What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-05-03 compared with 2023-10-31 · 77 added, 95 removed, 98 unchanged (64% 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 September 30, 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.

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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.

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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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.

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

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

Our operating performance during the first quarter of 2024 has benefited from fewer supply chain disruptions enabling us to obtain key component parts, increase production and reduce backlog.

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 conflicts, our operating results have been and may continue to be negatively impacted by supply chain constraints and inflationary pressures from these conflicts.

As described in Part I, Item 1A - Risk Factors in the annual report on Form 10-K for the fiscal year ended December 31, 2023, we may encounter financial difficulties if the U.S.

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We are actively monitoring the global macroeconomic environment, including geopolitical conflict, the potential impact of global supply chain constraints on material inflation, and change in demand for our products.

We continued to deliver strong net sales and net income growth in the third quarter of 2023.

Our performance reflects actions and investments we made beginning in 2022 and have continued to execute upon throughout 2023 and into 2024.

Global economic conditions continue to be highly volatile and uncertainty remains regarding supply chain challenges, inflationary trends, and overall business environment.

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 and nine months ended September 30, 2023 and 2022, respectively (in millions, except per share data and percentages):

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 service.

The following table compares the results of operations for the three months ended March 31, 2024 and 2023, respectively (in millions, except per share data and percentages):

Three Months Ended

September 30, Nine Months Ended

September 30,

2024 % 2023 %

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Research and development expense 10.1 3.2 7.9 2.6

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

Operating income 37.5 12.1 35.9 11.7

Interest expense, net (2.3) (0.7) (3.7) (1.2)

Net foreign currency transaction (loss) gain (0.4) (0.1) — — 0.5 0.1 (0.4) —

Other (expense) income, net (1.1) (0.4) 0.6 0.2 (1.8) (0.2) 0.1 —

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

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

Income before income taxes 35.1 11.3 32.0 10.5

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Net income per share - diluted $ 1.49 $ 1.30

Consolidated net sales for the third quarter of 2023 totaled $304.7 million, a 15.9% increase as compared to consolidated net sales of $262.9 million in the third quarter of 2022.

Consolidated net sales for the first quarter of 2024 totaled $311.0 million, a 1.7% increase as compared to consolidated net sales of $305.8 million in the first quarter of 2023.

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

Three Months Ended September 30, Nine Months Ended September 30,

Price 8.9% 9.6%

Three Months Ended March 31,

Volume (3.7)%

Organic growth 0.9%

Acquisitions 0.3%

Foreign currency 0.5%

Total growth 1.7%

The 15.9% increase in consolidated net sales in the third quarter of 2023 as compared to the same period in 2022 was driven by:

• Organic sales growth of 13.9%, which excludes the effects of foreign currency exchange.

The organic sales growth was primarily due to equipment sales growth in the Americas and APAC partly offset by volume declines in EMEA;

• A net favorable impact from foreign currency exchange across all regions of approximately 2.0%.

The 16.4% increase in consolidated net sales in the first nine months of 2023 as compared to the same period in 2022 was driven by:

• Organic sales growth of 16.6%, which excludes the effects of foreign currency exchange.

The organic sales increase was primarily due to growth across all regions and product categories, led by strong sales growth in the Americas region;

partly offset by

• A net unfavorable impact from foreign currency exchange across all regions of approximately 0.2%.

The following table sets forth the net sales by geographic area for the three and nine months ended September 30, 2023 and 2022 (in millions, except percentages):

The 1.7% increase in consolidated net sales in the first quarter of 2024 as compared to the same period in 2023 was driven by:

• Organic sales growth of 0.9% primarily due to equipment sales growth, particularly in the Americas;

• A net favorable impact from foreign currency exchange of approximately 0.5%;

• Inorganic growth of 0.3% driven by the acquisition of TCS.

The following table sets forth the net sales by geographic area for the three months ended March 31, 2024 and 2023 (in millions, except percentages):

Three Months Ended

September 30, Nine Months Ended

September 30,

2023 2022 % Change 2023 2022 % Change

2024 2023 % Change

Americas $ 215.6 $ 204.4 5.5 %

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Total $ 311.0 $ 305.8 1.7 %

Americas net sales were $211.2 million for the third quarter of 2023, an increase of 21.4% from the third quarter of 2022 driven by:

• Organic sales growth of 20.8% driven nearly equally by price realization and volume increases in equipment sales and service across the region;

Americas net sales were $215.6 million for the first quarter of 2024, an increase of 5.5% from the first quarter of 2023 driven by:

• Organic sales growth of 5.1% was driven primarily by price realization in North America and price realization and volume increases in Latin America.

This was partially offset by volume decreases in North America;

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

Americas net sales were $632.2 million for the first nine months of 2023, an increase of 23.3% from the first nine months of 2022 driven by:

• Organic sales growth of 23.3% driven nearly equally by price realization and volume increases in all product categories across the region.

Europe, Middle East and Africa ("EMEA")

EMEA net sales were $72.0 million for the third quarter of 2023, an increase of 4.3% from the third quarter of 2022 driven by:

EMEA net sales were $76.8 million for the first quarter of 2024, a decrease of 6.5% from the first quarter of 2023 driven by:

• Organic sales decline of 9.2% driven by volume declines in both equipment and parts and consumables partly offset by price realization in all product categories;

• A net favorable impact from foreign currency exchange of approximately 1.4%;

EMEA net sales were $234.1 million for the first nine months of 2023, an increase of 4.0% from the first nine months of 2022 driven by:

• Organic sales growth of 3.6% driven by price realization partly offset by volume declines across all product categories.

The organic growth was led by price realization on equipment sales across our direct geographies, especially in Iberia;

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

• Inorganic sales increase of 1.3% driven by the acquisition of TCS.

Asia Pacific ("APAC")

APAC net sales were $21.5 million for the third quarter of 2023, an increase of 8.0% from the third quarter of 2022 driven by:

• Organic sales growth of 11.8% driven primarily by price realization on equipment sales in Australia and volume growth in equipment sales in China;

partly offset by

• A net unfavorable impact from foreign currency exchange of approximately 3.8%.

APAC net sales were $65.9 million for the first nine months of 2023, an increase of 3.8% from the first nine months of 2022 driven by:

• Organic sales growth of 8.3% driven by price realization on equipment sales across our direct geographies, especially Australia, China and India;

partly offset by

APAC net sales were $18.6 million for the first quarter of 2024, a decrease of 3.6% from the first quarter of 2023 driven by:

• A net unfavorable impact from foreign currency exchange of approximately 2.5%;

Gross profit margin of 43.3% was 500 basis points higher in the third quarter of 2023 compared to the third quarter of 2022.

Gross profit margin of 42.6% was 440 basis points higher in the first nine months of 2023 compared to the first nine months of 2022.

The increase in both periods was driven by pricing realization, more than offsetting the impact of multi-year inflation.

The LIFO impact for the three and nine months ended September 30, 2023 was a charge of $0.7 million and a benefit of $2.5 million, respectively, compared to a LIFO charge of $2.1 million and $8.1 million in the three and nine months ended September 30, 2022, respectively.

The change in LIFO impact was attributable to a stabilized inflationary environment on materials in 2023.

• Organic sales decline of 1.1% driven by volume declines in China and Australia, partly offset by price realization in Australia.

Gross profit margin of 44.2% was 320 basis points higher in the first quarter of 2024 compared to the first quarter of 2023.

The increase was driven by pricing realization and cost saving initiatives.

Gross profit margin expansion year over year was also due to mix shift to higher margin sectors, including industrial equipment and the direct sales channel.

Operating Expense

Selling and Administrative Expense

Selling and administrative expense ("S&A expense") was $88.2 million for the third quarter of 2023, an increase of $16.8 million compared to the third quarter of 2022.

As a percentage of net sales, S&A expense for the third quarter of 2023 increased 170 basis points to 28.9% from 27.2% in the third quarter of 2022.

The S&A expense increase in each period was primarily driven by higher variable costs associated with increased operating performance.

S&A expense was $256.9 million for the first nine months of 2023, an increase of $29.8 million compared to the first nine months of 2022.

The increase was primarily driven by higher variable costs associated with increased operating performance and investments in strategic initiatives.

S&A expense as a percentage of net sales for the first nine months of 2023 decreased 70 basis points to 27.6% from 28.3% in the first nine months of 2022.

The decrease as a percentage of net sales was driven by our sales growth in the comparable periods, as well as our cost-containment initiatives.

Selling and administrative expense ("S&A expense") was $89.9 million for the first quarter of 2024, an increase of $8.2 million compared to the first quarter of 2023.

As a percentage of net sales, S&A expense for the first quarter of 2024 increased 220 basis points to 28.9% from 26.7% in the first quarter of 2023.

The S&A expense increase was primarily driven by annualization of resources to support growth and investment in enterprise initiatives.

Research and Development Expense

Research and development expense ("R&D expense") was $9.1 million, or 3.0% of net sales, for the third quarter of 2023, with R&D expense as a percentage of net sales remaining flat as compared to the third quarter of 2022.

R&D expense was $26.0 million, or 2.8% of net sales, for the first nine months of 2023, essentially flat compared to the first nine months of 2022.

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

Research and development expense ("R&D expense") was $10.1 million, or 3.2% of net sales, for the first quarter of 2024, with R&D expense as a percentage of net sales increasing 60 basis points compared to the first quarter of 2023.

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

Total Other Expense, Net

Interest Expense, Net

Interest expense, net was $3.3 million in the third quarter of 2023 compared to $2.2 million in the same period of 2022.

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

Interest expense, net was $11.0 million in the first nine months of 2023 compared to $3.7 million in the first nine months of 2022.

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

The following table compares the debt levels, average interest rate, interest income and interest expense for the three and nine months ended September 30, 2023 and 2022, respectively (in millions, except percentages):

Three Months Ended September 30, Nine Months Ended September 30,

2023 2022 2023 2022

Interest expense, net was $2.3 million in the first quarter of 2024 compared to $3.7 million in the same period of 2023.

The decrease was the result of lower weighted average outstanding borrowings.

The following table compares the debt levels, average interest rate, interest income and interest expense for the three months ended March 31, 2024 and 2023, respectively (in millions, except percentages):

Three Months Ended March 31,

Weighted Average Outstanding Borrowings $ 217.8 $ 316.5

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Interest expense, net $ 2.3 $ 3.7

Our debt portfolio as of September 30, 2023 was comprised of debt predominately in U.S.

Our debt portfolio as of March 31, 2024 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 $120.0 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 Gain (Loss)

Net foreign currency transaction loss was $0.4 million in the third quarter of 2023 compared to less than $0.1 million in the third quarter of 2022.

Net Foreign Currency Transaction Loss

Net foreign currency transaction loss was $0.2 million in the third quarter of 2024 compared to $0.1 million in the first quarter of 2023.

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

dollar relative to the Brazilian real and Mexican peso.

Net foreign currency transaction gain was $0.5 million in the first nine months of 2023 compared to a loss of $0.4 million in the first nine months of 2022.

The favorable impact was primarily due to hedging gains on foreign denominated receivables.

The effective tax rate for the third quarter of 2023 was 23.4% compared to 21.2% for the third quarter of 2022.

The increase was primarily due to a decrease in discrete tax benefits recognized during the quarter.

The effective tax rate for the first nine months of 2023 was 22.9% compared to 22.4% for the first nine months of 2022.

The increase was driven by a decrease in discrete tax benefits recognized, as well as unfavorable changes in the mix of forecasted earnings by jurisdiction.

dollar relative to the Brazilian real and other currencies.

The effective tax rate for the first quarter of 2024 was 19.1% compared to 24.1% for the first quarter of 2023.

The decrease was primarily due to an increase in discrete tax benefits associated with share-based compensation.

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.

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

Our order backlog was $213.9 million at September 30, 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.

Our order backlog was $136.7 million at March 31, 2024 compared to $186.2 million at December 31, 2023.

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

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 $97.0 million at September 30, 2023 compared to $77.4 million as of December 31, 2022.

Cash, cash equivalents and restricted cash totaled $88.8 million at March 31, 2024 compared to $117.1 million as of December 31, 2023.

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

Our current ratio was 2.3 as of September 30, 2023 and 2.2 as of December 31, 2022.

Our primary working capital, which is comprised of accounts receivable, inventories and accounts payables, was $328.0 million as of September 30, 2023 and $332.0 million as of December 31, 2022.

Our debt-to-capital ratio was 28.9% as of September 30, 2023 compared to 38.9% as of December 31, 2022.

As of September 30, 2023, we had letters of credit and bank guarantees outstanding in the amount of $3.1 million, leaving approximately $316.9 million of unused borrowing capacity on our revolving facility.

Our current ratio was 2.2 as of March 31, 2024 and 2.1 as of December 31, 2023.

Our primary working capital, which is comprised of accounts receivable, inventories and accounts payables, was $313.8 million as of March 31, 2024 and $312.1 million as of December 31, 2023.

Our debt-to-capital ratio was 25.8% as of March 31, 2024 compared to 25.8% as of December 31, 2023.

As of March 31, 2024, we had letters of credit and bank guarantees outstanding in the amount of $3.2 million, leaving approximately $321.8 million of unused borrowing capacity on our revolving facility.

Cash Flow from Operating Activities

Net cash provided by operating activities during the nine months ended September 30, 2023 was $124.6 million compared to net cash used by operating activities of $38.8 million during the nine months ended September 30, 2022.

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

Net cash provided by operating activities during the three months ended March 31, 2024 was $2.9 million compared to net cash provided by operating activities of $31.1 million during the three months ended March 31, 2023.

The decrease was the result of consumption of working capital, mainly related to bonus payouts and spend on our ERP modernization project, which was partly offset strong operating performance.

Cash Flow from Investing Activities

Net cash used in investing activities during the nine months ended September 30, 2023 was $15.2 million compared to net cash used by investing activities of $19.0 million during the nine months ended September 30, 2022.

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

Net cash used in investing activities during the three months ended March 31, 2024 was $60.6 million compared to net cash used by investing activities of $6.8 million during the three months ended March 31, 2023.

The increase in cash outflows was primarily driven by cash used for the investment in Brain Corp of $32.1 million and cash used, net of cash acquired, for the acquisition of TCS of $25.5 million.

Cash Flow from Financing Activities

Net cash used in financing activities during the nine months ended September 30, 2023 was $87.1 million compared to net cash used by financing activities of $1.2 million during the nine months ended September 30, 2022.

The increase in cash outflows was primarily driven by repayments of borrowings and share purchases.

The Company repurchased 165,098 shares of common stock for $11.7 million during the first nine months of 2023 as we continued to focus on returning capital to shareholders in line with our capital allocation priorities.

Net cash provided by financing activities during the three months ended March 31, 2024 was $26.9 million compared to net cash used by financing activities of $10.3 million during the three months ended March 31, 2023.

The increase in cash inflows was primarily driven by proceeds from exercises of stock options, in addition to net borrowings.

Newly Issued Accounting Guidance

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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geopolitical and economic uncertainty throughout the world;

uncertainty surrounding the impacts and duration of the COVID-19 pandemic;

our ability to comply with global laws and regulations;

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

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.

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.

Quantitative and Qualitative Disclosures About Market Risk

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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-Q

Item 2. Management’s Discussion and Analysis