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 March 31, 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 March 31, 1999, was 9,066,618.
Page 2 of 13
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)
Three Months
Ended March 31
-------------------------------
1999 1998
---- ----
Net sales $ 99,715 $ 88,721
Less:
Cost of sales 59,151 51,976
Selling and administrative 32,745 29,362
----------- -----------
Profit from operations 7,819 7,383
Other income (expense)
Net foreign currency loss (98) (128)
Interest income 770 1,142
Interest expense (584) (564)
Miscellaneous income (expense), net (305) 339
----------- -----------
Total other income (expense) (217) 789
----------- -----------
Earnings before income taxes 7,602 8,172
Taxes on income 2,716 2,929
----------- -----------
Net earnings $ 4,886 $ 5,243
----------- -----------
----------- -----------
Comprehensive earnings adjustment for (1,628) (674)
foreign currency translation, net of tax ----------- -----------
Comprehensive earnings $ 3,258 $ 4,569
----------- -----------
----------- -----------
PER SHARE:
Basic net earnings $ .53 $ .54
Diluted net earnings $ .53 $ .54
Dividends $ .19 $ .18
Weighted average number of shares 9,171,000 9,726,000
(basic)
Weighted average number of shares 9,212,500 9,758,000
(diluted)
Page 3 of 13
TENNANT COMPANY
Quarterly Report - Form 10-Q
ITEM 1 - FINANCIAL STATEMENTS (continued)
TENNANT COMPANY AND SUBSIDIARIES - CONSOLIDATED STATEMENTS
(Dollars in thousands)
BALANCE SHEET
(Condensed from Audited
(Unaudited) Financial Statements)
ASSETS March 31, 1999 December 31, 1998
-------------- -----------------
Cash and cash equivalents $ 8,117 $ 17,693
Receivables 85,332 81,145
Less deferred income from sales finance charges (690) (954)
Less allowance for doubtful accounts (4,107) (2,956)
----------- ------------
Net receivables 80,535 77,235
Inventories 47,108 46,162
Prepaid expenses 1,470 878
Deferred income taxes, current portion 8,911 8,900
----------- ------------
Total current assets 146,141 150,868
Property, plant, and equipment 173,906 169,515
Less allowance for depreciation (105,509) (102,875)
----------- ------------
Net property, plant, and equipment 68,397 66,640
Net noncurrent installment accounts receivable 2,185 2,843
Deferred income taxes, long-term portion 2,703 2,657
Intangible assets, net 19,580 15,631
Other assets 410 459
----------- -------------
Total assets $ 239,416 $ 239,098
----------- -------------
----------- -------------
LIABILITIES & SHAREHOLDERS' EQUITY
(Condensed from Audited
(Unaudited) Financial Statements)
LIABILITIES March 31, 1999 December 31, 1998
-------------- -----------------
Current debt $ 5,009 $ 7,302
Accounts payable 22,369 19,042
Accrued expenses 25,779 30,647
---------- ----------
Total current liabilities 53,157 56,991
Long-term debt 27,085 23,038
Long-term employee retirement-related benefits 28,677 27,802
---------- ----------
Total liabilities 108,919 107,831
SHAREHOLDERS' EQUITY
Common stock 3,406 3,421
Common stock subscribed 153 425
Unearned restricted shares (767) (307)
Retained earnings 137,632 136,730
Receivable from ESOP (9,886) (10,589)
Accumulated other comprehensive income (equity
Adjustment from foreign currency translation) (41) 1,587
---------- ----------
Total shareholders' equity 130,497 131,267
Total liabilities and shareholders' equity $ 239,416 $ 239,098
---------- ----------
---------- ----------
Page 4 of 13
TENNANT COMPANY
Quarterly Report - Form 10-Q
ITEM 1 - FINANCIAL STATEMENTS (continued)
TENNANT COMPANY AND SUBSIDIARIES - CONSOLIDATED STATEMENTS (UNAUDITED)
(Dollars in thousands)
CONDENSED STATEMENTS OF CASH FLOWS Three Months Ended March 31
----------------------------------
1999 1998
--------------- ---------------
Net cash flow provided by operating activities $ 7,451 $ 6,734
Cash flow used in investing activities:
Acquisition of property, plant, and equipment (4,724) (4,577)
Acquisition of Paul Andra KG, less cash acquired (note 7) (6,943) --
Proceeds from disposals of property, plant, and equipment 371 1,195
----------- -----------
Net cash flow used in investing activities (11,296) (3,382)
Cash flow related to financing activities:
Net changes in current debt (2,112) 599
Issuance of long-term debt 1,439 6,061
Payments to settle long-term debt (25) 5,777
Principal payment from ESOP 660 --
Proceeds from employee stock issues 456 497
Repurchase of common stock (4,177) (3,876)
Dividends paid (1,725) (1,739)
------------- ------------
Net cash flow provided by (used in) financing activities (5,484) 7,319
Effect of exchange rate changes on cash (247) 12
-------------- --------------
Net increase (decrease) in cash and cash equivalents (9,576) 10,683
Cash and cash equivalents at beginning of year 17,693 16,279
-------------- --------------
Cash and cash equivalents at end of first quarter $ 8,117 $ 26,962
-------------- --------------
-------------- --------------
Page 5 of 13
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 months ended
March 31, 1999 and 1998, as follows:
Three Months Ended March 31
----------------------------------
(In Thousands)
1999 1998
----------- -----------
Engineering, research and development $3,716 $4,451
------ ------
------ ------
Maintenance and repairs $1,371 $1,560
------ ------
------ ------
Warranty $1,386 $1,108
------ ------
------ ------
Bad debts $ 336 $ 189
------ ------
------ ------
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 March 31,
1999, and December 31, 1998, is as follows:
March 31 December 31
1999 1998
-------------- ---------------
(In Thousands)
FIFO Inventories:
Finished goods $ 34,567 $ 32,895
All other 31,338 32,162
LIFO Adjustment (18,797) (18,895)
--------- ----------
LIFO Inventories $ 47,108 $ 46,162
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Page 6 of 13
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 three months ended March 31, 1999 and 1998,
were $1,254,000 and $3,063,000, respectively. Interest costs paid during
the three months ended March 31, 1999 and 1998, were $615,000 and $555,000
respectively.
(5) Earning Per Share
(In thousands, except per share amounts)
For the Quarter Ended March 31, 1999
---------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
-------------- --------------- ------------
Basic EPS
Income available to
common shareholders $4,886 9,171 $ .53
Effect of dilutive
securities
Fixed stock options 41
Diluted EPS
Income available to
common shareholders
+ assumed conversions $4,886 9,212 $ .53
For the Quarter Ended March 31, 1998
---------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
-------------- --------------- ------------
Basic EPS
Income available to
common shareholders $5,243 9,726 $ .54
Effect of dilutive
securities
Fixed stock options 32
Diluted EPS
Income available to
common shareholders
+ assumed conversions $5,243 9,758 $ .54
Page 7 of 13
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.
(In Thousands) First quarter 1999 First quarter 1998
------------------ ------------------
Net sales
North America
Customer sales $ 72,403 $ 67,680
Transfers to Europe and other international areas 11,561 9,258
-------- --------
Total North America 83,964 76,938
Europe customer sales 18,754 14,258
Other international customer sales 8,558 6,783
Eliminations (11,561) (9,258)
-------- --------
Total $ 99,715 $ 88,721
-------- --------
-------- --------
Earnings before income taxes
North America $ 6,914 $ 6,713
Europe 926 1,292
Other international 620 799
Corporate items, interest income, interest
expense, and eliminations (858) (632)
-------- --------
Total earnings before income taxes $ 7,602 $ 8,172
-------- --------
-------- --------
Page 8 of 13
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 in first
quarter of $4 million generated a small operating loss that was in line
with expectations. These acquisitions are not expected to have a material
impact on operations.
Acquisition of Paul Andra KG:
Assets acquired $ 12,763
Liabilities assumed ( 10,371)
Goodwill 4,551
-----------
Total Cash Paid, less cash acquired $ 6,943
-----------
-----------
(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. March
1998 figures were restated to reflect a $531K 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. 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 what effect the
adoption of SFAS No. 133 will have on the Company's results of operations,
cash flows or financial position.
Page 9 of 13
TENNANT COMPANY
Quarterly Report - Form 10-Q
ITEM 1 - FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(9) (cont.)
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 to be capitalized in 1999 are approximately $1.3
million. $.7 million of this benefited first quarter with the remaining
$.6 million to be realized over the remainder of 1999.
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.
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.
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 Three Months Ended March 31, 1999, and is incorporated in
this Form 10-Q by reference.
ITEM 3 - MARKET RISK
Market risk has not changed from the market risk that existed at December 31,
1998.
Page 10 of 13
TENNANT COMPANY
Quarterly Report - Form 10-Q
PART II - OTHER INFORMATION
ITEM 5 - Y2K 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.
Progress status is as follows:
% Complete Estimated
as of 3/31/99 Completion
------------- ----------------
Applications Systems 90% 2nd Quarter 1999
Systems Infrastructure 80% 2nd Quarter 1999
External Agents 90% 2nd Quarter 1999
Embedded Systems 100% 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's business systems Year 2000 compliant.
European applications systems are completely installed, and the North American
Industrial systems are 90% implemented. The remaining non-SAP business software
is in the process of being upgraded to Year 2000 compliance and is now 90%
complete. The North American Commercial systems remediation was completed in
September of 1998. Contingency planning for Application Systems is in process
and will be completed by mid-year 1999. Our activity also includes assessment
and remediation of non-mission critical personal systems. Initial survey and
assessment work is complete with repair and remediation activities being
continuous with estimated completion second quarter, 1999.
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 evaluation is in process
and should be complete by the second quarter of 1999.
Page 11 of 13
TENNANT COMPANY
Quarterly Report - Form 10-Q
PART II - OTHER INFORMATION, cont.
ITEM 5 - Y2K PROJECT OVERVIEW (cont.)
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.
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.
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
$17 million has been expended. Funding for Year 2000 specific activities are
estimated at $950,000 of which $600,000 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 will be
addressed by conversion of systems to SAP. All other activities have been
incorporated into the existing plan. Funding for the SAP integration is
approximately $650,000. Funding for the Y2K specific activities are estimated
to be 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.
Page 12 of 13
TENNANT COMPANY
Quarterly Report - Form 10-Q
PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Item # Description Method of Filing
------ ----------- -----------------
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 Three Months Ended March 31, 1999
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 March 31, 1999.
Page 13 of 13
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: May 12, 1999 /s/ Janet Dolan
------------------------------- --------------------------------------
May 12, 1999 Janet Dolan
President and Chief Executive Officer
Date: May 12, 1999 /s/ John T. Pain
------------------------------- --------------------------------------
May 12, 1999 John T. Pain
Vice President, Treasurer and
Chief Financial Officer
Date: May 12, 1999 /s/ Dean A. Niehus
------------------------------- --------------------------------------
May 12, 1999 Dean A. Niehus
Corporate Controller and
Principal Accounting Officer