <C> <C> <C>
Basic EPS
Income available to
common shareholders $6,718 9,546 $ .70
Effect of dilutive securities
Fixed stock options 28
Diluted EPS
Income available to
common shareholders
+ assumed conversions $6,718 9,574 $ .70
</TABLE>
<PAGE>
Page 7 of 15
TENNANT COMPANY
Quarterly Report - Form 10-Q
ITEM 1 - FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) Segment Reporting
The Company operates in one industry segment which consists of the
design, manufacture, and sale of products and services used in the
maintenance of nonresidential floors.
Financial data by geographic area is before interest expense and
elimination of intercompany transactions. North America sales include
sales in the United States, Canada, and Mexico. Sales in Canada and
Mexico comprise less than 10% of consolidated sales and are interrelated
with the Company's U.S. operations. Product transfers from North America
are generally made at prices that recognize return on investment
objectives for both the manufacturing and selling units. Corporate items
include general corporate expense and miscellaneous items such as net
ESOP income and Foundation contribution expense.
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30 Ended June 30
------------- -------------
1999 1998 1999 1998
---- ---- ---- ----
Net sales (In Thousands)
<S> <C> <C> <C> <C>
North America
Customer sales $ 78,183 $ 74,045 $ 150,612 $ 141,850
Transfers to Europe and other
international areas 12,951 14,128 26,717 25,886
--------- --------- --------- ---------
Total North America 91,134 88,173 177,329 167,736
Europe customer sales 20,408 15,544 39,176 29,802
Other international customer sales 7,819 9,631 16,337 16,289
Eliminations (12,951) (14,128) (26,717) (25,886)
--------- --------- --------- ---------
Total $106,410 $ 99,220 $ 206,125 $ 187,941
--------- --------- --------- ---------
--------- --------- --------- ---------
Earnings before income taxes
North America 8,531 8,571 15,170 15,131
Europe 713 1,354 1,639 2,644
Other international 846 1,136 1,741 2,089
Corporate items, interest income,
interest expense, and eliminations (840) (671) (1,698) (1,302)
--------- --------- --------- ---------
Total earnings before income taxes $ 9,250 $ 10,390 $ 16,852 $ 18,562
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
<PAGE>
Page 8 of 15
TENNANT COMPANY
Quarterly Report - Form 10-Q
ITEM 1 - FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(7) Acquisition of Paul Andra KG
On January 4, 1999, the Company acquired the shares and holdings in
associated businesses of Paul Andra KG, a privately owned manufacturer
of commercial floor maintenance equipment in Germany. Paul Andra KG
sells products principally under the Sorma brand name, including single
disk machines, wet/dry vacuum cleaners and vacuumized scrubbers. Sales
of $9.7 million in the first six months of 1999 generated a small
operating loss that was in line with expectations. These acquisitions
are not expected to have a material impact on operations.
<TABLE>
<CAPTION>
Acquisition of Paul Andra KG:
<S> <C>
Assets acquired $ 12,763
Liabilities assumed ( 10,371)
Goodwill 4,551
--------
Total Cash Paid, less cash acquired $ 6,943
--------
--------
</TABLE>
(8) Change in Reporting Service Labor
The Company reports revenue from providing repair service in its sales
and cost of sales figures. Through 1998, in its European operations,
the related costs were included in selling and administrative expense.
June 1998 figures were restated to reflect a $616K reclassification
from selling and administrative expense to cost of sales to reflect the
related allocable portion of service labor costs for that quarter. This
makes European reporting consistent with Company reporting.
(9) New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement
No. 133, "Accounting for Derivative Instruments and Hedging Activities"
(SFAS No. 133), which is required to be adopted for fiscal years
beginning after June 15, 1999, although earlier application is
permitted as of the beginning of any fiscal quarter. In June 1999, the
Financial Accounting Standards Board issued Statement No. 137, which
defers the effective date of SFAS No. 133 to quarters of all fiscal
years beginning after June 15, 2000. SFAS No. 133 will require the
Company to recognize all derivatives on the balance sheet at fair
value. Derivatives that are not hedges must be adjusted to fair value
through income. If the derivative is a hedge, depending on the nature
of the hedge, changes in the fair value of the hedged assets,
liabilities, or firm commitments through earnings or recognized in
other comprehensive income until the hedged item is recognized in
earnings. The ineffective portion of a derivative's change in fair
value will be immediately recognized in earnings. The Company is in the
process of determining what effect the adoption of SFAS No. 133 will
have on the Company's results of operations, cash flows or financial
position.
<PAGE>
Page 9 of 15
TENNANT COMPANY
Quarterly Report - Form 10-Q
Also in 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) 98-1, Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use,
which was adopted by the Company in 1999. SOP 98-1 requires that
certain costs related to the development or purchase of internal use
software be capitalized and amortized over the estimated useful life of
the software. The estimated costs that have been capitalized in 1999
are approximately $1.3 million.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Net Earnings
Net earnings for the second quarter ended June 30, 1999 and June 30, 1998 were
$6.0 million and $6.7 million, respectively. Diluted earnings per share were
$.66 for the second quarter ended June 30, 1999 and $.70 for the same period
last year. Net earnings were $10.9 million or $1.19 per share diluted for the
six month period ended June 30, 1999, compared to $12.0 million or $1.24 per
share diluted for the comparable period last year.
Net Sales
Net sales of $106.4 million for the second quarter ended June 30, 1999 increased
7 percent compared to the same period last year, positively impacted by the
acquisition of Paul Andra KG in January, 1999. Excluding the impact of that
acquisition, sales grew $1.5 million or 1.5 percent over the prior year. North
American sales for the quarter were $78.2 million which was 6 percent or $4.1
million greater than second quarter 1998. This was due to increased sales of
existing and new industrial products and continued growth in commercial sales.
Sales outside North America, excluding Paul Andra KG, declined 11 percent or
$2.8 million due to a drop in export sales and a weak European economy.
Orders for the second quarter ended June 30, 1999 were $106.1 million. Order
growth second quarter, excluding the Paul Andra KG acquisition, was $4.4 million
or 5 percent over the comparable period in 1998. North American orders grew $3.4
or 5 percent over 1998 due to the improving industrial economy and new outdoor
machines. Orders outside of North America grew $1.0 million or 4 percent due to
improved growth in Japan and Europe. The disparity between order growth and
sales growth second quarter is due to a difference in backlog reduction between
the two years. Second quarter 1998 backlogs declined $2.9 million more than in
1999.
Gross Profit
Gross profit as a percentage of sales was 40.4 percent compared to 41.8 percent
last year. The decline was due primarily to manufacturing variances incurred as
the Company converted its manufacturing operations to an integrated
billed-to-order system and added two new products. In addition, the acquisition
of Paul Andra KG increased the proportion of sales with low gross margin in the
company's sales mix. Other than these factors, the Company's gross margin
between the two years was not significantly different.
<PAGE>
Page 10 of 15
TENNANT COMPANY
Quarterly Report - Form 10-Q
Selling, General, and Administrative Expense (SG&A)
SG&A expense for the quarter ended June 30, 1999 was $33.6 million compared to
$31.5 million for the comparable period last year largely due to expenses of
newly acquired Paul Andra KG. SG&A as a percent of sales decreased slightly from
31.7 percent a year ago to 31.6 for the current quarter.
Other Income and Expense
Other income and expense for the quarter ended June 30, 1999 was a net expense
of $.1 million compared to a net income of $.4 million last year. This decline
is due primarily to the reduction of interest income from equipment financing
provided by the Company to its customers. In 1998 the Company outsourced its
product financing business. The Company transferred its portfolio to the
outsourced vendor, and continues to report interest income and interest expense
on the portfolio. The principal balance of the portfolio is declining over time
as customer balances decrease thereby reducing the Company's interest income.
Income Taxes
The estimated effective tax rate for the Company's current fiscal year is 35.50
percent which has not changed significantly from the prior year rate of 35.56
percent.
LIQUIDITY AND CAPITAL RESOURCES
Operating activities provided $4.8 million of cash and cash equivalents for the
six month period ended June 30, 1999 compared to $16.2 million for the same
period a year ago. Significant uses of cash during the six month period ended
June 30, 1999 included the cash purchase price paid for the acquisition of Paul
Andra KG, purchases of property, plant, and equipment, repurchases of common
stock under the Company's stock purchase plan, and dividends paid to
shareholders.
MARKET RISK
The Company's market risk includes the potential loss arising from adverse
changes in foreign currency exchange rates. The Company uses forward exchange
contracts and other hedging activities to hedge the U.S. dollar value resulting
from anticipated foreign currency transactions. There have been no material
changes in the Company's market risks since December 31, 1998.
YEAR 2000 PROJECT OVERVIEW
Tennant's company-wide Year 2000 Project (Project) is proceeding on schedule.
Tennant's Project is divided into four major sections: Applications Systems,
Systems Infrastructure, External Agents (suppliers/partners/distributors/
customers) and Embedded Systems (manufacturing and facilities). General Project
phases common to all sections are: 1) inventorying Year 2000 items;
2) assigning priorities to identified items; 3) assessing the Year 2000
compliance of items determined to be material to the Company; 4) repairing or
replacing material items that are determined not to be Year 2000 compliant;
5) testing material items; and 6) designing and implementing contingency and
business continuation plans. Material items are those believed by the Company
to have risk involving the safety of individuals that may cause damage to either
property or the environment, or affect revenues.
<PAGE>
Page 11 of 15
TENNANT COMPANY
Quarterly Report - Form 10-Q
Progress status is as follows:
<TABLE>
<CAPTION>
% Complete
as of 6/30/99 Completion
------------- ----------
<S> <C> <C>
Applications Systems 100% 2nd Quarter 1999
Systems Infrastructure 100% 2nd Quarter 1999
External Agents 100% 2nd Quarter 1999
Embedded Systems 100% 1st Quarter 1999
</TABLE>
A more detailed description of activities is as follows:
Applications Systems - In 1994, in order to improve access to business
information through common integrated computing systems across the Company,
Tennant began a worldwide business systems replacement project with systems that
use programs from SAP America, Inc. (SAP). The new systems are expected to make
approximately 80% of the Company's business systems Year 2000 compliant.
European applications systems are completely installed, and the North American
Industrial systems are now completely installed. The remaining non-SAP business
software is now 100% complete. The North American Commercial systems remediation
was completed in September of 1998. Our activity also includes assessment and
remediation of non-mission critical personal systems. Initial survey and
assessment work is complete with repair and remediation now completed.
Systems Infrastructure - The Infrastructure section consists of hardware and
system software other than Applications Software. Activity in this area has been
continuous with the majority having been addressed and tested in conjunction
with project and regular replacement programs.
External Agents (Suppliers/Partners/Distributors/Customers) - The primary
activity in this section involves the process of identifying and prioritizing
critical suppliers, customers, distributors, and other partners at the direct
interface level and communicating with them about their plans and progress in
addressing the Year 2000 problem. The initial survey activity has been completed
and detailed evaluations of the most critical third parties have been initiated.
These evaluations have been followed by selective follow-up contact.
Embedded Systems (Manufacturing and Facilities) - This section focuses on the
hardware and software associated with embedded computer chips that are used in
the operation of all facilities operated by the Company. Survey and
prioritization activities are complete. In addition, our activities have
included the evaluation of Year 2000 dependencies in embedded chips produced in
our own products all of which have been certified to be compliant.
With the technical remediation and conversions now complete, our efforts for the
remainder of the year will focus on refining our business contingency plan. This
plan will identify actions to be implemented to reasonably sustain business in
the event of Y2K impacts out of our direct control.
<PAGE>
Page 12 of 15
TENNANT COMPANY
Quarterly Report - Form 10-Q
Costs
The total cost associated with the required modifications to become Year 2000
compliant is not expected to be material to the Company's financial position.
The core of the Company's IT investments have been focused on building new
capability while satisfying Year 2000 requirements. The estimated total cost of
the planned SAP activities through 1999 is approximately $20 million of which
$19 million has been expended. Funding for Year 2000 specific activities are
estimated at $950,000 of which $950,000 has been expended. Funding for both SAP
and Y2K activities is integrated with operational budgets, with IT funding for
fiscal year 1999 estimated to be at the same levels as fiscal year 1998.
In January 1999 Tennant Company completed the purchase of Paul Andra KG.
Activities for Year 2000 certification have been completed using the same
process as outlined for Tennant Company. An action plan has been completed and
integrated into the corporate plan. The majority of Y2K issues were addressed by
conversion of systems to SAP in June 1999. All other activities have been
incorporated into the existing plan and are complete. Funding for the SAP
integration is approximately $650,000. Funding for the Y2K specific activities
were less than $50,000.
Cautionary Statement Concerning Forward-Looking Statements
The statements in this report are forward-looking statements and are not meant
as historical facts. As discussed above, many factors are involved in this
project which contain risk and uncertainty and are beyond the control of the
Company. Included in this are the actions of suppliers, distributors, customers,
and other partners.
EURO CONVERSION
On January 1, 1999, eleven of the fifteen member countries of the European
Union established fixed conversion rates between their existing currencies and
the euro, a new European currency, and adopted the euro as their common legal
currency (the "Euro Conversion"). Either the euro or a participating country's
present currency will be accepted as legal tender from January 1, 1999, to
January 1, 2002, from which date forward only the euro will be accepted.
The Company has a significant number of customers located in European Union
countries participating in the Euro Conversion. Such customers will likely have
to upgrade or modify their computer systems and software to comply with euro
requirements. The amount of money the Company anticipates spending in connection
with product development related to the Euro Conversion is not expected to have
a material adverse effect on the Company's results of operations or financial
condition. The Euro Conversion may also have competitive implications for the
Company's pricing and marketing strategies, which could be material in nature;
however, any such impact is not known at this time.
<PAGE>
Page 13 of 15
TENNANT COMPANY
Quarterly Report - Form 10-Q
The Company has begun to analyze which of its internal systems will need to be
modified to deal with the Euro Conversion. The Company does not currently expect
the cost of such modifications to have a material effect on the Company's
results of operations or financial condition. There is no assurance, however,
that all problems related to the Euro Conversion will be foreseen and corrected,
or that no material disruptions of the Company's business will occur.
Additional management's discussion and analysis of financial condition and
results of operations is included in Exhibit 13.1, attached, text portion of
Report to Shareholders for the Six Months Ended June 30, 1999, and is
incorporated in this Form 10-Q by reference.
PART II - OTHER INFORMATION
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Shareholders' Meeting held on May 6, 1999, the following
matters were submitted to vote:
(a) Election of Directors
Janet M. Dolan was elected to serve a three-year term as a director of
the Company. Out of 7,815,996 common shares represented, 7,744,486
voted in favor and 71,510 withheld.
Roger L. Hale was elected to serve a three-year term as a director of
the Company. Out of 7,815,996 common shares represented, 7,755,399
voted in favor and 60,597 withheld.
Delbert W. Johnson was elected to serve a three-year term as a director
of the Company. Out of 7,815,996 common shares represented, 7,746,071
voted in favor and 69,925 withheld.
The following directors each continued their term of office after the
meeting:
Arthur D Collins, Jr.
David C. Cox
Andrew P. Czajkowski
Pamela K. Knous
William I. Miller
Edwin L. Russell
<PAGE>
Page 14 of 15
TENNANT COMPANY
Quarterly Report - Form 10-Q
(b) Tennant Company 1999 Stock Incentive Plan
The Tennant Company 1999 Stock Incentive Plan was approved and
ratified. Out of 7,815,996 common shares represented, 6,457,914 voted
in favor, 876,216 against, and 481,866 abstained.
(c) Tennant Company Restricted Stock Plan for Nonemployee Directors
The Amendments to and the Restatement of the Tennant Company Restricted
Stock Plan for Nonemployee Directors was approved and ratified. Out of
7,815,996 common shares represented, 7,189,229 voted in favor, 425,785
against, and 200,982 abstained.
(d) Appointment of KPMG LLP as Auditors
The appointment of KPMG LLP as independent auditors of the Company was
approved. Out of 7,815,996 common shares represented, 7,728,739 voted
in favor, 55,718 against, and 31,539 abstained.
PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Item # Description Method of Filing
------ ----------- ----------------
<S> <C> <C>
3i Articles of Incorporation Incorporated by reference to
Exhibit 4.1 to the Company's
Registration Statement No.
33-62003, Form S-8,
dated August 22, 1995.
3ii By-Laws Incorporated by reference to
Exhibit 4.2 to the Company's
Registration Statement No.
33-59054, Form S-8, dated March 2,
1993.
13.1 Text Portion of Report to Shareholders for Filed herewith electronically.
the Six Months Ended June 30, 1999
27.1 Financial Data Schedule Filed herewith electronically.
</TABLE>
(b) Reports on Form 8-K
There were no reports filed on Form 8-K for the quarter ended June 30,
1999.
<PAGE>
Page 15 of 15
TENNANT COMPANY
Quarterly Report - Form 10-Q
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TENNANT COMPANY
Date:
---------------------- --------------------------------------
August 11, 1999 Janet Dolan
President and Chief Executive Officer
Date:
---------------------- --------------------------------------
August 11, 1999 John T. Pain
Vice President, Treasurer and
Chief Financial Officer
Date:
---------------------- --------------------------------------
August 11, 1999 Dean A. Niehus
Corporate Controller and
Principal Accounting Officer
<PAGE>
TO OUR SHAREHOLDERS
An important part of our corporate strategy is to put in a new operating
system throughout the Company. This has been a major endeavor that we have been
engaged in for some time. We have converted the order services, the financial
systems, and in this quarter, the second quarter, we converted our manufacturing
process. In doing so we were able to continue service to customers without
interruption. However, we experienced a greater inefficiency in our
manufacturing processes as we made the conversion. This inefficiency created a
$1 million variance. Therefore, although sales were strong and the outlook for
Tennant's growth in the marketplace is strong, we had a second quarter impact on
earnings due to the variance. So the good news of second quarter is both that
the business health is strong and the conversion is behind us. However, it did
have a larger impact than anticipated on the operating efficiency of the
manufacturing process going through the conversion.
Second quarter revenues of $106.4 million increased 7 percent over the
$99.2 million recorded for the same three months last year. Expenses also
increased 7 percent compared with the prior year. Net earnings in the latest
quarter were $6.0 million, or 66 cents per diluted share, down 11 percent from
$6.7 million, or 70 cents per diluted share, for the comparable period last
year. The latest quarter included a one-time charge of approximately $1 million,
or 6 cents per diluted share after tax and profit-related expenses. This
reflected manufacturing inefficiencies related to the conversion to an
integrated manufacturing system based on SAP software and was recorded in cost
of sales.
For the first six months of 1999, sales were $206.1 million, 10 percent
higher than the $187.9 million seen in 1998. Expenses grew 9 percent between the
two periods. Net earnings were $10.9 million, or $1.19 per diluted share, down 9
percent from $12.0 million, or $1.24 per diluted share, for the comparable
period last year.
SECOND QUARTER MILESTONES
While we are disappointed with the decline in earnings, the second quarter
saw a number of important developments that indicate increased business
strength. Our primary markets were stronger, with orders in our base business
growing 5 percent (in local currencies) compared with 3 percent in the first
quarter. In addition, we substantially completed the integration of Paul Andra
KG into our European operations. It is performing according to our expectations
when it was purchased in January: reporting a loss for the first half, on its
way to a profitable second half, and should reach breakeven by year-end.
SHAREHOLDER VALUE ENHANCEMENT PLAN
Setting aside the one-time event that reduced earnings this quarter, the
performance of Tennant's industrial and commercial businesses have been
improving. However, this performance is not good enough. In March, our new
management team began developing a plan to increase shareholder value. We
identified two areas we believe will help us achieve this goal. First, we
evaluated the opportunity to streamline our management structure and leverage
key functions globally. We determined there are opportunities to improve
performance by providing centralized management of such
CONTINUED ON FACING PAGE
<PAGE>
TO OUR SHAREHOLDERS (CONTINUED)
functions as manufacturing, logistics and product development. As a result, in
June we changed the responsibility of a number of key managers to support that
global view. Second, we are reviewing opportunities to improve value by focusing
efforts on activities that contribute the most value--and eliminating those that
do not. We are in the process of completing this part of the plan and expect to
be ready to announce and implement it within the next month.
This letter includes forward-looking statements involving risks and
uncertainties. These include factors that affect all businesses operating in a
global market as well as matters specific to the company and the markets it
serves. Particular risks and uncertainties presently facing Tennant include:
political and economic uncertainty throughout the world; inflationary pressures;
increased competition in the company's businesses from competitors that have
substantial financial resources; soft markets in certain international regions
including Asia, Latin America and Europe; the continuing strength of the dollar,
which increases the cost of the company's products; the ability to successfully
implement the SAP enterprise resource planning system; and the company's plan
for growth. For additional information about factors that could materially
affect Tennant's results, please see the company's Securities and Exchange
Commission filings.
/s/ Janet Dolan
Janet Dolan
PRESIDENT - CEO July 20, 1999
PRODUCTS FOR A CLEANER AND SAFER WORLD
In response to a friendly challenge from the Hartford, CT, city council,
the Southside Institutions Neighborhood Alliance (SINA) and the Spanish American
Merchants Association (SAMA) are cleaning up - with help from the world's
leading manufacturer of indoor and outdoor surface maintenance equipment.
SINA and SAMA unveiled a new ATLV-TM- 4300, shown here, to keep the busy
Frog Hollow area of Hartford litter free. Chosen for its maneuverability and
litter-picking capacity, the ATLV-TM- 4300 is a key component in improving the
economic climate of Hartford.
The outdoor cleaning solution: Yet another way Tennant is making the world
a cleaner, safer place.
[PICTURE]
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE EARNINGS FOR THE SIX
MONTHS ENDED JUNE 30, 1999, AND THE CONSOLIDATED BALANCE SHEET AS OF JUNE 30,
1999, PAGES 2 AND 3, AND FOOTNOTE 2, PAGE 5, OF THIS FORM 10-Q QUARTERLY REPORT,
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 4,794
<SECURITIES> 0
<RECEIVABLES> 87,135
<ALLOWANCES> 3,598
<INVENTORY> 48,221
<CURRENT-ASSETS> 147,381
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0
0
<COMMON> 3,384
<OTHER-SE> 127,770
<TOTAL-LIABILITY-AND-EQUITY> 240,272
<SALES> 206,125
<TOTAL-REVENUES> 206,125
<CGS> 122,616
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<OTHER-EXPENSES> 66,339
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</TABLE>
