What changed in this filing

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Item 7. Management’s Discussion and Analysis

2024-02-22 compared with 2023-02-23 · 76 added, 76 removed, 135 unchanged (53% of the section changed)

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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;

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.

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The discussion of 2021 results and related year-over-year comparisons as of and for the years ended December 31, 2022 and December 31, 2021 are found in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," of our Form 10-K for the year ended December 31, 2022.

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.

Tennant Company is a world leader in designing, manufacturing and marketing solutions that help create a cleaner, safer, healthier world.

The Company is committed to creating and commercializing breakthrough, sustainable cleaning innovations to enhance its broad suite of products, including floor maintenance and cleaning equipment, detergent-free and other sustainable cleaning technologies, aftermarket parts and consumables, equipment maintenance and repair service, and asset management solutions.

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Macroeconomic Events

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

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 inflation and inefficiencies as a result of supply chain issues.

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 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.

In February 2022, the United States announced targeted economic sanctions on Russia in response to the military conflict in Ukraine.

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 been and may continue to be negatively impacted by supply chain constraints and inflationary pressures stemming from this conflict.

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.

Supply chain challenges continue to impact the global economy.

Our operating performance throughout 2023 has benefited from fewer supply chain disruptions enabling us to obtain key component parts, increase production and reduce backlog.

We continue to address and adapt to these temporary supply chain disruptions by employing local-for-local and region-for-region manufacturing and sourcing strategies, which allows us to contain costs and manufacture our products closer to our customers.

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

We are impacted by customer spend and global demand for our products.

We have been able to successfully manage volatility in demand through our broad and expanding product offerings.

The global nature of our operations subjects us to exposures resulting from both foreign currency exchange fluctuations in the normal course of business and geopolitical risks stemming from global conflicts.

While we do not have any direct operations or employees in areas experiencing conflict, our operating results have been and may continue to be negatively impacted by supply chain constraints and inflationary pressures stemming from these conflicts.

As described in Part I, Item 1A - Risk Factors, 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.

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We are actively monitoring the macroeconomic environment, especially the potential impact of global supply chain constraints on cost 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 actions and manage costs 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.

While global economic conditions continue to be uncertain, including the ability to attract and retain skilled labor, lingering and targeted supply chain disruptions, and evolving compliance regulations, we remain agile as we continue to manage evolving conditions.

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

Historical Results

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Interest expense, net (13.5) (1.1) (7.1) (0.7)

Net foreign currency transaction loss (1.2) (0.1) (0.7) (0.1)

Loss on extinguishment of debt — — (11.3) (1.0)

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

Net foreign currency transaction gain (loss) 0.3 — (1.2) (0.1)

Other (expense) income, net (1.6) (0.1) 0.6 0.1

Income before income taxes 123.8 10.0 79.5 7.3

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The 13.9% increase in consolidated net sales was driven by:

• Organic sales increase of approximately 4.2% primarily due to the impact of higher selling prices across all regions partially offset by volume declines due mostly to supply chain constraints impacting the availability of key component parts;

• A net unfavorable impact from foreign currency exchange across all business units of approximately 4.0%;

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

• Organic sales increase of approximately 13.6% primarily due to the impact of higher selling prices across all regions and volume increases;

• A net favorable impact from foreign currency exchange across all business units of approximately 0.3%.

Our strong organic sales increase was mainly supported by our ability to reduce backlog through the procurement of key component parts to facilitate increased production output.

The following table sets forth annual net sales by geographic area and the related percentage change from the prior year (in millions, except percentages):

2023 % 2022 %

Americas $ 840.3 19.0 $ 705.9 7.2

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Net sales in the Americas were $840.3 million in 2023, an increase of 19.0% from 2022.

Organic sales grew 7.4%, mainly due to higher selling prices in all categories across the region and volume increases in Latin America.

Diminished parts availability on certain component parts due to supply chain constraints limited the Company’s ability to increase production and address elevated backlog levels in the region.

The divestiture of the Coatings business resulted in a decline in net sales of approximately 0.2% in 2022.

Organic sales grew 18.9%, driven equally by price realization and increased volume across all geographies.

Foreign currency exchange within the Americas favorably impacted net sales by approximately 0.1%.

Europe, Middle East and Africa ("EMEA")

EMEA net sales were $301.6 million in 2022, a decrease of 9.1% from 2021.

Foreign currency exchange within EMEA unfavorably impacted net sales by approximately 11.6%.

Organic sales grew 2.5% in EMEA, primarily driven by higher selling prices in equipment and parts and consumables across the region, partially offset by volume declines due to supply chain constraints and softening demand in the region.

EMEA net sales were $314.4 million in 2023, an increase of 4.2% from 2022.

Organic sales grew 2.6% in EMEA, driven by price realization in all product categories, partially offset by lower EMEA volumes that were impacted by weaker-than-expected market conditions.

Foreign currency exchange within EMEA favorably impacted net sales by approximately 1.6%.

Asia Pacific ("APAC")

APAC net sales were $84.7 million in 2022, a decrease of 15.8% from 2021.

Organic sales declined 11.4% in APAC, primarily due to volume declines in China as government shutdowns related to COVID-19 unfavorably impacted demand.

This was partly offset by volume growth in Australian markets.

APAC net sales were $88.9 million in 2023, an increase of 5.0% from 2022.

Organic sales grew 8.6% in APAC, driven by price realization in Australia and volume increases in Australia and China.

Foreign currency exchange within APAC unfavorably impacted net sales by approximately 3.6% in 2023.

Gross profit margin of 38.5% was 170 basis points lower in 2022 compared to 2021.

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

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

Our order backlog was approximately $186.2 million at December 31, 2023 compared to $326.4 million at December 31, 2022.

The decrease in our order backlog is the result of the Company's ability to obtain key component parts and increase production levels.

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

Gross profit margin of 42.4% was 390 basis points higher in 2023 compared to 2022.

The margin rate increase was the result of price realization and cost saving initiatives, which more than offset the multi-year impact of inflation.

Operating Expenses

Selling and Administrative Expense

Selling and Administrative expense ("S&A expense") was $306.3 million in 2022, a decrease of $15.6 million compared to 2021.

As a percentage of net sales, S&A expense in 2022 decreased 150 basis points to 28.0% from 29.5% in 2021.

The S&A expense decrease was driven by lower variable employee compensation expenses partially offset by increased costs related to incremental consulting costs to address parts shortages.

Selling and Administrative expense ("S&A expense") was $352.6 million in 2023, an increase of $46.3 million compared to 2022.

As a percentage of net sales, S&A expense in 2023 increased 40 basis points to 28.4% from 28.0% in 2022.

The S&A expense increase was driven by higher variable costs linked to improved operating performance as well as strategic investments aimed at fostering future growth.

Research and Development Expense

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Interest Expense, Net

Interest expense, net was $7.1 million in 2022, a decrease of $0.2 million compared to 2021.

The decrease reflected lower average outstanding debt in 2022, partially offset by higher interest rates.

Interest expense, net was $13.5 million in 2023, an increase of $6.4 million compared to 2022.

The increase was the result of rising interest rates on our variable interest rate debt, partially offset by lower debt levels.

Our debt portfolio as of December 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.

On December 1, 2022, the Company entered into 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.

Foreign Currency Transaction Loss

Net foreign currency transaction loss was $1.2 million in 2022, compared to $0.7 million in 2021.

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

dollar relative to the Brazilian real on foreign denominated liabilities.

Foreign Currency Transaction Gain/Loss

Net foreign currency transaction gain was $0.3 million in 2023, compared to a $1.2 million loss in 2022.

The favorable impact was primarily due to weakening of the Chinese Renminbi relative to the U.S.

dollar on foreign U.S.

dollar denominated receivables during 2023, compared to strengthening of the U.S.

dollar relative to the Brazilian real on foreign denominated liabilities in 2022.

The effective tax rate for 2023 was 11.6% compared to 16.6% in 2022.

The increase in the effective tax rate was primarily driven by certain nonrecurring tax items.

The 2022 tax rate includes benefits related to a reduction to a deferred tax liability on undistributed foreign earnings.

The 2021 tax rate included benefits from a foreign tax basis step-up election and a valuation allowance related to net operating loss carryovers.

These nonrecurring events had a one-time impact of (7.2%) in 2022 and (11.5%) in 2021.

The decrease in the effective tax rate was primarily driven by certain nonrecurring tax items.

Both the 2023 and 2022 tax rates include benefits related to a reduction to a deferred tax liability on undistributed foreign earnings as those cumulative earnings were reduced by current year statutory book losses.

These nonrecurring events had one-time impacts of (12.0%) in 2023 and (7.2%) in 2022.

In December 2021, the Organization for Economic Cooperation and Development (OECD), which is an international public policy setting organization comprised of member countries including the U.S., published a proposal for the establishment of a global minimum tax rate of 15% (the "Pillar Two rule").

The OECD has recommended that the Pillar Two rule become effective for fiscal years beginning on or after January 1, 2024.

To date, member states are in various stages of implementing the rules through local legislation, and the OECD continues to refine the technical guidance.

We are closely monitoring developments of the Pillar Two rule and are currently evaluating the potential effect in each of the countries we operate in.

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 in 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 $326.4 million at December 31, 2022 compared to $169.7 million at December 31, 2021.

The increase in our order backlog is primarily due to higher order rates coupled with persistent supply chain challenges that impacted our ability to obtain key component parts and increase production.

We expect this level of backlog to continue in 2023.

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

Liquidity and Capital Resources

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Our debt-to-capital ratio was 25.8% as of December 31, 2023, compared to 40.9% as of December 31, 2022.

The Company's Board of Directors authorized a quarterly cash dividend of $0.265 per share payable on March 15, 2023, to shareholders of record at the close of business on March 3, 2023.

On February 13, 2024, the Company's Board of Directors authorized a quarterly cash dividend of $0.28 per share payable on March 15, 2024, to shareholders of record at the close of business on February 29, 2024.

Cash Flow from Operating Activities

Net cash used in operating activities in 2022 was $25.1 million compared to net cash provided by operating activities of $69.4 million in 2021.

The increase in cash used was primarily driven by an increase in working capital attributable to investments in inventory required to support an anticipated 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 income taxes.

Net cash provided by operating activities in 2023 was $188.4 million compared to net cash provided by operating activities of $25.1 million in 2022.

The increase in cash provided was the result of strong operating performance and managed reductions in working capital investments.

Cash Flow from Investing Activities

Net cash used in investing activities in 2022 was $24.5 million compared to net cash provided by investing activities of $1.7 million in 2021.

In 2022, we used $25.0 million for capital expenditures compared to $19.4 million in 2021.

The prior year period included $24.7 million of cash proceeds from sale of assets, net of cash divested in 2021 compared to $4.1 million of cash proceeds from sale of asset, net of cash divested in 2022.

Net cash used in investing activities in 2023 was $23.2 million compared to net cash used in investing activities of $24.5 million in 2022.

The decrease in cash outflows was primarily driven by reduced property, plant and equipment investments as the Company continues to deploy cash flow toward operational capital needs.

Cash Flow from Financing Activities

Net cash provided by financing activities in 2022 was $8.1 million compared to net cash used in financing activities of $84.5 million in 2021.

The increase in cash provided was primarily due to a decrease in repayments of borrowing and share repurchases in 2022, partly offset by increased dividend payments.

Net cash used in financing activities in 2023 was $122.6 million compared to net cash provided by financing activities of $8.1 million in 2022.

The increase in cash used was primarily driven by repayments of borrowings and share repurchases.

Cash Requirements

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See Note 2 to the consolidated financial statements for information on new accounting pronouncements.

In October 2023, the FASB issued ASU 2023-06 Disclosure Improvements:

Codification Amendments in Response to the SEC's Disclosure Update and Simplification Initiative, which aims to clarify or improve disclosure and presentation requirements on a variety of topics and align the requirements in the FASB accounting standard with the Securities and Exchange Commission regulations.

This guidance is effective for the Company no later than June 30, 2027.

We do not expect the amendments in this update to have a material impact on our consolidated financial statements.

In November 2023, the FASB issued ASU 2023-07 Segment Reporting (Topic 280):

Improvements to Reportable Segment Disclosures, which requires an entity to disclose significant segment expenses impacting profit and loss that are regularly provided to the chief operating decision maker.

The amendments in this ASU are required to be adopted for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024.

Early adoption is permitted.

We are currently evaluating the impact of adoption on our financial disclosures.

In December 2023, the FASB issued ASU 2023-09 Income Taxes (Topic 740):

Improvements to Income Tax Disclosures, which is intended to enhance the transparency and decision usefulness of income tax disclosures.

The amendments in ASU 2023-09 address investor requests for enhanced income tax information primarily through changes to the rate reconciliation and income taxes paid information.

The amendments in this ASU are required to be adopted for fiscal years beginning after December 15, 2024.

Early adoption is permitted for annual financial statements that have not yet been issued.

The amendments should be applied on a prospective basis although retrospective application is permitted.

We are currently evaluating the impact of adoption on our financial disclosures.

No other new accounting pronouncements issued but not yet effective have had, or are expected to have, a material impact on our results of operations or financial position.

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Goodwill – Goodwill represents the excess of cost over the fair value of net assets of businesses acquired and is allocated to our reporting units at the time of the acquisition.

We analyze goodwill on an annual basis and when an event occurs or circumstances change that may reduce the fair value of a reporting unit below its carrying amount.

We analyze goodwill on an annual basis and when an event occurs or circumstances change that may reduce the fair value of a reporting unit below its

carrying amount.

We have the option of first analyzing qualitative factors to determine whether it is more likely than not that the fair value of any reporting unit is less than its carrying amount.

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We perform our annual goodwill impairment analysis as of October 1 and when an event occurs or circumstances change that may reduce the fair value of a reporting unit below its carrying amount.

In 2020, we changed the goodwill impairment assessment date from December 31 to October 1 to better align with the timing of our annual planning process.

The change did not result in any adjustments to our consolidated financial statements.

In 2022, we elected to perform the quantitative goodwill test in lieu of the qualitative test on all reporting units.

Our tests indicated the fair value in each reporting unit was substantially in excess of its carrying value.

There was no goodwill impairment in any of our reporting units as of our annual assessment date.

In 2023, we elected to perform the qualitative test on all reporting units.

Our test indicated that there is no goodwill impairment in any of our reporting units as of our annual assessment date.

We had goodwill of $187.4 million and $182.0 million at December 31, 2023 and 2022, respectively.

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• Geopolitical and economic uncertainty throughout the world.

• Uncertainty surrounding the COVID-19 pandemic.

• Ability to comply with global laws and regulations.

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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-K

Item 7. Management’s Discussion and Analysis