What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-08-09 compared with 2022-04-28 · 96 added, 59 removed, 94 unchanged (62% 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.

COVID-19 Impact

Macroeconomic Events

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

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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.

Governments across the world have taken actions, 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 continue 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.

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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

At the same time, our engineering teams are evaluating platform design 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 alternatives where necessary.

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

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.

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. 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.

In addition to fully adhering to all sanctions, we will continue to monitor developments in the region, including the impact of rising commodity and energy prices.

As described in Part I, Item 1A - Risk Factors, in the annual report on Form 10-K for the fiscal year ended December 31, 2021, 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.

We are actively monitoring the macroeconomic environment, especially the potential impact of global supply chain constraints on material inflation, and the potential decreased demand for our products.

We expect the supply chain challenges and inflationary trends to continue in the second half of 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):

We continue to monitor prices in the current inflationary environment and will take action accordingly.

Strategic investments made during the second quarter have positioned us to address the strong overall demand for our products in 2022.

However, we anticipate that we will need to remain agile as we continue to manage evolving challenges throughout the year.

We remain confident in the long-term growth trends for all our products and services in the markets we serve.

The following table compares the results of operations for the three and six months ended June 30, 2022 and 2021, respectively (in millions, except per share data and percentages):

Three Months Ended

Six Months Ended

Cost of sales

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Research and development expense

Gain on sale of business

Gain on sale of assets

Operating income

Interest expense, net

Net foreign currency transaction gain

Net foreign currency transaction (loss) gain

Loss on extinguishment of debt

Other (expense) income, net

Income before income taxes

Income tax expense

Net income attributable to Tennant Company

Net income attributable to Tennant Company per share - diluted

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:

Income tax expense (benefit)

Net income per share - diluted

Consolidated net sales for the second quarter of 2022 totaled $280.2 million, a 0.4% increase as compared to consolidated net sales of $279.1 million in the second quarter of 2021.

Consolidated net sales for the first six months of 2022 were $538.3 million, a 0.8% decrease compared to consolidated net sales of $542.4 million in the first six months of 2021.

The 0.4% increase in consolidated net sales in the second quarter of 2022 as compared to the same period in 2021 was driven by:

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

A net unfavorable impact from foreign currency exchange of approximately 4.0%;

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An organic sales increase of approximately 4.4%, which excludes the effects of foreign currency exchange.

The organic sales increase was primarily due to the impact of higher selling prices across all regions, partially offset by volume declines due to limited availability of certain component parts resulting from continued supply chain constraints.

The 0.8% decrease in consolidated net sales in the first six months of 2022 as compared to the same period in 2021 was driven by:

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A net unfavorable impact from foreign currency exchange of approximately 3.1%;

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An organic sales increase of approximately 2.6%, which excludes the effects of foreign currency exchange and divestitures.

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;

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

• 

An unfavorable impact from the divestiture of our Coatings business in the first quarter of 2021 of 0.3%.

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):

The following table sets forth the net sales by geographic area for the three and six months ended June 30, 2022 and 2021 (in millions, except percentages):

Three Months Ended

Six Months Ended

Europe, Middle East and Africa

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;

Americas net sales were $178.4 million for the second quarter of 2022, an increase of 6.7% from the second quarter of 2021.

Organic sales grew 6.5% in the Americas, mainly due to higher selling prices across the region and volume increases in Latin America, partially offset by volume declines in North America. 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.

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

Americas net sales were $338.7 million for the first six months of 2022, an increase of 4.2% from the first six months of 2021.

Organic sales grew 4.5% in the Americas, mainly due to higher selling prices, partially offset by lower volume.

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

These items were offset by the divestiture of the Coatings business in the first six months of 2021 resulting in a decline in net sales of approximately 0.5% in the first six months of 2022.

Europe, Middle East and Africa ("EMEA")

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

EMEA net sales were $77.3 million for the second quarter of 2022, a decrease of 9.3% from the second quarter of 2021.

Foreign currency exchange within EMEA unfavorably impacted net sales by approximately 12.3%.

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.

Organic sales grew 3.0% in EMEA, primarily due to higher selling prices, growth in services and parts and consumables.

This was partially offset by volume declines as lack of component parts due to global supply chain constraints has limited our ability to meet the strong demand in the region.

EMEA net sales were $156.0 million for the first six months of 2022, a decrease of 6.1% from the first six months of 2021.

Foreign currency exchange within EMEA unfavorably impacted net sales by approximately 9.7%.

Organic sales grew 3.6% in EMEA, primarily due to higher selling prices, growth in services, and higher sales of parts and consumables.

Asia Pacific ("APAC")

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.

APAC net sales were $24.5 million for the second quarter of 2022, a decrease of 8.2% from the second quarter of 2021.

Organic sales declined 4.5% in APAC, primarily due to volume declines in China as government shutdowns related to COVID-19 continue to unfavorably impact demand.

This was partially offset by growth in equipment and parts and consumables in Australia.

Foreign currency exchange within APAC unfavorably impacted net sales by approximately 3.7% in the second quarter of 2022.

APAC net sales were $43.6 million for the first six months of 2022, a decrease of 15.0% from the first six months of 2021.

Organic sales declined 12.0% in APAC, primarily due to government shutdowns in China related to COVID-19 outbreaks impacting our ability to deliver finished goods to customers.

This was partly offset by volume upside in Australian markets.

Foreign currency exchange within APAC unfavorably impacted net sales by approximately 3.0% in the first six months of 2022.

Gross profit margin of 37.9% was 330 basis points lower in the second quarter of 2022 compared to the second quarter of 2021.

The decrease was attributable to the broad effects of inflation on materials, labor, and freight costs, partly offset by higher selling prices.

Inflation contributed to a $4.9 million LIFO charge during the second quarter of 2022 compared to $2.4 million in the second quarter of 2021.

Gross profit margin of 38.1% was 400 basis points lower in the first six months of 2022 compared to the first six months of 2021.

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

Inflation contributed to a LIFO charge of $6.0 million during the first six months of 2022 compared to $2.2 million in the first six months of 2021.

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.

Selling and administrative expense ("S&A expense") was $79.1 million for the second quarter of 2022, a decrease of $7.1 million compared to the second quarter of 2021.

As a percentage of net sales, S&A expense for the second quarter of 2022 decreased 270 basis points to 28.2% from 30.9% in the second quarter of 2021.

The S&A expense decrease in the second quarter of 2022 was primarily driven by lower variable employee compensation expenses, partially offset by increased strategic project spend initiatives to address strong overall demand.

S&A expense was $155.7 million for the first six months of 2022, a decrease of $9.9 million compared to the first six months of 2021.

As a percentage of net sales, S&A expense for the first six months of 2022 decreased 160 basis points to 28.9% from 30.5% in the first six months of 2021.

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

Research and Development Expense

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.

Research and development ("R&D") expense was $7.9 million, or 2.8% of net sales, for the second quarter of 2022, essentially flat compared to the second quarter of 2021.

R&D expense was $15.6 million, or 2.9% of net sales, for the first six months of 2022, flat as a percentage of net sales compared to the first six months of 2021.

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

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Interest Expense, Net

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.

Interest expense, net was $1.2 million in the second quarter of 2022 compared to $2.1 million in the same period of 2021.

Interest expense, net was $1.5 million in the first six months of 2022 compared to $6.0 million in the same period of 2021.

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.

Our debt portfolio as of June 30, 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.

Net Foreign Currency Transaction (Loss) Gain

Net foreign currency transaction (loss) gain was a $1.0 million loss and less than $0.1 million loss in the second quarter of 2022 and 2021, respectively.

Net foreign currency transaction (loss) gain was a $0.4 million loss and a $0.5 million gain in the first six months of 2022 and 2021, respectively.

The unfavorable impact was primarily due to strengthening of the U.S.

dollar relative to the Brazilian real on foreign denominated liabilities.

The effective tax rate for the second quarter of 2022 was 18.2% compared to (36.1)% for the second quarter of 2021.

The effective tax rate for the first six months of 2022 was 23.1% compared to 11.7% for the first six months of 2021.

The effective tax rate for both the second quarter and the first six months of 2022 increased primarily due to a high level of discrete tax benefit items in 2021 compared to 2022 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.

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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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.

Our order backlog at June 30, 2022 was approximately three times larger compared to June 30, 2021.

During the second quarter of 2022, our order backlog increased approximately 11.0%.

The increase in our order backlog 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.

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Liquidity and Capital Resources

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.

Cash, cash equivalents and restricted cash totaled $73.8 million at June 30, 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 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.

Our current ratio was 2.0 as of June 30, 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 $283.9 million and $250.5 million, respectively.

Our debt-to-capital ratio was 38.0% as of June 30, 2022, compared to 38.1% as of December 31, 2021.

As of June 30, 2022, 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.

On August 3, 2022, the Company's Board of Directors authorized a quarterly cash dividend of $0.25 per share payable September 15, 2022, to shareholders of record at the close of business on August 31, 2022.

Cash Flow from Operating Activities

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.

Net cash used in operating activities during the six months ended June 30, 2022 was $23.6 million compared to net cash provided by operating activities of $37.8 million during the six months ended June 30, 2021.

The increase in cash used was primarily driven by an increase in working capital attributable to the effects of inflation as well as an investment in constrained component parts to prepare for a ramp in production.

Cash Flow from Investing Activities

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.

Net cash used in investing activities during the six months ended June 30, 2022 was $10.1 million compared to net cash provided by investing activities of $16.7 million during the six months ended June 30, 2021. 

The increase of cash outflows was primarily the result of lower cash proceeds from the prior year sale of our Coatings business in 2021.

Cash Flow from Financing Activities

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.

Net cash used in financing activities decreased during the six months ended June 30, 2022 compared to the six months ended June 30, 2021 primarily due to a decrease in repayments of borrowings in the first six month of 2022.

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