Tennant Cleans Up in the Second Quarter

Investors had concerns heading into Tennant's (TNC -0.75%) second-quarter earnings report. After all, the commercial cleaning device specialist posted a rare sales decline in the prior period because of softness in Europe. That news ensured that the focus was on whether those weaknesses would threaten management's 2019 outlook.

This week, the company put those fears to rest by revealing robust second-quarter global sales growth and raising its outlook on both the top and bottom lines.

More on that 2019 brighter forecast in a moment. First let's take a closer look at the latest headline results from the quarter.

Data source: Tennant's financial filings. EPS = earnings per share.

What happened this quarter?

Tennant's sales returned to positive territory as strength in the U.S. and Latin America offset continued struggles in Europe. The company also overcame cost challenges to post improving profitability.

Image source: Tennant.

Here are the key highlights of the quarter:

• Organic sales rose 4% to mark a quick turnaround from last quarter's 1% decline. The growth came primarily from a booming U.S. market while demand in Europe fell. Sales in Tennant's Asia Pacific region were flat.
• Gross profit margin improved by over a full percentage point to reach 41.4% of sales as higher prices and a shift toward newer products more than offset the negative impact of tariffs and cost inflation.
• Tennant spent more on research and development, and boosted investments in sales and marketing. Still, operating margin ticked up to $20 million, or 6.6% of sales, from $19 million, or 6.5% of sales, a year ago.
• The company generated $23 million of cash flow and directed $6 million toward debt repayment and $4 million toward dividends.

What management had to say

CEO Chris Killingstad said management was happy with the results, given the mixed economic conditions across key parts of the world. "We are pleased with our strong performance in the second quarter," he said in a press release, "which exceeded our internal expectations."

Killingstad credited a few positive factors for outweighing weakness in Europe and a shift in timing of orders in the Asia Pacific region. Chief among them were Tennant's "strategic focus and more deliberate approach to margin improvement," Killingstad explained.

Looking forward

That margin uptick, plus generally strong demand in the U.S. and Latin America, convinced executives to raise their outlook for 2019. Tennant now sees organic sales rising by between 3% and 4%, up from their prior target range of 2% to 3%. Hitting that result would still mark a modest slowdown when compared to the 5.5% spike Tenant achieved in 2018.

The profit picture is also looking brighter, with adjusted earnings per share now on pace to land between $2.65 and $2.85, up from the previous forecast range of $2.30 to $2.50. These predictions might change with shifting market conditions, especially if economic growth slows further in Europe. However, the recent results show that Tennant might be able to weather sluggish demand in a few parts of the world as it delivers more of its commercial cleaning devices to large enterprises in the U.S.