TENNANT CO - Quarter Report: 2021 September (Form 10-Q)

tnc20210930_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☑

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

For the quarterly period ended September 30, 2021

	☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the transition period from ___________ to __________

Commission File Number 1-16191

____________________________________

TENNANT COMPANY

(Exact name of registrant as specified in its charter)

Minnesota	41-0572550
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

10400 Clean Street

Eden Prairie, Minnesota 55344

(Address of principal executive offices)

(Zip Code)

(763) 540-1200

(Registrant’s telephone number, including area code)

______________________________________________

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

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Common Stock, par value $0.375 per share		TNC		New York Stock Exchange

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

Yes

☑

☐

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

Yes

☑

☐

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

Large accelerated filer	☑	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
Emerging growth company	☐

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

☐

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

Yes

☐

☑

As of October 22, 2021, there were 18,536,215 shares of Common Stock outstanding.

Table of Contents

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION		Page
Item 1.	Financial Statements	3
	Consolidated Statements of Income	3
	Consolidated Statements of Comprehensive Income	3
	Consolidated Balance Sheets	4
	Consolidated Statements of Cash Flows	5
	Consolidated Statements of Equity	7
	Notes to Consolidated Financial Statements	8
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	18
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	23
Item 4.	Controls and Procedures	23
PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	23
Item 1A.	Risk Factors	23
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	24
Item 6.	Exhibits	24
Signatures		25

Table of Contents

PART I – FINANCIAL INFORMATION

Item 1.

Financial Statements

TENNANT COMPANY

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

	*Three Months Ended*						*Nine Months Ended*
(In millions, except shares and per share data)	*September 30,*						*September 30,*
	*2021*			*2020*			*2021*			*2020*
Net sales	$	272.0		$	261.9		$	814.4		$	728.0
Cost of sales		162.8			158.3			477.0			432.0
Gross profit		109.2			103.6			337.4			296.0
Research and development expense		8.4			7.4			24.1			21.4
Selling and administrative expense		76.9			77.8			232.7			218.9
Operating income		23.9			18.4			80.6			55.7
Interest expense, net		(0.6	)		(4.4	)		(6.6	)		(13.4	)
Net foreign currency transaction loss		(0.7	)		(0.9	)		(0.2	)		(5.0	)
Loss on extinguishment of debt		—			—			(11.3	)		—
Other expense, net		(0.3	)		(0.2	)		—			(0.2	)
Income before income taxes		22.3			12.9			62.5			37.1
Income tax expense		0.8			1.2			5.5			5.9
Net income including noncontrolling interest		21.5			11.7			57.0			31.2
Net income attributable to Tennant Company	$	21.5		$	11.7		$	57.0		$	31.2

Net income attributable to Tennant Company per share
Basic	$	1.16		$	0.64		$	3.08		$	1.70
Diluted	$	1.14		$	0.63		$	3.02		$	1.68

Weighted average shares outstanding
Basic		18,554,136			18,371,883			18,519,523			18,335,430
Diluted		18,871,217			18,648,328			18,869,898			18,623,967

See accompanying notes to consolidated financial statements.

TENNANT COMPANY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

	*Three Months Ended*						*Nine Months Ended*
(In millions)	*September 30,*						*September 30,*
	*2021*			*2020*			*2021*			*2020*
Net income including noncontrolling interest	$	21.5		$	11.7		$	57.0		$	31.2
Other comprehensive (loss) income:
Foreign currency translation adjustments (net of related tax benefit of $0.6, $0.3, $0.4 and $1.0, respectively)		(7.3	)		12.4			(13.1	)		5.6
Pension and postretirement medical benefits (net of related tax benefit of $-, $-, $0.1, and $-, respectively)		—			—			0.1			—
Cash flow hedge (net of related tax benefit (expense) of $0.1, $0.2, $0.1, and $(0.8), respectively)		(0.2	)		(0.6	)		(0.3	)		2.7
Total other comprehensive (loss) income, net of tax		(7.5	)		11.8			(13.3	)		8.3

Total comprehensive income including noncontrolling interest		14.0			23.5			43.7			39.5
Comprehensive income attributable to Tennant Company	$	14.0		$	23.5		$	43.7		$	39.5

See accompanying notes to consolidated financial statements.

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TENNANT COMPANY

CONSOLIDATED BALANCE SHEETS

	(Unaudited)
	*September 30,*			*December 31,*
(In millions, except shares and per share data)	*2021*			*2020*
ASSETS
Cash, cash equivalents, and restricted cash	$	140.6		$	141.0
Receivables, less allowances of $5.1 and $4.6, respectively		198.4			199.9
Inventories		158.3			127.7
Prepaid and other current assets		29.0			25.0
Total current assets		526.3			493.6
Property, plant and equipment, less accumulated depreciation of $267.6 and $252.0, respectively		169.7			185.5
Operating lease assets		41.6			44.5
Goodwill		197.7			207.8
Intangible assets, net		104.3			126.2
Other assets		27.5			25.0
Total assets	$	1,067.1		$	1,082.6
LIABILITIES AND TOTAL EQUITY
Current portion of long-term debt	$	3.7		$	10.9
Accounts payable		117.4			106.3
Employee compensation and benefits		59.9			53.7
Other current liabilities		95.2			83.4
Total current liabilities		276.2			254.3
Long-term debt		264.7			297.6
Long-term operating lease liabilities		26.3			28.7
Employee-related benefits		16.6			17.9
Deferred income taxes		25.8			39.1
Other liabilities		14.4			38.9
Total long-term liabilities		347.8			422.2
Total liabilities	$	624.0		$	676.5
Commitments and contingencies (Note 12)
Common Stock, $0.375 par value; 60,000,000 shares authorized; 18,583,237 and 18,503,805 shares issued and outstanding, respectively	$	7.0		$	6.9
Additional paid-in capital		60.8			54.7
Retained earnings		407.4			363.3
Accumulated other comprehensive loss		(33.4	)		(20.1	)
Total Tennant Company shareholders' equity		441.8			404.8
Noncontrolling interest		1.3			1.3
Total equity		443.1			406.1
Total liabilities and total equity	$	1,067.1		$	1,082.6

See accompanying notes to consolidated financial statements.

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TENNANT COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	*Nine Months Ended*
(In millions)	*September 30,*
	*2021*			*2020*
OPERATING ACTIVITIES
Net income including noncontrolling interest	$	57.0		$	31.2
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		24.5			24.1
Amortization of intangible assets		15.1			15.3
Deferred income taxes		(13.1	)		(1.7	)
Share-based compensation expense		9.5			4.7
Bad debt and returns expense		0.8			0.9
Acquisition contingent consideration adjustment		0.7			(0.3	)
Gain on sale of business		(9.8	)		—
Debt extinguishment cost		11.3			—
Other, net		1.6			2.9
Changes in operating assets and liabilities:
Receivables		(5.5	)		23.4
Inventories		(48.9	)		13.1
Accounts payable		16.4			(7.8	)
Employee compensation and benefits		7.2			(11.9	)
Other assets and liabilities		(3.9	)		3.6
Net cash provided by operating activities		62.9			97.5
INVESTING ACTIVITIES
Purchases of property, plant and equipment		(12.0	)		(25.5	)
Proceeds from disposals of property, plant and equipment		—			0.1
Proceeds from sale of business, net of cash divested		24.7			—
Purchase of intangible assets		(0.1	)		(0.1	)
Net cash provided by (used in) investing activities		12.6			(25.5	)
FINANCING ACTIVITIES
Proceeds from borrowings		315.8			126.4
Repayments of debt		(361.2	)		(142.3	)
Debt extinguishment payment		(8.4	)		—
Contingent consideration payments		(2.5	)		—
Change in finance lease obligations		0.2			(0.1	)
Proceeds from issuance of common stock		4.2			3.6
Dividends paid		(12.9	)		(12.1	)
Repurchases of common stock		(7.5	)		—
Net cash used in financing activities		(72.3	)		(24.5	)
Effect of exchange rate changes on cash, cash equivalents and restricted cash		(3.6	)		2.6
Net (decrease) increase in cash, cash equivalents and restricted cash		(0.4	)		50.1
Cash, cash equivalents and restricted cash at beginning of period		141.0			74.6
Cash, cash equivalents and restricted cash at end of period	$	140.6		$	124.7

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SUPPLEMENTAL CASH FLOW INFORMATION	*Nine Months Ended*
	*September 30,*
	*2021*		*2020*
Cash paid for income taxes	$	13.1	$	7.7
Cash paid for interest		10.3		9.6
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases		15.4		14.8
Financing cash flows from financing leases		0.1		0.1
Lease assets obtained in exchange for new operating lease liabilities		12.9		10.2
Supplemental non-cash investing and financing activities:
Capital expenditures in accounts payable		1.2		2.3

See accompanying notes to consolidated financial statements.

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TENNANT COMPANY

CONSOLIDATED STATEMENTS OF EQUITY

(Unaudited)

(In millions, except shares and per share data)

	Tennant Company Shareholders
	Common Shares			Common Stock		Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Loss			Tennant Company Shareholders' Equity			Noncontrolling Interest		Total Equity
Balance, December 31, 2020		18,503,805		$	6.9	$	54.7		$	363.3		$	(20.1	)	$	404.8		$	1.3	$	406.1
Net income					—		—			25.7			—			25.7			—		25.7
Other comprehensive loss					—		—			—			(10.7	)		(10.7	)		—		(10.7	)
Issue stock for directors, employee benefit and stock plans, net of related tax withholdings and repurchases of 22,724 shares		102,681			0.1		1.3			—			—			1.4			—		1.4
Share-based compensation					—		3.1			—			—			3.1			—		3.1
Dividends paid $0.23 per common share					—		—			(4.2	)		—			(4.2	)		—		(4.2	)
Balance, March 31, 2021		18,606,486		$	7.0	$	59.1		$	384.8		$	(30.8	)	$	420.1		$	1.3	$	421.4
Net income					—		—			9.8			—			9.8			—		9.8
Other comprehensive income					—		—			—			4.9			4.9			—		4.9
Issue stock for directors, employee benefit and stock plans, net of related tax withholdings of 3,305 shares		58,579			—		1.9			—			—			1.9			—		1.9
Share-based compensation					—		3.9			—			—			3.9			—		3.9
Dividends paid $0.23 per common share					—		—			(4.4	)		—			(4.4	)		—		(4.4	)
Balance, June 30, 2021		18,665,065		$	7.0	$	64.9		$	390.2		$	(25.9	)	$	436.2		$	1.3	$	437.5
Net income					—		—			21.5			—			21.5			—		21.5
Other comprehensive income					—		—			—			(7.5	)		(7.5	)		—		(7.5	)
Issue stock for directors, employee benefit and stock plans, net of related tax withholdings of 18 shares		20,401			—		0.9			—			—			0.9			—		0.9
Share-based compensation					—		2.5			—			—			2.5			—		2.5
Dividends paid $0.23 per common share					—		—			(4.3	)		—			(4.3	)		—		(4.3	)
Repurchases of common stock		(102,229	)		—		(7.5	)		—			—			(7.5	)		—		(7.5	)
Balance, September 30, 2021		18,583,237		$	7.0	$	60.8		$	407.4		$	(33.4	)	$	441.8		$	1.3	$	443.1

	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, 2019		18,336,010	$	6.9	$	45.5	$	346.0		$	(38.5	)	$	359.9		$	1.4	$	361.3
Net income				—		—		5.2			—			5.2			—		5.2
Other comprehensive loss				—		—		—			(7.6	)		(7.6	)		—		(7.6	)
Issue stock for directors, employee benefit and stock plans, net of related tax withholdings of 15,756 shares		98,805		—		1.1		—			—			1.1			—		1.1
Share-based compensation				—		2.8		—			—			2.8			—		2.8
Dividends paid $0.22 per common share				—		—		(4.0	)		—			(4.0	)		—		(4.0	)
Other				—		—		(0.1	)		—			(0.1	)		—		(0.1	)
Balance, March 31, 2020		18,434,815	$	6.9	$	49.4	$	347.1		$	(46.1	)	$	357.3		$	1.4	$	358.7
Net income				—		—		14.3			—			14.3			—		14.3
Other comprehensive income				—		—		—			4.1			4.1			—		4.1
Issue stock for directors, employee benefit and stock plans, net of related tax withholdings of 3,399 shares		20,647		—		—		—			—			—			—		—
Dividends paid $0.22 per common share				—		—		(4.0	)		—			(4.0	)		—		(4.0	)
Balance, June 30, 2020		18,455,462	$	6.9	$	49.4	$	357.4		$	(42.0	)	$	371.7		$	1.4	$	373.1
Net income				—		—		11.7			—			11.7			—		11.7
Other comprehensive income				—		—		—			11.8			11.8			—		11.8
Issue stock for directors, employee benefit and stock plans, net of related tax withholdings of 1,321 shares		17,687		—		0.9		—			—			0.9			—		0.9
Share-based compensation				—		1.9		—			—			1.9			—		1.9
Dividends paid $0.22 per common share				—		—		(4.1	)		—			(4.1	)		—		(4.1	)
Balance, September 30, 2020		18,473,149	$	6.9	$	52.2	$	365.0		$	(30.2	)	$	393.9		$	1.4	$	395.3

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, significantly reduce environmental impact and help create a cleaner, safer, healthier world.

Basis of Presentation – The accompanying unaudited consolidated financial statements have been prepared in accordance with the 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, 2020. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year.

Reclassification – We reclassified $1.2 million and $3.5 million of costs from selling and administrative expense to cost of sales in the consolidated statements of income for the three and nine months ended September 30, 2020, respectively. These reclassifications were made as part of a global alignment of cost across all regions.

We documented the summary of significant accounting policies in the notes to consolidated financial statements in our annual report on Form 10-K for the year ended December 31, 2020. There have been no material changes to our accounting policies since the filing of that report.

2.	Newly Adopted Accounting Pronouncements

Income Taxes

On January 1, 2021, we adopted Accounting Standards Update ("ASU") No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The impact of this amended guidance on our consolidated financial statements and related disclosures was immaterial.

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*				*Nine Months Ended*
	*September 30,*				*September 30,*
	*2021*		*2020*		*2021*		*2020*
Americas	$	166.7	$	167.7	$	491.7	$	466.6
Europe, Middle East and Africa		80.7		69.5		246.8		196.3
Asia Pacific		24.6		24.7		75.9		65.1
Total	$	272.0	$	261.9	$	814.4	$	728.0

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*				*Nine Months Ended*
	*September 30,*				*September 30,*
	*2021*		*2020*		*2021*		*2020*
Equipment	$	168.6	$	167.6	$	506.6	$	456.3
Parts and consumables		62.8		52.7		187.4		150.2
Specialty surface coatings^(a)		—		5.3		1.5		16.6
Service and other		40.6		36.3		118.9		104.9
Total	$	272.0	$	261.9	$	814.4	$	728.0

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

Net sales by sales channel

	*Three Months Ended*				*Nine Months Ended*
	*September 30,*				*September 30,*
	*2021*		*2020*		*2021*		*2020*
Sales direct to consumer	$	175.4	$	177.3	$	517.3	$	488.2
Sales to distributors		96.6		84.6		297.1		239.8
Total	$	272.0	$	261.9	$	814.4	$	728.0

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Contract Liabilities

Sales Returns

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

Sales Incentives

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

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

	*Nine Months Ended*
	*September 30,*
	*2021*			*2020*
Beginning balance	$	12.1		$	13.7
Additions to sales incentive accrual		29.9			15.0
Contract payments		(26.1	)		(15.6	)
Foreign currency fluctuations		0.2			(0.1	)
Divestiture of business		(0.1	)		—
Ending balance	$	16.0		$	13.0

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,*
	*2021*			*2020*
Beginning balance	$	9.3		$	10.7
Increase in deferred revenue representing our obligation to satisfy future performance obligations		25.9			15.3
Decrease in deferred revenue for amounts recognized in net sales for satisfied performance obligations		(25.2	)		(15.0	)
Foreign currency fluctuations		—			(0.8	)
Ending balance	$	10.0		$	10.2

At September 30, 2021, $6.7 million and $3.3 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 2021	$	4.6
2022		2.7
2023		1.6
2024		0.8
2025		0.3
Thereafter		—
Total	$	10.0

At December 31, 2020, $5.9 million and $3.4 million of deferred revenue was reported in other current liabilities and other liabilities, respectively, on our consolidated balance sheets.

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4.	Management Actions

Restructuring Actions

In the second quarter of 2021, we implemented a restructuring action impacting our Europe, Middle East and Africa ("EMEA") operating segment. The pre-tax charge of $0.9 million consisted of severance-related costs included in selling and administrative expense in the consolidated statements of income in 2021. We expect no further charges related to this restructuring action. We estimate the savings will offset the pre-tax charge approximately one year from the date of the action.

In the fourth quarter of 2020, we implemented a restructuring action as part of our global reorganization efforts. The pre-tax charge of $3.5 million consisted of severance-related costs included in selling and administrative expense in the consolidated statements of income in 2020. The charge primarily impacted our EMEA operating segment but also impacted the Americas and Asia Pacific ("APAC") operating segments. We expect no further charges related to this restructuring action. We estimate the savings will offset the pre-tax charge approximately one year from the date of the action.

In the third quarter of 2020, we implemented a restructuring action to consolidate our Gaomei business and our existing China business in order to deliver cost synergies and improve profitability. The pre-tax charge of $3.1 million consisted of $1.4 million of severance-related costs and $1.7 million of other costs in 2020. Of the restructuring costs, $1.2 million were included in cost of sales and $1.9 million in selling and administrative expense in the consolidated statements of income. The charge impacted our APAC operating segment. We expect no further charges related to this restructuring action.

In the first quarter of 2020, we implemented a restructuring action in an effort to streamline our operating model in Japan. The pre-tax charge of $2.0 million consisted of $1.3 million of severance-related costs and $0.7 million of other costs in 2020. Of the restructuring costs, $0.3 million were included in cost of sales and $1.7 million in selling and administrative expense in the consolidated statements of income. The charge impacted our APAC operating segment. We expect no further charges related to this restructuring action.

Our restructuring actions represent the continued execution of a multi-year enterprise strategy to drive increased productivity in all aspects of our operations.

A reconciliation of the beginning and ending liability balances is as follows:

	*Severance-related costs*
December 31, 2019 balance	$	4.5
2020 activity:
New charges		6.2
Cash payments		(5.4	)
Foreign currency fluctuations		0.2
Adjustments to accrual		(1.0	)
December 31, 2020 balance	$	4.5
2021 activity:
New charges		0.9
Cash payments		(2.3	)
Foreign currency fluctuations		(0.2	)
September 30, 2021 balance	$	2.9

Other Actions

In 2019, we made the decision to discontinue certain product lines. In the first quarter of 2020, we recorded an additional $1.7 million in cost of sales in the consolidated statements of income to reflect our estimate of inventory that will not be sold.

5.	Acquisition and Divestiture

Coatings

During the first quarter of 2021, we sold the Coatings business. The resulting pre-tax gain was $9.8 million and is reflected within selling and administrative expense in the consolidated statements of income.

Gaomei

On January 4, 2019, we completed the acquisition of Hefei Gaomei Cleaning Machines Co., Ltd. and Anhui Rongen Environmental Protection Technology Co., Ltd. (collectively "Gaomei"), privately held designers and manufacturers of commercial cleaning solutions based in China. The financial results for Gaomei have been included in our consolidated financial results since the date of closing. The purchase price included contingent consideration. A payment of $0.5 million was paid in the first quarter of 2021, and final payments totaling $2.0 million were paid in the third quarter of 2021.

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6.	Inventories

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

	*September 30,*			*December 31,*
	*2021*			*2020*
Inventories carried at LIFO:
Finished goods	$	51.4		$	42.4
Raw materials, production parts and work-in-process		37.1			21.6
Excess of FIFO over LIFO cost^(a)		(38.3	)		(31.4	)
Total LIFO inventories	$	50.2		$	32.6
Inventories carried at FIFO:
Finished goods	$	55.1		$	55.0
Raw materials, production parts and work-in-process		53.0			40.1
Total FIFO inventories	$	108.1		$	95.1
Total inventories	$	158.3		$	127.7

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

7.	Goodwill and Intangible Assets

The changes in the carrying value of goodwill for the nine months ended September 30, 2021 were as follows:

				*Accumulated*
				*Impairment*
	*Goodwill*			*Losses*			*Total*
Balance as of December 31, 2020	$	249.5		$	(41.7	)	$	207.8
Divestiture		(1.7	)		—			(1.7	)
Foreign currency fluctuations		(9.3	)		0.9			(8.4	)
Balance as of September 30, 2021	$	238.5		$	(40.8	)	$	197.7

The divestiture of goodwill during the first quarter of 2021 was the result of the sale of the Coatings business discussed in Note 5.

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

	*Customer Lists*			*Trade Names*			*Technology*			*Total*
Balance as of September 30, 2021
Original cost	$	157.7		$	30.9		$	17.4		$	206.0
Accumulated amortization		(77.7	)		(13.4	)		(10.6	)		(101.7	)
Carrying value	$	80.0		$	17.5		$	6.8		$	104.3
Weighted average original life (in years)		15			10			11

Balance as of December 31, 2020
Original cost	$	166.2		$	34.4		$	17.9		$	218.5
Accumulated amortization		(70.3	)		(12.3	)		(9.7	)		(92.3	)
Carrying value	$	95.9		$	22.1		$	8.2		$	126.2
Weighted average original life (in years)		15			11			11

During the first quarter of 2021, we divested identified intangible assets, excluding goodwill, with a carrying value of $0.9 million and $1.4 million in the categories of customer lists and trade names, respectively, as a result of the sale of the Coatings business discussed in Note 5.

Amortization expense on intangible assets for the three and nine months ended September 30, 2021 was $4.8 million and $15.1 million, respectively. Amortization expense on intangible assets for the three and nine months ended September 30, 2020 was $5.3 million and $15.3 million, respectively.

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

Remaining 2021	$	4.8
2022		17.2
2023		15.7
2024		14.1
2025		12.7
Thereafter		39.8
Total	$	104.3

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Debt

2021 Credit Agreement

On April 5, 2021, we and certain of our foreign subsidiaries entered into an Amended and Restated Credit Agreement (the “2021 Credit Agreement”) with JPMorgan Chase Bank, N.A. as administrative agent. The 2021 Credit Agreement provides us and certain of our foreign subsidiaries access to a senior secured credit facility until April 3, 2026, consisting of a term loan facility in an amount up to $100.0 million and a revolving facility in an amount up to $450.0 million with an option to expand the credit facility by up to $275.0 million, with the consent of the lenders willing to provide additional borrowings in the form of increases to their revolving facility commitment or funding of incremental term loans. Borrowings may be denominated in U.S. dollars or certain other currencies.

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

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

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

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

•

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

•

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

•

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

Redemption of Senior Notes

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

Debt Outstanding

Debt outstanding consisted of the following:

	*September 30,*			*December 31,*
	*2021*			*2020*
Senior unsecured notes	$	—		$	300.0
Credit facility borrowings:
Revolving credit facility borrowings		168.0			10.0
Term loan facility borrowings		99.4			—
Secured borrowings		0.9			1.5
Finance lease liabilities		0.1			0.1
Unamortized debt issuance costs		—			(3.1	)
Total debt		268.4			308.5
Less: current portion of long-term debt^(a)		(3.7	)		(10.9	)
Long-term debt	$	264.7		$	297.6

^(a)

As of September 30, 2021, the Company is required to repay $3.1 million in outstanding credit facility borrowings and $0.6 million of current maturities of secured borrowings over the next 12 months.

As of September 30, 2021, we had outstanding borrowings of $99.4 million and $168.0 million under our term loan facility and revolving facility, respectively. We had letters of credit and bank guarantees outstanding in the amount of $2.9 million, leaving approximately $279.1 million of unused borrowing capacity on our revolving facility. Commitment fees on unused lines of credit for the nine months ended September 30, 2021 were $0.6 million. The overall weighted average cost of debt is approximately 1.3% and net of a related cross-currency swap instrument is approximately 0.4%. Further details regarding the cross-currency swap instrument are discussed in Note 10.

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9.	Warranty

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

The changes in warranty reserves were as follows:

	*Nine Months Ended*
	*September 30,*
	*2021*			*2020*
Beginning balance	$	11.1		$	12.7
Additions charged to expense		6.7			6.9
Foreign currency fluctuations		(0.2	)		—
Claims paid		(7.1	)		(8.6	)
Ending balance	$	10.5		$	11.0

10.

Derivatives

Hedge Accounting and Hedging Programs

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

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

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

Balance Sheet Hedging

Hedges of Foreign Currency Assets and Liabilities

We hedge our net recognized foreign currency denominated assets and liabilities with foreign exchange forward contracts to reduce the risk that the value of these assets and liabilities will be adversely affected by changes in exchange rates. These contracts hedge assets and liabilities that are denominated in foreign currencies and are carried at fair value as either assets or liabilities on the consolidated balance sheets with changes in the fair value recorded to net foreign currency transaction 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, 2021 and December 31, 2020, the notional amounts of foreign currency forward exchange contracts outstanding not designated as hedging instruments were $46.7 million and $57.3 million, respectively.

Cash Flow Hedging

Hedges of Forecasted Foreign Currency Transactions

In countries outside the U.S., we transact business in U.S. dollars and in various other currencies. We may use foreign exchange option contracts or forward contracts to hedge certain cash flow exposures resulting from changes in these foreign currency exchange rates. These foreign exchange contracts, carried at fair value, have maturities of up to one year. We enter into these foreign exchange contracts to hedge a portion of our forecasted foreign currency denominated revenue in the normal course of business, and accordingly, they are not speculative in nature. The notional amounts of outstanding foreign currency forward contracts designated as cash flow hedges were $3.3 million as of September 30, 2021 and $2.7 million as of December 31, 2020. The notional amounts of outstanding foreign currency option contracts designated as cash flow hedges were $3.0 million and $8.2 million as of September 30, 2021 and December 31, 2020, respectively.

Foreign Currency Derivatives

We use foreign currency exchange rate derivatives to hedge our exposure to fluctuations in exchange rates for anticipated intercompany cash transactions between Tennant Company and its subsidiaries. We entered into Euro to U.S. dollar foreign exchange cross-currency swaps for all of the anticipated cash flows associated with an intercompany loan from a wholly-owned European subsidiary. We enter into these foreign exchange cross-currency swaps to hedge the foreign currency denominated cash flows associated with this intercompany loan, and accordingly, they are not speculative in nature. These cross-currency swaps are designated as cash flow hedges. The hedged cash flows as of September 30, 2021 and December 31, 2020 included €154.2 million and €159.6 million of total notional values, respectively. As of September 30, 2021, the aggregate scheduled interest payments over the course of the loan and related swaps amounted to €4.2 million. The scheduled maturity and principal payment of the loan and related swaps of €150.0 million are due in April 2022. There were no new cross-currency swaps designated as cash flow hedges as of September 30, 2021.

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

	*Derivative Assets*					*Derivative Liabilities*
	*Balance Sheet Location*	*September 30, 2021*		*December 31, 2020*		*Balance Sheet Location*	*September 30, 2021*		*December 31, 2020*
Derivatives designated as hedging instruments:
Foreign currency forward contracts	Other current assets	$	—	$	1.9	Other current liabilities	$	13.2	$	—
Foreign currency forward contracts	Other assets		—		—	Other liabilities		—		24.1
Derivatives not designated as hedging instruments:
Foreign currency forward contracts	Other current assets		1.1		0.4	Other current liabilities		—		0.7

As of September 30, 2021, we anticipate reclassifying approximately $0.6 million of gains from accumulated other comprehensive loss to net income during the next 12 months.

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

	*Three Months Ended*											*Nine Months Ended*
	*September 30,*											*September 30,*
	*2021*					*2020*						*2021*						*2020*
	*Total*			*Amount of Gain (Loss) on Cash Flow Hedge Activity*		*Total*			*Amount of Gain (Loss) on Cash Flow Hedge Activity*			*Total*			*Amount of Gain (Loss) on Cash Flow Hedge Activity*			*Total*			*Amount of Gain (Loss) on Cash Flow Hedge Activity*
Net sales	$	272.0		$	—	$	261.9		$	(0.1	)	$	814.4		$	(0.3	)	$	728.0		$	(0.1	)
Interest expense, net		(0.6	)		0.6		(4.4	)		0.6			(6.6	)		1.7			(13.4	)		2.1
Net foreign currency transaction loss		(0.7	)		4.1		(0.9	)		(7.3	)		(0.2	)		9.5			(5.0	)		(7.6	)

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

	*Three Months Ended*				*Nine Months Ended*
	*September 30, 2021*				*September 30, 2021*
	*Foreign Currency Option Contracts*		*Foreign Currency Forward Contracts*		*Foreign Currency Option Contracts*		*Foreign Currency Forward Contracts*
Derivatives in cash flow hedging relationships:
Net gain recognized in other comprehensive (loss) income, net of tax^(a)	$	—	$	3.4	$	—	$	8.1
Net loss reclassified from accumulated other comprehensive loss into income, net of tax, effective portion to net sales		—		—				(0.2	)
Net gain reclassified from accumulated other comprehensive loss into income, net of tax, effective portion to interest expense, net		—		0.4		—		1.3
Net gain reclassified from accumulated other comprehensive loss into income, net of tax, effective portion to net foreign currency transaction loss		—		3.2		—		7.3
Derivatives not designated as hedging instruments:
Net gain recognized in income^(b)		—		0.8		—		2.2

	*Three Months Ended*						*Nine Months Ended*
	*September 30, 2020*						*September 30, 2020*
	*Foreign Currency Option Contracts*			*Foreign Currency Forward Contracts*			*Foreign Currency Option Contracts*			*Foreign Currency Forward Contracts*
Derivatives in cash flow hedging relationships:
Net loss recognized in other comprehensive (loss) income, net of tax^(a)	$	(0.1	)	$	(5.8	)	$	(0.1	)	$	(1.6	)
Net loss reclassified from accumulated other comprehensive loss into income, net of tax, effective portion to net sales		—			(0.1	)		—			(0.1	)
Net gain reclassified from accumulated other comprehensive loss into income, net of tax, effective portion to interest expense, net		—			0.5			—			1.6
Net loss reclassified from accumulated other comprehensive loss into income, net of tax, effective portion to net foreign currency transaction loss		—			(5.7	)		—			(5.9	)
Derivatives not designated as hedging instruments:
Net loss recognized in income^(b)		—			(1.7	)		—			(1.1	)

^(a)

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

^(b)

Classified in net foreign currency transaction gain (loss).

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11.

Fair Value Measurements

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

•

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

•

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

•

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

Our population of assets and liabilities subject to fair value measurements at September 30, 2021 is as follows:

	*Fair*
	*Value*		*Level 1*		*Level 2*		*Level 3*
Assets:
Foreign currency forward exchange contracts	$	2.4	$	—	$	2.4	$	—
Total assets	$	2.4	$	—	$	2.4	$	—
Liabilities:
Foreign currency forward exchange contracts	$	14.5	$	—	$	14.5	$	—
Total liabilities	$	14.5	$	—	$	14.5	$	—

Our population of assets and liabilities subject to fair value measurements at December 31, 2020 is as follows:

	*Fair*
	*Value*		*Level 1*		*Level 2*		*Level 3*
Assets:
Foreign currency forward exchange contracts	$	3.0	$	—	$	3.0	$	—
Total assets	$	3.0	$	—	$	3.0	$	—
Liabilities:
Foreign currency forward exchange contracts	$	25.5	$	—	$	25.5	$	—
Contingent consideration		1.8		—		—		1.8
Total liabilities	$	27.3	$	—	$	25.5	$	1.8

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

Contingent consideration is valued using a probability-weighted analysis of projected gross profit and integration milestones. Actual results may differ significantly from those used in the estimate above, which may affect future payments. Changes in future payments will be reflected in future operating results as they occur.

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, were $270.0 million and $268.4 million, respectively, as of September 30, 2021. The fair value and carrying value of total debt, including current portion, were $323.4 million and $308.5 million, respectively, as of December 31, 2020. 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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*12.*	Commitments and Contingencies

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

13.

Stockholders' Equity

Accumulated Other Comprehensive Income

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

	*Foreign Currency Translation Adjustments*			*Pension and Post-Retirement Medical Benefits*			*Cash Flow Hedge*			*Total*
December 31, 2020	$	(19.1	)	$	(1.7	)	$	0.7		$	(20.1	)
Other comprehensive (loss) income before reclassifications		(13.1	)		0.1			8.1			(4.9	)
Amounts reclassified from accumulated other comprehensive loss		—			—			(8.4	)		(8.4	)
Net current period other comprehensive (loss) income		(13.1	)		0.1			(0.3	)		(13.3	)
September 30, 2021	$	(32.2	)	$	(1.6	)	$	0.4		$	(33.4	)

Repurchase of Common Stock

The Board of Directors has authorized the repurchase of our common stock. During the nine months ended September 30, 2021, the Company paid $7.5 million to repurchase 102,229 shares of its common stock at an average price of $73.34 per share. As of September 30, 2021, 1,288,167 shares were available to be repurchased. There were no share repurchases during the nine months ended September 30, 2020.

14.

Income Taxes

The effective tax rate for the third quarter of 2021 was 3.8% compared to 9.7% for the third quarter of 2020. The decrease in the effective tax rate was primarily driven by a tax benefit resulting from an election to step-up the tax basis of certain assets for Italian tax purposes.

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 and, with limited exceptions, state and foreign income tax examinations for taxable years before 2015. We are currently undergoing income tax examinations in various foreign jurisdictions. Although the final outcome of these examinations cannot be currently determined, we believe that we have adequate reserves with respect to these examinations.

We recognize potential accrued interest and penalties related to unrecognized tax benefits in income tax expense. In addition to the liability of $4.6 million for unrecognized tax benefits as of September 30, 2021, there was approximately $0.7 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, 2021 was $4.4 million. To the extent interest and penalties are not assessed with respect to uncertain tax positions, amounts accrued will be revised and reflected as an adjustment of the income tax expense.

15.

Share-Based Compensation

Our share-based compensation plans are described in Note 18 of our annual report on Form 10-K for the year ended December 31, 2020. During the three months ended September 30, 2021 and 2020, we recognized total share-based compensation expense of $2.5 million and $1.9 million, respectively. During the nine months ended September 30, 2021 and 2020, we recognized total share-based compensation expense of $9.5 million and $4.7 million, respectively. The total excess tax benefit recognized for share-based compensation arrangements during the nine months ended September 30, 2021 and 2020 was $0.4 million and $0.3 million, respectively.

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16.

Earnings Attributable to Tennant Company Per Share

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

	*Three Months Ended*				*Nine Months Ended*
	*September 30,*				*September 30,*
	*2021*		*2020*		*2021*		*2020*
Numerator:
Net income attributable to Tennant Company	$	21.5	$	11.7	$	57.0	$	31.2
Denominator:
Basic - weighted average shares outstanding		18,554,136		18,371,883		18,519,523		18,335,430
Effect of dilutive securities:
Share-based compensation plans		317,081		276,445		350,375		288,537
Diluted - weighted average shares outstanding		18,871,217		18,648,328		18,869,898		18,623,967
Basic earnings per share attributable to Tennant Company	$	1.16	$	0.64	$	3.08	$	1.70
Diluted earnings per share attributable to Tennant Company	$	1.14	$	0.63	$	3.02	$	1.68

Excluded from the dilutive securities shown above were options to purchase and shares to be paid out under share-based compensation plans of 148,747 and 578,858 shares of common stock during the three months ended September 30, 2021 and 2020, respectively. Excluded from the dilutive securities shown above were options to purchase and shares to be paid out under share-based compensation plans of 198,853 and 620,605 shares of common stock during the nine months ended September 30, 2021 and 2020, 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 are anti-dilutive.

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Item 2.

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

Overview

Tennant Company is a world leader in designing, manufacturing and marketing solutions that empower customers to achieve quality cleaning performance, reduce environmental impact and help create a cleaner, safer, healthier world. The Company is committed to creating and commercializing breakthrough, sustainable cleaning innovations to enhance its broad suite of products, including floor maintenance and cleaning equipment, detergent-free and other sustainable cleaning technologies, aftermarket parts and consumables, equipment maintenance and repair service, and asset management solutions. Our products are used in many types of environments, including retail establishments, distribution centers, factories and warehouses, public venues such as arenas and stadiums, office buildings, schools and universities, hospitals and clinics, and more. Customers include contract cleaners to whom organizations outsource facilities maintenance as well as businesses that perform facilities maintenance themselves. The Company reaches these customers through the industry's largest direct sales and service organization and through a strong and well-supported network of authorized distributors worldwide.

Impact of COVID-19

Because we are a global company, our results of operations are affected by macroeconomic conditions. We continue to see economic and geopolitical uncertainty in many regions around the world. The coronavirus ("COVID-19") pandemic has increased the uncertainty globally and has resulted in general economic disruption. Governments across the world have taken numerous actions to limit the spread of COVID-19, including stay-at-home orders, which have reduced operating activities across global businesses, and have recently begun rolling out vaccine programs.

We continue to actively manage our business to respond to the COVID-19 impact. We have prioritized the health and safety of our employees and customers. We have established a dedicated enterprise-wide response team and implemented work-from-home processes for much of our workforce, which partially remain in effect. We have established cross-functional and frequent communications with suppliers to review, track and prioritize high-risk components. We have also identified and activated alternative suppliers, materials and components as needed. Regarding transportation, we have set up tracking, reporting and communication channels with carriers to understand their risks and to evaluate available options where necessary. In addition, all of our factories currently have the potential to operate at full capacity, although some locations continue to face labor shortages.

We continue to monitor the evolving situation and guidance from authorities. The timing and extent of the impact of the pandemic is influenced by factors such as variants, vaccination rates and broader economic impacts. Accordingly, we cannot reasonably estimate the long-term impact of the pandemic on our financial results, although we expect the increased cost of freight, materials and labor to continue to impact our gross profit and overall operating results for the fourth quarter of 2021, early 2022, and potentially beyond.

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Results

The following table compares the results of operations for the three and nine months ended September 30, 2021 and 2020, respectively (in millions, except per share data and percentages):

	Three Months Ended												Nine Months Ended
	September 30,												September 30,
	2021			%			2020			%			2021			%			2020			%
Net sales	$	272.0			100.0		$	261.9			100.0		$	814.4			100.0		$	728.0			100.0
Cost of sales		162.8			59.9			158.3			60.4			477.0			58.6			432.0			59.3
Gross profit		109.2			40.1			103.6			39.6			337.4			41.4			296.0			40.7
Research and development expense		8.4			3.1			7.4			2.8			24.1			3.0			21.4			2.9
Selling and administrative expense		76.9			28.3			77.8			29.7			232.7			28.6			218.9			30.1
Operating income		23.9			8.8			18.4			7.0			80.6			9.9			55.7			7.7
Interest expense, net		(0.6	)		(0.2	)		(4.4	)		(1.7	)		(6.6	)		(0.8	)		(13.4	)		(1.8	)
Net foreign currency transaction loss		(0.7	)		(0.3	)		(0.9	)		(0.3	)		(0.2	)		(0.0	)		(5.0	)		(0.7	)
Loss on extinguishment of debt		—			—			—			—			(11.3	)		(1.4	)		—			—
Other expense, net		(0.3	)		(0.1	)		(0.2	)		(0.1	)		—			—			(0.2	)		(0.0	)
Income before income taxes		22.3			8.2			12.9			4.9			62.5			7.7			37.1			5.1
Income tax expense		0.8			0.3			1.2			0.5			5.5			0.7			5.9			0.8
Net income including noncontrolling interest		21.5			7.9			11.7			4.5			57.0			7.0			31.2			4.3
Net income attributable to Tennant Company	$	21.5			7.9		$	11.7			4.5		$	57.0			7.0		$	31.2			4.3
Net income attributable to Tennant Company per share - diluted	$	1.14					$	0.63					$	3.02					$	1.68

Net Sales

Consolidated net sales for the third quarter of 2021 totaled $272.0 million, a 3.9% increase as compared to consolidated net sales of $261.9 million in the third quarter of 2020. Consolidated net sales for the first nine months of 2021 were $ 814.4 million, an 11.9% increase compared to consolidated net sales of $728.0 million in the first nine months of 2020.

The 3.9% increase in consolidated net sales in the third quarter of 2021 as compared to the same period in 2020 was driven by:

	•	An organic sales increase of approximately 4.7%, which excludes the effects of foreign currency exchange and divestitures. The organic sales increase was primarily due to volume growth across the Americas and EMEA regions due to continued recovery from COVID-19 in 2021;
	•	An unfavorable impact from the divestiture of our Coatings business of 2.0%; and
	•	A net favorable impact from foreign currency exchange across all regions of approximately 1.2%.

The 11.9% increase in consolidated net sales in the first nine months of 2021 as compared to the same period in 2020 was driven by:

	•	An organic sales increase of approximately 10.9%, which excludes the effects of foreign currency exchange and divestitures. The organic sales increase was primarily due to volume growth across all regions due to continued recovery from COVID-19 in 2021;
	•	An unfavorable impact from the divestiture of our Coatings business of 2.0%; and
	•	A net favorable impact from foreign currency exchange across all regions of approximately 3.0%.

The following table sets forth the net sales by geographic area for the three and nine months ended September 30, 2021 and 2020 (in millions, except percentages):

	Three Months Ended							Nine Months Ended
	September 30,							September 30,
	2021		2020		% Change			2021		2020		% Change
Americas	$	166.7	$	167.7		(0.6	)%	$	491.7	$	466.6		5.4	%
Europe, Middle East and Africa		80.7		69.5		16.1	%		246.8		196.3		25.7	%
Asia Pacific		24.6		24.7		(0.4	)%		75.9		65.1		16.6	%
Total	$	272.0	$	261.9		3.9	%	$	814.4	$	728.0		11.9	%

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Americas

Net sales in the Americas were $166.7 million for the third quarter of 2021, a decrease of 0.6% from the third quarter of 2020. Foreign currency exchange within the Americas favorably impacted net sales by approximately 0.5% in the third quarter of 2021. The divestiture of the Coatings business in the first quarter of 2021 resulted in a decline in net sales of approximately 3.1%. Organic sales growth in the Americas favorably impacted net sales by approximately 2.0% for the third quarter of 2021 due to strong sales in Latin America, particularly in Brazil and Mexico, along with strong, region-wide results for the Company's parts and consumables and service, despite a decline in the Company's Autonomous Mobile Robot ("AMR") business, due to the lapping of a large order in North America in the prior-quarter. At the same time, the region was directly impacted by global supply-chain and labor constraints, which resulted in lower revenue than expected and increased backlog levels.

Net sales in the Americas were $491.7 million for the first nine months of 2021, an increase of 5.4% from the first nine months of 2020. Foreign currency exchange within the Americas favorably impacted net sales by 0.2%. The divestiture of the Coatings business resulted in a decline in net sales of approximately 3.1%. Organic sales growth in the Americas favorably impacted net sales by 8.3% due to growth in most regions and products compared to the first nine months of 2020, which was more impacted by COVID-19. The growth was partly offset by declines in the Company's AMR business, due to the lapping of a large order in North America in the prior year.

Europe, Middle East and Africa ("EMEA")

EMEA net sales were $80.7 million for the third quarter of 2021, an increase of 16.1% from the third quarter of 2020. Foreign currency exchange within EMEA favorably impacted net sales by approximately 2.1% in the third quarter of 2021. Organic sales growth in EMEA favorably impacted net sales by approximately 14.0% for the third quarter primarily due to market growth across the region and product categories compared to the third quarter of 2020, which was greatly impacted by COVID-19.

EMEA net sales were $246.8 million for the first nine months of 2021, an increase of 25.7% from the first nine months of 2020. Foreign currency exchange within EMEA favorably impacted net sales by approximately 8.7% in the first nine months of 2021. Organic sales growth in EMEA favorably impacted net sales by approximately 17.0% for the first nine months of 2021 primarily due to market growth across the region and product categories compared to the first nine months of 2020, which was more impacted by COVID-19.

Asia Pacific ("APAC")

APAC net sales were $24.6 million for the third quarter of 2021, a decrease of 0.4% from the third quarter of 2020. Foreign currency exchange within APAC favorably impacted net sales by approximately 2.7% in the third quarter of 2021. The divestiture of the Coatings business resulted in a decline in net sales of approximately 0.2%. Organic sales decline in APAC unfavorably impacted net sales by approximately 2.9% for the third quarter primarily due to decreases in China and Japan, partly caused by supply-chain and labor challenges in our North American plants which supply APAC. The decline in APAC was partly offset by strong results for parts and consumables and service, along with strength in Australia across all product categories.

APAC net sales were $75.9 million for the first nine months of 2021, an increase of 16.6% from the first nine months of 2020. Foreign currency exchange within APAC favorably impacted net sales by approximately 5.8% in the first nine months of 2021. Organic sales growth in APAC favorably impacted net sales by approximately 10.8% for the first nine months of 2021 primarily due to growth across the region, primarily in Australia and China, partly offset by supply chain and labor challenges in our North American plants which supply APAC.

Gross Profit

Gross profit margin of 40.1% was 50 basis points higher in the third quarter of 2021 compared to the third quarter of 2020. The increase was in spite of supply and labor constraints, and reflects the lapping of a number of strategic investments and productivity challenges based on lower volume due to the pandemic-related slowdown in the prior year.

Gross profit margin of 41.4% was 70 basis points higher in the first nine months of 2021 compared to the first nine months of 2020. The increase primarily reflected increased favorable pricing and cost-savings actions, partially offset by higher freight, material and labor costs and the impact of government credits received in the first nine months of 2020. The benefits represent wage subsidies received from various European and Canadian authorities that are not required to be repaid. All government benefits for the first nine months of 2020 were received in the second quarter of 2020.

Operating Expense

Research and Development Expense

Research and Development ("R&D") expense was $8.4 million, or 3.1% of net sales, for the third quarter of 2021, 30 basis points higher as a percentage of net sales compared to the third quarter of 2020 due to new product development and investment in talent. R&D expense was $24.1 million, or 3.0% of net sales, for the first nine months of 2021, nearly flat as a percentage of net sales compared to the first nine months of 2020.

We continue to invest in developing innovative products and technologies at levels necessary to propel our technology and innovation leadership position.

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Selling and Administrative Expense

Selling and administrative expense ("S&A expense") was $76.9 million for the third quarter of 2021, a decrease of $0.9 million compared to the third quarter of 2020. As a percentage of net sales, S&A expense for the third quarter of 2021 decreased 140 basis points to 28.3% from 29.7% in the third quarter of 2020. The S&A expense decrease in the third quarter of 2021 was primarily driven by adjustments to management incentives, partially offset by more normalized spending throughout the quarter compared to the third quarter of 2020.

S&A expense was $232.7 million for the first nine months of 2021, an increase of $13.8 million compared to the first nine months of 2020. As a percentage of net sales, S&A expense for the first nine months of 2021 decreased 150 basis points to 28.6% from 30.1% in the first nine months of 2020. The S&A decrease in the first nine months of 2021 was primarily driven by a 130 basis point benefit related to the inclusion in S&A expense of a $9.8 million pre-tax gain on the sale of the Coatings business that occurred in the first quarter of 2021. This benefit was partially offset by more normalized spending compared to the first nine months of 2020, when the Company took cost containment actions, including employee furloughs, reduction in travel spending, and temporary pay reductions, as well as benefits from government programs received related to COVID-19. The benefits represent wage subsidies received from various European and Canadian authorities that are not required to be repaid.

Total Other Expense, Net

Interest Expense, Net

Interest expense, net was $0.6 million and $6.6 million of net expense in the third quarter and first nine months of 2021, respectively, compared to $4.4 million and $13.4 million of net expense in the same periods of 2020, respectively. The decrease in both periods of 2021 was due to the restructuring of debt in the second quarter of 2021, which resulted in lower interest expense from more favorable interest rates and a lower amount of outstanding debt.

Net Foreign Currency Transaction Loss

Net foreign currency transaction loss was $0.7 million and $0.9 million in the third quarter of 2021 and 2020, respectively. Net foreign currency transaction loss was $0.2 million in the first nine months of 2021, compared to $5.0 million in the same period of 2020. The unfavorable impact from foreign currency transactions in the first nine months of 2021 and 2020 was primarily due to strengthening of the U.S. dollar relative to the Brazilian Real and Mexican Peso. The reduction of losses recognized in the first nine months of 2021 compared to the same period in 2020 is driven by stabilization in the currency markets in the current year versus the previous year.

Loss on Extinguishment of Debt

There was no loss on extinguishment of debt in the third quarter of 2021. Loss on extinguishment of debt was $11.3 million in the first nine months of 2021 due to the restructuring of debt that occurred in the second quarter of 2021.

Income Taxes

The effective tax rate for the third quarter of 2021 was 3.8%, as compared to 9.7% for the third quarter of 2020. The tax expense for the third quarter of 2020 included a $0.4 million tax benefit associated with $1.7 million of non-recurring expenses. The underlying tax rate for the third quarter of 2020 was 11.3% excluding these non-recurring expenses and related tax benefits.

The effective tax rate for the first nine months of 2021 was 8.8% compared to 15.9% for the same period of 2020. The tax expense for the nine months ended September 30, 2021 included a $1.1 million benefit associated with $3.2 million of non-recurring expenses. The tax expense for the nine months ended September 30, 2020 included a $1.2 million benefit associated with $4.1 million of non-recurring expenses. The underlying tax rate excluding these non-recurring items was 10.1% and 17.2% for 2021 and 2020 respectively.

Excluding these non-recurring expenses, the effective tax rate for both the third quarter and the first nine months of 2021 decreased primarily due to a tax benefit resulting from an election to step-up the tax basis of certain assets for Italian tax purposes.

In general, it is our practice and intention to permanently reinvest the earnings of our foreign subsidiaries and repatriate earnings only when the tax impact is zero or immaterial. No deferred taxes have been provided for withholding taxes or other taxes that would result upon repatriation of our foreign investments to the United States.

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Liquidity and Capital Resources

Liquidity

Cash, cash equivalents and restricted cash totaled $140.6 million at September 30, 2021, as compared to $141.0 million as of December 31, 2020. Wherever possible, cash management is centralized and intercompany financing is used to provide working capital to subsidiaries as needed. Our current ratio was 1.9 as of September 30, 2021 and December 31, 2020, and our working capital was $250.1 million and $239.3 million, respectively. Our debt-to-capital ratio was 37.7% as of September 30, 2021, compared to 43.2% as of December 31, 2020.

In the second quarter of 2021, we signed an agreement (the "2021 Credit Agreement") that restructured our previous credit agreement. The 2021 Credit Agreement provides greater flexibility with fewer restrictive covenants and more favorable interest rates than the previous arrangement, 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 revolving 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. As a result, we expect future interest expense to be lower by approximately $1.0 million per month as compared to periods prior to the debt restructuring. In the second quarter of 2021, we used the proceeds from the 2021 Credit Agreement to retire our 5.625% Senior Notes due 2025. As of September 30, 2021, we had outstanding borrowings of $99.4 million and $168.0 million under our term loan facility and revolving facility, respectively. As of September 30, 2021, we had letters of credit and bank guarantees outstanding in the amount of $2.9 million, leaving approximately $279.1 million of unused borrowing capacity on our revolving facility. See Note 8 to the Consolidated Financial Statements for more detail on the 2021 Credit Agreement.

The Company's Board of Directors has authorized a quarterly cash dividend of $0.25 per share payable December 15, 2021, to shareholders of record at the close of business on November 30, 2021.

Cash Flow from Operating Activities

Operating activities provided $62.9 million of cash for the nine months ended September 30, 2021. Cash provided by operating activities was driven primarily by inflows from a strong performance influencing net income, offset by outflows from an increase in working capital of $10.8 million.

Cash Flow from Investing Activities

Investing activities during the nine months ended September 30, 2021 provided $12.6 million, resulting from $24.7 million of proceeds from the sale of our Coatings business net of cash divested, partially offset by $12.0 million of capital expenditures. Cash used for capital expenditures decreased from the nine months ended September 30, 2020 due to the investments in the new corporate headquarters that occurred in 2020.

Cash Flow from Financing Activities

Net cash used in financing activities was $72.3 million during the first nine months of 2021. Proceeds from borrowings of $315.8 million were mainly offset by payments of debt of $361.2 million, dividend payments of $12.9 million, repurchases of common stock of $7.5 million and a debt extinguishment payment of $8.4 million.

Newly Issued Accounting Guidance

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

No other new accounting pronouncements issued but not yet effective have had, or are expected to have, a material impact on our results of operations or financial position.

Cautionary Statement Relevant to Forward-Looking Information

This Form 10-Q, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 2, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “intend,” “estimate,” “anticipate,” “believe,” “project,” or “continue” or similar words or the negative thereof. These statements do not relate to strictly historical or current facts and provide current expectations of forecasts of future events. Any such expectations or forecasts of future events are subject to a variety of factors. Particular risks and uncertainties presently facing us include: geopolitical and economic uncertainty throughout the world; uncertainty surrounding the impacts and duration of the COVID-19 pandemic; our ability to comply with global laws and regulations; our ability to adapt to customer pricing sensitivities; the competition in our business; fluctuations in the cost, quality or availability of raw materials and purchased components; our ability to adjust pricing to respond to cost pressures; unforeseen product liability claims or product quality issues; our ability to attract, retain and develop key personnel and create effective succession planning strategies; our ability to effectively develop and manage strategic planning and growth processes and the related operational plans; our ability to successfully upgrade and evolve our information technology systems; our ability to successfully protect our information technology systems from cybersecurity risks; the occurrence of a significant business interruption; our ability to maintain the health and safety of our workers; our ability to integrate acquisitions; and, our ability to develop and commercialize new innovative products and services.

We caution that forward-looking statements must be considered carefully and that actual results may differ in material ways due to risks and uncertainties both known and unknown. Shareholders, potential investors and other readers are urged to consider these factors in evaluating forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. Additional information about factors that could materially affect our results can be found in Part I, Item 1A, Risk Factors in our annual report on Form 10-K for the year ended December 31, 2020 and Part II, Item 1A of this Form 10-Q.

We undertake no obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as required by law. Investors are advised to consult any further disclosures by us in our filings with the SEC and in other written statements on related subjects. It is not possible to anticipate or foresee all risk factors, and investors should not consider any list of such factors to be an exhaustive or complete list of all risks or uncertainties.

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Item 3.

Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes in our market risk since December 31, 2020. For additional information, refer to Item 7A of our annual report on Form 10-K for the year ended December 31, 2020.

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, 2021 (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, 2020. 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. During the three months ended September 30, 2021, the Company paid $7.5 million to repurchase 102,229 shares of its common stock. The most recent share repurchase program approved by the Board of Directors on October 31, 2016 authorized the repurchase of 1,000,000 shares of our common stock, in addition to the 288,167 shares that remain authorized under the prior program that was authorized by the Board of Directors on June 22, 2015.

For the Quarter Ended	Total Number of Shares		Average Price Paid		Total Number of Shares Purchased as Part of Publicly Announced Plans or		Maximum Number of Shares that May Yet Be Purchased Under the Plans or
September 30, 2021	Purchased⁽¹⁾		Per Share		Programs		Programs
July 1–31, 2021		18	$	79.85		—		1,390,396
August 1–31, 2021		43,731	$	72.69		43,731		1,346,665
September 1–30, 2021		58,498	$	73.84		58,498		1,288,167
Total		102,247	$	73.35		102,229		1,288,167

⁽¹⁾

Includes 18 shares delivered or attested to in satisfaction of the exercise price and/or tax withholding obligations by employees who exercised stock options or restricted stock under employee share-based compensation plans.

Item 6.

Exhibits

Item #	Description	Method of Filing
3i	Restated Articles of Incorporation	Incorporated by reference to Exhibit 3i to the Company’s report on Form 10-Q for the quarterly period ended June 30, 2006.
3ii	Amended and Restated By-Laws	Incorporated by reference to Exhibit 3iii to the Company’s Form 8-K dated December 14, 2010.
3iii	Articles of Amendment of Restated Articles of Incorporation of Tennant Company	Incorporated by reference to Exhibit 3iii to the Company's report on Form 10-Q for the quarterly period ended March 31, 2018.
31.1	Rule 13a-14(a)/15d-14(a) Certification of CEO	Filed herewith electronically.
31.2	Rule 13a-14(a)/15d-14(a) Certification of CFO	Filed herewith electronically.
32.1	Section 1350 Certification of CEO	Filed herewith electronically.
32.2	Section 1350 Certification of CFO	Filed herewith electronically.
101	The following financial information from Tennant Company's Quarterly Report on Form 10-Q for the period ended September 30, 2021, formatted in Inline eXtensible Business Reporting Language (iXBRL): (i) Consolidated Statements of Income for the three and nine months ended September 30, 2021 and 2020; (ii) Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2021 and 2020; (iii) Consolidated Balance Sheets as of September 30, 2021 and December 31, 2020; (iv) Consolidated Statements of Cash Flows for the nine months ended September 30, 2021 and 2020; (v) Consolidated Statements of Equity for the nine months ended September 30, 2021 and 2020; and (vi) Notes to the Consolidated Financial Statements.	Filed herewith electronically.
104	Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)	Filed herewith electronically.

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SIGNATURES

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

		TENNANT COMPANY

Date:	November 2, 2021	/s/ David W. Huml
		David W. Huml President and Chief Executive Officer

Date:	November 2, 2021	/s/ Fay West
		Fay West Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)