Tennant Company Reports 2015 Second Quarter Results

MINNEAPOLIS--(BUSINESS WIRE)--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 $14.8 million, or $0.79 per diluted share, on net sales of $215.4 million for the second quarter ended June 30, 2015. On a “Constant Currency” basis (assuming no change in foreign exchange rates from the prior year), Tennant would have reported 2015 second quarter net sales of $227.4 million and net earnings per diluted share of $0.92, which would have been an increase of 10.8 percent over the prior year quarter. In the 2014 second quarter, Tennant reported net earnings of $15.5 million, or $0.83 per diluted share, on net sales of $219.1 million.

Commented Chris Killingstad, Tennant Company's president and chief executive officer: “Tennant posted another solid quarter, led by robust sales to strategic accounts in North America and global sales of new products. We are pleased with our continued strong performance in Tennant’s largest market, North America, which was the chief driver of our organic sales growth.”

Added Killingstad: “Overall, we remain pleased with the company’s progress against our organic sales growth goals during the 2015 second quarter and first half, as we strive to reach $1 billion in revenues by 2017. We continue to anticipate organic sales gains and improved profitability for the full year, despite ongoing global economic uncertainty and foreign currency headwinds.”

Tennant plans to meet its $1 billion strategic growth goal 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.

Second Quarter Operating Review
The company's 2015 second quarter consolidated net sales of $215.4 million decreased 1.7 percent compared to the prior year quarter. Unfavorable foreign currency exchange reduced consolidated net sales by approximately 5.5 percent. Organic net sales, which exclude the impact of foreign currency exchange (and acquisitions when applicable), increased approximately 3.8 percent.

In addition to higher sales to strategic accounts in North America in the 2015 second quarter, Tennant saw continued strong global demand for new products, especially the T12 and T17, the company’s new modular rider scrubbers for the industrial market.

Geographically, sales rose 5.0 percent in Tennant’s largest region, the Americas, or grew approximately 7.5 percent organically, excluding an unfavorable foreign currency exchange impact of about 2.5 percent. Sales in Europe, Middle East and Africa (EMEA) were down 18.2 percent, or decreased approximately 1.7 percent organically, excluding an unfavorable foreign currency exchange impact of about 16.5 percent. Organic sales growth in Western Europe was more than offset by lower sales of outdoor equipment. Sales in the Asia Pacific region (APAC) declined 16.1 percent, or down approximately 8.1 percent organically, excluding an unfavorable foreign currency exchange impact of about 8.0 percent. Tennant’s organic sales in China rose approximately 15 percent in the 2015 second quarter, although this was not enough to offset continued economic weakness, primarily in Australia, compared to the prior year quarter. For both EMEA and APAC, the company continues to anticipate organic sales growth for the 2015 full year.

Tennant's gross margin in the 2015 second quarter was 44.1 percent versus 43.5 percent in the prior year quarter. Several factors led to the gross margin improvement, including improved operating efficiencies in the direct service organization and manufacturing operations, and also a greater mix of higher margin business. The company anticipates gross margin for the 2015 full year will be at its target range of approximately 43 percent.

Research and development (R&D) expense for the 2015 second quarter totaled $8.4 million, or 3.9 percent of sales, compared to $7.7 million, or 3.5 percent of sales, in the same quarter last year. 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 2015 second quarter totaled $64.0 million, or 29.7 percent of sales, which was in line with the company’s expectations, as Tennant continued to invest in its sales growth initiatives. S&A in the 2014 second quarter was $64.5 million, or 29.4 percent of sales.

Tennant's 2015 second quarter operating profit was $22.6 million, or 10.5 percent of sales, versus an operating profit of $23.1 million, or 10.6 percent of sales, in the year ago quarter. Due to the strength of the U.S. dollar in the 2015 second quarter, foreign currency exchange reduced operating profit by approximately $3.4 million. Tennant remains committed to the goal of a 12 percent or above operating profit margin.

New Product and Technology Pipeline
Commented Killingstad: “We are excited about the steady launch cadence of Tennant’s new core equipment offerings and continued progress with sustainable cleaning solutions from our Orbio Technologies Group. The introduction of new products and technologies is important to our revenue growth. We remain committed to being an industry innovation leader and raising the standard for sustainable cleaning around the world.”

Tennant Company continues to execute against the strongest new product pipeline in its history. Year to date in 2015, Tennant has introduced 33 new products and product variants and plans to introduce three additional new products in the second half of 2015, on top of 55 new products launched from 2012 to 2014.

In the 2015 second quarter, Tennant introduced the T300 Walk-Behind Scrubber-adding to its broad portfolio of commercial floor scrubbers in one of the largest unit categories in the floor cleaning industry. The T300 is the first scrubber equipped with Tennant’s next generation of sustainable cleaning technology, ec-H2O NanoClean™. The name NanoClean refers to the creation of nano-scale bubbles that are an important part of the cleaning mechanism. Like the original ec-H2O, the next generation ec-H2O NanoClean technology electrically converts water into an innovative cleaning solution that cleans effectively, saves money and reduces environmental impact compared to daily floor cleaning chemicals. This converted water is created by an on-board e-cell that generates millions of microscopic bubbles– nanobubbles–per milliliter of solution.

The new ec-H2O NanoClean technology will soon be available on the company’s full line of commercial scrubbers.

In addition, the new Orbio® os3, which delivers on-site generation of an anti-microbial solution, as well as an effective multi-surface cleaner, continues to receive positive response from customers across a variety of industries.

2015 First Half Results
For the six months ended June 30, 2015, Tennant’s net earnings totaled $19.8 million, or $1.06 per diluted share, on net sales of $401.1 million. In the prior year first six months, Tennant reported net earnings of $21.3 million, or $1.14 per diluted share, on net sales of $403.1 million. Net sales declined 0.5 percent, or grew approximately 5.0 percent organically, excluding an unfavorable foreign currency exchange impact of about 5.5 percent.

Year-to-date 2015 gross margin was 43.2 percent versus 42.7 percent in the prior year period. R&D expense in the 2015 first half was $16.1 million, or 4.0 percent of sales, compared to $15.1 million, or 3.8 percent of sales, in the prior year period. S&A expense in the 2015 first half was $126.2 million, or 31.4 percent of sales, versus $124.7 million, or 30.9 percent of sales, in the first six months of 2014.

Operating profit in the 2015 first half was $30.8 million, or 7.7 percent of sales, compared to $32.4 million, or 8.0 percent of sales, in the prior year first six months. Due to the strength of the U.S. dollar in the 2015 first half, foreign currency exchange reduced operating profit by approximately $5.3 million.

Tennant generated $6.6 million in cash from operations in the 2015 first half. Cash on the balance sheet at June 30, 2015, totaled $67.6 million, up from $62.6 million a year ago. The company's total debt was $24.6 million, down from $28.2 million at the end of the 2014 first half. During the first six months of 2015, Tennant paid a total of $7.3 million in cash dividends to shareholders and repurchased 220,120 shares at a cost of $14.2 million.

Business Outlook
Based on its year-to-date results and expectations of performance for the remainder of the year, Tennant Company now estimates 2015 full year net sales in the range of $825 million to $845 million, up 0.4 percent to 2.8 percent, or up approximately 5 percent to 9 percent organically, assuming an unfavorable foreign currency exchange impact on sales in the range of 4 percent to 6 percent. Previously, Tennant anticipated 2015 full year net sales in the range of $825 million to $855 million. The company continues to expect 2015 full year earnings in the range of $2.40 to $2.70 per diluted share. As stated previously, foreign currency exchange headwinds in 2015 are estimated to negatively impact operating profit in the range of $10 million to $12 million, or approximately $0.37 to $0.44 earnings per diluted share. The estimated higher effective tax rate in 2015 is anticipated to negatively impact earnings per diluted share by approximately $0.14. The company expects its 2015 financial results to be stronger in the second half of the year. For the 2014 full year, diluted earnings per share totaled $2.70 on net sales of $822 million.

Tennant’s 2015 annual financial outlook includes the following assumptions:

• Economic strength in North America and modest improvement in Europe, and growth in emerging markets;
• Increased foreign currency impact on sales for the full year in the range of an unfavorable 4 percent to 6 percent, with a $10 million to $12 million negative effect on operating profit;
• 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;
• Capital expenditures in the range of $25 million to $28 million; and
• An effective tax rate of approximately 31 percent, including the anticipated enactment of the 2015 Federal R&D tax credit.

Commented Killingstad: “We are continuing to invest in our growth agenda, and we remain on track to deliver gains in organic sales and operating profit margin in 2015. We expect Tennant’s financial performance to be stronger in the second half of 2015, despite foreign currency headwinds. We are focused on creating value through new product introductions, and expanding our global sales and marketing initiatives to increase our global market share, while concurrently running a more efficient business to raise productivity.”

Conference Call
Tennant will host a conference call to discuss the 2015 second quarter results today, July 23, 2015, at 10 a.m. Central Time (11 a.m. Eastern Time). The conference call and accompanying slides will be available via webcast on Tennant's investor website. To listen to the call live and view the slide presentation, go to investors.tennantco.com and click on the link at the bottom of the Home page. A taped replay of the conference call with slides will be available at investors.tennantco.com for approximately three months after the call.

About Tennant Company
Minneapolis-based Tennant Company (TNC) is a world leader in designing, manufacturing and marketing solutions that empower customers to achieve quality cleaning performance, significantly reduce their environmental impact and 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: the competition in our business, foreign currency exchange rate fluctuations, particularly the relative strength of the U.S. dollar against other major currencies; geopolitical and economic uncertainty throughout the world; our ability to attract and retain key personnel; our ability to successfully upgrade, evolve and protect our information technology systems; fluctuations in the cost, quality, or availability of raw materials and purchased components; our ability to effectively manage organizational changes; our ability to comply with laws and regulations; the occurrence of a significant business interruption; our ability to develop and commercialize new innovative products and services; and unforeseen product liability claims or product quality issues.

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.