Tennant Company Predicts Faster Growth in 2018

Cleaning-machine specialist Tennant (NYSE: TNC) announced fourth-quarter earnings results this week that paired steady sales growth with continued struggles at generating profits. Yet the company issued an aggressive outlook for 2018, highlighted by faster revenue gains and a return to positive earnings.

More on that outlook in a moment. But first, here's how the headline figures compared to the prior-year period:

What happened this quarter?

Tennant's 32% sales boost was driven mostly by its recent acquisition of IPC Group. Organic sales growth sped up in the quarter, even as profitability worsened due to several unfavorable cost trends.

Here are the key highlights of the quarter:

  • Organic sales accelerated slightly, rising to a 2.1% increase from the prior quarter's 1.3% gain. The boost was powered by growth across Tennant's selling regions, but demand was especially strong in the U.S. market.
  • Gross profit margin fell to 41% of sales from 44%. Management blamed several challenges for this shortfall, including manufacturing inefficiencies, productivity issues, and rising raw material costs.
  • Research and development spending dipped due to the timing of new product rollouts. Selling and administrative expenses, meanwhile, jumped to 35% of sales from 29%. As a result, operating profit margin dove to 3.4% of sales from 10.7% last year.
  • Adjusted earnings stopped at $31 million, or 11.1% of sales, compared to $27 million, or 12.5% of sales in the year-ago quarter.

What management had to say

"We are pleased with the results we achieved in the fourth quarter," CEO Chris Killingstad said in a press release. "We exceeded net sales of over $1 billion for the full year and made substantial progress with our initiatives to position the business for future growth."

Specifically, executives said they made "significant strides" in their strategic goals for the year, including integrating the IPC Group business, bulking up the sales and field service infrastructure, and improving manufacturing struggles that have hurt productivity lately. These wins combined with "encouraging sales and backlog growth across our geographies," Killingstad said, to give the team confidence in a solid 2018.

Looking forward

After logging 1.4% organic growth for the full 2017 year, Tennant executives offered a positive forecast for the current year. Growth will be "reasonable" across all its sales regions, the company predicts, with large accounts based in the U.S. helping push organic sales higher by 3% overall.

Tennant is committed to pushing its gross profit margin back up again following last year's decline. Yet the company's initial outlook calls for roughly steady profitability of between 41% and 42% of sales.

Net earnings should improve to between $1.70 per share and $1.90 per share from the $0.35 loss it endured in 2017. Adjusted profit, which accounts for temporary changes like those associated with the IPC Group purchase, are expected to rise by about 11% to $113.5 million at the midpoint of guidance, from $102 million last year.

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