NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except shares and per share data)
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with the Securities and Exchange Commission (“SEC”) requirements for interim reporting, which allows certain footnotes and other financial information normally required by accounting principles generally accepted in the United States of America to be condensed or omitted. In our opinion, the Condensed Consolidated Financial Statements contain all adjustments (consisting of only normal recurring adjustments) necessary for the fair presentation of our financial position and results of operations.
These statements should be read in conjunction with the Consolidated Financial Statements and Notes included in our annual report on Form 10-K for the year ended
December 31, 2013
. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year.
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|
|
|
2.
|
Newly Adopted Accounting Pronouncements
|
Presentation of Unrecognized Tax Benefits
In July 2013, the Financial Accounting Standards Board (“FASB”) issued amendments to guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss or a tax credit carryforward exists. The amendments require entities to present an unrecognized tax benefit netted against certain deferred tax assets when specific requirements are met. The amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013; however, early adoption is permitted. Adoption of this guidance did not have a material impact on our results of operations or financial position.
Q4 2013 Action -
During the fourth quarter of 2013, we implemented a restructuring action to right size the cost structure in our European operations, primarily as a result of the strategic decision to adjust our Direct versus Distribution selling efforts, to enhance our go-to-market approach which is anticipated to improve profitability and increase customer satisfaction. The pre-tax charge of
$1,577
recognized in the fourth quarter consisted primarily of severance and was included within Selling and Administrative Expense in the Condensed Consolidated Statements of Earnings. We do not expect additional costs will be incurred related to this restructuring action and we believe the anticipated savings will offset the pre-tax charge in approximately
1.5
years. The charge impacted our Europe, Middle East, Africa (EMEA) operating segment, which has no goodwill balance.
A reconciliation of the beginning and ending liability balances is as follows:
|
|
|
|
|
|
|
|
|
|
|
Severance and Related Costs
|
|
Q4 2013 restructuring action
|
|
$
|
1,577
|
|
|
December 31, 2013 balance
|
|
$
|
1,577
|
|
|
2014 utilization:
|
|
|
|
Cash payments
|
|
(938
|
)
|
|
Foreign currency adjustments
|
|
(6
|
)
|
|
Change in estimate
|
|
(25
|
)
|
|
June 30, 2014 balance
|
|
$
|
608
|
|
Q1 2013 Action -
During the first quarter of 2013, we implemented a restructuring action to right size the cost structure of our European operations, primarily focused on reducing the size of our sales and service organization, in response to the challenging economic situation. The pre-tax charge of
$1,440
recognized in the first quarter consisted primarily of severance and was included within Selling and Administrative Expense in the Condensed Consolidated Statements of Earnings. We do not expect additional costs will be incurred related to this restructuring action and the anticipated savings will offset the pre-tax charge in approximately
one
year. The charge impacted our Europe, Middle East, Africa (EMEA) operating segment, which has no goodwill balance.
A reconciliation of the beginning and ending liability balances is as follows:
|
|
|
|
|
|
|
|
|
|
|
Severance and Related Costs
|
|
Q1 2013 restructuring action
|
|
$
|
1,440
|
|
|
Cash payments
|
|
(1,110
|
)
|
|
Foreign currency adjustments
|
|
17
|
|
|
December 31, 2013 balance
|
|
$
|
347
|
|
|
2014 utilization:
|
|
|
|
Cash payments
|
|
(84
|
)
|
|
Foreign currency adjustments
|
|
6
|
|
|
June 30, 2014 balance
|
|
$
|
269
|
|
|
|
|
|
4.
|
Acquisitions and Divestitures
|
Acquisitions
On
May 31, 2011
, we acquired Water Star, Inc. (“Water Star”), a Newbury, Ohio firm specializing in electrochemistry for
$4,456
. The total purchase price of
$4,456
was comprised of
$2,956
paid at closing and
two
$750
installment payments which were paid in cash on May 31, 2012 and 2013. This acquisition is consistent with our strategy to expand our intellectual property in support of our long-term vision to deliver sustainable, breakthrough innovations.
Divestitures
On
July 31, 2012
, we entered into a Share Purchase Agreement (“SPA”) with M&F Management and Financing GmbH (“M&F”) for the sale of ownership of our subsidiary, Tennant CEE GmbH, and our minority interest in a joint venture, OOO Tennant. In exchange for the ownership of these entities, we received
€815
, or
$1,014
as of the date of sale, in cash and financed the remaining
€5,351
, for a total purchase price of
€6,166
. A total of
€2,126
, or
$2,826
, was received in equal quarterly payments during 2013 and the first anniversary payment of
€1,075
, or
$1,435
, was received on July 31, 2013. The remaining
€2,150
, or
$2,943
, as of
June 30, 2014
, will be received in equal installments on the second and third anniversary dates of the divestiture. As a result of this divestiture, we recorded a pre-tax gain of
$784
during the third quarter of 2012 in our Profit from Operations in the Condensed Consolidated Statements of Earnings.
M&F is now a master distributor of Tennant products in the Central Eastern Europe, Middle East and Africa markets. In addition, as further discussed in Note 17, at the time of the transaction, M&F was a related party of ours. We have identified M&F as a variable interest entity (“VIE”) and have performed a qualitative assessment that considered M&F's purpose and design, our involvement and the risks and benefits and determined that we are not the primary beneficiary of this VIE. The only financing we have provided to M&F was related to the SPA as noted above and there are no arrangements that would require us to provide significant financial support in the future.
Inventories are valued at the lower of cost or market. Inventories at
June 30, 2014
and
December 31, 2013
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2014
|
|
December 31,
2013
|
|
Inventories carried at LIFO:
|
|
|
|
|
Finished goods
|
$
|
41,598
|
|
|
$
|
36,238
|
|
|
Raw materials, production parts and work-in-process
|
18,525
|
|
|
13,922
|
|
|
LIFO reserve
|
(27,463
|
)
|
|
(27,463
|
)
|
|
Total LIFO inventories
|
32,660
|
|
|
22,697
|
|
|
Inventories carried at FIFO:
|
|
|
|
|
|
|
Finished goods
|
32,560
|
|
|
31,489
|
|
|
Raw materials, production parts and work-in-process
|
13,814
|
|
|
12,720
|
|
|
Total FIFO inventories
|
46,374
|
|
|
44,209
|
|
|
Total inventories
|
$
|
79,034
|
|
|
$
|
66,906
|
|
The LIFO reserve approximates the difference between LIFO carrying cost and FIFO.
|
|
|
|
6.
|
Goodwill and Intangible Assets
|
The changes in the carrying value of Goodwill for the
six
months ended
June 30, 2014
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
Accumulated
Impairment
Losses
|
|
Total
|
|
Balance as of December 31, 2013
|
$
|
68,906
|
|
|
$
|
(49,977
|
)
|
|
$
|
18,929
|
|
|
Foreign currency fluctuations
|
1,679
|
|
|
(1,313
|
)
|
|
366
|
|
|
Balance as of June 30, 2014
|
$
|
70,585
|
|
|
$
|
(51,290
|
)
|
|
$
|
19,295
|
|
The balances of acquired Intangible Assets, excluding Goodwill, as of
June 30, 2014
and
December 31, 2013
were as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer Lists
|
|
Trade
Name
|
|
Technology
|
|
Total
|
|
Balance as of June 30, 2014
|
|
|
|
|
|
|
|
|
Original cost
|
$
|
24,451
|
|
|
$
|
4,807
|
|
|
$
|
7,323
|
|
|
$
|
36,581
|
|
|
Accumulated amortization
|
(12,783
|
)
|
|
(2,138
|
)
|
|
(3,524
|
)
|
|
(18,445
|
)
|
|
Carrying value
|
$
|
11,668
|
|
|
$
|
2,669
|
|
|
$
|
3,799
|
|
|
$
|
18,136
|
|
|
Weighted-average original life (in years)
|
15
|
|
|
14
|
|
|
13
|
|
|
|
|
|
Balance as of December 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
Original cost
|
$
|
23,763
|
|
|
$
|
4,836
|
|
|
$
|
7,347
|
|
|
$
|
35,946
|
|
|
Accumulated amortization
|
(11,609
|
)
|
|
(1,976
|
)
|
|
(3,333
|
)
|
|
(16,918
|
)
|
|
Carrying value
|
$
|
12,154
|
|
|
$
|
2,860
|
|
|
$
|
4,014
|
|
|
$
|
19,028
|
|
|
Weighted-average original life (in years)
|
15
|
|
|
14
|
|
|
13
|
|
|
|
|
Amortization expense on Intangible Assets for the
three and six
months ended
June 30, 2014
was
$612
and
$1,223
, respectively. Amortization expense on Intangible Assets for the
three and six
months ended
June 30, 2013
was
$637
and
$1,281
, respectively.
Estimated aggregate amortization expense based on the current carrying value of amortizable Intangible Assets for each of the five succeeding years and thereafter is as follows:
|
|
|
|
|
|
|
|
Remaining 2014
|
$
|
1,220
|
|
|
2015
|
2,231
|
|
|
2016
|
1,897
|
|
|
2017
|
1,794
|
|
|
2018
|
1,787
|
|
|
Thereafter
|
9,207
|
|
|
Total
|
$
|
18,136
|
|
Debt outstanding is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2014
|
|
December 31,
2013
|
|
Short-Term Debt:
|
|
|
|
|
Credit facility borrowings
|
$
|
—
|
|
|
$
|
1,500
|
|
|
Long-Term Debt:
|
|
|
|
|
Bank borrowings
|
4
|
|
|
9
|
|
|
Credit facility borrowings
|
28,000
|
|
|
30,000
|
|
|
Collateralized borrowings
|
10
|
|
|
11
|
|
|
Capital lease obligations
|
198
|
|
|
283
|
|
|
Total Debt
|
28,212
|
|
|
31,803
|
|
|
Less: Current Portion
|
(3,640
|
)
|
|
(3,803
|
)
|
|
Long-Term Portion
|
$
|
24,572
|
|
|
$
|
28,000
|
|
As of
June 30, 2014
, we had committed lines of credit totaling
$125,000
and uncommitted lines of credit totaling
$87,738
. There was
$10,000
in outstanding borrowings under our JPMorgan facility (described below) and
$18,000
in outstanding borrowings under our Prudential facility (described below) as of
June 30, 2014
. In addition, we had stand alone letters of credit of
$2,460
outstanding and bank guarantees in the amount of
$341
. Commitment fees on unused lines of credit for the
six
months ended
June 30, 2014
were
$158
.
Our most restrictive covenants are part of our 2011 Credit Agreement with JPMorgan (as defined below), which are the same covenants in the Shelf Agreement (as defined below) with Prudential (as defined below), and require us to maintain an indebtedness to EBITDA ratio of not greater than
3.00 to 1
and to maintain an EBITDA to interest expense ratio of no less than
3.50 to 1
as of the end of each quarter. As of
June 30, 2014
, our indebtedness to EBITDA ratio was
0.36 to 1
and our EBITDA to interest expense ratio was
49.02 to 1
.
Credit Facilities
JPMorgan Chase Bank, National Association
Details regarding our Credit Agreement, dated as of May 5, 2011 and amended on April 25, 2013, with JPMorgan Chase Bank, N. A. (“JPMorgan”), as administrative agent and collateral agent, U.S. Bank National Association, as syndication agent, Wells Fargo Bank, National Association, and RBS Citizens, N.A., as co-documentation agents, and the Lenders (including JPMorgan) from time to time party thereto (the “2011 Credit Agreement”) are described in Note 8 of the 2013 annual report on Form 10-K.
As of
June 30, 2014
, we were in compliance with all covenants under this credit agreement. There was
$10,000
in outstanding borrowings under this facility at
June 30, 2014
, with a weighted average interest rate of
1.46%
. This facility, under the current terms of the 2011 Credit Agreement, expires on
March 1, 2018
.
Prudential Investment Management, Inc.
Details regarding our Private Shelf Agreement, dated as of July 29, 2009, and amended on May 5, 2011 and July 24, 2012 with Prudential Investment Management, Inc. (“Prudential”) and Prudential affiliates from time to time party thereto (the “Shelf Agreement”) are described in Note 8 of the 2013 annual report on Form 10-K.
As of
June 30, 2014
, there was
$18,000
in outstanding borrowings under this facility, consisting of the
$8,000
Series A notes issued in March 2011 with a fixed interest rate of
4.00%
and a
7
year term serially maturing from
2014
to
2018
and the
$10,000
Series B notes issued in June 2011 with a fixed interest rate of
4.10%
and a
10
year term serially maturing from
2015
to
2021
. The first payment of
$2,000
on Series A notes was made during the first quarter of 2014. We were in compliance with all covenants under this private shelf agreement as of
June 30, 2014
. The issuance period, under the current terms of the Shelf Agreement, expires on
July 24, 2015
.
The Royal Bank of Scotland Citizens, N.A.
On
September 14, 2010
, we entered into an overdraft facility with The Royal Bank of Scotland Citizens, N.A. in the amount of
€2,000
, or approximately
$2,738
. There was
no
balance outstanding on this facility as of
June 30, 2014
.
HSBC Bank (China) Company Limited, Shanghai Branch
On June 20, 2012, we entered into a banking facility with the HSBC Bank (China) Company Limited, Shanghai Branch in the amount of
$5,000
. During the first quarter of 2014, we repaid previous borrowings under this facility amounting to
$1,500
and as of
June 30, 2014
, there were
no
outstanding borrowings on this facility.
We record a liability for warranty claims at the time of sale. The amount of the liability is based on the trend in the historical ratio of claims to sales, the historical length of time between the sale and resulting warranty claim, new product introductions and other factors. Warranty terms on machines generally range from
one
to
four
years; however, the majority of our claims are paid out within the first
six
to
nine
months following a sale.
The changes in warranty reserves for the
six
months ended
June 30, 2014
and
2013
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
June 30
|
|
|
2014
|
|
2013
|
|
Beginning balance
|
$
|
9,663
|
|
|
$
|
9,357
|
|
|
Additions charged to expense
|
5,127
|
|
|
5,578
|
|
|
Foreign currency fluctuations
|
33
|
|
|
(132
|
)
|
|
Claims paid
|
(4,916
|
)
|
|
(5,055
|
)
|
|
Ending balance
|
$
|
9,907
|
|
|
$
|
9,748
|
|
|
|
|
|
9.
|
Fair Value Measurements
|
Estimates of fair value for financial assets and financial liabilities are based on the framework established in the accounting guidance for fair value measurements. The framework defines fair value, provides guidance for measuring fair value and requires certain disclosures. The framework discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow) and the cost approach (cost to replace the service capacity of an asset or replacement cost). The framework utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:
|
|
|
|
•
|
Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
|
|
|
|
|
•
|
Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
|
|
|
|
|
•
|
Level 3: Unobservable inputs that reflect the reporting entity’s own assumptions.
|
Our population of assets and liabilities subject to fair value measurements at
June 30, 2014
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Assets:
|
|
|
|
|
|
|
|
|
Foreign currency forward exchange contracts
|
$
|
18
|
|
|
$
|
—
|
|
|
$
|
18
|
|
|
$
|
—
|
|
|
Total Assets
|
$
|
18
|
|
|
$
|
—
|
|
|
$
|
18
|
|
|
$
|
—
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward exchange contracts
|
$
|
138
|
|
|
$
|
—
|
|
|
$
|
138
|
|
|
$
|
—
|
|
|
Total Liabilities
|
$
|
138
|
|
|
$
|
—
|
|
|
$
|
138
|
|
|
$
|
—
|
|
Our foreign currency forward exchange contracts are valued based on quoted forward foreign exchange prices at the reporting date.
We use derivative instruments to manage exposures to foreign currency only in an attempt to limit underlying exposures from currency fluctuations and not for trading purposes. Gains or losses on forward foreign exchange contracts that hedge foreign currency-denominated assets and liabilities are recognized in Other Current Assets and Other Current Liabilities within the Condensed Consolidated Balance Sheets and are recognized in Other Income (Expense), Net under Net Foreign Currency Transaction Gains (Losses) within the Condensed Consolidated Statements of Earnings. As of
June 30, 2014
, the fair value of such contracts outstanding was an asset of
$18
and a liability of
$138
. As of
December 31, 2013
, the fair value of such contracts outstanding was an asset of
$16
and a liability of
$109
. At
June 30, 2014
and
December 31, 2013
, the notional amounts of foreign currency forward exchange contracts outstanding were
$39,068
and
$30,280
, respectively. We recognized a net loss of
$902
and a net gain of
$901
on such contracts during the first
six
months of
2014
and
2013
, respectively.
The carrying amounts reported in the Condensed Consolidated Balance Sheets for Cash and Cash Equivalents, Accounts Receivable, Other Current Assets, Accounts Payable and Other Current Liabilities approximate fair value.
The fair value of our Long-Term Debt approximates cost based on the borrowing rates currently available to us for bank loans with similar terms and remaining maturities.
|
|
|
|
10.
|
Retirement Benefit Plans
|
Our defined benefit pension plans and postretirement medical plan are described in Note 11 of the
2013
annual report on Form 10-K. We have contributed
$73
and
$278
during the
second
quarter of
2014
and
$252
and
$542
during the first
six
months of
2014
to our pension plans and to our postretirement medical plan, respectively.
The components of the net periodic benefit cost for the
three and six
months ended
June 30, 2014
and
2013
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
June 30
|
|
|
|
Pension Benefits
|
|
Postretirement
|
|
|
|
U.S. Plans
|
|
Non-U.S. Plans
|
|
Medical Benefits
|
|
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
|
Service cost
|
|
$
|
123
|
|
|
$
|
216
|
|
|
$
|
38
|
|
|
$
|
33
|
|
|
$
|
32
|
|
|
$
|
38
|
|
|
Interest cost
|
|
488
|
|
|
563
|
|
|
134
|
|
|
121
|
|
|
118
|
|
|
110
|
|
|
Expected return on plan assets
|
|
(672
|
)
|
|
(910
|
)
|
|
(131
|
)
|
|
(115
|
)
|
|
—
|
|
|
—
|
|
|
Amortization of net actuarial loss (gain)
|
|
30
|
|
|
1,073
|
|
|
—
|
|
|
—
|
|
|
(11
|
)
|
|
127
|
|
|
Amortization of prior service cost (benefit)
|
|
10
|
|
|
(503
|
)
|
|
47
|
|
|
80
|
|
|
(1
|
)
|
|
(102
|
)
|
|
Foreign currency
|
|
—
|
|
|
—
|
|
|
(2
|
)
|
|
(13
|
)
|
|
—
|
|
|
—
|
|
|
Net periodic (benefit) cost
|
|
$
|
(21
|
)
|
|
$
|
439
|
|
|
$
|
86
|
|
|
$
|
106
|
|
|
$
|
138
|
|
|
$
|
173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
June 30
|
|
|
|
Pension Benefits
|
|
Postretirement
|
|
|
|
U.S. Plans
|
|
Non-U.S. Plans
|
|
Medical Benefits
|
|
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
|
Service cost
|
|
$
|
247
|
|
|
$
|
432
|
|
|
$
|
76
|
|
|
$
|
66
|
|
|
$
|
64
|
|
|
$
|
76
|
|
|
Interest cost
|
|
982
|
|
|
1,131
|
|
|
266
|
|
|
243
|
|
|
249
|
|
|
222
|
|
|
Expected return on plan assets
|
|
(1,342
|
)
|
|
(1,820
|
)
|
|
(260
|
)
|
|
(231
|
)
|
|
—
|
|
|
—
|
|
|
Amortization of net actuarial loss
|
|
74
|
|
|
1,096
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
101
|
|
|
Amortization of prior service cost (benefit)
|
|
21
|
|
|
46
|
|
|
93
|
|
|
161
|
|
|
(3
|
)
|
|
(52
|
)
|
|
Foreign currency
|
|
—
|
|
|
—
|
|
|
16
|
|
|
29
|
|
|
—
|
|
|
—
|
|
|
Net periodic (benefit) cost
|
|
$
|
(18
|
)
|
|
$
|
885
|
|
|
$
|
191
|
|
|
$
|
268
|
|
|
$
|
310
|
|
|
$
|
347
|
|
|
|
|
|
11.
|
Commitments and Contingencies
|
Certain operating leases for vehicles contain residual value guarantee provisions, which would become due at the expiration of the operating lease agreement if the fair value of the leased vehicles is less than the guaranteed residual value. As of
June 30, 2014
, of those leases that contain residual value guarantees, the aggregate residual value at lease expiration was
$12,055
, of which we have guaranteed
$9,799
. As of
June 30, 2014
, we have recorded a liability for the estimated end of term loss related to this residual value guarantee of
$194
for certain vehicles within our fleet. Our fleet also contains vehicles we estimate will settle at a gain. Gains on these vehicles will be recognized at the end of the lease term.
During the second quarter of 2014, we entered into a
three year
software licensing agreement with a total commitment of
$1,198
.
During the second quarter of 2012, we entered into a
three year
agreement with a supplier, commencing
January 1, 2013
, with a total commitment of
$2,102
of which
$1,054
is still outstanding as of
June 30, 2014
.
|
|
|
|
12.
|
Accumulated Other Comprehensive Loss
|
Components of Accumulated Other Comprehensive Loss, net of tax, within the Condensed Consolidated Balance Sheets, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2014
|
|
December 31, 2013
|
|
Foreign currency translation adjustments
|
$
|
(20,127
|
)
|
|
$
|
(21,991
|
)
|
|
Pension and retiree medical benefits
|
(2,922
|
)
|
|
(2,980
|
)
|
|
Total Accumulated Other Comprehensive Loss
|
$
|
(23,049
|
)
|
|
$
|
(24,971
|
)
|
The changes in components of Accumulated Other Comprehensive Loss, net of tax, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Translation Adjustments
|
|
Pension and Post Retirement Benefits
|
|
Total
|
|
December 31, 2013
|
$
|
(21,991
|
)
|
|
$
|
(2,980
|
)
|
|
$
|
(24,971
|
)
|
|
Other comprehensive income before reclassifications
|
1,864
|
|
|
—
|
|
|
1,864
|
|
|
Amounts reclassified from Accumulated Other Comprehensive Loss
|
—
|
|
|
58
|
|
|
58
|
|
|
Net current period other comprehensive income
|
1,864
|
|
|
58
|
|
|
1,922
|
|
|
June 30, 2014
|
$
|
(20,127
|
)
|
|
$
|
(2,922
|
)
|
|
$
|
(23,049
|
)
|
We and our subsidiaries are subject to U.S. federal income tax as well as income tax of numerous state and foreign jurisdictions. We are generally no longer subject to U.S. federal tax examinations for taxable years before
2011
and, with limited exceptions, state and foreign income tax examinations for taxable years before
2007
.
We recognize potential accrued interest and penalties related to unrecognized tax benefits in Income Tax Expense. In addition to the liability of
$3,931
for unrecognized tax benefits as of
June 30, 2014
, there was approximately
$617
for accrued interest and penalties. The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate as of
June 30, 2014
was
$3,623
. To the extent interest and penalties are not assessed with respect to uncertain tax positions, amounts accrued will be revised and reflected as an adjustment of the Income Tax Expense.
Unrecognized tax benefits were reduced by
$21
during the first
six
months of
2014
for expiration of the statute of limitations in various jurisdictions.
We are currently undergoing income tax examinations in various state and foreign jurisdictions covering 2007 to 2011 for which settlement is expected prior to year end. Although the final outcome of these examinations cannot be currently determined, we believe that we have adequate reserves with respect to these examinations.
|
|
|
|
14.
|
Share-Based Compensation
|
Our share-based compensation plans are described in Note 15 of the
2013
annual report on Form 10-K. During the three months ended
June 30, 2014
and
2013
we recognized total Share-Based Compensation Expense of
$2,216
and
$1,732
, respectively. During the
six
months ended
June 30, 2014
and
2013
we recognized total Share-Based Compensation Expense of
$3,756
and
$3,439
, respectively. The total excess tax benefit recognized for share-based compensation arrangements during the
six
months ended
June 30, 2014
and
2013
was
$1,329
and
$1,506
, respectively.
During the first
six
months of
2014
, we granted
20,278
restricted shares. The weighted average grant date fair value of each share awarded was
$61.77
. Restricted share awards generally have a
3
year vesting period from the effective date of the grant. The total fair value of shares vested during the
six
months ended
June 30, 2014
and
2013
was
$827
and
$538
, respectively.
The computations of Basic and Diluted Earnings per Share were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 30
|
|
June 30
|
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net Earnings
|
$
|
15,523
|
|
|
$
|
14,254
|
|
|
$
|
21,318
|
|
|
$
|
19,313
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Basic - Weighted Average Shares Outstanding
|
18,167,054
|
|
|
18,253,326
|
|
|
18,242,240
|
|
|
18,298,379
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
Share-based compensation plans
|
508,553
|
|
|
534,554
|
|
|
534,129
|
|
|
537,163
|
|
|
Diluted - Weighted Average Shares Outstanding
|
18,675,607
|
|
|
18,787,880
|
|
|
18,776,369
|
|
|
18,835,542
|
|
|
Basic Earnings per Share
|
$
|
0.85
|
|
|
$
|
0.78
|
|
|
$
|
1.17
|
|
|
$
|
1.06
|
|
|
Diluted Earnings per Share
|
$
|
0.83
|
|
|
$
|
0.76
|
|
|
$
|
1.14
|
|
|
$
|
1.03
|
|
Excluded from the dilutive securities shown above were options to purchase
154,897
and
278,862
shares of Common Stock during the three months ended
June 30, 2014
and
2013
, respectively. Excluded from the dilutive securities shown above were options to purchase
155,497
and
270,433
shares of Common Stock during the
six
months ended
June 30, 2014
and
2013
, respectively. These exclusions were made as the effects were anti-dilutive.
We are organized into
four
operating segments: North America; Latin America; Europe, Middle East and Africa; and Asia Pacific. We combine our North America and Latin America operating segments into the “Americas” for reporting Net Sales by geographic area. In accordance with the objective and basic principles of the applicable accounting guidance, we aggregate our operating segments into
one
reportable segment that consists of the design, manufacture and sale of products used primarily in the maintenance of nonresidential surfaces.
Net Sales attributed to each geographic area for the
three and six
months ended
June 30, 2014
and
2013
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 30
|
|
June 30
|
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
|
Americas
|
$
|
153,698
|
|
|
$
|
139,593
|
|
|
$
|
276,087
|
|
|
$
|
252,840
|
|
|
Europe, Middle East and Africa
|
41,273
|
|
|
39,838
|
|
|
84,336
|
|
|
79,029
|
|
|
Asia Pacific
|
24,113
|
|
|
20,807
|
|
|
42,640
|
|
|
36,461
|
|
|
Total
|
$
|
219,084
|
|
|
$
|
200,238
|
|
|
$
|
403,063
|
|
|
$
|
368,330
|
|
Net Sales are attributed to each geographic area based on the country from which the product was shipped and are net of intercompany sales.
|
|
|
|
17.
|
Related Party Transactions
|
On July 31, 2012, we entered into a share purchase agreement with M&F, as further discussed in Note 4. Two of the M&F shareholders are individuals who were employed by Tennant prior to the transaction date and were no longer employed by Tennant as of the transaction date.
Our
May 31, 2011
acquisition of Water Star includes installment payments totaling
$1,500
, all of which have been paid to the former owners of Water Star, as further discussed in Note 4. As of
September 30, 2013
, the former owners of Water Star were no longer employees of Tennant.
During the first quarter of
2008
, we acquired Sociedade Alfa Ltda. and entered into lease agreements for certain properties owned by or partially owned by the former owners of this entity. Some of these individuals are current employees of Tennant. Lease payments made under these lease agreements are not material to our financial position or results of operations.
|
|
|
|
Item 2.
|
Management's Discussion and Analysis of Financial Condition and Results of Operations
|
Overview
Tennant Company is a world leader in designing, manufacturing and marketing solutions that help create a cleaner, safer, healthier world. Our products include equipment for maintaining surfaces in industrial, commercial and outdoor environments; chemical-free and other sustainable cleaning technologies; and coatings for protecting, repairing and upgrading floors and other surfaces. We sell our products through our direct sales and service organization and a network of authorized distributors worldwide. Geographically, our customers are located in North America, Latin America, Europe, the Middle East, Africa and Asia Pacific. We strive to be an innovator in our industry through our commitment to understanding our customers’ needs and using our expertise to create innovative products and solutions.
Net Earnings for the
second
quarter of
2014
were
$15.5 million
, or
$0.83
per diluted share, as compared to Net Earnings of
$14.3 million
, or
$0.76
per diluted share, in the
second
quarter of
2013
. Operating Profit for the
second
quarter of 2014 was $23.1 million, or 10.6% of Net Sales, as compared to Operating Profit of $21.6 million, or 10.8% of Net Sales, in the second quarter of 2013. Operating Profit during the second quarter of 2014 was favorably impacted by higher Net Sales and lower Research and Development (“R&D”) Expense, somewhat offset by higher Selling and Administrative (“S&A”) Expense.
Net Earnings for the first
six
months of
2014
were
$21.3 million
, or
$1.14
per diluted share, as compared to Net Earnings of
$19.3 million
, or
$1.03
per diluted share, in the first
six
months of
2013
. Operating Profit for the first
six
months of
2014
was $32.4 million, or 8.0% of Net Sales, as compared to Operating Profit of $28.5 million, or 7.7% of Net Sales, in the first six months of 2013. Operating Profit during the first six months of 2014 was favorably impacted by higher Net Sales, somewhat offset by higher S&A Expense.
Net Earnings for the second quarter of 2013 were $1
4.3 million, or $0.76 per diluted share, as compared to Net Earnings of $13.7 million, or $0.71 per diluted share, in the second quarter of 2012. Net Earnings during the second quarter of 2013 were favorably impacted by higher Net Sales and lower S&A Expense due to continued tight cost controls and improved operating efficiencies, somewhat offset by increased R&D Expense.
Net Earnings for the first six months of 2013 were $19.3 million, or $1.03 per diluted share, as compared to Net Earnings of $19.0 million, or $0.99 per diluted share, in the first six months of 2012. Net Earnings during the first six months of 2013 were favorably impacted by a tax benefit of $0.6 million related to the 2012 R&D tax credit which was retrospectively enacted in January of 2013. Included in the lower S&A Expense in the first six months of 2013 was a restructuring charge, described in Note 3, of $1.4 million, or 40 basis points as a percent of sales.
Historical Results
The following table compares the historical results of operations for the
three and six
months ended
June 30, 2014
and
2013
, respectively, and as a percentage of Net Sales (in thousands, except per share data and percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 30
|
|
June 30
|
|
|
2014
|
|
%
|
|
2013
|
|
%
|
|
2014
|
|
%
|
|
2013
|
|
%
|
|
Net Sales
|
$
|
219,084
|
|
|
100.0
|
|
|
$
|
200,238
|
|
|
100.0
|
|
|
$
|
403,063
|
|
|
100.0
|
|
|
$
|
368,330
|
|
|
100.0
|
|
|
Cost of Sales
|
123,821
|
|
|
56.5
|
|
|
112,497
|
|
|
56.2
|
|
|
230,883
|
|
|
57.3
|
|
|
208,066
|
|
|
56.5
|
|
|
Gross Profit
|
95,263
|
|
|
43.5
|
|
|
87,741
|
|
|
43.8
|
|
|
172,180
|
|
|
42.7
|
|
|
160,264
|
|
|
43.5
|
|
|
Operating Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and Development Expense
|
7,651
|
|
|
3.5
|
|
|
7,821
|
|
|
3.9
|
|
|
15,132
|
|
|
3.8
|
|
|
15,339
|
|
|
4.2
|
|
|
Selling and Administrative Expense
|
64,471
|
|
|
29.4
|
|
|
58,298
|
|
|
29.1
|
|
|
124,670
|
|
|
30.9
|
|
|
116,420
|
|
|
31.6
|
|
|
Total Operating Expense
|
72,122
|
|
|
32.9
|
|
|
66,119
|
|
|
33.0
|
|
|
139,802
|
|
|
34.7
|
|
|
131,759
|
|
|
35.8
|
|
|
Profit from Operations
|
23,141
|
|
|
10.6
|
|
|
21,622
|
|
|
10.8
|
|
|
32,378
|
|
|
8.0
|
|
|
28,505
|
|
|
7.7
|
|
|
Other Income (Expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Income
|
95
|
|
|
—
|
|
|
114
|
|
|
0.1
|
|
|
170
|
|
|
—
|
|
|
228
|
|
|
0.1
|
|
|
Interest Expense
|
(419
|
)
|
|
(0.2
|
)
|
|
(411
|
)
|
|
(0.2
|
)
|
|
(905
|
)
|
|
(0.2
|
)
|
|
(878
|
)
|
|
(0.2
|
)
|
|
Net Foreign Currency Transaction Gains (Losses)
|
328
|
|
|
0.1
|
|
|
(419
|
)
|
|
(0.2
|
)
|
|
120
|
|
|
—
|
|
|
(743
|
)
|
|
(0.2
|
)
|
|
Other Expense, Net
|
(89
|
)
|
|
—
|
|
|
(87
|
)
|
|
—
|
|
|
(120
|
)
|
|
—
|
|
|
(81
|
)
|
|
—
|
|
|
Total Other Expense, Net
|
(85
|
)
|
|
—
|
|
|
(803
|
)
|
|
(0.4
|
)
|
|
(735
|
)
|
|
(0.2
|
)
|
|
(1,474
|
)
|
|
(0.4
|
)
|
|
Profit Before Income Taxes
|
23,056
|
|
|
10.5
|
|
|
20,819
|
|
|
10.4
|
|
|
31,643
|
|
|
7.9
|
|
|
27,031
|
|
|
7.3
|
|
|
Income Tax Expense
|
7,533
|
|
|
3.4
|
|
|
6,565
|
|
|
3.3
|
|
|
10,325
|
|
|
2.6
|
|
|
7,718
|
|
|
2.1
|
|
|
Net Earnings
|
$
|
15,523
|
|
|
7.1
|
|
|
$
|
14,254
|
|
|
7.1
|
|
|
$
|
21,318
|
|
|
5.3
|
|
|
$
|
19,313
|
|
|
5.2
|
|
|
Earnings per Diluted Share
|
$
|
0.83
|
|
|
|
|
$
|
0.76
|
|
|
|
|
|
$
|
1.14
|
|
|
|
|
|
$
|
1.03
|
|
|
|
Net Sales
Consolidated Net Sales for the
second
quarter of
2014
totaled
$219.1
million, a
9.4%
increase as compared to consolidated Net Sales of
$200.2
million in the
second
quarter of
2013
.
The components of the consolidated Net Sales change for the
three and six
months ended
June 30, 2014
as compared to the same period in
2013
were as follows:
|
|
|
|
|
|
|
|
|
2014 v. 2013
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 30
|
|
June 30
|
|
Organic Growth:
|
|
|
|
|
Volume
|
7.9%
|
|
9.4%
|
|
Price
|
1.0%
|
|
0.5%
|
|
Organic Growth
|
8.9%
|
|
9.9%
|
|
Foreign Currency
|
0.5%
|
|
(0.5%)
|
|
Total
|
9.4%
|
|
9.4%
|
The
9.4%
increase in consolidated Net Sales in the
second
quarter of
2014
as compared to the same period in
2013
was driven by:
|
|
|
|
•
|
An organic sales increase of approximately
8.9%
, which excludes the effects of foreign currency exchange (and acquisitions when applicable), due to an approximate
7.9%
volume increase and a
1.0%
price increase. The volume increase was primarily due to strong sales through the direct selling channel, demand for new products such as the T12 rider scrubber, and gains in commercial, industrial and outdoor equipment. Sales of new products introduced since the 2012 fourth quarter were 10% of equipment sales in the second quarter of 2014. The price increase was the result of selling list price increases, typically in the range of 2 percent to 4 percent in most geographies, with an effective date of March 1, 2014. We expect the increase in selling prices to increase Net Sales in the range of 1 percent to 2 percent for the 2014 full year. The impact to gross margin is estimated to be minimal as these selling price increases were taken to offset inflation.
|
|
|
|
|
•
|
A favorable direct foreign currency exchange impact of approximately
0.5%
.
|
The
9.4%
increase in consolidated Net Sales in the first
six
months of
2014
as compared to the same period in
2013
was driven by:
|
|
|
|
•
|
An organic sales increase of approximately
9.9%
, which excludes the effects of foreign currency exchange (and acquisitions when applicable), due to an approximate
9.4%
volume increase and a
0.5%
price increase. The volume increase was primarily due to strong sales to strategic accounts, direct and distribution selling channels, demand for new products such as the T12 rider scrubber, and gains in commercial, industrial and outdoor equipment. Sales of new products introduced since the 2012 fourth quarter were 9% of equipment sales in the first six months of 2014. The price increase was the result of selling list price increases, typically in the range of 2 percent to 4 percent in most geographies, with an effective date of March 1, 2014. We expect the increase in selling prices to increase Net Sales in the range of 1 percent to 2 percent for the 2014 full year. The impact to gross margin is estimated to be minimal as these selling price increases were taken to offset inflation.
|
|
|
|
|
•
|
An unfavorable direct foreign currency exchange impact of approximately
0.5%
.
|
The following table sets forth the Net Sales by geographic area for the
three and six
months ended
June 30, 2014
and
2013
and the percentage change from the prior year (in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
June 30
|
|
June 30
|
|
|
|
2014
|
|
2013
|
|
%
|
|
2014
|
|
2013
|
|
%
|
|
Americas
|
|
$
|
153,698
|
|
|
$
|
139,593
|
|
|
10.1
|
|
$
|
276,087
|
|
|
$
|
252,840
|
|
|
9.2
|
|
Europe, Middle East and Africa
|
|
41,273
|
|
|
39,838
|
|
|
3.6
|
|
84,336
|
|
|
79,029
|
|
|
6.7
|
|
Asia Pacific
|
|
24,113
|
|
|
20,807
|
|
|
15.9
|
|
42,640
|
|
|
36,461
|
|
|
16.9
|
|
Total
|
|
$
|
219,084
|
|
|
$
|
200,238
|
|
|
9.4
|
|
$
|
403,063
|
|
|
$
|
368,330
|
|
|
9.4
|
Americas
Net Sales in the Americas were
$153.7 million
and
$276.1 million
for the
second
quarter and first
six
months of
2014
, an increase of
10.1%
and
9.2%
, respectively, from the
second
quarter and first
six
months of
2013
. Organic sales in the
second
quarter and first
six
months of 2014 were favorably impacted by higher sales of sweepers and scrubbers in North America, including scrubbers equipped with ec-H2O™ technology. The direct impact of foreign currency translation exchange effects within the Americas unfavorably impacted Net Sales by approximately 1.0% during the second quarter and 1.5% during the first six months of
2014
. Organic sales increased approximately 11.1% in the second quarter and 10.7% in the first six months of
2014
.
Europe, Middle East and Africa
In our markets within Europe, the Middle East and Africa (“EMEA”), Net Sales increased
3.6%
and
6.7%
to
$41.3 million
and
$84.3 million
, respectively for the
second
quarter and first
six
months of
2014
, compared to the
second
quarter and first
six
months of
2013
. Organic sales decreased approximately 1.9% in the
second
quarter primarily due to timing of orders; some of the orders expected in June 2014 were received in July 2014. Organic sales increased approximately 1.7% in the first
six
months of
2014
. There was a favorable foreign currency exchange impact on Net Sales during the
second
quarter and first
six
months of
2014
of approximately 5.5% and 5.0%, respectively. EMEA organic sales in the first
six
months of
2014
were favorably impacted by higher sales of outdoor equipment.
Asia Pacific
Net Sales in the Asia Pacific market for the
second
quarter and first
six
months of
2014
totaled
$24.1 million
and
$42.6 million
, respectively, an increase of
15.9%
and
16.9%
from the
second
quarter and first
six
months of
2013
. Organic sales increased approximately 18.9% in the
second
quarter and 21.9% in the first
six
months of
2014
due to broad based growth throughout the region including continued strong sales performance in China. Direct foreign currency translation exchange effects unfavorably impacted sales by approximately 3.0% and 5.0% in the
second
quarter and first
six
months of
2014
, respectively.
Gross Profit
Gross profit in the
second
quarter of
2014
was
$95.3 million
, or
43.5%
of Net Sales, as compared to
$87.7 million
, or
43.8%
of Net Sales, in the
second
quarter of
2013
. Gross profit dollars increased
8.6%
versus the prior year period due to the higher Net Sales in the second quarter of 2014. Gross margin was
30
basis points lower versus the prior year period primarily due to costs related to hiring and training additional manufacturing employees to support the higher levels of production.
Gross profit in the first
six
months of
2014
was
$172.2 million
, or
42.7%
of Net Sales, as compared to
$160.3 million
, or
43.5%
of Net Sales, in the first
six
months of
2013
. Gross profit dollars increased
7.4%
versus the prior year period due to the higher Net Sales in the first
six
months of
2014
. Gross margin was
80
basis points lower versus the prior year period primarily due to strong sales through distribution and sales to strategic accounts that tend to have lower gross margins and costs related to hiring and training additional manufacturing employees to support the higher levels of production.
Operating Expense
Research & Development Expense
R&D Expense in the
second
quarter of
2014
decreased by
2.2%
to
$7.7
million as compared with
$7.8
million in the
second
quarter of
2013
. R&D Expense as a percentage of Net Sales was
3.5%
for the
second
quarter of
2014
, a decrease of
40
basis points as compared to
3.9%
in the
second
quarter of
2013
.
R&D Expense for the first
six
months of
2014
was
$15.1 million
, a decrease of
1.3%
from
$15.3 million
in the same period in
2013
. R&D Expense as a percentage of Net Sales was
3.8%
for the first
six
months of
2014
as compared to
4.2%
for the first
six
months of
2013
.
The company continued to invest in developing innovative new products for its traditional core business, as well as in its Orbio Technologies Group, which is focused on advancing a suite of sustainable cleaning technologies. New products are a key driver of sales growth. Nine new products were launched in the first half of 2014, including a line of walk-behind burnishers and a mid-size battery-powered rider scrubber. There are plans to introduce an additional seven new products in the second half of the year.
Selling & Administrative Expense
S&A Expense in the
second
quarter of
2014
was
$64.5
million, as compared to
$58.3
million in the
second
quarter of
2013
. S&A Expense as a percentage of Net Sales was
29.4%
for the
second
quarter of
2014
, an increase of
30
basis points from
29.1%
in the comparable
2013
quarter.
For the
six
months ended
June 30, 2014
, S&A Expense increased to
$124.7 million
from
$116.4 million
in the comparable period last year. S&A Expense as a percentage of Net Sales was
30.9%
for the first half of
2014
versus
31.6%
in the comparable period last year. Included in S&A Expense in the first
six
months of
2013
was the first quarter 2013 restructuring charge, described in Note 3, of $1.4 million, or 40 basis points as a percent of sales.
The increase in S&A Expense in the
second
quarter and first
six
months of
2014
as compared to the same periods in the prior year was due to investments in direct sales, distribution and marketing to build organic sales. Continued cost controls and improved operating efficiencies favorably impacted S&A Expense in the first six months of 2014.
Other Income (Expense), Net
Interest Income
There was no significant change in Interest Income in the
second
quarter and first
six
months of
2014
as compared to the same periods in
2013
.
Interest Expense
There was no significant change in Interest Expense in the
second
quarter and first
six
months of
2014
as compared to the same periods in
2013
.
Net Foreign Currency Transaction Gains (Losses)
Net Foreign Currency Transaction Gains in the
second
quarter and first
six
months of
2014
were
$0.3 million
and
$0.1 million
, respectively, as compared to Net Foreign Currency Transaction Losses of
$0.4
million and
$0.7 million
in the same periods in the prior year. The favorable change in the impact from foreign currency transactions in
2014
was due to fluctuations in foreign currency rates and settlement of transactional hedging activity in the normal course of business.
Other (Expense) Income, Net
There was no significant change in Other (Expense) Income, Net in the
second
quarter and first
six
months of
2014
as compared to the same periods in
2013
.
Income Taxes
The effective tax rate in the second quarter of 2014 was 32.7% compared to the effective rate in the second quarter of the prior year of 31.5%.
The year-to-date overall effective rate was 32.6% for 2014 compared to 28.6% for 2013. The tax expense for the first half of 2013 included a $0.4 million tax benefit associated with a $1.4 million expense related to a European restructuring reserve. The tax expense for the first half of 2013 also included a discrete tax benefit of $0.6 million for the enactment of the Federal R&D tax credit retroactively impacting the tax year ended December 31, 2012. Excluding these benefits, the 2013 year-to-date overall effective tax rate would have been 30.6%.
The increase in the overall year-to-date effective tax rate, excluding these special items, was primarily related to the mix in expected full year taxable earnings by country and changes related to the Federal R&D tax credits. The 2014 second quarter and first half year-to-date tax rate did not include any benefit for Federal R&D tax credits as we are not allowed to consider these credits in our tax rate until they are formally reenacted.
We do not have any plans to repatriate the undistributed earnings of non-U.S. subsidiaries. Any repatriation from foreign subsidiaries that would result in incremental U.S. taxation is not being considered. It is management's belief that reinvesting these earnings outside the U.S. is the most efficient use of capital.
Liquidity and Capital Resources
Liquidity
Cash and Cash Equivalents totaled
$62.6
million at
June 30, 2014
, as compared to
$81.0
million as of
December 31, 2013
. Wherever possible, cash management is centralized and intercompany financing is used to provide working capital to subsidiaries as needed. Our current ratio was
2.4
as of
June 30, 2014
and
2.4
as of
December 31, 2013
, and our working capital was
$185.4
million and
$183.8
million, respectively. Our debt-to-capital ratio was
9.5%
and
10.8%
at
June 30, 2014
and
December 31, 2013
, respectively.
Cash Flow Summary
Cash provided by (used for) our operating, investing and financing activities is summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
June 30
|
|
|
2014
|
|
2013
|
|
Operating Activities
|
$
|
10,508
|
|
|
$
|
15,224
|
|
|
Investing Activities:
|
|
|
|
|
Purchases of Property, Plant and Equipment, Net of Disposals
|
(7,293
|
)
|
|
(7,132
|
)
|
|
Acquisition of Business, Net of Cash Acquired
|
—
|
|
|
(750
|
)
|
|
Proceeds from Sale of Business
|
—
|
|
|
699
|
|
|
(Increase) Decrease in Restricted Cash
|
(12
|
)
|
|
(228
|
)
|
|
Financing Activities
|
(22,260
|
)
|
|
(12,667
|
)
|
|
Effect of Exchange Rate Changes on Cash and Cash Equivalents
|
676
|
|
|
(510
|
)
|
|
Net Decrease in Cash and Cash Equivalents
|
$
|
(18,381
|
)
|
|
$
|
(5,364
|
)
|
Operating Activities
Operating activities provided
$10.5
million of cash for the
six
months ended
June 30, 2014
. Cash provided by operating activities was driven primarily from Net Earnings of
$21.3 million
and an increase in Accounts Payable of
$7.5 million
partially offset by an increase in Accounts Receivable of
$18.6 million
, an increase in Inventories of
$13.2 million
, and a decrease in Employee Compensation and Benefits liabilities of
$5.5 million
.
Operating activities provided $15.2 million of cash for the six months ended June 30, 2013. Cash provided by operating activities was driven primarily from Net Earnings of $19.3 million and an increase in Accounts Payable of $6.1 million partially offset by increases in Accounts Receivable, payment of Employee Compensation and Benefits liabilities and higher Inventories. The increase in Accounts Payable was due to higher production levels and timing of payments.
Management evaluates how effectively we utilize two of our key operating assets, Accounts Receivable and Inventories, using Accounts Receivable “Days Sales Outstanding” (DSO) and “Days Inventory on Hand” (DIOH), on a FIFO basis. The metrics are calculated on a rolling three month basis in order to more readily reflect changing trends in the business. These metrics for the quarters ended were as follows (in days):
|
|
|
|
|
|
|
|
|
|
|
June 30,
2014
|
|
December 31,
2013
|
|
June 30,
2013
|
|
DSO
|
64
|
|
61
|
|
61
|
|
DIOH
|
79
|
|
81
|
|
75
|
As of
June 30, 2014
, DSO increased 3 days as compared to
June 30, 2013
and
December 31, 2013
. The increase is primarily due to the variety of terms offered and mix of business having a larger unfavorable impact than the favorable trend of continued proactive management of our receivables by enforcing tighter credit limits and continuing to successfully collect past due balances.
As of
June 30, 2014
, DIOH increased 4 days as compared to
June 30, 2013
primarily due to increased levels of inventory in support of higher sales levels and the launches of many new products somewhat offset by progress from inventory reduction initiatives; and decreased 2 days as compared to
December 31, 2013
, primarily due to progress from inventory reduction initiatives being somewhat offset by increased levels of inventory to support higher sales levels and new products.
Investing Activities
Investing activities, consisting of capital expenditures, during the
six
months ended
June 30, 2014
used
$7.3
million in cash. Capital expenditures included investments in tooling related to new product development, and manufacturing and information technology process improvement projects.
Investing activities during the six months ended June 30, 2013 used $7.4 million in cash. Net capital expenditures used $7.1 million and the installment payment to the former owners of Water Star used $0.8 million. This was partially offset by proceeds of $0.7 million from the sale of a business as described in Note 4. Capital expenditures included investments in tooling related to new product development and manufacturing and also information technology process improvement projects.
Financing Activities
Net cash used by financing activities was
$22.3
million during the first
six
months of
2014
. The purchases of our Common Stock per our authorized repurchase program used
$13.6
million, dividend payments used
$7.2
million, the payment of Long-Term Debt used
$2.0
million and the repayment of Short-Term borrowings used
$1.5 million
, partially offset by proceeds from the issuance of Common Stock of
$0.7
million and the excess tax benefit on stock plans of
$1.3
million.
Net cash used by financing activities was $12.7 million during the first six months of 2013. The purchases of our Common Stock per our authorized repurchase program used $12.1 million, dividend payments used $6.6 million and the payment of Long-Term Debt used $0.7 million, partially offset by proceeds from the issuance of Common Stock of $3.8 million, the tax benefit on stock plans of $1.5 million and the Short-Term Borrowings of $1.5 million.
Indebtedness
As of
June 30, 2014
, we had committed lines of credit totaling
$125.0 million
and uncommitted lines of credit totaling
$87.7 million
. There was
$10.0 million
in outstanding borrowings under our JPMorgan facility (described below) and
$18.0 million
in outstanding borrowings under our Prudential facility (described below) as of
June 30, 2014
. In addition, we had stand alone letters of credit of
$2.5 million
outstanding and bank guarantees in the amount of
$0.3 million
. Commitment fees on unused lines of credit for the
six
months ended
June 30, 2014
were
$0.2 million
.
Our most restrictive covenants are part of our 2011 Credit Agreement with JPMorgan (as defined below), which are the same covenants in the Shelf Agreement (as defined below) with Prudential (as defined below), and require us to maintain an indebtedness to EBITDA ratio of not greater than
3.00 to 1
and to maintain an EBITDA to interest expense ratio of no less than
3.50 to 1
as of the end of each quarter. As of
June 30, 2014
, our indebtedness to EBITDA ratio was
0.36 to 1
and our EBITDA to interest expense ratio was
49.02 to 1
.
Credit Facilities
JPMorgan Chase Bank, National Association
Details regarding our Credit Agreement, dated as of May 5, 2011 and amended on April 25, 2013, with JPMorgan Chase Bank, N. A. (“JPMorgan”), as administrative agent and collateral agent, U.S. Bank National Association, as syndication agent, Wells Fargo Bank, National Association, and RBS Citizens, N.A., as co-documentation agents, and the Lenders (including JPMorgan) from time to time party thereto (the “2011 Credit Agreement”) are described in Note 8 of the 2013 annual report on Form 10-K.
As of
June 30, 2014
, we were in compliance with all covenants under this credit agreement. There was
$10.0 million
in outstanding borrowings under this facility at
June 30, 2014
, with a weighted average interest rate of
1.46%
. This facility, under the current terms of the 2011 Credit Agreement, expires on
March 1, 2018
.
Prudential Investment Management, Inc.
Details regarding our Private Shelf Agreement, dated as of July 29, 2009, and amended on May 5, 2011 and July 24, 2012 with Prudential Investment Management, Inc. (“Prudential”) and Prudential affiliates from time to time party thereto (the “Shelf Agreement”) are described in Note 8 of the 2013 annual report on Form 10-K.
As of
June 30, 2014
, there was
$18.0 million
in outstanding borrowings under this facility, consisting of the
$8.0 million
Series A notes issued in March 2011 with a fixed interest rate of
4.00%
and a
7
year term serially maturing from
2014
to
2018
and the
$10.0 million
Series B notes issued in June 2011 with a fixed interest rate of
4.10%
and a
10
year term serially maturing from
2015
to
2021
. The first payment of
$2.0 million
on Series A notes was made during the first quarter of 2014. We were in compliance with all covenants under this private shelf agreement as of
June 30, 2014
. The issuance period, under the current terms of the Shelf Agreement, expires on
July 24, 2015
.
The Royal Bank of Scotland Citizens, N.A.
On
September 14, 2010
, we entered into an overdraft facility with The Royal Bank of Scotland Citizens, N.A. in the amount of
2.0 million
Euros, or approximately
$2.7 million
. There was
no
balance outstanding on this facility as of
June 30, 2014
.
HSBC Bank (China) Company Limited, Shanghai Branch
On June 20, 2012, we entered into a banking facility with the HSBC Bank (China) Company Limited, Shanghai Branch in the amount of
$5.0 million
. During the first quarter of 2014, we repaid previous borrowings under this facility amounting to
$1.5 million
and as of
June 30, 2014
, there were
no
outstanding borrowings on this facility.
Contractual Obligations
During the second quarter of 2014, we entered into a
three year
year software licensing agreement with a total commitment of
$1.2 million
.
Except as noted above, there have been no material changes with respect to contractual obligations as disclosed in our 2013 annual report on Form 10-K.
Newly Issued Accounting Guidance
Revenue from Contracts with Customers
In May 2014, the FASB issued guidance on revenue from contracts with customers that will replace most of the existing revenue recognition guidance, including industry-specific guidance when it becomes effective. This guidance requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. This guidance provides a five-step analysis of transactions to determine when and how revenue is recognized. Other major provisions include capitalization of certain contract costs, consideration of time value of money in the transaction price, and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances. This guidance also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with customers. This guidance is effective for the interim and annual periods beginning on or after December 15, 2016. Early adoption is not permitted. This guidance permits the use of either a retrospective or cumulative effect transition method. We have not yet selected a transition method and are currently evaluating the impact of the guidance on our results of operations or financial position and related disclosures.
No other new accounting pronouncements issued during 2014 but not yet effective have had, or are expected to have, a material impact on our results of operations or financial position.
Cautionary Statement Relevant to Forward-Looking Information
This Form 10-Q, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 2, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “intend,” “estimate,” “anticipate,” “believe,” “project,” or “continue” or similar words or the negative thereof. These statements do not relate to strictly historical or current facts and provide current expectations of forecasts of future events. Any such expectations or forecasts of future events are subject to a variety of factors. Particular risks and uncertainties presently facing us include: geopolitical and economic uncertainty throughout the world; the competition in our business; our ability to attract and retain key personnel; our ability to successfully upgrade, evolve and protect our information technology systems; our ability to effectively manage organizational changes; our ability to develop and commercialize new innovative products and services; our ability to comply with laws and regulations; fluctuations in the cost or availability of raw materials and purchased components; unforeseen product liability claims or product quality issues; the occurrence of a significant business interruption; and the relative strength of the U.S. dollar, which affects the cost of our materials and products purchased and sold internationally. We caution 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. Information about factors that could materially affect our results can be found in Part I, Item 1A. Risk Factors in our annual report on Form 10-K for the year ended
December 31, 2013
and Part II, Item 1A of this Form 10-Q. Shareholders, potential investors and other readers are urged to consider these factors in evaluating forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements.
We undertake no obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. Investors are advised to consult any further disclosures by us in our filings with the Securities and Exchange Commission and in other written statements on related subjects. It is not possible to anticipate or foresee all risk factors, and investors should not consider any list of such factors to be an exhaustive or complete list of all risks or uncertainties.
|
|
|
|
Item 3.
|
Quantitative and Qualitative Disclosures About Market Risk
|
There have been no material changes in our market risk since
December 31, 2013
. For additional information, refer to Item 7A of our 2013 annual report on Form 10-K for the year ended
December 31, 2013
.
|
|
|
|
Item 4.
|
Controls and Procedures
|
Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and our Principal Financial and Accounting Officer, have evaluated the effectiveness of our disclosure controls and procedures for the period ended
June 30, 2014
(as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)). Based on that evaluation, our Chief Executive Officer and our Principal Financial and Accounting Officer have concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our principal executive and our principal financial officers, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Controls
There were no changes in our internal controls over financial reporting during the most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.