TENNANT CO 10-Q

Item 2. 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, 2025 and 2024. 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. 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 retail establishments, distribution centers, factories and warehouses, public venues such as arenas and stadiums, office buildings, 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 Ongoing geopolitical tensions, including conflicts in the Middle East and Eastern Europe, along with evolving global trade dynamics, continue to contribute to economic uncertainty and market volatility. In March 2025, the U.S. imposed additional tariffs on a wide range of imports, with the potential for further tariff actions. These trade measures, along with updates to export controls and sanctions regimes, pose ongoing risks to global supply chains, potentially increasing the cost of goods, straining procurement cycles, and impacting customer demand. We are closely monitoring the evolving trade landscape, and our analysis of the potential impact of tariffs on our operations is actively underway. Future trade policy shifts or retaliatory measures could raise manufacturing costs, affect product pricing, or contribute to inflationary pressures on our customers, which may in turn reduce demand for our products. Our business remains sensitive to global demand trends. In China, market saturation has contributed to declining sales of mid-tier products and intensified pricing competition. In certain other markets, including Australia and Mexico, shifting customer behavior has led to deferred purchases or a greater reliance on rental solutions. In response, we continue to pursue operational efficiencies, refine cost management strategies, and monitor global developments closely to mitigate potential risks. As described in Part I, Item 1A - Risk Factors in the annual report on Form 10-K for the fiscal year ended December 31, 2024, 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. 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. Changes in foreign currency may also adversely impact our new sales, earnings, and financial condition. 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. Outlook Amid the uncertainties of a slowing global economy, rising inflation, and ongoing geopolitical challenges, our focus remains on building long-term resilience. With our global footprint, supply chain, and customer base, we 26 Table of Contents are working to navigate the effects of shifting trade policies, such as tariffs, alongside broader geopolitical and macroeconomic uncertainties. While the full impact of these factors is uncertain and difficult to predict, we are committed to supporting our customers, ensuring operational stability, and navigating these volatile conditions with a focus on long-term growth. Results The following table compares the results of operations for the three months ended March 31, 2025 and 2024, respectively (in millions, except per share data and percentages): Three Months Ended March 31, 2025 % 2024 % Net sales $ 290.0 100.0 $ 311.0 100.0 Cost of sales 170.0 58.6 173.5 55.8 Gross profit 120.0 41.4 137.5 44.2 Selling and administrative expense 90.7 31.3 89.9 28.9 Research and development expense 9.7 3.3 10.1 3.2 Operating income 19.6 6.8 37.5 12.1 Interest expense, net (2.3) (0.8) (2.3) (0.7) Net foreign currency transaction loss (0.2) (0.1) (0.2) (0.1) Other income, net 0.1 — 0.1 — Income before income taxes 17.2 5.9 35.1 11.3 Income tax expense 4.1 1.4 6.7 2.2 Net income $ 13.1 4.5 $ 28.4 9.1 Net income per share - diluted $ 0.69 $ 1.49 Net Sales Consolidated net sales for the first quarter of 2025 totaled $290.0 million, a 6.8% decrease as compared to consolidated net sales of $311.0 million in the first quarter of 2024. The components of the consolidated net sales change were as follows: Three Months Ended March 31 2025 vs. 2024 Price (0.1)% Volume (4.9)% Organic decline (5.0)% Acquisitions 0.3% Foreign currency (2.1)% Total decline (6.8)% The 6.8% decrease in consolidated net sales in the first quarter of 2025 as compared to the same period in 2024 was driven by: • Organic sales decline of 5.0% was primarily due to broad volume declines across all geographies, particularly in North America, which was lapping a significant backlog reduction benefit in the prior year period; and • A net unfavorable impact from foreign currency exchange of approximately 2.1% due primarily to the strengthening of the Brazilian Real and Euro relative to the U.S. dollar ; partly offset by • Acquisition-related growth of 0.3% driven by TCS. 27 Table of Contents The following table sets forth the net sales by geographic area for the three months ended March 31, 2025 and 2024 (in millions, except percentages): Three Months Ended March 31, 2025 2024 % Change Americas $ 197.3 $ 215.6 (8.5) % Europe, Middle East and Africa 76.0 76.8 (1.0) % Asia Pacific 16.7 18.6 (10.2) % Total $ 290.0 $ 311.0 (6.8) % Americas Americas net sales were $197.3 million for the first quarter of 2025, a decrease of 8.5% from the first quarter of 2024 driven by: • Organic sales decline of 6.9% was driven by volume declines, particularly in North America, which was lapping a significant backlog reduction benefit in the prior year period, partly offset by price realization in Latin America; and • A net unfavorable impact from foreign currency exchange of approximately 1.6%. Europe, Middle East and Africa ("EMEA") EMEA net sales were $76.0 million for the first quarter of 2025, a decrease of 1.0% from the first quarter of 2024 driven by: • A net unfavorable impact from foreign currency exchange of approximately 3.0%; partly offset by • Acquisition-related growth of 1.4% due to TCS; and • Organic sales growth of 0.6% was primarily due to price realization in parts and consumables and service, partly offset by volume declines in equipment. Asia Pacific ("APAC") APAC net sales were $16.7 million for the first quarter of 2025, a decrease of 10.2% from the first quarter of 2024 driven by: • Organic sales decline of 7.5% driven primarily by net volume declines in parts and consumables and the impact of negative product mix; and • A net unfavorable impact from foreign currency exchange of approximately 2.7%. Gross Profit Gross profit margin of 41.4% was 280 basis points lower in the first quarter of 2025 compared to the first quarter of 2024. The margin rate decrease was primarily attributed to a shift in product and channel mix as well as ongoing inflation. The prior-year quarter includes benefits from a significant reduction in the backlog, largely consisting of higher-margin industrial products sold to direct customers. Operating Expense Selling and Administrative Expense Selling and administrative expense ("S&A expense") was $90.7 million for the first quarter of 2025, an increase of $0.8 million compared to the first quarter of 2024. As a percentage of net sales, S&A expense for the first quarter of 2025 increased 240 basis points to 31.3% from 28.9% in the first quarter of 2024. The S&A expense increase was driven by higher costs linked to our strategic investments, including Enterprise Resource Planning ("ERP") modernization costs and restructuring-related charges, partly offset by lower compensation and benefit expense and discretionary spending. 28 Table of Contents Research and Development Expense Research and development expense ("R&D expense") was $9.7 million, or 3.3% of net sales, for the first quarter of 2025, with R&D expense as a percentage of net sales increasing 10 basis points compared to the first quarter of 2024. We continue to invest in developing innovative products and technologies at levels necessary to propel our technology and innovative leadership position and drive growth. Total Other Expense, Net Interest Expense, Net Interest expense, net was $2.3 million in the first quarter of 2025 and 2024. The following table compares the debt levels, average interest rate, interest income and interest expense for the three months ended March 31, 2025 and 2024, respectively (in millions, except percentages): Three Months Ended March 31, 2025 2024 Weighted Average Outstanding Borrowings $ 204.0 $ 217.8 Average interest rate 5.68 % 6.52 % Interest expense 3.2 3.6 Interest income (0.9) (1.3) Interest expense, net $ 2.3 $ 2.3 Our debt portfolio as of March 31, 2025 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. 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 Loss Net foreign currency transaction loss was $0.2 million in the first quarters of 2025 and 2024. The unfavorable impact was primarily due to the strengthening of the Euro relative to the U.S. dollar. Income Taxes The effective tax rate for the first quarter of 2025 was 23.8% compared to 19.1% for the first quarter of 2024. The increase was primarily due to a decrease in discrete tax benefits associated with share-based compensation recognized in the first quarter of 2024. 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 U.S. Liquidity and Capital Resources Liquidity Cash and cash equivalents totaled $79.5 million at March 31, 2025 compared to $99.8 million as of December 31, 2024. 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 March 31, 2025 and 2.0 as of December 31, 2024. Our primary working capital, which is comprised of accounts receivable, inventories and accounts payables, was $327.2 million as of March 31, 2025 and $316.0 million as of December 31, 2024. Our debt-to-capital ratio was 25.5% as of March 31, 2025 compared to 24.3% as of December 31, 2024. 29 Table of Contents As of March 31, 2025, we had letters of credit and bank guarantees outstanding in the amount of $3.2 million, leaving approximately $434.3 million of unused borrowing capacity on our revolving facility. Cash Flow from Operating Activities Net cash used in operating activities during the three months ended March 31, 2025 was $0.4 million compared to net cash provided by operating activities of $2.9 million during the three months ended March 31, 2024. The cash used was driven by spend of our ERP modernization project of $12.4 million as well as consumption of working capital and lower operating performance. Cash Flow from Investing Activities Net cash used in investing activities during the three months ended March 31, 2025 was $6.9 million compared to net cash used in investing activities of $60.6 million during the three months ended March 31, 2024. The cash used was driven by capital expenditures. Cash Flow from Financing Activities Net cash used in financing activities during the three months ended March 31, 2025 was $13.7 million compared to net cash provided by financing activities of $26.9 million during the three months ended March 31, 2024. The cash used was driven by share repurchases and dividends, partly offset by net proceeds from 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 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. Cautionary Statement Relevant to Forward-Looking Information 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 30 Table of Contents 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; our ability to comply with global laws and regulations; changes in foreign currency exchange rates; our ability to adapt to customer pricing sensitivities; the competition in our business; fluctuations in the cost, quality or availability of raw materials and purchased components; our ability to adjust pricing to respond to cost pressures; unforeseen product liability claims or product quality issues; our ability to attract, retain and develop key personnel and create effective succession planning strategies; our ability to effectively develop and manage strategic planning and growth processes and the related operational plans; our ability to successfully upgrade and evolve our information technology systems; our ability to successfully protect our information technology systems from cybersecurity risks; complications with our new Enterprise Resource Planning ("ERP") system; the occurrence of a significant business interruption; our ability to maintain the health and safety of our workers; our ability to integrate acquisitions; our ability to develop and commercialize new innovative products and services; and risks related to our business transformation and strategic initiatives. 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. 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. Additional information about factors that could materially affect our results can be found in Part I, Item 1A, Risk Factors in our annual report on Form 10-K for the year ended December 31, 2024. 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. Item 3. Quantitative and Qualitative Disclosures About Market Risk There have been no material changes in our market risk since December 31, 2024. For additional information, refer to Item 7A of our annual report on Form 10-K for the year ended December 31, 2024.