Tennant Company Reports 2011 Second Quarter Results

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 $5.9 million, or $0.30 per diluted share, on record net sales of $201.3 million for the second quarter ended June 30, 2011. In the prior year quarter, Tennant reported net earnings of $6.2 million, or $0.32 per diluted share, on net sales of $166.1 million.

Tennant recorded special charges in the 2011 second quarter totaling $5.0 million after tax, or a $0.26 loss per diluted share, including: a $0.20 loss per diluted share related to obsolescence of the two Hofmans outdoor city cleaning products in Europe; and a $0.06 loss per diluted share related to severance in connection with the previously announced departure of Tennant’s vice president of international. Excluding these special charges, adjusted second quarter 2011 net earnings totaled $10.9 million, or $0.56 per diluted share, up 75 percent compared to the prior year quarter. (See the Supplemental Financial Tables.)

"We are very pleased with the company’s record second quarter sales, which surpassed any previous quarter in our history,” said Chris Killingstad, Tennant Company's president and chief executive officer. "This was our sixth consecutive quarter of double-digit organic sales growth. Notably, these results come on top of the double-digit sales gains we saw in the second quarter of last year. The increased revenue was driven by robust growth across all of our geographies and throughout our entire product portfolio, with the exception of city cleaning.”

Commenting on the special charges in the 2011 second quarter, Killingstad said: "In light of the economic climate in Europe, we conducted a review of Tennant’s city cleaning portfolio and have decided to focus on the innovative Green Machines^TM products which have the highest potential for long-term growth and margin expansion. In addition, regarding our international business unit, we do not plan to fill the vice president of international position at this time. Instead, we will leverage the strengths of our regional leaders based in Europe, China and Australia.”

Sales of scrubbers equipped with Tennant’s ec-H2O^TM technology grew approximately 85 percent in the 2011 second quarter compared to the prior year quarter. In the first six months of 2011, sales of scrubbers equipped with ec-H2O totaled $67 million and Tennant expects 2011 full year ec-H2O sales in the range of $130 million to $140 million. The environmentally friendly ec-H2O process converts water into a cleaning solution that cleans as well as or better than traditional general purpose chemicals and provides a lower total cost of ownership and safety benefits.

"Our ec-H2O technology has firmly established Tennant as an innovator in sustainable, water-based cleaning,” said Killingstad. "We expect ec-H2O to continue to help achieve significant penetration of existing and new customers in the 2011 second half.”

Second Quarter Operating Review
Tennant’s consolidated net sales grew 21.1 percent to a record $201.3 million in the 2011 second quarter versus $166.1 million for the 2010 second quarter. Favorable foreign currency exchange effects contributed approximately 5.5 percent in the 2011 second quarter. Organic net sales, which exclude acquisitions and foreign currency impact, rose approximately 15.6 percent in the quarter. Organic sales grew approximately: 18.9 percent in Tennant's Americas region; 6.3 percent in the Europe, Middle East and Africa (EMEA) region; and 17.9 percent in the Asia Pacific region.

The company’s gross profit margin in the 2011 second quarter was 41.5 percent, and 42.2 percent excluding special charges of $1.5 million, which was down from 43.1 percent in the year earlier quarter. Gross margins were impacted primarily by inflation in raw materials in all geographic regions, and lower production and sales volumes in city cleaning products in the EMEA region. On an adjusted basis, however, gross margins in the second quarter returned to Tennant’s target range of 42 to 43 percent.

Commented Killingstad: "Adjusted gross margins were up sequentially in the second quarter – without the full benefit of selling price increases that went into effect in mid-May. We expect further improvement in gross margins in the second half of this year, as the full effects of our pricing actions are realized.”

For the 2011 second quarter, selling and administrative (S&A) expense totaled $66.5 million, or 33.0 percent of sales, and $62.5 million, or 31.0 percent of sales excluding special charges of $4.0 million, versus $54.5 million, or 32.8 percent of sales, in the second quarter last year. The increase in S&A expense was primarily attributable to investments in the company’s sustainable cleaning business and higher variable costs stemming from increased sales. Adjusted S&A expense as a percent of sales, however, decreased 180 basis points versus the prior year second quarter due to improved operating efficiencies.

Tennant's 2011 second quarter operating profit was $10.2 million, or 5.1 percent of sales, and was $15.7 million, or 7.8 percent of sales excluding special charges of $5.5 million, versus an operating profit of $10.6 million, or 6.4 percent of sales in the prior year quarter.

2011 First Half Results
For the six months ended June 30, 2011, Tennant reported net earnings of $11.7 million, or $0.60 per diluted share, on net sales of $373.8 million. Excluding special items in the 2011 second quarter of $5.0 million, or a $0.26 loss per diluted share, the company’s 2011 first half adjusted net earnings were $16.7 million, or $0.86 per diluted share. In the prior year first six months, Tennant reported net earnings of $10.3 million, or $0.53 per diluted share, on net sales of $316.2 million.

Year-to-date gross margins were 41.6 percent, and 42.0 percent excluding special charges of $1.5 million, versus 42.8 percent in the first six months of 2010, again primarily reflecting the increase in raw material costs. S&A expense in the 2011 first half totaled $124.0 million, or 33.2 percent of sales, and $120.0 million, or 32.1 percent of sales excluding special charges of $4.0 million. This compares to $106.2 million, or 33.6 percent of sales, in the first six months of 2010.

Operating profit in the 2011 first half increased to $18.4 million, or 4.9 percent of sales, and $23.9 million or 6.4 percent of sales excluding special charges of $5.5 million, versus an operating profit of $17.1 million, or 5.4 percent of sales, in the first six months of 2010.

Tennant generated $12.7 million in cash from operations in the 2011 first half. Total cash and cash equivalents at June 30, 2011, was $41.5 million, compared with $34.5 million a year ago. The company's total debt was $41.3 million versus $32.4 million at the end of the 2010 first half. During the second quarter, Tennant repurchased approximately 243,000 shares of the company’s stock. Tennant had approximately 19 million common shares outstanding at June 30, 2011.

Business Outlook
"Tennant’s performance in the first six months of 2011 benefited from a combination of improved macroeconomic conditions, strong ec-H2O and core products sales around the globe, and our ongoing focus on operational excellence,” said Killingstad.

Based on its strong results in the first half of 2011, Tennant Company is raising its sales and earnings outlook. Including the 2011 second quarter special charges of $5.0 million after tax, or a loss of $0.26 per diluted share, Tennant now estimates 2011 full year earnings in the range of $1.69 to $1.79 per diluted share. Excluding these special charges, the company now expects adjusted earnings for full year 2011 in the range of $1.95 to $2.05 per diluted share on full year net sales in the range of $750 million to $765 million. Previously, the company anticipated 2011 full year adjusted earnings in the range of $1.75 to $1.95 per diluted share on net sales in the range of $710 million to $730 million. For full year 2010, adjusted earnings totaled $1.31 per diluted share on net sales of $667.7 million.

Tennant will continue to manage its business with a focus on operational excellence and strong cost controls, and make selective investments in key strategic priorities. In 2011, the company anticipates continued recovery in North America, strong growth in emerging markets and modestly improving conditions in Europe. Tennant continues to closely monitor commodity prices, which have risen recently. In addition, Tennant's 2011 full year financial outlook includes the following expectations:

• Favorable foreign currency impact on sales for the full year in the range of 3 to 4 percent;
• Minimal inflation net of cost-saving initiatives and selling price increases;
• A gross margin of approximately 42 to 43 percent;
• R&D expense of approximately 4 percent of sales, as the company continues to invest in its core products and increases investment in its water-based cleaning business; and
• Capital expenditures in the range of $16 million to $18 million.

"We remain committed to profitably growing our traditional business and expanding the company’s global leadership position in sustainable, water-based cleaning technologies,” said Killingstad. "We believe that Tennant can continue to post solid growth going forward by successfully executing our current strategy and assuming the global economy as a whole continues to improve. We are confident that our strategic direction, coupled with rigorous cost controls, improved operating efficiency and new products, will further enhance our value-creation potential.”

Conference Call
Tennant will host a conference call to discuss the 2011 second quarter and first half results today, July 28, 2011, 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 http://www.tennantco.com and click on Investor. A taped replay of the conference call will be available at http://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 specialty surface coatings for protecting, repairing and upgrading floors. 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 http://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 effectively maintain and manage the data in our computer systems; our ability to develop new innovative products and services; our ability to successfully upgrade and evolve the capabilities of our computer systems; our ability to attract and retain key personnel; the occurrence of a significant business interruption; fluctuations in the cost or availability of raw materials and purchased components; unforeseen product liability claims or product quality issues; our ability to acquire, retain and protect proprietary intellectual property rights; 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 Tables.

FINANCIAL TABLES FOLLOW