Tennant(US:TNC)2023-02-23 20:59Part I Item 1 Business Tennant Company is a global leader in designing, manufacturing, and marketing nonresidential cleaning solutions across Americas, EMEA, and APAC - Tennant Company is a world leader in designing, manufacturing, and marketing cleaning solutions for nonresidential surfaces, operating in Americas, EMEA, and APAC1415 - Product offerings include mechanized cleaning equipment, detergent-free and other sustainable cleaning technologies, aftermarket parts and consumables, equipment maintenance and repair services, and business solutions (financing, rental, leasing, asset management)16 - The company serves over 40,000 customers, including contract cleaners and businesses performing facilities maintenance themselves, through direct sales in 15 countries and distributors in over 100 countries17 - The company has experienced cost inflation and constrained supply of primary raw materials (steel, metal alloys, resin) and component parts, which are expected to continue into 202318 - Quarterly revenues typically range from 22% to 28% of the total year, with the first quarter usually at the low end and the second and fourth quarters toward the high end21 Item 1A Risk Factors The company faces macroeconomic, industry, and operational risks, including economic downturns, competitive pressures, supply chain disruptions, and talent retention challenges - Macroeconomic risks include potential financial difficulties from economic downturns, uncertainty surrounding the COVID-19 pandemic, and significant compliance costs from global laws and regulations424344 - Industry risks involve inability to take advantage of product pricing due to competitive markets and price sensitivity, challenges in developing innovative products and technologies, and disruptions in the availability, quality, or cost of raw materials, components, or labor4546484950 - Operational risks include challenges in attracting and retaining key personnel, managing strategic planning and growth processes, upgrading IT systems, protecting against cybersecurity threats, potential business interruptions, managing workforce health and safety, and successfully integrating acquisitions53565758606162 Item 1B Unresolved Staff Comments There are no unresolved staff comments - No unresolved staff comments66 Item 2 Properties Tennant Company owns corporate offices and manufacturing facilities globally, with additional leased facilities for manufacturing, sales, and warehousing, all in good operating condition - The company owns its corporate offices in Minneapolis, Minnesota, and manufacturing facilities in Minneapolis, Holland (Michigan), Uden (The Netherlands), and several Italian cities (Venice, Cremona, Reggio Emilia, Province of Padua)67 - Leased manufacturing facilities are located in Louisville (Kentucky), São Paulo (Brazil), Hefei (China), and another facility in the Province of Padua, with sales offices, warehouses, and storage facilities leased in various locations globally6768 - All company facilities are in good operating condition, suitable for their respective uses, and adequate for current needs6768 Item 3 Legal Proceedings The company is not involved in any material pending legal proceedings beyond ordinary business litigation - There are no material pending legal proceedings other than ordinary litigation incidental to the Company's business70 Item 4 Mine Safety Disclosures This item is not applicable to Tennant Company - Not applicable71 Part II Item 5 Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities Tennant's common stock trades on the NYSE, with a history of 78 consecutive years of cash dividends and 51 years of increases, alongside share repurchase programs - Tennant's common stock is traded on the New York Stock Exchange under the ticker symbol TNC, with 269 shareholders of record as of January 31, 202374 Dividend Information | Metric | 2022 | 2021 | | :-------------------------------- | :----- | :----- | | Consecutive years of cash dividends paid | 78 | 77 | | Consecutive years of annual dividend increase | 51 | 50 | | Annual cash dividend payout per share | $1.015 | $0.94 | | Quarterly cash dividend (declared Feb 14, 2023) | $0.265 | N/A | Share Repurchases for Q4 2022 | For the Quarter Ended | Total Number of Shares Purchased | Average Price Per Share | | :-------------------- | :------------------------------- | :---------------------- | | October 1–31, 2022 | 18 | $56.56 | | November 1–30, 2022 | 50,067 | $62.80 | | December 1–31, 2022 | 29,849 | $62.46 | | Total | 79,934 | $62.67 | - During the twelve months ended December 31, 2022, the Company paid $5.0 million to repurchase 79,756 shares of its common stock, with 1,112,333 shares remaining authorized for repurchase7677 Stock Performance Graph (Cumulative Total Shareholder Return, $100 invested on Dec 31, 2017) | Year | Tennant Company | S&P SmallCap 600 | S&P 500 Industrials (Sector) (TR) | | :--- | :-------------- | :--------------- | :------------------------------- | | 2017 | $100 | $100 | $100 | | 2018 | $73 | $92 | $87 | | 2019 | $110 | $112 | $112 | | 2020 | $100 | $125 | $125 | | 2021 | $117 | $159 | $151 | | 2022 | $91 | $133 | $143 | Item 6 [Reserved] This item is reserved and contains no information - Item 6 is reserved81 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations This section reviews Tennant Company's financial performance, liquidity, and capital resources, highlighting macroeconomic challenges and the focus on sustainable innovations and long-term growth - Tennant Company is a world leader in designing, manufacturing, and marketing solutions that empower customers to achieve quality cleaning performance, reduce environmental impact, and create a cleaner, safer, healthier world, with a commitment to breakthrough, sustainable cleaning innovations85 - The company continues to actively manage its business in response to the COVID-19 pandemic, supply chain disruptions, inflation, and foreign currency exchange fluctuations, which have negatively impacted financial results86878889 - Global economic conditions remain highly volatile, with ongoing uncertainty regarding supply chain challenges and inflationary trends, requiring agile management and pricing actions for long-term growth91 Historical Results Consolidated net sales slightly increased in 2022, but gross profit margin decreased due to inflation, leading to lower operating income and a significant increase in order backlog Consolidated Statements of Income (in millions, except per share amounts and percentages) | Metric | 2022 | % of Net Sales | 2021 | % of Net Sales | | :-------------------------------- | :----- | :------------- | :----- | :------------- | | Net sales | $1,092.2 | 100.0 | $1,090.8 | 100.0 | | Cost of sales | 671.3 | 61.5 | 652.8 | 59.8 | | Gross profit | 420.9 | 38.5 | 438.0 | 40.2 | | Selling and administrative expense | 306.3 | 28.0 | 321.9 | 29.5 | | Research and development expense | 31.1 | 2.8 | 32.2 | 3.0 | | Gain on sale of assets | (3.7) | (0.3) | (9.8) | (0.9) | | Operating income | 87.2 | 8.0 | 93.7 | 8.6 | | Interest expense, net | (7.1) | (0.7) | (7.3) | (0.7) | | Net foreign currency transaction loss | (1.2) | (0.1) | (0.7) | (0.1) | | Loss on extinguishment of debt | — | — | (11.3) | (1.0) | | Other income (expense), net | 0.6 | 0.1 | (0.3) | — | | Income before income taxes | 79.5 | 7.3 | 74.1 | 6.8 | | Income tax expense | 13.2 | 1.2 | 9.2 | 0.8 | | Net income | 66.3 | 6.1 | 64.9 | 5.9 | | Net income per share - diluted | $3.55 | N/A | $3.44 | N/A | - Consolidated net sales increased by 0.1% in 2022 to $1,092.2 million, driven by a 4.2% organic sales increase (higher selling prices) partially offset by a 4.0% unfavorable foreign currency impact and a 0.1% unfavorable impact from the divestiture of the Coatings business93100 Net Sales by Geographic Area (in millions, except percentages) | Geographic Area | 2022 | % Change YoY | 2021 | | :---------------------- | :----- | :------------- | :----- | | Americas | $705.9 | 7.2 | $658.3 | | Europe, Middle East and Africa (EMEA) | $301.6 | (9.1) | $331.9 | | Asia Pacific (APAC) | $84.7 | (15.8) | $100.6 | | Total | $1,092.2 | 0.1 | $1,090.8 | - Gross profit margin decreased by 170 basis points to 38.5% in 2022 (from 40.2% in 2021), primarily due to broad effects of inflation on materials, labor, and freight costs, partly offset by higher selling prices and favorable sales mix98 - Selling and administrative expense decreased by $15.6 million to $306.3 million in 2022, representing 28.0% of net sales (down 150 basis points from 29.5% in 2021), mainly due to lower variable employee compensation expenses99 - The effective tax rate increased to 16.6% in 2022 from 12.5% in 2021, primarily driven by certain nonrecurring tax items104 - Order backlog increased significantly to $326.4 million at December 31, 2022, compared to $169.7 million at December 31, 2021, due to higher order rates and persistent supply chain challenges, and is expected to continue at this level in 2023106 Liquidity and Capital Resources The company's liquidity needs are met through operations and credit facilities, with cash decreasing in 2022 due to increased working capital investments and higher payments - Primary liquidity needs include funding working capital, investments, debt service, cash reserves, and capital expenditures, with sources from operations, revolving credit facility, and debt/equity offerings107 Cash, Cash Equivalents, and Restricted Cash (in millions) | Year | Amount | | :--- | :----- | | Dec 31, 2022 | $77.4 | | Dec 31, 2021 | $123.6 | - The current ratio was 2.2 as of December 31, 2022, up from 1.8 in 2021, and the debt-to-capital ratio was 40.9% in 2022, up from 38.1% in 2021108 Net Cash Flow from Operating Activities (in millions) | Year | Amount | | :--- | :----- | | 2022 | $(25.1) | | 2021 | $69.4 | - The increase in cash used in operating activities in 2022 was primarily driven by an increase in working capital (investments in inventory, higher accounts receivables) and increased cash payments for employee compensation, benefits, and income taxes110 Net Cash Flow from Investing Activities (in millions) | Year | Amount | | :--- | :----- | | 2022 | $(24.5) | | 2021 | $1.7 | Net Cash Flow from Financing Activities (in millions) | Year | Amount | | :--- | :----- | | 2022 | $8.1 | | 2021 | $(84.5) | - Significant contractual purchase obligations for 2023 are approximately $113 million113 Newly Issued Accounting Guidance The company adopted several ASUs (Income Taxes, Defined Benefit Plans, Reference Rate Reform, Financial Instruments-Credit Losses) in recent years, all with immaterial impacts - ASU No. 2019-12 (Income Taxes) was adopted on January 1, 2021, with an immaterial impact on consolidated financial statements208 - ASU No. 2018-14 (Defined Benefit Plans) was adopted in December 2022, with an immaterial impact on consolidated financial statements209 - ASU No. 2020-04 (Reference Rate Reform) was effective through December 31, 2022, with no material impact on financial condition, results of operations, or cash flows210 - ASU No. 2016-13 (Financial Instruments-Credit Losses) was adopted on January 1, 2020, with an immaterial impact on consolidated financial statements211 Critical Accounting Policies and Estimates The company's financial statements rely on estimates for goodwill impairment and income taxes, with annual goodwill tests showing no impairment in 2022 - Goodwill is analyzed annually (as of October 1) and when events or circumstances change, with a quantitative goodwill impairment test performed in 2022 on all reporting units, indicating no impairment116118119 Goodwill Balance (in millions) | December 31 | Amount | | :------------ | :----- | | 2022 | $182.0 | | 2021 | $193.1 | - Income taxes require estimating current tax obligations, establishing reserves for uncertain tax matters, and assessing deferred tax assets, with a valuation allowance provided when recovery is not more likely than not121122 Item 7A Quantitative and Qualitative Disclosures About Market Risk Tennant Company manages commodity, interest rate, and foreign currency exchange rate risks through supplier negotiations, hedging instruments, and pricing actions - The company is subject to commodity risk from potential cost increases for raw materials (steel, metal alloys, resin) and petroleum-related components, mitigated through supplier negotiations, supply chain optimization, cost-reduction actions, and product pricing128129130 - Interest rate risk from variable-rate debt is managed using interest rate swaps to reduce increased interest costs; as of December 31, 2022, $120 million notional amount of swaps exchange a variable rate for a fixed rate of 4.076% (maturing Dec 2026)131132 - Foreign currency exchange rate risk from global operations (Euro, AUD, CAD, GBP, JPY, CNY, BRL, MXN against USD) is actively managed using hedging instruments such as foreign exchange purchased options, forward contracts, and cross-currency swaps for forecasted revenues, sales, net assets/liabilities, intercompany loans, and net investments133134136137138 Item 8 Financial Statements and Supplementary Data This section includes the independent auditor's report with an unqualified opinion, consolidated financial statements, and detailed notes covering accounting policies and various financial accounts - Deloitte & Touche LLP issued an unqualified opinion on the consolidated financial statements and the effectiveness of internal control over financial reporting as of December 31, 2022141142153154 - Goodwill for the EMEA reporting unit was identified as a critical audit matter due to significant management judgments in estimating fair value, though no impairment was recognized146147148149 Report of Independent Registered Public Accounting Firm Deloitte & Touche LLP issued an unqualified opinion on Tennant Company's financial statements and internal controls, highlighting EMEA goodwill as a critical audit matter - Deloitte & Touche LLP issued an unqualified opinion on the Company's consolidated financial statements and internal control over financial reporting as of December 31, 2022141142153154 - Goodwill for the EMEA reporting unit was identified as a critical audit matter due to significant management estimates and assumptions related to forecasts of future revenues, profit margins, discount rates, and EBITDA multiples in determining its fair value146147149 - The EMEA goodwill balance was $145.8 million as of December 31, 2022, and no impairment was recognized148 Consolidated Financial Statements This section presents the core consolidated financial statements for Tennant Company, including Statements of Income, Comprehensive Income, Balance Sheets, Cash Flows, and Equity for 2020-2022 Consolidated Statements of Income (in millions, except shares and per share data) | Years ended December 31 | 2022 | 2021 | 2020 | | :------------------------ | :----- | :----- | :----- | | Net sales | $1,092.2 | $1,090.8 | $1,001.0 | | Gross profit | $420.9 | $438.0 | $407.8 | | Operating income | $87.2 | $93.7 | $63.7 | | Income before income taxes | $79.5 | $74.1 | $41.1 | | Net income | $66.3 | $64.9 | $33.7 | | Diluted EPS | $3.55 | $3.44 | $1.81 | Consolidated Statements of Comprehensive Income (in millions) | Years ended December 31 | 2022 | 2021 | 2020 | | :------------------------ | :----- | :----- | :----- | | Net income | $66.3 | $64.9 | $33.7 | | Total other comprehensive (loss) income, net of tax | $(12.3) | $(17.8) | $18.4 | | Comprehensive income | $54.0 | $47.1 | $52.1 | Consolidated Balance Sheets (in millions) | December 31 | 2022 | 2021 | | :------------------------------------------ | :----- | :----- | | Total current assets | $575.3 | $526.8 | | Total assets | $1,085.1 | $1,061.7 | | Total current liabilities | $261.6 | $290.3 | | Total liabilities | $613.0 | $626.6 | | Total equity | $472.1 | $435.1 | Consolidated Statements of Cash Flows (in millions) | Years ended December 31 | 2022 | 2021 | 2020 | | :------------------------------------------ | :----- | :----- | :----- | | Net cash (used in) provided by operating activities | $(25.1) | $69.4 | $133.8 | | Net cash (used in) provided by investing activities | $(24.5) | $1.7 | $(29.9) | | Net cash provided by (used in) financing activities | $8.1 | $(84.5) | $(42.8) | | Net (decrease) increase in cash, cash equivalents and restricted cash | $(46.2) | $(17.4) | $66.4 | | Cash, cash equivalents and restricted cash at end of year | $77.4 | $123.6 | $141.0 | Consolidated Statements of Equity (in millions, except shares and per share data) | December 31 | Common Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Total Tennant Company Shareholders' Equity | Total Equity | | :------------------------ | :----------- | :----------------------- | :---------------- | :----------------------------------- | :--------------------------------------- | :----------- | | 2022 | $7.0 | $56.0 | $458.0 | $(50.2) | $470.8 | $472.1 | | 2021 | $7.0 | $54.1 | $410.6 | $(37.9) | $433.8 | $435.1 | | 2020 | $6.9 | $54.7 | $363.3 | $(20.1) | $404.8 | $406.1 | Notes to the Consolidated Financial Statements This sub-section provides detailed explanations for various accounts and policies in the consolidated financial statements, covering operations, accounting policies, revenue, assets, liabilities, and equity 1 Summary of Significant Accounting Policies This note outlines Tennant Company's key accounting policies, including consolidation, foreign currency translation, inventory valuation, goodwill impairment, and revenue recognition - Tennant Company designs, manufactures, and markets solutions for quality cleaning performance, reduced environmental impact, and a cleaner, safer, healthier world, including floor maintenance equipment, sustainable cleaning technologies, aftermarket parts, and services170 - Foreign currency-denominated assets and liabilities are translated at year-end exchange rates, while income and expense items are translated at average exchange rates, with gains or losses included in accumulated other comprehensive loss174 - Inventories are valued at the lower of cost or net realizable value, determined on a first-in, first-out (FIFO) basis, except for North America inventories, which are determined on a last-in, first-out (LIFO) basis179 - Goodwill is analyzed annually as of October 1 and when events or circumstances change, with a quantitative goodwill impairment test performed in 2022 on all reporting units, indicating no impairment184185 - Revenue is recognized when control of promised products or services transfers to customers, generally at the point of shipment for products, and in the period the service is performed or ratably over the contract period for service revenue195196 2 Newly Adopted Accounting Pronouncements Tennant Company adopted several ASUs (Income Taxes, Defined Benefit Plans, Reference Rate Reform, Financial Instruments-Credit Losses) in recent years, all with immaterial impacts - ASU No. 2019-12, Income Taxes, was adopted on January 1, 2021, with an immaterial impact on consolidated financial statements208 - ASU No. 2018-14, Defined Benefit Plans, was adopted in December 2022, with an immaterial impact on consolidated financial statements209 - ASU No. 2020-04, Reference Rate Reform, was effective through December 31, 2022, with no material impact on financial condition, results of operations, or cash flows210 - ASU No. 2016-13, Financial Instruments-Credit Losses, was adopted on January 1, 2020, with an immaterial impact on consolidated financial statements211 3 Revenue Revenue is recognized upon transfer of control, disaggregated by geographic area, product/service, and sales channel, with total net sales of $1,092.2 million in 2022 - Revenue is recognized upon transfer of control of promised products or services to customers, measured as the consideration expected to be received213 Net Sales by Geographic Area (in millions) | Geographic Area | 2022 | 2021 | 2020 | | :---------------------- | :----- | :----- | :----- | | Americas | $705.9 | $658.3 | $631.0 | | Europe, Middle East and Africa (EMEA) | $301.6 | $331.9 | $278.2 | | Asia Pacific (APAC) | $84.7 | $100.6 | $91.8 | | Total | $1,092.2 | $1,090.8 | $1,001.0 | Net Sales by Groups of Similar Products and Services (in millions) | Product/Service Group | 2022 | 2021 | 2020 | | :---------------------- | :----- | :----- | :----- | | Equipment | $664.0 | $679.9 | $629.7 | | Parts and consumables | $263.1 | $249.3 | $205.8 | | Specialty surface coatings | — | $1.5 | $22.7 | | Service and other | $165.1 | $160.1 | $142.8 | | Total | $1,092.2 | $1,090.8 | $1,001.0 | Net Sales by Sales Channel (in millions) | Sales Channel | 2022 | 2021 | 2020 | | :-------------------- | :----- | :----- | :----- | | Sales direct to consumer | $712.6 | $692.4 | $664.9 | | Sales to distributors | $379.6 | $398.4 | $336.1 | | Total | $1,092.2 | $1,090.8 | $1,001.0 | - Deferred revenue, primarily from prepaid maintenance contracts (12 to 60 months), had an ending balance of $9.3 million as of December 31, 2022, with $6.6 million expected to be recognized in net sales in 2023220221222 4 Management Actions Tennant Company incurred $4.1 million in pre-tax restructuring costs in both 2022 and 2021 as part of global reorganization efforts to increase productivity Total Pre-Tax Restructuring Costs (in millions) | Cost Type | 2022 | 2021 | | :------------------------------------------ | :----- | :----- | | Severance-related costs - Selling and administrative expense | $2.2 | $3.3 | | Severance-related costs - Cost of sales | — | $0.8 | | Other costs - Selling and administrative expense | $1.6 | — | | Other costs - Cost of sales | $0.3 | — | | Total | $4.1 | $4.1 | - Restructuring charges in 2022 impacted all operating segments, while charges in 2021 primarily impacted the EMEA and APAC operating segments223 Reconciliation of Severance and Related Costs Liability (in millions) | Year | Beginning balance | New charges | Cash payments | Ending balance | | :--- | :---------------- | :---------- | :------------ | :------------- | | 2022 | $4.9 | $2.2 | $(2.9) | $1.7 | | 2021 | $4.5 | $4.1 | $(2.9) | $4.9 | 5 Acquisitions and Divestitures In 2022, the company sold a building for a $3.7 million gain, following the 2021 divestiture of its Coatings business for a $9.8 million gain - In 2022, the company sold a building in Golden Valley, Minnesota, resulting in a pre-tax gain of $3.7 million and proceeds of $4.1 million227 - In 2021, the Coatings business was sold, resulting in a pre-tax gain of $9.8 million and cash proceeds of $24.7 million228 - On January 4, 2019, Tennant Company acquired Hefei Gaomei Cleaning Machines Co., Ltd. and Anhui Rongen Environmental Protection Technology Co., Ltd. (collectively "Gaomei")229 6 Inventories Inventories are valued at the lower of cost or net realizable value, with total inventories increasing to $206.6 million in 2022, and a LIFO charge of $6.7 million - Inventories are valued at the lower of cost or net realizable value, with cost determined on a FIFO basis except for North America, which uses LIFO179 Inventories as of December 31 (in millions) | Category | 2022 | 2021 | | :-------------------------------- | :----- | :----- | | Inventories carried at LIFO: | | | | Finished goods | $85.0 | $54.0 | | Raw materials and work-in-process | $46.4 | $42.4 | | Excess of FIFO over LIFO cost | $(49.7) | $(43.0) | | Total LIFO inventories | $81.7 | $53.4 | | Inventories carried at FIFO: | | | | Finished goods | $68.9 | $53.8 | | Raw materials and work-in-process | $56.0 | $53.4 | | Total FIFO inventories | $124.9 | $107.2 | | Total inventories | $206.6 | $160.6 | - The LIFO charge for the twelve months ended December 31, 2022, was $6.7 million, compared to $10.6 million in 2021, with increases in both periods attributable to the broad effects of inflation230 7 Property, Plant and Equipment Net property, plant and equipment increased to $179.9 million in 2022, with depreciation expense of $32.8 million Property, Plant and Equipment, Net (in millions) | December 31 | 2022 | 2021 | | :------------------------------------------ | :----- | :----- | | Property, plant and equipment | $459.2 | $431.2 | | Less: accumulated depreciation | $(279.3) | $(258.4) | | Property, plant and equipment, net | $179.9 | $172.8 | Depreciation Expense (in millions) | Year | Amount | | :--- | :----- | | 2022 | $32.8 | | 2021 | $33.1 | | 2020 | $32.6 | 8 Goodwill and Intangible Assets Goodwill, allocated to reporting units, decreased to $182.0 million in 2022 due to foreign currency, with no impairment recognized after annual testing - Goodwill is allocated to North America, Latin America, EMEA, and APAC reporting units and tested annually for impairment, with a quantitative test in 2022 finding no impairment232233 Changes in Carrying Amount of Goodwill (in millions) | December 31 | Goodwill | Accumulated Impairment Losses | Total | | :------------ | :------- | :---------------------------- | :---- | | 2022 | $218.8 | $(36.8) | $182.0 | | 2021 | $233.9 | $(40.8) | $193.1 | | Change (2022 vs 2021) | $(15.1) | $4.0 | $(11.1) | Balances of Acquired Intangible Assets, Excluding Goodwill (in millions) | Category | 2022 | 2021 | | :-------------------- | :----- | :----- | | Customer Lists | $59.1 | $75.4 | | Trade Names | $12.7 | $16.4 | | Technology | $4.6 | $6.2 | | Total Carrying Amount | $76.4 | $98.0 | Amortization Expense of Intangible Assets (in millions) | Year | Amount | | :--- | :----- | | 2022 | $15.9 | | 2021 | $20.0 | | 2020 | $20.8 | 9 Debt Tennant Company's total debt was $300.3 million in 2022, primarily from a senior secured credit facility amended to use Term SOFR, with a weighted average cost of 5.0% - The 2021 Credit Agreement provides a senior secured credit facility until April 3, 2026, consisting of a term loan facility up to $100.0 million and a revolving facility up to $450.0 million237 - The 2021 Credit Agreement was amended on November 10, 2022, to replace LIBOR with Term SOFR as the reference rate for calculating interest238239 Debt Outstanding as of December 31 (in millions) | Category | 2022 | 2021 | | :-------------------------- | :----- | :----- | | Revolving credit facility borrowings | $205.0 | $168.0 | | Term loan facility borrowings | $95.0 | $98.8 | | Secured borrowings | $0.2 | $0.7 | | Finance lease liabilities | $0.1 | $0.1 | | Total debt | $300.3 | $267.6 | - As of December 31, 2022, the company had approximately $242.2 million of unused borrowing capacity on its revolving facility, and the overall weighted average cost of debt was approximately 5.0% (4.1% net of a related cross-currency swap)245 10 Other Current Liabilities Other current liabilities totaled $86.3 million in 2022, down from $104.0 million in 2021, including taxes, warranty reserves, and deferred revenue Other Current Liabilities as of December 31 (in millions) | Category | 2022 | 2021 | | :-------------------------- | :----- | :----- | | Taxes | $11.1 | $13.8 | | Warranty | $7.8 | $10.4 | | Deferred revenue | $6.6 | $7.7 | | Customer sales incentives | $20.0 | $19.9 | | Freight | $6.4 | $7.1 | | Restructuring | $1.7 | $4.9 | | Operating leases | $15.0 | $16.4 | | Cash flow hedge liabilities | — | $10.4 | | Miscellaneous accrued expenses | $17.7 | $13.4 | | Total other current liabilities | $86.3 | $104.0 | 11 Derivatives Tennant Company uses derivative instruments (cross-currency swaps, interest rate swaps, foreign exchange contracts) to manage foreign exchange and interest rate volatility, recognized at fair value - The company uses cross-currency swaps, interest rate swaps, and foreign exchange forward and option contracts to manage risks associated with foreign exchange rate and interest rate volatility, recognizing all derivative instruments at fair value on the consolidated balance sheets193248 - Hedging programs include balance sheet hedges (foreign exchange forward contracts for net recognized foreign currency assets/liabilities), cash flow hedges (foreign currency exchange rate derivatives for anticipated intercompany cash transactions and interest rate swaps for floating rate debt), fair value hedges (Euro to U.S. dollar cross-currency swaps for intercompany loans), and net investment hedges (Euro to U.S. dollar cross-currency swaps for net investment in Euro functional currency subsidiary)251252254255256 Fair Value of Derivative Instruments on Consolidated Balance Sheets (in millions) | Category | Dec 31, 2022 (Assets) | Dec 31, 2021 (Assets) | Dec 31, 2022 (Liabilities) | Dec 31, 2021 (Liabilities) | | :------------------------------------------ | :-------------------- | :-------------------- | :------------------------- | :------------------------- | | Derivatives designated as cash flow hedges: | | | | | | Foreign currency forward contracts | — | — | — | $10.4 | | Interest rate swaps | $0.8 | — | $1.8 | — | | Derivatives designated as fair value hedges: | | | | | | Cross-currency swaps | $2.2 | — | — | — | | Derivatives designated as net investment hedges: | | | | | | Cross-currency swaps | $1.7 | — | — | — | | Derivatives not designated as hedging instruments: | | | | | | Foreign currency forward contracts | $0.1 | $0.3 | $0.3 | $0.4 | | Total Assets | $4.8 | $0.9 | | | | Total Liabilities | | | $2.1 | $11.4 | 12 Fair Value Measurements Fair value measurements for financial assets and liabilities are categorized into a three-level hierarchy, with most derivatives valued using Level 2 observable market inputs - Fair value measurements are categorized into a three-level hierarchy: Level 1 (quoted prices in active markets), Level 2 (observable inputs other than quoted prices), and Level 3 (unobservable inputs)262 Assets and Liabilities Subject to Fair Value Measurements (in millions, as of Dec 31, 2022) | Category | 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 | — | - The fair value of total debt, including the current portion, was $301.8 million, approximating its carrying value of $300.3 million as of December 31, 2022, calculated based on Level 2 inputs (borrowing rates for similar bank loans)264 13 Retirement Benefit Plans Tennant Company provides various retirement benefits, including 401(k) and defined benefit pension plans in the UK, Germany, France, and Italy, with total benefit costs of $11.6 million in 2022 Total Cost of Benefits (in millions) | Year | Amount | | :--- | :----- | | 2022 | $11.6 | | 2021 | $14.8 | | 2020 | $12.3 | - U.S. employees are covered by a 401(k) plan (expenses $6.0 million in 2022), a postretirement medical benefit plan for those hired before 1999, and a nonqualified supplemental benefit plan267268269 - Defined benefit pension plans exist in the United Kingdom, Germany, France, and Italy, all closed to new participants, with the German Pension Plan being unfunded270274 - The U.K. Pension Plan's investment account, held in insurance contracts, had a fair value of $11.3 million as of December 31, 2022, classified as Level 3272 Funded Status of Defined Benefit and Postretirement Medical Benefit Plans (in millions, as of Dec 31, 2022) | Plan | Funded Status | | :---------------------------- | :------------ | | U.S. Nonqualified Plan | $(0.9) | | Non-U.S. Pension Benefits | $1.0 | | Postretirement Medical Benefits | $(5.4) | Expected Benefit Payments (in millions) | Year | U.S. Nonqualified Plan | Non-U.S. Pension Benefits | Postretirement Medical Benefits | | :--- | :--------------------- | :------------------------ | :------------------------------ | | 2023 | $0.1 | $0.5 | $0.7 | | Total (2023-2030) | $0.9 | $6.6 | $5.4 | 14 Shareholders' Equity Total shareholders' equity increased to $470.8 million in 2022, with accumulated other comprehensive loss increasing due to foreign currency, and $5.0 million in share repurchases - The company is authorized to issue an aggregate of 60,000,000 shares of Common Stock, with a par value of $0.375 per share283 Total Tennant Company Shareholders' Equity (in millions) | December 31 | Amount | | :------------ | :----- | | 2022 | $470.8 | | 2021 | $433.8 | Changes in Accumulated Other Comprehensive Loss, Net of Tax (in millions) | December 31 | Foreign Currency Translation Adjustments | Pension and Postretirement Medical Benefits | Derivative Financial Instruments | Total | | :------------ | :----------------------------------- | :---------------------------------------- | :----------------------------- | :------ | | 2022 | $(53.9) | $2.7 | $1.0 | $(50.2) | | 2021 | $(36.0) | $(2.1) | $0.2 | $(37.9) | | Change (2022 vs 2021) | $(17.9) | $4.8 | $0.8 | $(12.3) | - During 2022, the company repurchased 79,756 shares of common stock for $5.0 million, with 1,112,333 shares remaining authorized for repurchase285 15 Leases Tennant Company leases facilities, vehicles, and equipment, with operating lease assets decreasing to $31.8 million in 2022 and total lease cost of $26.3 million Lease Assets and Liabilities as of December 31 (in millions) | Category | 2022 | 2021 | | :------------------------------------------ | :----- | :----- | | Operating lease assets | $31.8 | $41.3 | | Finance lease assets | $0.2 | $0.1 | | Total leased assets | $32.0 | $41.4 | | Operating lease liabilities (current + noncurrent) | $32.1 | $41.8 | | Finance lease liabilities (current + noncurrent) | $0.1 | $0.1 | | Total lease liabilities | $32.2 | $41.9 | Total Lease Cost (in millions) | Year | Amount | | :--- | :----- | | 2022 | $26.3 | | 2021 | $26.7 | | 2020 | $25.3 | - As of December 31, 2022, the aggregate residual value at lease expiration for certain vehicle operating leases was $11.4 million, of which the company guaranteed $5.5 million287 16 Commitments and Contingencies The company does not expect pending litigation, tax, environmental, and other matters to materially affect its financial position or results of operations - The company does not expect pending and threatened litigation, tax, environmental, and other matters to have a material adverse effect on its consolidated financial position or results of operations290 - Legal costs associated with such matters are expensed as incurred290 17 Income Taxes Income tax expense increased to $13.2 million in 2022, with an effective tax rate of 16.6%, primarily due to nonrecurring tax items Total Income Tax Expense (in millions) | Year | Amount | | :--- | :----- | | 2022 | $13.2 | | 2021 | $9.2 | | 2020 | $7.4 | Effective Income Tax Rate | Year | Rate | | :--- | :----- | | 2022 | 16.6% | | 2021 | 12.5% | | 2020 | 17.9% | - The increase in the effective tax rate in 2022 was primarily driven by certain nonrecurring tax items104 Net Deferred Tax Assets (Liabilities) as of December 31 (in millions) | Category | 2022 | 2021 | | :------------------------------------------ | :----- | :----- | | Gross deferred tax assets | $43.3 | $44.1 | | Less: valuation allowance | $(3.3) | $(4.8) | | Total net deferred tax assets | $40.0 | $39.3 | | Total deferred tax liabilities | $31.1 | $44.1 | | Net deferred tax assets (liabilities) | $8.9 | $(4.8) | - A valuation allowance of $3.3 million was recorded as of December 31, 2022, principally against tax credit carryforwards in the Netherlands and certain U.S. states, with a net valuation allowance release of $1.5 million occurring in 2022295296 - Unrecognized tax benefits totaled $4.2 million as of December 31, 2022, down from $4.7 million in 2021297 18 Share-Based Compensation Total share-based compensation expense was $7.8 million in 2022, covering stock options, restricted shares, performance shares, and restricted stock units with various vesting periods Total Share-Based Compensation Expense (in millions) | Year | Amount | | :--- | :----- | | 2022 | $7.8 | | 2021 | $9.5 | | 2020 | $6.0 | - Stock option awards are valued using the Black-Scholes model; 931,843 shares were outstanding at year-end 2022, with $1.5 million in unrecognized compensation cost304307 - Restricted share awards for employees generally have a three-year vesting period; 75,412 nonvested shares remained at year-end 2022, with $1.5 million in unrecognized compensation cost308309 - Performance share awards (PSUs) are earned based on financial performance targets over a three-year period; 134,763 nonvested shares remained at year-end 2022, with $3.6 million in unrecognized compensation cost310311 - Restricted stock units (RSUs) generally vest within three years; 114,704 nonvested units remained at year-end 2022, with $3.1 million in unrecognized compensation cost312313 19 Income Attributable to Tennant Company Per Share Diluted earnings per share for Tennant Company was $3.55 in 2022, an increase from $3.44 in 2021, including the effect of dilutive securities Earnings Per Share | Year | Basic EPS | Diluted EPS | | :--- | :-------- | :---------- | | 2022 | $3.58 | $3.55 | | 2021 | $3.51 | $3.44 | | 2020 | $1.84 | $1.81 | Weighted Average Shares Outstanding (Diluted) | Year | Basic | Effect of Dilutive Securities | Diluted | | :--- | :---------- | :-------------------------- | :---------- | | 2022 | 18,494,356 | 202,899 | 18,697,255 | | 2021 | 18,499,674 | 349,543 | 18,849,217 | | 2020 | 18,349,724 | 285,278 | 18,635,002 | - Excluded from dilutive securities were 649,054 shares in 2022 (171,273 in 2021, 610,118 in 2020) that were anti-dilutive due to exercise prices greater than market price, repurchase method exceeding weighted shares, or a net loss315 20 Segment Reporting Tennant Company is organized into four operating segments (North America, Latin America, EMEA, APAC), aggregated into one reportable segment focused on nonresidential surface maintenance products - The company is organized into four operating segments: North America, Latin America, Europe, Middle East, Africa (EMEA), and Asia Pacific (APAC)316 - Operating segments are aggregated into one reportable segment focused on the design, manufacture, and sale of products for the maintenance of nonresidential surfaces316 Net Sales by Geographic Area (in millions) | Geographic Area | 2022 | 2021 | 2020 | | :------------------------ | :----- | :----- | :----- | | United States | $618.8 | $566.4 | $546.2 | | Other Americas | $87.1 | $91.9 | $84.8 | | Americas | $705.9 | $658.3 | $631.0 | | Europe, Middle East, Africa | $301.6 | $331.9 | $278.2 | | Asia Pacific | $84.7 | $100.6 | $91.8 | | Total | $1,092.2 | $1,090.8 | $1,001.0 | Long-Lived Assets by Geographic Area (in millions, as of Dec 31) | Geographic Area | 2022 | 2021 | 2020 | | :------------------------ | :----- | :----- | :----- | | United States | $105.9 | $106.6 | $121.9 | | Other Americas | $26.4 | $18.8 | $14.7 | | Americas | $132.3 | $125.4 | $136.6 | | Italy | $223.5 | $280.4 | $321.5 | | Other Europe, Middle East, Africa | $69.6 | $36.2 | $34.0 | | Europe, Middle East, Africa | $293.1 | $316.6 | $355.5 | | Asia Pacific | $32.1 | $35.8 | $37.5 | | Total | $457.5 | $477.8 | $529.6 | Part III Item 10 Directors, Executive Officers and Corporate Governance This section incorporates director information from the Proxy Statement, lists executive officers, and references the company's Business Ethics Guide applicable to all personnel - Key executive officers include Barb Balinski (SVP, Innovation and Technology), David W. Huml (President and CEO), Carol E. McKnight (SVP, Chief Administrative Officer), Kristin A. Erickson (SVP, General Counsel and Corporate Secretary), Fay West (SVP, Chief Financial Officer), and Richard H. Zay (SVP, Chief Commercial Officer)353637383940 - The Tennant Company Business Ethics Guide applies to all employees, directors, consultants, and agents, including specific provisions for senior financial management, and is available on the Investor Relations website334 Item 11 Executive Compensation Information regarding executive compensation is incorporated by reference from the company's 2023 Proxy Statement - Information required under this item is contained in the sections entitled "Director Compensation," "Executive Compensation Information" and "Pay Ratio" as part of the 2023 Proxy Statement and is incorporated herein by reference335 Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters Information regarding security ownership of beneficial owners and management, and equity compensation plans, is incorporated by reference from the 2023 Proxy Statement - Information required under this item is contained in the sections entitled "Security Ownership of Certain Beneficial Owners and Management" and "Equity Compensation Plan Information" as part of the 2023 Proxy Statement and is incorporated herein by reference336 Item 13 Certain Relationships and Related Transactions, and Director Independence Information concerning director independence and the related-person transaction approval policy is incorporated by reference from the company's 2023 Proxy Statement - Information required under this item is contained in the sections entitled "Director Independence" and "Related-Person Transaction Approval Policy" as part of the 2023 Proxy Statement and is incorporated herein by reference337 Item 14 Principal Accountant Fees and Services Information regarding fees paid to the independent registered public accounting firm is incorporated by reference from the company's 2023 Proxy Statement - Information required under this item is contained in the section entitled "Fees Paid to Independent Registered Public Accounting Firm" as part of the 2023 Proxy Statement and is incorporated herein by reference338 Part IV Item 15 Exhibits and Financial Statement Schedules This section lists all financial statements, schedules, and exhibits filed as part of the 10-K report, including consolidated financial statements and a comprehensive exhibit list - Consolidated financial statements and related notes, along with reports of Deloitte & Touche LLP, are filed as part of this report in Part II, Item 8341 Schedule II - Valuation and Qualifying Accounts (in millions) | Category | 2022 | 2021 | 2020 | | :------------------------------------------ | :----- | :----- | :----- | | Allowance for doubtful accounts | $6.1 | $5.3 | $4.6 | | Sales returns reserve | $1.4 | $1.0 | $1.0 | | Allowance for excess and obsolete inventories | $14.2 | $14.3 | $13.6 | | Valuation allowance for deferred tax assets | $3.3 | $4.8 | $7.5 | | Warranty reserve | $10.9 | $10.4 | $11.1 | - A comprehensive list of exhibits is provided, including Restated Articles of Incorporation, Amended and Restated By-Laws, various Stock Incentive Plans, and the Credit Agreement, with many incorporated by reference344346349 Item 16 Form 10-K Summary This item indicates that no Form 10-K Summary is provided - No Form 10-K Summary is provided350