Tennant(TNC) - 2021 Q4 - Annual Report

Part I Business Tennant Company, a global leader in cleaning solutions across Americas, EMEA, and APAC, navigated 2021 raw material inflation while prioritizing human capital - The company operates 11 global manufacturing locations and serves customers in over 100 countries through direct sales and a distributor network[10][14] - Principal products include mechanized cleaning equipment, detergent-free technologies, aftermarket parts, and maintenance services, marketed under brands like Tennant®, Nobles®, and IPC®[12][13] - In 2021, the company experienced raw material price inflation and supply constraints for components like steel, metal alloys, and resin, which it expects to continue[15] - As of December 31, 2021, women represented 57% of the executive management team and 33% of the Board of Directors[26] Employees by Gender and Region as of December 31, 2021 | | Female | Male | Total | | :--- | :--- | :--- | :--- | | Americas | 404 | 1,776 | 2,180 | | Europe, Middle East, Africa | 406 | 1,265 | 1,671 | | Asia Pacific | 156 | 256 | 412 | | Total | 966 | 3,297 | 4,263 | Risk Factors The company identifies macroeconomic, industry, and operational risks, including economic downturns, supply chain disruptions, and challenges in talent management and IT systems - Macroeconomic risks include potential long-term economic downturns affecting capital spending, uncertainty from the COVID-19 pandemic impacting supply chains and labor, and the high cost of compliance with complex international laws[42][43][45] - Industry risks stem from a competitive marketplace with price sensitivity, challenges in developing innovative products, and significant disruptions in the availability and cost of raw materials and components like semiconductors[46][47][50] - Operational risks include the inability to attract and retain key personnel, difficulties in managing strategic growth processes, potential failures in upgrading IT infrastructure, cybersecurity threats, and challenges in successfully integrating acquired businesses[55][58][60][65] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - None[69] Properties The company owns corporate offices and manufacturing facilities in several countries, with all facilities reported to be in good operating condition - The company owns its corporate offices in the Minneapolis, Minnesota metropolitan area[70] - Owned manufacturing facilities are located in Minneapolis, MN; Holland, MI; Uden, The Netherlands; and several cities in Italy, while leased facilities are in Louisville, KY; São Paulo, Brazil; and Hefei, China[70] Legal Proceedings The company states there are no material pending legal proceedings beyond ordinary routine litigation incidental to its business - There are no material pending legal proceedings other than ordinary routine litigation incidental to the Company's business[73] Mine Safety Disclosures This item is not applicable to the company - Not applicable[74] Part II 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 50-year history of increased dividends, and the company repurchased $15.0 million of its stock in 2021, though its performance lagged major indices - The company's annual cash dividend increased for the 50th consecutive year to $0.94 per share in 2021[78] - In the twelve months ended December 31, 2021, the company repurchased 196,982 shares of its common stock for $15.0 million[80] Share Repurchases for Quarter Ended December 31, 2021 | Period | Total Shares Purchased | Average Price Paid Per Share | Shares Purchased as Part of Publicly Announced Programs | | :--- | :--- | :--- | :--- | | October 1–31, 2021 | 63,692 | $77.26 | 63,674 | | November 1–30, 2021 | 31,173 | $82.97 | 31,079 | | December 1–31, 2021 | 8,902 | $83.46 | — | | Total | 103,767 | $79.51 | 94,753 | Stock Performance Comparison (2016-2021, Indexed to $100) | | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Tennant Company | $100 | $103 | $75 | $114 | $104 | $121 | | S&P SmallCap 600 | $100 | $113 | $104 | $127 | $142 | $180 | | S&P 500 Industrials (Sector) | $100 | $121 | $105 | $136 | $151 | $183 | Management's Discussion and Analysis of Financial Condition and Results of Operations In 2021, Tennant Company's net sales grew 9.0% to $1,090.8 million with net income nearly doubling, despite gross margin pressure from inflation and decreased operating cash flow Historical Results Consolidated net sales for 2021 increased 9.0% to $1,090.8 million due to organic growth across all regions, leading to a significant rise in operating and net income despite gross margin decline Financial Performance Summary (2021 vs. 2020, In millions) | Metric | 2021 | 2020 | Change | | :--- | :--- | :--- | :--- | | Net Sales | $1,090.8 | $1,001.0 | +9.0% | | Gross Profit | $438.0 | $407.8 | +7.4% | | Gross Margin | 40.2% | 40.7% | -50 bps | | Operating Income | $93.7 | $63.7 | +47.1% | | Net Income | $64.9 | $33.7 | +92.6% | | Diluted EPS | $3.44 | $1.81 | +90.1% | Net Sales by Geographic Area (2021 vs. 2020, In millions) | Region | 2021 Net Sales | 2020 Net Sales | % Change | | :--- | :--- | :--- | :--- | | Americas | $658.3 | $631.0 | +4.3% | | EMEA | $331.9 | $278.2 | +19.3% | | APAC | $100.6 | $91.8 | +9.6% | | Total | $1,090.8 | $1,001.0 | +9.0% | - The 9.0% increase in consolidated net sales was driven by a 9.1% organic sales increase, a 2.1% unfavorable impact from the divestiture of the Coatings business, and a 2.0% favorable impact from foreign currency exchange[96] - The company recorded a one-time loss on extinguishment of debt of $11.3 million in 2021 due to debt restructuring[106] Liquidity and Capital Resources The company maintained strong liquidity with $123.6 million cash at year-end 2021, restructured debt for lower interest, and improved its debt-to-capital ratio, despite decreased operating cash flow due to inventory and receivables increases - Cash, cash equivalents, and restricted cash totaled $123.6 million at December 31, 2021, compared to $141.0 million at year-end 2020[112] - In Q2 2021, the company entered a new credit agreement with a $100.0 million term loan and a $450.0 million revolving facility, using the proceeds to retire its 5.625% Senior Notes, which is expected to lower future interest expense by approximately $1.0 million per month[113] - Cash provided by operating activities was $69.4 million in 2021, a decrease from 2020, driven by outflows from a $56.0 million increase in inventory and a $20.3 million increase in receivables[115] - The debt-to-capital ratio improved from 43.2% at the end of 2020 to 38.1% as of December 31, 2021[112] Critical Accounting Policies and Estimates Goodwill, totaling $193.1 million, and Income Taxes are critical accounting policies requiring significant judgment, with goodwill tested annually for impairment and a $4.8 million valuation allowance for deferred tax assets - Goodwill is tested for impairment annually as of October 1, with a qualitative test used for most reporting units and a quantitative test for the EMEA unit in 2021, recognizing no impairment[124][125] - The carrying amount of goodwill was $193.1 million as of December 31, 2021[126] - Income tax accounting requires significant estimates for current tax obligations, reserves for uncertain tax matters, and assessing the need for a valuation allowance against deferred tax assets, with a valuation allowance of $4.8 million recorded as of December 31, 2021[127][128] Quantitative and Qualitative Disclosures About Market Risk The company faces market risks from commodity price fluctuations, interest rate changes on its $266.8 million variable-rate debt, and foreign currency volatility, which it actively manages through hedging instruments - The company is exposed to commodity price risk for materials such as steel, oil, and lead, but does not use derivative instruments to manage this exposure[134] - As of December 31, 2021, the company has $266.8 million in variable-rate debt, where a hypothetical 50 basis point increase in short-term interest rates would have increased 2021 interest expense by approximately $1.0 million[138] - The company actively manages foreign currency exchange rate risk for currencies like the euro, Australian and Canadian dollars, and others using hedging instruments, including forward contracts and cross-currency swaps[139][140] Financial Statements and Supplementary Data This section includes unqualified audit opinions on financial statements and internal controls, identifying goodwill impairment for EMEA as a critical audit matter, and presents detailed consolidated financial statements and notes Reports of Independent Registered Public Accounting Firms Deloitte & Touche LLP issued unqualified opinions on the consolidated financial statements and internal controls, highlighting the goodwill impairment test for the EMEA reporting unit as a critical audit matter - The independent auditor, Deloitte & Touche LLP, provided an unqualified opinion on the financial statements for 2021 and 2020[145] - The auditor also issued an unqualified opinion on the effectiveness of the Company's internal control over financial reporting as of December 31, 2021[156] - The audit identified the goodwill impairment evaluation for the EMEA reporting unit as a Critical Audit Matter, due to the significant judgments required by management in forecasting future revenues, profit margins, and selecting discount rates[151][153] Consolidated Financial Statements The consolidated financial statements show 2021 net sales of $1,090.8 million, net income of $64.9 million, total assets of $1,061.7 million, and a net decrease in cash of $17.4 million Consolidated Statements of Income Highlights (Year ended Dec 31, In millions) | (In millions) | 2021 | 2020 | | :--- | :--- | :--- | | Net sales | $1,090.8 | $1,001.0 | | Gross profit | $438.0 | $407.8 | | Operating income | $93.7 | $63.7 | | Net income attributable to Tennant Company | $64.9 | $33.7 | Consolidated Balance Sheets Highlights (As of Dec 31, In millions) | (In millions) | 2021 | 2020 | | :--- | :--- | :--- | | Total current assets | $526.8 | $493.6 | | Total assets | $1,061.7 | $1,082.6 | | Total current liabilities | $290.3 | $254.3 | | Long-term debt | $263.4 | $297.6 | | Total equity | $435.1 | $406.1 | Consolidated Statements of Cash Flows Highlights (Year ended Dec 31, In millions) | (In millions) | 2021 | 2020 | | :--- | :--- | :--- | | Net cash provided by operating activities | $69.4 | $133.8 | | Net cash provided by (used in) investing activities | $1.7 | $(29.9) | | Net cash used in financing activities | $(84.5) | $(42.8) | | Net (decrease) increase in cash | $(17.4) | $66.4 | Notes to the Consolidated Financial Statements Detailed notes reveal equipment sales as the largest revenue category, a $9.8 million gain from the Coatings business sale, debt restructuring, increased inventories, and $15.0 million in share repurchases 2021 Net Sales Disaggregation (In millions) | Category | Amount (in millions) | | :--- | :--- | | By Geography: | | | Americas | $658.3 | | EMEA | $331.9 | | APAC | $100.6 | | By Product/Service: | | | Equipment | $679.9 | | Parts and consumables | $249.3 | | Service and other | $160.1 | - In the first quarter of 2021, the company sold its Coatings business, resulting in a pre-tax gain of $9.8 million and net proceeds of $24.7 million[239] - On April 5, 2021, the company entered into a new credit agreement providing a $100.0 million term loan and a $450.0 million revolving facility, which was used to redeem its $300.0 million 5.625% Senior Notes[248][252] - During 2021, the company paid $15.0 million to repurchase 196,982 shares of its common stock at an average price of $76.13 per share[298] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[336] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2021, with no significant changes reported during Q4 - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of December 31, 2021[337] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2021, based on the COSO framework[342] - There were no significant changes in internal control over financial reporting during the fourth quarter of 2021[344] Other Information The company reports no other information for this item - None[345] Part III Directors, Executive Officers and Corporate Governance Information on directors and executive officers is incorporated by reference from the 2022 Proxy Statement, and the company maintains a Business Ethics Guide - Required information regarding directors is incorporated by reference from the 2022 Proxy Statement[349] - The company has adopted the Tennant Company Business Ethics Guide, which is available on its investor relations website[350] Executive Compensation Information regarding executive compensation, including the CEO pay ratio, is incorporated by reference from the company's 2022 Proxy Statement - Information required under this item is contained in the company's 2022 Proxy Statement and is incorporated by reference[351] Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters Information on security ownership and equity compensation plans is incorporated by reference from the company's 2022 Proxy Statement - Information required under this item is contained in the company's 2022 Proxy Statement and is incorporated by reference[352] Certain Relationships and Related Transactions, and Director Independence Information on director independence and related-person transaction policies is incorporated by reference from the company's 2022 Proxy Statement - Information required under this item is contained in the company's 2022 Proxy Statement and is incorporated by reference[353] Principal Accountant Fees and Services Information detailing fees paid to the independent registered public accounting firm is incorporated by reference from the company's 2022 Proxy Statement - Information required under this item is contained in the company's 2022 Proxy Statement and is incorporated by reference[354] Part IV Exhibits and Financial Statement Schedules This section lists financial statements, the schedule for valuation and qualifying accounts, and various exhibits filed as part of the Form 10-K Schedule II - Valuation and Qualifying Accounts (2021, In millions) | (In millions) | Beginning Balance | Charged to Costs | Deductions/Other | Ending Balance | | :--- | :--- | :--- | :--- | :--- | | Allowance for doubtful accounts | $4.6 | $1.5 | $(0.8) | $5.3 | | Allowance for excess and obsolete inventories | $13.6 | $1.7 | $(1.0) | $14.3 | | Valuation allowance for deferred tax assets | $7.5 | $(2.6) | $(0.1) | $4.8 | | Warranty reserve | $11.1 | $8.5 | $(9.2) | $10.4 | Form 10-K Summary The company reports no summary for this item - None[362]