Tennant Company Reports 2018 Full-Year and Fourth-Quarter Results

Full-year 2018 organic sales growth of 5.5 percent and EBITDA
achieved 10.8 percent of sales

Full-year cash flow from operations of $80.0 million, up 47.6
percent vs. last year

Organic sales increased 4.3 percent to $285.2 million in the
fourth quarter

Fourth-quarter GAAP diluted earnings per share of $0.42; adjusted
diluted EPS of $0.54 per share

Company provides 2019 guidance for net sales, EBITDA and EPS

MINNEAPOLIS–(BUSINESS WIRE)–Tennant Company (“Tennant”) (NYSE: TNC), a world leader in designing,
manufacturing and marketing of solutions that help create a cleaner,
safer, healthier world, today reported fourth-quarter and full year 2018
results.

2018 Full-Year Highlights
For
the 2018 full year, net sales climbed 12.0 percent to $1.12 billion, or
5.5 percent on an organic basis, reflecting organic growth in all three
regions across the globe. Adjusted EBITDA rose 18.9 percent to $120.8
million, or 10.8 percent of sales, compared to $101.6 million, or 10.1
percent of sales, last year. During the year, cash flow from operations
improved by 47.6 percent to $80.0 million and the company paid down
$38.3 million of our outstanding debt.

“Our full-year 2018 results illustrate strong top-line growth,
disciplined expense management, and improved financial strength driving
shareholder returns. For the full-year, Tennant achieved organic growth
across all geographic regions and continued our trend of six consecutive
quarters of achieving top-line organic growth. We also continued to make
progress across several initiatives such as improved field-service
utilization, strong expense management, cash flow improvement and
ongoing debt reduction, all while continuing to invest for growth and
successfully integrating the IPC business. While we clearly continue to
be affected by headwinds in the form of tariffs, raw material price
inflation, higher freight costs and a tight labor market, our ability to
execute on our core strategies to diversify revenue streams, drive
organizational efficiencies and improve our financial strength is
creating a stronger Tennant. I believe the company is well-positioned
for long-term, profitable growth,” said Chris Killingstad, Tennant
Company’s president and chief executive officer.

Fourth-Quarter Operating Review
In
the fourth-quarter 2018, Tennant’s consolidated net sales of $285.2
million grew approximately 2.1 percent over the same period last year.
This includes a 2.0 percent reduction from foreign currency. On an
organic basis, sales rose 4.3 percent.

Sales in the Americas region improved 4.2 percent, or 5.7 percent
organically, reflecting strength in both the North America and Latin
America regions. North America posted another positive organic growth
quarter of 4.8 percent driven by continued strength in strategic
accounts and distribution channels, along with continued growth in
service and parts and consumables businesses. Sales in the Americas
region also reflect 14.0 percent organic growth in the Latin American
region reflecting broad-based strength in the region with particular
strength in Mexico.

Sales in the Europe, Middle East and Africa (EMEA) region were up 1.0
percent, or 4.3 percent organically, reflecting strength in all channels
and particular strength in Germany and France. Sales in the Asia Pacific
(APAC) region declined 6.8 percent, or 3.4 percent organically,
primarily reflecting a challenging year-over-year sales comparison.

Gross margin in the 2018 fourth quarter was 39.3 percent, compared to
40.8 percent in last year’s fourth quarter. The prior-year gross margin
rate included a $1.2 million acquisition-related net adjustment.
Excluding the net adjustment, the prior year gross margin rate was 40.3
percent. Historical gross margins have also been adjusted due to a
reclassification of certain expenses impacting gross margin and selling
and administrative expenses. There was no impact on operating profit or
adjusted EBITDA. The impact of the reclassification in the
fourth-quarter 2017 had the effect of reducing the gross margin rate by
approximately 60 basis points and reducing the selling and
administrative as a percent of sales by approximately 60 basis points.
The numbers throughout this release and Supplemental Non-GAAP financial
tables reflect the restated figures. Gross margin performance continues
to primarily reflect higher levels of strategic accounts sales, higher
freight costs, raw material price inflation and the continuing impact
from tariffs. (See the Supplemental Non-GAAP Financial Table.)

Tennant’s 2018 fourth-quarter net earnings were $7.7 million, or $0.42
per diluted share, compared to a net loss of $3.2 million, or a loss of
$0.18 per share, in the 2017 fourth quarter. Excluding the
non-operational items, the 2018 fourth-quarter net earnings were $10.0
million, or $0.54 per diluted share, compared to $6.2 million, or $0.34
per diluted share, in the 2017 fourth quarter. Adjusted earnings before
interest, taxes, depreciation and amortization (EBITDA) in the 2018
fourth quarter were $30.3 million, or 10.6 percent of sales, compared to
$30.9 million, or 11.1 percent of sales, in the 2017 fourth quarter.
(See the Supplemental Non-GAAP Financial Table.)

During the 2018 fourth quarter, Tennant generated $36.5 million in cash
flow from operations, an increase of 65 percent compared to net cash
flow from operations of $22.1 million in the 2017 fourth quarter. The
company also reduced outstanding debt by $8.0 million and paid $4.0
million in cash dividends to shareholders during the fourth quarter.

2019 Business Outlook
Killingstad
concluded, “As we move into 2019, we remain focused on sustaining our
growth momentum, improving our profitability, continuing our investment
in innovation and managing a capital allocation strategy that balances
effective investment in our business with cash returns for our
shareholders.”

For 2019, Tennant provides the following guidance:

  • Net sales of $1.15 billion to $1.17 billion, reflecting organic sales
    growth of 2 to 3 percent;
  • Full-year reported GAAP earnings in the range of $2.05 to $2.25 per
    diluted share;
  • Adjusted EPS of $2.30 to $2.50 per diluted share;
  • Adjusted EBITDA of $129 million to $133 million;
  • Capital expenditures in the range of $40 million to $45 million; and
  • An effective tax rate of approximately 20 percent.

Conference Call
Tennant will
host a conference call to discuss 2018 fourth-quarter results February
21, 2019, 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
until March 21, 2019.

Company Profile
Founded in
1870, Tennant Company (TNC), headquartered in Minneapolis, Minnesota, is
a world leader in designing, manufacturing and marketing solutions that
empower customers to achieve quality cleaning performance, 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; detergent-free and other
sustainable cleaning technologies; cleaning tools and supplies; and
coatings for protecting, repairing and upgrading surfaces. Tennant’s
global field service network is the most extensive in the industry.
Tennant Company had sales of $1.12 billion in 2018 and has approximately
4,300 employees. Tennant has manufacturing operations throughout the
world and sells products directly in 15 countries and through
distributors in more than 100 countries. For more information, visit www.tennantco.com
and www.ipcworldwide.com.
The Tennant Company logo and other trademarks designated with the symbol
“®” are trademarks of Tennant Company registered in the United States
and/or other countries.

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: our ability to effectively manage
organizational changes; our ability to attract, retain and develop key
personnel and create effective succession planning strategies; the
competition in our business; fluctuations in the cost, quality or
availability of raw materials and purchased components; our ability to
successfully upgrade and evolve our information technology systems; our
ability to develop and commercialize new innovative products and
services; our ability to integrate acquisitions, including IPC and
Gaomei; our ability to generate sufficient cash to satisfy our debt
obligations; geopolitical and economic uncertainty throughout the world;
our ability to successfully protect our information technology systems
from cybersecurity risks; the occurrence of a significant business
interruption; our ability to comply with laws and regulations; the
potential disruption of our business from actions of activist investors
or others; the relative strength of the U.S. dollar, which affects the
cost of our materials and products purchased and sold internationally;
unforeseen product liability claims or product quality issues; and our
internal control over financial reporting risks resulting from our
acquisitions of IPC and Gaomei.

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. Information about factors that
could materially affect our results can be found in our 2017 Form 10-K
or 2018 Form 10-Qs. 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.

We undertake no obligation to update or revise any forward-looking
statement, whether as a result of new information, future events or
otherwise, except as required by law. Investors are advised to consult
any further disclosures by us in our filings with the Securities and
Exchange Commission and in other written statements on related subjects.
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 and the related conference call include presentation 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.

We believe that disclosing Gross Profit – as adjusted, Gross Margin – as
adjusted, Selling and Administrative Expense – as adjusted, Selling and
Administrative Expense as a percent of Net Sales – as adjusted, Profit
from Operations – as adjusted, Operating Margin – as adjusted, Profit
Before Income Taxes – as adjusted, Income Tax Expense – as adjusted, Net
Earnings Attributable to Tennant Company – as adjusted and Net Earnings
Attributable to Tennant Company per Share – as adjusted (collectively,
the “Non-GAAP Measures”), excluding the impacts from restructuring
charge, inventory step-up, acquisition and integration costs, certain
non-operational professional services, building design costs, gain on
the sale of a business, pension curtailment gain/loss, certain tax
related benefits/charges, and debt financing costs write-off, are useful
to investors as a measure of operating performance. We use these as one
measure to monitor and evaluate operating performance. The non-GAAP
measures are financial measures that do not reflect United States
Generally Accepted Accounting Principles (GAAP). We calculate Gross
Profit – as adjusted, Gross Margin – as adjusted, Selling and
Administrative Expense – as adjusted, Selling and Administrative Expense
as a percent of Net Sales – as adjusted, Profit from Operations – as
adjusted, Operating Margin – as adjusted, and Profit Before Income Taxes
– as adjusted by adding back the pre-tax effect of the restructuring
charge, inventory step-up, acquisition and integration costs, certain
non-operational professional services, building design costs, gain on
the sale of a business, and pension curtailment gain/loss. We calculate
Income Tax Expense – as adjusted by adding back the tax effect of the
restructuring charge, inventory step-up, acquisition and integration
costs, certain non-operational professional services, building design
costs, gain on the sale of a business, pension curtailment gain/loss,
certain tax-related benefits/charges, and debt financing costs
write-off. We calculate Net Earnings Attributable to Tennant Company –
as adjusted by adding back the after-tax effect of the restructuring
charge, inventory step-up, acquisition and integration costs, certain
non-operational professional services, building design costs, gain on
the sale of a business, pension curtailment gain/loss, certain
tax-related benefits/charges, and debt financing costs write-off. We
calculate Net Earnings Attributable to Tennant Company per Share – as
adjusted by adding back the after-tax effect of the restructuring
charge, inventory step-up, acquisition and integration costs, certain
non-operational professional services, building design costs, gain on
the sale of a business, pension curtailment gain/loss, certain
tax-related benefits/charges, and debt financing costs write-off and
dividing the result by the diluted weighted average shares outstanding.

We believe that disclosing Earnings Before Interest, Taxes, Depreciation
and Amortization (EBITDA) and EBITDA Margin, excluding the impact from
restructuring charge, acquisition and integration costs, certain
non-operational professional services, building design costs, gain on
the sale of a business, pension curtailment gain/loss, and debt
financing costs write-off (EBITDA – as adjusted) and EBITDA Margin – as
adjusted, is useful to investors as a measure of operating performance.
We use these measures to monitor and evaluate operating performance.
EBITDA – as adjusted and EBITDA Margin – as adjusted are financial
measures that do not reflect GAAP. We calculate EBITDA – as adjusted by
adding back the pre-tax effect of the restructuring charge, acquisition
and integration costs, certain non-operational professional services,
building design costs, gain on the sale of a business, pension
curtailment gain/loss, and debt financing costs write-off, Interest
Income, Interest Expense, Income Tax Expense, Depreciation Expense and
Amortization Expense to Net Earnings (Loss) – as reported. We calculate
EBITDA Margin – as adjusted by dividing EBITDA – as adjusted by Net
Sales.

Investors should consider these non-GAAP financial measures in addition
to, not as a substitute for, or better than, financial measures prepared
in accordance with GAAP. Reconciliations of the components of these
measures to the most directly comparable GAAP financial measures are
included in the Supplemental Non-GAAP Financial Table to this earnings
release.

TENNANT COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

   
(In thousands, except shares and per share data) Three Months Ended Twelve Months Ended
December 31 December 31
2018   2017 2018   2017
Net Sales $ 285,212 $ 279,295 $ 1,123,511 $ 1,003,066
Cost of Sales   173,040     165,429     678,478     603,253  
Gross Profit   112,172       113,866       445,033       399,813  
Gross Margin 39.3 % 40.8 % 39.6 % 39.9 %
Operating Expense:
Research and Development Expense 7,331 7,774 30,739 32,013
Selling and Administrative Expense   91,703     91,100     356,316     334,782  
Total Operating Expense   99,034     98,874     387,055     366,795  
Profit from Operations 13,138 14,992 57,978 33,018
Operating Margin 4.6 % 5.4 % 5.2 % 3.3 %
Other Income (Expense):
Interest Income 495 830 3,035 2,405
Interest Expense (5,606 ) (6,674 ) (23,342 ) (25,394 )
Net Foreign Currency Transaction Gains (Losses) 280 (1,012 ) (1,100 ) (3,387 )
Other Income (Expense), Net   161     (6,796 )   (729 )   (7,934 )
Total Other Expense, Net   (4,670 )   (13,652 )   (22,136 )   (34,310 )
Profit (Loss) Before Income Taxes 8,468 1,340 35,842 (1,292 )
Income Tax Expense   706     4,528     2,304     4,913  
Net Earnings (Loss) Including Noncontrolling Interest 7,762 (3,188 ) 33,538 (6,205 )
Net Earnings (Loss) Attributable to Noncontrolling Interest   45     18     126     (10 )
Net Earnings (Loss) Attributable to Tennant Company $ 7,717   $ (3,206 ) $ 33,412   $ (6,195 )
 
Net Earnings (Loss) Attributable to Tennant Company per Share:
Basic $ 0.43   $ (0.18 ) $ 1.86   $ (0.35 )
Diluted $ 0.42   $ (0.18 ) $ 1.82   $ (0.35 )
 
Weighted Average Shares Outstanding:
Basic 18,025,181 17,759,883 17,940,438 17,695,390
Diluted 18,328,359 17,759,883 18,338,569 17,695,390
 
Cash Dividends Declared per Common Share $ 0.22 $ 0.21 $ 0.85 $ 0.84
                                 

GEOGRAPHICAL NET SALES(1) (Unaudited)

   
(In thousands) Three Months Ended Twelve Months Ended
December 31 December 31
2018   2017   % 2018   2017   %
Americas $ 174,265 $ 167,321 4.2 $ 690,996 $ 640,274 7.9
Europe, Middle East and Africa 85,123 84,255 1.0 335,603 273,738 22.6
Asia Pacific   25,824     27,719   (6.8 )   96,912     89,054   8.8
Total $ 285,212   $ 279,295   2.1   $ 1,123,511   $ 1,003,066   12.0
 

(1) Net of intercompany sales.

 

TENNANT COMPANY

   

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

 
(In thousands) December 31, December 31,
2018 2017
ASSETS
Current Assets:
Cash and Cash Equivalents $ 85,609 $ 58,398
Restricted Cash 525 653
Net Receivables 216,170 209,516
Inventories 135,133 127,694
Prepaid Expenses 22,141 19,351
Other Current Assets   9,066     7,503  
Total Current Assets   468,644     423,115  
Property, Plant and Equipment 386,641 382,768
Accumulated Depreciation   (223,194 )   (202,750 )
Property, Plant and Equipment, Net 163,447 180,018
Deferred Income Taxes 15,489 11,134
Goodwill 182,671 186,044
Intangible Assets, Net 146,546 172,347
Other Assets   15,747     21,319  
Total Assets $ 992,544   $ 993,977  
 
LIABILITIES AND TOTAL EQUITY
Current Liabilities:
Current Portion of Long-Term Debt $ 27,005 $ 30,883
Accounts Payable 98,398 96,082
Employee Compensation and Benefits 49,453 37,257
Income Taxes Payable 2,123 2,838
Other Current Liabilities   71,895     69,447  
Total Current Liabilities   248,874     236,507  
Long-Term Liabilities:
Long-Term Debt 328,060 345,956
Employee-Related Benefits 21,110 23,867
Deferred Income Taxes 46,018 53,225
Other Liabilities   32,130     35,948  
Total Long-Term Liabilities   427,318     458,996  
Total Liabilities   676,192     695,503  
Equity:
Common Stock 6,797 6,705
Additional Paid-In Capital 28,550 15,089
Retained Earnings 316,269 297,032
Accumulated Other Comprehensive Loss   (37,194 )   (22,323 )
Total Tennant Company Shareholders’ Equity   314,422     296,503  
Noncontrolling Interest   1,930     1,971  
Total Equity   316,352     298,474  
Total Liabilities and Total Equity $ 992,544   $ 993,977  
 

TENNANT COMPANY

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

 
(In thousands) Twelve Months Ended
December 31
2018   2017
OPERATING ACTIVITIES
Net Earnings (Loss) Including Noncontrolling Interest $ 33,538 $ (6,205 )
Adjustments to reconcile Net Earnings (Loss) to Net Cash Provided by
Operating Activities:
Depreciation 32,291 26,199
Amortization of Intangible Assets 22,129 17,054
Amortization of Debt Issuance Costs 2,353 1,779
Debt Issuance Cost Charges Related to Short-Term Financing 6,200
Fair Value Step-Up Adjustment to Acquired Inventory 7,245
Deferred Income Taxes (10,862 ) (6,095 )
Share-Based Compensation Expense 8,314 5,891
Allowance for Doubtful Accounts and Returns 768 1,602
Other, Net (436 ) 364
Changes in Operating Assets and Liabilities, Net of Assets Acquired:
Receivables, Net (7,618 ) (14,381 )
Inventories (16,557 ) (2,898 )
Accounts Payable 4,569 10,849
Employee Compensation and Benefits 12,649 (7,780 )
Other Current Liabilities 722 14,560
Income Taxes (1,383 ) 285
Other Assets and Liabilities   (507 )   (495 )
Net Cash Provided by Operating Activities 79,970 54,174
 
INVESTING ACTIVITIES
Purchases of Property, Plant and Equipment (18,780 ) (20,437 )
Proceeds from Disposals of Property, Plant and Equipment 112 2,511
Proceeds from Principal Payments Received on Long-Term Note
Receivable
1,416 667
Issuance of Long-Term Note Receivable (1,500 )
Proceeds from Sale of Business 4,000
Acquisition of Business, Net of Cash, Cash Equivalents and
Restricted Cash Acquired
(354,073 )
Purchase of Intangible Assets   (2,775 )   (2,500 )
Net Cash Used in Investing Activities (16,027 ) (375,332 )
 
FINANCING ACTIVITIES
Proceeds from Short-Term Debt 3,926 303,000
Repayments of Short-Term Debt (303,000 )
Proceeds from Issuance of Long-Term Debt 11,000 440,000
Payments of Long-Term Debt (38,255 ) (96,248 )
Payments of Debt Issuance Costs (16,482 )
Change in Capital Lease Obligations 14 311
Proceeds from Issuances of Common Stock 5,880 6,875
Purchase of Noncontrolling Owner Interest (30 )
Dividends Paid   (15,343 )   (14,953 )
Net Cash (Used in) Provided by Financing Activities (32,778 ) 319,473
 
Effect of Exchange Rate Changes on Cash, Cash Equivalents and
Restricted Cash
(4,082 ) 2,186
 
Net Increase in Cash, Cash Equivalents and Restricted Cash 27,083 501
 
Cash, Cash Equivalents and Restricted Cash at Beginning of Period 59,051 58,550
   
Cash, Cash Equivalents and Restricted Cash at End of Period $ 86,134   $ 59,051  
 

TENNANT COMPANY

   

SUPPLEMENTAL NON-GAAP FINANCIAL TABLE

 
(In thousands, except per share data) Three Months Ended Twelve Months Ended
December 31 December 31
2018   2017 2018   2017
 
Gross Profit – as reported $ 112,172 $ 113,866 $ 445,033 $ 399,813
Gross Margin – as reported 39.3 % 40.8 % 39.6 % 39.9 %

Adjustments:

Inventory Step-Up       (1,200 )       7,245  
Gross Profit – as adjusted $ 112,172   $ 112,666   $ 445,033   $ 407,058  
Gross Margin – as adjusted     39.3 %     40.3 %     39.6 %     40.6 %
 
Selling and Administrative Expense – as reported $ 91,703 $ 91,100 $ 356,316 $ 334,782
Selling and Administrative Expense as a percent of Net Sales – as
reported
32.2 % 32.6 % 31.7 % 33.4 %

Adjustments:

Acquisition and Integration Costs (1,524 ) (2,117 ) (6,869 ) (10,560 )
Restructuring Charge (1,032 ) (2,501 ) (1,032 ) (10,519 )
Professional Services (123 ) (1,914 )
Building Design Costs (1,556 ) (1,556 )
Gain on Sale of Business           955      
Selling and Administrative Expense – as adjusted $ 87,468   $ 86,482   $ 345,900   $ 313,703  
Selling and Administrative Expense as a percent of Net Sales – as
adjusted
    30.7 %     31.0 %     30.8 %     31.3 %
 
Profit from Operations – as reported $ 13,138 $ 14,992 $ 57,978 $ 33,018
Operating Margin – as reported 4.6 % 5.4 % 5.2 % 3.3 %

Adjustments:

Acquisition and Integration Costs 1,524 2,117 6,869 10,560
Restructuring Charge 1,032 2,501 1,032 10,519
Professional Services 123 1,914
Building Design Costs 1,556 1,556
Gain on Sale of Business (955 )
Inventory Step-Up       (1,200 )       7,245  
Profit from Operations – as adjusted $ 17,373   $ 18,410   $ 68,394   $ 61,342  
Operating Margin – as adjusted     6.1 %     6.6 %     6.1 %     6.1 %
 
Profit (Loss) Before Income Taxes – as reported $ 8,468 $ 1,340 $ 35,842 $ (1,292 )

Adjustments:

Acquisition and Integration Costs 1,524 2,117 6,869 10,560
Acquisition Costs (Other Expense, Net) 814 814
Restructuring Charge 1,032 2,501 1,032 10,519
Professional Services 123 1,914
Building Design Costs 1,556 1,556
Gain on Sale of Business (955 )
Pension Curtailment (Gain)/Settlement Loss (165 ) 6,168 (165 ) 6,373
Inventory Step-Up (1,200 ) 7,245
Financing Costs               7,378  
Profit Before Income Taxes – as adjusted   $ 12,538     $ 11,740     $ 46,093     $ 41,597  
 

Contacts

INVESTOR CONTACT:
Keith Woodward
Senior Vice President and
Chief Financial Officer
keith.woodward@tennantco.com
763-540-1205

MEDIA CONTACT:
Kathryn Lovik
Global Communications Director
kathryn.lovik@tennantco.com
763-540-1212

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