Tennant Company Books a Loss As Organic Growth Turns Negative

Cleaning-machine specialist Tennant (TNC -0.75%) posted quarterly earnings results this week that paired a spike in revenue with net losses.

Here's how the headline figures compared with the prior-year period: 

Data source: Tennant's financial filings.

What happened this quarter?

Tennant booked 25% higher revenue, but only because of its recent acquisition of IPC Group. Its organic sales growth, which strips out the purchased gains, posted a surprise decline even as operating and selling expenses spiked.

Image source: Getty Images.

Here are the key highlights of the quarter:

• Organic sales fell 2% to mark a sharp turnaround from the prior quarter's 5% increase. The U.S. geography shrank by 3%, Europe was down by 5%, and the Asia-Pacific region ticked up 3%.
• Gross profit margin plunged to 39% of sales, from 44% in the prior year. While executives blamed a portion of that drop on the IPC Group integration, profitability still declined by 3 full percentage points after excluding that temporary headwind.
• Expenses rose to 32% of sales from 30% a year ago as Tennant spent aggressively on growth initiatives, including its e-commerce infrastructure.
• Operating profit fell to $9 million, or 3.4% of sales, from $23 million, or 10% of sales, a year ago.

What management had to say

Executives said the operating decline had more to do with temporary factors -- such as its reorganization initiative and e-commerce spending -- than with surprisingly weak demand for its cleaning machines. "Our performance during the 2017 second quarter primarily reflected near-term operational headwinds mainly stemming from our first-quarter 2017 restructuring," CEO Chris Killingstad said in a press release. "These actions negatively impacted ... gross margin," he continued, referring to the restructuring and to spending on e-commerce capabilities and an increased sales presence.

Management wasn't happy with execution around earnings and suggested that significant improvements might not begin on this metric until next year. "While we are disappointed with our second quarter profitability, we largely control these factors and are committed to improving margins, although these issues may not be resolved until early 2018," Killingstad explained.

Looking forward

Tennant has a solid pipeline of new products it plans to launch over the second half of the year, and their reception in the market will play a disproportionately large role in the growth the company ends up achieving. In fact, just under half of Tennant's revenue today comes from innovations it has launched over just the past three years.

The popularity of recent releases, such as the i-mop walk-behind scrubber has management confident that launches will help Tennant meet its sales growth goal that targets between 1% and 3% organic growth. Executives also see a long runway for growth in Europe that's now possible because of the IPC Group purchase.

However, Killingstad and his team don't see operating trends improving quickly enough to offset the weak start Tennant has had so far this year on profits. As a result, management lowered its 2017 earnings guidance and now sees profits coming in at between $2.20 and $2.40 per share, compared with the prior range of $2.40 to $2.60 per share.