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Tennant Closes Out 2018 With a Sales Growth Win

By Demitri Kalogeropoulos - Updated Apr 22, 2019 at 10:56AM

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The cleaning machine specialist announced healthy revenue gains for the year while projecting a modest slowdown ahead.

Tennant (TNC 2.51%) lifted its sales growth outlook three times in 2018, but the company still managed to land above the high end of management's targets. With its earnings release this week, the commercial cleaning machine specialist paired that solid performance with a conservative forecast for the upcoming fiscal year.

More on that outlook in a moment. First, let's examine the latest headline results.

 Metric

Q4 2018

Q4 2017

Year-Over-Year Change

Revenue

$285 million

$279 million

2%

Net income

$7.7 million

($3.2 million)

N/A

Earnings per share

$0.42

($0.18)

N/A

Data source: Tennant's financial filings.

What happened this quarter?

Tennant's sales growth landed in positive territory for the sixth consecutive quarter thanks to broad-based demand for its cleaning products. Profitability held steady, too, after accounting for one-time charges.

A floor scrubbing machine in action.

Image source: Getty Images.

Here are the key highlights of the quarter:

  • Organic sales growth decelerated as compared to last quarter's 6.1% rate. However, the gains still outpaced expectations so that full-year growth reached 5.5% compared to the 5% forecast management issued back in late October. Tennant entered the year predicting organic growth of roughly 3%.
  • The U.S. market led the way higher with a 5% organic sales spike. This segment continues to benefit from the company's focus on winning larger clients. Sales in the European and Latin American regions rose as well, offsetting a 3% decline in the China geography.
  • Gross profit margin held steady at 40% of sales after accounting for one-time charges that reduced Tennant reported profitability figure. That drop was the key factor in operating earnings falling to $13 million, or 4.6% of sales from $15 million, or 5.4% of sales, a year earlier. Operating margin expanded for the wider 2018 period, to 5.2% of sales from 3.3%.
  • Tennant generated $80 million of operating cash for the year, up from $54 million in 2017. These funds helped support investments in the business and a slight reduction in the company's debt.

What management had to say

CEO Chris Killingstad focused his comments on big-picture wins. "Our full-year 2018 results illustrate strong top-line growth, disciplined expense management, and improved financial strength driving shareholder returns," he said in a press release. "We continued to make progress across several initiatives such as improved field-service utilization, strong expense management, cash flow improvement and ongoing debt reduction," Killingstad explained, "all while continuing to invest for growth."

Check out the latest Tennantearnings call transcript.

Looking forward

Executives noted that several financial headwinds will likely pressure profitability in the near future, including tariffs, rising freight costs, and higher commodity prices. These challenges, however, shouldn't block Tennant from achieving another year of modest gains in both sales and earnings.

To that end, management is projecting organic growth of between 2% and 3% in 2019 for a slowdown from this past year's 5.5% spike. Earnings should jump to between $2.05 per share and $2.25 per share compared to $1.82 per share in 2018 and a loss of $0.35 per share in 2017.

Adjusted profits, which account for unusual charges like those tied to Tennant's recent acquisitions, should rise to between $129 million and $133 million from $121 million. These projections imply a second straight year of profitability gains, with adjusted earnings inching above 11% of sales from 10.1% in 2017.

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TNC
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