Tennant Company Raises Its 2018 Outlook Again

Tennant's (NYSE:TNC) business is on the upswing. The cleaning machine specialist this week announced broad-based sales growth and upgraded its outlook for the second time in fiscal 2018.

More on that brightening operating forecast in a moment. First, here's how the second-quarter headline figures compared to the prior year:

�Metric

Q2 2018

Q2 2017

Year-Over-Year Change

Revenue	$292 million	$271 million	8%
Net income	$12.7 million	($2.6 million)	N/A
EPS	$0.69	($0.15)	N/A

Data source: Tennant. EPS = earnings per share.

What happened this quarter?

Tennant's sales gains beat management's expectations, while its profitability held steady despite rising costs. These wins put the company on track to post significant operating improvements this year compared to 2017.

Image source: Getty Images.

Here are the key highlights of the quarter:

Organic sales grew 5.2% to mark just a slight slowdown from the prior quarter's 6.5%. Demand increased in each of Tennant's geographic regions, but the U.S. market was a standout performer as the company's focus on larger customers paid off and that group delivered robust revenue gains. Reported gross profit margin improved by 2 full percentage points. However, after stripping out a one-time charge in the prior-year period, gross margin actually held steady at 41% of sales. The lack of growth here was pinned on the combination of a shift toward high-volume accounts and rising costs. Research and development spending stayed below management's full-year target due to the timing of new-product releases. That fact, plus a slight drop in reported selling expenses, led to a significant expansion of profitability as operating margin jumped to 6.5% of sales from 3.4% a year ago. What management had to say

"We posted organic revenue growth in every geographic region for the third consecutive quarter," CEO Chris Killingstad said in a press release. "We had revenue growth across all of our channels," he continued, "with particular strength in our strategic [large-volume] accounts."

While noting challenges with respect to labor shortages and rising material costs, the CEO highlighted the company's financial successes during the quarter. "We also made efficient use of our expense structure and substantially improved our cash flow," Killingstad said. Overall, he said executives are "pleased with our progress to date and are confident in the underlying performance of the business."

Looking forward

Citing the "significant momentum" that management sees in its operating results, Tennant boosted its 2018 outlook on both the top and bottom lines. The company now sees organic growth coming in at between 4% and 4.5%. That range stood at 3% to 3.5% in late April.

The target for adjusted earnings rose despite expectations for elevated costs ahead. That goal is now between $117 million and $121 million, up from the prior range of $113 million to $118 million.

Tennant still believes gross profit margin will inch up to 41% of sales, which is higher than last year's 40% but lower than the 43% rate it had reached in previous fiscal years. Its research and development spending, meanwhile, will remain a key priority as the company prepares to innovate around new products like the global rollout of its T7 robotic floor scrubber.