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, 1998 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, 1998, was 9,353,878.
Page 2 of 10 TENNANT COMPANY Quarterly Report - Form 10-Q PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS TENNANT COMPANY AND SUBSIDIARIES - CONSOLIDATED STATEMENTS (UNAUDITED) - ---------------------------------------------------------------------- (Dollars in thousands, except per share amounts) <TABLE> <CAPTION> Three Months Six Months Ended June 30 Ended June 30 -------------------- ------------------- EARNINGS (note 1) 1998 1997 1998 1997 ---- ---- ---- ---- <S> <C> <C> <C> <C> Net sales $99,220 $93,359 $187,941 $176,385 Less: Cost of sales (note 2) 57,166 53,589 108,611 102,466 Selling and administrative (note 2) 32,086 30,306 61,979 57,868 ------- ------- -------- -------- Profit from operations 9,968 9,464 17,351 16,051 Other income and (expense) Net foreign currency gain (loss) (43) 8 (171) (28) Interest income 1,167 1,113 2,309 2,234 Interest expense (742) (459) (1,306) (986) Miscellaneous income (expense), net 40 (181) 379 (482) ------- ------- -------- -------- Total other income (expense) 422 481 1,211 738 ------- ------- -------- -------- Earnings before income taxes 10,390 9,945 18,562 16,789 Taxes on income 3,672 3,528 6,601 5,965 ------- ------- -------- -------- Net earnings $ 6,718 $ 6,417 $ 11,961 $ 10,824 ------- ------- -------- -------- Comprehensive earnings adjustment for foreign currency translation, net of tax 341 (13) (333) (1,747) ------- ------- -------- -------- Comprehensive Earnings (note 7) $ 7,059 $ 6,404 $ 11,628 $ 9,077 ------- ------- -------- -------- ------- ------- -------- -------- </TABLE> PER SHARE (note 6) <TABLE> <S> <C> <C> <C> <C> Basic net earnings $ .70 $ .64 $ 1.24 $ 1.08 Diluted net earnings $ .70 $ .63 $ 1.24 $ 1.07 Dividends $ .18 $ .18 $ .36 $ .36 Average number of shares (diluted) 9,574,000 10,106,000 9,666,000 10,106,300 </TABLE> See Accompanying Notes
Page 3 of 10 TENNANT COMPANY Quarterly Report - Form 10-Q ITEM 1 - FINANCIAL STATEMENTS (continued) ITEM 1 - FINANCIAL STATEMENTS TENNANT COMPANY AND SUBSIDIARIES - CONSOLIDATED STATEMENTS - ---------------------------------------------------------- (Dollars in thousands) BALANCE SHEET <TABLE> <CAPTION> (Condensed from Audited (Unaudited) Financial Statements) ASSETS June 30, 1998 December 31, 1997 ------------ ----------------- <S> <C> <C> Cash and cash equivalents $ 16,157 $ 16,279 Receivables 77,856 83,099 Less deferred income from sales finance charges (1,094) (1,636) Less allowance for doubtful accounts (3,645) (3,302) --------- --------- Net receivables 73,117 78,161 Inventories (note 3) 44,236 40,323 Prepaid expenses 978 985 Deferred income taxes, current portion 7,359 7,357 --------- --------- Total current assets 141,847 143,105 Property, plant, and equipment 161,062 156,602 Less allowance for depreciation (96,989) (91,491) --------- --------- Net property, plant, and equipment 64,073 65,111 Net noncurrent installment accounts receivable 6,255 6,337 Deferred income taxes, long-term portion 2,366 2,257 Intangible assets 16,009 16,525 Other assets 407 535 --------- --------- Total assets $230,957 $233,870 --------- --------- --------- --------- </TABLE> LIABILITIES & SHAREHOLDERS' EQUITY <TABLE> <CAPTION> (Condensed from Audited (Unaudited) Financial Statements) LIABILITIES June 30, 1998 December 31, 1997 ------------- ----------------------- <S> <C> <C> Current debt $ 5,456 $ 2,377 Accounts payable 19,703 19,078 Accrued expenses 26,686 35,694 --------- --------- Total current liabilities 51,845 57,149 Long-term debt 28,113 20,678 Employee retirement-related benefits 23,919 21,767 Other long-term liabilities -- 190 --------- --------- Total liabilities 103,877 99,784 SHAREHOLDERS' EQUITY Common stock (note 5) 3,507 3,637 Additional paid-in capital (note 5) -- -- Common stock subscribed 131 444 Unearned restricted shares (722) (789) Retained earnings 134,641 141,656 Receivable from ESOP (10,707) (11,425) Accumulated other comprehensive income (equity adjustment from foreign currency translation) 230 563 --------- --------- Total shareholders' equity 127,080 134,086 --------- --------- Total liabilities and shareholders' equity $230,957 $233,870 --------- --------- --------- --------- </TABLE> See Accompanying Notes
Page 4 of 10 TENNANT COMPANY Quarterly Report - Form 10-Q ITEM 1 - FINANCIAL STATEMENTS (continued) TENNANT COMPANY AND SUBSIDIARIES - CONSOLIDATED STATEMENTS (UNAUDITED) - ---------------------------------------------------------------------- (Dollars in thousands) <TABLE> <CAPTION> STATEMENTS OF CASH FLOWS (note 4) Six Months Ended June 30 ------------------------ 1998 1997 ---- ---- <S> <C> <C> Net cash flow related to operating activities $ 15,903 $16,819 Cash flow related to investing activities: Acquisition of property, plant, and equipment (10,726) (9,985) Acquisition of intangible assets -- -- Proceeds from disposals of property, plant, and equipment 3,565 1,401 Settlement of foreign currency hedging contracts -- 470 --------- --------- Net cash flow related to investing activities (7,161) (8,114) Cash flow related to financing activities: Net changes in current debt 4,709 (2,126) Issuance of long-term debt 5,782 8 Payments to settle long-term debt (6) (12) Principal payment from ESOP 600 545 Proceeds from employee stock issues 903 920 Repurchase of common stock (17,404) (3,874) Dividends paid (3,427) (3,590) --------- --------- Net cash flow related to financing activities (8,843) (8,129) Effect of exchange rate changes on cash (21) 217 --------- --------- Net increase (decrease) in cash and cash equivalents (122) 793 Cash and cash equivalents at beginning of year 16,279 9,881 --------- --------- Cash and cash equivalents at end of second quarter $ 16,157 $10,674 --------- --------- --------- --------- </TABLE> See Accompanying Notes
Page 5 of 10 TENNANT COMPANY Quarterly Report - Form 10-Q ITEM 1 - FINANCIAL STATEMENTS (continued) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In the opinion of management, financial the accompanying 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) The Company's Summary of Significant Accounting Policies and other Related Data and Summary of Stock Plans, Bonuses, and Profit Sharing is included in the Company's 1997 Annual Report filed as Exhibit 13.1 to the Company's annual filing on Form 10-K and is 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, 1998 and 1997, as follows: <TABLE> <CAPTION> Three Months Six Months Ended June 30 Ended June 30 ------------- ------------- 1998 1997 1998 1997 ---- ---- ---- ---- (In Thousands) <S> <C> <C> <C> <C> Engineering, research and development $4,013 $3,459 $6,520 $6,696 ------ ------ ------ ------ ------ ------ ------ ------ Maintenance and Repairs $1,459 $1,396 $3,019 $2,886 ------ ------ ------ ------ ------ ------ ------ ------ Warranty $1,216 $1,096 $2,324 $2,130 ------ ------ ------ ------ ------ ------ ------ ------ Bad debts $ 309 $ 203 $ 498 $ 338 ------ ------ ------ ------ ------ ------ ------ ------ </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, 1998, and December 31, 1997, is as follows: <TABLE> <CAPTION> June 30 December 31 1998 1997 ------- ----------- (In Thousands) <S> <C> <C> FIFO Inventories: Finished Goods $31,015 $27,028 All Other 32,711 31,833 LIFO Adjustment (19,490) (18,538) ------- ------- LIFO Inventories $44,236 $40,323 ------- ------- ------- ------- </TABLE>
Page 6 of 10 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, 1998 and 1997, were $6,019,000 and $7,187,000, respectively. Interest costs paid during the six months ended June 30, 1998 and 1997, were $1,291,958 and $555,000, respectively. (5) Stock Split On February 16, 1995, the Board of Directors declared a two-for-one stock split effective April 26, 1995, for shareholders of record on April 12, 1995. For each share to be issued in connection with the stock split, an amount equal to the par value of $.375 was transferred to the common stock amount from additional paid-in capital retroactive to December 31, 1994. All share and per share data in this report have been retroactively adjusted to reflect this stock split. (6) Earnings Per Share (In thousands, except per share amounts) <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 stockholders $6,718 9,546 $ 0.70 Effect of Dilutive Securities Fixed stock options 28 Performance-related shares 0 Diluted EPS Income available to common stockholders + assumed conversions $6,718 9,574 $ 0.70 </TABLE> <TABLE> <CAPTION> For the Quarter Ended June 30, 1997 ------------------------------------- Income Shares Per Share (Numerator) (Denominator) Amount ----------- -------------- --------- <S> <C> <C> <C> Basic EPS Income available to common stockholders $6,417 10,091 $ 0.64 Effect of Dilutive Securities Fixed stock options 6 Performance-related shares 9 Diluted EPS Income available to common stockholders + assumed conversions $6,417 10,106 $ 0.63 </TABLE>
Page 7 of 10 TENNANT COMPANY Quarterly Report - Form 10-Q (7) Comprehensive Earnings (In thousands) Beginning the first quarter 1998, the Company adopted SFAS No. 130, REPORTING COMPREHENSIVE INCOME, which establishes standards for reporting and displaying the components of comprehensive income. The Company has retroactively reflected comprehensive income to meet these requirements. ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION 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, 1998, and is incorporated in this Form 10-Q by reference.
Page 8 of 10 TENNANT COMPANY Quarterly Report - Form 10-Q PART II - OTHER INFORMATION ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the Annual Shareholders' Meeting held on May 8, 1998, the following matters were submitted to vote: (a) Election of Directors Arthur D. Collins, Jr., was elected to serve a three-year term as a director of the Company. Out of 8,502,617 common shares represented, 8,166,950 voted in favor and 335,666 withheld. Andrew P. Czajkowski was elected to serve a three-year term as a director of the Company. Out of 8,502,617 common shares represented, 8,161,892 voted in favor and 340,725 withheld. Pamela K. Knous was elected to serve a three-year term as a director of the Company. Out of 8,502,617 common shares represented, 8,150,064 voted in favor and 352,552 withheld. The following directors each continued their term of office after the meeting: David C. Cox Roger L. Hale Delbert W. Johnson William I. Miller Edwin L. Russell (b) Tennant Company 1998 Management Incentive Plan The Tennant Company 1998 Management Incentive Plan was approved and ratified. Out of 8,502,617 common shares represented, 7,975,382 voted in favor, 407,689 against, and 119,545 abstained. (c) Appointment of KPMG Peat Marwick as Auditors The appointment of KPMG Peat Marwick LLP as independent auditors of the Company was approved. Out of 8,502,617 common shares represented, 8,147,937 voted in favor, 265,816 against, and 88,864 abstained.
Page 9 of 10 TENNANT COMPANY Quarterly Report - Form 10-Q 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. 10.1 Non Employee Director Incorporated by reference to Stock Option Plan Exhibit 99 to the Company's Registration Statement No. 333-28641, Form S-8, dated June 6, 1997 13.1 Text Portion of Report to Filed herewith electronically. Shareholders for the Six Months Ended June 30, 1998 27.1 Financial Data Schedule Filed herewith electronically. </TABLE> (b) Reports on Form 8-K A Form S-8 was filed May 1, 1998, reporting the Castex Incorporated Employee's Retirement Savings Plan and Trust.
Page 10 of 10 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: ------------------------------- ------------------------------------ Richard A. Snyder Vice President, Treasurer and Chief Financial Officer Date: ------------------------------- ------------------------------------ John T. Pain Corporate Controller and Principal Accounting Officer