tnc20220331_10q.htm

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

	☐	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

____________________________________

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

☑

☐

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

☑

☐

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

☐

☑

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

Table of Contents

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION		Page
Item 1.	Financial Statements	3
	Consolidated Statements of Income	3
	Consolidated Statements of Comprehensive Income	3
	Consolidated Balance Sheets	4
	Consolidated Statements of Cash Flows	5
	Consolidated Statements of Equity	6
	Notes to Consolidated Financial Statements	7
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	17
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	22
Item 4.	Controls and Procedures	22
PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	22
Item 1A.	Risk Factors	22
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	23
Item 6.	Exhibits	23
Signatures		24

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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

SEC Form 10-Q filed by Tennant Company