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 June 30, 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 As a company with a global presence, we are subject to risks and uncertainties caused by significant events with macroeconomic impacts, including, but not limited to, geopolitical tensions, elevated interest rates, monetary policy changes, and foreign currency fluctuations. The global business landscape continues to be shaped by volatility, including heightened uncertainty in trade policy. Previously implemented U.S. tariffs and the potential for future actions could increase input costs, disrupt supply chains, and impact customer demand as end users absorb cost increases. These trade dynamics may also create competitive shifts within the market. Future policy changes or retaliatory measures could increase manufacturing costs and pressure pricing, potentially reducing product demand. We are carefully monitoring these developments to assess potential impacts and will continue to adapt as the situation evolves. Demand trends across our key markets remain mixed. In China, recovery is slow due to market saturation impacting product sales and driving pricing competition. In other regions like Mexico, uncertainty and rising interest rates are leading to delayed spending decisions and increased rental solutions. In Europe, heightened competitive pressures have tempered demand for our products. To manage these challenges, we are focused on cost control, operational improvements, and diversifying sourcing. We are taking proactive pricing actions alongside supply-chain initiatives to mitigate the impact of tariffs, although some margin pressure may persist as the full benefits of our cost-out and pricing initiatives are phased in, leading to a gradual improvement in margin rates. At the same time, we are adapting our product and service offerings to meet evolving customer needs and continuing to invest in innovation to support long-term demand, while maintaining disciplined spending across the organization. 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 27 Table of Contents environment, including geopolitical conflict, the potential impact of global supply chain constraints on material inflation, and change in demand for our products. Outlook Amid ongoing economic uncertainty, we are actively managing margins through market-based pricing actions and targeted supply-chain strategies, including supplier negotiations, dual sourcing, and logistics shifts to mitigate tariff-related cost inflation. While timing mismatches between cost increases and realization of both price increases and cost-out initiatives may pressure margins in the near term, diligent management of both levers is crucial for sustained profitability. We continuously strive to optimize our financial performance to achieve sustainable profitability and expand our margins. Results The following table compares the results of operations for the three and six months ended June 30, 2025 and 2024, respectively (in millions, except per share data and percentages): Three Months Ended June 30, Six Months Ended June 30, 2025 % 2024 % 2025 % 2024 % Net sales $ 318.6 100.0 $ 331.0 100.0 $ 608.6 100.0 $ 642.0 100.0 Cost of sales 184.5 57.9 188.3 56.9 354.5 58.2 361.8 56.4 Gross profit 134.1 42.1 142.7 43.1 254.1 41.8 280.2 43.6 Selling and administrative expense 93.7 29.4 92.9 28.1 184.4 30.3 182.8 28.5 Research and development expense 9.8 3.1 11.2 3.4 19.5 3.2 21.3 3.3 Operating income 30.6 9.6 38.6 11.7 50.2 8.2 76.1 11.9 Interest expense, net (2.2) (0.7) (2.5) (0.8) (4.5) (0.7) (4.8) (0.7) Net foreign currency transaction (loss) gain (0.8) (0.3) 0.7 0.2 (1.0) (0.2) 0.5 0.1 Other (expense) income, net (0.3) (0.1) 0.1 — (0.2) — 0.2 — Income before income taxes 27.3 8.6 36.9 11.1 44.5 7.3 72.0 11.2 Income tax expense 7.1 2.2 9.0 2.7 11.2 1.8 15.7 2.4 Net income $ 20.2 6.3 $ 27.9 8.4 $ 33.3 5.5 $ 56.3 8.8 Net income per share - diluted $ 1.08 $ 1.45 $ 1.77 $ 2.94 Net Sales Consolidated net sales for the second quarter of 2025 totaled $318.6 million, a 3.7% decrease as compared to consolidated net sales of $331.0 million in the second quarter of 2024. The components of the consolidated net sales change were as follows: Three Months Ended June 30, Six Months Ended June 30, 2025 vs. 2024 Price 1.8% 0.9% Volume (6.3)% (5.6)% Organic decline (4.5)% (4.7)% Acquisitions —% 0.2% Foreign currency 0.8% (0.7)% Total (3.7)% (5.2)% 28 Table of Contents The 3.7% decrease in consolidated net sales in the second quarter of 2025 as compared to the same period in 2024 was driven by: • Organic sales decline of 4.5% was primarily due to volume declines across all geographies, particularly in North America, which was lapping a significant backlog-reduction benefit in the prior-year period, partly offset by price realization; and • A net favorable impact from foreign currency exchange of approximately 0.8% primarily due to the strengthening of the Euro relative to the U.S. dollar. The 5.2% decrease in consolidated net sales in the first six months of 2025 as compared to the same period in 2024 was driven by: • Organic sales decline of 4.7% was primarily due to volume declines across all geographies, particularly in North America, which was lapping a significant backlog-reduction benefit in the prior-year period, partly offset by price realization; and • A net unfavorable impact from foreign currency exchange of approximately 0.7%; partly offset by • Acquisition-related growth of 0.2% driven by TCS. The following table sets forth the net sales by geographic area for the three and six months ended June 30, 2025 and 2024 (in millions, except percentages): Three Months Ended June 30, Six Months Ended June 30, 2025 2024 % Change 2025 2024 % Change Americas $ 213.5 $ 227.8 (6.3) % $ 410.8 $ 443.4 (7.4) % Europe, Middle East and Africa 84.7 81.5 3.9 % 160.7 158.3 1.5 % Asia Pacific 20.4 21.7 (6.0) % 37.1 40.3 (7.9) % Total $ 318.6 $ 331.0 (3.7) % $ 608.6 $ 642.0 (5.2) % Americas Americas net sales were $213.5 million for the second quarter of 2025, a decrease of 6.3% from the second quarter of 2024 driven by: • Organic sales decline of 5.5% was driven by volume declines, particularly in North America industrial equipment, which was lapping a significant backlog reduction benefit in the prior year period, partly offset by price realization and volume increases in commercial equipment; and • A net unfavorable impact from foreign currency exchange of approximately 0.8%. Americas net sales were $410.8 million for the first six months of 2025, a decrease of 7.4% from the first six months of 2024 driven by: • Organic sales decline of 6.2% was driven by volume declines, particularly in North America industrial equipment, which was lapping a significant backlog reduction benefit in the prior year period, partly offset by volume increases in commercial equipment and price realization; and • A net unfavorable impact from foreign currency exchange of approximately 1.2%. Europe, Middle East and Africa ("EMEA") EMEA net sales were $84.7 million for the second quarter of 2025, an increase of 3.9% from the second quarter of 2024 driven by: • A net favorable impact from foreign currency exchange of approximately 5.3%; partly offset by • Organic sales decline of 1.4% was primarily due to volume declines in Germany and the Middle East region, partly offset by volume increases in the UK and Iberia, and price realization. 29 Table of Contents EMEA net sales were $160.7 million for the first six months of 2025, an increase of 1.5% from the first six months of 2024 driven by: • A net favorable impact from foreign currency exchange of approximately 1.2%; • Acquisition-related growth of 0.7% due to TCS; partly offset by • Organic sales decline of 0.4% was primarily due to volume declines in Germany and the Middle East region, partly offset by volume increases in the UK and Iberia, and price realization. Asia Pacific ("APAC") APAC net sales were $20.4 million for the second quarter of 2025, a decrease of 6.0% from the second quarter of 2024 driven by: • Organic sales decline of 5.0% driven primarily by decreased volumes in China, partly offset by increased equipment volume in Australia; and • A net unfavorable impact from foreign currency exchange of approximately 1.0%. APAC net sales were $37.1 million for the first six months of 2025, a decrease of 7.9% from the first six months of 2024 driven by: • Organic sales decline of 6.2% driven primarily by decreased volumes in China, partly offset by increased equipment volume in Australia; and • A net unfavorable impact from foreign currency exchange of approximately 1.7%. Gross Profit Gross profit margin of 42.1% was 100 basis points lower in the second quarter of 2025 compared to the second quarter of 2024. Gross profit margin of 41.8% was 180 basis points lower in the first six months of 2025 compared to first six months of 2024. The margin rate decrease in both periods was primarily attributed to a shift in product and customer mix as well as ongoing inflation and lower productivity. This was partly offset by price realization. The prior-year periods include benefits from a significant reduction in the backlog, largely consisting of higher-margin industrial products sold through direct channels. Operating Expense Selling and Administrative Expense Selling and administrative expense ("S&A expense") was $93.7 million for the second quarter of 2025, an increase of $0.8 million compared to the second quarter of 2024. As a percentage of net sales, S&A expense for the second quarter of 2025 increased 130 basis points to 29.4% from 28.1% in the second quarter of 2024. The S&A expense increase was driven by higher costs linked to our strategic investments, including Enterprise Resource Planning ("ERP") costs, and a bad debt charge. This increase was partly offset by lower variable compensation expense and discretionary spending. S&A expense was $184.4 million for the first six months of 2025, an increase of $1.6 million compared to the first six months of 2024. As a percentage of net sales, S&A expense for the first six months of 2025 increased 180 basis points to 30.3% from 28.5% in the first six months of 2024. The S&A expense increase was driven by higher costs linked to our strategic investments, including ERP costs and restructuring-related charges, and a bad debt charge, partly offset by lower variable compensation expense and discretionary spending. Research and Development Expense Research and development expense ("R&D expense") was $9.8 million, or 3.1% of net sales, for the second quarter of 2025, with R&D expense as a percentage of net sales decreasing 30 basis points compared to the second quarter of 2024. R&D expense was $19.5 million, or 3.2% of net sales, for the first six months of 2025, with R&D expense as a percentage of net sales decreasing 10 basis points compared to the first six months 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. 30 Table of Contents Total Other Expense, Net Interest Expense, Net Interest expense, net was $2.2 million in the second quarter of 2025 compared to $2.5 million in the second quarter of 2024. The following table compares the debt levels, average interest rate, interest income and interest expense for the three and six months ended June 30, 2025 and 2024, respectively (in millions, except percentages): Three Months Ended June 30, Six Months Ended June 30, 2025 2024 2025 2024 Weighted Average Outstanding Borrowings $ 213.8 $ 214.6 $ 209.3 $ 214.1 Average interest rate 5.67 % 6.50 % 5.68 % 6.33 % Interest expense 3.0 3.5 6.2 6.8 Interest income (0.8) (1.0) (1.7) (1.9) Interest expense, net $ 2.2 $ 2.5 $ 4.5 $ 4.9 Our debt portfolio as of June 30, 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 $0.8 million in the second quarter of 2025 compared to a gain of $0.7 million in the second quarter of 2024. Net foreign currency translation loss was $1.0 million in the first six months of 2025 compared to a gain of $0.5 million in the first six months of 2024. The unfavorable impact in both periods was primarily due to the strengthening of the Euro relative to the U.S. dollar. Income Taxes The effective tax rate for the second quarter of 2025 was 26.0% compared to 24.4% for the second quarter of 2024. The increase was primarily due to a decrease in discrete tax benefits associated with share-based compensation recognized in the second quarter of 2024. The effective tax rate for the first six months of 2025 was 25.2% compared to 21.8% for the first six months of 2024. The increase was primarily due to a decrease in discrete tax benefits associated with share-based compensation recognized in the first six months 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 $80.1 million at June 30, 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 June 30, 2025 and 2.0 as of December 31, 2024. Our primary working capital, which is comprised of accounts receivable, inventories and accounts payables, was $338.4 million as of June 30, 2025 and $316.0 million as of December 31, 2024. Our debt-to-capital ratio was 24.6% as of June 30, 2025 compared to 24.3% as of December 31, 2024. 31 Table of Contents As of June 30, 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 provided by operating activities during the six months ended June 30, 2025 was $22.1 million compared to net cash provided by operating activities of $21.5 million during the six months ended June 30, 2024. The increase was the result of decreased consumption of working capital, partly offset by spend on our ERP project of $28.4 million and lower operating performance. Cash Flow from Investing Activities Net cash used in investing activities during the six months ended June 30, 2025 was $10.6 million compared to net cash used in investing activities of $64.9 million during the six months ended June 30, 2024. The decrease was primarily due to one-time cash outflows in the prior year related to a $32.1 million investment in Brain, Corp and a $25.7 million net cash outlay for the acquisition of TCS. Cash Flow from Financing Activities Net cash used in financing activities during the six months ended June 30, 2025 was $32.8 million compared to net cash provided by financing activities of $12.4 million during the six months ended June 30, 2024. The decrease was driven by increased repurchases of common stock and lower proceeds from the exercise of stock options. 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. 32 Table of Contents 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 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.