Tennant Company Lifts Its 2018 Outlook for a Third Time
Tennant's (NYSE: TNC) industrial cleaning machines are selling briskly in most markets across the world. That's the key takeaway from the company's third-quarter earnings report that included management's third straight upgrade to its sales outlook.
More on that brightening forecast in a moment. First, let's take a closer look at the latest results.
Metric | Q3 2018 | Q3 2017 | Year-Over-Year Change |
|---|---|---|---|
Revenue | $273 million | $262 million | 4% |
Net income | $9.7 million | $3.6 million | 169% |
EPS | $0.52 | $0.20 | 160% |
Data source: Tennant's financial filings. EPS = earnings per share.
What happened this quarter?
Tennant's sales gains sped up, as solid demand in its core U.S., Latin America, and Chinese markets offset modest losses elsewhere. The company faced significant cost challenges, but still executed well enough to push operating profitability higher for the period.
Image source: Getty Images.
Here are the key highlights of the quarter:
Organic sales growth accelerated to a 6.1% rate from 5.2% last quarter. The growth was broad-based, with most of Tennant's geographic regions contributing to gains. The U.S. market's 11.1% boost was especially strong, as new floor-scrubber releases resonated with large corporate clients. Solid demand in China helped the Asia segment grow 10.6%. These gains more than offset slightly lower sales in Europe.
Gross profit margin, after accounting for unusual charges, dipped to 39.6% from 40.8% a year ago. Management blamed its shift toward prioritizing large contracts in the U.S. and on higher costs on labor, raw materials, and freight.
Tennant spent $7.5 million on research and development to mark a decrease from last year's $7.9 million.
Selling expenses fell slightly as a percentage of sales, so operating margin improved to 5.7% of sales from 4.2% a year earlier.
Lower taxes and favorable exchange-rate moves combined with the rising operating margin to push net income higher by 169%, to $9.7 million.
What management had to say
CEO Chris Killingstad said the company benefited from strong demand through its entire sales footprint. "We remain pleased with our ability to generate broad based growth across our geographies, products, and channels," he said in a press release. Executives highlighted progress in cutting costs, too.
Killingstad went on to say the company performed well in a tough cost environment. "While gross margin performance in the period reflected factors affecting U.S.-based manufacturers, such as labor and raw material shortages, tariffs and higher freight costs, we did continue to improve our field-service utilization and manufacturing productivity" while lowering expenses, he explained.
Looking forward
Executives believe those manufacturing-cost challenges will continue impacting results for the foreseeable future. However, healthy demand trends have management feeling more optimistic about their overall outlook.
As a result, Tennant raised its organic sales target for the third time this year and now sees the figure landing at about 5% compared to the range of between 4% and 4.5% that they issued back in July. The company had entered the year targeting gains of 3%.
Tennant lifted its earnings goal, too, thanks to the higher sales expectations and the company's success so far at mitigating increased costs. Adjusted profits are now expected to land between $2.05 per share and $2.15 per share, up from the prior range of $1.95 to $2.10.
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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.
