Tennant Company Reports 2013 Second Quarter Results Second quarter diluted EPS rose to $0.76 on net sales of $200.2 million; Gross margins of 43.8 percent within target range; Operating profit margin was 10.8 percent; Company maintains 2013 full year guidance Business Wire MINNEAPOLIS -- July 25, 2013 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 $14.3 million, or $0.76 per diluted share, on net sales of $200.2 million for the second quarter ended June 30, 2013. In the prior year quarter, Tennant reported net earnings of $13.7 million, or $0.71 per diluted share, on net sales of $199.5 million. Commented Chris Killingstad, Tennant Company's president and chief executive officer: “We are pleased to report a very solid 2013 second quarter, with increased sales and earnings versus the prior year. Strong demand for new products and continuing momentum in global strategic accounts contributed to higher sales. We were encouraged to see total organic sales rise about 1 percent following three consecutive quarters of approximately 2 percent negative organic sales growth. In addition, we continued to achieve further efficiencies in our cost structure which we anticipate will lead to higher profitability in the future.” Second Quarter Operating Review The company's 2013 second quarter consolidated net sales of $200.2 million were up 0.4 percent compared to the prior year quarter. Unfavorable foreign currency exchange reduced consolidated net sales by approximately 0.5 percent. Organic net sales, which exclude the impact of foreign currency exchange (and acquisitions when applicable), increased approximately 0.9 percent. Contributing to 2013 second quarter results were sales to strategic accounts, sales in the Americas of scrubbers equipped with Tennant's ec-H2O^TM technology and strong shipments of newly introduced products. Of note, Tennant saw high demand for the T12 rider scrubber, which is the first new product in Tennant's redesigned modular large equipment portfolio. Geographically, sales increased 2.9 percent in the Americas, driven by record quarterly sales in North America, with particular sales gains to strategic accounts, and continued broad-based growth in Latin America. Sales in the Americas rose approximately 3.4 percent organically, excluding an unfavorable foreign currency exchange impact of about 0.5 percent. Sales in Europe, Middle East and Africa (EMEA) were down 8.2 percent, declining approximately 9.2 percent organically, excluding a favorable foreign currency exchange impact of about 1.0 percent. Sales of city cleaning equipment continue to be constrained primarily due to tight municipal spending in Europe, while sales to strategic accounts continued to gain momentum and sales in France were particularly robust. Sales in the Asia Pacific region (APAC) increased 2.0 percent, growing about 5.5 percent organically, excluding an unfavorable foreign currency exchange impact of about 3.5 percent. Organic sales growth resumed in the APAC region due mainly to strong sales performance in Australia. Tennant's gross margin in the 2013 second quarter was 43.8 percent compared to 44.6 percent in the prior year quarter, and within the company's targeted range of 43 percent to 44 percent. Gross margin in the 2013 second quarter was impacted by the selling channel mix, with strong sales to strategic accounts. Research and development (R&D) expense for the 2013 second quarter totaled $7.8 million, or 3.9 percent of sales, compared to $6.9 million, or 3.5 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 business, which is focused on advancing a platform of chemical-free and other sustainable, water-based cleaning technologies. Selling and administrative (S&A) expense in the 2013 second quarter totaled $58.3 million, down from $60.4 million in the second quarter last year. As a percent of sales, S&A decreased to 29.1 percent in the 2013 second quarter compared to 30.3 percent in the same quarter last year. S&A spending declined 3.5 percent on a dollar basis and was down 120 basis points as a percent of sales compared to the 2012 second quarter. The improvement in S&A was due to continued tight cost controls and improved operating efficiencies. Commented Killingstad: “Through strict cost controls and process improvement initiatives, we succeeded in reducing 2013 second quarter S&A expense to below 30 percent of sales, which is the lowest percentage achieved in at least 10 years.” The company's 2013 second quarter operating profit was $21.6 million, or 10.8 percent of sales, equal to the year ago quarter. Strong New Product Pipeline Tennant continues to execute against one of the most robust new product and technology pipelines in the company's history. The company resolved the supply chain issues it encountered in the 2013 first quarter related to the transition to new products, and sales of new products in the 2013 second quarter met internal plans. By 2013 third quarter-end, sales of new products are expected to be back on track on a year-to-date basis. The company introduced 17 new products in the 2012 fourth quarter and is launching 25 new products in 2013. Product introductions in 2013 to date include the: *T12 rider scrubber, which as noted above is the first new product in Tennant's redesigned modular large equipment portfolio; *T3 orbital scrubber, which provides a chemical-free way to clean and strip floors; and *B10, Tennant's first rider burnisher, which enables rapid cleaning and polishing of large areas. These new core equipment offerings are engineered to improve cleaning performance and operator safety, lower operating costs and reduce environmental impact. In addition, Tennant's Orbio Technologies Group is developing an exciting new product with Split Stream Technology that will deliver an anti-microbial solution, as well as an effective multi-surface cleaner, for use in a wide variety of customer segments. The company plans to introduce this new Orbio product in 2014. Tennant remains committed to being an industry innovation leader and aims to set the standard for sustainable cleaning around the world. 2013 First Half Results For the six months ended June 30, 2013, Tennant reported net earnings of $19.3 million, or $1.03 per diluted share, on net sales of $368.3 million. Excluding special items in the 2013 first quarter, adjusted 2013 net earnings totaled $19.8 million, or $1.05 per diluted share. (See the Supplemental Non-GAAP Financial Table.) In the prior year first six months, Tennant reported net earnings of $19.0 million, or $0.99 per diluted share, on net sales of $373.2 million. Year-to-date 2013 gross margin was 43.5 percent versus 44.0 percent in the prior year period and was down 50 basis points primarily due to a change in product mix. R&D expense in the 2013 first half increased to $15.3 million, or 4.2 percent of sales, compared to $14.2 million or 3.8 percent of sales, in the prior year period. S&A expense in the 2013 first half declined to $116.4 million, or 31.6 percent of sales, and $115.0 million or 31.2 percent of sales as adjusted, versus $120.1 million, or 32.2 percent of sales, in the first six months of 2012. Operating profit in the 2013 first half was $28.5 million, or 7.7 percent of sales, and $29.9 million or 8.1 percent of sales as adjusted, compared to $29.9 million, or 8.0 percent of sales, in the first six months of 2012. Tennant generated $15.2 million in cash from operations in the 2013 first half. Cash on the balance sheet at June 30, 2013, totaled $48.6 million, up from $38.4 million a year ago. The company's total debt was $32.2 million, down from $34.3 million, at the end of the 2012 first half. During the 2013 first half, Tennant's stock repurchases in the market totaled approximately 257,000 shares at a cost of $12.1 million. The company also paid $6.6 million in cash dividends to shareholders. Business Outlook Based on its first half 2013 results and expectations of performance for the remainder of the year, Tennant Company continues to estimate 2013 full year adjusted earnings in the range of $2.20 to $2.50 per diluted share on net sales in the range of $750 million to $770 million. Including the 2013 first quarter special items of a net loss of $0.02 per diluted share, the company expects 2013 full year diluted earnings per share in the range of $2.18 to $2.48. For the 2012 full year, adjusted diluted earnings per share were $2.08 on net sales of $739 million. (See the Supplemental Non-GAAP Financial Table.) The company's 2013 annual financial outlook includes the following expectations: *Modest economic improvement in North America, continued uncertainty in Europe and steady growth in emerging markets; *Unfavorable foreign currency impact on sales for the full year in the range of 0 to 1 percent; *Gross margin performance in the range of 43 percent to 44 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 $18 million to $20 million. Tennant will continue to manage its business with a focus on operational excellence and strong cost controls, and make selective investments in innovative technologies and other key strategic priorities. Killingstad said, “We are pleased with our current momentum and prospects for the rest of the year. We continue to expect 2013 sales to be stronger in the back half of the year, as new product sales accelerate and growth continues in Tennant's global strategic accounts and our overall Americas business.” Conference Call Tennant will host a conference call to discuss the 2013 second quarter results today, July 25, 2013, 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 towww.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. Company Profile 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 effectively manage organizational changes; our ability to comply with laws and regulations; our ability to attract and retain key personnel; our ability to develop and fund new innovative products and services; unforeseen product liability claims or product quality issues; our ability to successfully upgrade and evolve the capabilities of our computer systems; the occurrence of a significant business interruption; the relative strength of the U.S. dollar, which affects the cost of our materials and products purchased and sold internationally; the occurrence of disruptions to our supply and delivery chains; fluctuations in the cost or availability of raw materials and purchased components; and the impact of the economic uncertainty on our customers' ability to obtain credit. 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 theSecurities and Exchange Commissionand 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 ofTennant Company'soperating 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. TENNANT COMPANY CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited) (In thousands, except shares Three Months Ended Six Months Ended and per share data) June 30 June 30 2013 2012 2013 2012 Net Sales $ 200,238 $ 199,493 $ 368,330 $ 373,205 Cost of Sales 112,497 110,542 208,066 208,935 Gross Profit 87,741 88,951 160,264 164,270 Gross Margin 43.8 % 44.6 % 43.5 % 44.0 % Operating Expense: Research and Development 7,821 6,935 15,339 14,205 Expense Selling and Administrative 58,298 60,419 116,420 120,133 Expense Total Operating 66,119 67,354 131,759 134,338 Expense Profit from 21,622 21,597 28,505 29,932 Operations Operating 10.8 % 10.8 % 7.7 % 8.0 % Margin Other Income (Expense): Interest 114 330 228 642 Income Interest (411 ) (669 ) (878 ) (1,381 ) Expense Net Foreign Currency (419 ) (880 ) (743 ) (1,111 ) Transaction Losses Other (Expense) (87 ) 41 (81 ) 76 Income, Net Total Other (803 ) (1,178 ) (1,474 ) (1,774 ) Expense, Net Profit Before 20,819 20,419 27,031 28,158 Income Taxes Income Tax 6,565 6,748 7,718 9,163 Expense Net Earnings $ 14,254 $ 13,671 $ 19,313 $ 18,995 Earnings per Share: Basic $ 0.78 $ 0.74 $ 1.06 $ 1.02 Diluted $ 0.76 $ 0.71 $ 1.03 $ 0.99 Weighted Average Shares Outstanding: Basic 18,253,326 18,594,207 18,298,379 18,658,182 Diluted 18,787,880 19,203,563 18,835,542 19,262,469 Cash Dividend Declared per $ 0.18 $ 0.17 $ 0.36 $ 0.34 Common Share GEOGRAPHICAL NET SALES^(1) (Unaudited) (In Three Months Ended Six Months Ended thousands) June 30 June 30 2013 2012 % 2013 2012 % Americas $ 139,593 $ 135,689 2.9 $ 252,840 $ 247,102 2.3 Europe, Middle 39,838 43,414 (8.2 ) 79,029 87,218 (9.4 ) East and Africa Asia 20,807 20,390 2.0 36,461 38,885 (6.2 ) Pacific Total $ 200,238 $ 199,493 0.4 $ 368,330 $ 373,205 (1.3 ) ^(1) Net of intercompany sales. TENNANT COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (In thousands) June 30, December 31, June 30, 2013 2012 2012 ASSETS Current Assets: Cash and Cash Equivalents $ 48,576 $ 53,940 $ 38,432 Restricted Cash 394 187 1,586 Accounts Receivable, Net 146,789 138,147 135,062 Inventories 62,699 58,136 68,413 Prepaid Expenses 10,875 11,309 11,598 Deferred Income Taxes, 9,619 11,339 10,114 Current Portion Other Current Assets 2,431 388 16 Total Current Assets 281,383 273,446 265,221 Property, Plant and 299,284 294,910 293,631 Equipment Accumulated Depreciation (215,038 ) (208,717 ) (206,941 ) Property, Plant and 84,246 86,193 86,690 Equipment, Net Deferred Income Taxes, 10,428 10,989 16,607 Long-Term Portion Goodwill 19,263 19,717 19,830 Intangible Assets, Net 19,245 21,393 22,198 Other Assets 8,389 9,022 5,397 Total Assets $ 422,954 $ 420,760 $ 415,943 LIABILITIES AND SHAREHOLDERS’ EQUITY Current Liabilities: Short-Term Borrowings and Current Portion of $ 4,013 $ 2,042 $ 3,235 Long-Term Debt Accounts Payable 52,763 47,002 49,039 Employee Compensation and 24,496 33,021 24,763 Benefits Income Taxes Payable 963 785 2,699 Other Current Liabilities 39,156 38,844 36,836 Total Current Liabilities 121,391 121,694 116,572 Long-Term Liabilities: Long-Term Debt 28,169 30,281 31,049 Employee-Related Benefits 25,168 25,873 38,343 Deferred Income Taxes, 3,070 3,325 3,434 Long-Term Portion Other Liabilities 4,643 4,533 3,945 Total Long-Term Liabilities 61,050 64,012 76,771 Total Liabilities 182,441 185,706 193,343 Shareholders’ Equity: Preferred Stock — — — Common Stock 6,899 6,924 6,977 Additional Paid-In Capital 25,892 22,398 17,882 Retained Earnings 241,065 236,065 228,332 Accumulated Other (33,343 ) (30,333 ) (30,591 ) Comprehensive Loss Total Shareholders’ Equity 240,513 235,054 222,600 Total Liabilities and $ 422,954 $ 420,760 $ 415,943 Shareholders’ Equity TENNANT COMPANY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands) Six Months Ended June 30 2013 2012 OPERATING ACTIVITIES Net Earnings $ 19,313 $ 18,995 Adjustments to reconcile Net Earnings to Net Cash Provided by Operating Activities: Depreciation 8,858 8,937 Amortization 1,281 1,432 Deferred Income Taxes 1,898 (1,271 ) Share-Based Compensation Expense 3,439 3,911 Allowance for Doubtful Accounts and Returns 703 1,148 Other, Net 1 19 Changes in Operating Assets and Liabilities: Accounts Receivable (11,514 ) (7,538 ) Inventories (7,536 ) (7,278 ) Accounts Payable 6,145 3,978 Employee Compensation and Benefits (8,875 ) (8,438 ) Other Current Liabilities 1,825 (1,714 ) Income Taxes 1,752 855 U.S. Pension Plan Contributions — (846 ) Other Assets and Liabilities (2,066 ) 353 Net Cash Provided by Operating Activities 15,224 12,543 INVESTING ACTIVITIES Purchases of Property, Plant and Equipment (7,192 ) (7,482 ) Proceeds from Disposals of Property, Plant and 60 534 Equipment Acquisition of Businesses, Net of Cash (750 ) (750 ) Acquired Proceeds from Sale of Business 699 — (Increase) Decrease in Restricted Cash (228 ) 1,691 Net Cash Used for Investing Activities (7,411 ) (6,007 ) FINANCING ACTIVITIES Short-Term Borrowings 1,500 — Payment of Long-Term Debt (733 ) (1,764 ) Purchases of Common Stock (12,141 ) (15,281 ) Proceeds from Issuance of Common Stock 3,812 1,952 Tax Benefit on Stock Plans 1,506 1,076 Dividends Paid (6,611 ) (6,358 ) Net Cash Used for Financing Activities (12,667 ) (20,375 ) Effect of Exchange Rate Changes on Cash and (510 ) (68 ) Cash Equivalents Net Decrease in Cash and Cash Equivalents (5,364 ) (13,907 ) Cash and Cash Equivalents at Beginning of 53,940 52,339 Period Cash and Cash Equivalents at End of Period $ 48,576 $ 38,432 TENNANT COMPANY SUPPLEMENTAL NON-GAAP FINANCIAL TABLE (In thousands, except per Three Months Ended Six Months Ended share data) June 30 June 30 2013 2012 2013 2012 Net Sales $ 200,238 $ 199,493 $ 368,330 $ 373,205 Cost of Sales 112,497 110,542 208,066 208,935 Gross Profit - 87,741 88,951 160,264 164,270 as reported Gross Margin 43.8 % 44.6 % 43.5 % 44.0 % Operating Expense: Research and Development 7,821 6,935 15,339 14,205 Expense Selling and Administrative 58,298 60,419 116,420 120,133 Expense Total Operating 66,119 67,354 131,759 134,338 Expense Profit from Operations - $ 21,622 $ 21,597 $ 28,505 $ 29,932 as reported Operating 10.8 % 10.8 % 7.7 % 8.0 % Margin Adjustments: Restructuring — — 1,440 — Charge Profit from Operations - $ 21,622 $ 21,597 $ 29,945 $ 29,932 as adjusted Operating 10.8 % 10.8 % 8.1 % 8.0 % Margin Other Income (Expense): Interest 114 330 228 642 Income Interest (411 ) (669 ) (878 ) (1,381 ) Expense Net Foreign Currency (419 ) (880 ) (743 ) (1,111 ) Transaction Losses Other (Expense) (87 ) 41 (81 ) 76 Income, Net Total Other (803 ) (1,178 ) (1,474 ) (1,774 ) Expense, Net Profit Before Income Taxes - $ 20,819 $ 20,419 $ 27,031 $ 28,158 as reported Adjustments: Restructuring — — 1,440 — Charge Profit Before Income Taxes - $ 20,819 $ 20,419 $ 28,471 $ 28,158 as adjusted Income Tax Expense - as $ 6,565 $ 6,748 $ 7,718 $ 9,163 reported Adjustments: Restructuring — — 417 — Charge Discrete Tax Item Related — — 582 — to 2012 R&D Tax Credit Income Tax Expense - as $ 6,565 $ 6,748 $ 8,717 $ 9,163 adjusted TENNANT COMPANY SUPPLEMENTAL NON-GAAP FINANCIAL TABLE (In thousands, except Three Months Ended Six Months Ended per share data) June 30 June 30 2013 2012 2013 2012 Net Earnings - as $ 14,254 $ 13,671 $ 19,313 $ 18,995 reported Adjustments: Restructuring Charge — — 1,023 — Discrete Tax Item Related to 2012 R&D Tax — — (582 ) — Credit Net Earnings - as $ 14,254 $ 13,671 $ 19,754 $ 18,995 adjusted Earnings per Share: Basic $ 0.78 $ 0.74 $ 1.06 $ 1.02 Diluted Earnings per $ 0.76 $ 0.71 $ 1.03 $ 0.99 Share - as reported Adjustments: Restructuring Charge — — 0.05 — Discrete Tax Item Related to 2012 R&D Tax — — (0.03 ) — Credit Diluted Earnings per $ 0.76 $ 0.71 $ 1.05 $ 0.99 Share - as adjusted TENNANT COMPANY SUPPLEMENTAL NON-GAAP FINANCIAL TABLE (In thousands, except per share data) Full Year 2012 Diluted Earnings per Share - as reported $ 2.18 Adjustments: International Entity Restructuring (0.11 ) Gain on Sale of Business (0.03 ) Restructuring Charge 0.04 Diluted Earnings per Share - as adjusted $ 2.08 Contact: Tennant Company Investor Contact: Tom Paulson, 763-540-1204 Vice President and Chief Financial Officer or Media Contact: Kathryn Lovik, 763-540-1212 Global Communications Director
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