NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except shares and per share data)
|
|
1.
|
Summary of Significant Accounting Policies
|
Basis of Presentation
– The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with the Securities and Exchange Commission (“SEC”) requirements for interim reporting, which allows certain footnotes and other financial information normally required by accounting principles generally accepted in the United States of America to be condensed or omitted. In our opinion, the Condensed 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, 2016
. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year.
Equity Method Investment
– Investments in which we have the ability to exercise significant influence, but do not control, are accounted for under the equity method of accounting and are included in Other Assets on the Condensed Consolidated Balance Sheets. Under this method of accounting, our share of the net earnings or losses of the investee are presented as a component of Other Expense, Net on the Condensed Consolidated Statements of Operations. The details regarding our equity method investment in i-team North America B.V., a joint venture that operates as the distributor of the i-mop in North America, are further described in Note 3.
New Accounting Pronouncements
– In accordance with Accounting Standards Update ("ASU") No. 2016-09, C
ompensation–Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
, all excess tax benefits and tax deficiencies are recorded as a component of the provision for income taxes in the reporting period in which they occur. Additionally, we present excess tax benefits along with other income tax cash flows on the Condensed Consolidated Statements of Cash Flows as an operating activity rather than, as previously required, a financing activity. For further details regarding the implementation of this ASU and the impact on our financial statements, see Note 2.
We documented the summary of significant accounting policies in the Notes to the Consolidated Financial Statements of our annual report on Form 10-K for the fiscal year ended
December 31, 2016
. Other than the accounting policies noted above, there have been no material changes to our accounting policies since the filing of that report.
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2.
|
Newly Adopted Accounting Pronouncements
|
On March 30, 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-09, C
ompensation–Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
, which amends Accounting Standards Codification ("ASC")
Topic 718, Compensation – Stock Compensation.
ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the Condensed Consolidated Statements of Cash Flows. Under the new standard, all excess tax benefits and tax deficiencies are recorded as a component of the provision for income taxes in the reporting period in which they occur. Additionally, ASU 2016-09 requires that the Company present excess tax benefits along with other income tax cash flows on the Condensed Consolidated Statements of Cash Flows as an operating activity rather than, as previously required, a financing activity. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016.
We have adopted ASU 2016-09 effective January 1, 2017 on a prospective basis where permitted by the new standard. As a result of this adoption:
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•
|
For the
three and six months ended
June 30, 2017
, we recognized discrete tax benefits of
$742
and
$1,144
, respectively, in the Income Tax Expense (Benefit) line item of our Condensed Consolidated Statements of Operations related to excess tax benefits upon vesting or settlement in that period.
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•
|
We elected to adopt the cash flow presentation of the excess tax benefits prospectively where the tax benefits are classified along with other income tax cash flows as operating cash flows in 2017. Our prior year's excess tax benefits are recognized as financing cash flows. However, other income tax cash flows are classified as operating cash flows.
|
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•
|
We have elected to account for forfeitures as they occur, rather than electing to estimate the number of share-based awards expected to vest to determine the amount of compensation cost to be recognized in each period. The difference of such change is immaterial.
|
|
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•
|
We excluded the excess tax benefits from the assumed proceeds available to repurchase shares in the computation of our diluted earnings per share for the
three and six months ended
June 30, 2017
.
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3.
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Investment in Joint Venture
|
On February 13, 2017, the Company, through a Dutch subsidiary, and i-team Global, a Future Cleaning Technologies, B.V. company headquartered in The Netherlands, announced the January 1, 2017 formation of i-team North America B.V., a joint venture that will operate as the distributor of the i-mop in North America. The Company began selling and servicing the i-mop in the
second
quarter of
2017
. The Company owns a
50%
ownership interest in the joint venture and is accounted for under the equity method of accounting, with our proportionate share of income or loss presented as a component of Other Expense, Net on the Condensed Consolidated Statements of Operations.
As of
June 30, 2017
, the carrying value of the Company's investment in the joint venture was
$57
. In March 2017, the Company issued a
$1,500
loan to the joint venture and, as a result, recorded a long-term note receivable in Other Assets on the Condensed Consolidated Balance Sheets.
During the first quarter of 2017, we implemented a restructuring action to better align our global resources and expense structure with a lower growth global economic environment. The pre-tax charge of
$8,018
, including other associated costs of
$961
, consisted primarily of severance and was included within Selling and Administrative Expense in the Condensed Consolidated Statements of Operations. The charge impacted our Americas, Europe, Middle East and Africa ("EMEA") and Asia Pacific ("APAC") operating segments. We believe the anticipated savings will offset the pre-tax charge in approximately
one year
from the date of the action. We do not expect additional costs will be incurred related to this restructuring action.
A reconciliation to the ending liability balance of severance and related costs as of
June 30, 2017
is as follows:
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|
|
|
|
|
|
|
Severance and Related Costs
|
Q1 2017 restructuring action
|
|
$
|
7,057
|
|
Cash payments
|
|
(5,297
|
)
|
Foreign currency adjustments
|
|
110
|
|
June 30, 2017 balance
|
|
$
|
1,870
|
|
IP Cleaning S.p.A.
On
April 6, 2017
, we acquired
100 percent
of the outstanding capital stock of
IP Cleaning S.p.A. and its subsidiaries ("IPC Group")
for a purchase price of
$353,769
, net of cash acquired of
$10,652
. The primary seller was Ambienta SGR S.p.A., a European private equity fund. IPC Group, based in Italy, is a designer and manufacturer of innovative professional cleaning equipment, cleaning tools and supplies. The acquisition strengthens our presence and market share in Europe and will allow us to better leverage our EMEA cost structure. We funded the acquisition of IPC Group, along with related fees, including refinancing of existing debt, with funds raised through borrowings under a senior secured credit facility in an aggregate principal amount of
$420,000
.
Further details regarding our acquisition financing arrangements are discussed in Note 9.
The following table summarizes the preliminary fair value measurement of the assets acquired and liabilities assumed as of the date of acquisition:
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ASSETS
|
|
|
Restricted Cash
|
|
538
|
|
Receivables
|
|
40,067
|
|
Inventories
|
|
54,222
|
|
Other Current Assets
|
|
4,362
|
|
Assets Held for Sale
|
|
2,247
|
|
Property, Plant and Equipment
|
|
62,845
|
|
Intangible Assets Subject to Amortization:
|
|
|
Trade Name
|
|
29,963
|
|
Customer Lists
|
|
115,571
|
|
Noncompete Agreements
|
|
3,210
|
|
Other Assets
|
|
4,168
|
|
Total Identifiable Assets Acquired
|
|
317,193
|
|
LIABILITIES
|
|
|
Accounts Payable
|
|
31,529
|
|
Accrued Expenses
|
|
15,756
|
|
Deferred Income Taxes
|
|
58,573
|
|
Other Liabilities
|
|
6,967
|
|
Total Identifiable Liabilities Assumed
|
|
112,825
|
|
Net Identifiable Assets Acquired
|
|
204,368
|
|
Noncontrolling Interest
|
|
(3,312
|
)
|
Goodwill
|
|
152,713
|
|
Total Estimated Purchase Price, net of Cash Acquired
|
|
$
|
353,769
|
|
The acquired assets, liabilities and operating results have been included in our Condensed Consolidated Financial Statements from the date of acquisition. During the
three and six months ended
June 30, 2017
, we included Net Sales of
$59,074
and a net loss of
$5,187
from IPC Group in our Condensed Consolidated Statements of Operations. The net loss includes a
$4,470
fair value adjustment, net of tax, to the acquired inventory of IPC Group. In addition, costs of
$4,684
, net of tax, associated with the acquisition of the IPC Group were expensed as incurred in the Condensed Consolidated Statements of Operations. The preliminary gross amount of the accounts receivable acquired is
$43,785
, of which
$3,718
is expected to be uncollectible.
The fair value measurement was preliminary at
June 30, 2017
. During the measurement period, the Company expects to record adjustments relating to the finalization of Intangible Assets, Inventories, Restricted Cash and Property, Plant and Equipment valuations, and various income tax matters, amongst others. We expect the fair value measurement process to be completed as soon as possible, but no later than one year from the acquisition date.
Goodwill was calculated as the difference between the acquisition date fair value of the total purchase price consideration and the fair value of the net identifiable assets acquired, and represents the future economic benefits that we expect to achieve as a result of the acquisition. This resulted in an estimated purchase price in excess of the fair value of identifiable net assets acquired.
The estimated purchase price also included the fair value of other assets that were not identifiable and not separately recognizable under accounting rules (i.e. assembled workforce) or these assets were of immaterial value. In addition, there is a going concern element that represents our ability to earn a higher rate of return on the group of assets than would be expected on the separate assets as determined during the valuation process. Based on preliminary fair value measurement of the assets acquired and liabilities assumed, we allocated
$152,713
to goodwill for the expected synergies from combining IPC Group with our existing business. None of the goodwill is expected to be deductible for income tax purposes. The assignment of Goodwill to reporting units is not complete, pending finalization of the valuation measurements.
The fair value of acquired identifiable intangible assets was primarily determined using discounted expected cash flows. The fair value of acquired identifiable tangible assets was primarily determined using the cost or market approach. The valuations were based on the information that was available as of the acquisition date and the expectations and assumptions that have been deemed reasonable by us. There are inherent uncertainties and management judgment required in these determinations. The fair value measurements of the assets acquired and liabilities assumed were based on valuations involving significant unobservable inputs, or Level 3 in the fair value hierarchy.
The preliminary fair value of the acquired intangible assets is
$148,744
. The expected lives of the acquired amortizable intangible assets are approximately
15 years
for Customer Lists,
11 years
for Trade Names and
two years
for Non-Compete Agreements and all are being amortized on a straight-line basis, pending finalization of fair value.
The following unaudited pro forma financial information presents the combined results of operations of Tennant Company as if the acquisition of IPC Group had occurred as of January 1, 2017 and 2016. The unaudited pro forma financial information is presented for informational purposes only. It is not necessarily indicative of what our consolidated results of operations actually would have been had the acquisition occurred at the beginning of each year, nor does it attempt to project the future results of operations of the combined company.
Pro Forma Financial Information (Unaudited)
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|
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|
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|
|
|
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Three Months Ended
|
|
Six Months Ended
|
(In thousands, except per share data)
|
June 30
|
|
June 30
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Net Sales
|
|
|
|
|
|
|
|
Pro forma
|
$
|
270,791
|
|
|
$
|
269,689
|
|
|
$
|
517,163
|
|
|
$
|
497,896
|
|
As reported
|
270,791
|
|
|
216,828
|
|
|
461,850
|
|
|
396,692
|
|
|
|
|
|
|
|
|
|
Net Earnings (Loss) Attributable to Tennant Company
|
|
|
|
|
|
|
|
Pro forma
|
$
|
10,308
|
|
|
$
|
13,577
|
|
|
$
|
10,260
|
|
|
$
|
15,889
|
|
As reported
|
(2,591
|
)
|
|
15,328
|
|
|
(6,548
|
)
|
|
19,767
|
|
|
|
|
|
|
|
|
|
Net Earnings (Loss) Attributable to Tennant Company per Share
|
|
|
|
|
|
|
|
Pro forma
|
$
|
0.58
|
|
|
$
|
0.76
|
|
|
$
|
0.58
|
|
|
$
|
0.88
|
|
As reported
|
(0.15
|
)
|
|
0.85
|
|
|
(0.37
|
)
|
|
1.10
|
|
The unaudited pro forma financial information is based on certain assumptions which we believe are reasonable, directly attributable to the transaction, factually supportable and do not reflect any cost savings, operating synergies or revenue enhancements that we may achieve, nor the costs necessary to achieve those cost savings, operating synergies, revenue enhancements or integration efforts.
The unaudited pro forma financial information above gives effect to the following:
|
|
•
|
Incremental amortization and depreciation expense related to the estimated fair value of the identifiable intangible assets and property, plant and equipment from the preliminary purchase price allocation
.
|
|
|
•
|
Exclusion of the purchase accounting impact of the inventory step up reported in cost of sales for the sale of acquired inventory of
$6,199
.
|
|
|
•
|
Incremental interest expense related to additional debt used to finance the acquisition.
|
|
|
•
|
Exclusion of non-recurring acquisition-related transaction and financing costs.
|
|
|
•
|
Pro forma adjustments tax affected based on the jurisdiction where the costs were incurred.
|
Other Acquisitions
On
July 28, 2016
, pursuant to an asset purchase agreement and real estate purchase agreement with
Crawford Laboratories, Inc. and affiliates thereof ("Sellers")
, we acquired selected assets and liabilities of the Seller's commercial floor coatings business, including the Florock
®
Polymer Flooring brand ("Florock"). Florock manufactures commercial floor coatings systems in Chicago, IL. The purchase price was
$11,843
, including working capital and other adjustments, and is comprised of
$10,965
paid at closing, with the remaining
$878
paid in
two
installments. We paid the first installment of
$575
on October 14, 2016. The remaining amount was paid during
the
2017
first quarter.
On
September 1, 2016
, we acquired selected assets and liabilities of
Dofesa Barrido Mecanizado ("Dofesa")
which was our largest distributor in Mexico over many decades. The operations are based in Aguascalientes, Mexico, and their addition allows us to expand our sales and service network in an important market. The purchase price was
$5,000
less assumed liabilities of
$3,448
, subject to customary working capital adjustments. The net purchase price of
$1,552
is comprised of
$1,202
paid at closing, and a value added tax of
$191
, with the remaining
$350
subject to working capital adjustments. The working capital adjustment is not yet finalized, but we do not expect to pay additional cash beyond the cash already paid.
The acquisitions have been accounted for as business combinations and the results of their operations have been included in the Condensed Consolidated Financial Statements since their respective dates of acquisition.
The impact of the incremental revenue and earnings recorded as a result of the acquisitions are not material to our Condensed Consolidated Financial Statements.
The purchase price allocation for the Florock acquisition is complete. The purchase price allocation for the Dofesa acquisition is complete except for a preliminary valuation of Intangible Assets and finalization of the working capital adjustment. We expect our valuation will be complete in the third quarter of 2017.
The preliminary components of the purchase price of the business combinations described above have been allocated as follows:
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|
|
|
|
Current Assets
|
|
$
|
5,949
|
|
Property, Plant and Equipment, net
|
|
4,112
|
|
Identified Intangible Assets
|
|
6,055
|
|
Goodwill
|
|
1,739
|
|
Other Assets
|
|
7
|
|
Total Assets Acquired
|
|
17,862
|
|
Current Liabilities
|
|
4,764
|
|
Other Liabilities
|
|
53
|
|
Total Liabilities Assumed
|
|
4,817
|
|
Net Assets Acquired
|
|
$
|
13,045
|
|
On
January 19, 2016
, we signed a Business Purchase Agreement (“BPA”) with Green Machines International GmbH and Green Machine Sweepers UK Limited ("the Buyers"), subsidiaries of M&F Management and Financing GmbH, which is also the parent company of the master distributor of our products in Central Eastern Europe, Middle East and Africa, TCS EMEA GmbH, for the sale of our Green Machines
outdoor city cleaning line. The sale closed on
January 31, 2016
. Including working capital adjustments, the aggregate consideration for the Green Machines business was
$5,774
.
For additional information regarding the sale of our Green Machines outdoor city cleaning line, the distributor agreement with the Buyers and the subsequent amendments to the distributor agreement and BPA, refer to Note 4 of our Consolidated Financial Statements as disclosed in our 2016 annual report on Form 10-K for the year ended
December 31, 2016
.
In the first
six
months of
2016
, as a result of this divestiture, we recorded a pre-tax loss of
$149
in our Profit from Operations in the Condensed Consolidated Statements of Operations. The impact of the recorded loss and the sale of Green Machines was not material to our earnings as Green Machines only accounted for approximately
two percent
of our total sales.
We have identified Green Machines International GmbH as a variable interest entity (“VIE”) and have performed a qualitative assessment to determine if Tennant is the primary beneficiary of the VIE. We have determined that we are not the primary beneficiary of the VIE and consolidation of the VIE is not considered necessary.
Inventories are valued at the lower of cost or market. Inventories at
June 30, 2017
and
December 31, 2016
consisted of the following:
|
|
|
|
|
|
|
|
|
|
June 30,
2017
|
|
December 31,
2016
|
Inventories carried at LIFO:
|
|
|
|
Finished goods
|
$
|
45,562
|
|
|
$
|
39,142
|
|
Raw materials, production parts and work-in-process
|
25,107
|
|
|
23,980
|
|
LIFO reserve
|
(28,190
|
)
|
|
(28,190
|
)
|
Total LIFO inventories
|
42,479
|
|
|
34,932
|
|
Inventories carried at FIFO:
|
|
|
|
|
|
Finished goods
|
57,771
|
|
|
31,044
|
|
Raw materials, production parts and work-in-process
|
41,329
|
|
|
12,646
|
|
Total FIFO inventories
|
99,100
|
|
|
43,690
|
|
Total inventories
|
$
|
141,579
|
|
|
$
|
78,622
|
|
The LIFO reserve approximates the difference between LIFO carrying cost and FIFO.
|
|
8.
|
Goodwill and Intangible Assets
|
The changes in the carrying value of Goodwill for the
six
months ended
June 30, 2017
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
Accumulated
Impairment
Losses
|
|
Total
|
Balance as of December 31, 2016
|
$
|
58,397
|
|
|
$
|
(37,332
|
)
|
|
$
|
21,065
|
|
Additions
|
152,713
|
|
|
—
|
|
|
152,713
|
|
Purchase accounting adjustments
|
(2,048
|
)
|
|
—
|
|
|
(2,048
|
)
|
Foreign currency fluctuations
|
13,736
|
|
|
(2,216
|
)
|
|
11,520
|
|
Balance as of June 30, 2017
|
$
|
222,798
|
|
|
$
|
(39,548
|
)
|
|
$
|
183,250
|
|
The balances of acquired Intangible Assets, excluding Goodwill, as of
June 30, 2017
and
December 31, 2016
, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer Lists
|
|
Trade Name
|
|
Technology
|
|
Noncompete Agreement
|
|
Total
|
Balance as of June 30, 2017
|
|
|
|
|
|
|
|
|
|
Original cost
|
$
|
136,503
|
|
|
$
|
33,954
|
|
|
$
|
5,247
|
|
|
$
|
3,424
|
|
|
$
|
179,128
|
|
Accumulated amortization
|
(8,697
|
)
|
|
(823
|
)
|
|
(2,982
|
)
|
|
(428
|
)
|
|
(12,930
|
)
|
Carrying value
|
$
|
127,806
|
|
|
$
|
33,131
|
|
|
$
|
2,265
|
|
|
$
|
2,996
|
|
|
$
|
166,198
|
|
Weighted average original life (in years)
|
15
|
|
|
11
|
|
|
14
|
|
|
2
|
|
|
|
|
Balance as of December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Original cost
|
$
|
8,016
|
|
|
$
|
2,000
|
|
|
$
|
5,136
|
|
|
$
|
—
|
|
|
$
|
15,152
|
|
Accumulated amortization
|
(5,948
|
)
|
|
—
|
|
|
(2,744
|
)
|
|
—
|
|
|
(8,692
|
)
|
Carrying value
|
$
|
2,068
|
|
|
$
|
2,000
|
|
|
$
|
2,392
|
|
|
$
|
—
|
|
|
$
|
6,460
|
|
Weighted average original life (in years)
|
15
|
|
|
15
|
|
|
13
|
|
|
0
|
|
|
|
|
The additions to Goodwill during the first
six
months of
2017
were based on the preliminary purchase price allocation of our acquisition of the IPC Group and adjustments to the preliminary purchase price allocation related to our acquisition of the Florock
brand and the assets of Dofesa Barrido Mecanizado, as described further in Note 5.
As part of our acquisition of the IPC Group, we acquired a Trade Name, Customer Lists and a Noncompete Agreement for a preliminary fair value measurement of
$148,744
. Further details regarding the preliminary purchase price allocation of our acquisition of the IPC Group described is described further in Note 5.
As part of the formation of the i-team North America B.V. joint venture, we purchased the distribution rights to sell the i-mop in North America for
$2,500
. The distribution rights were recorded in Intangible Assets, Net as a customer list on the Condensed Consolidated Balance Sheets as of
June 30, 2017
. The i-mop distribution rights have a useful life of
five years
. Further details regarding the joint venture are discussed in Note 3.
Amortization expense on Intangible Assets for the
three and six months ended
June 30, 2017
was
$3,536
and
$3,780
, respectively. Amortization expense on Intangible Assets for the
three and six months ended
June 30, 2016
was
$112
and
$224
, 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 2017
|
$
|
7,043
|
|
2018
|
14,085
|
|
2019
|
12,801
|
|
2020
|
12,374
|
|
2021
|
12,374
|
|
Thereafter
|
107,521
|
|
Total
|
$
|
166,198
|
|
JPMorgan Credit Facility
In order to finance the acquisition of the IPC Group, the Company and certain of our foreign subsidiaries entered into a Credit Agreement (the “2017 Credit Agreement”) with JPMorgan, as administrative agent, Goldman Sachs Bank USA, as syndication agent, Wells Fargo, National Association, U.S. Bank National Association, and HSBC Bank USA, National Association, as co-documentation agents, and the lenders (including JPMorgan) from time to time party thereto on
April 4, 2017
. The 2017 Credit Agreement provides the Company and certain of our foreign subsidiaries access to a senior secured credit facility until
April 4, 2022
, consisting of a multi-tranche term loan facility in an amount up to
$400,000
and a revolving facility in an amount up to
$200,000
with an option to expand the revolving facility by
$150,000
, 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 2017 Credit Agreement ranges from an annual rate of
0.175%
to
0.35%
, depending on the Company’s leverage ratio. Borrowings denominated in U.S. dollars under the 2017 Credit Agreement bear interest at a rate per annum equal to (a) the greatest of (i) the prime rate, (ii) the federal funds rate plus
0.50%
and (iii) the adjusted LIBOR rate for a one month period, but in any case, not less than
0%
, plus, in any such case,
1.00%
, plus an additional spread of
0.075%
to
0.90%
for revolving loans and
0.25%
to
1.25%
for term loans, depending on the Company’s leverage ratio, or (b) the LIBOR Rate, as adjusted for statutory reserve requirements for eurocurrency liabilities, but in any case, not less than
0%
, plus an additional spread of
1.075%
to
1.90%
for revolving loans and
1.25%
to
2.25%
for term loans, depending on the Company’s leverage ratio.
Upon entry into the 2017 Credit Agreement, the Company repaid
$45,000
in outstanding borrowings under our Amended and Restated Credit Agreement, as described in Note 9 of our annual report on Form 10-K for the year ended
December 31, 2016
, and terminated the Amended and Restated Credit Agreement.
The 2017 Credit Agreement contains customary representations, warranties and covenants, including but not limited to covenants restricting the Company’s ability to incur indebtedness and liens and merge or consolidate with another entity. The Credit Agreement also contains financial covenants, including the ratio of consolidated total indebtedness to consolidated earnings before income, taxes, depreciation and amortization ("EBITDA"), as well as the ratio of consolidated EBITDA to consolidated interest expense. These financial covenants may restrict our ability to pay dividends and purchase outstanding shares of our common stock. At
June 30, 2017
, we were in compliance with these financial covenants.
The full terms and conditions of the senior secured credit facility, including our financial covenants, are set forth in the 2017 Credit Agreement. A copy of the 2017 Credit Agreement was filed as Exhibit 10.1 to the Company's Current Report on Form 8-K filed April 5, 2017 and is incorporated by reference herein.
Issuance of
5.625%
Senior Notes due 2025
On
April 18, 2017
, we issued and sold
$300,000
in aggregate principal amount of our
5.625%
Senior Notes due 2025 (the “Notes”), pursuant to an Indenture, dated as of April 18, 2017, among the Company, the Guarantors (as defined therein), and Wells Fargo Bank, National Association, a national banking association, as trustee. The Notes are guaranteed by Tennant Coatings, Inc. and Tennant Sales and Service Company (collectively, the “Guarantors”), which are wholly owned subsidiaries of the Company.
The Notes will mature on
May 1, 2025
. Interest on the Notes will accrue at the rate of
5.625%
per annum and will be payable semiannually in cash on each May 1 and November 1, commencing on November 1, 2017.
The Notes and the guarantees will constitute senior unsecured obligations of the Company and the Guarantors, respectively. The Notes and the guarantees, respectively, will be: (a) equal in right of payment with all of the Company’s and the Guarantors’ senior debt, without giving effect to collateral arrangements; (b) senior in right of payment to all of the Company’s and the Guarantors’ future subordinated debt, if any; (c) effectively subordinated in right of payment to all of the Company’s and the Guarantors’ debt and obligations that are secured, including borrowings under the Company’s senior secured credit facilities for so long as the senior secured credit facilities are secured, to the extent of the value of the assets securing such liens; and (d) structurally subordinated in right of payment to all liabilities (including trade payables) of the Company’s and the Guarantors’ subsidiaries that do not guarantee the Notes.
We used the net proceeds from this offering to refinance a
$300,000
term loan under our 2017 Credit Agreement that we borrowed as part of the financing for the acquisition of the IPC Group and to pay related fees and expenses.
The full terms and conditions of the Indenture are set forth in Exhibit 4.1 to the Company's Current Report on Form 8-K filed April 24, 2017 and is incorporated by reference herein.
Registration Rights Agreement
In connection with the issuance and sale of the Notes, the Company entered into a Registration Rights Agreement, dated
April 18, 2017
, among the Company, the Guarantors and Goldman, Sachs & Co. and J.P. Morgan Securities LLC (the “Registration Rights Agreement”). Pursuant to the Registration Rights Agreement, the Company agreed (1) to use its commercially reasonable efforts to consummate an exchange offer to exchange the Notes for new registered notes (the “Exchange Notes”), with terms substantially identical in all material respects with the Notes (except that the Exchange Notes will not contain terms with respect to additional interest, registration rights or transfer restrictions) and (2) if required, to have a shelf registration statement declared effective with respect to resales of the Notes. If the Company fails to satisfy its obligations under the Registration Rights Agreement within
360 days
, it will be required to pay additional interest to the holders of the Notes under certain circumstances.
The Registration Rights Agreement is incorporated by reference to Exhibit 4.2 to the Company's Current Report on Form 8-K filed April 24, 2017.
Debt outstanding at
June 30, 2017
is summarized as follows:
|
|
|
|
|
|
|
|
|
|
June 30,
2017
|
|
December 31,
2016
|
Long-Term Debt:
|
|
|
|
Senior Unsecured Notes
|
$
|
300,000
|
|
|
$
|
—
|
|
Credit Facility Borrowings
|
117,750
|
|
|
36,143
|
|
Capital Lease Obligations
|
688
|
|
|
51
|
|
Total Long-Term Debt
|
418,438
|
|
|
36,194
|
|
Less: Unamortized Debt Issuance Costs
|
(7,415
|
)
|
|
—
|
|
Less: Current Maturities of Credit Facility Borrowings, Net of Debt Issuance Costs
(1)
|
(4,905
|
)
|
|
(3,459
|
)
|
Less: Current Maturities of Capital Lease Obligations
(1)
|
(402
|
)
|
|
—
|
|
Long-Term Portion, Net
|
$
|
405,716
|
|
|
$
|
32,735
|
|
|
|
(1)
|
Current maturities of long-term debt includes
$5,000
of current maturities, less
$95
of unamortized debt issuance costs, under our 2017 Credit Agreement and
$402
of current maturities of capital lease obligations.
|
As of
June 30, 2017
, we had outstanding borrowings under our 2017 Credit Agreement, totaling
$97,750
under our term loan facility and
$20,000
under our revolving facility. There were
$300,000
in outstanding borrowings under the Notes as of
June 30, 2017
. In addition, we had stand alone letters of credit and bank guarantees outstanding in the amount of
$4,645
. Commitment fees on unused lines of credit for the
six
months ended
June 30, 2017
were
$200
. The overall weighted average cost of debt is approximately
4.9%
and, net of a related cross-currency swap instrument, is approximately
4.2%
. Further details regarding the cross-currency swap instrument are discussed in Note 11.
Prudential Investment Management, Inc.
In March 2017, we repaid
$11,143
of debt evidenced by the notes issued under our Private Shelf Agreement, as described in Note 9 of our annual report on Form 10-K for the year ended
December 31, 2016
, and terminated the Private Shelf Agreement.
HSBC Bank (China) Company Limited, Shanghai Branch
On June 20, 2012, we entered into a banking facility with the HSBC Bank (China) Company Limited, Shanghai Branch in the amount of
$5,000
. As of
June 30, 2017
, there were
no
outstanding borrowings on this facility.
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 for the
six
months ended
June 30, 2017
and
2016
were as follows:
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
June 30
|
|
2017
|
|
2016
|
Beginning balance
|
$
|
10,960
|
|
|
$
|
10,093
|
|
Additions charged to expense
|
5,815
|
|
|
5,946
|
|
Acquired warranty obligations
|
384
|
|
|
—
|
|
Foreign currency fluctuations
|
154
|
|
|
48
|
|
Claims paid
|
(5,872
|
)
|
|
(5,766
|
)
|
Ending balance
|
$
|
11,441
|
|
|
$
|
10,321
|
|
Hedge Accounting and Hedging Programs
We recognize all derivative instruments as either assets or liabilities in our Condensed 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 in Net Foreign Currency Transaction (Losses) Gains in our Condensed Consolidated Statements of Operations. The time value of purchased contracts is recorded in Net Foreign Currency Transaction (Losses) Gains in our Condensed Consolidated Statements of Operations.
Balance Sheet Hedging
Hedges of Foreign Currency Assets and Liabilities
We hedge portions of 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 Condensed Consolidated Balance Sheets with changes in the fair value recorded to Net Foreign Currency Transaction (Losses) Gains in our Condensed Consolidated Statements of Operations. 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
June 30, 2017
and
December 31, 2016
, the notional amounts of foreign currency forward exchange contracts outstanding not designated as hedging instruments were
$71,415
and
$42,866
, respectively.
During the first quarter of 2017, in connection with our acquisition of IPC Group, we entered into a foreign currency option contract not designated as a hedging instrument for a notional amount of
€180,000
. The option contract has since expired and there were
no
outstanding foreign currency option contracts not designated as hedging instruments as of
June 30, 2017
and
December 31, 2016
.
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
$2,781
and
$2,127
as of
June 30, 2017
and
December 31, 2016
, respectively. The notional amounts of outstanding foreign currency option contracts designated as cash flow hedges were
$8,989
and
$8,522
as of
June 30, 2017
and
December 31, 2016
, respectively.
To receive hedge accounting treatment, all hedging relationships are formally documented at the inception of the hedge, and the hedges must be highly effective in offsetting changes to future cash flows on hedged transactions. We record changes in the fair value of these cash flow hedges in Accumulated Other Comprehensive Loss in our Condensed Consolidated Balance Sheets, until the forecasted transaction occurs. When the forecasted transaction occurs, we reclassify the related gain or loss on the cash flow hedge to Net Sales in our Condensed Consolidated Statements of Operations. In the event the hedge becomes ineffective, the underlying forecasted transaction does not occur, or it becomes probable that it will not occur, we reclassify the gain or loss on the related cash flow hedge from Accumulated Other Comprehensive Loss to Net Foreign Currency Transaction (Losses) Gains in our Condensed Consolidated Statements of Operations at that time. If we do not elect hedge accounting, or the contract does not qualify for hedge accounting treatment, the changes in fair value from period to period are recorded in Net Foreign Currency Transaction (Losses) Gains in our Condensed Consolidated Statements of Operations.
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. During the
second
quarter of
2017
we entered into Euro to US 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 entered 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. We designated these cross currency swaps as cash flow hedges. The hedged cash flows as of
June 30, 2017
included
€184,800
of total notional value. As of
June 30, 2017
, the aggregate scheduled interest payments over the course of the loan and related swaps amounted to
€34,800
. The scheduled maturity and principal payment of the loan and related swaps of
€150,000
are due in
April 2022
. There were
no
cross currency swaps designated as cash flow hedges as of
December 31, 2016
.
The fair value of derivative instruments on our Condensed Consolidated Balance Sheets as of
June 30, 2017
and
December 31, 2016
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
December 31, 2016
|
|
|
Fair Value Asset Derivatives
|
|
Fair Value Liability Derivatives
|
|
Fair Value Asset Derivatives
|
|
Fair Value Liability Derivatives
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
|
Foreign currency option contracts
(1)
|
|
$
|
78
|
|
|
$
|
—
|
|
|
$
|
184
|
|
|
$
|
—
|
|
Foreign currency forward contracts
(1)
|
|
10,154
|
|
|
26,090
|
|
|
—
|
|
|
13
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
Foreign currency option contracts
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Foreign currency forward contracts
(1)
|
|
$
|
713
|
|
|
$
|
1,324
|
|
|
$
|
12
|
|
|
$
|
162
|
|
|
|
(1)
|
Contracts that mature within the next 12 months are included in Other Current Assets and Other Current Liabilities for asset derivatives and liability derivatives, respectively, on our Condensed Consolidated Balance Sheets. Contracts with maturities greater than 12 months are included in Other Assets and Other Liabilities for asset derivatives and liability derivatives, respectively, on our Condensed Consolidated Balance Sheets. Amounts included in our Condensed Consolidated Balance Sheets are recorded net where a right of offset exists with the same derivative counterparty.
|
As of
June 30, 2017
, we anticipate reclassifying approximately
$2,252
of losses from Accumulated Other Comprehensive Loss to net earnings during the next 12 months.
The effect of foreign currency derivative instruments designated as cash flow hedges and of foreign currency derivative instruments not designated as hedges in our Condensed Consolidated Statements of Operations for the
three and six months ended
June 30, 2017
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 30, 2017
|
|
June 30, 2017
|
|
|
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 Income, net of
tax
(1)
|
|
$
|
(47
|
)
|
|
$
|
(9,517
|
)
|
|
$
|
(137
|
)
|
|
$
|
(9,534
|
)
|
Net gain (loss) reclassified from Accumulated Other Comprehensive Loss into earnings, net of tax, effective portion to Net Sales
|
|
43
|
|
|
(83
|
)
|
|
1
|
|
|
(102
|
)
|
Net gain reclassified from Accumulated Other Comprehensive Loss into earnings, net of tax, effective portion to Interest Income
|
|
—
|
|
|
449
|
|
|
—
|
|
|
449
|
|
Net loss reclassified from Accumulated Other Comprehensive Loss into earnings, net of tax, effective portion to Net Foreign Currency Transaction (Losses) Gains
|
|
—
|
|
|
(7,148
|
)
|
|
—
|
|
|
(7,148
|
)
|
Net (loss) gain recognized in earnings
(2)
|
|
(4
|
)
|
|
3
|
|
|
(5
|
)
|
|
5
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
Net loss recognized in earnings
(3)
|
|
$
|
—
|
|
|
$
|
(3,939
|
)
|
|
$
|
(1,132
|
)
|
|
$
|
(5,307
|
)
|
The effect of foreign currency derivative instruments designated as cash flow hedges and of foreign currency derivative instruments not designated as hedges in our Condensed Consolidated Statements Operations for the
three and six months ended
June 30, 2016
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 30, 2016
|
|
June 30, 2016
|
|
|
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 Income, net of tax
(1)
|
|
$
|
(44
|
)
|
|
$
|
(29
|
)
|
|
$
|
(230
|
)
|
|
$
|
(65
|
)
|
Net loss reclassified from Accumulated Other Comprehensive Loss into earnings, net of tax, effective portion to Net Sales
|
|
—
|
|
|
(84
|
)
|
|
—
|
|
|
(26
|
)
|
Net loss recognized in earnings
(2)
|
|
—
|
|
|
—
|
|
|
(6
|
)
|
|
—
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
Net loss recognized in earnings
(3)
|
|
$
|
—
|
|
|
$
|
(371
|
)
|
|
$
|
—
|
|
|
$
|
(2,062
|
)
|
|
|
(1)
|
Net change in the fair value of the effective portion classified in Other Comprehensive Income.
|
|
|
(2)
|
Ineffective portion and amount excluded from effectiveness testing classified in Net Foreign Currency Transaction (Losses) Gains.
|
|
|
(3)
|
Classified in Net Foreign Currency Transaction (Losses) Gains.
|
|
|
12.
|
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 on a recurring basis at
June 30, 2017
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Assets:
|
|
|
|
|
|
|
|
Foreign currency forward exchange contracts
|
$
|
10,867
|
|
|
$
|
—
|
|
|
$
|
10,867
|
|
|
$
|
—
|
|
Foreign currency option contracts
|
78
|
|
|
—
|
|
|
78
|
|
|
—
|
|
Total Assets
|
$
|
10,945
|
|
|
$
|
—
|
|
|
$
|
10,945
|
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward exchange contracts
|
$
|
27,414
|
|
|
$
|
—
|
|
|
$
|
27,414
|
|
|
$
|
—
|
|
Foreign currency option contracts
|
$
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total Liabilities
|
$
|
27,414
|
|
|
$
|
—
|
|
|
$
|
27,414
|
|
|
$
|
—
|
|
Our foreign currency forward and option 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 11.
The carrying amounts reported in the Condensed 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 of our Long-Term Debt approximates cost based on the borrowing rates currently available to us for bank loans with similar terms and remaining maturities.
From time to time, we measure certain assets at fair value on a non-recurring basis, including evaluation of long-lived assets, goodwill and other intangible assets, as part of a business acquisition. These assets are measured and recognized at amounts equal to the fair value determined as of the date of acquisition. Fair value valuations are based on the information available as of the acquisition date and the expectations and assumptions that have been deemed reasonable by us. There are inherent uncertainties and management judgment required in these determinations. The fair value measurements of assets acquired and liabilities assumed as part of a business acquisition are based on valuations involving significant unobservable inputs, or Level 3, in the fair value hierarchy.
These assets are also subject to periodic impairment testing by comparing the respective carrying value of each asset to the estimated fair value of the reporting unit or asset group in which they reside. In the event we determine these assets to be impaired, we would recognize an impairment loss equal to the amount by which the carrying value of the reporting unit, impaired asset or asset group exceeds its estimated fair value. These periodic impairment tests utilize company-specific assumptions involving significant unobservable inputs, or Level 3, in the fair value hierarchy.
|
|
13.
|
Retirement Benefit Plans
|
Our defined benefit pension plans and postretirement medical plan are described in Note 13 of our annual report on Form 10-K for the year ended
December 31, 2016
. We have contributed
$186
and
$86
during the
second
quarter of
2017
and
$265
and
$295
during the first
six
months of
2017
to our pension plans and postretirement medical plan, respectively.
The components of the net periodic cost (benefit) for the
three and six months ended
June 30, 2017
and
2016
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
June 30
|
|
|
Pension Benefits
|
|
Postretirement
|
|
|
U.S. Plans
|
|
Non-U.S. Plans
|
|
Medical Benefits
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Service cost
|
|
$
|
—
|
|
|
$
|
97
|
|
|
$
|
24
|
|
|
$
|
36
|
|
|
$
|
20
|
|
|
$
|
24
|
|
Interest cost
|
|
390
|
|
|
415
|
|
|
129
|
|
|
103
|
|
|
90
|
|
|
100
|
|
Expected return on plan assets
|
|
(586
|
)
|
|
(603
|
)
|
|
(101
|
)
|
|
(97
|
)
|
|
—
|
|
|
—
|
|
Amortization of net actuarial loss
|
|
11
|
|
|
8
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Amortization of prior service cost
|
|
—
|
|
|
10
|
|
|
49
|
|
|
32
|
|
|
—
|
|
|
—
|
|
Settlement charge
|
|
205
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Foreign currency
|
|
—
|
|
|
—
|
|
|
234
|
|
|
(16
|
)
|
|
—
|
|
|
—
|
|
Net periodic cost (benefit)
|
|
$
|
20
|
|
|
$
|
(73
|
)
|
|
$
|
335
|
|
|
$
|
58
|
|
|
$
|
110
|
|
|
$
|
124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
June 30
|
|
|
Pension Benefits
|
|
Postretirement
|
|
|
U.S. Plans
|
|
Non-U.S. Plans
|
|
Medical Benefits
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Service cost
|
|
$
|
—
|
|
|
$
|
177
|
|
|
$
|
48
|
|
|
$
|
72
|
|
|
$
|
40
|
|
|
$
|
48
|
|
Interest cost
|
|
780
|
|
|
830
|
|
|
219
|
|
|
208
|
|
|
181
|
|
|
199
|
|
Expected return on plan assets
|
|
(1,171
|
)
|
|
(1,200
|
)
|
|
(197
|
)
|
|
(194
|
)
|
|
—
|
|
|
—
|
|
Amortization of net actuarial loss
|
|
21
|
|
|
17
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Amortization of prior service cost
|
|
—
|
|
|
21
|
|
|
96
|
|
|
64
|
|
|
—
|
|
|
—
|
|
Settlement charge
|
|
205
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Foreign currency
|
|
—
|
|
|
—
|
|
|
229
|
|
|
24
|
|
|
—
|
|
|
—
|
|
Net periodic (benefit) cost
|
|
$
|
(165
|
)
|
|
$
|
(155
|
)
|
|
$
|
395
|
|
|
$
|
174
|
|
|
$
|
221
|
|
|
$
|
247
|
|
|
|
14.
|
Commitments and Contingencies
|
Certain operating leases for vehicles contain residual value guarantee provisions, which would become due at the expiration of the operating lease agreement if the fair value of the leased vehicles is less than the guaranteed residual value. As of
June 30, 2017
, of those leases that contain residual value guarantees, the aggregate residual value at lease expiration was
$14,700
, of which we have guaranteed
$13,319
. As of
June 30, 2017
, we have recorded a liability for the estimated end of term loss related to this residual value guarantee of
$374
for certain vehicles within our fleet. Our fleet also contains vehicles we estimate will settle at a gain. Gains on these vehicles will be recognized at the end of the lease term.
The minimum rentals for aggregate lease commitments as of
June 30, 2017
were as follows:
|
|
|
|
|
|
Remaining 2017
|
|
$
|
7,702
|
|
2018
|
|
10,540
|
|
2019
|
|
7,074
|
|
2020
|
|
4,380
|
|
2021
|
|
2,488
|
|
Thereafter
|
|
4,183
|
|
Total
|
|
$
|
36,367
|
|
|
|
15.
|
Accumulated Other Comprehensive Loss
|
Components of Accumulated Other Comprehensive Loss, net of tax, within the Condensed Consolidated Balance Sheets, are as follows:
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
December 31, 2016
|
Foreign currency translation adjustments
|
$
|
(28,404
|
)
|
|
$
|
(44,444
|
)
|
Pension and retiree medical benefits
|
(5,251
|
)
|
|
(5,391
|
)
|
Cash flow hedge
|
(2,959
|
)
|
|
(88
|
)
|
Total Accumulated Other Comprehensive Loss
|
$
|
(36,614
|
)
|
|
$
|
(49,923
|
)
|
The changes in components of Accumulated Other Comprehensive Loss, net of tax, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Translation Adjustments
|
|
Pension and Post Retirement Benefits
|
|
Cash Flow Hedge
|
|
Total
|
December 31, 2016
|
$
|
(44,444
|
)
|
|
$
|
(5,391
|
)
|
|
$
|
(88
|
)
|
|
$
|
(49,923
|
)
|
Other comprehensive income (loss) before reclassifications
|
16,040
|
|
|
127
|
|
|
(9,671
|
)
|
|
6,496
|
|
Amounts reclassified from Accumulated Other Comprehensive Loss
|
—
|
|
|
13
|
|
|
6,800
|
|
|
6,813
|
|
Net current period other comprehensive income (loss)
|
$
|
16,040
|
|
|
$
|
140
|
|
|
$
|
(2,871
|
)
|
|
$
|
13,309
|
|
June 30, 2017
|
$
|
(28,404
|
)
|
|
$
|
(5,251
|
)
|
|
$
|
(2,959
|
)
|
|
$
|
(36,614
|
)
|
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
2013
and, with limited exceptions, state and foreign income tax examinations for taxable years before
2012
.
We recognize potential accrued interest and penalties related to unrecognized tax benefits in Income Tax Expense. In addition to the liability of
$2,790
for unrecognized tax benefits as of
June 30, 2017
, there was approximately
$536
for accrued interest and penalties. The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate as of
June 30, 2017
was
$2,433
. 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.
Unrecognized tax benefits were reduced by
$138
during the first
six
months of
2017
as a result of the expiration of the statute of limitations in various jurisdictions and settlement with tax authorities.
We are currently undergoing income tax examinations in various state and foreign jurisdictions covering
2014
to
2016
. Although the final outcome of these examinations cannot be currently determined, we believe that we have adequate reserves with respect to these examinations.
|
|
17.
|
Share-Based Compensation
|
Our share-based compensation plans are described in Note 17 of our annual report on Form 10-K for the year ended
December 31, 2016
. During the
three
months ended
June 30, 2017
and
2016
, we recognized total Share-Based Compensation Expense of
$1,049
and
$1,789
, respectively. During the
six
months ended
June 30, 2017
and
2016
, we recognized total Share-Based Compensation Expense of
$3,622
and
$4,426
, respectively. The total excess tax benefit recognized for share-based compensation arrangements during the
six
months ended
June 30, 2017
and
2016
was
$1,144
and
$246
, respectively.
During the first
six
months of
2017
, we granted
19,971
restricted shares. The weighted average grant date fair value of each share awarded was
$73.16
. Restricted share awards generally have a
three
year vesting period from the effective date of the grant. The total fair value of shares vested during the
six
months ended
June 30, 2017
and
2016
was
$1,250
and
$1,724
, respectively.
|
|
18.
|
(Loss) Earnings Attributable to Tennant Company Per Share
|
The computations of Basic and Diluted (Loss) Earnings Attributable to Tennant Company per Share were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30
|
|
June 30
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Numerator:
|
|
|
|
|
|
|
|
Net (Loss) Earnings Attributable to Tennant Company
|
$
|
(2,591
|
)
|
|
$
|
15,328
|
|
|
$
|
(6,548
|
)
|
|
$
|
19,767
|
|
Denominator:
|
|
|
|
|
|
|
|
Basic - Weighted Average Shares Outstanding
|
17,693,102
|
|
|
17,508,022
|
|
|
17,645,090
|
|
|
17,526,107
|
|
Effect of Dilutive Securities:
|
|
|
|
|
|
|
|
Share-Based Compensation Plans
|
—
|
|
|
425,221
|
|
|
—
|
|
|
428,060
|
|
Diluted - Weighted Average Shares Outstanding
|
17,693,102
|
|
|
17,933,243
|
|
|
17,645,090
|
|
|
17,954,167
|
|
Basic (Loss) Earnings per Share
|
$
|
(0.15
|
)
|
|
$
|
0.88
|
|
|
$
|
(0.37
|
)
|
|
$
|
1.13
|
|
Diluted (Loss) Earnings per Share
|
$
|
(0.15
|
)
|
|
$
|
0.85
|
|
|
$
|
(0.37
|
)
|
|
$
|
1.10
|
|
Excluded from the dilutive securities shown above were options to purchase
735,377
and
408,979
shares of Common Stock during the
three
months ended
June 30, 2017
and
2016
, respectively. Excluded from the dilutive securities shown above were options to purchase
716,401
and
405,123
shares of Common Stock during the
six
months ended
June 30, 2017
and
2016
, 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.
We are organized into
four
operating segments: North America; Latin America; EMEA; and APAC. We combine our North America and Latin America operating segments into the “Americas” for reporting Net Sales by geographic area. In accordance with the objective and basic principles of the applicable accounting guidance, we aggregate our operating segments into
one
reportable segment that consists of the design, manufacture and sale of products used primarily in the maintenance of nonresidential surfaces.
Net Sales attributed to each geographic area for the
three and six months ended
June 30, 2017
and
2016
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30
|
|
June 30
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Americas
|
$
|
169,146
|
|
|
$
|
163,857
|
|
|
$
|
311,916
|
|
|
$
|
297,410
|
|
EMEA
|
77,356
|
|
|
34,391
|
|
|
110,632
|
|
|
65,124
|
|
APAC
|
24,289
|
|
|
18,580
|
|
|
39,302
|
|
|
34,158
|
|
Total
|
$
|
270,791
|
|
|
$
|
216,828
|
|
|
$
|
461,850
|
|
|
$
|
396,692
|
|
Net Sales are attributed to each geographic area based on the end user country and are net of intercompany sales.
|
|
20.
|
Related Party Transactions
|
During the first quarter of
2008
, we acquired Sociedade Alfa Ltda. and entered into lease agreements for certain properties owned by or partially owned by the former owners of this entity. Some of these individuals are current employees of Tennant. Lease payments made under these lease agreements are not material to our financial position or results of operations.