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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For
Quarter Ended March 31, 2000
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. 763-540-1200
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 March 31, 2000, was 9,042,993.
TENNANT COMPANY
Quarterly Report—Form 10-Q
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(in millions, except per share amounts)
| |
Three Months Ended March 31 |
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|---|---|---|---|---|---|---|---|
| |
2000 |
1999 |
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| Net sales | $ | 108.4 | $ | 99.7 | |||
| Less: | |||||||
| Cost of sales | 64.4 | 59.2 | |||||
| Selling and administrative expenses | 35.4 | 32.7 | |||||
| Profit from operations | 8.6 | 7.8 | |||||
| Interest income (expense), net | 0.1 | 0.2 | |||||
| Other income (expense) | (0.1 | ) | (0.4 | ) | |||
| Earnings before income taxes | 8.6 | 7.6 | |||||
| Income tax expense | 3.1 | 2.7 | |||||
| Net earnings | $ | 5.5 | $ | 4.9 | |||
| Per Share: | |||||||
| Basic net earnings | $ | .60 | $ | .53 | |||
| Diluted net earnings | $ | .60 | $ | .53 | |||
| Dividends | $ | .19 | $ | .19 | |||
| Weighted Average Number of Shares: | |||||||
| Basic | 9.14 | 9.17 | |||||
| Diluted | 9.16 | 9.21 | |||||
See accompanying notes to consolidated financial statements.
2
TENNANT COMPANY
Quarterly Report—Form 10-Q
CONSOLIDATED BALANCE SHEETS
(in millions)
| |
(Unaudited) March 31, 2000 |
(Condensed from Audited Financial Statements) December 31, 1999 |
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|---|---|---|---|---|---|---|---|
| ASSETS | |||||||
| Cash and cash equivalents | $ | 4.7 | $ | 14.9 | |||
| Receivables | 93.0 | 94.2 | |||||
| Less allowance for doubtful accounts | (4.6 | ) | (4.3 | ) | |||
| Net receivables | 88.4 | 89.9 | |||||
| Inventories | 51.7 | 47.7 | |||||
| Prepaid expenses | 1.8 | 1.7 | |||||
| Deferred income taxes, current portion | 10.9 | 10.9 | |||||
| Total current assets | 157.5 | 165.1 | |||||
| Property, plant and equipment | 177.4 | 175.7 | |||||
| Less accumulated depreciation | (112.3 | ) | (109.4 | ) | |||
| Net property, plant and equipment | 65.1 | 66.3 | |||||
| Net noncurrent installment accounts receivable | 0.7 | 1.0 | |||||
| Deferred income taxes, long-term portion | 6.2 | 6.0 | |||||
| Intangible assets, net | 19.0 | 18.5 | |||||
| Other assets | 0.4 | 0.6 | |||||
| Total assets | $ | 248.9 | $ | 257.5 | |||
| LIABILITIES & SHAREHOLDERS' EQUITY |
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| LIABILITIES | |||||||
| Current debt | $ | 6.5 | $ | 12.9 | |||
| Accounts payable | 18.8 | 19.8 | |||||
| Accrued expenses | 37.2 | 42.3 | |||||
| Total current liabilities | 62.5 | 75.0 | |||||
| Long-term debt | 15.7 | 16.0 | |||||
| Long-term employee related benefits | 31.1 | 30.6 | |||||
| Total liabilities | 109.3 | 121.6 | |||||
| SHAREHOLDERS' EQUITY | |||||||
| Common stock | 3.4 | 3.4 | |||||
| Common stock subscribed | 0.2 | 0.9 | |||||
| Unearned restricted shares | (1.4 | ) | (0.8 | ) | |||
| Retained earnings | 150.2 | 144.7 | |||||
| Accumulated other comprehensive income (equity adjustment from foreign currency translation) | (3.8 | ) | (2.5 | ) | |||
| Receivable from ESOP | (9.0 | ) | (9.8 | ) | |||
| Total shareholders' equity | 139.6 | 135.9 | |||||
| Total liabilities and shareholders' equity | $ | 248.9 | $ | 257.5 | |||
See accompanying notes to consolidated financial statements.
3
TENNANT COMPANY
Quarterly Report—Form 10-Q
CONSOLIDATED CONDENSED STATEMENTS OF
CASH FLOWS (Unaudited)
(in millions)
| |
Three Months Ended March 31 |
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|---|---|---|---|---|---|---|---|
| |
2000 |
1999 |
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| CASH FLOWS RELATED TO OPERATING ACTIVITIES: | |||||||
| Net earnings | $ | 5.5 | $ | 4.9 | |||
| Adjustments to net earnings to arrive at operating cash flows: | |||||||
| Depreciation and amortization | 4.5 | 4.5 | |||||
| Changes in operating assets and liabilities | (7.7 | ) | (1.4 | ) | |||
| Other, net | 0.2 | (0.6 | ) | ||||
| Net cash flows related to operating activities | 2.5 | 7.4 | |||||
| CASH FLOWS RELATED TO INVESTING ACTIVITIES: |
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| Acquisition of property, plant and equipment | (3.4 | ) | (4.7 | ) | |||
| Acquisition of Paul Andra KG, net of cash acquired | — | (6.9 | ) | ||||
| Proceeds from disposals of property, plant and equipment | 0.1 | 0.3 | |||||
| Other | (1.0 | ) | — | ||||
| Net cash flows related to investing activities | (4.3 | ) | (11.3 | ) | |||
| CASH FLOWS RELATED TO FINANCING ACTIVITIES: |
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| Net changes in short-term borrowings | (1.5 | ) | (2.1 | ) | |||
| Issuance (payments) of long-term borrowings | (5.0 | ) | 1.4 | ||||
| Proceeds from employee stock issuances | 0.3 | 0.5 | |||||
| Purchases of common stock | (1.4 | ) | (4.2 | ) | |||
| Dividends to shareholders | (1.7 | ) | (1.7 | ) | |||
| Principal payment from ESOP | 0.7 | 0.6 | |||||
| Net cash flows related to financing activities | (8.6 | ) | (5.5 | ) | |||
| Effect of exchange rates on cash | 0.2 | (0.2 | ) | ||||
| Net increase (decrease) in cash and cash equivalents | (10.2 | ) | (9.6 | ) | |||
| Cash and cash equivalents at beginning of year | 14.9 | 17.7 | |||||
| Cash and cash equivalents at end of period | $ | 4.7 | $ | 8.1 | |||
See accompanying notes to consolidated financial statements.
4
TENNANT COMPANY
Quarterly Report—Form 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Engineering, research and development, maintenance and repairs, warranty, and bad debt expenses were charged to operations for the three months ended March 31, 2000 and 1999, as follows:
| |
Three Months Ended March 31 |
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|---|---|---|---|---|---|---|
| (In millions) |
2000 |
1999 |
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| Engineering, research and development | $ | 3.7 | $ | 3.7 | ||
| Maintenance and repairs | $ | 1.3 | $ | 1.4 | ||
| Warranty | $ | 1.8 | $ | 1.4 | ||
| Bad debt | $ | 0.4 | $ | 0.3 | ||
The Company records accruals on a quarterly basis for bonus and profit sharing expenses which are settled after year end. This allows for a fair statement of the results for the interim periods presented.
Inventories are valued at the lower of cost (principally on a last-in, first-out basis) or market. The composition of inventories at March 31, 2000, and December 31, 1999, was as follows:
| (In millions) |
March 31, 2000 |
December 31, 1999 |
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|---|---|---|---|---|---|---|---|
| FIFO Inventories: | |||||||
| Finished goods | $ | 32.6 | $ | 28.6 | |||
| Raw materials, parts and work-in-process | 38.8 | 37.4 | |||||
| LIFO reserve | (19.7 | ) | (18.3 | ) | |||
| LIFO inventories | $ | 51.7 | $ | 47.7 | |||
5
Income taxes paid during the three months ended March 31, 2000 and 1999 were $1.0 million and $1.3 million, respectively. Interest costs paid during the three months ended March 31, 2000 and 1999 were $0.5 million and $0.6 million, respectively.
The Company reports accumulated other comprehensive income as a separate item in the shareholders' equity section of the balance sheet. Comprehensive income is comprised of net earnings and other comprehensive income (loss). Other comprehensive income (loss) consists solely of foreign currency translation adjustments. Total comprehensive income and its components are as follows:
| |
Three Months Ended March 31 |
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|---|---|---|---|---|---|---|---|
| (In millions) |
2000 |
1999 |
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| Net earnings | $ | 5.5 | $ | 4.9 | |||
| Foreign currency translation adjustment, net of tax | (1.3 | ) | (1.6 | ) | |||
| Comprehensive income | $ | 4.2 | $ | 3.3 | |||
(In millions, except per share amounts)
| |
Three Months Ended March 31, 2000 |
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|---|---|---|---|---|---|---|---|---|
| |
Income Available to Common Shareholders |
Shares |
Per Share Amount |
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| Basic EPS Computation | $ | 5.5 | 9.14 | $ | .60 | |||
| Dilutive effect of stock options | .02 | |||||||
| Diluted EPS Computation | $ | 5.5 | 9.16 | $ | .60 | |||
| |
Three Months Ended March 31, 1999 |
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|---|---|---|---|---|---|---|---|---|
| |
Income Available to Common Shareholders |
Shares |
Per Share Amount |
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| Basic EPS Computation | $ | 4.9 | 9.17 | $ | .53 | |||
| Dilutive effect of stock options | .04 | |||||||
| Diluted EPS Computation | $ | 4.9 | 9.21 | $ | .53 | |||
6
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.
| |
Three Months Ended March 31, |
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|---|---|---|---|---|---|---|
| (In millions) |
2000 |
1999(b) |
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| Geographical Net Sales(a) | ||||||
| North America |
|
$ |
76.7 |
|
$ |
70.9 |
| Europe | 20.3 | 18.7 | ||||
| Other International | 11.4 | 10.1 | ||||
| Total | $ | 108.4 | $ | 99.7 | ||
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 the statement of earnings. 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 are recognized 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 and financial position.
7
TENNANT COMPANY
Quarterly Report—Form 10-Q
Management's Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations
Net earnings in the first quarter ended March 31, 2000 were $5.5 million compared with $4.9 million in the first quarter of 1999, an increase of 12.2%. Diluted net earnings per share for the quarter were $0.60, an increase of 13.2% from the previous years' first quarter of $0.53 per share.
The increase in net earnings and earnings per share were primarily as a result of higher sales volumes across all geographic regions, partially offset by the unfavorable translation effect of a strong U.S. dollar, which decreased diluted earnings per share by $.03 compared with the 1999 first quarter. Net sales of $108.4 million for the first quarter 2000 increased 8.7% over the first quarter 1999 sales of $ 99.7 million. Sales increased in all three geographic regions in the quarter despite the unfavorable effects of a strong U.S. dollar, as the company benefited from recoveries in regional economies and market share gains in key product categories. Excluding the unfavorable foreign exchange impact, net sales in the 2000 first quarter increased 11% from the 1999 first quarter. Pricing of products is estimated to have less than a 1% effect on the year-over-year net sales comparison.
North American sales for the quarter were $76.7 million, 8.2% greater than the first quarter 1999 sales of $70.9 million. The increase was primarily due to higher volumes in industrial indoor products and equipment for outdoor cleaning.
In Europe, strengthening economies combined with market share gains produced an 8.6% increase in sales to $20.3 million from $18.7 million in the first quarter 1999. Excluding incremental year-over-year contributions from the Paul Andra KG acquisition completed in January 1999 and negative foreign currency exchange effects, first quarter 2000 sales in Europe were 15% above the first quarter 1999 level.
In other international, first quarter sales grew 12.9% to $11.4 million from $10.1 million in the first quarter 1999. The increase was primarily a result of recoveries in certain Latin American and Asian economies.
Orders for the first quarter ended March 31, 2000 were up 12% overall from the first quarter of 1999, with double-digit growth in all three geographic regions. The growth is due largely to the reasons identified above, including strong or improving economies where the Company does business. Order backlog at quarter end totaled $20 million, up from $12 million at March 31, 1999 and approximately $8.5 million at December 31, 1999.
First quarter gross profit was $44.0 million compared with $40.5 million in the first quarter of 1999. As a percentage of sales, gross profit for the first quarter in both periods was 40.6%. Manufacturing variances year-over-year were comparable. Favorable product-mix, purchase price variance and other efficiencies offset the unfavorable effects of foreign exchange translation and higher selling price discounts as a percentage of gross sales year-over-year.
Selling and administrative expenses (S&A) increased 8.3% to $35.4 million from $32.7 million in the first quarter of 1999. As a percent of sales, S&A decreased slightly from 32.8% a year ago to 32.7% for the 2000 first quarter. The increased expenses were primarily due to increased sales levels, related distribution expenses, a decrease in the amount of capitalized software and increased warranty and employee-benefit expenses.
Interest income and expense, net, was income of $.1 million in the first quarter compared with $.2 million the 1999 first quarter. In 1998, the Company sold with recourse to a third party its product financing lease portfolio and reports interest income and interest expense on the portfolio. The principal balance of the portfolio is declining over time. Reduced interest income of $.2 million earned on this portfolio was partially offset by a $.1 million decrease in interest expense.
8
Other income and expense was $.1 million expense compared with $.4 million in the same period in 1999. Lower ESOP-related expense and a reduction from 1999 first quarter foreign currency losses resulted in the improvement year-over-year.
The effective tax rate for the Company's 2000 first quarter was 36% compared with a 35.5% in the first quarter of 1999.
Financial Condition
The Company generated $2.5 million of cash and cash equivalents from operations for the three-month period ended March 31, 2000 compared with $7.4 million for the same period a year ago. Operating cash flows decreased primarily due to the increase in inventory levels from year-end levels and a decline in accrued expenses. During the 2000 first quarter, the Company repaid $5 million of long-term debt. First quarter 1999 included a $6.9 million cash outlay related to the acquisition of Paul Andra KG. The total cash paid was $10.1 million with the remainder of $3.2 million paid in the fourth quarter of 1999.
The ratio of total debt to capital decreased to 13.7% at the end of first quarter from 17.5% at the end of 1999. The Company believes that the combination of internally generated funds and available financing sources are more than sufficient to meet the Company's cash requirements for the next year.
Market Risk
The Company's market risk includes the risk of adverse changes in foreign currency exchange rates. Foreign exchange effects of a strong U.S. dollar reduced diluted earnings per share by approximately $.03 for the first quarter 2000. Unfavorable foreign exchange impacts of the euro, Australian dollar and British pound sterling contributed to the unfavorable first quarter 2000 effect. At exchange rates in effect at March 31, 2000, further unfavorable effects would be expected in the remainder of 2000, compared with prior year results. The Company uses forward exchange contracts to hedge net exposed assets in Australia, Canada and Japan.
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 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.
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.
Cautionary Statement Relevant to Forward-Looking Information
This document contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In addition, the Company and its representatives may from time-to-time
9
make written and oral forward-looking statements. These forward-looking statements are based on current expectations or beliefs, including, but not limited to, statements concerning the Company's operations and financial performance and condition. For this purpose, statements that are not statements of historical fact may be deemed to be forward-looking statements. The Company cautions that these statements by their nature involve risks and uncertainties, and actual results may differ materially depending on a variety of important factors. 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 currently facing Tennant include: the ability to implement its plan to increase worldwide manufacturing efficiencies; political and economic uncertainty throughout the world; inflationary pressures; the potential for increased competition in the company's businesses from competitors that have substantial financial resources; the potential for soft markets in certain regions, including North America, Asia, Latin America and Europe; the relative strength of the U.S. dollar, which affects the cost of the company's products sold internationally; 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 including its report on Form 10-K for the year ended December 31, 1999.
10
TENNANT
COMPANY
Quarterly Report—Form 10-Q
Item 6—Exhibits and Reports on Form 8-K
(a) Exhibits
| Item # |
Description |
Method of Filing |
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|---|---|---|---|---|
| 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 |
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By-Laws |
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Incorporated by reference to Exhibit 3ii to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999. |
| 27.1 |
|
Financial Data Schedule |
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Filed herewith electronically. |
(b) Reports on Form 8-K
There were no reports filed on Form 8-K for the quarter ended March 31, 2000
11
TENNANT
COMPANY
Quarterly Report—Form 10-Q
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: |
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May 15, 2000 |
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/s/ JANET DOLAN JANET DOLAN President and Chief Executive Officer |
| Date: |
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May 15, 2000 |
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/s/ ANTHONY T. BRAUSEN ANTHONY T. BRAUSEN Vice President and Chief Financial Officer |
| Date: |
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May 15, 2000 |
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/s/ DEAN A. NIEHUS DEAN A. NIEHUS Corporate Controller and Principal Accounting Officer |
12
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