Tennant Company Announces Restructuring Plan as Growth Remains Sluggish

By Demitrios Kalogeropoulos Markets Fool.com

Tennant (NYSE: TNC)made a flurry of announcements as part of its fourth-quarter earnings report on Thursday. The maker of cleaning machines posted an encouraging return to sales growth, revealed an expensive acquisition of a European peer, and detailed plans to slash costs through a global restructuring initiative.

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More on the corporate changes in a moment. First, here's a look at how the headline figures stacked up against the prior-year period:

Metric

Q4 2016

Q4 2015

Year-Over-Year Change

Revenue

$212 million

$206 million

3%

Net income

$15 million

$13 million

16%

EPS

$0.85

$0.73

16%

Data source: Tennant financial filings.

What happened this quarter?

Tennant's sales and profit trends both improved following declines in the third quarter, yet global demand growth remained sluggish.

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Here are the key highlights of the quarter:

  • Organic growth accelerated to a 3% pace from last quarter's 1% decline, which adds credence to management's claim that the prior slump was tied to manufacturing issues and not collapsing demand. The key U.S. region led the way higher thanks to well-received new product launches.
  • Tennant's Asia-Pacific division fell 10% under the weight of sluggish economic conditions in China.
  • Gross profit margin reversed the prior quarter's decline and jumped to 44% of sales from 42% thanks to productivity improvements.
  • Research and development expenses rose to nearly 5% of sales as the company continued to invest heavily in its product pipeline.
  • Operating expenses fell by a full percentage point to 29% of sales.
  • Operating profit jumped to 11% of sales from 9%.

Image source: Tennant.

What management had to say

Executives said they were pleased with the overall results. "As we anticipated, Tennant returned to organic sales growth in the quarter, led by sales in our largest region, theAmericas," CEO Chris Killingstad said in a press release.

Commenting on the $350 million all-cash acquisition of Italy's IPC Group, management said the cleaning equipment, tools, and solutions maker will fit well in Tennant's global portfolio. "IPC Group significantly increases our presence and market share inEurope," Killingstad said. "We will gain the scale needed to accelerate our growth and better leverage our cost structure in the [European geography]."

Finally, in regards to its restructuring plan, Killingstad said that the current low-growth global environment has spurred management to take "bold steps to further ignite growth and increase profitability." Tennant plans to cut 3% of its global workforce as part of the initiative, which should save $7 million this year and $10 million in 2018.

Looking forward

Tennant projects sales of between $810 million and $830 million in 2017, which would equate to a range of 0% to 3% growth. Earnings will take a hit both from one-time restructuring charges and from expenses tied to the IPC Group purchase. Yet the two strategic moves should begin boosting profits as early as next year.

In fact, the IPC acquisition will quickly push Tennant over its goal of achieving $1 billion of annual sales by the end of this year. Its target of a 12% operating margin will be a tougher challenge, but is still seeming more likely by the year. Operating margin in 2016 improved to 8.5% of sales from 6.6% despite the fact that overall revenue barely budged.

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Demitrios Kalogeropoulos has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Tennant Company. The Motley Fool has a disclosure policy.