What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2023-04-28 compared with 2022-10-27 · 77 added, 110 removed, 82 unchanged (70% of the section changed)

Management's Discussion and Analysis of Financial Condition and Results of Operations

The following Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) provides a comparison of the Company's results of operations, as well as liquidity and capital resources for the quarters ended March 31, 2023 and 2022.

The MD&A should be read in conjunction with the Company's consolidated financial statements and notes included in Item 1 of this Quarterly Report.

Throughout this MD&A, the Company refers to measures used by management to evaluate performance, including financial measures that are not defined under generally accepted accounting principles (GAAP) in the U.S.

Net sales excluding foreign currency translation (i.e.

organic sales) is not a measure of financial performance under GAAP;

however, the Company believes it is useful in understanding its financial results and provides comparable measures for understanding the operating results of the Company between different periods.

Tennant Company is a world leader in designing, manufacturing and marketing solutions that empower customers to achieve quality cleaning performance, reduce environmental impact and help create a cleaner, safer, healthier world.

4 unchanged sentences

Macroeconomic Events

We continue to actively manage our business to respond to the COVID-19 pandemic and related impacts.

We maintain our commitment to protect the health and safety of our employees and customers.

We have enhanced our on-site safety protocols at our manufacturing facilities and continue to monitor the evolving situation and guidance from local authorities.

Governments across the world have taken actions, including stay-at-home orders, to limit the spread of COVID-19.

These actions, specifically in China, have and may continue to reduce operating activities and negatively impact financial results.

We continue to experience disruption in the supply of key component parts, as well as price inflation and inefficiencies as a result of supply chain issues.

Supply chain challenges continue to impact the global economy.

Our operating performance during the first quarter of 2023 has benefited from fewer supply chain disruptions enabling us to obtain key component parts.

Uncertainty remains on the timing of a full recovery from supply chain inefficiencies.

We have established frequent communications with suppliers to review, track and prioritize high-risk components.

We have also identified and activated alternative suppliers, materials and components as needed.

We continue to work closely with our suppliers to achieve a deeper integration into our suppliers' supply chains, including the procurement of sub-component parts.

The Company continues work to minimize the impact of price inflation on inputs and market supply challenges by employing local-for-local and region-for-region manufacturing and sourcing to allow us to manufacture our products closer to our customers.

At the same time, our engineering teams are evaluating platform design to increase our sourcing flexibility.

The crisis in Russia and Ukraine that began in February 2022 continues as of the date of this Form 10-Q.

While we do not have any direct operations or employees in Russia or Ukraine and have suspended sales to Russia and Belarus, our operating results have and may continue to be negatively impacted by supply chain constraints and inflationary pressures stemming from this conflict.

Sales to Russia and Belarus represented less than 1% of consolidated net sales and less than 2% of Europe, Middle East and Africa net sales for the year ended December 31, 2021.

In addition to fully adhering to all sanctions, we will continue to monitor developments in the region, including the impact of rising commodity and energy prices.

Due to the global nature of our operations, we are subject to exposures resulting from foreign currency exchange fluctuations in the normal course of business.

The direct financial impact of foreign currency exchange includes the effect of translating profits from local currencies to U.S.

dollars, the impact of currency fluctuations on the transfer of goods between our operations in the United States and our international operations and transaction gains and losses.

Volatility in the foreign exchange market has and may continue to negatively impact the financial results of our international operations.

As described in Part I, Item 1A - Risk Factors, in the annual report on Form 10-K for the fiscal year ended December 31, 2021, we may encounter financial difficulties if the United States or other global economies experience an additional or continued long-term economic downturn as our product sales are sensitive to declines in capital spending by our customers.

If we continue to experience certain supply shortages, or if there are additional disruptions in our supply chain, it could materially or adversely impact our operating results and financial condition.

We continue to operate and adapt to these temporary supply chain disruptions.

We minimizes the impact of price inflation on inputs and market supply challenges by employing local-for-local and region-for-region manufacturing and sourcing to allow us to manufacture our products closer to our customers.

At the same time, our engineering teams continue evaluating platform design to increase our sourcing flexibility.

As described in Part I, Item 1A - Risk Factors, in the annual report on Form 10-K for the fiscal year ended December 31, 2022, we may encounter financial difficulties if the U.S.

or other global economies experience an additional or continued long-term economic downturn as our product sales are sensitive to declines in capital spending by our customers.

Any sustained adverse impacts to our business, the industries in which we operate, market demand for our products, and/or certain suppliers or customers may also affect our future results of operations, financial position, or cash flows.

We are actively monitoring the macroeconomic environment, especially the potential impact of global supply chain constraints on material inflation, and the potential decreased demand for our products.

Global economic conditions continue to be highly volatile and uncertainty remains regarding the timing of a full recovery from supply chain challenges and inflationary trends.

We continue to monitor costs in the current inflationary environment and will take pricing action accordingly.

We anticipate that we will need to remain agile as we continue to manage evolving challenges.

We remain confident in the long-term growth trends for all our products and services in the markets we serve.

The following table compares the results of operations for the three and nine months ended September 30, 2022 and 2021, respectively (in millions, except per share data and percentages):

Global economic conditions continue to be highly volatile and uncertainty remains regarding supply chain challenges, inflationary trends, and short-term market demand.

We continue to monitor the environment and will take pricing and other actions accordingly.

We anticipate that we will need to remain agile as we continue to navigate evolving challenges.

We remain confident in the long-term growth trends for our products and services in the markets we serve.

The following table compares the results of operations for the three months ended March 31, 2023 and 2022, respectively (in millions, except per share data and percentages):

Three Months Ended

September 30, Nine Months Ended

September 30,

2023 % 2022 %

4 unchanged sentences

Research and development expense 7.9 2.6 7.7 3.0

Gain on sale of assets — — — — (3.7) (0.5) (9.8) (1.2)

Operating income 35.9 11.7 14.6 5.7

1 unchanged sentence

Net foreign currency transaction (loss) gain (0.1) — 0.6 0.2

Loss on extinguishment of debt — — — — — — (11.3) (1.4)

Other (expense) income, net 0.6 0.2 (0.3) (0.1) 0.1 — — —

Other expense, net (0.1) — (0.2) (0.1)

Income before income taxes 32.0 10.5 14.7 5.7

2 unchanged sentences

Net income per share - diluted $ 1.30 $ 0.55

Consolidated net sales for the third quarter of 2022 totaled $262.9 million, a 3.3% decrease as compared to consolidated net sales of $272.0 million in the third quarter of 2021.

Consolidated net sales for the first nine months of 2022 were $801.2 million, a 1.6% decrease compared to consolidated net sales of $814.4 million in the first nine months of 2021.

The 3.3% decrease in consolidated net sales in the third quarter of 2022 as compared to the same period in 2021 was driven by:

• A net unfavorable impact from foreign currency exchange across all regions of approximately 5.0%;

Consolidated net sales for the first quarter of 2023 totaled $305.8 million, an 18.5% increase as compared to consolidated net sales of $258.1 million in the first quarter of 2022.

The components of the consolidated net sales change were as follows:

Three Months Ended March 31,

Organic growth 21.0%

Foreign currency (2.5)%

Total growth 18.5%

The 18.5% increase in consolidated net sales in the first quarter of 2023 as compared to the same period in 2022 was driven by:

• Organic sales growth of approximately 21.0%, which excludes the effects of foreign currency exchange.

The organic sales growth was primarily due to growth across all regions led by strong sales growth in the Americas region;

partly offset by

• An organic sales increase of approximately 1.7%, which excludes the effects of foreign currency exchange.

The organic sales increase was primarily due to the impact of higher selling prices across all regions partially offset by volume declines due to supply chain constraints impacting the availability of certain component parts.

The 1.6% decrease in consolidated net sales in the first nine months of 2022 as compared to the same period in 2021 was driven by:

• A net unfavorable impact from foreign currency exchange across all regions of approximately 2.5%.

• An organic sales increase of approximately 2.3%, which excludes the effects of foreign currency exchange and divestitures.

The organic sales increase was primarily due to the impact of higher selling prices across all regions, partially offset by volume declines resulting from continued supply chain constraints;

• An unfavorable impact from the divestiture of our Coatings business in the first quarter of 2021 of 0.1%.

The following table sets forth the net sales by geographic area for the three and nine months ended September 30, 2022 and 2021 (in millions, except percentages):

The following table sets forth the net sales by geographic area for the three months ended March 31, 2023 and 2022 (in millions, except percentages):

Three Months Ended

September 30, Nine Months Ended

September 30,

2022 2021 % Change 2022 2021 % Change

2023 2022 % Change

Americas $ 204.4 $ 160.3 27.5 %

2 unchanged sentences

Total $ 305.8 $ 258.1 18.5 %

Americas net sales were $174.0 million for the third quarter of 2022, an increase of 4.4% from the third quarter of 2021.

Organic sales grew 4.6% in the Americas, mainly due to higher selling prices across the region, volume increases in Latin America, and growth in parts and consumables in North America.

This was partially offset by volume declines on equipment in North America.

Diminished parts availability on certain component parts due to global supply chain constraints has limited our ability to increase production.

Additionally, foreign currency exchange within the Americas unfavorably impacted net sales by approximately 0.2% in the third quarter of 2022.

Americas net sales were $512.7 million for the first nine months of 2022, an increase of 4.3% from the first nine months of 2021.

Organic sales grew 4.5% in the Americas, mainly due to higher selling prices, partially offset by lower volume.

This was partially offset by the divestiture of the Coatings business in the first nine months of 2021 resulting in a decline in net sales of approximately 0.2% in the first nine months of 2022.

Americas net sales were $204.4 million for the first quarter of 2023, an increase of 27.5% from the first quarter of 2022 driven by:

• Organic sales growth of 27.9% driven equally by price realization and volume increases in both service and equipment sales;

partly offset by

• A net unfavorable impact from foreign currency exchange of approximately 0.4%.

Europe, Middle East and Africa ("EMEA")

EMEA net sales were $69.0 million for the third quarter of 2022, a decrease of 14.5% from the third quarter of 2021.

Foreign currency exchange within EMEA unfavorably impacted net sales by approximately 15.1%.

Organic sales grew 0.6% in EMEA, primarily due to higher selling prices and growth in parts and consumables.

This was partially offset by volume declines as lack of component parts due to global supply chain constraints has limited our ability to increase production.

EMEA net sales were $225.0 million for the first nine months of 2022, a decrease of 8.8% from the first nine months of 2021.

Foreign currency exchange within EMEA unfavorably impacted net sales by approximately 11.4%.

Organic sales grew 2.6% in EMEA, primarily due to higher selling prices, growth in services, and higher sales of parts and consumables.

EMEA net sales were $82.1 million for the first quarter of 2023, an increase of 4.3% from the first quarter of 2022 driven by:

• Organic sales growth of 10.6% driven by broad-based growth across all product categories, led by equipment, and across our direct geographies, especially in the United Kingdom and Iberia;

partly offset by

• A net unfavorable impact from foreign currency exchange of approximately 6.3%.

Asia Pacific ("APAC")

APAC net sales were $19.9 million for the third quarter of 2022, a decrease of 19.1% from the third quarter of 2021.

Organic sales declined 14.0% in APAC, primarily due to volume declines in China as government shutdowns related to COVID-19 continue to unfavorably impact demand.

Foreign currency exchange within APAC unfavorably impacted net sales by approximately 5.1% in the third quarter of 2022.

APAC net sales were $63.5 million for the first nine months of 2022, a decrease of 16.3% from the first nine months of 2021.

Organic sales declined 12.6% in APAC, primarily due to government shutdowns in China related to COVID-19 outbreaks impacting our ability to deliver finished goods to customers.

This was partly offset by volume growth in Australian markets.

Foreign currency exchange within APAC unfavorably impacted net sales by approximately 3.7% in the first nine months of 2022.

Gross profit margin of 38.3% was 180 basis points lower in the third quarter of 2022 compared to the third quarter of 2021.

The decrease was attributable to the broad effects of inflation on materials, labor, and freight costs, partly offset by higher selling prices.

Inflation contributed to a $ 2.1 million LIFO charge during the third quarter of 2022 compared to $ 3.7 million in the third quarter of 2021.

Gross profit margin of 38.2% was 320 basis points lower in the first nine months of 2022 compared to the first nine months of 2021.

The decrease was due to inflation on materials, labor, and higher freight costs, partly offset by price increases.

Inflation contributed to a LIFO charge of $ 8.1 million during the first nine months of 2022 compared to $ 5.9 million in the first nine months of 2021.

APAC net sales were $19.4 million for the first quarter of 2023, an increase of 1.4% from the first quarter of 2022 driven by:

• Organic sales growth of 7.0% driven by growth across our product categories, particularly equipment sales, and across our direct geographies, especially Australia, China and India;

partly offset by

• A net unfavorable impact from foreign currency exchange of approximately 5.6%.

Gross profit margin of 41.0% was 270 basis points higher in the first quarter of 2023 compared to the first quarter of 2022.

The increase was driven by pricing realization, offsetting the impact of multi-year inflation on materials and labor.

Operating Expense

Selling and Administrative Expense

Selling and administrative expense ("S&A expense") was $71.4 million for the third quarter of 2022, a decrease of $5.5 million compared to the third quarter of 2021.

As a percentage of net sales, S&A expense for the third quarter of 2022 decreased 110 basis points to 27.2% from 28.3% in the third quarter of 2021.

The S&A expense decrease in the third quarter of 2022 was primarily driven by lower variable employee compensation expenses and cost containment initiatives.

S&A expense was $227.1 million for the first nine months of 2022, a decrease of $15.4 million compared to the first nine months of 2021.

As a percentage of net sales, S&A expense for the first nine months of 2022 decreased 150 basis points to 28.3% from 29.8% in the first nine months of 2021.

The S&A expense decrease in the first nine months of 2022 was primarily driven by lower variable employee compensation expenses partially offset by increased costs related to strategic initiatives to address limited availability of component parts.

Selling and administrative expense ("S&A expense") was $81.7 million for the first quarter of 2023, an increase of $5.1 million compared to the first quarter of 2022.

The S&A expense increase in the first quarter of 2023 was primarily driven by higher variable costs associated with increased operating performance, such as warranty costs and other employee costs.

As a percentage of net sales, S&A expense for the first quarter of 2023 decreased 300 basis points to 26.7% from 29.7% in the first quarter of 2022, driven by both the leverage attributable to our sales and gross margin growth, as well as out cost-containment initiatives.

Research and Development Expense

Research and development expense ("R&D expense") was $7.9 million, or 3.0% of net sales, for the third quarter of 2022, essentially flat compared to the third quarter of 2021.

R&D expense was $23.5 million, or 2.9% of net sales, for the first nine months of 2022, flat as a percentage of net sales compared to the first nine months of 2021.

Research and development expense ("R&D expense") was $7.9 million, or 2.6% of net sales, for the first quarter of 2023, essentially flat compared to the first quarter of 2022.

We continue to invest in developing innovative products and technologies at levels necessary to propel our technology and innovation leadership position.

1 unchanged sentence

Interest Expense, Net

Interest expense, net was $2.2 million in the third quarter of 2022 compared to $0.6 million in the same period of 2021.

The increase was the result of rising interest rates on our variable interest rate debt.

Interest expense, net was $3.7 million in the first nine months of 2022 compared to $6.6 million in the same period of 2021.

The decrease was a result of restructuring of debt in the second quarter of 2021, which resulted in lower interest expense due to a lower amount of outstanding debt.

Our debt portfolio as of September 30, 2022 was comprised of debt predominately in U.S.

We are exposed to changes in interest rates as a result of borrowing activities with variable interest rates that impact interest incurred.

Net Foreign Currency Transaction Loss

Net foreign currency transaction loss was less than $0.1 million and $0.7 million in the third quarter of 2022 and 2021, respectively.

Net foreign currency transaction loss was $0.4 million and $0.2 million in the first nine months of 2022 and 2021, respectively.

Interest expense, net was $3.7 million in the first quarter of 2023 compared to $0.3 million in the same period of 2022.

The increase was the result of higher debt levels coupled with rising interest rates on our variable interest rate debt.

Our debt portfolio as of March 31, 2023 was comprised of debt predominately in U.S.

The Company manages its floating rate debt exposure using fixed rate interest rate swaps to reduce the Company's risk of the possibility of increased interest costs.

The Company has an aggregate $120 million notional amount of interest rate swaps that exchange a variable rate of interest for a fixed rate of interest of 4.076% over the term of the agreements.

Net Foreign Currency Transaction (Loss) Gain

Net foreign currency transaction loss was $0.1 million in the first quarter of 2023 compared to a gain of $0.6 million in the first quarter of 2022.

The unfavorable impact was primarily due to strengthening of the U.S.

dollar relative to the Brazilian real on foreign-denominated liabilities.

The effective tax rate for the third quarter of 2022 was 21.2% compared to 3.6% for the third quarter of 2021.

The effective tax rate for the first nine months of 2022 was 22.4% compared to 8.8% for the first nine months of 2021.

The effective tax rate for both the third quarter and the first nine months of 2022 increased primarily due to a high level of discrete tax benefit items in 2021 compared to 2022 and the mix in expected full year taxable earnings by country.

The discrete tax benefits in 2021 included a tax benefit resulting from an election to step-up the tax basis of certain assets for Italian tax purposes, as well as the release of certain valuation allowances related to net operating loss carryovers.

The valuation allowance release was driven by a change in law providing an unlimited carryforward period.

The effective tax rate for the first quarter of 2023 was 24.1% compared to 29.9% for the first quarter of 2022.

The decrease was primarily due to the mix in forecasted full year taxable earnings by country and an increase in discrete tax benefit items recognized during the quarter.

In general, it is our practice and intention to permanently reinvest the earnings of our foreign subsidiaries and repatriate earnings only when the tax impact is zero or immaterial.

No deferred taxes have been provided for withholding taxes or other taxes that would result upon repatriation of our foreign investments to the United States.

No deferred taxes have been provided for withholding taxes or other taxes that would result upon repatriation of our foreign investments to the U.S.

Backlog is one of the many indicators of business conditions in the Company's markets.

Our order backlog was approximately $281.7 million at September 30, 2022 compared to $288.7 million at June 30, 2022 and $169.7 million at December 31, 2021.

The increase in our order backlog is primarily due to persistent supply chain challenges that impacted our ability to obtain key component parts.

Unless these factors change, we expect our backlog level to remain elevated.

Our order backlog was approximately $298.5 million at March 31, 2023 compared to $326.4 million at December 31, 2022.

The decrease was the result of the Company's ability to obtain key component parts and increase production levels.

We expect our backlog level to remain elevated amid uncertainty in the supply chain environment.

Backlog includes orders that can be cancelled or postponed at the option of the customer at any time without penalty.

Liquidity and Capital Resources

Cash, cash equivalents and restricted cash totaled $59.2 million at September 30, 2022, as compared to $123.6 million as of December 31, 2021.

Cash, cash equivalents and restricted cash totaled $91.4 million at March 31, 2023, compared to $77.4 million as of December 31, 2022.

Wherever possible, cash management is centralized and intercompany financing is used to provide working capital to subsidiaries as needed.

Our current ratio was 2.1 as of September 30, 2022 and 1.8 as of December 31, 2021, and our primary working capital, which is comprised of accounts receivable, inventories and accounts payables, was $308.9 million and $250.5 million, respectively.

Our debt-to-capital ratio was 39.8% as of September 30, 2022, compared to 38.1% as of December 31, 2021.

As of September 30, 2022, we had letters of credit and bank guarantees outstanding in the amount of $3.1 million, leaving approximately $261.9 million of unused borrowing capacity on our revolving facility.

Our current ratio was 2.3 as of March 31, 2023 and 2.2 as of December 31, 2022.

and our primary working capital, which is comprised of accounts receivable, inventories and accounts payables, was $340.3 million and $332.0 million, respectively.

Our debt-to-capital ratio was 37.8% as of March 31, 2023, compared to 38.9% as of December 31, 2022.

As of March 31, 2023, we had letters of credit and bank guarantees outstanding in the amount of $2.7 million, leaving approximately $242.3 million of unused borrowing capacity on our revolving facility.

Cash Flow from Operating Activities

Net cash used in operating activities during the nine months ended September 30, 2022 was $38.8 million compared to net cash provided by operating activities of $62.9 million during the nine months ended September 30, 2021.

The increase in cash used was primarily driven by an increase in working capital attributable to investments in inventory to support a ramp in production, higher accounts receivables due to increased sales to customers with extended payment terms, and increased cash payments for employee compensation and benefits and taxes.

We anticipate that inventory levels will begin to decrease in the fourth quarter as production increases.

We also actively manage our accounts receivable portfolio and expect increased collection activity in the fourth quarter.

Net cash provided by operating activities during the three months ended March 31, 2023 was $31.1 million compared to net cash used by operating activities of $10.1 million during the three months ended March 31, 2022.

The increase was the result of improved operating performance and moderating investments in working capital.

Cash Flow from Investing Activities

Net cash used in investing activities during the nine months ended September 30, 2022 was $19.0 million compared to net cash provided by investing activities of $12.6 million during the nine months ended September 30, 2021.

The increase of cash outflows was primarily the result of lower cash proceeds from the prior year sale of our Coatings business in 2021.

Net cash used in investing activities during the three months ended March 31, 2023 was $6.8 million compared to net cash used by investing activities of $8.6 million during the three months ended March 31, 2022.

The decrease in cash outflows was the result of lower investment in leased assets partially offset by higher capital expenditures as the Company continues to deploy cash flow toward operational capital needs.

Cash Flow from Financing Activities

Net cash used in financing activities decreased during the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021 primarily due to a decrease in repayments of borrowings in the first nine month of 2022.

The Company used the proceeds from borrowings to invest in constrained component parts to prepare for a ramp in production.

Net cash used in financing activities during the three months ended March 31, 2023 was $10.3 million compared to net cash provided by financing activities of $8.3 million during the three months ended March 31, 2022.

The increase in cash outflows was driven by repayments of borrowings.

The Company also repurchased 73,525 shares of common stock for $5.0 million during the first quarter of 2023 as we continue to focus on returning capital to shareholders in line with our capital allocation priorities.

Newly Issued Accounting Guidance

2 unchanged sentences

Cautionary Statement Relevant to Forward-Looking Information

This Form 10-Q, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 2, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

This Quarterly Report, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 2, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “intend,” “estimate,” “anticipate,” “believe,” “project,” or “continue” or similar words or the negative thereof.

23 unchanged sentences

Investors are advised to consult any further disclosures by us in our filings with the SEC and in other written statements on related subjects.

It is not possible to anticipate or foresee all risk factors, and investors should not consider any list of such factors to be an exhaustive or complete list of all risks or uncertainties.

possible to anticipate or foresee all risk factors, and investors should not consider any list of such factors to be an exhaustive or complete list of all risks or uncertainties.

Quantitative and Qualitative Disclosures About Market Risk

2 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis