Tennant Company Reports 2010 Third Quarter Results

Continued double-digit organic sales growth;

Company generated $30.2 million of cash from operations year to date;

Full year earnings per share guidance raised

MINNEAPOLIS, October 26, 2010—Tennant Company (NYSE: TNC), a world leader in designing, manufacturing and marketing of solutions that help create a cleaner, healthier world, today reported net earnings of $7.5 million, or $0.39 per diluted share, on net sales of $168.6 million for the third quarter ended September 30, 2010. In the 2009 third quarter, Tennant reported net earnings of $5.8 million, or $0.31 per diluted share, on net sales of $154.4 million. The company’s performance for the 2010 third quarter also improved sequentially from the 2010 second quarter’s net earnings of $6.2 million, or $0.32 per diluted share, on net sales of $166.1 million.

Both the 2010 and 2009 third quarters were affected by special items. Favorable discrete tax items added $0.2 million, or $0.01 per diluted share, to earnings in the 2010 period, and contributed $0.8 million, or $0.04 per diluted share, in the comparable 2009 quarter.

Commented Chris Killingstad, Tennant Company’s president and chief executive officer: “We are very pleased to report Tennant’s third consecutive quarter of sequential sales and earnings gains. The company continued to experience increased demand in the Americas and Asia Pacific regions. Contributing to the solid quarterly results were record sales of scrubbers equipped with our ec-H2O™ chemical-free cleaning technology, which exceeded our expectations. The company also benefited in the quarter from operating efficiencies.”

Added Killingstad: “Our continued focus on tight spending controls is supporting our planned investments in research and development, in order to extend the ec-H2O platform to new applications and markets. Tennant is an industry innovation leader in chemical-free cleaning and we remain committed to pursuing exciting new growth opportunities.”

Tennant generated $30.2 million in cash from operations in the first nine months of 2010 versus $58.4 million in the first nine months of 2009. At September 30, 2010, the company’s total cash was $33.7 million compared to $13.9 million a year ago. Total debt declined to $31.8 million from $43.4 million at the end of the prior year quarter.

ec-H2O Technology

During the 2010 third quarter, Tennant generated further marketplace momentum with its breakthrough ec-H2O chemical-free cleaning technology, which converts plain tap water into a powerful cleaning agent without any added chemicals. In addition to being environmentally friendly, it offers customers significant cost savings and benefits, including greater productivity and worker safety. Tennant extended ec-H2O to three large rider scrubbers in the first half of 2010. There are now six walk-behind and nine rider scrubbers equipped with this technology.

“We are gaining significant sales traction on scrubbers equipped with ec-H2O, with record sales in the 2010 third quarter bringing our year to date sales to $63 million. As a result, we now expect full year sales of scrubbers with ec-H2O to be in the range of $90 million to $100 million,” said Killingstad. “Additionally, we believe this technology is potentially relevant to a vast array of other applications that offer significant growth opportunities. Through our Orbio Technologies Group, we are focused on leveraging the ec-H2O platform to create and deliver sustainable cleaning solutions to Tennant’s existing and new markets. We anticipate launching our first Orbio new product in the first half of 2011.”

Tennant’s sales of new products introduced in the past three years generated approximately 46 percent of equipment sales during the 2010 third quarter and approximately 40 percent year to date. This compares favorably to the company’s ongoing goal of 30 percent. To continue to gain market share through innovative new products, the company expects to maintain its spending on research and development within the targeted range of 3 percent to 4 percent of annual net sales.

Operating Review

Tennant’s consolidated net sales of $168.6 million for the 2010 third quarter increased 9.2 percent compared to the 2009 third quarter. The growth was primarily driven by sales of Industrial equipment in the Americas and continued strong sales of scrubbers equipped with ec-H2O technology. The 2010 third quarter consolidated net sales grew sequentially from $166.1 million in the 2010 second quarter and $150.1 million in the 2010 first quarter. Unfavorable foreign currency exchange effects reduced consolidated net sales by approximately 1.5 percent for the 2010 third quarter.

For the third consecutive quarter, Tennant posted double-digit organic sales gains, which exclude the impact of foreign currency. Organic sales growth was approximately 10.7 percent in the 2010 third quarter, 12.3 percent in the 2010 second quarter and 11.7 percent in the 2010 first quarter. Organic sales rose approximately 16.0 percent in the Americas and 29.1 percent in the Asia Pacific region. In EMEA (Europe, Middle East and Africa), organic sales declined approximately 5.8 percent, as weak economic conditions in Europe led to lower sales of outdoor City Cleaning equipment to municipalities. Excluding these City Cleaning sales, EMEA grew organically by approximately 4.5 percent.

Year to date, consolidated net sales rose 12.3 percent compared with the previous year. The foreign currency exchange impact increased consolidated net sales by approximately 1.0 percent for the first nine months of 2010.

Tennant’s gross profit margin was 42.6 percent for the 2010 third quarter, up from 42.0 percent in the 2009 third quarter, and within the company’s 2010 target range of 42 percent to 43 percent. Year to date, the gross profit margin was 42.7 percent, up from 41.2 percent for the first nine months of 2009.

Selling and administrative expense (S&A) in the 2010 third quarter totaled $54.2 million, or 32.2 percent of sales, compared to $51.8 million, or 33.5 percent of sales, in the 2009 third quarter. Year to date, S&A expense was $160.5 million, or 33.1 percent of sales, versus adjusted S&A expense of $147.6 million, or 34.2 percent of sales, in the prior-year period. Third quarter 2010 research and development (R&D) spending totaled $7.1 million, or 4.2 percent of sales, up from $5.5 million, or 3.5 percent of sales, a year ago. For the first nine months of 2010, R&D expense was $19.1 million, or 3.9 percent of sales, consistent with the company’s target range.

Tennant’s 2010 third quarter operating profit rose to $10.5 million, or 6.2 percent of sales, from $7.6 million, or 4.9 percent of sales, in the 2009 third quarter. Year to date, the company’s operating profit increased to $27.6 million, or 5.7 percent of sales, compared to an operating loss of $28.8 million, or a negative 6.7 percent of sales, in 2009. Excluding special items, the adjusted operating profit for the first nine months of 2009 was $13.3 million, or 3.1 percent of sales.

For the nine months ended September 30, 2010, Tennant reported net earnings of $17.8 million, or $0.92 per diluted share, on net sales of $484.9 million. Impacting the 2010 nine-month results was one favorable discrete tax item of $0.2 million, or $0.01 per diluted share. Excluding this special item, the company’s 2010 year-to-date net income would have been $17.6 million, or $0.91 per diluted share. In the 2009 nine-month period, the company had a net loss of $33.0 million, or a loss of $1.78 per diluted share, on net sales of $431.7 million. The 2009 nine-month results were affected by two special items from the first quarter: a non-cash pretax goodwill impairment charge of $43.4 million, or a $2.29 loss per diluted share, and a pretax benefit of $1.3 million, or $0.07 per diluted share, from a revision to the reserve for workforce reduction severance and related costs associated with the restructuring program announced in the 2008 fourth quarter. Further, the third quarter 2009 net benefit of $0.8 million, or $0.04 per diluted share, from discrete net favorable tax items, contributed positively to the 2009 year-to-date results. Excluding these special items, the company’s 2009 year-to-date net earnings would have been $7.3 million, or $0.40 per diluted share.

Business Outlook

Based on results year to date, Tennant Company is raising its 2010 full year earnings guidance to the range of $1.25 to $1.35 per diluted share on net sales in the range of $655 million to $665 million. The company's previous guidance anticipated 2010 earnings in the range of $1.00 to $1.30 per diluted share on net sales in the range of $645 million to $665 million. Tennant's 2009 adjusted earnings totaled $0.67 per diluted share on net sales of $596 million.