Cleaning machine specialist Tennant (NYSE: TNC) had good news for investors in its first-quarter earnings report released this week. The company managed higher sales growth while improving on its production costs. These trends gave executives confidence to lift Tennant's full-year outlook as they prepare to launch a new lineup of robotic cleaning devices.
More on that brightening outlook in a moment. But first, here's how the headline figures stacked up against the prior-year period:
Data source: Tennant.
What happened this quarter?
The 43% revenue boost was mostly a consequence of Tennant's recent acquisition of European cleaning specialist IPC Group. The company managed a significant improvement in its organic sales pace, though, even as profitability remained under pressure.
Image source: Getty Images.
Here are the key highlights of the quarter:
- Organic sales growth jumped to a 6.5% pace from 2.1% in the prior quarter. The U.S. market was a key contributor, as the region logged 8% growth. Tennant succeeded in bolstering its big accounts in the U.S. while also selling additional services, parts, and consumables. Each of its international segments expanded as well, led by an 11% spike in Latin America.
- Gross margin dropped to 40.5% from 41.7%. Profitability was hurt by the increasing proportion of IPC Group sales and an inventory writedown. On the plus side, manufacturing costs improved.
- Research and development costs dived as a percentage of sales due to the timing of product releases. Selling expenses held steady at 33% of sales. As a result, Tennant's adjusted earnings were unchanged at about $5 million.
- The company generated $5.5 million in cash flow from operations and cash on hand was $54 million at the end of the quarter.
What management had to say
CEO Chris Killingstad said in a press release: "We are very pleased with our strong start to the year and are well positioned for additional momentum throughout the rest of 2018. In the first quarter, we made important, ongoing progress against our growth and value-creation initiatives by improving field-service utilization and manufacturing efficiencies, introducing new products, developing strategic relationships to drive innovation, and executing on our sales strategy across all of our geographies, especially with our strategic accounts."
While sales and manufacturing improvements will help, management said upcoming product launches will be crucial to Tennant's long-term growth pace.
"We remain committed to maintaining our robust new product and technology pipeline." Killingstad said. These launches include a new franchise of automatic floor scrubbers and Tennant's first line of autonomous, robotic floor care machines.
With demand on the upswing and cost trends improving, Tennant raised its 2018 forecasts on both the top and bottom lines. Organic growth should be between 3% and 3.5%, management now believes, up from its prior 3% target . Adjusted earnings should be slightly higher than initially expected, too, rising to between $113 million and $118 million.
Tennant still believes profitability will be roughly 41% of sales this year, and executives are committed to improving that figure over time. It fell to 40% in 2017, but routinely landed at 43% of sales in prior years.
Tennant is targeting spending as much as $39 million on research and development in 2018, or about 3.5% of sales, to support new product development -- including its first robotic cleaner, the T7 floor scrubber, which is set to launch soon in the U.S. before rolling out to global markets starting in 2019.
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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 .