What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-04-28 compared with 2021-11-02 · 75 added, 115 removed, 78 unchanged (71% of the section changed)

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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.

Impact of COVID-19

Because we are a global company, our results of operations are affected by macroeconomic conditions.

We continue to see economic and geopolitical uncertainty in many regions around the world.

The coronavirus ("COVID-19") pandemic has increased the uncertainty globally and has resulted in general economic disruption.

Governments across the world have taken numerous actions to limit the spread of COVID-19, including stay-at-home orders, which have reduced operating activities across global businesses, and have recently begun rolling out vaccine programs.

We continue to actively manage our business to respond to the COVID-19 impact.

We have prioritized the health and safety of our employees and customers.

We have established a dedicated enterprise-wide response team and implemented work-from-home processes for much of our workforce, which partially remain in effect.

We have established cross-functional and frequent communications with suppliers to review, track and prioritize high-risk components.

COVID-19 Impact

We continue to actively manage our business to respond to the COVID-19 pandemic and related impacts.

We maintain our commitment to protect the health and safety of our employees and customers.

We have continued our enhanced safety protocols on-site at our manufacturing facilities, and continue to monitor the evolving situation and guidance from local authorities.

Governments across the world have taken actions during the first quarter of 2022, including stay-at-home orders, to limit the spread of COVID-19.

These actions, specifically in China, have and may continue to reduce operating activities and negatively impact financial results.

During the first quarter of 2022, we continued to experience disruption in the supply of raw materials and component parts, as well as price inflation and inefficiencies as a result of supply chain issues.

We have established frequent communications with suppliers to review, track and prioritize high-risk components.

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

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, although some locations continue to face labor shortages.

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, 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):

The Company continues work to minimize the impact of price inflation in inputs and market supply challenges by employing local-for-local and region-for-region manufacturing and sourcing to allow us to manufacture our products closer to our customers.

At the same time, our engineering teams are evaluating platform design to allow for available parts and to increase our sourcing flexibility.

Regarding transportation, we have set up tracking, reporting and communication channels with carriers to understand their risks and to evaluate available options where necessary.

Russia and Ukraine Conflict

The crisis in Russia and Ukraine that began in February 2022 continues as of the date of this Form 10-Q.

While we do not have any direct operations or employees in Russia or Ukraine and have suspended sales to Russia and Belarus, our operating results have and may continue to be negatively impacted by supply chain constraints and inflationary pressures stemming from this conflict.

In addition to fully adhering to all sanctions, we will continue to monitor developments in the region.

Sales to Russia and Belarus represented less than 1% of consolidated net sales and less than 2% of Europe, Middle East and Africa net sales for the year ended December 31, 2021.

We expect the supply chain challenges and inflationary trends to continue throughout 2022.

Global economic conditions continue to be highly volatile and uncertainty remains regarding the timing of a full recovery.

We anticipate that we will need to remain agile as we manage these evolving challenges throughout the year.

Strong overall demand for our products has returned to pre-pandemic levels and we remain confident in the long-term growth trends for all our products and markets.

The following table compares the results of operations for the three months ended March 31, 2022 and 2021, respectively (in millions, except per share data and percentages):

Three Months Ended

Nine Months Ended

September 30,

Cost of sales

Research and development expense

Selling and administrative expense

Research and development expense

Gain on sale of business

Operating income

Interest expense, net

Net foreign currency transaction loss

Loss on extinguishment of debt

Other expense, net

Net foreign currency transaction gain

Other (expense) income, net

Income before income taxes

Income tax expense

Net income including noncontrolling interest

Net income attributable to Tennant Company

Net income attributable to Tennant Company per share - diluted

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 the Americas and EMEA regions due to continued recovery from COVID-19 in 2021;

• 

An unfavorable impact from the divestiture of our Coatings business of 2.0%;

Consolidated net sales for the first quarter of 2022 totaled $258.1 million, a 2.0% decrease as compared to consolidated net sales of $263.3 million in the first quarter of 2021.

The 2.0% decrease in consolidated net sales in the first quarter of 2022 as compared to the same period in 2021 was driven by:

• 

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

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:

A net unfavorable impact from foreign currency exchange across all regions of approximately 2.2%;

• 

An organic sales increase of approximately 0.8%, which excludes the effects of foreign currency exchange and divestitures.

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

• 

An unfavorable impact from the divestiture of our Coatings business of 2.0%;

The organic sales increase was primarily due to the impact of higher selling prices across all regions, partly offset by volume declines resulting from continued supply chain constraints;

• 

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 nine months ended September 30, 2021 and 2020 (in millions, except percentages):

An unfavorable impact from the divestiture of our Coatings business in the first quarter of 2021 of 0.6%.

The following table sets forth the net sales by geographic area for the three months ended March 31, 2022 and 2021 (in millions, except percentages):

Three Months Ended

Nine Months Ended

September 30,

Europe, Middle East and Africa

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 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.

Americas net sales were $160.3 million for the first quarter of 2022, an increase of 1.6% from the first quarter of 2021.

Organic sales growth in the Americas favorably impacted net sales by approximately 2.3% mainly due to higher selling prices, partly offset by lower volume.

Demand in the region remained strong;

however, diminished parts availability, due to global supply chain constraints, resulted in increased backlog levels.

Additionally, foreign currency exchange within the Americas favorably impacted net sales by approximately 0.2% in the first quarter of 2022.

These items were offset by the divestiture of the Coatings business in the first quarter of 2021 resulting in a decline in net sales of approximately 0.9% in the first quarter of 2022.

Europe, Middle East and Africa ("EMEA")

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.

EMEA net sales were $78.7 million for the first quarter of 2022, a decrease of 2.7% from the first quarter of 2021.

Foreign currency exchange within EMEA unfavorably impacted net sales by approximately 6.9%.

Organic sales growth in EMEA favorably impacted net sales by approximately 4.2% primarily due to higher selling prices, growth in services, and higher sales of parts and consumables.

Asia Pacific ("APAC")

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.

APAC net sales were $19.1 million for the first quarter of 2022, a decrease of 22.4% from the first quarter of 2021.

Organic sales decline in APAC unfavorably impacted net sales by approximately 20.2% primarily due to government shutdowns in China related to COVID-19 outbreaks as well as softer demand in certain markets partly offset by volume upside in Australian markets.

Foreign currency exchange within APAC unfavorably impacted net sales by approximately 2.2% in the first quarter of 2022.

Gross profit margin of 38.3% was 470 basis points lower in the first quarter of 2022 compared to the first quarter of 2021.

The decrease was due to material inflation and higher freight costs, partly offset by price increases.

Operating Expense

Selling and Administrative Expense

Selling and administrative expense ("S&A expense") was $76.6 million for the first quarter of 2022, a decrease of $2.8 million compared to the first quarter of 2021.

As a percentage of net sales, S&A expense for the first quarter of 2022 decreased 50 basis points to 29.7% from 30.2% in the first quarter of 2021.

The S&A expense decrease in the first quarter of 2022 was primarily driven by lower variable employee compensation expenses.

Research and Development Expense

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.

Research and Development ("R&D") expense was $7.7 million, or 3.0% of net sales, for the first quarter of 2022, 20 basis points higher as a percentage of net sales compared to the first quarter of 2021 due to new product development.

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 $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.

Total Other Expense, Net

Interest Expense, Net

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

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.

Interest expense, net was $0.3 million in the first quarter of 2022 compared to $3.9 million in the same period of 2021.

The decrease 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.

Our debt portfolio as of March 31, 2022, was comprised of debt predominately in U.S.

We are exposed to changes in interest rates as a result of borrowing activities with variable interest rates that impact interest incurred. 

Net Foreign Currency Transaction Gain

Net foreign currency transaction gain was $0.6 million and $0.5 million in the first quarter of 2022 and 2021, respectively.

The favorable impact was primarily due to strengthening of the Brazilian real relative to foreign-denominated payables.

The effective tax rate for the first quarter of 2022 was 30.1% compared to 22.1% for the first quarter of 2021.

The effective tax rate increased primarily due to the mix in forecasted full year taxable earnings by country and a decrease in discrete tax benefit items recognized during the quarter.

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 United States.

Backlog is one of the many indicators of business conditions in the Company's markets.

Our order backlog at March 31, 2022 was approximately five times larger compared to March 31, 2021.

The increase in our order backlog year over year was primarily due to higher order rates coupled with persistent supply chain challenges that impacted our ability to obtain raw materials and component parts.

Unless these factors change, we expect our backlog level to remain high throughout 2022.

Backlog includes orders that can be cancelled or postponed at the option of the customer at any time without penalty.

Liquidity and Capital Resources

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.

Cash, cash equivalents and restricted cash totaled $110.4 million at March 31, 2022, as compared to $123.6 million as of December 31, 2021.

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

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.

The 2021 Credit Agreement provides greater flexibility with fewer restrictive covenants and more favorable interest rates than the previous arrangement, consisting of a term loan facility in an amount up to $100.0 million and a revolving facility in an amount up to $450.0 million with an option to expand the revolving facility by up to $275.0 million with the consent of the lenders willing to provide additional borrowings in the form of increases to their revolving facility commitment or funding of incremental term loans. As a result, we expect future interest expense to be lower by approximately $1.0 million per month as compared to periods prior to the debt restructuring.

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 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.

Our current ratio was 2.0 as of March 31, 2022 and 1.8 as of December 31, 2021, and our primary working capital, which is comprised of accounts receivable, inventories and accounts payables, was $263.9 million and $250.5 million, respectively.

Our debt-to-capital ratio was 39.2% as of March 31, 2022, compared to 38.1% as of December 31, 2021.

As of March 31, 2022, we had letters of credit and bank guarantees outstanding in the amount of $2.9 million, leaving approximately $264.1 million of unused borrowing capacity on our revolving facility.

The Company's Board of Directors has authorized a quarterly cash dividend of $0.25 per share payable June 15, 2022, to shareholders of record at the close of business on May 31, 2022.

Cash Flow from Operating Activities

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.

Net cash used in operating activities during the three months ended March 31, 2022 was $10.1 million, driven primarily by inflows from net income, by adding back non-cash items of $13.8 million, a decrease in accounts receivable of $10.1 million and an increase in accounts payable of $2.0 million.

This was offset by outflows from an increase in inventory of $29.0 million and a decrease in employee compensation and benefits of $12.6 million.

Cash Flow from Investing Activities

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.

Net cash used in investing activities during the three months ended March 31, 2022 was $8.6 million, resulting from $5.0 million related to capital expenditures and $3.7 million from investments in leased assets.

Cash Flow from Financing Activities

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.

Net cash provided by financing activities was $8.3 million during the first three months of 2022.

Proceeds from borrowings of $15.0 million were mainly offset by dividend payments of $4.6 million, payments for repurchases of common stock for employee tax withholdings obligations of $1.2 million and payments of debt of $0.9 million.

Newly Issued Accounting Guidance

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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, 2020 and Part II, Item 1A of this Form 10-Q.

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, 2021.

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.

5 unchanged sentences

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