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, 2026 and 2025. 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 global company, we are exposed to risks and uncertainties arising from macroeconomic, geopolitical, and regulatory conditions, including inflationary pressures, interest rate volatility, foreign currency fluctuations, changes in global capital markets, and evolving international trade and tariff policies. These factors continue to influence our operating environment and may impact revenue growth, margins, liquidity, and the execution of our strategic initiatives. During the first quarter of 2026, macroeconomic conditions were affected by escalating geopolitical conflict involving Iran and heightened tensions in the Middle East, which disrupted global energy markets and transportation routes. As a result, global energy, fuel, and logistics costs increased, contributing to renewed inflationary pressures following periods of moderation in fiscal year 2025. These dynamics led to higher costs in certain areas of our cost structure, including freight and select raw materials, and could adversely affect customer demand if sustained. We continue to implement cost management initiatives to mitigate these impacts and are actively monitoring supply chain, sourcing, and input cost trends, while continuing to evaluate the evolving macroeconomic environment and its potential impact on our business, financial condition, and results of operations. As described in Part I, Item 1A - Risk Factors in the annual report on Form 10-K for the fiscal year ended December 31, 2025, 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. Tariffs On February 20, 2026, the United States Supreme Court issued a ruling striking down certain tariffs previously imposed under the International Emergency Economic Powers Act (IEEPA). The availability, timing, and amount 26 Table of Contents of any related refunds remain uncertain and subject to further legal and administrative processes. Following the decision, the U.S. presidential administration announced new temporary tariffs based on different statutory authority for a 150 day period beginning February 24, 2026. These actions have created continued uncertainty regarding tariff levels, duration, and the potential for additional actions or retaliatory measures, and we are monitoring developments to assess potential impacts on our business and results of operations. Outlook The Company entered fiscal year 2026 facing continued uncertainty in global economic conditions, elevated energy and logistics costs, and changes in international trade policy, including evolving U.S. tariff programs. Despite this environment, customer demand and order activity early in the year have remained favorable, supported by strength across core end markets and continued momentum in autonomous mobile robotics. Operationally, fiscal year 2026 represents a transition period as the Company progresses beyond the initial implementation of its North America ERP system. ERP recovery advanced steadily during the first quarter, with operational performance improving meaningfully as the quarter progressed following a planned two‑week shutdown of North American manufacturing facilities in January to complete a physical inventory count. Management remains focused on restoring execution discipline and improving production flow, while continuing to actively manage inflationary pressures, including labor, freight, and tariffs. The Company continues to invest selectively in growth initiatives, including robotic and autonomous cleaning solutions, while maintaining a disciplined approach to spending, liquidity, and capital allocation. Results The following table compares the results of operations for the three months ended March 31, 2026 and 2025, respectively (in millions, except per share data and percentages): Three Months Ended March 31, 2026 % 2025 % Net sales $ 297.9 100.0 $ 290.0 100.0 Cost of sales 184.3 61.9 170.0 58.6 Gross profit 113.6 38.1 120.0 41.4 Selling and administrative expense 98.1 32.9 90.7 31.3 Research and development expense 10.6 3.6 9.7 3.3 Operating income 4.9 1.6 19.6 6.8 Interest expense, net (3.4) (1.1) (2.3) (0.8) Net foreign currency transaction loss (0.4) (0.1) (0.2) (0.1) Other (expense) income, net (0.2) (0.1) 0.1 — Income before income taxes 0.9 0.3 17.2 5.9 Income tax expense 0.7 0.2 4.1 1.4 Net income $ 0.2 0.1 $ 13.1 4.5 Net income per share - diluted $ 0.01 $ 0.69 Net Sales Consolidated net sales for the first quarter of 2026 totaled $297.9 million, a 2.7% increase as compared to consolidated net sales of $290.0 million in the first quarter of 2025. The components of the consolidated net sales change were as follows: 27 Table of Contents Three Months Ended March 31, 2026 vs. 2025 Price 4.2% Volume (6.1)% Organic decline (1.9)% Acquisitions 0.5% Foreign currency 4.1% Total 2.7% The 2.7% increase in consolidated net sales in the first quarter of 2026 as compared to the same period in 2025 was driven by: • A net favorable impact from foreign currency exchange of approximately 4.1% primarily due to the strengthening of the Euro, Brazilian real, and Mexican peso relative to the U.S. dollar; and • Acquisition related growth of 0.5% driven by the acquisitions of distributors in EMEA; partly offset by • Organic sales decline of 1.9% primarily due to volume declines in North America related to ERP impacts earlier in the quarter, partly offset by pricing r ealization in North America and EMEA. The following table sets forth the net sales by geographic area for the three months ended March 31, 2026 and 2025 (in millions, except percentages): Three Months Ended March 31, 2026 2025 % Change Americas $ 194.0 $ 197.3 (1.7) % Europe, Middle East and Africa 86.9 76.0 14.3 % Asia Pacific 17.0 16.7 1.8 % Total $ 297.9 $ 290.0 2.7 % Americas Americas net sales were $194.0 million for the first quarter of 2026, a decrease of 1.7% from the first quarter of 2025 driven by: • Organic sales decline of 3.0% primarily driven by lower volumes in North America related to ERP impacts earlier in the quarter, partially offset by pricing realization in North America and increased rental and equipment volumes in Latin America; and • A net favorable impact from foreign currency exchange of approximately 1.3%. Europe, Middle East and Africa ("EMEA") EMEA net sales were $86.9 million for the first quarter of 2026, an increase of 14.3% from the first quarter of 2025 driven by: • A net favorable impact from foreign currency exchange of approximately 11.3%; • Acquisition related growth of 2.0% driven by acquisitions of distributors; and • Organic sales growth of 1.0% primarily due to price realization and equipment volume increases in France and Germany. Asia Pacific ("APAC") APAC net sales were $17.0 million for the first quarter of 2026, an increase of 1.8% from the first quarter of 2025 driven by: 28 Table of Contents • A net favorable impact from foreign currency exchange of approximately 3.8%; partly offset by • Organic sales decline of 2.0%, primarily driven by lower pricing in China equipment sales and softer underlying demand, particularly in China, Australia, and Southeast Asia, partially offset by volume growth in India and Korea. Gross Profit Gross profit margin of 38.1% was 330 basis points lower in the first quarter of 2026 compared to the first quarter of 2025. The margin rate decline was driven primarily by incremental labor, freight, and expediting costs associated with ERP recovery efforts earlier in the quarter, as well as a shift in customer mix toward strategic accounts, which carry a different margin profile. Tariff and other inflationary pressures were fully offset by price realization and cost-out initiatives. Operating Expense Selling and Administrative Expense Selling and administrative expense ("S&A expense") was $98.1 million for the first quarter of 2026, an increase of $7.4 million compared to the first quarter of 2025. As a percentage of net sales, S&A expense for the first quarter of 2026 increased 160 basis points to 32.9% from 31.3% in the first quarter of 2025. The increase in S&A expense was primarily driven by unfavorable foreign currency, legal and financial advisory costs, higher compensation and benefits, and software subscription fees. Research and Development Expense Research and development expense ("R&D expense") was $10.6 million, or 3.6% of net sales, for the first quarter of 2026, with R&D expense as a percentage of net sales increasing 30 basis points compared to the first quarter of 2025. 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 $3.4 million in the first quarter of 2026 compared to $2.3 million in the first quarter of 2025. The increase was the result of higher weighted average outstanding borrowings, including incremental borrowings to fund share repurchases, partly offset by a lower average interest rate. The following table compares the debt levels, average interest rate, interest income and interest expense for the three months ended March 31, 2026 and 2025, respectively (in millions, except percentages): Three Months Ended March 31, 2026 2025 Weighted Average Outstanding Borrowings $ 306.8 $ 204.0 Average interest rate 5.0 % 5.7 % Interest expense 4.4 3.2 Interest income (1.0) (0.9) Interest expense, net $ 3.4 $ 2.3 Our debt portfolio as of March 31, 2026 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 3.44% over the term of the agreements. 29 Table of Contents Net Foreign Currency Transaction Loss Net foreign currency transaction loss was $0.4 million, a $0.2 million increase compared to the first quarter of 2025. The unfavorable impact was primarily due to volatile currency markets driving larger than normal exchange rate fluctuations on small unhedged exposures. Income Taxes The effective tax rate for the first quarter of 2026 was 80.5% compared to 23.8% for the first quarter of 2025. The increase was primarily due to an increase of discrete tax costs associated with share-based compensation as a percentage of pre-tax book income. 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 $82.6 million at March 31, 2026 compared to $106.4 million as of December 31, 2025. 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, 2026 and 2.0 as of December 31, 2025. Our primary working capital, which is comprised of accounts receivable, inventories and accounts payables, was $362.1 million as of March 31, 2026 and $327.8 million as of December 31, 2025. Our debt-to-capital ratio was 40.2% as of March 31, 2026 compared to 31.2% as of December 31, 2025. As of March 31, 2026, we had letters of credit and bank guarantees outstanding in the amount of $3.2 million, leaving approximately $289.3 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, 2026 was $31.2 million compared to net cash used in operating activities of $0.4 million during the three months ended March 31, 2025. The increase was the result of investments in working capital investments, reflecting increases in accounts receivable and inventory, lower accounts payable, and changes in other assets and liabilities, as well as lower operating performance. Cash Flow from Investing Activities Net cash used in investing activities during the three months ended March 31, 2026 was $10.3 million compared to net cash used in investing activities of $6.9 million during the three months ended March 31, 2025. The increase was primarily due to the acquisition of Clean Machine in the first quarter of 2026, partly offset by lower capital expenditures. Cash Flow from Financing Activities Net cash provided by financing activities during the three months ended March 31, 2026 was $17.2 million compared to net cash used in financing activities of $13.7 million during the three months ended March 31, 2025. The increase was driven by increased net proceeds from borrowing, partly offset by higher repurchases of common stock. 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 30 Table of Contents 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 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. In November 2025, the FASB issued ASU 2025-09 Derivatives and Hedging (Topic 815): Hedge Accounting Improvements, which includes amendments to more closely align hedge accounting with the economics of an entity's risk management activities. The ASU is effective for annual periods beginning after December 15, 2026, and interim periods within those fiscal years. Early adoption is permitted. The amendments should be applied on a prospective basis. We are evaluating the impact of the ASU to determine its impact on our consolidated financial statements and related disclosures. In December 2025, the FASB issued ASU 2025-11 Interim Reporting (Topic 270): Narrow-Scope Improvements, which clarifies the applicability of the interim reporting guidance, the types of interim reporting, and the form and content of interim financial statements in accordance with U.S. generally accepted accounting principles. The amendment does not intend to change the fundamental nature of interim reporting or expand or reduce current interim reporting disclosure requirements, but rather aims to provide clarity and improve navigability of the existing interim reporting requirements. The update will be effective for interim periods within annual periods beginning after December 15, 2027. Adoption of this ASU can either be applied prospectively or retrospectively to any or all prior periods presented in the financial statements. We are evaluating the impact of the ASU to determine its impact on our consolidated financial statements and related disclosures. In December 2025, the FASB issued ASU 2025-12 Codification Improvements, which aims to update the FASB Accounting Standards Codification for a broad range of topics arising from technical corrections, unintended application or the Codification, clarifications, and other minor improvements. The ASU is effective for annual periods beginning after December 15, 2026, including interim periods within those fiscal years. 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 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 or forecasts of future events. Any such expectations or forecasts of future events are subject to a variety of factors. These include factors that affect all businesses operating in a global market as well as matters specific to us and the markets the Company serves. 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 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 31 Table of Contents 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, 2025. 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, 2025. For additional information, refer to Item 7A of our annual report on Form 10-K for the year ended December 31, 2025.