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Tennant Company's Earnings Fall 22% on Growth Slowdown

By Demitri Kalogeropoulos - Feb 23, 2016 at 9:23AM

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The cleaning-machine maker was hit by a big pullback in customer spending in its its largest market.

Industrial cleaning machine specialist Tennant (TNC 0.10%) posted fourth-quarter earnings results on Feb. 23 that showed increasing pressure from slowing economic growth and currency swings against the U.S dollar.

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

Metric 

Q4 2015 Actuals

Q4 2014 Actuals

Growth (YOY)

Revenue

$206 million

$216 million

(5%)

Net Income

$13.1 million

$17.5 million

(25%)

EPS

$0.73

$0.93

(22%)

Data source: Tennant's financial filings.

What happened this quarter?
Sales growth slowed to a crawl in Tennant's key U.S. region, but the company did manage to return to organic growth in the European market for the first time in 2015. Here are the key operating highlights of the quarter:

  • Overall organic growth, which strips out the effect of exchange-rate swings, was flat, constituting a sharp slowdown from the prior quarter's 8% organic sales jump.
  • The key U.S. market, which had grown at an 8% pace last quarter, posted zero organic gains in Q4.
  • Organic sales in the Europe, Middle East, and Africa region rose 1%, reversing a 2% drop last quarter.
  • Gross margin declined to 42% of sales from 43% due to foreign currency moves.
  • Research and development expenses rose to 4% of sales from 3% as Tennant continued to invest in product innovations.
  • Net profit margin slipped to 9% of sales from 10% a year ago, but excluding the impact of a stronger U.S. dollar, profitability would have ticked up to 11% of sales.

What management had to say

T7 rider scrubber. Image source: Tennant.

"Like other industrial companies, we saw a more sluggish business environment in the 2015 fourth quarter," CEO Chris Killingstad said in a press release.

The slowdown was compounded by restructuring charges tied to Tennant's exiting of the Green Machines product line, but the shift resulted in a stronger operating position for the company. "We believe we are now well positioned to operate more efficiently in an uncertain economic environment," he said.

Despite that weak selling outlook, Tennant executives believe the company is "on the right path" to achieving its long term goals, which include $1 billion of annual sales with a 12% net profit margin (revenue was $812 million in 2015 and net margin was 7%).

The company plans to hit that aggressive target through "a strong new product and technology pipeline, continued gains in emerging markets, a return to growth in Europe, a focus on strategic accounts and an enhanced go-to-market strategy designed to significantly expand Tennant's worldwide market coverage and customer base," management explained.

Looking forward
The year ahead will likely be marked by weak growth but higher profits. Tennant forecast an organic sales uptick of 2% at the midpoint of guidance, down significantly from last year's 4.3% improvement. Healthy gains in Europe and emerging markets will be held back by slowing growth in the U.S., according to management.

Profit should rise to $2.40 per share, compared to $1.74 per share last year and $2.70 per share in 2014.

Meanwhile, Tennant is hoping to lay the groundwork for long-term growth by investing heavily in new product development. Executives plan on introducing 13 new machines and technologies this year, building on the positive momentum from popular launches like 2015's next-generation NanoClean technology and the T7 rider scrubber solution.

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Stocks Mentioned

Tennant Company Stock Quote
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TNC
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