FORM 10-Q/A

 

SECURITIES AND EXCHANGE COMMISSION

 

Washington, D.C.  20549

 

Quarterly Report Under Section 13 or 15 (d)
of the Securities Exchange Act of 1934

 

For Quarter Ended June 30, 2002

Commission File No. 04804

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes   ý   No   o

 

The number of shares outstanding of Registrant’s common stock, par value $.375, on June 30, 2002, was 8,971,164.

 

TENNANT COMPANY

Quarterly Report - FORM 10-Q/A

 

Tennant Company announced in February 2003 that due to a technical accounting interpretation brought to the Company’s attention by its auditors, the Company is restating its financial statements to recognize revenues and earnings associated with the sales of its equipment to a U.S. third party lessor, that occurred between 1998 and 2002, over the lease period for operating lease transactions and, for short term rental transactions, at the time the customer converts the short term rental to an outright purchase or long term capital lease of the equipment.  Previously, revenues and earnings associated with these sales were recognized at the time of shipment.  The original contract between the Company and the U.S. third party lessor included retained ownership risk provisions that were determined to preclude operating lease and short-term rental transactions from meeting the criteria for sale treatment under Statement of Financial Accounting Standards No. 13.  The effect of the correction to the timing of the revenue recognition on these transactions includes a revision in previously reported net earnings of $25,000 and ($320,000) and net earnings per share – diluted of $0.00 and ($0.03) for the quarters ended June 30, 2002 and 2001, respectively and a revision in previously reported net earnings of ($83,000) and ($31,000) and net earnings per share – diluted of $0.00 for both six month periods ended June 30, 2002 and 2001, respectively.  The consolidated financial statements as of December 31, 2001 and June 30, 2002 and for the three and six month periods ended June 30, 2002 and 2001 and notes thereto included in this Form 10-Q/A have been restated to include the effects of the correction to the timing of the revenue recognition.

 

On February 4, 2003, the Company amended the agreement with the third party lessor to eliminate the retained ownership risk provisions for operating leases which will result in revenue recognition for future operating lease transactions at the time of shipment.  The amendment to the agreement is retroactive to the beginning of the agreement, therefore, the Company expects to recognize the remaining unrecognized revenue and earnings for past operating lease transactions in the first quarter of 2003. 

 

This amendment to the Company’s Annual Report on Form 10-Q for the quarter ended June 30, 2002 amends and restates those items of the Form 10-Q originally filed on August 13, 2002 (the Original Filing) which have been affected by the restatement. In order to preserve the nature and character of the disclosures set forth in such items as originally filed, no attempt has been made in this amendment to update any disclosures not impacted by the restatement.  Except as required to reflect the effects of the restatement, all information contained in this amendment is stated as of the date of the Original Filing.  For additional information regarding the restatement, see “Notes to Consolidated Financial Statements – Restated” included in the Form 10-Q/A.

 

CONSOLIDATED STATEMENTS OF EARNINGS (unaudited)

(in thousands, except per share amounts)

		Three Months Ended June 30						Six Months Ended June 30
		2002 Restated			2001 Restated			2002 Restated			2001 Restated
Net sales		$	106,099		$	109,667		$	202,518		$	214,295
Less:
Cost of sales		67,182			69,738			128,653			134,121
Selling and administrative expenses		33,788			33,897			66,235			68,717
Restructuring charges		—			4,802			4,004			9,962
Profit from operations		5,129			1,230			3,626			1,495
Interest income, net		11			122			63			289
Other income (expense)		(113		)	(114		)	(134		)	173
Earnings before income taxes		5,027			1,238			3,555			1,957
Income tax expense		2,073			215			2,044			495
Net earnings		$	2,954		$	1,023		$	1,511		$	1,462
Per share:
Basic earnings		$	0.33		$	0.11		$	0.17		$	0.16
Diluted earnings		$	0.32		$	0.11		$	0.17		$	0.16
Dividends		$	0.20		$	0.20		$	0.40		$	0.40
Weighted average number of shares:
Basic		8,984			9,078			9,004			9,089
Diluted		9,151			9,230			9,066			9,234

 

See accompanying notes to consolidated financial statements.

 

2

 

TENNANT COMPANY

Quarterly Report - FORM 10-Q/A

 

CONSOLIDATED BALANCE SHEETS

(In thousands)

 

		(Unaudited) June 30, 2002 Restated			(Unaudited) December 31, 2001 Restated
ASSETS
Cash and cash equivalents		$	11,000		$	23,783
Receivables		83,327			76,952
Less allowance for doubtful accounts		(5,388		)	(4,701		)
Net receivables		77,939			72,251
Inventories		55,619			48,288
Prepaid expenses		2,598			2,394
Deferred income taxes, current portion		6,879			6,879
Total current assets		154,035			153,595
Property, plant and equipment		207,336			200,825
Less accumulated depreciation		(134,097		)	(127,729		)
Net property, plant and equipment		73,239			73,096
Deferred income taxes, long-term portion		5,496			5,496
Goodwill, net		16,765			16,373
Other assets		3,197			3,999
Total assets		$	252,732		$	252,559
LIABILITIES & SHAREHOLDERS’ EQUITY
LIABILITIES
Current debt		$	12,828		$	13,418
Accounts payable, accrued expenses and deferred revenue		56,401			48,031
Total current liabilities		69,229			61,449
Long-term debt		7,496			12,496
Long-term employee-related benefits		26,906			26,643
Total liabilities		103,631			100,588
SHAREHOLDERS’ EQUITY
Common stock		3,364			3,389
Additional paid-in capital		—			383
Unearned restricted shares		(288		)	(278		)
Retained earnings		157,582			161,945
Accumulated other comprehensive loss (equity adjustment from foreign currency translation)		(4,304		)	(6,247		)
Receivable from ESOP		(7,253		)	(7,221		)
Total shareholders’ equity		149,101			151,971
Total liabilities and shareholders’ equity		$	252,732		$	252,559

 

See accompanying notes to consolidated financial statements.

 

3

 

TENNANT COMPANY

Quarterly Report - FORM 10-Q/A

 

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(In thousands)

 

		Six Months Ended June 30
		2002 Restated			2001 Restated
CASH FLOWS RELATED TO OPERATING ACTIVITIES:
Net earnings		$	1,511		$	1,462
Adjustments to net earnings to arrive at operating cash flows:
Depreciation and amortization		8,431			10,552
Deferred tax expense (benefit)		—			(2,434		)
Changes in operating assets and liabilities		(3,976		)	(3,786		)
Other, net		523			1,640
Net cash flows related to operating activities		6,489			7,434
CASH FLOWS RELATED TO INVESTING ACTIVITIES:
Acquisition of property, plant and equipment		(7,889		)	(11,761		)
Proceeds from disposals of property, plant and equipment		1,009			635
Net cash flows related to investing activities		(6,880		)	(11,126		)
CASH FLOWS RELATED TO FINANCING ACTIVITIES:
Net changes in short-term borrowings		(6,218		)	1,125
Proceeds from issuance of common stock		217			994
Purchases of common stock		(2,869		)	(1,678		)
Dividends paid		(3,597		)	(3,628		)
Principal payment from ESOP		—			799
Net cash flows related to financing activities		(12,467		)	(2,388		)
Effect of exchange rate changes on cash		75			(14		)
Net decrease in cash and cash equivalents		(12,783		)	(6,094		)
Cash and cash equivalents at beginning of year		23,783			21,512
Cash and cash equivalents at end of period		$	11,000		$	15,418
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Collateralized borrowings incurred for operating lease equipment		$	388		$	630

 

See accompanying notes to consolidated financial statements.

 

4

 

TENNANT COMPANY

Quarterly Report - FORM 10-Q/A

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - RESTATED (Unaudited)

(In thousands, except per share data)

 

(1)          Basis of Presentation

 

In the Company’s opinion, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments, except as noted elsewhere in the notes to the consolidated financial statements) necessary to present fairly its financial position as of June 30, 2002 and the results of its operations for the three and six-months ended June 30, 2002 and 2001, and cash flows for the six-months ended June 30, 2002 and 2001.  These statements are condensed and, therefore, do not include all of the information and note disclosures required by accounting principles generally accepted in the United States of America for complete financial statements.  The statements should be read in conjunction with the consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2001.  The results of operations for the three and six-months ended June 30, 2002 are not necessarily indicative of the results to be expected for the full year.

 

(2)          Restatement

 

Tennant Company announced in February 2003 that due to a technical accounting interpretation brought to the Company’s attention by its auditors, the Company is restating its financial statements to recognize revenues and earnings associated with the sales of its equipment to a U.S. third party lessor, that occurred between 1998 and 2002, over the lease period for operating lease transactions and, for short term rental transactions, at the time the customer converts the short term rental to an outright purchase or long term capital lease of the equipment.  Previously, revenues and earnings associated with these sales were recognized at the time of shipment.  The original contract between the Company and the U.S. third party lessor included retained ownership risk provisions that were determined to preclude operating lease and short-term rental transactions from meeting the criteria for sale treatment under Statement of Financial Accounting Standards No. 13.  The effect of the correction to the timing of the revenue recognition on these transactions includes a revision in previously reported net earnings of $25,000 and ($320,000) and net earnings per share – diluted of $0.00 and ($0.03) for the quarters ended June 30, 2002 and 2001, respectively and a revision in previously reported net earnings of ($83,000) and ($31,000) and net earnings per share – diluted of $0.00 for both six month periods ended June 30, 2002 and 2001, respectively.  The consolidated financial statements as of December 31, 2001 and June 30, 2002 and for the three and six month periods ended June 30, 2002 and 2001 and notes thereto included in this Form 10-Q/A have been restated to include the effects of the correction to the timing of the revenue recognition. Impacted financial statement line items were sales, cost of sales, interest expense, income tax expense, inventory, machinery and equipment, accumulated depreciation, deferred taxes, accrued expenses, deferred revenue and debt.  There was no impact on cash flows or cash and cash equivalents.  The consolidated financial statements as of December 31, 2001 and June 30, 2002 and for the periods ended June 30, 2002 and 2001 and notes thereto included in this Form 10-Q/A have been restated to include the effects of the correction to the timing of the revenue recognition, as follows:

 

		Quarter Ended June 30, 2002						Quarter Ended June 30, 2001
		As Previously Reported			Restated			As Previously Reported			Restated
CONSOLIDATED STATEMENTS OF EARNINGS
Net sales		$	105,783		$	106,099		$	110,783		$	109,667
Cost of sales		66,985			67,182			70,446			69,738
Interest income, net		90			11			210			122
Earnings before income taxes		4,988			5,027			1,734			1,238
Income tax expense		2,059			2,073			391			215
Net earnings		2,929			2,954			1,343			1,023
Net earnings per common share
- Basic		$	0.33		$	0.33		$	0.14		$	0.11
- Diluted		$	0.32		$	0.32		$	0.14		$	0.11

 

 

		Six Months Ended  June 30, 2002						Six Months Ended June 30, 2001
		As Previously Reported			Restated			As Previously Reported			Restated
CONSOLIDATED STATEMENTS OF EARNINGS
Net sales		$	202,381		$	202,518		$	214,436		$	214,295
Cost of sales		128,553			128,653			134,379			134,121
Interest income, net		224			63			454			289
Earnings before income taxes		3,680			3,555			2,006			1,957
Income tax expense		2,086			2,044			513			495
Net earnings		1,594			1,511			1,493			1,462
Net earnings per common share
– Basic		$	0.18		$	0.17		$	0.16		$	0.16
– Diluted		$	0.17		$	0.17		$	0.16		$	0.16

 

 

		June 30, 2002						December 31, 2001
		As Previously Reported			Restated			As Previously Reported			Restated
CONSOLIDATED BALANCE SHEETS
Inventories		$	54,656		$	55,619		$	47,080		$	48,288
Total current assets		153,072			154,035			152,387			153,595
Net property, plant and equipment		69,790			73,239			69,792			73,096
Total assets		246,892			252,732			246,619			252,559
Current debt		8,831			12,828			9,765			13,418
Accounts payable, accrued expenses and deferred revenue		54,614			56,401			45,883			48,031
Total current liabilities		63,445			69,229			55,648			61,449
Long-term debt		5,000			7,496			10,000			12,496
Total liabilities		95,351			103,631			92,291			100,588
Retained earnings		160,022			157,582			164,302			161,945
Total shareholders’ equity		151,541			149,101			154,328			151,971
Total liabilities and shareholders’ equity		246,892			252,732			246,619			252,559

 

 

		Six Months Ended June 30, 2002						Six Months Ended June 30, 2001
		As Previously Reported			Restated			As Previously Reported			Restated
CONSOLIDATED STATEMENTS OF CASH FLOWS
Net earnings		$	1,594		$	1,511		$	1,493		$	1,462
Depreciation and amortization		7,842			8,431			10,043			10,552
Changes in operating assets and liabilities		(3,860		)	(3,976		)	(3,195		)	(3,786		)
Other, net		913			523			1,527			1,640

 

 

(3)           Inventories

 

Inventories are valued at the lower of cost (principally on a last-in, first-out basis) or market.  Inventories at June 30, 2002, and December 31, 2001, consist of the following:

 

		June 30, 2002 Restated			December 31, 2001 Restated
FIFO Inventories:
Finished goods		$	38,660		$	34,271
Raw materials, parts and work-in-process		37,723			34,487
Total FIFO Inventories		76,383			68,758
LIFO reserve		(20,764		)	(20,470		)
LIFO inventories		$	55,619		$	48,288

 

The LIFO reserve approximates the difference between LIFO carrying cost and replacement cost.

 

(4)           Supplemental Cash Flow Information

 

Income taxes paid during the six-months ended June 30, 2002 and 2001 were $966 and $6,556 respectively.  Interest costs paid during the six-months ended June 30, 2002 and 2001 were $528 and $734, respectively.

 

5

 

TENNANT COMPANY

Quarterly Report - FORM 10-Q/A

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - RESTATED (Unaudited)

(In thousands, except per share data)

 

(5)           Comprehensive Income

 

The Company reports accumulated other comprehensive income (loss) as a separate item in the shareholders’ equity section of the balance sheet.  Comprehensive income (loss) is comprised of net earnings and other comprehensive income (loss).  Other comprehensive income (loss) consists solely of foreign currency translation adjustments.  The reconciliations of net earnings to comprehensive income (loss) are as follows:

 

		Three Months Ended June 30						Six Months Ended June 30
		2002 Restated			2001 Restated			2002 Restated			2001 Restated
Net earnings		$	2,954		$	1,023		$	1,511		$	1,462
Foreign currency translation adjustments		2,274			(2,028		)	1,943			(461		)
Comprehensive income (loss)		$	5,228		$	(1,005	)	$	3,454		$	1,001

 

(6)           Earnings Per Share Computation

 

		Three Months Ended June 30						Six Months Ended June 30
		2002 Restated			2001 Restated			2002 Restated			2001 Restated
Weighted average shares outstanding — Basic		8,984			9,078			9,004			9,089
Dilutive share equivalents		167			152			62			145
Weighted average shares outstanding — Diluted		9,151			9,230			9,066			9,234
Net earnings		$	2,954		$	1,023		$	1,511		$	1,462
Earnings per share — Basic		$	0.33		$	0.11		$	0.17		$	0.16
Earnings per share — Diluted		$	0.32		$	0.11		$	0.17		$	0.16

 

6

 

TENNANT COMPANY

Quarterly Report - FORM 10-Q/A

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - RESTATED (Unaudited)

(In thousands, except per share data)

 

(7)           Segment Reporting

 

The Company operates in one industry segment which consists of the design, manufacture and sale of products used primarily in the maintenance of nonresidential floors.  The following sets forth net sales by geographic area:

 

		Three Months Ended June 30						Six Months Ended June 30
		2002 Restated			2001 Restated			2002 Restated			2001 Restated
Geographical Net Sales (a)
North America		$	78,946		$	78,248		$	149,449		$	153,466
Europe		16,670			20,892			34,286			39,125
Other International		10,483			10,527			18,783			21,704
Total		$	106,099		$	109,667		$	202,518		$	214,295

 

(a)   Net of intercompany sales.

 

		Three Months Ended June 30						Six Months Ended June 30
		2002 As Originally Reported			2001 As Originally Reported			2002 As Originally Reported			2001 As Originally Reported
Geographical Net Sales (a)
North America		$	78,630		$	79,364		$	149,312		$	153,607
Europe		16,670			20,892			34,286			39,125
Other International		10,483			10,527			18,783			21,704
Total		$	105,783		$	110,783		$	202,381		$	214,436

 

(a)   Net of intercompany sales.

 

(8)           Restructuring and Other Unusual Charges

 

During the first quarter of 2002, the Company announced its plan to consolidate its North American distribution operations from a current network of seven distribution centers into two new facilities that will be under the ownership and management of a third-party logistics services provider.  The Company also announced plans to consolidate its European customer service function and take other streamlining actions in Europe and North America.  The Company recorded a restructuring charge of $4,004 and an inventory write-down of $500 related to these actions.  The restructuring charge consists primarily of severance, building lease costs and write-down of certain fixed assets.  The inventory write-down is classified in cost of sales.

 

In connection with these activities, the Company will terminate a total of approximately 140 employees.  These restructuring actions are expected to be substantially completed by March 31, 2003.

 

During the second quarter of 2002, the Company recorded an unusual charge of $500 for severance pertaining to the departure from the Company of its Chief Operating Officer.  This amount has been classified in selling and administrative expenses.

 

7

 

TENNANT COMPANY

Quarterly Report - FORM 10-Q/A

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - RESTATED (Unaudited)

(In thousands, except per share data)

 

During the first six-months of 2001, the Company recorded pre-tax charges of $9,962 for restructuring and $1,007 for a write-down of inventory.  The restructuring charges related to a workforce reduction and the closure of a leased plant in Germany and the transfer of its production to a contract manufacturer in the Czech Republic.  Approximately 150 employees were terminated as a result of these actions.  The restructuring charges primarily consisted of severance payments, building lease costs and write-downs of certain fixed assets.  The inventory write-down related to the closing of the leased plant in Germany and has been classified in cost of sales.  The majority of these actions were completed during 2001.

 

The components of the 2002 and 2001 unusual charges and the cash and noncash utilizations against the charges during the six-month period ended June 30, 2002 were as follows:

 

		Severance, Early Retirement and Related Costs			Noncancelable Contractual Obligations and Other			Total
2002 Restructuring Charges:
Initial charges		$	3,588		$	416		$	4,004
Utilization:
Cash		(470		)	(37		)	(507		)
Other (a)		156			30			186
June 30, 2002 liability balance		$	3,274		$	409		$	3,683
2001 Restructuring Charges:
December 31, 2001 liability Balance		$	961		$	819		$	1,780
Utilization:
Cash		(816		)	(265		)	(1,081		)
Other (a)		(2		)	36			34
June 30, 2002 liability balance		$	143		$	590		$	733

 

(a)   Primarily foreign currency translation effects

 

The above liabilities are included in accrued expenses.

 

(9)           Goodwill and Intangible Assets

 

In July 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) SFAS 142, Goodwill and Other Intangible Assets. SFAS 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually.  SFAS 142 also requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives.

 

8

 

TENNANT COMPANY

Quarterly Report - FORM 10-Q/A

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - RESTATED (Unaudited)

(In thousands, except per share data)

 

The Company adopted SFAS 142 effective January 1, 2002.  Had this statement been effective January 1, 2001, net earnings and diluted earnings per share for the three month period ended June 30, 2001 would have approximated $1,146 and $0.12 and $1,718 and $0.19 for the first six-months of 2001.  During the first quarter, the Company completed its initial impairment test of goodwill.  As of January 1, 2002, there was no impairment.

 

Intangible assets consist entirely of purchased technology and are included in other assets on the consolidated balance sheet.  The balances at June 30, 2002 and December 31, 2001 were as follows:

 

		June 30, 2002			December 31, 2001
Original Cost		$	1,075		$	1,075
Accumulated amortization		(300		)	(250		)
Carrying value		$	775		$	825

 

Amortization expense will approximate $100 per year for each of the five succeeding years.

 

(10)         New Accounting Pronouncements

 

SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, was issued in October 2001.  SFAS 144 provides new guidance on the recognition of impairment losses on long-lived assets to be held and used or to be disposed of and also broadens the definition of what constitutes a discontinued operation and how the results of a discontinued operation are to be measured and presented.  The Company adopted the provisions of this statement on January 1, 2002.  The adoption of SFAS 144 did not have an impact on the consolidated results of operations or financial position.

 

9

 

TENNANT COMPANY

Quarterly Report - FORM 10-Q/A

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The Management’s Discussion and Analysis of Financial Condition and Results of Operations presented below reflects the impact of the restatements to our previously reported consolidated financial statements as of June 30, 2002 and for the quarter then ended.

 

Tennant Company announced in February 2003 that due to a technical accounting interpretation brought to the Company’s attention by its auditors, the Company is restating its financial statements to recognize revenues and earnings associated with the sales of its equipment to a U.S. third party lessor, that occurred between 1998 and 2002, over the lease period for operating lease transactions and, for short term rental transactions, at the time the customer converts the short term rental to an outright purchase or long term capital lease of the equipment.  Previously, revenues and earnings associated with these sales were recognized at the time of shipment.  The original contract between the Company and the U.S. third party lessor included retained ownership risk provisions that were determined to preclude operating lease and short-term rental transactions from meeting the criteria for sale treatment under Statement of Financial Accounting Standards No. 13.  The effect of the correction to the timing of the revenue recognition on these transactions includes a revision in previously reported net earnings of $25,000 and ($320,000) and net earnings per share — diluted of $0.00 and ($0.03) for the quarters ended June 30, 2002 and 2001, respectively and a revision in previously reported net earnings of ($83,000) and ($31,000) and net earnings per share — diluted of $0.00 for both six month periods ended June 30, 2002 and 2001, respectively.  The consolidated financial statements as of December 31, 2001 and June 30, 2002 and for the three and six month periods ended June 30, 2002 and 2001 and notes thereto included in this Form 10-Q/A have been restated to include the effects of the correction to the timing of the revenue recognition.

 

On February 4, 2003, the Company amended the agreement with the third party lessor to eliminate the retained ownership risk provisions for operating leases which will result in revenue recognition for future operating lease transactions at the time of shipment.  The amendment to the agreement is retroactive to the beginning of the agreement, therefore, the Company expects to recognize the remaining unrecognized revenue and earnings for past operating lease transactions in the first quarter of 2003.  

 

 

Results of Operations

 

Net earnings for the second quarter ended June 30, 2002, were $3.0 million or $0.32 per diluted share, on net sales of $106.1 million.  In the comparable 2001 period, the Company reported net earnings of $1.0 million or $0.11 per diluted share, on net sales of $109.7 million.  For the six-months ended June 30, 2002, net earnings were $1.5 million or $0.17 per diluted share, on net sales of $202.5 million.  In the comparable 2001 period, the Company reported net earnings of $1.5 million, or $0.16 per diluted share, on net sales of $214.3 million. Foreign currency translation effects reduced diluted earnings per share in 2002 by approximately $0.02 and $0.07 for the three and six-month periods, respectively.  This unfavorable translation effect resulted primarily from the strength of the U. S. dollar compared to the Euro, Japanese yen, Australian and Canadian dollars, although the effect decreased during the second quarter as the U.S. dollar weakened.

 

The Company adopted Statement of Financial Accounting Standard 142, “Goodwill and Other Intangible Assets”, effective January 1, 2002.  Had this statement been effective January 1, 2001, net earnings and diluted earnings per share for the 2001 second quarter would have approximated $1.1 million and $0.12 and $1.7 million and $0.19 for the six-month period ended June 30, 2001.

 

As discussed in note 8 to the consolidated financial statements, restructuring and other unusual charges of $3.3 million after tax ($4.5 million pretax) or $0.37 per diluted share were recorded during the first quarter of 2002.  Restructuring charges of $4.0 million pretax consisted primarily of severance costs, including severance related to a decision to close several North American distribution centers and transfer these distribution operations to a third-party logistics provider. In addition, management approved plans in the first quarter to consolidate and centralize customer service operations in Europe and to streamline other operations in North America. Inventory write-downs related to the consolidation of the distribution operations account for the remaining $.5 million of the unusual charges and are classified as cost of sales in the consolidated statement of earnings. These 2002 restructuring actions are expected to provide an annualized pre-tax benefit of up to $3 million beginning late in 2002.

 

During the second quarter of 2002, the Company recorded an unusual charge of $0.3 million after tax ($0.5 million pretax) or $0.03 per diluted share for severance pertaining to the departure from the Company of its Chief Operating Officer.  This amount has been classified in selling and administrative expenses.

 

Restructuring and unusual charges of $6.9 million after tax ($11.0 million pretax) or $0.75 per diluted share were recorded during the six-month period ended June 30, 2001.  The restructuring charges of $10 million pretax related to a workforce reduction and the closure of a leased plant in Germany and the transfer of its production to a contract manufacturer in the Czech Republic.  Approximately 150 employees were terminated as a result of these actions.  The charges primarily consisted of severance payments, building lease costs and write-downs of certain fixed assets and are classified as restructuring charges.  The inventory write-down of $1 million pretax related to the closing of the leased plant in Germany and has been classified in cost of sales.

 

Excluding the effects of the restructuring and other unusual charges, net earnings for the 2002 second quarter were $3.3 million or $0.35 per diluted share compared to $4.6 million or $0.50 per diluted share for the 2001 second quarter.  For the first six-months of 2002, results excluding the effects of restructuring and other unusual charges were $5.1 million or $0.56 per diluted share and $8.4 million or $0.91 per diluted share for the comparable 2001 period.

 

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TENNANT COMPANY

Quarterly Report - FORM 10-Q/A

 

Consolidated net sales of $106.1 million for the 2002 second quarter decreased 3.3% compared to 2001 second quarter sales of $109.7 million.  Price increases benefited consolidated net sales in the 2002 second quarter by approximately 2.5%.  For the six-month period, 2002 consolidated net sales declined 5.5% to $202.5 million versus 2001.  The impact of foreign currency translation effects on sales during the second quarter and the first six-months of 2002 were not significant. The year-over-year declines in consolidated net sales for the three and six-month periods ended June 30, 2002 resulted primarily from lower sales in North America and Europe.

 

North American sales for the 2002 second quarter increased 0.9% to $78.9 million compared with the second quarter of 2001.  For the first six-months of 2002, sales of $149.4 million were down 2.6% versus the comparable 2001 period.  The decrease for the six-month period was primarily due to lower sales of industrial floor maintenance equipment.  Sales of industrial floor maintenance equipment are down because of weak economic conditions in North America compared to a year ago.  Sales declines also occurred in commercial products and floor coatings, offset by increased service revenues.

 

In Europe, net sales for the 2002 second quarter decreased 20.1% to $16.7 million versus the comparable 2001 period.  For the first six-months, sales were $34.3 million, down 12.3% versus the first six-months of 2001.  Beginning in 2002, Europe’s fiscal year and quarterly sales correspond with the calendar year as a result of a change in fiscal year-end from November to December that was effective December 31, 2001.  Had Europe’s 2001 second quarter ended June 30 2001, sales for the 2002 second quarter would have decreased 13.0% versus the comparable 2001 quarter.  The 13.0% decline resulted primarily from weakness in European industrial markets, where recovery appears to be lagging the North American recovery.  In addition, the Company encountered aggressive price competition, primarily in Germany, which Tennant chose not to match.

 

In Other International, 2002 second quarter sales of $10.5 million were flat with 2001.  The 2002 second quarter benefited from the shipment of several orders that were received late in the preceding quarter that were reflected in the 2002 first quarter-end backlog.  For the six-months ended June 30, 2002, sales to other international markets totaled $18.8 million, down 13.5% from $21.7 million in the comparable 2001 period.  Weak economic conditions in the global economy, particularly in Latin America and Japan, contributed to the 13.5% decline.

 

Order backlog at June 30, 2002, totaled $12 million compared with $10 million at March 31, 2002, and $9 million at June 30, 2001.

 

Gross profit margin was 36.7% for the 2002 second quarter and 36.4% for the 2001 second quarter.  For the six-month periods ended June 30, gross profit margins were 36.5% in 2002 and 37.4% in 2001.  Adjusted to exclude unfavorable foreign currency translation effects and the impact of unusual charges, gross profit margin for the 2002 second quarter was 37.0% and 37.5% for the 2001 second quarter.  For the six-month periods ended June 30, gross profit margins excluding foreign currency translation effects and unusual charges were 36.8% in 2002 and 37.9% in 2001.  The declines in adjusted 2002 second quarter and year-to-date gross profit margins resulted primarily from the lower sales volumes, including the related sales mix effects.  Sales of North American industrial equipment products, which have a higher gross margin than both North American commercial products and service revenues, decreased on a relative percentage basis in 2002.  Sales volume declines in Europe also contributed to the decrease in second quarter and year-to-date gross margins.  These effects were partially offset by the impact of selling price increases.

 

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TENNANT COMPANY

Quarterly Report - FORM 10-Q/A

 

Second quarter selling and administrative (S&A) expenses including unusual charges decreased from $33.9 million in 2001 to $33.8 million in 2002.  For the first six months of 2002, S&A expenses including unusual charges were $66.2 million, down 3.6% versus the first six months of 2001.  Excluding the impact of unusual charges, S&A expenses decreased due to the decline in 2002 sales, savings from various cost reduction measures initiated during 2001, offset by higher incentive compensation expenses.  For the second quarter, S&A expense as a percentage of sales increased from 30.9% in 2001 to 31.8% in 2002.  For the six-month period, S&A expenses represented 32.1% of sales in 2001 compared to 32.7% in 2002.

 

Net interest income for the three and six-month periods ended June 30, 2002 decreased $0.1 million and $0.2 million, respectively, primarily because of lower interest rates in 2002.  Other income (expense) was flat for the second quarter of 2002 compared to the second quarter of 2001, but decreased $0.3 million on a year-to-date basis.  The year-to-date decrease was primarily because of currency translation losses during 2002.

 

Income tax expense for the three and six-month periods ended June 30, 2002 was $2.1 million and $2.0 million, versus $0.2 million and $0.5 million for the comparable periods in 2001.  Income tax expense in 2001 was lower in both the three and six-month periods primarily as a result of the tax effects of the restructuring and other unusual charges described in note 7 to the consolidated financial statements.  The first quarter expenses from European restructuring initiatives were not tax benefited.  Excluding restructuring and other unusual charges, the effective tax rate for the six-month periods ended June 30, 2002 and 2001 were 40% and 35.5%, respectively.  The increase in the effective rate is primarily because of a change in the mix of U.S. and foreign earnings.

 

 

Liquidity and Capital Resources

 

Cash and cash equivalents totaled $11.0 million at June 30, 2002, compared with $15.4 million at June 30, 2001.  The Company generated $6.5 million of operating cash flows during the first six-months of 2002 compared with $7.4 million in the comparable 2001 period.  Net cash outflows from capital expenditures decreased to $6.9 million in 2002 from $11.1 million in 2001.  Capital expenditures in 2001 were greater because of spending on projects intended to improve financial performance through new business systems or cost savings, including investments in design systems software.  Cash outflows from financing activities increased to $12.5 million in 2002 from $2.4 million during 2001 primarily because of the paydown of short-term debt at foreign subsidiaries in 2002.  The debt-to-total-capitalization ratio was 12.0% at June 30, 2002 versus 16.2% at June 30, 2001.  The Company believes that the combination of internally generated funds and available financing sources are more than sufficient to meet the Company’s cash requirements for the next year.

 

Management regularly reviews the Company’s business operations with the objective of improving financial performance and maximizing its return on investment.  In this regard, the Company continues to consider actions to improve financial performance which, if taken, could result in material nonrecurring charges.

 

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TENNANT COMPANY

Quarterly Report - FORM 10-Q/A

 

Market Risk

 

The Company’s market risk includes the risk of adverse changes in foreign currency exchange rates.  Foreign currency translation effects reduced diluted earnings per share by approximately $0.02 for the second quarter of 2002 and $0.07 for the year to date versus the comparable 2001 periods.  If foreign exchange rates at the end of the second quarter prevailed for the balance of 2002, the foreign exchange effects would be favorable for the remainder of 2002 compared with prior year results.  The Company uses forward exchange contracts to hedge net exposed assets in Australia, Canada, Japan and Europe.  Additional information on market risk is included in the Management Discussion and Analysis section of the Company’s Form 10-K filing for the year ended December 31, 2001.

 

 

Cautionary Statement Relevant to Forward-Looking Information

 

Certain statements contained in this document as well as other written and oral statements made from time to time by the Company are considered “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act.  These statements do not relate to strictly historical or current facts and provide current expectations or forecasts of future events.  These include factors that affect all businesses operating in a global market as well as matters specific to the Company and the markets it serves.  Particular risks and uncertainties presently facing the Company include: the ability to implement its plan to increase worldwide operational efficiencies; the success of new products; political and economic uncertainty throughout the world; inflationary pressures; the potential for increased competition in the Company’s businesses from competitors that have substantial financial resources; the potential for soft markets in certain regions including North America, Asia, Latin America and Europe; the relative strength of the U.S. dollar, which affects the cost of the Company’s products sold internationally; and the Company’s plan for growth.  The Company cautions that forward-looking statements must be considered carefully and that actual results may differ in material ways due to risks and uncertainties both known and unknown.  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.

 

The Company does not undertake to update any forward-looking statement, and investors are advised to consult any further disclosures by the Company on this matter in its filings with the Securities and Exchange Commission and in other written statements made from time to time by the Company.  It is not possible to anticipate or foresee all risk factors, and investors should not consider that any list of such factors to be an exhaustive or complete list of all risks or uncertainties.

 

 

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TENNANT COMPANY

Quarterly Report - FORM 10-Q/A

 

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 3ii to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1999.
		99.1		Certification under Section 906 of the Sarbanes-Oxley Act of 2002				Filed herewith electronically.
(b)		Reports on Form 8-K
		Form 8-K, dated June 28, 2002, regarding an announcement that James Moar, Chief Operating Officer, left the Company effective June 30, 2002.

 

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TENNANT COMPANY

Quarterly Report - FORM 10-Q/A

 

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:	s/March 25, 2003		/s/ Janet M. Dolan
			Janet M. Dolan
			President and Chief Executive Officer
Date:	s/March 25, 2003		/s/ Anthony T. Brausen
			Anthony T. Brausen
			Vice President, Chief Financial Officer, and Treasurer
Date:	s/March 25, 2003		/s/ Gregory M. Siedschlag
			Gregory M. Siedschlag
			Corporate Controller and Principal Accounting Officer

 

15

 

CERTIFICATIONS

 

I, Janet M. Dolan, certify that:

 

1.		I have reviewed this quarterly report on Form 10-Q/A of Tennant Company;
2.		Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; and
3.		Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report.

 

 

Date:		/s/  March 25, 2003
				/s/	Janet M. Dolan
				Janet M. Dolan President and Chief Executive Officer

 

 

I, Anthony T. Brausen, certify that:

 

1.		I have reviewed this quarterly report on Form 10-Q/A of Tennant Company;
2.		Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; and
3.		Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report.

 

 

Date:		/s/  March 25, 2003
				/s/	Anthony T. Brausen
				Anthony T. Brausen Vice President, Chief Financial Officer Treasurer