10-Q 1 tnc20220331_10q.htm FORM 10-Q tnc20220331_10q.htm
0000097134 TENNANT CO false --12-31 Q1 2022 0.4 0.1 0.1 0.0 5.6 5.3 265.1 258.4 0.375 0.375 60,000,000 60,000,000 18,579,816 18,579,816 18,535,116 18,535,116 24,025 0.25 22,724 0.23 44.1 1.70 1 4 6 9 1 152.4 2018 2017 2018 2019 2020 2021 Finished goods include machines, parts and consumables and component parts that are used in our products. The difference between replacement cost and the stated LIFO inventory value is not materially different from the reserve for the LIFO valuation method. Classified in net foreign currency transaction gain. As of March 31, 2022, the Company is required to repay $4.4 million in outstanding credit facility borrowings and $0.3 million of current maturities of secured borrowings over the next 12 months. 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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2022

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

For the transition period from ___________ to __________

 

Commission File Number 1-16191

____________________________________

 

tennantcompanylogo.jpg

 

 

TENNANT COMPANY

(Exact name of registrant as specified in its charter)

Minnesota

41-0572550

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

 

10400 Clean Street

Eden Prairie, Minnesota 55344

(Address of principal executive offices)

(Zip Code)

(763) 540-1200

(Registrant’s telephone number, including area code)

______________________________________________

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

Common Stock, par value $0.375 per share

 

TNC

 

New York Stock Exchange

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes

No

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes

No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

Emerging growth company

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

  

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes

No

 

As of April 22, 2022, there were 18,579,816 shares of common stock outstanding.

 

 

 
 

PART I FINANCIAL INFORMATION

 

Item 1.

Financial Statements

 

TENNANT COMPANY

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

  

Three Months Ended

 

(In millions, except shares and per share data)

 

March 31,

 
  

2022

  

2021

 

Net sales

 $258.1  $263.3 

Cost of sales

  159.2   150.0 

Gross profit

  98.9   113.3 

Selling and administrative expense

  76.6   79.4 

Research and development expense

  7.7   7.4 

Gain on sale of business

     (9.8)

Operating income

  14.6   36.3 

Interest expense, net

  (0.3)  (3.9)

Net foreign currency transaction gain

  0.6   0.5 

Other (expense) income, net

  (0.2)  0.1 

Income before income taxes

  14.7   33.0 

Income tax expense

  4.4   7.3 

Net income attributable to Tennant Company

 $10.3  $25.7 
         

Net income attributable to Tennant Company per share

        

Basic

 $0.56  $1.39 

Diluted

 $0.55  $1.37 
         

Weighted average shares outstanding

        

Basic

  18,463,419   18,456,079 

Diluted

  18,799,732   18,831,423 
 

 

TENNANT COMPANY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

  

Three Months Ended

 

(In millions)

 

March 31,

 
  

2022

  

2021

 

Net income attributable to Tennant Company

 $10.3  $25.7 

Other comprehensive loss:

        

Foreign currency translation adjustments (net of related tax (expense) benefit of $(0.4) and $0.1, respectively)

  (3.8)  (10.7)

Cash flow hedge (net of related tax benefit (expense) of $0.1 and $0.0, respectively)

  (0.2)   

Total other comprehensive loss, net of tax

  (4.0)  (10.7)
         

Comprehensive income attributable to Tennant Company

 $6.3  $15.0 

 

See accompanying notes to consolidated financial statements.

 

 

 

TENNANT COMPANY

CONSOLIDATED BALANCE SHEETS

 

 

  (Unaudited)     
  

March 31,

  

December 31,

 

(In millions, except shares and per share data)

 

2022

  

2021

 

ASSETS

        

Cash, cash equivalents, and restricted cash

 $110.4  $123.6 

Receivables, less allowances of $5.6 and $5.3, respectively

  199.5   211.4 

Inventories

  184.4   160.6 

Prepaid and other current assets

  30.5   31.2 

Total current assets

  524.8   526.8 

Property, plant and equipment, less accumulated depreciation of $265.1 and $258.4, respectively

  171.2   172.8 

Operating lease assets

  38.6   41.3 

Goodwill

  190.0   193.1 

Intangible assets, net

  91.6   98.0 

Other assets

  34.0   29.7 

Total assets

 $1,050.2  $1,061.7 

LIABILITIES AND EQUITY

        

Current portion of long-term debt

 $4.7  $4.2 

Accounts payable

  120.0   121.5 

Employee compensation and benefits

  48.0   60.6 

Other current liabilities

  93.7   104.0 

Total current liabilities

  266.4   290.3 

Long-term debt

  276.9   263.4 

Long-term operating lease liabilities

  22.9   25.4 

Employee-related benefits

  16.2   16.3 

Deferred income taxes

  19.6   20.6 

Other liabilities

  10.9   10.6 

Total long-term liabilities

  346.5   336.3 

Total liabilities

 $612.9  $626.6 

Commitments and contingencies (Note 12)

          

Common Stock, $0.375 par value; 60,000,000 shares authorized; 18,579,816 and 18,535,116 shares issued and outstanding, respectively

 $7.0  $7.0 

Additional paid-in capital

  54.6   54.1 

Retained earnings

  416.3   410.6 

Accumulated other comprehensive loss

  (41.9)  (37.9)

Total Tennant Company shareholders' equity

  436.0   433.8 

Noncontrolling interest

  1.3   1.3 

Total equity

  437.3   435.1 

Total liabilities and total equity

 $1,050.2  $1,061.7 

 

See accompanying notes to consolidated financial statements.

 

 

 

TENNANT COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

  

Three Months Ended

 

(In millions)

 

March 31,

 
  

2022

  

2021

 

OPERATING ACTIVITIES

        

Net income including noncontrolling interest

 $10.3  $25.7 

Adjustments to reconcile net income to net cash provided by operating activities:

        

Depreciation expense

  8.2   8.3 

Amortization expense

  4.5   5.3 

Deferred income tax expense (benefit)

  (1.3)  (1.5)

Share-based compensation expense

  1.8   3.1 

Bad debt and returns expense

  0.4   0.6 

Gain on sale of business

     (9.8)

Other, net

  0.2   1.4 

Changes in operating assets and liabilities:

        

Receivables

  10.1   (0.7)

Inventories

  (29.0)  (18.3)

Accounts payable

  2.0   3.2 

Employee compensation and benefits

  (12.6)  (5.7)

Other assets and liabilities

  (4.7)  6.8 

Net cash (used in) provided by operating activities

  (10.1)  18.4 

INVESTING ACTIVITIES

        

Purchases of property, plant and equipment

  (5.0)  (4.8)

Proceeds from sale of business, net of cash divested

     24.7 

Purchase of intangible assets

     (0.1)

Investment in leased assets

  (3.7)   

Cash received from leased assets

  0.1    

Net cash (used in) provided by investing activities

  (8.6)  19.8 

FINANCING ACTIVITIES

        

Proceeds from borrowings

  15.0    

Repayments of borrowings

  (0.9)  (0.2)

Contingent consideration payments

     (0.5)

(Repurchases) proceeds from exercise of stock options, net of employee tax withholdings obligations

  (1.2)  3.1 

Dividends paid

  (4.6)  (4.2)

Net cash provided by (used in) financing activities

  8.3   (1.8)

Effect of exchange rate changes on cash, cash equivalents and restricted cash

  (2.8)  (2.2)

Net (decrease) increase in cash, cash equivalents and restricted cash

  (13.2)  34.2 

Cash, cash equivalents and restricted cash at beginning of period

  123.6   141.0 

Cash, cash equivalents and restricted cash at end of period

 $110.4  $175.2 

 

SUPPLEMENTAL CASH FLOW INFORMATION

 

Three Months Ended

 
  

March 31,

 
  

2022

  

2021

 

Cash paid for income taxes

 $1.3  $1.2 

Cash paid for interest

  1.0   0.3 

Cash paid for amounts included in the measurement of lease liabilities:

        

Operating cash flows from operating leases

  4.9   5.1 

Lease assets obtained in exchange for new finance lease liabilities

  0.1    

Lease assets obtained in exchange for new operating lease liabilities

  2.8   4.3 

Supplemental non-cash investing and financing activities:

        

Capital expenditures in accounts payable

  1.6   1.3 

 

See accompanying notes to consolidated financial statements.

 

 

 

TENNANT COMPANY

CONSOLIDATED STATEMENTS OF EQUITY

(Unaudited)

 

(In millions, except shares and per share data)

 

  

Tennant Company Shareholders

         
  

Common Shares

  

Common Stock

  

Additional Paid-in Capital

  

Retained Earnings

  

Accumulated Other Comprehensive Loss

  

Tennant Company Shareholders' Equity

  

Noncontrolling Interest

  

Total Equity

 

Balance, December 31, 2021

  18,535,116  $7.0  $54.1  $410.6  $(37.9) $433.8  $1.3  $435.1 

Net income

            10.3      10.3      10.3 

Other comprehensive loss

               (4.0)  (4.0)     (4.0)

Issue stock for directors, employee benefit and stock plans, net of related tax withholdings and repurchases of 24,025 shares

  44,700      (1.2)        (1.2)     (1.2)

Share-based compensation

         1.8         1.8      1.8 

Dividends paid $0.25 per common share

            (4.6)     (4.6)     (4.6)

Other

         (0.1)        (0.1)     (0.1)

Balance, March 31, 2022

  18,579,816  $7.0  $54.6  $416.3  $(41.9) $436.0  $1.3  $437.3 

 

  

Tennant Company Shareholders

         
  

Common Shares

  

Common Stock

  

Additional Paid-in Capital

  

Retained Earnings

  

Accumulated Other Comprehensive Loss

  

Tennant Company Shareholders' Equity

  

Noncontrolling Interest

  

Total Equity

 

Balance, December 31, 2020

  18,503,805  $6.9  $54.7  $363.3  $(20.1) $404.8  $1.3  $406.1 

Net income

            25.7      25.7      25.7 

Other comprehensive loss

               (10.7)  (10.7)     (10.7)

Issue stock for directors, employee benefit and stock plans, net of related tax withholdings of 22,724 shares

  102,681   0.1   1.3         1.4      1.4 

Share-based compensation

         3.1         3.1      3.1 

Dividends paid $0.23 per common share

            (4.2)     (4.2)     (4.2)

Balance, March 31, 2021

  18,606,486  $7.0  $59.1  $384.8  $(30.8) $420.1  $1.3  $421.4 

 

See accompanying notes to consolidated financial statements.

 

 

TENNANT COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(In millions, except shares and per share data)

 

 

1.

Summary of Significant Accounting Policies

 

Tennant Company ("the Company", "we", "us", or "our") is a world leader in designing, manufacturing and marketing solutions that empower customers to achieve quality cleaning performance, reduce environmental impact and 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.

 

Basis of Presentation The accompanying unaudited consolidated financial statements have been prepared in accordance with the U.S. Securities and Exchange Commission (“SEC”) requirements for interim reporting. In our opinion, the consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary for the fair presentation of our financial position and results of operations.

 

These statements should be read in conjunction with the consolidated financial statements and notes included in our annual report on Form 10-K for the year ended December 31, 2021. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year.

 

 

2.

Newly Adopted Accounting Pronouncements

 

Reference Rate Reform

 

In  March 2020, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update (“ASU”) No. 2020-04, Reference Rate Reform (Topic 848). This ASU provides optional expedients to applying generally accepted accounting principles to certain contract modifications, hedging relationships, and other transactions affected by the reference rate reform, which affects the London Interbank Offered Rate, if certain criteria are met. The amendments are effective  March 12, 2020 through  December 31, 2022. We continue to monitor our contracts and transactions for potential application of this ASU.

 

 

3.

Revenue

 

Disaggregation of Revenue

 

The following tables illustrate the disaggregation of revenue by geographic area, groups of similar products and services and sales channels:

 

Net sales by geographic area

 

  

Three Months Ended

 
  

March 31,

 
  

2022

  

2021

 

Americas

 $160.3  $157.8 

Europe, Middle East and Africa

  78.7   80.9 

Asia Pacific

  19.1   24.6 

Total

 $258.1  $263.3 

 

Net sales are attributed to each geographic area based on the end user country and are net of intercompany sales.

 

Net sales by groups of similar products and services

 

  

Three Months Ended

 
  

March 31,

 
  

2022

  

2021

 

Equipment

 $158.1  $160.9 

Parts and consumables

  60.6   62.3 

Specialty surface coatings(a)

     1.5 

Service and other

  39.4   38.6 

Total

 $258.1  $263.3 

 

(a) On February 1, 2021, we sold our Coatings business.  Further details regarding the sale are discussed in Note 5.

 

 

7

 

Net sales by sales channel

 

  

Three Months Ended

 
  

March 31,

 
  

2022

  

2021

 

Sales direct to consumer

 $163.8  $169.0 

Sales to distributors

  94.3   94.3 

Total

 $258.1  $263.3 

 

Contract Liabilities

 

Sales Returns

 

The right of return may exist explicitly or implicitly with our customers. When the right of return exists, we adjust the transaction price for the estimated effect of returns. We estimate the expected returns using the expected value method by assessing historical sales levels and the timing and magnitude of historical sales return levels as a percent of sales and projecting this experience into the future.

 

Sales Incentives

 

Our sales contracts may contain various customer incentives, such as volume-based rebates or other promotions. We reduce the transaction price for certain customer programs and incentive offerings that represent variable consideration. Sales incentives given to our customers are recorded using the most likely amount approach for estimating the amount of consideration to which the Company will be entitled. We forecast the most likely amount of the incentive to be paid at the time of sale, update this forecast quarterly, and adjust the transaction price accordingly to reflect the new amount of incentives expected to be earned by the customer. A majority of our customer incentives are settled within one year. We record our accruals for volume-based rebates and other promotions in other current liabilities on our consolidated balance sheets.

 

The change in our sales incentive accrual balance was as follows:

 

  

Three Months Ended

 
  

March 31,

 
  

2022

  

2021

 

Beginning balance

 $19.9  $12.1 

Additions to sales incentive accrual

  4.4   5.2 

Contract payments

  (12.8)  (5.7)

Foreign currency fluctuations

  (0.2)  (0.3)

Ending balance

 $11.3  $11.3 

 

Deferred Revenue

 

We sell separately priced prepaid contracts to our customers where we receive payment at the inception of the contract and defer recognition of the consideration received because we have to satisfy future performance obligations. Our deferred revenue balance is primarily attributed to prepaid maintenance contracts on our machines ranging from 12 months to 60 months. In circumstances where prepaid contracts are bundled with machines, we use an observable price to determine stand-alone selling price for separate performance obligations.

 

The change in the deferred revenue balance was as follows:

 

  

Three Months Ended

 
  

March 31,

 
  

2022

  

2021

 

Beginning balance

 $11.2  $9.3 

Increase in deferred revenue representing our obligation to satisfy future performance obligations

  7.4   4.1 

Decrease in deferred revenue for amounts recognized in net sales for satisfied performance obligations

  (6.5)  (3.4)

Foreign currency fluctuations

  0.1    

Ending balance

 $12.2  $10.0

 

 

 

At March 31, 2022, $8.7 million and $3.5 million of deferred revenue was reported in other current liabilities and other liabilities, respectively, on our consolidated balance sheets. Of these amounts, we expect to recognize the following approximate amounts in net sales in the following periods:

 

Remaining 2022

 $8.1 

2023

  2.2 

2024

  1.3 

2025

  0.4 

2026

  0.2 

Thereafter

   

Total

 $12.2 

 

At December 31, 2021, $7.7 million and $3.5 million of deferred revenue was reported in other current liabilities and other liabilities, respectively, on our consolidated balance sheets.

 

8

 
 

4.

Management Actions

 

Restructuring Actions

 

During the three months ended March 31, 2022 and March 31, 2021, we implemented restructuring actions as part of our global reorganization efforts. The pre-tax severance-related charges were as follows:

 

 

  

Three Months Ended

 
  

March 31,

 
  

2022

  

2021

 

Selling and administrative expense

 $0.8  $3.3 

Cost of sales

     0.8 

Total pre-tax severance-related costs

 $0.8  $4.1 

 

The charges in 2022 primarily impacted the Americas operating segment. The charges in 2021 primarily impacted the EMEA and APAC operating segments. Our restructuring actions represent the continued execution of a multi-year enterprise strategy to drive increased productivity throughout our operations.

 

A reconciliation of the beginning and ending liability balances for severance-related costs is as follows:

 

  

Three Months Ended

 
  

March 31,

 
  

2022

  

2021

 

Beginning balance

 $4.9  $4.5 

New charges

  0.8    

Cash payments

  (0.7)  (0.9)

Foreign currency fluctuations

  (0.1)  (0.1)

Adjustments to accrual

  (0.6)   

Ending balance

 $4.3  $3.5 

 

 

5.

Acquisition and Divestiture

 

Coatings

 

During the first quarter of 2021, we sold the Coatings business. The resulting pre-tax gain was $9.8 million and is reflected within gain on sale of business in the consolidated statements of income. Proceeds from sale of business, net of cash divested, was $24.7 million.

 

Gaomei

 

On January 4, 2019, we completed the acquisition of Hefei Gaomei Cleaning Machines Co., Ltd. and Anhui Rongen Environmental Protection Technology Co., Ltd. (collectively "Gaomei"), privately held designers and manufacturers of commercial cleaning solutions based in China. The financial results for Gaomei have been included in our consolidated financial results since the date of closing. The purchase price included contingent consideration payments totaling $2.5 million paid in 2021.

 

9

 
 

6.

Inventories

 

Inventories are valued at the lower of cost or net realizable value and consisted of the following:

 

 

March 31,

  

December 31,

 
 

2022

  

2021

 

Inventories carried at LIFO:

       

Finished goods(a)

$57.8  $54.0 

Raw materials and work-in-process

 51.7   42.4 

Excess of FIFO over LIFO cost(b)

 (44.1)   (43.0)

Total LIFO inventories

$65.4  $53.4 
        

Inventories carried at FIFO:

       

Finished goods(a)

$58.6  $53.8 

Raw materials and work-in-process

 60.4   53.4 

Total FIFO inventories

$119.0  $107.2 

Total inventories

$184.4  $160.6 

 

(a) Finished goods include machines, parts and consumables and component parts that are used in our products.

(b) The difference between replacement cost and the stated LIFO inventory value is not materially different from the reserve for the LIFO valuation method.

 

 

7.

Goodwill and Intangible Assets

 

The changes in the carrying amount of goodwill for the three months ended March 31, 2022 were as follows:

 

      

Accumulated

     
      

Impairment

     
  

Goodwill

  

Losses

  

Total

 

Balance as of December 31, 2021

 $233.9  $(40.8) $193.1 

Foreign currency fluctuations

  (4.3)  1.2   (3.1)

Balance as of March 31, 2022

 $229.6  $(39.6) $190.0 

 

The balances of acquired intangible assets, excluding goodwill, were as follows:

 

  

Customer Lists

  

Trade Names

  

Technology

  

Total

 

Balance as of March 31, 2022

                

Original cost

 $152.2  $29.6  $16.8  $198.6 

Accumulated amortization

  (81.7)  (14.3)  (11.0)  (107.0)

Carrying value

 $70.5  $15.3  $5.8  $91.6 

Weighted average original life (in years)

  15   10   11     
                 

Balance as of December 31, 2021

                

Original cost

 $155.4  $30.3  $17.0  $202.7 

Accumulated amortization

  (80.0)  (13.9)  (10.8)  (104.7)

Carrying value

 $75.4  $16.4  $6.2  $98.0 

Weighted average original life (in years)

  15   11   11     

 

Amortization expense on intangible assets for the three months ended March 31, 2022 and 2021 was $4.5 million and $5.3 million, respectively.

 

Estimated aggregate amortization expense based on the current carrying value of amortizable intangible assets for each of the five succeeding years and thereafter is as follows:

 

Remaining 2022

 $12.2 

2023

  15.0 

2024

  13.6 

2025

  12.2 

2026

  10.9 

Thereafter

  27.7 

Total

 $91.6 

 

10

 
 

8.

Debt

 

2021 Credit Agreement

 

On  April 5, 2021, we and certain of our foreign subsidiaries entered into an Amended and Restated Credit Agreement (the “2021 Credit Agreement”) with JPMorgan Chase Bank, N.A. as administrative agent. The 2021 Credit Agreement provides us and certain of our foreign subsidiaries access to a senior secured credit facility until  April 3, 2026, 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 credit 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. Borrowings  may be denominated in U.S. dollars or certain other currencies.

 

The fee for committed funds under the revolving facility of the 2021 Credit Agreement ranges from an annual rate of 0.15% to 0.30%, depending on our leverage ratio. Borrowings denominated in U.S. dollars under the 2021 Credit Agreement bear interest at a rate per annum equal to (a) the Adjusted LIBO Rate, as adjusted for statutory reserve requirements for eurocurrency liabilities, but in any case, not less than 0%, plus an additional spread of 1.10% to 1.70%, depending on our leverage ratio or (b) the Alternate Base Rate which is the greatest of (i) the prime rate, (ii) the federal funds rate plus 0.50% and (iii) the adjusted LIBO rate for a one month period, but in any case, not less than 1.0%, plus, in any such case, 1.0%, plus an additional spread of 0.10% to 0.70%, depending on our leverage ratio.

 

In connection with the 2021 Credit Agreement, we reaffirmed our security interest in favor of the lenders in substantially all our personal property and pledged the stock of our domestic subsidiaries and 65% of the stock of our first-tier foreign subsidiaries. The obligations under the 2021 Credit Agreement are also guaranteed by certain of our first-tier domestic subsidiaries, and those subsidiaries also provided a security interest in their similar personal property.

 

Our 2021 Credit Agreement restricts the payment of dividends or repurchasing of stock requiring that, after giving effect to such payments, no default exists or would result from such payment. Additionally, cash dividends are restricted to $7.5 million per quarter and approved levels of other restricted payments range from $60.0 million to unlimited based on our net leverage ratio (not taking into account any acquisition holiday) after giving effect to such payment.

 

The 2021 Credit Agreement contains customary representations, warranties and covenants, including but not limited to covenants restricting our ability to incur indebtedness and liens and merge or consolidate with another entity. Further, the 2021 Credit Agreement contains the following covenants:

 

 

a covenant requiring us to maintain an indebtedness to EBITDA ratio, determined as of the end of each of our fiscal quarters, of no greater than 3.50 to 1.00, with certain alternative requirements for permitted acquisitions greater than $50.0 million;

 

a covenant requiring us to maintain an EBITDA to interest expense ratio for a period of four consecutive fiscal quarters as of the end of each quarter of no less than 3.00 to 1; and

 

a covenant restricting us from paying dividends or repurchasing stock if, after giving effect to such payments and assuming no default exists or would result from such payment, our leverage ratio is greater than 2.50 to 1, in such case limiting such payments to $60.0 million during any fiscal year.

 

Redemption of Senior Notes

 

In the second quarter of 2021, the Company redeemed $300.0 million principal amount outstanding of its 5.625% Senior Notes due 2025 ("Senior Notes"). We used the proceeds from the borrowings under the 2021 Credit Agreement to retire our Senior Notes and pay the $8.4 million call premium due upon redemption in the second quarter of 2021. In addition, we wrote off $2.9 million of unamortized debt issuance costs in the second quarter of 2021.

 

Debt Outstanding

 

Debt outstanding consisted of the following:

 

  

March 31,

  

December 31,

 
  

2022

  

2021

 

Credit facility borrowings:

        

Revolving credit facility borrowings

 $183.0  $168.0 

Term loan facility borrowings

  98.1   98.8 

Secured borrowings

  0.4   0.7 

Finance lease liabilities

  0.1   0.1 

Total debt

  281.6   267.6 

Less: current portion of long-term debt(a)

  (4.7)  (4.2)

Long-term debt

 $276.9  $263.4 

 

 

(a)

As of March 31, 2022, the Company is required to repay $4.4 million in outstanding credit facility borrowings and $0.3 million of current maturities of secured borrowings over the next 12 months.

 

As of March 31, 2022, we had outstanding borrowings of $183.0 million and $98.1 million under our revolving facility and term loan facility, respectively. 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. Commitment fees on unused lines of credit for the three months ended March 31, 2022 were $0.2 million. The overall weighted average cost of debt is approximately 1.4% and net of a related cross-currency swap instrument is approximately 0.3%. Further details regarding the cross-currency swap instrument are discussed in Note 10.

 

 

 

 

9.

Warranty

 

We record a liability for warranty claims at the time of sale. The amount of the liability is based on the trend in the historical ratio of claims to sales, the historical length of time between the sale and resulting warranty claim, new product introductions and other factors. Warranty terms on machines generally range from one to four years. However, the majority of our claims are paid out within the first six to nine months following a sale. The majority of the liability for estimated warranty claims represents amounts to be paid out in the near term for qualified warranty issues, with immaterial amounts reserved to be paid for older equipment warranty issues.

 

The changes in warranty reserves were as follows:

 

  

Three Months Ended

 
  

March 31,

 
  

2022

  

2021

 

Beginning balance

 $10.4  $11.1 

Additions charged to expense

  1.7   2.6 

Foreign currency fluctuations

     (0.1)

Claims paid

  (1.9)  (2.9)

Ending balance

 $10.2  $10.7 

 

 

10.

Derivatives

 

Hedge Accounting and Hedging Programs

 

We recognize all derivative instruments as either assets or liabilities in our consolidated balance sheets and measure them at fair value. Gains and losses resulting from changes in fair value are accounted for depending on the use of the derivative and whether it is designated and qualifies for hedge accounting.

 

We evaluate hedge effectiveness on our hedges that are designated and qualify for hedge accounting at the inception of the hedge prospectively, as well as retrospectively, and record any ineffective portion of the hedging instruments along with the time value of purchased contracts in the same line item of the income statement as the item being hedged on our consolidated statements of income.

 

Our hedging policy establishes maximum limits for each counterparty to mitigate any concentration of risk.

 

Balance Sheet Hedging

 

Hedges of Foreign Currency Assets and Liabilities

 

We hedge our net recognized foreign currency denominated assets and liabilities with foreign exchange forward contracts to reduce the risk that the value of these assets and liabilities will be adversely affected by changes in exchange rates. These contracts hedge assets and liabilities that are denominated in foreign currencies and are carried at fair value as either assets or liabilities on the consolidated balance sheets with changes in the fair value recorded to net foreign currency transaction gain in our consolidated statements of income. These contracts do not subject us to material balance sheet risk due to exchange rate movements because gains and losses on these derivatives are intended to offset gains and losses on the assets and liabilities being hedged. At March 31, 2022 and December 31, 2021, the notional amounts of foreign currency forward exchange contracts outstanding not designated as hedging instruments were $52.7 million and $45.0 million, respectively.

 

Cash Flow Hedging

 

Hedges of Forecasted Foreign Currency Transactions

 

In countries outside the U.S., we transact business in U.S. dollars and in various other currencies. We may use foreign exchange option contracts or forward contracts to hedge certain cash flow exposures resulting from changes in these foreign currency exchange rates. These foreign exchange contracts, carried at fair value, have maturities of up to one year. We enter into these foreign exchange contracts to hedge a portion of our forecasted foreign currency denominated revenue in the normal course of business, and accordingly, they are not speculative in nature. As of March 31, 2022 and December 31, 2021, we had no outstanding foreign currency forward contracts or foreign currency option contracts designated as cash flow hedges.

 

Foreign Currency Derivatives

 

We use foreign currency exchange rate derivatives to hedge our exposure to fluctuations in exchange rates for anticipated intercompany cash transactions between Tennant Company and its subsidiaries. We entered into Euro to U.S. dollar foreign exchange cross-currency swaps for all of the anticipated cash flows associated with an intercompany loan from a wholly-owned European subsidiary. We enter into these foreign exchange cross-currency swaps to hedge the foreign currency denominated cash flows associated with this intercompany loan, and accordingly, they are not speculative in nature. These cross-currency swaps are designated as cash flow hedges. The hedged cash flows as of March 31, 2022 and December 31, 2021 included 150.6 million and €152.4 million of total notional values, respectively. As of March 31, 2022, the aggregated scheduled interest payments over the course of the loan and related swaps amounted to 0.6 million. The scheduled maturity and principal payment of the loan and related swaps of 151.2 million are due in April 2022. There were no new cross-currency swaps designated as cash flow hedges as of March 31, 2022. In April 2022, we entered into new cross-currency swaps. The scheduled maturity and principal payment of the loan and related swaps of 150 million are due in April 2027.

 

12

 

The fair value of derivative instruments on our consolidated balance sheets was as follows:

 

 

Derivative Assets

 

Derivative Liabilities

 
 

Balance Sheet Location

 

March 31, 2022

  

December 31, 2021

 

Balance Sheet Location

 

March 31, 2022

  

December 31, 2021

 

Derivatives designated as hedging instruments:

                  

Foreign currency forward contracts

Other current assets

 $0.2  $ 

Other current liabilities

 $6.2  $10.4 

Derivatives not designated as hedging instruments:

                  

Foreign currency forward contracts

Other current assets

  0.1   0.3 

Other current liabilities

  1.4   0.4 

 

As of March 31, 2022, we anticipate reclassifying less than $0.1 million of gains from accumulated other comprehensive loss to net income during the next 12 months.

 

The following tables include the amounts in the consolidated statements of income in which the effects of cash flow hedges are recorded and the effects of cash flow hedge activity on these line items:

 

  

Three Months Ended

 
  

March 31,

 
  

2022

  

2021

 
  

Total

  

Amount of Gain (Loss) on Cash Flow Hedge Activity

  

Total

  

Amount of Gain (Loss) on Cash Flow Hedge Activity

 

Net sales

 $258.1  $  $263.3  $(0.1)

Interest expense, net

  (0.3)  0.7   0.7   0.6 

Net foreign currency transaction gain

  0.6   4.5   0.5   7.3 

 

The effect of foreign currency derivative instruments designated as hedges and of foreign currency derivative instruments not designated as hedges in our consolidated statements of income was as follows:

 

  Foreign Currency Forward Contracts 
  

Three Months Ended

 
  

March 31,

 
  

2022

  

2021

 

Derivatives in cash flow hedging relationships:

        

Net gain recognized in other comprehensive loss, net of tax(a)

 $3.8  $6.0 

Net gain reclassified from accumulated other comprehensive loss into income, net of tax, effective portion to interest expense, net

  0.5   0.4 

Net gain reclassified from accumulated other comprehensive loss into income, net of tax, effective portion to net foreign currency transaction gain

  3.5   5.6 

Derivatives not designated as hedging instruments:

        

Net gain recognized in income(b)

  1.6   2.1 

 

 

(a)

Net change in the fair value of the effective portion classified in other comprehensive loss.

 

(b)

Classified in net foreign currency transaction gain.

 

13

 
 

11.

Fair Value Measurements

 

Estimates of fair value for financial assets and financial liabilities are based on the framework established in the accounting guidance for fair value measurements. The framework defines fair value, provides guidance for measuring fair value and requires certain disclosures. The framework discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow) and the cost approach (cost to replace the service capacity of an asset or replacement cost). The framework utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:

 

 

• 

Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.

 

• 

Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.

 

• 

Level 3: Unobservable inputs that reflect the reporting entity’s own assumptions.

 

Our population of assets and liabilities subject to fair value measurements at March 31, 2022 were as follows:

 

  

Fair

             
  

Value

  

Level 1

  

Level 2

  

Level 3

 

Assets:

                

Foreign currency forward exchange contracts

 $0.3  $  $0.3  $ 

Total assets

  0.3      0.3    

Liabilities:

                

Foreign currency forward exchange contracts

  7.6      7.6    

Total liabilities

 $7.6  $  $7.6  $ 

 

Our population of assets and liabilities subject to fair value measurements at  December 31, 2021 were as follows:

 

  

Fair

             
  

Value

  

Level 1

  

Level 2

  

Level 3

 

Assets:

                

Foreign currency forward exchange contracts

 $0.9  $  $0.9  $ 

Total assets

  0.9      0.9    

Liabilities:

                

Foreign currency forward exchange contracts

  11.4      11.4    

Total liabilities

 $11.4  $  $11.4  $ 

 

Our foreign currency forward exchange contracts are valued using observable Level 2 market expectations at the measurement date and standard valuation techniques to convert future amounts to a single present value amount. Further details regarding our foreign currency forward exchange and option contracts are discussed in Note 10.

 

The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, restricted cash, accounts receivable, other current assets, accounts payable and other current liabilities approximate fair value due to their short-term nature.

 

The fair value and carrying value of total debt, including current portion, was $284.2 million and $281.6 million, respectively, as of March 31, 2022. The fair value and carrying value of total debt, including current portion, was $271.2 million and $267.6 million, respectively, as of December 31, 2021. The fair value was calculated based on the borrowing rates currently available to us for bank loans with similar terms and remaining maturities, which is a Level 2 in the fair value hierarchy.

 

14

 
  

12.

Commitments and Contingencies

 

In the ordinary course of business, we may become liable with respect to pending and threatened litigation, tax, environmental and other matters. While the ultimate results of current claims, investigations and lawsuits involving us are unknown at this time, we do not expect that these matters will have a material adverse effect on our consolidated financial position or results of operations. Legal costs associated with such matters are expensed as incurred.

 

 

13.

Shareholders' Equity

 

Accumulated Other Comprehensive Loss

 

The changes in components of accumulated other comprehensive loss, net of tax, are as follows:

 

 

  

Three Months Ended March 31, 2022

  

Three Months Ended March 31, 2021

 
  

Foreign Currency Translation Adjustments

  

Pension and Post-Retirement Medical Benefits

  

Cash Flow Hedge

  

Total

  

Foreign Currency Translation Adjustments

  

Pension and Post-Retirement Medical Benefits

  

Cash Flow Hedge

  

Total

 

Beginning balance

 $(36.0) $(2.1) $0.2  $(37.9) $(19.1) $(1.7) $0.7  $(20.1)

Other comprehensive (loss) income before reclassifications

  (3.8)     3.8      (10.7)     6.0   (4.7)

Amounts reclassified from accumulated other comprehensive loss

        (4.0)  (4.0)        (6.0)  (6.0)

Net current period other comprehensive loss

  (3.8)     (0.2)  (4.0)  (10.7)        (10.7)

Ending balance

 $(39.8) $(2.1) $  $(41.9) $(29.8) $(1.7) $0.7  $(30.8)

 

 

14.

Income Taxes

 

We and our subsidiaries are subject to U.S. federal income tax as well as income tax of numerous state and foreign jurisdictions. We are generally no longer subject to U.S. federal tax examinations for taxable years before 2018. The number of years which remain open for audit for U.S. state or foreign tax purposes varies by jurisdiction but generally ranges from 3-5 years. We are currently undergoing income tax examinations in various foreign jurisdictions. Although the outcome of these examinations cannot be currently determined, we believe that we have adequate reserves with respect to these examinations.

 

We recognize potential accrued interest and penalties related to unrecognized tax benefits in income tax expense. In addition to the liability of $4.8 million for unrecognized tax benefits as of March 31, 2022, there was approximately $0.8 million for accrued interest and penalties. The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate as of March 31, 2022 was $4.6 million. To the extent interest and penalties are not assessed with respect to uncertain tax positions, amounts accrued will be revised and reflected as an adjustment of the income tax expense.

 

 

15.

Share-Based Compensation

 

Our share-based compensation plans are described in Note 18 of our annual report on Form 10-K for the year ended December 31, 2021. During the three months ended March 31, 2022 and 2021, we recognized total share-based compensation expense of $1.8 million and $3.1 million, respectively. The total excess tax benefit recognized for share-based compensation arrangements during the three months ended March 31, 2022 and 2021 was $0.3 million and $0.2 million, respectively.

 

 

 

 

16.

Income Attributable to Tennant Company Per Share

 

The computations of basic and diluted earnings per share were as follows:

 

  

Three Months Ended

 
  

March 31,

 
  

2022

  

2021

 

Numerator:

        

Net income attributable to Tennant Company

 $10.3  $25.7 

Denominator:

        

Basic - weighted average shares outstanding

  18,463,419   18,456,079 

Effect of dilutive securities:

  336,313   375,344 

Diluted - weighted average shares outstanding

  18,799,732   18,831,423 

Basic earnings per share attributable to Tennant Company

 $0.56  $1.39 

Diluted earnings per share attributable to Tennant Company

 $0.55  $1.37 

 

Excluded from the dilutive securities shown above were options to purchase and shares to be paid out under share-based compensation plans of 191,587 and 142,027 shares of common stock during the three months ended March 31, 2022 and 2021, respectively. These exclusions were made if the exercise prices of the options are greater than the average market price of our common stock for the period, if the number of shares we can repurchase under the treasury stock method exceeds the weighted average shares outstanding in the options or if we have a net loss, as these effects would be anti-dilutive.

 

 

17.

Subsequent Event

 

On April 14, 2022, we sold a building located in Golden Valley, Minnesota. Proceeds from sale of the building totaled $4.1 million. We expect to record a gain on sale of approximately $3.7 million in the second quarter of 2022 in our consolidated statements of income. 

 

16

 

 

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

 

Overview

 

Tennant Company is a world leader in designing, manufacturing and marketing solutions that empower customers to achieve quality cleaning performance, reduce environmental impact and 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.

 

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. 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.

 

Outlook

 

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.

 

 

Results

 

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

 
   

March 31,

 
   

2022

   

%

   

2021

   

%

 

Net sales

  $ 258.1       100.0     $ 263.3       100.0  

Cost of sales

    159.2       61.7       150.0       57.0  

Gross profit

    98.9       38.3       113.3       43.0  

Selling and administrative expense

    76.6       29.7       79.4       30.2  

Research and development expense

    7.7       3.0       7.4       2.8  

Gain on sale of business

                (9.8 )     (3.7 )

Operating income

    14.6       5.7       36.3       13.8  

Interest expense, net

    (0.3 )     (0.1 )     (3.9 )     (1.5 )

Net foreign currency transaction gain

    0.6       0.2       0.5       0.2  

Other (expense) income, net

    (0.2 )     (0.1 )     0.1       0.0  

Income before income taxes

    14.7       5.7       33.0       12.5  

Income tax expense

    4.4       1.7       7.3       2.8  

Net income attributable to Tennant Company

  $ 10.3       4.0     $ 25.7       9.8  

Net income attributable to Tennant Company per share - diluted

  $ 0.55             $ 1.37          

 

Net Sales

 

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 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 the impact of higher selling prices across all regions, partly offset by volume declines resulting from continued supply chain constraints; and
  •  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

 
   

March 31,

 
   

2022

   

2021

   

% Change

 

Americas

  $ 160.3     $ 157.8       1.6 %

Europe, Middle East and Africa

    78.7       80.9       (2.7 )%

Asia Pacific

    19.1       24.6       (22.4 )%

Total

  $ 258.1     $ 263.3       (2.0 )%

 

 

Americas

 

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 $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 $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

 

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 $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.

 

 

Total Other Expense, Net

 

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. dollars. 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.

 

Income Taxes

 

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

 

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

 

Liquidity

 

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 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

 

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

 

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 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

 

See Note 2 to the Consolidated Financial Statements for information on new accounting pronouncements.

 

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 Form 10-Q, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 2, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “intend,” “estimate,” “anticipate,” “believe,” “project,” or “continue” or similar words or the negative thereof. These statements do not relate to strictly historical or current facts and provide current expectations of forecasts of future events. Any such expectations or forecasts of future events are subject to a variety of factors. Particular risks and uncertainties presently facing us include: geopolitical and economic uncertainty throughout the world; uncertainty surrounding the impacts and duration of the COVID-19 pandemic; our ability to comply with global laws and regulations; 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; the occurrence of a significant business interruption; our ability to maintain the health and safety of our workers; our ability to integrate acquisitions; and our ability to develop and commercialize new innovative products and services.

 

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, 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. 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, 2021. For additional information, refer to Item 7A of our annual report on Form 10-K for the year ended December 31, 2021.

 

Item 4.

Controls and Procedures

 

Disclosure Controls and Procedures

 

Our management, with the participation of our Chief Executive Officer and our Principal Financial and Accounting Officer, has evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2022 (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)). Based on that evaluation, our Chief Executive Officer and our Principal Financial and Accounting Officer have concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our principal executive and our principal financial officers, as appropriate, to allow timely decisions regarding required disclosure.

 

Changes in Internal Controls

 

There were no changes in our internal controls over financial reporting during the most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II OTHER INFORMATION

 

Item 1.

Legal Proceedings

 

There are no material pending legal proceedings other than ordinary routine litigation incidental to our business.

 

Item 1A.

Risk Factors

 

We documented our risk factors in Item 1A of Part I of our annual report on Form 10-K for the year ended December 31, 2021. There have been no material changes to our risk factors since the filing of that report.

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

Share repurchases are made from time to time in the open market or through privately negotiated transactions. The most recent share repurchase program approved by the Board of Directors on October 31, 2016 authorized the repurchase of 1,000,000 shares of our common stock, in addition to the 192,089 shares that remain authorized under the prior program that was authorized by the Board of Directors on June 22, 2015.

 

For the Quarter Ended

 

Total Number of Shares

   

Average Price Paid

   

Total Number of Shares Purchased as Part of Publicly Announced Plans or

   

Maximum Number of Shares that May Yet Be Purchased Under the Plans or

 

March 31, 2022

 

Purchased(1)

   

Per Share

   

Programs

   

Programs

 

January 1–31, 2022

    5,909     $ 81.04             1,193,414  

February 1–28, 2022

    1,589     $ 78.99             1,193,414  

March 1–31, 2022

    17,852     $ 78.88       1,325       1,192,089  

Total

    25,350     $ 79.39       1,325       1,192,089  

 

 

(1)

Includes 24,025 shares delivered or attested to in satisfaction of the exercise price and/or tax withholding obligations by employees who exercised stock options or restricted stock under employee share-based compensation plans.

 

Item 6.

Exhibits

 

Item #

 

Description

 

Method of Filing

3i

 

Restated Articles of Incorporation

 

Incorporated by reference to Exhibit 3i to the Company’s report on Form 10-Q for the quarterly period ended June 30, 2006.

3ii

 

Amended and Restated By-Laws

 

Incorporated by reference to Exhibit 3iii to the Company’s Form 8-K dated December 14, 2010.

3iii

 

Articles of Amendment of Restated Articles of Incorporation of Tennant Company

 

Incorporated by reference to Exhibit 3iii to the Company's report on Form 10-Q for the quarterly period ended March 31, 2018.

31.1

 

Rule 13a-14(a)/15d-14(a) Certification of CEO

 

Filed herewith electronically.

31.2

 

Rule 13a-14(a)/15d-14(a) Certification of CFO

 

Filed herewith electronically.

32.1

 

Section 1350 Certification of CEO

 

Filed herewith electronically.

32.2

 

Section 1350 Certification of CFO

 

Filed herewith electronically.

101

 

The following financial information from Tennant Company's Quarterly Report on Form 10-Q for the period ended March 31, 2022, formatted in Inline eXtensible Business Reporting Language (iXBRL): (i) Consolidated Statements of Income for the three months ended March 31, 2022 and 2021; (ii) Consolidated Statements of Comprehensive Income for the three months ended March 31, 2022 and 2021; (iii) Consolidated Balance Sheets as of March 31, 2022 and December 31, 2021; (iv) Consolidated Statements of Cash Flows for the three months ended March 31, 2022 and 2021; (v) Consolidated Statements of Equity for the three months ended March 31, 2022 and 2021; and (vi) Notes to the Consolidated Financial Statements.

 

Filed herewith electronically.

104

 

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

 

Filed herewith electronically.

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.