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 September 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 September 30, 1998, was 9,279,903.
Page 2 of 11
TENNANT COMPANY
Quarterly Report - Form 10-Q
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
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TENNANT COMPANY AND SUBSIDIARIES - CONSOLIDATED STATEMENTS OF EARNINGS AND
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COMPREHENSIVE EARNINGS (UNAUDITED)
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(Dollars in thousands, except per share amounts)
Three Months Nine Months
Ended September 30 Ended September 30
----------------------- -------------------------
1998 1997 1998 1997
---- ---- ---- ----
Net sales $ 96,116 $ 90,570 $ 284,057 $ 266,955
Less:
Cost of sales 55,464 52,272 164,075 154,738
Selling and administrative 31,172 29,621 93,151 87,489
---------- ---------- ---------- ----------
Profit from operations 9,480 8,677 26,831 24,728
Other income (expense)
Net foreign currency gain (loss) 93 (77) (79) (105)
Interest income 1,036 1,236 3,345 3,470
Interest expense (573) (518) (1,878) (1,504)
Miscellaneous income (expense), net (214) (103) 165 (585)
---------- ---------- ---------- ----------
Total other income (expense) 342 538 1,553 1,276
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Earnings before income taxes 9,822 9,215 28,384 26,004
Taxes on income 3,514 3,243 10,115 9,208
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Net earnings $ 6,308 $ 5,972 $ 18,269 $ 16,796
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Comprehensive earnings adjustment for
foreign currency translation, net of tax (877) (1,149) (1,210) (1,162)
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Comprehensive earnings $ 5,431 $ 4,823 $ 17,059 $ 15,634
---------- ---------- ---------- ----------
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PER SHARE
Basic net earnings $ .67 $ .60 $ 1.91 $ 1.68
Diluted net earnings $ .67 $ .60 $ 1.91 $ 1.67
Dividends $ .19 $ .18 $ .55 $ .54
Weighted average number of shares
(basic) 9,383,871 9,928,700 9,550,808 9,999,300
Weighted average number of shares
(diluted) 9,411,800 10,006,900 9,580,100 10,077,500
Page 3 of 11
TENNANT COMPANY
Quarterly Report - Form 10-Q
ITEM 1 - FINANCIAL STATEMENTS (continued)
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TENNANT COMPANY AND SUBSIDIARIES - CONSOLIDATED STATEMENTS
- - ----------------------------------------------------------
(Dollars in thousands)
BALANCE SHEET
(Condensed from Audited
(Unaudited) Financial Statements)
ASSETS September 30, 1998 December 31, 1997
------------------ -----------------------
Cash and cash equivalents $17,901 $16,279
Receivables 78,724 83,099
Less deferred income from sales finance charges (1,320) (1,636)
Less allowance for doubtful accounts (3,358) (3,302)
--------- --------
Net receivables 74,046 78,161
Inventories 45,707 40,323
Prepaid expenses 755 985
Deferred income taxes, current portion 7,357 7,357
--------- --------
Total current assets 145,766 143,105
Property, plant, and equipment 163,779 156,602
Less allowance for depreciation (99,980) (91,491)
--------- --------
Net property, plant, and equipment 63,799 65,111
Net noncurrent installment accounts receivable 3,249 6,337
Deferred income taxes, long-term portion 2,269 2,257
Intangible assets, net 15,766 16,525
Other assets 477 535
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Total assets $231,326 $233,870
--------- --------
--------- --------
LIABILITIES & SHAREHOLDERS' EQUITY
(Condensed from Audited
(Unaudited) Financial Statements)
LIABILITIES September 30, 1998 December 31, 1997
------------------ ------------------------
Current debt $5,354 $2,377
Accounts payable 15,125 19,078
Accrued expenses 31,764 35,694
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Total current liabilities 52,243 57,149
Long-term debt 26,524 20,678
Employee retirement-related benefits 24,502 21,767
Other long-term liabilities -- 190
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Total liabilities 103,269 99,784
SHAREHOLDERS' EQUITY
Common stock 3,466 3,637
Common stock subscribed 130 444
Unearned restricted shares (509) (789)
Retained earnings 134,971 141,656
Receivable from ESOP (10,648) (11,425)
Accumulated other comprehensive income (equity
adjustment from foreign currency translation) 647 563
--------- --------
Total shareholders' equity 128,057 134,086
Total liabilities and shareholders' equity $231,326 $233,870
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Page 4 of 11
TENNANT COMPANY
Quarterly Report - Form 10-Q
ITEM 1 - FINANCIAL STATEMENTS (continued)
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TENNANT COMPANY AND SUBSIDIARIES - CONSOLIDATED STATEMENTS (UNAUDITED)
- - ----------------------------------------------------------------------
(Dollars in thousands)
CONDENSED STATEMENTS OF CASH FLOWS Nine Months Ended September 30
------------------------------
1998 1997
---- ----
Net cash flow related to operating activities $28,682 $30,384
Cash flow related to investing activities:
Acquisition of property, plant, and equipment (14,597) (14,417)
Proceeds from disposals of property, plant, and equipment 4,178 3,269
Settlement of foreign currency hedging contracts -- 935
------- -------
Net cash flow related to investing activities (10,419) (10,213)
Cash flow related to financing activities:
Net changes in current debt 4,541 (2,136)
Issuance of long-term debt 4,163 13
Payments to settle long-term debt (27) (16)
Principal payment from ESOP 600 545
Proceeds from employee stock issues 1,521 1,374
Repurchase of common stock (22,259) (7,635)
Dividends paid (5,201) (5,367)
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Net cash flow related to financing activities (16,662) (13,222)
Effect of exchange rate changes on cash 21 368
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Net increase in cash and cash equivalents 1,622 7,317
Cash and cash equivalents at beginning of year 16,279 9,881
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Cash and cash equivalents at end of third quarter $17,901 $17,198
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Page 5 of 11
TENNANT COMPANY
Quarterly Report - Form 10-Q
ITEM 1 - FINANCIAL STATEMENTS (continued)
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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) 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 1997 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 nine
months ended September 30, 1998 and 1997, as follows:
Three Months Nine Months
Ended September 30 Ended September 30
------------------ ------------------
1998 1997 1998 1997
---- ---- ---- ----
(In Thousands)
Engineering, research and development $4,091 $3,489 $12,555 $10,185
------ ------ ------- -------
------ ------ ------- -------
Maintenance and repairs $1,155 $1,258 $ 4,174 $ 4,144
------ ------ ------- -------
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Warranty $1,612 $1,150 $ 3,936 $ 3,280
------ ------ ------- -------
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Bad debts $ 364 $ 338 $ 862 $ 676
------ ------ ------- -------
------ ------ ------- -------
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 September
30, 1998, and December 31, 1997, is as follows:
September 30 December 31
1998 1997
------------ -----------
(In Thousands)
FIFO Inventories:
Finished Goods $32,883 $27,028
All Other 32,433 31,833
LIFO Adjustment (19,609) (18,538)
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LIFO Inventories $45,707 $40,323
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Page 6 of 11
TENNANT COMPANY
Quarterly Report - Form 10-Q
ITEM 1 - FINANCIAL STATEMENTS (continued)
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(4) Cash Flow
Income taxes paid during the nine months ended September 30, 1998 and 1997,
were $14,405,000 and $10,454,600, respectively. Interest costs paid during
the nine months ended September 30, 1998 and 1997, were $1,866,094 and
$1,226,318, respectively.
(5) Earning Per Share
(In thousands, except per share amounts)
For the Quarter Ended September 30, 1998
------------------------------------------
Income Shares Per Share
(Numerator) Denominator Amount
--------- ----------- ------
Basic EPS
Income available to
common stockholders $6,308 9,383 $ .67
Effect of dilutive securities
Fixed stock options 29
Diluted EPS
Income available to
common stockholders
+ assumed conversions $6,308 9,412 $ .67
For the Quarter Ended September 30, 1997
------------------------------------------
Income Shares Per Share
(Numerator) Denominator Amount
--------- ----------- ------
Basic EPS
Income available to
common stockholders $5,972 9,929 $.60
Effect of dilutive securities
Fixed stock options 35
Performance-related shares 43
Diluted EPS
Income available to
common stockholders
+ assumed conversions $5,972 10,007 $.60
Page 7 of 11
TENNANT COMPANY
Quarterly Report - Form 10-Q
ITEM 1 - FINANCIAL STATEMENTS (continued)
- - -----------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) Comprehensive Earnings
Beginning the First Quarter 1998, the Company adopted SFAS No. 130,
Reporting Comprehensive Earnings, which establishes standards for reporting
and displaying the components of comprehensive income. The Company has
retroactively reflected comprehensive income to meet these requirements.
(7) 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. This statement 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 if earlier
application would be feasible and what effect the adoption of SFAS No. 133
will have on the company's results of operations, cash flows or financial
position.
New European Currency: On January 1, 1999, eleven of the fifteen member
countries of the European Union are scheduled to establish fixed conversion
rates between their existing currencies and the euro, a new European
currency, and to adopt 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.
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.
Page 8 of 11
TENNANT COMPANY
Quarterly Report - Form 10-Q
PART II - OTHER INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- - ------------------------------------------------------------------------
RESULTS OF OPERATIONS
- - ---------------------
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 Nine Months Ended September 30, 1998, and is
incorporated in this Form 10-Q by reference.
ITEM 5 - Y2K PROJECT OVERVIEW
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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.
Progress status is as follows:
% Complete Estimated
as of 9/30/98 Completion
------------- ----------
Applications Systems 80% 2nd Quarter 1999
Systems Infrastructure 70% 2nd Quarter 1999
External Agents 50% 2nd Quarter 1999
Embedded Systems 60% 1st Quarter 1999
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 business systems Year 2000
compliant. European applications systems are completely installed, and the
North American Industrial systems are 60% implemented. The remaining non-SAP
business software is in the process of being upgraded to Year 2000
compliance. The North American Commercial systems remediation was completed
in September of 1998. Contingency planning for Application Systems will
commence in the fourth quarter of 1998 and will be completed by mid-year
1999. Our activity also includes assessment and remediation of nonmission
critical personal systems. Initial survey and assessment work is expected to
be completed by first quarter 1999, with repair and remediation activities
being continuous with estimated completion second quarter 1999.
Page 9 of 11
TENNANT COMPANY
Quarterly Report - Form 10-Q
PART II - OTHER INFORMATION, cont.
ITEM 5 - Y2K PROJECT OVERVIEW (cont.)
- - -----------------------------
Systems Infrastructure - The Infrastructure section consists of hardware and
system software other than Applications Software. Activity in this area is
continuous with the majority being addressed and tested in conjunction with
project and regular replacement programs. Contingency planning for this
section will commence the fourth quarter of 1998.
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 will be followed by selective follow-up
contact, and development of contingency plans will commence in the fourth
quarter of 1998, with expected completion by the end of the first quarter
1999.
Embedded Systems (Manufacturing and Facilities) - This area 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 scheduled for completion in the fourth quarter
1998. 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.
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 $16 million has been expended. Funding for Year 2000 specific
activities are estimated at $950,000 of which $400,000 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.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
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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.
Page 10 of 11
TENNANT COMPANY
Quarterly Report - Form 10-Q
PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
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(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 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 Filed herewith electronically.
Shareholders for
the Nine Months Ended
September 30, 1998
27.1 Financial Data Schedule Filed herewith electronically.
(b) Reports on Form 8-K
There were no reports filed on Form 8-K for the quarter ended September 30,
1998.
Page 11 of 11
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:
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November 12, 1998 John T. Pain
Vice President, Treasurer and
Principal Financial Officer
Date:
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November 12, 1998 Dean A. Niehus
Corporate Controller and
Principal Accounting Officer