Tennant Company Returns to Sales Growth

Tennant (TNC -0.47%) posted second-quarter earnings results on July 26 that included a return to sales growth after two straight quarters of declines. The company benefited from a few large deals to supply its cleaning machines to customers in several key markets. Still, TNC projects a roughly flat 2016 for the business.

Here's how the headline figures stacked up against the prior-year period:

YOY = year over year. Data source: Tennant's financial filings.

What happened this quarter?

Foreign currency swings and the divestment of its Green Machines product line pressured results, but Tennant returned to organic sales growth after two consecutive quarters of no gains.

Image source: Tennant.

Here are the key highlights of the quarter:

• Organic growth was 2% thanks to solid gains in its U.S. region and in the European market that offset a decline in Asia, which management blamed on sluggish economic growth.
• Gross margin held steady at 44% of sales, consistent with TNC's full-year profitability target.
• Operating expenses didn't budge, remaining at 34% of sales as research and development spending continued to be one of the company's biggest spending priorities.
• TNC generated $15 million of net income, which kept bottom line profitability steady at 10% of sales.

What management had to say

Executives credited the sales team's focus on pursuing large contracts for delivering the revenue improvement. "Tennant returned to modest growth in the second quarter, primarily led by sales to strategic accounts," CEO Chris Killingstad said in a press release. "The company's sales and earnings gains over the prior year quarter reflect our ongoing focus on executing our growth strategies and leveraging our operating efficiency," Killingstad said.

While affirming their full-year forecast that projects a minor 1% sales decline, management explained that TNC "will continue to face global economic volatility which can lead to lumpy order patterns." Excluding exchange rate moves and the Green Machines divestment, the company should boost organic sales by 2%, down from its 4% growth pace in 2015.

Looking forward

The introduction of new products will be key to TNC's growth over the next few quarters. Tennant plans to release 14 new cleaners and scrubbers in 2016 in what executives call their "strongest new product pipeline in history." Management hopes these machines will drive healthy demand growth in its key markets.

Over the longer term, Tennant is preparing to attack complementary market niches that it hasn't traditionally served. "We are no longer just trying to improve cleaning performance," Killingstad said. TNC will be expanding its business into a broader range of technologies including telemetry, battery tech, water recycling, and robotics.

In the meantime, 2016 is shaping up to play out just as management has forecast. Sales growth will be moderate, and margins should hold up despite increased investments in product development and e-commerce initiatives. The timing of a few large deals could create volatility around earnings from one quarter to the next, but Tennant's overall business appears to be expanding moderately and profitably.