Item 7. Management’s Discussion and Analysis
ITEM 7 – 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 years ended December 31, 2024 and 2023. The MD&A should be read in conjunction with the Company's consolidated financial statements and notes included in Item 8 of this Annual 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.
The year-over-year comparisons in this MD&A are as of and for the years ended December 31, 2024 and December 31, 2023, unless stated otherwise. The discussion of 2022 results and related year-over-year comparisons as of and for the years ended December 31, 2023 and December 31, 2022 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, 2023.
Overview
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. Our products are used in many types of environments, including factories and warehouses, distribution centers, office buildings, public venues such as arenas and stadiums, schools and universities, hospitals and clinics, and more. Customers include contract cleaners to whom organizations outsource facilities maintenance as well as businesses that perform facilities maintenance themselves. The Company reaches these customers through the industry's largest direct sales and service organization and through a strong and well-supported network of authorized distributors worldwide.
Macroeconomic Events
Recent geopolitical and macroeconomic events have led to economic uncertainty and volatility globally. Additionally, shifts in the U.S. and international government policies and priorities such as changes in tariffs, trade barriers, and price and exchange controls could impact demand for our products and services, disrupt supply chain, and ultimately have an adverse effect on our business.
Our business is influenced by customer spending and global demand for our products. We are closely monitoring challenging business conditions in APAC, especially in China, which continues to experience market saturation, leading to decreased demand for our mid-tier products and heightened pricing pressures in the region. In Australia, there are signals of reduced demand as customers are delaying equipment orders or moving to rental units. To address these pressures, we've implemented adaptive measures, such as streamlining operations and refining cost management strategies.
Amid the uncertainty of a slowing global economy, global inflation, and geopolitical challenges, we continue to remain focused on long-term resilience. While we are unable to predict the full effect of these geopolitical and macroeconomic events and how they might evolve, we are committed to supporting our customers, maintaining operational stability, and navigating the volatile global landscape with a focus on sustainable growth.
See the "Risk Factors" section in Part I, Item 1A of this Annual Report for further discussion of the possible impact of the above conflicts and macroeconomic events on our business and financial results.
Outlook
As w e look ahead to 2025, while we expect to face a significant backlog headwind in 2025, the underlying business continues to drive year-over-year order growth. Given the robust reception to our recent product
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introductions and a solid pipeline of upcoming products, combined with expanded go-to-market strategies and a disciplined pricing approach, we are well positioned to continue to execute our enterprise growth strategy effectively.
Historical Results
The following table compares the historical results of operations for the years ended December 31, 2024, and 2023 in dollars and as a percentage of net sales (in millions, except per share amounts and percentages):
2024 % 2023 %
Net sales $ 1,286.7 100.0 $ 1,243.6 100.0
Cost of sales 736.7 57.3 715.8 57.6
Gross profit 550.0 42.7 527.8 42.4
Selling and administrative expense 391.9 30.5 352.6 28.4
Research and development expense 43.8 3.4 36.6 2.9
Operating income 114.3 8.9 138.6 11.1
Interest expense, net (9.1) (0.7) (13.5) (1.1)
Net foreign currency transaction gain 0.1 — 0.3 —
Other expense, net (0.5) — (1.6) (0.1)
Income before income taxes 104.8 8.1 123.8 10.0
Income tax expense 21.1 1.6 14.3 1.1
Net income 83.7 6.5 109.5 8.8
Net income per share - diluted $ 4.38 $ 5.83
Net Sales
Consolidated net sales in 2024 totaled $1,286.7 million, a 3.5% increase as compared to consolidated net sales of $1,243.6 million in 2023. The components of the consolidated net sales change were as follows:
Twelve Months Ended December 31,
2024 vs. 2023
Price 2.5%
Volume 0.7%
Organic growth 3.2%
Acquisitions 0.7%
Foreign currency (0.4)%
Total growth 3.5%
The 3.5% increase in consolidated net sales was driven by:
• Organic sales growth of 3.2% attributed to price realization across all regions, favorable product and channel mix, and higher equipment sales in the Americas, partly offset by volume declines in the EMEA and APAC regions;
• Inorganic sales growth of 0.7% driven by the acquisition of TCS; partly offset by
• A net unfavorable impact from foreign currency exchange of approximately 0.4%.
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The following table sets forth annual net sales by geographic area and the related percentage change from the prior year (in millions, except percentages):
2024 % 2023 %
Americas $ 888.5 5.7 $ 840.3 7.2
Europe, Middle East and Africa (EMEA) 318.5 1.3 314.4 (9.1)
Asia Pacific (APAC) 79.7 (10.3) 88.9 (15.8)
Total $ 1,286.7 3.5 $ 1,243.6 0.1
Americas
Net sales in the Americas were $888.5 million in 2024, an increase of 5.7% from 2023 driven by:
• Organic sales growth of 6.3%, primarily due to price realization and volume increases in equipment and service, partly offset by volume declines in parts and consumables in North America; and
• A net unfavorable impact from foreign currency exchange of approximately 0.6%.
Europe, Middle East and Africa ("EMEA")
EMEA net sales were $318.5 million in 2024, an increase of 1.3% from 2023 driven by:
• Inorganic sales growth of 2.6% driven by the acquisition of TCS;
• A net favorable impact from foreign currency exchange of approximately 0.3%; partly offset by
• Organic sales decrease of 1.6%, primarily due to volume declines in both equipment sales and parts and consumables, partly offset by price realization in all categories. EMEA volumes were impacted by weak economic conditions and a small contribution from backlog reduction.
Asia Pacific ("APAC")
APAC net sales were $79.7 million in 2024, a decrease of 10.3% from 2023 driven by:
• Organic sales decrease of 9.5%, primarily driven by volume declines partly offset by price realization in China and Australia; and
• A net unfavorable impact from foreign currency exchange of approximately 0.8%.
Backlog
Backlog is one of the many indicators of business conditions in the Company's markets. Our order backlog was approximately $61.5 million at December 31, 2024, compared to $186.2 million at December 31, 2023. From 2020 to 2022, our backlog grew to unusually high levels due to supply chain constraints resulting from the COVID-19 pandemic. This trend began to reverse in 2023 as supply chain conditions improved, allowing us to obtain key component parts and increase production levels. As a result, our order backlog at December 31, 2024 reflects a return to normalized levels.
Gross Profit
Gross profit margin of 42.7% was 30 basis points higher in 2024 compared to 2023. The margin rate increase was the result of pricing and cost-out initiative efforts, which outpaced the impact of inflation in the year. Strong margin rates are also supported by favorable product mix, including the reduction of industrial equipment backlog in the first half of 2024.
Operating Expenses
Selling and Administrative Expense
Selling and Administrative expense ("S&A expense") was $391.9 million in 2024, an increase of $39.3 million compared to 2023. As a percentage of net sales, S&A expense in 2024 increased 210 basis points to 30.5% from 28.4% in 2023. The S&A expense increase was primarily driven by Enterprise Resource Planning
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("ERP") modernization costs, legal contingency costs related to an intellectual property dispute, restructuring-related charges associated with our global workforce realignment, and transaction and integration costs.
Research and Development Expense
Research and Development ("R&D") expense was $43.8 million, or 3.4% of net sales, in 2024, with R&D as a percentage of sales increasing 50 basis points compared to 2023.
We continue to invest in developing innovative products and technologies at levels necessary to propel our technology, innovative leadership position and drive growth.
Total Other Expense, Net
Interest Expense, Net
Interest expense, net was $9.1 million in 2024, a decrease of $4.4 million compared to 2023. The decrease was the result of lower weighted average outstanding borrowings. The following table compares the weighted average outstanding borrowings, average interest rate, interest expense and interest income for the years ended December 31 (in millions, except percentages):
2024 2023
Weighted Average Outstanding Borrowings $ 211.8 $ 270.4
Average interest rate 6.42 % 6.27 %
Interest expense 13.6 17.0
Interest income (4.5) (3.5)
Interest expense, net $ 9.1 $ 13.5
Our debt portfolio as of December 31, 2024 was comprised of debt predominately in U.S. dollars. 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.
Foreign Currency Transaction Gain/Loss
Net foreign currency transaction gain was $0.1 million in 2024, compared to a $0.3 million gain in 2023. The favorable impact was primarily due to hedging gains on foreign denominated receivables.
Income Taxes
The effective tax rate for 2024 was 20.1% compared to 11.6% in 2023. The increase in the effective tax rate was primarily driven by the value of certain non-cash exceptional tax items. Both the 2024 and 2023 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. We do not expect similar benefits in future years. These non-cash events had impacts of (3.7%) in 2024 and (12.0%) in 2023. Absent these benefits the effective tax rate for 2024 and 2023 would be 23.8% and 23.6%, respectively.
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"). Member states have begun implementing the rules through local legislation and the OECD continues to refine technical guidance. Member states have begun implementing the rules through local legislation and the OECD continues to refine technical guidance. We have considered the applicable developments under the Pillar Two rules and there is no material impact on the 2024 consolidated financial statements.
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.
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Liquidity and Capital Resources
Liquidity
Our primary liquidity needs are to fund working capital, fund investments, service our debt, maintain cash reserves and invest in capital expenditures. Our sources of liquidity include cash generated from operations, borrowings under our revolving credit facility and from time to time, debt and equity offerings. We believe our current resources are sufficient to meet our working capital requirements for our current business for at least the next 12 months and thereafter for the foreseeable future.
Cash, cash equivalents and restricted cash totaled $99.8 million at December 31, 2024, as 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 2.0 as of December 31, 2024 and 2.1 as of December 31, 2023. Our primary working capital, which is comprised of accounts receivable, inventories and accounts payable was $316.0 million as of December 31, 2024 and $312.1 million as of December 31, 2023. Our debt-to-capital ratio was 24.3% as of December 31, 2024, compared to 25.8% as of December 31, 2023.
As of December 31, 2024, we had letters of credit and bank guarantees outstanding in the amount of $3.2 million, leaving approximately $449.3 million of unused borrowing capacity on our revolving facility.
On February 11, 2025, the Company's Board of Directors authorized a quarterly cash dividend of $0.295 per share payable on March 14, 2025, to shareholders of record at the close of business on February 28, 2025.
Cash Flow from Operating Activities
Net cash provided by operating activities in 2024 was $89.7 million compared to net cash provided by operating activities of $188.4 million in 2023. The decrease in cash provided was the result of consumption of working capital, mainly related to inventories, accounts receivable and bonus payouts, and spend on our ERP modernization project of $37.3 million.
Cash Flow from Investing Activities
Net cash used in investing activities in 2024 was $78.4 million compared to net cash used in investing activities of $23.2 million in 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 $25.7 million.
Cash Flow from Financing Activities
Net cash used in financing activities in 2024 was $25.2 million compared to net cash used in financing activities of $122.6 million in 2023. The decrease in cash outflows was primarily driven by proceeds from exercises of stock options decreased net repayments of borrowings, partly offset by dividend payments and share repurchases.
Stock Repurchase Program
On February 11, 2025, our board of directors authorized the repurchase of up to 2,000,000 shares of our common stock. This increase was in addition to the remaining authorized shares under our prior common stock repurchase program that was authorized on October 31, 2016 (the "Program"). Share repurchases may be made on an opportunistic basis through open market transactions, privately negotiated transactions, or by other means in accordance with applicable federal securities laws. We are not obligated to purchase any shares, and there is no set date that the program will expire. Our board of directors, at its discretion, may increase or decrease the number of authorized shares or terminate the Program at any time.
During the year ended December 31, 2024, we repurchased 198,352 shares under the Program, with 623,061 shares of common stock remaining.
For more information related to our stock repurchases, see Note 14, Shareholders' Equity , of the Notes to Consolidated Financial Statements in "Item 8. Financial Statements and Supplementary Data" of this Form 10-K.
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Cash Requirements
The Company believes the liquidity available from the combination of expected cash generated by operating activities, existing cash and available credit under existing credit facilities will be sufficient to meet its short-term and long-term cash requirements. Significant contractual obligations include principal and interest payments on long-term debt (Note 9) and operating lease commitments (Note 15). We also have contractual purchase obligations of approximately $62 million for 2025.
Newly Issued Accounting Guidance
See Note 2 to the consolidated financial statements for information on newly adopted 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 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.
In November 2024, the FASB issued ASU 2024-03 Income Statement - Reporting Comprehensive Income - Expense Disaggregation Disclosures (Topic 220) - Disaggregation of Income Statement Expenses , which requires disaggregation of certain income statement expense captions into specified categories to be disclosed within the notes to the financial statements, but does not change the expense captions on the consolidated income statement. The ASU is effective for annual periods beginning after December 15, 2026, and interim periods within fiscal years beginning after December 15, 2027. Adoption of this ASU can either be applied prospectively to consolidated financial statements issued for reporting periods after the effective date of this ASU or retrospectively to any or all prior periods presented in the consolidated financial statements. We are evaluating the effect that this guidance will have on our consolidated financial statements and related 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.
Critical Accounting Policies and Estimates
Our consolidated financial statements are based on the selection and application of accounting principles generally accepted in the United States of America, which require us to make estimates and assumptions about future events that affect the amounts reported in our consolidated financial statements and the accompanying notes. Our significant accounting policies are described in Note 1 to the consolidated financial statements. Future events and their effects cannot be determined with absolute certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results could differ from those estimates, and any such differences may be material to the consolidated financial statements. We believe that the following policies may involve a higher degree of judgment and complexity in their application and represent the critical accounting policies used in the preparation of our consolidated financial statements. If different assumptions or conditions were to prevail, the results could be materially different from our reported results.
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 have the option of first analyzing qualitative factors to determine whether it is more likely
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than not that the fair value of any reporting unit is less than its carrying amount. However, we may elect to perform a quantitative goodwill impairment test in lieu of the qualitative test. An entity must recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. Subsequent reversal of goodwill impairment charges is not permitted.
When we perform a qualitative goodwill test, we analyze qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the quantitative goodwill impairment test. If the qualitative test indicates there may be an impairment, we perform the quantitative test, which measures the amount of the goodwill impairment, if any. To perform the quantitative test, we calculate the fair value of each reporting unit, primarily utilizing the income approach and market approach. The income approach is based on discounted cash flow models that use reporting unit estimates for forecasted future financial performance, including revenues, margins, operating expenses, capital expenditures, depreciation, amortization, tax and discount rates. The market approach is based on assumptions related to earnings before interest, taxes, depreciation, and amortization ("EBITDA") multiples. These estimates are developed as part of our planning process based on assumed growth rates, along with historical data and various internal estimates. Projected future cash flows are then discounted to a present value employing a discount rate that properly accounts for the estimated risk-adjusted weighted-average cost of capital relevant to each reporting unit.
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 2024, we elected to perform the quantitative test on the EMEA and APAC reporting units. Our test indicated that the fair value 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.
We had goodwill of $185.6 million and $187.4 million at December 31, 2024 and 2023, respectively.
Income Taxes – We are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating our actual current tax obligations based on expected income, statutory tax rates and tax planning opportunities in the various jurisdictions. We also establish reserves for uncertain tax matters that are complex in nature and uncertain as to the ultimate outcome. Although we believe that our tax return positions are fully supportable, we consider our ability to ultimately prevail in defending these matters when establishing these reserves. We adjust our reserves in light of changing facts and circumstances, such as the closing of a tax audit. We believe that our current reserves are adequate. However, the ultimate outcome may differ from our estimates and assumptions and could impact the income tax expense reflected in our consolidated statements of income.
Tax law requires certain items to be included in our tax return at different times than the items are reflected in our results of operations. Some of these differences are permanent, such as expenses that are not deductible in our tax returns, and some differences will reverse over time, such as depreciation expense on property, plant and equipment. These temporary differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheets. Deferred tax assets generally represent items that can be used as a tax deduction or credit in our tax returns in future years but have already been recorded as an expense in our consolidated statements of income. We assess the likelihood that our deferred tax assets will be recovered from future taxable income, and, based on management’s judgment, to the extent we believe that recovery is not more likely than not, we establish a valuation allowance against those deferred tax assets. The deferred tax asset valuation allowance could be materially different from actual results because of changes in the mix of future taxable income, the relationship between book and taxable income and our tax planning strategies. As of December 31, 2024, a valuation allowance of $3.3 million was recorded against foreign and state tax credit carryforwards.
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Cautionary Factors Relevant to Forward-Looking Information
This Annual Report on Form 10-K, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7, contains certain statements that are considered “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. These statements do not relate to strictly historical or current facts and provide current expectations of forecasts of future events. Any such expectations or forecasts of future events are subject to a variety of factors. Particular risks and uncertainties presently facing us include:
• Geopolitical and economic uncertainty throughout the world.
• Ability to comply with global laws and regulations.
• Changes in foreign currency translation rates.
• Ability to adapt to price sensitivity.
• Competition in our business.
• Fluctuations in the cost, quality or availability of raw materials and purchased components.
• Ability to adjust pricing to respond to cost pressures.
• Unforeseen product liability claims or product quality issues.
• Ability to attract, retain and develop key personnel and create effective succession planning strategies.
• Ability to effectively manage strategic plan or growth processes.
• Ability to implement our new ERP system.
• Ability to successfully protect our information technology systems from cybersecurity risks.
• Occurrence of a significant business interruption.
• Ability to maintain the health and safety of our workforce.
• Ability to complete and integrate acquisitions.
• Ability to develop and commercialize new innovative products and services.
• Ability to execute our business transformation strategy.
We caution that forward-looking statements must be considered carefully and that actual results may differ in material ways due to risks and uncertainties both known and unknown. Information about factors that could materially affect our results can be found in Part I, Item 1A "Risk Factors" of this Form 10-K. Shareholders, potential investors and other readers are urged to consider these factors in evaluating forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements.
We undertake no obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as required by law. 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.
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