Form 10-Q - Quarterly report [Sections 13 or 15(d)]

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


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

For the quarterly period ended September 30, 2023


o			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.


			o

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

Yes

As of October 27, 2023, there were 18,680,218 shares of common stock outstanding.

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TABLE OF CONTENTS


PART I - FINANCIAL INFORMATION (Unaudited)		Page
Item 1.	Financial Statements	3
	Consolidated Statements of Income	3
	Consolidated Statements of Comprehensive Income	4
	Consolidated Balance Sheets	5
	Consolidated Statements of Cash Flows	6
	Consolidated Statements of Equity	8
	Notes to Consolidated Financial Statements	10
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	25
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	31
Item 4.	Controls and Procedures	31
PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	31
Item 1A.	Risk Factors	31
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	32
Item 5.	Other Information	32
Item 6.	Exhibits	33
Signatures		34

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PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

TENNANT COMPANY

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)


(In millions, except shares and per share data)	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Net sales	$	304.7	$	262.9	$	932.2	$	801.2
Cost of sales	172.7		162.2		535.2		495.5
Gross profit	132.0		100.7		397.0		305.7
Selling and administrative expense	88.2		71.4		256.9		227.1
Research and development expense	9.1		7.9		26.0		23.5
Gain on sale of assets	—		—		—		(3.7)
Operating income	34.7		21.4		114.1		58.8
Interest expense, net	(3.3)		(2.2)		(11.0)		(3.7)
Net foreign currency transaction (loss) gain	(0.4)		—		0.5		(0.4)
Other (expense) income, net	(1.1)		0.6		(1.8)		0.1
Income before income taxes	29.9		19.8		101.8		54.8
Income tax expense	7.0		4.2		23.3		12.3
Net income	$	22.9	$	15.6	$	78.5	$	42.5

Net income per share
Basic	$	1.23	$	0.84	$	4.25	$	2.30
Diluted	$	1.21	$	0.83	$	4.19	$	2.27

Weighted average shares outstanding
Basic	18,570,293		18,515,851		18,485,806		18,495,640
Diluted	18,878,311		18,691,916		18,747,128		18,713,337

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TENNANT COMPANY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)


(In millions)	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Net income	$	22.9	$	15.6	$	78.5	$	42.5
Other comprehensive income (loss):
Foreign currency translation adjustments (net of related tax benefit (expense) of $(0.2), $(1.2), $0.1, and $(2.6), respectively)	(10.6)		(20.1)		(5.2)		(40.8)
Derivative financial instruments (net of related tax expense of $0.4, $0.0, $0.2, and $0.2, respectively)	0.2		(0.1)		0.7		0.5
Total other comprehensive income (loss), net of tax	(10.4)		(20.2)		(4.5)		(40.3)

Comprehensive income (loss)	$	12.5	$	(4.6)	$	74.0	$	2.2

See accompanying notes to consolidated financial statements.

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TENNANT COMPANY

CONSOLIDATED BALANCE SHEETS


	(Unaudited)
(In millions, except shares and per share data)	September 30, 2023		December 31, 2022
ASSETS
Cash, cash equivalents, and restricted cash	$	97.0	$	77.4
Receivables, less allowances of $8.6 and $6.1, respectively	241.9		251.5
Inventories	184.6		206.6
Prepaid and other current assets	31.1		39.8
Total current assets	554.6		575.3
Property, plant and equipment, less accumulated depreciation of $299.7 and $279.3, respectively	182.0		179.9
Operating lease assets	32.4		31.8
Goodwill	180.5		182.0
Intangible assets, net	64.2		76.4
Other assets	45.6		39.7
Total assets	$	1,059.3	$	1,085.1
LIABILITIES AND EQUITY
Current portion of long-term debt	$	5.9	$	5.2
Accounts payable	98.5		126.1
Employee compensation and benefits	62.1		44.0
Other current liabilities	78.3		86.3
Total current liabilities	244.8		261.6
Long-term debt	215.9		295.1
Long-term operating lease liabilities	18.7		17.1
Employee benefits	13.0		13.2
Deferred income taxes	8.6		11.5
Other liabilities	12.0		14.5
Total long-term liabilities	268.2		351.4
Total liabilities	$	513.0	$	613.0
Commitments and contingencies (Note 11)
Common Stock, $0.375 par value; 60,000,000 shares authorized; 18,741,371 and 18,521,485 shares issued and outstanding, respectively	7.0		7.0
Additional paid-in capital	71.0		56.0
Retained earnings	521.7		458.0
Accumulated other comprehensive loss	(54.7)		(50.2)
Total Tennant Company shareholders' equity	545.0		470.8
Noncontrolling interest	1.3		1.3
Total equity	546.3		472.1
Total liabilities and total equity	$	1,059.3	$	1,085.1

See accompanying notes to consolidated financial statements.

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TENNANT COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


(In millions)	Nine Months Ended September 30,
	2023		2022
OPERATING ACTIVITIES
Net income	$	78.5	$	42.5
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation expense	26.4		24.0
Amortization expense	11.0		12.1
Deferred income tax benefit	(7.4)		(6.3)
Share-based compensation expense	8.6		4.4
Bad debt and returns expense	3.2		0.5
Gain on sale of assets	—		(3.7)
Other, net	0.5		0.7
Changes in operating assets and liabilities:
Receivables	7.9		(17.3)
Inventories	3.5		(65.5)
Accounts payable	(25.1)		(1.2)
Employee compensation and benefits	18.3		(10.4)
Other assets and liabilities	(0.8)		(18.6)
Net cash provided by (used in) operating activities	124.6		(38.8)
INVESTING ACTIVITIES
Purchases of property, plant and equipment	(15.3)		(19.4)
Proceeds from sale of assets, net of cash divested	—		4.1
Investment in leased assets	(0.5)		(4.1)
Cash received from leased assets	0.6		0.4
Net cash used in investing activities	(15.2)		(19.0)
FINANCING ACTIVITIES
Proceeds from borrowings	20.0		32.0
Repayments of borrowings	(98.7)		(18.0)
Proceeds (repurchases) from exercise of stock options, net of employee tax withholdings obligations	18.1		(1.2)
Repurchases of common stock	(11.7)		—
Dividends paid	(14.8)		(14.0)
Net cash used in financing activities	(87.1)		(1.2)
Effect of exchange rate changes on cash, cash equivalents and restricted cash	(2.7)		(5.4)
Net increase (decrease) in cash, cash equivalents and restricted cash	19.6		(64.4)
Cash, cash equivalents and restricted cash at beginning of period	77.4		123.6
Cash, cash equivalents and restricted cash at end of period	$	97.0	$	59.2

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SUPPLEMENTAL CASH FLOW INFORMATION	Nine Months Ended September 30,
(In millions)	2023		2022
Cash paid for income taxes	$	29.1	$	21.9
Cash paid for interest	14.7		5.4
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	13.9		13.8
Lease assets obtained in exchange for new operating lease liabilities	13.0		8.4
Lease assets obtained in exchange for new financing lease liabilities	0.6		—
Supplemental non-cash investing and financing activities:
Capital expenditures in accounts payable	1.9		1.9

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, 2022	18,521,485	$	7.0	$	56.0	$	458.0	$	(50.2)	$	470.8	$	1.3	$	472.1
Net income		—		—		24.3		—		24.3		—		24.3
Other comprehensive income		—		—		—		4.7		4.7		—		4.7
Issue stock for directors, employee benefit and stock plans, net of related tax withholdings and repurchases of 18,468 shares	93,073	—		0.8		—		—		0.8		—		0.8
Share-based compensation		—		1.2		—		—		1.2		—		1.2
Repurchases of common stock	(73,525)	—		(5.0)		—		—		(5.0)		—		(5.0)
Dividends paid $0.265 per common share		—		—		(4.9)		—		(4.9)		—		(4.9)
Balance, March 31, 2023	18,541,033	$	7.0	$	53.0	$	477.4	$	(45.5)	$	491.9	$	1.3	$	493.2
Net income		—		—		31.3		—		31.3		—		31.3
Other comprehensive income		—		—		—		1.2		1.2		—		1.2
Issue stock for directors, employee benefit and stock plans, net of related tax withholdings of 4,258 shares	69,345	—		3.4		—		—		3.4		—		3.4
Share-based compensation		—		2.7		—		—		2.7		—		2.7
Repurchases of common stock	(69,780)	—		(5.0)		—		—		(5.0)		—		(5.0)
Dividends paid $0.265 per common share		—		—		(4.9)		—		(4.9)		—		(4.9)
Balance, June 30, 2023	18,540,598	$	7.0	$	54.1	$	503.8	$	(44.3)	$	520.6	$	1.3	$	521.9
Net income		—		—		22.9		—		22.9		—		22.9
Other comprehensive income		—		—		—		(10.4)		(10.4)		—		(10.4)
Issue stock for directors, employee benefit and stock plans, net of related tax withholdings of 148 shares	222,566	—		13.9		—		—		13.9		—		13.9
Share-based compensation		—		4.7		—		—		4.7		—		4.7
Repurchases of common stock	(21,793)	—		(1.7)		—		—		(1.7)		—		(1.7)
Dividends paid $0.265 per common share		—		—		(5.0)		—		(5.0)		—		(5.0)
Balance, September 30, 2023	18,741,371	$	7.0	$	71.0	$	521.7	$	(54.7)	$	545.0	$	1.3	$	546.3

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	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	—		(1.3)		—		—		(1.3)		—		(1.3)
Share-based compensation		—		1.8		—		—		1.8		—		1.8
Dividends paid $0.25 per common share		—		—		(4.6)		—		(4.6)		—		(4.6)
Balance, March 31, 2022	18,579,816	$	7.0	$	54.6	$	416.3	$	(41.9)	$	436.0	$	1.3	$	437.3
Net income		—		—		16.6		—		16.6		—		16.6
Other comprehensive income		—		—		—		(16.1)		(16.1)		—		(16.1)
Issue stock for directors, employee benefit and stock plans, net of related tax withholdings of 2,071 shares	9,859	—		(0.1)		—		—		(0.1)		—		(0.1)
Share-based compensation		—		0.9		—		—		0.9		—		0.9
Dividends paid $0.25 per common share		—		—		(4.6)		—		(4.6)		—		(4.6)
Balance, June 30, 2022	18,589,675	$	7.0	$	55.4	$	428.3	$	(58.0)	$	432.7	$	1.3	$	434.0
Net income		—		—		15.6		—		15.6		—		15.6
Other comprehensive income		—		—		—		(20.2)		(20.2)		—		(20.2)
Issue stock for directors, employee benefit and stock plans, net of related tax withholdings of 54 shares	6,714	—		0.2		—		—		0.2		—		0.2
Share-based compensation		—		1.7		—		—		1.7		—		1.7
Dividends paid $0.25 per common share		—		—		(4.8)		—		(4.8)		—		(4.8)
Balance, September 30, 2022	18,596,389	$	7.0	$	57.3	$	439.1	$	(78.2)	$	425.2	$	1.3	$	426.5

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, 2022. 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 ASU No. 2020-04, Reference Rate Reform (Topic 848), and in December 2022 subsequently issued ASU 2022-06, to temporarily ease the potential burden in accounting for reference rate reform. The standard provides optional expedients and exceptions for applying generally accepted accounting principles to certain contract modifications, hedging relationships, and other transactions affected by the reference rate reform, which affects the London Inter-bank Offered Rate ("LIBOR"), if certain criteria are met. The guidance was effective upon issuance and can generally be applied through December 31, 2024. There has been no material impact to our financial condition, results of operations, or cash flows from reference rate reform as of September 30, 2023. See Note 7 for information on the replacement of LIBOR with the Secured Overnight Financing Rate ("SOFR") in our Credit Agreements.

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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 September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Americas	$	211.2	$	174.0	$	632.2	$	512.7
Europe, Middle East and Africa	72.0		69.0		234.1		225.0
Asia Pacific	21.5		19.9		65.9		63.5
Total	$	304.7	$	262.9	$	932.2	$	801.2

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 September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Equipment	$	189.5	$	153.8	$	579.1	$	484.0
Parts and consumables	68.3		67.4		212.7		194.1
Service and other	46.9		41.7		140.4		123.1
Total	$	304.7	$	262.9	$	932.2	$	801.2

Net sales by sales channel


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Sales direct to consumer	$	214.6	$	174.9	$	638.4	$	518.4
Sales to distributors	90.1		88.0		293.8		282.8
Total	$	304.7	$	262.9	$	932.2	$	801.2

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.

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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:


	Nine Months Ended September 30,
	2023		2022
Beginning balance	$	20.0	$	19.9
Additions to sales incentive accrual	21.9		16.1
Contract payments	(20.4)		(19.5)
Foreign currency fluctuations	(0.1)		(0.9)
Ending balance	$	21.4	$	15.6

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:


	Nine Months Ended September 30,
	2023		2022
Beginning balance	$	9.3	$	11.2
Increase in deferred revenue representing our obligation to satisfy future performance obligations	13.5		19.4
Decrease in deferred revenue for amounts recognized in net sales for satisfied performance obligations	(14.0)		(19.9)
Foreign currency fluctuations	—		(0.7)
Ending balance	$	8.8	$	10.0

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At September 30, 2023, $6.8 million and $2.0 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 2023	$	4.6
2024	2.1
2025	1.2
2026	0.6
2027	0.2
Thereafter	0.1
Total	$	8.8

At December 31, 2022, $6.6 million and $2.7 million of deferred revenue was reported in other current liabilities and other liabilities, respectively, on our consolidated balance sheets.

4. Management Actions

Restructuring Actions

During the three and nine months ended September 30, 2023 and September 30, 2022, we incurred the following restructuring expenses as part of our ongoing global reorganization efforts. The following pre-tax restructuring charges were included in selling and administrative expense in the consolidated statements of income.


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Severance-related costs	$	—	$	—	$	1.2	$	0.3
Other costs	—		0.5		—		0.8
Total pre-tax restructuring costs	$	—	$	0.5	$	1.2	$	1.1

The charge in 2023 impacted the Europe, Middle East and Africa (EMEA) and Asia Pacific (APAC) operating segments. The charge in 2022 primarily impacted the Americas 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:


	Nine Months Ended September 30,
	2023		2022
Beginning balance	$	1.7	$	4.9
New charges	1.1		0.9
Cash payments	(1.6)		(2.3)
Foreign currency fluctuations	—		(0.7)
Adjustments to accrual	0.1		(0.6)
Ending balance	$	1.3	$	2.2

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5. Inventories

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


	September 30, 2023		December 31, 2022
Inventories carried at LIFO:
Finished goods(a)	$	72.6	$	85.0
Raw materials and work-in-process	42.0		46.4
Excess of FIFO over LIFO cost(b)	(47.3)		(49.7)
Total LIFO inventories	$	67.3	$	81.7

Inventories carried at FIFO:
Finished goods(a)	$	59.1	$	68.9
Raw materials and work-in-process	58.2		56.0
Total FIFO inventories	$	117.3	$	124.9
Total inventories	$	184.6	$	206.6

(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.

6. Goodwill and Intangible Assets

The changes in the carrying amount of goodwill for the nine months ended September 30, 2023 were as follows:


	Goodwill		Accumulated Impairment Losses		Total
Balance as of December 31, 2022	$	218.8	$	(36.8)	$	182.0
Foreign currency fluctuations	(6.3)		4.8		(1.5)
Balance as of September 30, 2023	$	212.5	$	(32.0)	$	180.5

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


	Customer Lists		Trade Names		Technology		Total
Balance as of September 30, 2023
Original cost	$	144.6	$	28.1	$	15.9	$	188.6
Accumulated amortization	(94.2)		(17.8)		(12.4)		(124.4)
Carrying value	$	50.4	$	10.3	$	3.5	$	64.2
Weighted average original life (in years)	15		11		11

Balance as of December 31, 2022
Original cost	$	146.6	$	28.6	$	15.9	$	191.1
Accumulated amortization	(87.5)		(15.9)		(11.3)		(114.7)
Carrying value	$	59.1	$	12.7	$	4.6	$	76.4
Weighted average original life (in years)	15		11		11

Amortization expense on intangible assets for the three and nine months ended September 30, 2023 was $3.5 million and $11.0 million, respectively. Amortization expense on intangible assets for the three and nine months ended September 30, 2022 was $3.7 million and $12.1 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 2023	$	3.4
2024	12.9
2025	11.6
2026	10.3
2027	7.1
Thereafter	18.9
Total	$	64.2

7. 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.

On November 10, 2022, we amended the 2021 Credit Agreement (the "Amendment") to update the benchmark provisions to replace LIBOR with Term SOFR (as defined in the Amendment) as the reference rate for purposes of calculating interest under the 2021 Credit Agreement. Pursuant to the Amendment, borrowings denominated in U.S. dollars bear interest at a rate per annum equal to (a) the Term SOFR Rate (as defined in the Amendment) plus a credit spread adjustment of 0.10% per annum, but in any case, not less than 0%, plus an additional spread of 1.10% to 1.70%, depending on the Company’s leverage ratio, or (b) the Alternate Base Rate (as defined in the Amendment), which is the greatest of (i) the prime rate, (ii) the federal funds rate plus 0.50% and (iii) the adjusted Term SOFR Rate for a one month period, but in any case, not less than 1.0%, plus,

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in any such case, 1.0%, plus an additional spread of 0.10% to 0.70%, depending on the Company’s leverage ratio. All other material terms included in the 2021 Credit Agreement remain unchanged as a result of the Amendment.

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.

The 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 to 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 1.00; 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 1.00, in such case limiting such payments to $60.0 million during any fiscal year.

Debt Outstanding

Debt outstanding consisted of the following:


	September 30, 2023		December 31, 2022
Credit facility borrowings:
Revolving credit facility borrowings	$	130.0	$	205.0
Term loan facility borrowings	91.3		95.0
Secured borrowings	0.2		0.2
Finance lease liabilities	0.3		0.1
Total debt	221.8		300.3
Less: current portion of long-term debt(a)	(5.9)		(5.2)
Long-term debt	$	215.9	$	295.1

(a)As of September 30, 2023, the Company is required to repay $5.6 million in outstanding credit facility borrowings and $0.3 million of finance lease liabilities over the next 12 months.

As of September 30, 2023, we had outstanding borrowings of $130.0 million and $91.3 million under our revolving facility and term loan facility, respectively. We had letters of credit and bank guarantees outstanding in the amount of $3.1 million, leaving approximately $316.9 million of unused borrowing capacity on our revolving facility. Commitment fees on unused lines of credit for the nine months ended September 30, 2023 were $0.6 million. The overall weighted average cost of debt was approximately 6.5% and net of related cross-currency swap instruments and fixed rate interest rate swap instruments was approximately 5.1%. Further details regarding the cross-currency swap instrument are discussed in Note 9.

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8. 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. The majority of the liability for estimated warranty claims represents amounts to be paid out in the near term for qualified warranty issues.

The changes in warranty reserves were as follows:


	Nine Months Ended September 30,
	2023		2022
Beginning balance	$	10.9	$	10.4
Additions charged to expense	9.5		6.7
Foreign currency fluctuations	0.1		(0.3)
Claims paid	(9.3)		(6.2)
Ending balance	$	11.2	$	10.6

9. 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 Hedges

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 (loss) 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 September 30, 2023 and December 31, 2022, the notional amounts of foreign currency forward exchange contracts outstanding not designated as hedging instruments were $74.1 million and $83.7 million, respectively.

Cash Flow Hedges

We manage our floating rate debt exposure using interest rate swaps. Fixed rate swaps are used to reduce our risk of the possibility of increased interest costs. We entered into an aggregate $120 million notional amount of interest rate swaps effective December 1, 2022 that exchange a variable rate of interest for a fixed rate of interest of 4.076%. These interest rate swaps are designated as cash flow hedges. These swaps are scheduled to mature on December 1, 2026.

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Fair Value Hedges

On April 5, 2022, we entered into Euro to U.S. dollar foreign exchange cross-currency swaps 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 risk associated with this intercompany loan, and accordingly, they are not speculative in nature. These cross-currency swaps are designated as fair value hedges. As of September 30, 2023 and December 31, 2022, these cross-currency swaps included €83.1 million and €84.8 million of total notional value, respectively. As of September 30, 2023, the aggregated scheduled interest payments over the course of the loan and related swaps amounted to €8.1 million. The scheduled maturity and principal payment of the loan and related swaps of €75.0 million are due in April 2027.

Net Investment Hedges

On April 5, 2022, we entered into Euro to U.S. dollar foreign exchange cross-currency swaps to hedge our exposure to adverse foreign currency exchange rate movements between Tennant Company and a wholly owned European subsidiary. We enter into these fixed-to-fixed cross-currency swap agreements to protect a designated monetary amount of the Company’s net investment in its Euro functional currency subsidiary against the risk of changes in the Euro to U.S. dollar foreign exchange rate. These cross-currency swaps are designated as net investment hedges. As of September 30, 2023 and December 31, 2022, the cross-currency swaps included €75.0 million of total notional value. These swaps are scheduled to mature in April 2027.

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


	Derivative Assets					Derivative Liabilities
	Balance Sheet Location	September 30, 2023		December 31, 2022		Balance Sheet Location	September 30, 2023		December 31, 2022
Derivatives designated as cash flow hedges:
Interest rate swaps	Other current assets	$	1.5	$	0.8	Other current liabilities	$	—	$	—
Interest rate swaps	Other assets	0.2		—		Other liabilities	—		1.8
Derivatives designated as fair value hedges:
Cross-currency swaps	Other current assets	1.4		1.4		Other current liabilities	—		—
Cross-currency swaps	Other assets	0.2		0.8		Other liabilities	—		—
Derivatives designated as net investment hedges:
Cross-currency swaps	Other current assets	1.2		1.2		Other current liabilities	—		—
Cross-currency swaps	Other assets	—		0.5		Other liabilities	0.1		—
Derivatives not designated as hedging instruments:
Foreign currency forward contracts	Other current assets	$	1.0	$	0.1	Other current liabilities	$	0.1	$	0.3

As of September 30, 2023, we anticipate reclassifying $2.4 million of gains from accumulated other comprehensive loss to net income during the next 12 months.

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The following tables include the amounts in the consolidated statements of income in which the effects of derivatives designated as hedging instruments are recorded:


	Three Months Ended September 30,
	2023				2022
	Total		Gain (Loss) on Hedging		Total		Gain (Loss) on Hedging
Derivatives designated as cash flow hedges:
Interest expense, net	$	(3.3)	$	0.3	$	(2.2)	$	—
Net foreign currency transaction gain (loss)	(0.4)		—		—		—
Derivatives designated as fair value hedges:
Interest expense, net	(3.3)		0.3		(2.2)		0.4
Net foreign currency transaction gain (loss)	(0.4)		2.0		—		5.6
Derivatives designated as net investment hedges:
Interest expense, net	$	(3.3)	$	0.2	$	(2.2)	$	0.3


	Nine Months Ended September 30,
	2023				2022
	Total		Gain (Loss) on Hedging		Total		Gain (Loss) on Hedging
Derivatives designated as cash flow hedges:
Interest expense, net	$	(11.0)	$	0.6	$	(3.7)	$	0.7
Net foreign currency transaction gain (loss)	0.5		—		(0.4)		4.7
Derivatives designated as fair value hedges:
Interest expense, net	(11.0)		1.7		(3.7)		0.8
Net foreign currency transaction gain (loss)	0.5		2.8		(0.4)		9.9
Derivatives designated as net investment hedges:
Interest expense, net	$	(11.0)	$	1.4	$	(3.7)	$	0.6

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


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Derivatives designated as cash flow hedges:
Net gain recognized in other comprehensive income, net of tax(a)	$	1.2	$	—	$	2.6	$	3.8
Net gain reclassified from accumulated other comprehensive loss into income, net of tax, effective portion to interest expense, net	0.3		—		0.6		0.5
Net gain reclassified from accumulated other comprehensive loss into income, net of tax, effective portion to net foreign currency transaction gain (loss)	—		—		—		3.6
Derivatives designated as fair value hedges:
Net (loss) gain recognized in other comprehensive income (loss), net of tax(a)	(0.5)		0.2		(0.5)		1.4
Net gain reclassified from accumulated other comprehensive loss into income, net of tax, effective portion to interest expense, net	0.2		0.3		0.8		0.6
Net gain reclassified from accumulated other comprehensive loss into income, net of tax, effective portion to net foreign currency transaction gain (loss)	—		—		—		—
Derivatives designated as net investment hedges:
Net (loss) gain recognized in other comprehensive income (loss), net of tax(a)	1.3		3.9		0.2		7.8
Net gain reclassified from accumulated other comprehensive loss into income, net of tax, effective portion to interest expense, net	0.2		0.3		0.7		0.5
Derivatives not designated as hedging instruments:
Net gain recognized in income(b)	$	0.1	$	4.0	$	1.0	$	6.6

(a)Net change in the fair value of the effective portion classified in other comprehensive income (loss).

(b)Classified in net foreign currency transaction gain (loss).

10. 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

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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 September 30, 2023 was as follows:


	Fair Value		Level 1		Level 2		Level 3
Assets:
Foreign currency forward exchange contracts	$	1.0	$	—	$	1.0	$	—
Cross-currency swaps	2.8		—		2.8		—
Interest rate swaps	1.7		—		1.7		—
Total assets	5.5		—		5.5		—
Liabilities:
Foreign currency forward exchange contracts	0.1		—		0.1		—
Interest rate swaps	—		—		—		—
Total liabilities	$	0.1	$	—	$	0.1	$	—

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


	Fair Value		Level 1		Level 2		Level 3
Assets:
Foreign currency forward exchange contracts	$	0.1	$	—	$	0.1	$	—
Cross-currency swaps	3.9		—		3.9		—
Interest rate swaps	0.8		—		0.8		—
Total assets	4.8		—		4.8		—
Liabilities:
Foreign currency forward exchange contracts	0.3		—		0.3		—
Interest rate swaps	1.8		—		1.8		—
Total liabilities	$	2.1	$	—	$	2.1	$	—

Our foreign currency forward exchange contracts, cross-currency swaps and interest rate swaps 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 derivative instruments are discussed in Note 9.

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 $221.3 million and $221.8 million, respectively, as of September 30, 2023. The fair value and carrying value of total debt, including current portion, was $301.8 million and $300.3 million, respectively, as of December 31, 2022. 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.

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11. 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.

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12. Shareholders' Equity

Accumulated Other Comprehensive Loss

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


	Nine Months Ended September 30, 2023
	Foreign Currency Translation Adjustments		Pension and Post- Retirement Medical Benefits		Derivative Financial Instruments		Total
Beginning balance	$	(53.9)	$	2.7	$	1.0	$	(50.2)
Other comprehensive (loss) income before reclassifications	(4.5)		—		2.1		(2.4)
Amounts reclassified from accumulated other comprehensive loss	(0.7)		—		(1.4)		(2.1)
Net current period other comprehensive income	(5.2)		—		0.7		(4.5)
Ending balance	$	(59.1)	$	2.7	$	1.7	$	(54.7)


	Nine Months Ended September 30, 2022
	Foreign Currency Translation Adjustments		Pension and Post- Retirement Medical Benefits		Derivative Financial Instruments		Total
Beginning balance	$	(36.0)	$	(2.1)	$	0.2	$	(37.9)
Other comprehensive (loss) income before reclassifications	(40.3)		—		5.2		(35.1)
Amounts reclassified from accumulated other comprehensive loss	(0.5)		—		(4.7)		(5.2)
Net current period other comprehensive (loss) income	(40.8)		—		0.5		(40.3)
Ending balance	$	(76.8)	$	(2.1)	$	0.7	$	(78.2)

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13. 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 three to five 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 $3.6 million for unrecognized tax benefits as of September 30, 2023, there was approximately $0.4 million for accrued interest and penalties. The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate as of September 30, 2023 was $3.3 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.

14. 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, 2022. During the three months ended September 30, 2023 and 2022, we recognized total share-based compensation expense of $4.7 million and $1.7 million, respectively. During the nine months ended September 30, 2023 and 2022, we recognized total share-based compensation expense of $8.6 million and $4.4 million, respectively. The total excess tax recognized for share-based compensation arrangements during the nine months ended September 30, 2023 and 2022 was a tax expense of $0.1 million and tax benefit of $0.3 million, respectively.

15. Earnings Per Share

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


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Numerator:
Net income	$	22.9	$	15.6	$	78.5	$	42.5
Denominator:
Basic - weighted average shares outstanding	18,570,293		18,515,851		18,485,806		18,495,640
Effect of dilutive securities	308,018		176,065		261,322		217,697
Diluted - weighted average shares outstanding	18,878,311		18,691,916		18,747,128		18,713,337
Basic earnings per share	$	1.23	$	0.84	$	4.25	$	2.30
Diluted earnings per share	$	1.21	$	0.83	$	4.19	$	2.27

Excluded from the dilutive securities shown above were options to purchase and shares to be paid out under share-based compensation plans of 169,458 and 766,235 shares of common stock during the three months ended September 30, 2023 and 2022, respectively. Excluded from the dilutive securities shown above were options to purchase and shares to be paid out under share-based compensation plans of 325,862 and 425,920 shares of common stock during the nine months ended September 30, 2023 and 2022, 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.

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) provides a comparison of the Company's results of operations, as well as liquidity and capital resources for the quarters ended September 30, 2023 and 2022. The MD&A should be read in conjunction with the Company's consolidated financial statements and notes included in Item 1 of this Quarterly Report. Throughout this MD&A, the Company refers to measures used by management to evaluate performance, including financial measures that are not defined under generally accepted accounting principles (GAAP) in the U.S. Net sales excluding foreign currency translation (i.e., organic sales) is not a measure of financial performance under GAAP; however, the Company believes it is useful in understanding its financial results and provides comparable measures for understanding the operating results of the Company between different periods.

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.

Macroeconomic Events

Supply chain challenges continue to impact the global economy. Our operating performance throughout 2023 has benefited from fewer supply chain disruptions enabling us to obtain key component parts, increase production and reduce backlog. If there are additional disruptions in our supply chain, or we continue to experience certain supply shortages, it could materially or adversely impact our operating results and financial condition. We continue to address and adapt to these temporary supply chain disruptions.

As described in Part I, Item 1A - Risk Factors in the annual report on Form 10-K for the fiscal year ended December 31, 2022, we may encounter financial difficulties if the U.S. 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. Any sustained adverse impacts to our business, the industries in which we operate, market demand for our products, and/or certain suppliers or customers may also affect our future results of operations, financial position, or cash flows. We are actively monitoring the global macroeconomic environment, including geopolitical conflict, the potential impact of global supply chain constraints on material inflation, and change in demand for our products.

Outlook

We continued to deliver strong net sales and net income growth in the third quarter of 2023. Our performance reflects actions and investments we made beginning in 2022 and have continued to execute upon throughout 2023 and into 2024. Global economic conditions continue to be highly volatile and uncertainty remains regarding supply chain challenges, inflationary trends, and overall business environment. We remain confident in the long-term growth trends for our products and services in the markets we serve.

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Results

The following table compares the results of operations for the three and nine months ended September 30, 2023 and 2022, respectively (in millions, except per share data and percentages):


	Three Months Ended September 30,						Nine Months Ended September 30,
	2023		%	2022		%	2023		%	2022		%
Net sales	$	304.7	100.0	$	262.9	100.0	$	932.2	100.0	$	801.2	100.0
Cost of sales	172.7		56.7	162.2		61.7	535.2		57.4	495.5		61.8
Gross profit	132.0		43.3	100.7		38.3	397.0		42.6	305.7		38.2
Selling and administrative expense	88.2		28.9	71.4		27.2	256.9		27.6	227.1		28.3
Research and development expense	9.1		3.0	7.9		3.0	26.0		2.8	23.5		2.9
Gain on sale of assets	—		—	—		—	—		—	(3.7)		(0.5)
Operating income	34.7		11.4	21.4		8.1	114.1		12.2	58.8		7.3
Interest expense, net	(3.3)		(1.1)	(2.2)		(0.8)	(11.0)		(1.2)	(3.7)		(0.5)
Net foreign currency transaction (loss) gain	(0.4)		(0.1)	—		—	0.5		0.1	(0.4)		—
Other (expense) income, net	(1.1)		(0.4)	0.6		0.2	(1.8)		(0.2)	0.1		—
Income before income taxes	29.9		9.8	19.8		7.5	101.8		10.9	54.8		6.8
Income tax expense	7.0		2.3	4.2		1.6	23.3		2.5	12.3		1.5
Net income	$	22.9	7.5	$	15.6	5.9	$	78.5	8.4	$	42.5	5.3
Net income per share - diluted	$	1.21		$	0.83		$	4.19		$	2.27

Net Sales

Consolidated net sales for the third quarter of 2023 totaled $304.7 million, a 15.9% increase as compared to consolidated net sales of $262.9 million in the third quarter of 2022. The components of the consolidated net sales change were as follows:


	Three Months Ended September 30,	Nine Months Ended September 30,
	2023 vs. 2022
Price	8.9%	9.6%
Volume	5.0%	7.0%
Organic growth	13.9%	16.6%
Foreign currency	2.0%	(0.2)%
Total growth	15.9%	16.4%

The 15.9% increase in consolidated net sales in the third quarter of 2023 as compared to the same period in 2022 was driven by:

•Organic sales growth of 13.9%, which excludes the effects of foreign currency exchange. The organic sales growth was primarily due to equipment sales growth in the Americas and APAC partly offset by volume declines in EMEA; and

•A net favorable impact from foreign currency exchange across all regions of approximately 2.0%.

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The 16.4% increase in consolidated net sales in the first nine months of 2023 as compared to the same period in 2022 was driven by:

•Organic sales growth of 16.6%, which excludes the effects of foreign currency exchange. The organic sales increase was primarily due to growth across all regions and product categories, led by strong sales growth in the Americas region; partly offset by

•A net unfavorable impact from foreign currency exchange across all regions of approximately 0.2%.

The following table sets forth the net sales by geographic area for the three and nine months ended September 30, 2023 and 2022 (in millions, except percentages):


	Three Months Ended September 30,						Nine Months Ended September 30,
	2023		2022		% Change		2023		2022		% Change
Americas	$	211.2	$	174.0	21.4	%	$	632.2	$	512.7	23.3	%
Europe, Middle East and Africa	72.0		69.0		4.3	%	234.1		225.0		4.0	%
Asia Pacific	21.5		19.9		8.0	%	65.9		63.5		3.8	%
Total	$	304.7	$	262.9	15.9	%	$	932.2	$	801.2	16.4	%

Americas

Americas net sales were $211.2 million for the third quarter of 2023, an increase of 21.4% from the third quarter of 2022 driven by:

•Organic sales growth of 20.8% driven nearly equally by price realization and volume increases in equipment sales and service across the region; and

•A net favorable impact from foreign currency exchange of approximately 0.6%.

Americas net sales were $632.2 million for the first nine months of 2023, an increase of 23.3% from the first nine months of 2022 driven by:

•Organic sales growth of 23.3% driven nearly equally by price realization and volume increases in all product categories across the region.

Europe, Middle East and Africa ("EMEA")

EMEA net sales were $72.0 million for the third quarter of 2023, an increase of 4.3% from the third quarter of 2022 driven by:

•Organic sales decline of 2.8% driven by volume declines in both equipment and parts and consumables partly offset by price realization in all product categories; and

•A net favorable impact from foreign currency exchange of approximately 7.1%.

EMEA net sales were $234.1 million for the first nine months of 2023, an increase of 4.0% from the first nine months of 2022 driven by:

•Organic sales growth of 3.6% driven by price realization partly offset by volume declines across all product categories. The organic growth was led by price realization on equipment sales across our direct geographies, especially in Iberia; and

•A net favorable impact from foreign currency exchange of approximately 0.4%.

Asia Pacific ("APAC")

APAC net sales were $21.5 million for the third quarter of 2023, an increase of 8.0% from the third quarter of 2022 driven by:

•Organic sales growth of 11.8% driven primarily by price realization on equipment sales in Australia and volume growth in equipment sales in China; partly offset by

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•A net unfavorable impact from foreign currency exchange of approximately 3.8%.

APAC net sales were $65.9 million for the first nine months of 2023, an increase of 3.8% from the first nine months of 2022 driven by:

•Organic sales growth of 8.3% driven by price realization on equipment sales across our direct geographies, especially Australia, China and India; partly offset by

•A net unfavorable impact from foreign currency exchange of approximately 4.5%.

Gross Profit

Gross profit margin of 43.3% was 500 basis points higher in the third quarter of 2023 compared to the third quarter of 2022. Gross profit margin of 42.6% was 440 basis points higher in the first nine months of 2023 compared to the first nine months of 2022. The increase in both periods was driven by pricing realization, more than offsetting the impact of multi-year inflation.

The LIFO impact for the three and nine months ended September 30, 2023 was a charge of $0.7 million and a benefit of $2.5 million, respectively, compared to a LIFO charge of $2.1 million and $8.1 million in the three and nine months ended September 30, 2022, respectively. The change in LIFO impact was attributable to a stabilized inflationary environment on materials in 2023.

Operating Expense

Selling and Administrative Expense

Selling and administrative expense ("S&A expense") was $88.2 million for the third quarter of 2023, an increase of $16.8 million compared to the third quarter of 2022. As a percentage of net sales, S&A expense for the third quarter of 2023 increased 170 basis points to 28.9% from 27.2% in the third quarter of 2022. The S&A expense increase in each period was primarily driven by higher variable costs associated with increased operating performance.

S&A expense was $256.9 million for the first nine months of 2023, an increase of $29.8 million compared to the first nine months of 2022. The increase was primarily driven by higher variable costs associated with increased operating performance and investments in strategic initiatives. S&A expense as a percentage of net sales for the first nine months of 2023 decreased 70 basis points to 27.6% from 28.3% in the first nine months of 2022. The decrease as a percentage of net sales was driven by our sales growth in the comparable periods, as well as our cost-containment initiatives.

Research and Development Expense

Research and development expense ("R&D expense") was $9.1 million, or 3.0% of net sales, for the third quarter of 2023, with R&D expense as a percentage of net sales remaining flat as compared to the third quarter of 2022. R&D expense was $26.0 million, or 2.8% of net sales, for the first nine months of 2023, essentially flat compared to the first nine months of 2022.

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 $3.3 million in the third quarter of 2023 compared to $2.2 million in the same period of 2022. The increase was the result of higher interest rates on our variable interest debt. Interest expense, net was $11.0 million in the first nine months of 2023 compared to $3.7 million in the first nine months of 2022. The increase was the result of higher debt levels coupled with rising interest rates on our variable interest rate debt. The following table compares the debt levels, average interest rate, interest income and interest expense for the three and nine months ended September 30, 2023 and 2022, respectively (in millions, except percentages):

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	Three Months Ended September 30,						Nine Months Ended September 30,
	2023			2022			2023			2022
Weighted Average Outstanding Borrowings	$	262.4		$	269.3		$	291.3		$	269.4
Average interest rate	6.48		%	3.34		%	6.19		%	2.26		%
Interest expense	4.3			2.2			13.5			4.6
Interest income	(1.0)			—			(2.5)			(0.9)
Interest expense, net	$	3.3		$	2.2		$	11.0		$	3.7

Our debt portfolio as of September 30, 2023 was comprised of debt predominately in U.S. dollars. The Company manages its floating rate debt exposure using fixed rate interest rate swaps to reduce the Company's risk of the possibility of increased interest costs. The Company has an aggregate $120 million notional amount of interest rate swaps that exchange a variable rate of interest for a fixed rate of interest of 4.076% over the term of the agreements.

Net Foreign Currency Transaction Gain (Loss)

Net foreign currency transaction loss was $0.4 million in the third quarter of 2023 compared to less than $0.1 million in the third quarter of 2022. The unfavorable impact was primarily due to the strengthening of the U.S. dollar relative to the Brazilian real and Mexican peso. Net foreign currency transaction gain was $0.5 million in the first nine months of 2023 compared to a loss of $0.4 million in the first nine months of 2022. The favorable impact was primarily due to hedging gains on foreign denominated receivables.

Income Taxes

The effective tax rate for the third quarter of 2023 was 23.4% compared to 21.2% for the third quarter of 2022. The increase was primarily due to a decrease in discrete tax benefits recognized during the quarter.

The effective tax rate for the first nine months of 2023 was 22.9% compared to 22.4% for the first nine months of 2022. The increase was driven by a decrease in discrete tax benefits recognized, as well as unfavorable changes in the mix of forecasted earnings by jurisdiction.

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 U.S.

Backlog

Backlog is one of the many indicators of business conditions in the Company's markets. Our order backlog was $213.9 million at September 30, 2023 compared to $326.4 million at December 31, 2022. The decrease was the result of the Company's ability to obtain key component parts and increase production levels. 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 $97.0 million at September 30, 2023 compared to $77.4 million as of December 31, 2022. Wherever possible, cash management is centralized and intercompany financing is used to provide working capital to subsidiaries as needed. Our current ratio was 2.3 as of September 30, 2023 and 2.2 as of December 31, 2022. Our primary working capital, which is comprised of accounts receivable, inventories and accounts payables, was $328.0 million as of September 30, 2023 and $332.0 million as of December 31, 2022. Our debt-to-capital ratio was 28.9% as of September 30, 2023 compared to 38.9% as of December 31, 2022.

As of September 30, 2023, we had letters of credit and bank guarantees outstanding in the amount of $3.1 million, leaving approximately $316.9 million of unused borrowing capacity on our revolving facility.

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Cash Flow from Operating Activities

Net cash provided by operating activities during the nine months ended September 30, 2023 was $124.6 million compared to net cash used by operating activities of $38.8 million during the nine months ended September 30, 2022. The increase was the result of improved operating performance and moderating investments in working capital.

Cash Flow from Investing Activities

Net cash used in investing activities during the nine months ended September 30, 2023 was $15.2 million compared to net cash used by investing activities of $19.0 million during the nine months ended September 30, 2022. The decrease in cash outflows was primarily driven by the timing of property, plant and equipment investments as the Company continues to deploy cash flow toward operational capital needs.

Cash Flow from Financing Activities

Net cash used in financing activities during the nine months ended September 30, 2023 was $87.1 million compared to net cash used by financing activities of $1.2 million during the nine months ended September 30, 2022. The increase in cash outflows was primarily driven by repayments of borrowings and share purchases. The Company repurchased 165,098 shares of common stock for $11.7 million during the first nine months of 2023 as we continued to focus on returning capital to shareholders in line with our capital allocation priorities.

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 Quarterly Report, 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, 2022.

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

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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, 2022. For additional information, refer to Item 7A of our annual report on Form 10-K for the year ended December 31, 2022.

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 September 30, 2023 (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, 2022. There have been no material changes to our risk factors since the filing of that report.

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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. 947,235 shares remain authorized under the most recent share repurchase program approved by the Board of Directors on October 31, 2016.


For the Quarter Ended September 30, 2023	Total Number of Shares Purchased(1)	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
July 1-31, 2023	8,665	$	79.15	8,660	960,368
August 1-31, 2023	2,163	$	79.50	2,020	958,348
September 1-30, 2023	11,113	$	76.59	11,113	947,235
Total	21,941	$	71.70	21,793	947,235

(1)Includes 148 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 5. Other Information

During the three months ended September 30, 2023, no director or officer of the Company adopted, modified or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) of Regulation S-K.

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Item 6. Exhibits

Item #

Description

Method of Filing

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 3,2 to the Company’s Form 8-K dated January 19, 2023.

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