What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-11-02 compared with 2021-08-03 · 82 added, 80 removed, 111 unchanged (59% of the section changed)

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We have also identified and activated alternative suppliers, materials and components as needed.

To date, we have been able to avoid major supply disruptions.

Regarding transportation, we have set up tracking, reporting and communication channels with carriers to understand their risks and to evaluate available options where necessary. In addition, all of our factories currently have the potential to operate at full capacity.

We continue to monitor the evolving situation and guidance from authorities.

The timing and extent of the impact of the pandemic is influenced by factors such as variants, vaccination rates and broader economic impacts.

Accordingly, we cannot reasonably estimate the long-term impact of the pandemic on our financial results.

The following table compares the results of operations for the three and six months ended June 30, 2021 and 2020, respectively (in millions, except per share data and percentages):

Accordingly, we cannot reasonably estimate the long-term impact of the pandemic on our financial results, although we expect the increased cost of freight, materials and labor to continue to impact our gross profit and overall operating results for the fourth quarter of 2021, early 2022, and potentially beyond.

The following table compares the results of operations for the three and nine months ended September 30, 2021 and 2020, respectively (in millions, except per share data and percentages):

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Cost of sales

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Interest expense, net

Net foreign currency transaction gain (loss)

Net foreign currency transaction loss

Loss on extinguishment of debt

Other income (expense), net

Other expense, net

Income before income taxes

Income tax (benefit) expense

Income tax expense

Net income including noncontrolling interest

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Net income attributable to Tennant Company per share - diluted

Consolidated net sales for the second quarter of 2021 totaled $279.1 million, a 30.4% increase as compared to consolidated net sales of $214.0 million in the second quarter of 2020.

Consolidated net sales for the first six months of 2021 were $ 542.4 million, a 16.4% increase compared to consolidated net sales of $ 466.1 million in the first six months of 2020.

The 30.4% increase in consolidated net sales in the second quarter of 2021 as compared to the same period in 2020 was driven by:

Consolidated net sales for the third quarter of 2021 totaled $272.0 million, a 3.9% increase as compared to consolidated net sales of $261.9 million in the third quarter of 2020.

Consolidated net sales for the first nine months of 2021 were $ 814.4 million, an 11.9% increase compared to consolidated net sales of $728.0 million in the first nine months of 2020.

The 3.9% increase in consolidated net sales in the third quarter of 2021 as compared to the same period in 2020 was driven by:

• 

An organic sales increase of approximately 4.7%, which excludes the effects of foreign currency exchange and divestitures.

The organic sales increase was primarily due to volume growth across all regions;

The organic sales increase was primarily due to volume growth across the Americas and EMEA regions due to continued recovery from COVID-19 in 2021;

• 

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A net favorable impact from foreign currency exchange across all regions of approximately 1.2%.

The 16.4% increase in consolidated net sales in the first six months of 2021 as compared to the same period in 2020 was driven by:

The 11.9% increase in consolidated net sales in the first nine months of 2021 as compared to the same period in 2020 was driven by:

• 

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A net favorable impact from foreign currency exchange across all regions of approximately 3.0%.

The following table sets forth the net sales by geographic area for the three and six months ended June 30, 2021 and 2020 (in millions, except percentages):

The following table sets forth the net sales by geographic area for the three and nine months ended September 30, 2021 and 2020 (in millions, except percentages):

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Europe, Middle East and Africa

Net sales in the Americas were $167.2 million for the second quarter of 2021, an increase of 22.7% from the second quarter of 2020.

Foreign currency exchange within the Americas favorably impacted net sales by approximately 1.1% in the second quarter of 2021.

The divestiture of the Coatings business resulted in a decline in net sales of approximately 3.8%.

Organic sales growth in the Americas favorably impacted net sales by approximately 25.4% for the second quarter of 2021 due to growth in most channels and products compared to the second quarter of 2020, which was greatly impacted by COVID-19.

The growth was partly limited by increased backlog levels in North America from parts shortages due to supply chain challenges and labor shortages.

Net sales in the Americas were $325.0 million for the first six months of 2021, an increase of 8.7% from the first six months of 2020.

Net sales in the Americas were $166.7 million for the third quarter of 2021, a decrease of 0.6% from the third quarter of 2020.

Foreign currency exchange within the Americas favorably impacted net sales by approximately 0.5% in the third quarter of 2021.

The divestiture of the Coatings business in the first quarter of 2021 resulted in a decline in net sales of approximately 3.1%.

Organic sales growth in the Americas favorably impacted net sales by approximately 2.0% for the third quarter of 2021 due to strong sales in Latin America, particularly in Brazil and Mexico, along with strong, region-wide results for the Company's parts and consumables and service, despite a decline in the Company's Autonomous Mobile Robot ("AMR") business, due to the lapping of a large order in North America in the prior-quarter.

At the same time, the region was directly impacted by global supply-chain and labor constraints, which resulted in lower revenue than expected and increased backlog levels.

Net sales in the Americas were $491.7 million for the first nine months of 2021, an increase of 5.4% from the first nine months of 2020.

Foreign currency exchange within the Americas favorably impacted net sales by 0.2%.

The divestiture of the Coatings business resulted in a decline in net sales of approximately 3.1%.

Organic sales growth in the Americas favorably impacted net sales by 11.8% due to growth in most regions and products compared to the first six months of 2020, which was more impacted by COVID-19.

The growth was partly offset by declines due to the prior period's strong sales performance in the strategic account channel.

Organic sales growth in the Americas favorably impacted net sales by 8.3% due to growth in most regions and products compared to the first nine months of 2020, which was more impacted by COVID-19.

The growth was partly offset by declines in the Company's AMR business, due to the lapping of a large order in North America in the prior year.

Europe, Middle East and Africa ("EMEA")

EMEA net sales were $85.2 million for the second quarter of 2021, an increase of 55.5% from the second quarter of 2020.

Foreign currency exchange within EMEA favorably impacted net sales by approximately 15.3% in the second quarter of 2021.

Organic sales growth in EMEA favorably impacted net sales by approximately 40.2% for the second quarter primarily due to market growth across the region compared to the second quarter of 2020, which was greatly impacted by COVID-19.

EMEA net sales were $166.1 million for the first six months of 2021, an increase of 31.0% from the first six months of 2020.

Foreign currency exchange within EMEA favorably impacted net sales by approximately 12.3% in the first six months of 2021.

Organic sales growth in EMEA favorably impacted net sales by approximately 18.7% for the first six months of 2021 primarily due to market growth across the region compared to the first six months of 2020, which was more impacted by COVID-19.

EMEA net sales were $80.7 million for the third quarter of 2021, an increase of 16.1% from the third quarter of 2020.

Foreign currency exchange within EMEA favorably impacted net sales by approximately 2.1% in the third quarter of 2021.

Organic sales growth in EMEA favorably impacted net sales by approximately 14.0% for the third quarter primarily due to market growth across the region and product categories compared to the third quarter of 2020, which was greatly impacted by COVID-19.

EMEA net sales were $246.8 million for the first nine months of 2021, an increase of 25.7% from the first nine months of 2020.

Foreign currency exchange within EMEA favorably impacted net sales by approximately 8.7% in the first nine months of 2021.

Organic sales growth in EMEA favorably impacted net sales by approximately 17.0% for the first nine months of 2021 primarily due to market growth across the region and product categories compared to the first nine months of 2020, which was more impacted by COVID-19.

Asia Pacific ("APAC")

APAC net sales were $26.7 million for the second quarter of 2021, an increase of 16.6% from the second quarter of 2020.

Foreign currency exchange within APAC favorably impacted net sales by approximately 7.0% in the second quarter of 2021.

Organic sales growth in APAC favorably impacted net sales by approximately 9.6% for the second quarter primarily due to strength in Australia across all product categories.

China net sales were flat due to parts shortages caused by supply chain challenges.

APAC net sales were $51.3 million for the first six months of 2021, an increase of 27.0% from the first six months of 2020.

Foreign currency exchange within APAC favorably impacted net sales by approximately 7.8% in the first six months of 2021.

Organic sales growth in APAC favorably impacted net sales by approximately 19.2% for the first six months of 2021 primarily due to growth across the region, primarily in Australia and China.

Gross profit margin of 41.2% was 60 basis points lower in the second quarter of 2021 compared to the second quarter of 2020.

The decrease primarily reflected higher freight, material and labor costs and the impact of government credits received in the second quarter of 2020, partially offset by favorable pricing and cost-savings actions.

The government benefits included in gross profit in the second quarter of 2020 were $3.8 million. The benefits represent wage subsidies received from various European and Canadian authorities that are not required to be repaid.

Gross profit margin of 42.1% was 80 basis points higher in the first six months of 2021 compared to the first six months of 2020.

All government benefits for the first six months of 2020 were received in the second quarter of 2020.

While we are currently unable to estimate the duration and the financial magnitude, we expect the increased cost of freight, materials and labor to negatively impact our results for the last half of 2021, and potentially beyond.

APAC net sales were $24.6 million for the third quarter of 2021, a decrease of 0.4% from the third quarter of 2020.

Foreign currency exchange within APAC favorably impacted net sales by approximately 2.7% in the third quarter of 2021.

The divestiture of the Coatings business resulted in a decline in net sales of approximately 0.2%.

Organic sales decline in APAC unfavorably impacted net sales by approximately 2.9% for the third quarter primarily due to decreases in China and Japan, partly caused by supply-chain and labor challenges in our North American plants which supply APAC.

The decline in APAC was partly offset by strong results for parts and consumables and service, along with strength in Australia across all product categories.

APAC net sales were $75.9 million for the first nine months of 2021, an increase of 16.6% from the first nine months of 2020.

Foreign currency exchange within APAC favorably impacted net sales by approximately 5.8% in the first nine months of 2021.

Organic sales growth in APAC favorably impacted net sales by approximately 10.8% for the first nine months of 2021 primarily due to growth across the region, primarily in Australia and China, partly offset by supply chain and labor challenges in our North American plants which supply APAC.

Gross profit margin of 40.1% was 50 basis points higher in the third quarter of 2021 compared to the third quarter of 2020.

The increase was in spite of supply and labor constraints, and reflects the lapping of a number of strategic investments and productivity challenges based on lower volume due to the pandemic-related slowdown in the prior year. 

Gross profit margin of 41.4% was 70 basis points higher in the first nine months of 2021 compared to the first nine months of 2020.

The increase primarily reflected increased favorable pricing and cost-savings actions, partially offset by higher freight, material and labor costs and the impact of government credits received in the first nine months of 2020. The benefits represent wage subsidies received from various European and Canadian authorities that are not required to be repaid.

All government benefits for the first nine months of 2020 were received in the second quarter of 2020.

Operating Expense

Research and Development Expense

Research and Development ("R&D") expense was $8.3 million, or 3.0% of net sales, for the second quarter of 2021, flat as a percentage of net sales compared to the second quarter of 2020. R&D expense was $15.7 million, or 2.9% of net sales, for the first six months of 2021, flat as a percentage of net sales compared to the first six months of 2020.

Research and Development ("R&D") expense was $8.4 million, or 3.1% of net sales, for the third quarter of 2021, 30 basis points higher as a percentage of net sales compared to the third quarter of 2020 due to new product development and investment in talent. R&D expense was $24.1 million, or 3.0% of net sales, for the first nine months of 2021, nearly flat as a percentage of net sales compared to the first nine months of 2020.

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

Selling and Administrative Expense

Selling and administrative expense ("S&A expense") was $86.2 million for the second quarter of 2021, an increase of $26.2 million compared to the second quarter of 2020.

As a percentage of net sales, S&A expense for the second quarter of 2021 increased 290 basis points to 30.9% from 28.0% in the second quarter of 2020.

The S&A expense increase in the second quarter of 2021 was primarily driven by more normalized spending throughout the quarter compared to the second quarter of 2020 when the Company took cost containment actions, including employee furloughs, reduction in travel spending, and temporary pay reductions, as well as benefits from government programs received related to COVID-19 and adjustments to management incentives.

The government benefits included in S&A expense in the first six months of 2020 were $1.4 million and did not repeat in 2021.

Selling and administrative expense ("S&A expense") was $76.9 million for the third quarter of 2021, a decrease of $0.9 million compared to the third quarter of 2020.

As a percentage of net sales, S&A expense for the third quarter of 2021 decreased 140 basis points to 28.3% from 29.7% in the third quarter of 2020.

The S&A expense decrease in the third quarter of 2021 was primarily driven by adjustments to management incentives, partially offset by more normalized spending throughout the quarter compared to the third quarter of 2020.

S&A expense was $232.7 million for the first nine months of 2021, an increase of $13.8 million compared to the first nine months of 2020.

As a percentage of net sales, S&A expense for the first nine months of 2021 decreased 150 basis points to 28.6% from 30.1% in the first nine months of 2020.

The S&A decrease in the first nine months of 2021 was primarily driven by a 130 basis point benefit related to the inclusion in S&A expense of a $9.8 million pre-tax gain on the sale of the Coatings business that occurred in the first quarter of 2021.

This benefit was partially offset by more normalized spending compared to the first nine months of 2020, when the Company took cost containment actions, including employee furloughs, reduction in travel spending, and temporary pay reductions, as well as benefits from government programs received related to COVID-19.

The benefits represent wage subsidies received from various European and Canadian authorities that are not required to be repaid.

S&A expense was $155.8 million for the first six months of 2021, an increase of $14.8 million compared to the first six months of 2020.

As a percentage of net sales, S&A expense for the first six months of 2021 decreased 160 basis points to 28.7% from 30.3% in the first six months of 2020.

The S&A increase in the first six months of 2021 was primarily driven by the same factors as the drivers for the changes during the second quarter of 2021 compared to the second quarter of 2020, offset by a 180 basis point benefit related to the inclusion in S&A expense of a $9.8 million pre-tax gain on the sale of the Coatings business that occurred in the first quarter of 2021.

Total Other Expense, Net

Interest Expense, Net

Interest expense, net was $2.1 million and $6.0 million of net expense in the second quarter and first six months of 2021, respectively, compared to $4.8 million and $9.0 million of net expense in the same periods of 2020, respectively.

The decrease in both periods of 2021 was due to the restructuring of debt in the second quarter of 2021, which resulted in lower interest expense from more favorable interest rates.

Net Foreign Currency Transaction Gain (Loss)

Net foreign currency transaction gain (loss) was a less than $0.1 million loss in the second quarter of 2021 and 2020.

Net foreign currency transaction gain (loss) was a $0.5 million gain in the first six months of 2021, compared to a $4.1 million loss in the same period of 2020.

The favorable impact from foreign currency transactions in the first six months of 2021 was primarily due to the strengthening of the Brazilian real relative to the euro during this time.

The unfavorable impact from foreign currency transactions in the first six months of 2020 was primarily due to significant strengthening of the U.S.

Interest expense, net was $0.6 million and $6.6 million of net expense in the third quarter and first nine months of 2021, respectively, compared to $4.4 million and $13.4 million of net expense in the same periods of 2020, respectively.

The decrease in both periods of 2021 was due to the restructuring of debt in the second quarter of 2021, which resulted in lower interest expense from more favorable interest rates and a lower amount of outstanding debt.

Net Foreign Currency Transaction Loss

Net foreign currency transaction loss was $0.7 million and $0.9 million in the third quarter of 2021 and 2020, respectively.

Net foreign currency transaction loss was $0.2 million in the first nine months of 2021, compared to $5.0 million in the same period of 2020.

The unfavorable impact from foreign currency transactions in the first nine months of 2021 and 2020 was primarily due to strengthening of the U.S.

dollar relative to the Brazilian Real and Mexican Peso.

The reduction of losses recognized in the first nine months of 2021 compared to the same period in 2020 is driven by stabilization in the currency markets in the current year versus the previous year.

Loss on Extinguishment of Debt

Loss on extinguishment of debt was $11.3 million in the second quarter and first six months of 2021 due to the restructuring of debt that occurred in the second quarter of 2021.

Other Income (Expense), Net

Other income (expense), net was $0.2 million and $0.3 million of income in the second quarter and first six months of 2021, an increase of $0.4 million and $0.3 million compared to the same periods in 2020, respectively.

The effective tax rate for the second quarter of 2021 was (37.0)%, as compared to the second quarter of 2020 of 19.7%.

The effective tax rate for the first six months of 2021 was 11.6% compared to 19.3% for the same period of 2020.

The tax benefit for the second quarter of 2021 included a $2.7 million tax benefit associated with the $11.3 million loss on extinguishment of debt, a $0.3 million tax benefit associated with a $0.9 million restructuring charge, and a $0.5 million tax benefit associated with a $0.7 million acquisition contingent consideration adjustment.

The underlying tax rate for the quarter was 4.0% excluding these non-recurring expenses and related tax benefits.

The tax expense for the second quarter of 2020 included a $0.1 million tax benefit associated with a $0.3 million restructuring charge.

The underlying tax rate was 20.4% excluding these non-recurring expenses and related tax benefits.

Excluding these non-recurring expenses, the effective tax rate for both the second quarter and the first six months of 2021 decreased primarily due to a high level of discrete tax benefit items recognized in 2021 compared to 2020 and the mix in expected full year taxable earnings by country.

For the second quarter of 2021, the discrete tax benefits included the release of certain tax reserves as a result of a lapse in the applicable statute of limitations and a $3.4 million benefit associated with the reversal of a valuation allowance related to tax loss carryovers in the Netherlands. The reversal was driven by a change in law providing an unlimited carryforward period.

There was no loss on extinguishment of debt in the third quarter of 2021.

Loss on extinguishment of debt was $11.3 million in the first nine months of 2021 due to the restructuring of debt that occurred in the second quarter of 2021.

The effective tax rate for the third quarter of 2021 was 3.8%, as compared to 9.7% for the third quarter of 2020.

The tax expense for the third quarter of 2020 included a $0.4 million tax benefit associated with $1.7 million of non-recurring expenses.

The underlying tax rate for the third quarter of 2020 was 11.3% excluding these non-recurring expenses and related tax benefits.

The effective tax rate for the first nine months of 2021 was 8.8% compared to 15.9% for the same period of 2020.

The tax expense for the nine months ended September 30, 2021 included a $1.1 million benefit associated with $3.2 million of non-recurring expenses.

The tax expense for the nine months ended September 30, 2020 included a $1.2 million benefit associated with $4.1 million of non-recurring expenses.

The underlying tax rate excluding these non-recurring items was 10.1% and 17.2% for 2021 and 2020 respectively.

Excluding these non-recurring expenses, the effective tax rate for both the third quarter and the first nine months of 2021 decreased primarily due to a tax benefit resulting from an election to step-up the tax basis of certain assets for Italian tax purposes.

In general, it is our practice and intention to permanently reinvest the earnings of our foreign subsidiaries and repatriate earnings only when the tax impact is zero or immaterial.

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Liquidity and Capital Resources

Cash, cash equivalents and restricted cash totaled $135.1 million at June 30, 2021, as compared to $141.0 million as of December 31, 2020.

Cash, cash equivalents and restricted cash totaled $140.6 million at September 30, 2021, as compared to $141.0 million as of December 31, 2020.

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

Our current ratio was 1.8 as of June 30, 2021 and 1.9 as of December 31, 2020, and our working capital was $238.1 million and $239.3 million, respectively.

Our debt-to-capital ratio was 38.1% as of June 30, 2021, compared to 43.2% as of December 31, 2020.

Our current ratio was 1.9 as of September 30, 2021 and December 31, 2020, and our working capital was $250.1 million and $239.3 million, respectively.

Our debt-to-capital ratio was 37.7% as of September 30, 2021, compared to 43.2% as of December 31, 2020.

In the second quarter of 2021, we signed an agreement (the "2021 Credit Agreement") that restructured our previous credit agreement.

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In the second quarter of 2021, we used the proceeds from the 2021 Credit Agreement to retire our 5.625% Senior Notes due 2025.

As of June 30, 2021, we had outstanding borrowings of $100.0 million and $168.0 million under our term loan facility and revolving facility, respectively.

As of June 30, 2021, we had letters of credit and bank guarantees outstanding in the amount of $3.2 million, leaving approximately $278.8 million of unused borrowing capacity on our revolving facility.

As of September 30, 2021, we had outstanding borrowings of $99.4 million and $168.0 million under our term loan facility and revolving facility, respectively.

As of September 30, 2021, we had letters of credit and bank guarantees outstanding in the amount of $2.9 million, leaving approximately $279.1 million of unused borrowing capacity on our revolving facility.

See Note 8 to the Consolidated Financial Statements for more detail on the 2021 Credit Agreement.

The Company's Board of Directors has authorized a quarterly cash dividend of $0.25 per share payable December 15, 2021, to shareholders of record at the close of business on November 30, 2021.

Cash Flow from Operating Activities

Operating activities provided $37.8 million of cash for the six months ended June 30, 2021.

Cash provided by operating activities was driven primarily by inflows from a strong performance influencing net income, by adding back non-cash items of $32.0 million and an increase in accounts payable of $16.9 million.

These cash inflows were partially offset by cash outflows resulting from an increase in inventories of $32.3 million and an increase in receivables of $13.5 million.

Operating activities provided $62.9 million of cash for the nine months ended September 30, 2021.

Cash provided by operating activities was driven primarily by inflows from a strong performance influencing net income, offset by outflows from an increase in working capital of $10.8 million.

Cash Flow from Investing Activities

Investing activities during the six months ended June 30, 2021 provided $16.7 million, resulting from $24.7 million of proceeds from the sale of our Coatings business net of cash divested, partially offset by $8.0 million of capital expenditures.

Investing activities during the nine months ended September 30, 2021 provided $12.6 million, resulting from $24.7 million of proceeds from the sale of our Coatings business net of cash divested, partially offset by $12.0 million of capital expenditures.

Cash used for capital expenditures decreased from the nine months ended September 30, 2020 due to the investments in the new corporate headquarters that occurred in 2020.

Cash Flow from Financing Activities

Net cash used in financing activities was $58.6 million during the first six months of 2021.

Proceeds from borrowings of $315.8 million were mainly offset by payments of debt of $360.4 million, dividend payments of $8.6 million and a debt extinguishment payment of $8.4 million.

Net cash used in financing activities was $72.3 million during the first nine months of 2021.

Proceeds from borrowings of $315.8 million were mainly offset by payments of debt of $361.2 million, dividend payments of $12.9 million, repurchases of common stock of $7.5 million and a debt extinguishment payment of $8.4 million.

Newly Issued Accounting Guidance

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis