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, 2001Commission File No. 04804
TENNANT COMPANY
701 North Lilac DriveP.O. Box 1452Minneapolis, Minnesota 55440Telephone 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 ý No o
The number of shares outstanding of Registrant’s common stock, par value $.375 on June 30, 2001, was 9,082,651.
TENNANT COMPANYQuarterly Report - Form 10-Q
CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited)(in millions, except per share amounts)
See accompanying notes to consolidated financial statements.
CONSOLIDATED BALANCE SHEETS (in millions)
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)(in millions)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Management's Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations
Net earnings in the second quarter ended June 30, 2001, before unusual charges of $3.6 million after tax, were $4.9 million or $.53 per diluted share, on net sales of $110.7 million for the quarter. Including unusual charges, net earnings for the second quarter of 2001 were $1.3 million, or $.14 per diluted share. In the comparable 2000 period, the company reported net earnings of $7.6 million, or $.83 per diluted share, on net sales of $115.1 million. Negative foreign currency translation effects, resulting primarily from the strength of the U. S. dollar compared to the Euro, Japanese yen and Australian dollar reduced net sales in the 2001 second quarter by approximately $2.0 million and diluted earnings per share by approximately $.08.
Unusual charges recorded in the second quarter of 2001 totaled $3.6 million after tax ($5.9 million pretax), or $.39 per diluted share. The unusual charges were comprised largely of severance and related costs associated with a workforce reduction and other restructuring actions announced in April 2001. In addition, the unusual charges in the 2001 second quarter include an inventory write-down of $1 million and other costs related to the previously announced closing of a leased plant in Germany and the transfer of the plant’s production to a contact manufacturer in the Czech Republic. The inventory write-down has been classified in cost of sales, while all other unusual charges have been classified as restructuring charges. See note 7 to the consolidated financial statements.
For the six months ended June 30, 2001, net earnings, before unusual charges of $6.9 million after tax, were $8.4 million or $.91 per diluted share, on net sales of $214.4 million. Including unusual charges, net earnings for the second quarter of 2001 were $1.5 million, or $.16 per diluted share. In the comparable 2000 period, the company reported net earnings of $13.1 million, or $1.43 per diluted share, on net sales of $223.5 million. Negative foreign currency translation effects, resulting primarily from the strength of the U. S. dollar compared to the Euro, Japanese yen and Australian dollar reduced net sales in the 2001 first six months by approximately $3.9 million and diluted earnings per share by approximately $.15.
Unusual charges in the six months ended June 30, 2001, of $6.9 million after tax ($11.0 million pretax), or $.75 per diluted share, were comprised of the restructuring charges and inventory write-down recorded in the 2001 second quarter, as well as 2001 first quarter charges related to the planned closure of the plant in Germany and the transfer of its production to a contract manufacturer in the Czech Republic. The 2001 restructuring actions are expected to provide an annualized pre-tax benefit of approximately $3.5 million. See note 7 to the consolidated financial statements.
Consolidated net sales of $110.7 million for the second quarter 2001 decreased 3.8% compared to the second quarter 2000 sales of $115.1 million. Negative foreign currency translation effects reduced second quarter net sales by approximately $2.0 million. Excluding this unfavorable impact, consolidated net sales were down 2.1%. Price increases benefited consolidated net sales in the 2001 second quarter by about 1.5%. Year-to-date, consolidated net sales declined 4.1% compared with the six months ended June 30, 2000. Excluding negative foreign currency translation effects, consolidated net sales for the year to date declined 2.3%. The period-to-period declines in consolidated net sales for the quarter and six months ended June 30, 2001 resulted primarily from lower sales of North American industrial floor maintenance equipment that resulted from a rapid deterioration in the North American industrial economy beginning late in 2000 and continuing through the first six months of 2001. The unfavorable effects of this economic slowdown are expected to continue in the second half of the year.
North American sales for the 2001 second quarter decreased 4.1% to $79.3 million, compared with $82.7 million in 2000. For the first six months, sales were $153.6 million, down 3.6% from $159.4 million for the first six months of 2000. The decreases for both the comparable quarter and six-month periods were due to double-digit percentage declines in industrial equipment sales resulting from the deteriorating conditions in the North America industrial economy. This was partially offset by double-digit percentage increases for the comparable quarter and six-month periods in North America commercial equipment sales and service revenues.
In Europe, net sales for the 2001 second quarter decreased 4.1% to $20.9 million, compared with the comparable 2000 period. For the first six months, sales were $39.1 million, down 7.1% from the first six months of 2000. Excluding foreign currency translation effects, sales in Europe for the 2001 second quarter increased about 1% but decreased by 1.7% for the six-month period compared with the corresponding year-ago periods. The economic conditions in Europe weakened during the first half of 2001.
In Other International, 2001 second quarter sales decreased 0.9% to $10.5 million, compared with $10.6 million in 2000. For the first six months, sales were $21.7 million, down 1.4% from $22.0 million for the first six months of 2000. Excluding the effects of foreign currency translation, sales were up 5.7% for the quarter and 4.1% for the six-month period compared with the 2000 periods. This is despite a downturn in sales to Japan, where economic conditions remain difficult.
Consolidated orders for the six months ended June 30, 2001, were down 3.8% from the comparable 2000 period. Order backlog at June 30, 2001, totaled $9 million compared with $11 million at March 31, 2001, and $14 million at June 30, 2000. In the 2000 second quarter, industrial machine orders were extremely strong, which resulted in an unusually large backlog entering the third quarter of 2000.
Second quarter 2001 gross profit margin before unusual charges was 37.4% compared with 40.6% reported in the second quarter of 2000. Adjusted for negative foreign currency translation effects, gross margin for the 2001 second quarter was 38.2%. The remaining 2.4 percentage-point decline resulted primarily from a shift in the mix of products sold toward lower margin products. North American industrial equipment products have a higher gross margin than both North American commercial products and service revenues. The unfavorable effects on gross profit margins are expected to continue in the second half of the year.
The first six months of 2001 gross margin before unusual charges were 37.8% compared to 40.6% in the comparable 2000 period. Adjusted for foreign currency translation effects, gross margin for the 2001 six-month period was 38.8%. Again, the remaining 1.8 percentage-point decline was primarily due to the aforementioned product mix shift for the six-month period.
Second quarter selling and administrative (S&A) expenses in 2001 decreased 2% to $33.9 million from $34.6 million in 2000. For the second quarter, S&A expense as a percentage of sales increased from 30.1% in 2000 to 30.6% in 2001 reflecting the decline in year-over-year sales. Similarly, the first six month’s S&A expenses in 2001 represented 32.0% of sales compared to 31.3% in the first six months of 2000.
The effective tax rate, before unusual charges, for the second quarter and first six months of 2001 approximated 35.5% compared with 36% in the 2000 comparative periods. Including unusual charges, the effective tax rate for the quarter was 23.5% and for the first six months of 2001 was 25%.
The Company expects to record a nonrecurring pension settlement gain in the second half of 2001. This non-cash gain will be recorded once government approvals of changes being made to the company’s defined benefit retirement plan are received. The gain is estimated to total $3.2 to $3.6 million after tax, or $.35 to $.39 per diluted share.
Liquidity and Capital Resources
The Company generated $7.4 million of operating cash flows year-to-date in 2001 compared with $18.3 million in the comparable 2000 period. Cash and cash equivalents totaled $15.4 million at June 30, 2001, compared with $21.5 million at December 31, 2000. Significant uses of cash in 2001 included cash for employee severance payments and increased capital expenditures.
The debt-to-total-capitalization ratio was 13% at June 30, 2001, and at June 30, 2000. Netting cash against debt, the net debt to total capitalization is 5% at June 30, 2001. 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.
Management regularly reviews the Company’s business operations with the objective of improving financial performance and maximizing its return on investment and has adopted economic profit as its key financial performance measure. In this regard, the Company continues to consider actions to improve financial performance which, if taken, could result in material nonrecurring charges.
Market Risk
The Company’s market risk includes the risk of adverse changes in foreign currency exchange rates. Foreign currency translation effects of a strong U.S. dollar reduced diluted earnings per share by approximately $.08 for the second quarter of 2001 and $.15 year to date compared with the year-ago periods. Based on current foreign exchange rates, the Company expects further unfavorable foreign exchange effects for the remainder of 2001, compared with prior year results. The Company uses forward exchange contracts to hedge net exposed assets in Australia, Canada, Japan and U.S. dollar-denominated trade payables in Europe. Additional information on market risk is included in the Management Discussion and Analysis section of the Company's Form 10-K filing for the year ended December 31, 2000.
Cautionary Statement Relevant to Forward-Looking Information
Certain statements contained in this document as well as other written and oral statements made from time to time by the Company are considered “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act. These statements do not relate to strictly historical or current facts and provide current expectations or forecasts of future events. 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 the Company 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 Enterprise Resource Planning System; and the Company’s plan for growth. The Company cautions that forward-looking statements must be considered carefully and that actual results may differ in material ways due to risks and uncertainties both known and unknown.
The Company does not undertake to update any forward-looking statement, and investors are advised to consult any further disclosures by the Company on this matter in its filings with the Securities and Exchange Commission. It is not possible to anticipate or foresee all risk factors, and investors should not consider that any list of such factors to be an exhaustive or complete list of all risks or uncertainties.
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
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.