Tennant Company Earnings Spike on Profitability Boost

Commercial cleaning device specialist Tennant (TNC 0.70%) raised its growth outlook three times in 2018 and ended the year comfortably exceeding management's initial forecast. Its start to fiscal 2019, in first-quarter results announced on Tuesday, April 30, wasn't quite as strong, as sales slipped into negative territory.

However, that slump was likely temporary, and it came in the context of an encouraging uptick in profitability. At the same time, CEO Chris Killingstad and his team affirmed their forecast for the full year.

More on that steady outlook in a moment. First, let's take a closer look at the latest headline results:

Data source: Tennant financial filings.

What happened with Tennant this quarter?

Tennant's sales growth slipped into negative territory for the first time in over a year because of declines in key European markets and a slight decline in the Americas. The company achieved healthy increases in both gross and operating profit margins, though, which powered robust earnings growth in the period.

Image source: Getty Images.

Here are the key highlights of the quarter:

• Organic sales fell 1% to mark a sharp deceleration from the 5.5% growth rate the company achieved over the prior 12 months. Looking at the performance by region, the U.S. segment was essentially flat as Tennant struggled to repeat the success it had in landing a few large accounts in the prior-year period. Organic sales fell 5% in Europe and jumped over 8% in the Asia segment.
• Gross profit margin improved by more than a full percentage point to reach 41% of sales. Management credited higher prices and a shift toward premium products for the boost.
• Operating expenses fell across the board, so operating margin rose to 4.1% of sales from 3.8% a year ago. That improvement combined with the gross margin gain to power a 60%-plus earnings spike. Excluding temporary charges, adjusted earnings rose 82% to $9 million.

What management had to say

CEO Chris Killingstad described the first-quarter results as mixed, but generally positive. "Our margin improvement initiatives and pursuit of profitable top-line growth are key focus areas," he said in a press release. "The first-quarter results reflect progress in these areas," he continued, "as well as some challenging sales comparisons."

Executives went on to cite "difficult comparisons" to U.S. sales results in the prior year, along with "industry softness" in the U.K. as key contributors to the sluggish overall revenue results.

Looking forward

Executives affirmed their full-year outlook predicting modest sales growth and far higher earnings. Specifically, organic gains should land at between 2% and 3% compared to last year's 5.5% spike. Profits are still on track to rise to between $2.05 and $2.25 per share, despite financial headwinds including rising commodity costs, tariffs, and freight expenses.

That forecast implies greater sales gains over the next few quarters, which investors will be watching for in Tennant's upcoming earnings reports. Shareholders likely have more confidence in the profit outlook, meanwhile, considering that the company is easily finding ways to boost productivity even in today's difficult environment of rising costs.