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Tennant Company Reports 2014 Third Quarter Results

INVESTOR CONTACT:

Tom Paulson
Senior Vice President and
Chief Financial Officer
763-540-1204

MEDIA CONTACT:

Kathryn Lovik
Director, Global Corporate
Communications
763-540-1212

Tennant Company Reports 2014 Third Quarter Results

Company posts record sales for a third quarter of $202.6 million, up 7.5 percent;

Diluted EPS increased 12.5 percent to $0.63;

Company raises 2014 full year sales outlook and narrows earnings range


MINNEAPOLIS, Oct. 23, 2014-Tennant Company (NYSE:TNC), a world leader in designing, manufacturing and marketing of solutions that help create a cleaner, safer, healthier world, today reported net earnings of $11.8 million, or $0.63 per diluted share, on net sales of $202.6 million for the third quarter ended September 30, 2014. In the 2013 third quarter, Tennant reported net earnings of $10.6 million, or $0.56 per diluted share, on net sales of $188.5 million.

Commented Chris Killingstad, Tennant Company's president and chief executive officer: “We are very pleased with the impact our new growth strategies have had on Tennant’s sales in 2014. Today, we are announcing the highest sales for a third quarter in Tennant’s history, driven by strong growth in the Americas and EMEA regions. Year-to-date sales are up approximately 9 percent. The gross margin in the quarter, however, was below our expectations and constrained by supply chain challenges, as we ramped up production and launched new products. These are short-term growing pains; they are fixable and we are taking the necessary steps for improvement.”

Added Killingstad: “Our strong order position going into the 2014 fourth quarter gives us confidence in our outlook for the full year. We anticipate sales in our APAC region will return to growth in the 2014 fourth quarter. We are committed to our growth goal of $1 billion in sales by 2017 and a 12 percent or above operating profit margin.”

Tennant plans to meet its growth objectives through a strong new product pipeline in both the core business and in the Orbio Technologies Group, continued gains in emerging markets, growth in Europe, focus on strategic accounts and an enhanced go-to-market strategy, designed to significantly expand its global market coverage and customer base.

Third Quarter Operating Review

The company's 2014 third quarter consolidated net sales of $202.6 million rose 7.5 percent versus the prior year quarter. The foreign currency exchange effects on consolidated net sales were essentially flat compared to the same quarter last year. Contributing to 2014 third quarter results were increased sales to strategic accounts and through distribution, and continued demand for new products such as the compact T12 and mid-size T17 rider scrubbers, and walk-behind burnishers.

Geographically, sales increased 9.3 percent in Tennant’s largest region, the Americas. Unfavorable foreign currency exchange reduced sales by approximately 0.5 percent. Organic sales, which exclude the impact of foreign currency exchange (and acquisitions when applicable), increased approximately 9.8 percent. Sales in Europe, Middle East and Africa (EMEA) were up 8.5 percent, or approximately 6.5 percent organically, excluding a favorable foreign currency exchange impact of about 2.0 percent. Growth in EMEA was broad based, and the company anticipates continued organic growth in this region in the 2014 fourth quarter. Sales in the Asia Pacific (APAC) region were down 5.6 percent, or down approximately 5.1 percent organically, excluding an unfavorable foreign currency exchange impact of about 0.5 percent. Economic uncertainties in the key markets of Australia, Japan, and China lengthened sales cycles, which impacted the timing of orders and shipments in the 2014 third quarter. Tennant expects positive sales growth in the 2014 fourth quarter and full year. APAC sales for the 2014 first nine months increased 8.7 percent, or approximately 11.7 percent organically, excluding an unfavorable foreign currency impact of about 3.0 percent, driven by growth in China of approximately 20 percent.

In the 2014 third quarter, gross margin was 43.0 percent - within the company’s target range but lower than the 43.4 percent in the prior year quarter. The 40 basis point decline was primarily due to supply chain challenges with increased costs related to hiring and training additional manufacturing employees and temporary workers to support higher production levels, including the continued ramp up to meet the growing demand for new products.

Research and development (R&D) expense for the 2014 third quarter totaled $6.8 million, or 3.4 percent of sales, compared to $8.0 million, or 4.2 percent of sales, in the prior year quarter. 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.

Selling and administrative (S&A) expense in the 2014 third quarter totaled $63.2 million, or 31.2 percent of sales. S&A in the 2013 third quarter was $57.7 million, or 30.6 percent of sales. Reflecting the company’s growth priorities, Tennant continued to make investments in direct sales, distribution and marketing to build organic sales.

Tennant's 2014 third quarter operating profit was $17.1 million, or 8.4 percent of sales, versus an operating profit of $16.2 million, or 8.6 percent of sales, in the year ago quarter.

Robust Product and Technology Pipeline

Tennant Company continues to have the most robust new product pipeline in its history. Year to date in 2014, Tennant has introduced 10 new products, with six additional products planned for unveiling in the fourth quarter. The company is on track to launch more than 63 new products and technologies between 2014 and 2016, on top of 37 new products from 2012 to 2013.

During the 2014 third quarter, Tennant launched the S30 mid-size rider sweeper, which provides innovative indoor and outdoor sweeping performance with optimized dust control in both light- and heavy-duty applications. Other major 2014 launches that have already occurred include: the T17 mid-size battery-powered rider scrubber with the largest available battery capacity in its class, making it highly productive; and walk-behind battery-operated burnishers that are emissions-free and deliver propane-like gloss results. In addition, the Orbio Technologies Group from Tennant Company launched the Orbio® os3, which delivers on-site generation of an anti-microbial solution, as well as an effective multi-surface cleaner, for use in a wide variety of customer segments.

“On top of the sales momentum our new offerings have generated to date, we look forward to announcing several more new products at the upcoming ISSA industry trade show in early November, including a prototype of our next generation ec-H2O™ technology that we anticipate offering on select scrubbers in the first quarter of 2015,” stated Killingstad.

Tennant remains committed to being an industry innovation leader and aims to set the standard for sustainable cleaning around the world.

2014 First Nine Month Results

For the nine months ended September 30, 2014, Tennant’s net earnings totaled $33.1 million, or $1.77 per diluted share, on net sales of $605.7 million. In the prior year first nine months, Tennant reported adjusted net earnings of $30.4 million, or $1.61 per diluted share, as adjusted, on net sales of $556.9 million. (See the Supplemental Non-GAAP Financial Table.)

Year-to-date 2014 gross margin was 42.8 percent versus 43.5 percent in the prior year period. R&D expense in the 2014 first nine months was $22.0 million, or 3.6 percent of sales, compared to $23.3 million, or 4.2 percent of sales in the previous year. S&A expense in the 2014 first nine months totaled $187.9 million, or 31.0 percent of sales, versus $174.1 million, or 31.3 percent of sales, and $172.6 million, or 31.0 percent of sales, as adjusted, in the first nine months of 2013.

Operating profit in the 2014 first nine months rose to $49.5 million, or 8.2 percent of sales, compared to $44.7 million, or 8.0 percent of sales, and $46.2 million, or 8.3 percent of sales, as adjusted, in the first nine months of 2013.

Tennant generated $36.8 million in cash from operations in the 2014 first nine months. Cash on the balance sheet at September 30, 2014, totaled $79.8 million, up from $65.3 million a year ago. The company's total debt was $28.2 million, down from $32.0 million at the end of the 2013 first nine months. During the 2014 first nine months, Tennant paid a total of $10.9 million in cash dividends to shareholders and repurchased 217,534 shares of common stock at a cost of $13.6 million.

Business Outlook

Based on its year-to-date results and expectations of performance for the remainder of the year, Tennant Company is raising its estimate for net sales to the range of $810 million to $820 million and is narrowing its estimate for 2014 full year earnings to the range of $2.60 to $2.70 per diluted share. Previously, Tennant anticipated 2014 net sales in the range of $800 million to $815 million and full year earnings in the range of $2.60 to $2.80 per diluted share. For the 2013 full year, adjusted diluted earnings per share totaled $2.26 on net sales of $752 million. (See the Supplemental Non-GAAP Financial Table.)

The company's 2014 annual financial outlook includes the following expectations:

  • Modest economic improvement in North America and Europe, and growth in emerging markets;
  • Foreign currency impact on sales for the full year in the range of neutral to an unfavorable 1 percent;
  • Gross margin performance of approximately 43 percent;
  • R&D expense of approximately 4 percent of sales, as the company continues to invest in its core products and in water-based cleaning technologies; and
  • Capital expenditures in the range of $20 million to $22 million.

“We are encouraged by our performance against our growth agenda year to date, and are on track to deliver robust sales and earnings growth in the 2014 fourth quarter,” said Killingstad. “Tennant’s future prospects are exciting. Our focus is on executing our growth strategies and working to resolve short-term supply chain challenges, in order to achieve our profitability objectives.”

Conference Call

Tennant will host a conference call to discuss the 2014 third quarter results today, October 23, 2014, at 10 a.m. Central Time (11 a.m. Eastern Time). The conference call will be available via webcast on the investor portion of Tennant's website. To listen to the call live, go to www.tennantco.com and click on Company, Investors. A taped replay of the conference call will be available at www.tennantco.com for approximately two weeks after the call.

About Tennant Company

Minneapolis-based Tennant Company (NYSE: TNC) is a world leader in designing, manufacturing and marketing solutions that help create a cleaner, safer, healthier world. Its 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 surfaces. Tennant's global field service network is the most extensive in the industry. Tennant has manufacturing operations in Minneapolis, Minn.; Holland, Mich.; Louisville, Ky.; Uden, The Netherlands; the United Kingdom; São Paulo, Brazil; and Shanghai, China; and sells products directly in 15 countries and through distributors in more than 80 countries. For more information, visit www.tennantco.com.

Forward-Looking Statements

Certain statements contained in this document, as well as other written and oral statements made by us from time to time, 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. Any such expectations or forecasts of future events are subject to a variety of factors. These include factors that affect all businesses operating in a global market as well as matters specific to us and the markets we serve. 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 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; the occurrence of disruptions to our supply and delivery chains; 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. 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. For additional information about factors that could materially affect Tennant's results, please see our other Securities and Exchange Commission filings, including disclosures under “Risk Factors.”

We do not undertake to update any forward-looking statement, and investors are advised to consult any further disclosures by us on this matter in our filings with the Securities and Exchange Commission and in other written statements we make from time to time. 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.

Non-GAAP Financial Measures

This news release includes presentations of non-GAAP measures that include or exclude special items. Management believes that the non-GAAP measures provide useful information to investors regarding the company's results of operations and financial condition because they permit a more meaningful comparison and understanding of Tennant Company's operating performance for the current, past or future periods. Management uses these non-GAAP measures to monitor and evaluate ongoing operating results and trends, and to gain an understanding of the comparative operating performance of the company. See the Supplemental Non-GAAP Financial Table.

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