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 $8,804. 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 8.
The following table summarizes the preliminary fair value measurement of the assets acquired and liabilities assumed as of the date of acquisition:
|
| | | | |
| ASSETS | | |
| Restricted Cash | | $ | 538 |
|
| Receivables | | 40,067 |
|
| Inventories | | 54,256 |
|
| Other Current Assets | | 4,362 |
|
| Assets Held for Sale | | 2,247 |
|
| Property, Plant and Equipment | | 63,256 |
|
| Intangible Assets Subject to Amortization: | | |
| Trade Name | | 26,753 |
|
| Customer Lists | | 123,061 |
|
| Technology | | 9,631 |
|
| Other Assets | | 4,168 |
|
| Total Identifiable Assets Acquired | | 328,339 |
|
| LIABILITIES | | |
| Accounts Payable | | 31,529 |
|
| Accrued Expenses | | 15,756 |
|
| Deferred Income Taxes | | 61,694 |
|
| Other Liabilities | | 6,967 |
|
| Total Identifiable Liabilities Assumed | | 115,946 |
|
| Net Identifiable Assets Acquired | | 212,393 |
|
| Noncontrolling Interest | | (2,266 | ) |
| Goodwill | | 143,642 |
|
| 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 months ended September 30, 2017, we included net sales of $56,110 and a net loss of $6,850 from IPC Group in our Condensed Consolidated Statements of Operations. During the nine months endedSeptember 30, 2017, we included net sales of $115,184and a net loss of$12,037 from IPC Group in our Condensed Consolidated Statements of Operations. For the three and nine months ended September 30, 2017, the net loss includes a fair value adjustment, net of tax, of $1,619 and$6,089, respectively, to the acquired inventory of IPC Group. In addition, costs of $622 and $8,180, net of tax, associated with the acquisition of the IPC Group were expensed as incurred in the Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2017, respectively. The preliminary gross amount of the accounts receivable acquired is $43,785, of which $3,718 is expected to be uncollectible.
Amortization expense recorded for acquired intangible assets for the three and nine months ended September 30, 2017 was$7,331 and $10,438, respectively. For the three months ended September 30, 2017, amortization expense includes a $1,999 measurement period adjustment resulting from updates to the provisional fair values of the acquired intangible assets recorded in the second quarter of 2017 as well as the use of an accelerated method of amortization for the acquired customer lists and technology. This charge affected selling and administrative expense in the Condensed Consolidated Statements of Operations, along with an associated reduction to income tax expense of$553.
The fair value measurement was preliminary at September 30, 2017.During the measurement period, we expect to record adjustments relating to the finalization of intangible assets, inventories, restricted cash and property, plant and equipment valuations, and various income tax matters, among others. We expect the fair value measurement process to be completed not 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 (e.g., 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 $143,642 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 $159,445. The expected lives of the acquired amortizable intangible assets are approximately 15 years for customer lists, 10 years for trade names and 10 years for technology. Trade names are being amortized on a straight-line basis while the customer lists and technology are being amortized on an accelerated basis.
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) |
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| (In thousands, except per share data) | September 30 | | September 30 |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Net Sales | | | | | | | |
| Pro forma | $ | 261,921 |
| | $ | 250,050 |
| | $ | 777,832 |
| | $ | 747,943 |
|
| As reported | 261,921 |
| | 200,134 |
| | 723,771 |
| | 596,826 |
|
| | | | | | | | |
| Net Earnings (Loss) Attributable to Tennant Company | | | | | | | |
| Pro forma | $ | 5,800 |
| | $ | 7,696 |
| | $ | 14,875 |
| | $ | 20,659 |
|
| As reported | 3,559 |
| | 11,477 |
| | (2,989 | ) | | 31,244 |
|
| | | | | | | | |
| Net Earnings (Loss) Attributable to Tennant Company per Share | | | | | | | |
| Pro forma | $ | 0.32 |
| | $ | 0.43 |
| | $ | 0.84 |
| | $ | 1.15 |
|
| As reported | 0.20 |
| | 0.64 |
| | (0.17 | ) | | 1.74 |
|
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 three and nine months ended September 30, 2017 related to the sale of acquired inventory of $2,246 and $8,445, respectively.
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 Sellers' 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. 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 $4,650 less assumed liabilities of $3,448, subject to customary working capital adjustments. The net purchase price of $1,202 and a value added tax of $191 were paid at closing.
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 allocations for both the Florock and Dofesa acquisitions are complete.
The components of the final purchase price of the business combinations described above have been allocated as follows:
|
| | | | |
| 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 |
|
Inventories are valued at the lower of cost or market. Inventories at September 30, 2017net realizable value and December 31, 2016 consisted of the following:
| | | | | | | | | | | |
| September 30,
2023 | | December 31,
2022 |
| Inventories carried at LIFO: | | | |
Finished goods(a) | $ | 72.6 | | | $ | 85.0 | |
| Raw materials and work-in-process | 42.0 | | | 46.4 | |
Excess of FIFO over LIFO cost(b) | (47.3) | | | (49.7) | |
| Total LIFO inventories | $ | 67.3 | | | $ | 81.7 | |
| | | |
| Inventories carried at FIFO: | | | |
Finished goods(a) | $ | 59.1 | | | $ | 68.9 | |
| Raw materials and work-in-process | 58.2 | | | 56.0 | |
| Total FIFO inventories | $ | 117.3 | | | $ | 124.9 | |
| Total inventories | $ | 184.6 | | | $ | 206.6 | |
|
| | | | | | | |
| | September 30,
2017 | | December 31,
2016 |
| Inventories carried at LIFO: | | | |
| Finished goods | $ | 47,734 |
| | $ | 39,142 |
|
| Raw materials, production parts and work-in-process | 24,275 |
| | 23,980 |
|
| LIFO reserve | (28,190 | ) | | (28,190 | ) |
| Total LIFO inventories | 43,819 |
| | 34,932 |
|
| Inventories carried at FIFO: | |
| | |
|
| Finished goods | 56,477 |
| | 31,044 |
|
| Raw materials, production parts and work-in-process | 41,223 |
| | 12,646 |
|
| Total FIFO inventories | 97,700 |
| | 43,690 |
|
| Total inventories | $ | 141,519 |
| | $ | 78,622 |
|
(b)The LIFO reserve approximates the difference between LIFO carryingreplacement cost and FIFO.the stated LIFO inventory value is not materially different from the reserve for the LIFO valuation method.
| |
7. | Goodwill and Intangible Assets |
6. Goodwill and Intangible Assets
The changes in the carrying valueamount of goodwill for the nine months ended September 30, 20172023 were as follows:
| | | | | | | | | | | | | | | | | |
| Goodwill | | Accumulated Impairment Losses | | Total |
| Balance as of December 31, 2022 | $ | 218.8 | | | $ | (36.8) | | | $ | 182.0 | |
| Foreign currency fluctuations | (6.3) | | | 4.8 | | | (1.5) | |
| Balance as of September 30, 2023 | $ | 212.5 | | | $ | (32.0) | | | $ | 180.5 | |
|
| | | | | | | | | | | |
| | Goodwill | | Accumulated Impairment Losses | | Total |
| Balance as of December 31, 2016 | $ | 58,397 |
| | $ | (37,332 | ) | | $ | 21,065 |
|
| Additions | 143,642 |
| | — |
| | 143,642 |
|
| Purchase accounting adjustments | (1,865 | ) | | — |
| | (1,865 | ) |
| Foreign currency fluctuations | 19,632 |
| | (3,426 | ) | | 16,206 |
|
| Balance as of September 30, 2017 | $ | 219,806 |
| | $ | (40,758 | ) | | $ | 179,048 |
|
The balances of acquired intangible assets, excluding goodwill, as of September 30, 2017 and December 31, 2016, were as follows:
|
| | | | | | | | | | | | | | | |
| | Customer Lists | | Trade Names | | Technology | | Total |
| Balance as of September 30, 2017 | | | | | | | |
| Original cost | $ | 147,582 |
| | $ | 31,515 |
| | $ | 14,425 |
| | $ | 193,522 |
|
| Accumulated amortization | (13,492 | ) | | (1,631 | ) | | (2,647 | ) | | (17,770 | ) |
| Carrying value | $ | 134,090 |
| | $ | 29,884 |
| | $ | 11,778 |
| | $ | 175,752 |
|
| Weighted average original life (in years) | 15 |
| | 10 |
| | 11 |
| | |
|
| | | | | | | | |
| 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 |
| | |
|
The additions to goodwill during the first nine months of 2017 were based on the preliminary purchase price allocation of our acquisition of the IPC Group, as described further in Note 5.
As part of our acquisition of the IPC Group, we acquired customer lists, trade names and technology for a preliminary fair value measurement of $159,445. Further details regarding the preliminary purchase price allocation of our acquisition of the IPC Group are 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 September 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. | | | | | | | | | | | | | | | | | | | | | | | |
| Customer Lists | | Trade Names | | Technology | | Total |
| Balance as of September 30, 2023 | | | | | | | |
| Original cost | $ | 144.6 | | | $ | 28.1 | | | $ | 15.9 | | | $ | 188.6 | |
| Accumulated amortization | (94.2) | | | (17.8) | | | (12.4) | | | (124.4) | |
| Carrying value | $ | 50.4 | | | $ | 10.3 | | | $ | 3.5 | | | $ | 64.2 | |
| Weighted average original life (in years) | 15 | | 11 | | 11 | | |
| | | | | | | |
| Balance as of December 31, 2022 | | | | | | | |
| Original cost | $ | 146.6 | | | $ | 28.6 | | | $ | 15.9 | | | $ | 191.1 | |
| Accumulated amortization | (87.5) | | | (15.9) | | | (11.3) | | | (114.7) | |
| Carrying value | $ | 59.1 | | | $ | 12.7 | | | $ | 4.6 | | | $ | 76.4 | |
| Weighted average original life (in years) | 15 | | 11 | | 11 | | |
Amortization expense on intangible assets for the three and nine months ended September 30, 20172023 was $7,650$3.5 million and $11,430,$11.0 million, respectively. Amortization expense on intangible assets for the three and nine months ended September 30, 20162022 was $99$3.7 million and $323,$12.1 million, respectively.
Estimated aggregate amortization expense based on the current carrying value of amortizable intangible assets for each of the five succeeding years and thereafter is as follows:
| | | | | |
| Remaining 2023 | $ | 3.4 | |
| 2024 | 12.9 | |
| 2025 | 11.6 | |
| 2026 | 10.3 | |
| 2027 | 7.1 | |
| Thereafter | 18.9 | |
| Total | $ | 64.2 | |
|
| | | |
| Remaining 2017 | $ | 5,635 |
|
| 2018 | 22,042 |
|
| 2019 | 21,398 |
|
| 2020 | 19,928 |
|
| 2021 | 18,315 |
|
| Thereafter | 88,434 |
|
| Total | $ | 175,752 |
|
JPMorgan2021 Credit FacilityAgreement
In order to finance the acquisition of the IPC Group, onOn April 4, 2017, the Company5, 2021, we and certain of our foreign subsidiaries entered into aan Amended and Restated Credit Agreement (the “2017“2021 Credit Agreement”) with JPMorgan Chase Bank, N.A. 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.agent. The 20172021 Credit Agreement provides the companyus and certain of our foreign subsidiaries access to a senior secured credit facility until April 4, 2022,3, 2026, consisting of a multi-tranche term loan facility in an amount up to $400,000$100.0 million and a revolving facility in an amount up to $200,000$450.0 million with an option to expand the revolvingcredit facility by $150,000,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 feeOn November 10, 2022, we amended the 2021 Credit Agreement (the "Amendment") to update the benchmark provisions to replace LIBOR with Term SOFR (as defined in the Amendment) as the reference rate for committed fundspurposes of calculating interest under the revolving facility of2021 Credit Agreement. Pursuant to the 2017 Credit Agreement ranges from an annual rate of 0.175% to 0.35%, depending on the company’s leverage ratio. BorrowingsAmendment, borrowings denominated in U.S. dollars under the 2017 Credit Agreement bear interest at a rate per annum equal to (a) the Term SOFR Rate (as defined in the Amendment) plus a credit spread adjustment of 0.10% per annum, but in any case, not less than 0%, plus an additional spread of 1.10% to 1.70%, depending on the Company’s leverage ratio, or (b) the Alternate Base Rate (as defined in the Amendment), which is the greatest of (i) the prime rate, (ii) the federal funds rate plus 0.50% and (iii) the adjusted LIBOR rateTerm SOFR Rate for a one month period, but in any case, not less than 0%1.0%, plus,
in any such case, 1.00%1.0%, plus an additional spread of 0.075%0.10% to 0.90% for revolving loans and 0.25% to 1.25% for term loans,0.70%, depending on the company’sCompany’s leverage ratio. All other material terms included in the 2021 Credit Agreement remain unchanged as a result of the Amendment.
In connection with the 2021 Credit Agreement, we reaffirmed our security interest in favor of the lenders in substantially all our personal property and pledged the stock of our domestic subsidiaries and 65% of the stock of our first-tier foreign subsidiaries. The obligations under the 2021 Credit Agreement are also guaranteed by certain of our first-tier domestic subsidiaries, and those subsidiaries also provided a security interest in their similar personal property.
The 2021 Credit Agreement restricts the payment of dividends or repurchasing of stock requiring that, after giving effect to such payments, no default exists or would result from such payment. Additionally, cash dividends are restricted to $7.5 million per quarter and approved levels of other restricted payments range from $60.0 million to unlimited based on our net leverage ratio or (b) the LIBOR Rate, as adjusted for statutory reserve requirements for eurocurrency liabilities, but in(not taking into account any case, not less than 0%, plus an additional spread of 1.075%acquisition holiday) after giving effect to 1.90% for revolving loans and 1.25% to 2.25% for term loans, depending on the company’s leverage ratio.such payment.
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 20172021 Credit Agreement contains customary representations, warranties and covenants, including but not limited to covenants restricting the company’sour ability to incur indebtedness and liens and to merge or consolidate with another entity. The 2017Further, the 2021 Credit Agreement also contains financial covenants, requiring us to maintain athe following covenants:
| | | | | |
| • | A covenant requiring us to maintain an indebtedness to EBITDA ratio, determined as of the end of each of our fiscal quarters, of no greater than 3.50 to 1.00, with certain alternative requirements for permitted acquisitions greater than $50.0 million; |
| | | | | |
| • | A covenant requiring us to maintain an EBITDA to interest expense ratio for a period of four consecutive fiscal quarters as of the end of each quarter of no less than 3.00 to 1.00; and |
| | | | | |
| • | A covenant restricting us from paying dividends or repurchasing stock if, after giving effect to such payments and assuming no default exists or would result from such payment, our leverage ratio is greater than 2.50 to 1.00, in such case limiting such payments to $60.0 million during any fiscal year. |
Debt Outstanding
Debt outstanding consisted of consolidated total indebtedness to consolidated earnings before income, taxes, depreciation and amortization, subject to certain adjustments ("Adjusted EBITDA")the following:
| | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 |
| Credit facility borrowings: | | | |
| Revolving credit facility borrowings | $ | 130.0 | | | $ | 205.0 | |
| Term loan facility borrowings | 91.3 | | | 95.0 | |
| Secured borrowings | 0.2 | | | 0.2 | |
| Finance lease liabilities | 0.3 | | | 0.1 | |
| Total debt | 221.8 | | | 300.3 | |
Less: current portion of long-term debt(a) | (5.9) | | | (5.2) | |
| Long-term debt | $ | 215.9 | | | $ | 295.1 | |
(a)As of not greater than 4.25 to 1, as well as requiring us to maintain a ratio of consolidated Adjusted EBITDA to consolidated interest expense of no less than 3.50 to 1 for the quarter ended September 30, 2017. The 2017 Credit Agreement also contains a financial covenant requiring us to maintain a senior secured net indebtedness to Adjusted EBITDA ratio of not greater than 3.50 to 1. These financial covenants may restrict our ability to pay dividends and purchase outstanding shares of our common stock. We were in compliance with our financial covenants at September 30, 2017.
We will be2023, the Company is required to repay the senior credit agreement with 25% to 50% of our excess cash flow from the preceding fiscal year, as defined$5.6 million in the agreement, unless our net leverage ratio for such preceding fiscal year is less than or equal to 3.00 to 1, which will be first measured using our fiscal year ended December 31, 2018.
The full terms and conditions of the senior securedoutstanding credit facility including our financial covenants, are set forth inborrowings and $0.3 million of finance lease liabilities over 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, as amended on Form 8-K/A filed July 27, 2017.next 12 months.
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 constitute senior unsecured obligations of the company and the Guarantors, respectively. The Notes and the guarantees, respectively, are: (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. The Notes also contain customary representations, warranties and covenants, and are less restrictive than those contained in the 2017 Credit Agreement.
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.
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 full terms and conditions of the the Registration Rights Agreement are set forth in Exhibit 4.2 to the company's Current Report on Form 8-K filed April 24, 2017.
Debt outstanding at September 30, 2017 is summarized as follows:
|
| | | | | | | |
| | September 30,
2017 | | December 31,
2016 |
| Long-Term Debt: | | | |
| Senior Unsecured Notes | $ | 300,000 |
| | $ | — |
|
| Credit Facility Borrowings | 95,000 |
| | 36,143 |
|
| Capital Lease Obligations | 671 |
| | 51 |
|
| Total Long-Term Debt | 395,671 |
| | 36,194 |
|
| Less: Unamortized Debt Issuance Costs | (7,138 | ) | | — |
|
Less: Current Maturities of Credit Facility Borrowings, Net of Debt Issuance Costs(1) | (4,887 | ) | | (3,459 | ) |
Less: Current Maturities of Capital Lease Obligations(1) | (394 | ) | | — |
|
| Long-Term Portion, Net | $ | 383,252 |
| | $ | 32,735 |
|
| |
(1)
| Current maturities of long-term debt include $5,000 of current maturities, less $113 of unamortized debt issuance costs, under our 2017 Credit Agreement and $394 of current maturities of capital lease obligations. |
As of September 30, 2017,2023, we had outstanding borrowings of $130.0 million and $91.3 million under our 2017 Credit Agreement, totaling $75,000 under ourrevolving facility and term loan facility, and $20,000 under our revolving facility. There were $300,000 in outstanding borrowings under the Notes as of September 30, 2017. In addition, werespectively. We had stand alone letters of credit and bank guarantees outstanding in the amount of $4,721.$3.1 million, leaving approximately $316.9 million of unused borrowing capacity on our revolving facility. Commitment fees on unused lines of credit for the nine months ended September 30, 20172023 were $353.$0.6 million. The overall weighted average cost of debt iswas approximately 5.0%6.5% and net of a related cross-currency swap instrument, isinstruments and fixed rate interest rate swap instruments was approximately 4.2%5.1%. Further details regarding the cross-currency swap instrument are discussed in Note 10.
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.
The aggregate maturities of our outstanding debt, including capital lease obligations as of September 30, 2017, are as follows:9.
|
| | | | |
| Remaining 2017 | | $ | 1,348 |
|
| 2018 | | 5,386 |
|
| 2019 | | 7,062 |
|
| 2020 | | 9,375 |
|
| 2021 | | 11,875 |
|
| Thereafter | | 360,625 |
|
| Total aggregate maturities | | $ | 395,671 |
|
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 nine months ended September 30, 2017 and 2016were as follows:
| | | | | | | | | | | |
| Nine Months Ended
September 30, |
| 2023 | | 2022 |
| Beginning balance | $ | 10.9 | | | $ | 10.4 | |
| Additions charged to expense | 9.5 | | | 6.7 | |
| Foreign currency fluctuations | 0.1 | | | (0.3) | |
| Claims paid | (9.3) | | | (6.2) | |
| Ending balance | $ | 11.2 | | | $ | 10.6 | |
9. Derivatives
|
| | | | | | | |
| | Nine Months Ended |
| | September 30 |
| | 2017 | | 2016 |
| Beginning balance | $ | 10,960 |
| | $ | 10,093 |
|
| Additions charged to expense | 8,879 |
| | 8,888 |
|
| Acquired warranty obligations | 384 |
| | — |
|
| Foreign currency fluctuations | 225 |
| | 85 |
|
| Claims paid | (8,912 | ) | | (8,707 | ) |
| Ending balance | $ | 11,536 |
| | $ | 10,359 |
|
Hedge Accounting and Hedging Programs
We recognize all derivative instruments as either assets or liabilities in our Condensed Consolidated Balance Sheetsconsolidated 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 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 consolidated balance sheets with changes in the fair value recorded to net foreign currency transaction gain (loss) in our consolidated statements of income. These contracts do not subject us to material balance sheet risk due to exchange rate movements because gains and losses on these derivatives are intended to offset gains and losses on the assets and liabilities being hedged. At September 30, 20172023 and December 31, 2016,2022, the notional amounts of foreign currency forward exchange contracts outstanding not designated as hedging instruments were $67,672$74.1 million and $42,866,$83.7 million, respectively.
DuringCash Flow Hedges
We manage our floating rate debt exposure using interest rate swaps. Fixed rate swaps are used to reduce our risk of the first quarterpossibility of 2017, in connection with our acquisition of IPC Group, weincreased interest costs. We entered into a foreign currency option contract not designated as a hedging instrument for aan aggregate $120 million 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 asinterest rate swaps effective December 1, 2022 that exchange a variable rate of September 30, 2017 and December 31, 2016.
Cash Flow Hedging
Hedgesinterest for a fixed rate of Forecasted Foreign Currency Transactions
In countries outside the United States, 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.interest of 4.076%. 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, theyinterest rate swaps are not speculative in nature. The notional amounts of outstanding foreign currency forward contracts designated as cash flow hedges were $3,033 and $2,127 ashedges. These swaps are scheduled to mature on December 1, 2026.
Foreign Currency DerivativesFair Value Hedges
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 2017On April 5, 2022, we entered into Euro to U.S. dollar foreign exchange cross currencycross-currency swaps for all of the anticipated cash flows associated with an intercompany loan from a wholly-ownedwholly owned European subsidiary. We enteredenter into these foreign exchange cross currencycross-currency swaps to hedge the foreign currency denominated cash flowsrisk associated with this intercompany loan, and accordingly, they are not speculative in nature. WeThese cross-currency swaps are designated these cross currency swaps as cash flowfair value hedges. The hedged cash flows as of September 30, 2017 included €183,000 of total notional value. As of September 30, 2017,2023 and December 31, 2022, these cross-currency swaps included €83.1 million and €84.8 million of total notional value, respectively. As of September 30, 2023, the aggregateaggregated scheduled interest payments over the course of the loan and related swaps amounted to €33,000.€8.1 million. The scheduled maturity and principal payment of the loan and related swaps of €150,000€75.0 million are due in April 2022. There were no cross2027.
Net Investment Hedges
On April 5, 2022, we entered into Euro to U.S. dollar foreign exchange cross-currency swaps to hedge our exposure to adverse foreign currency exchange rate movements between Tennant Company and a wholly owned European subsidiary. We enter into these fixed-to-fixed cross-currency swap agreements to protect a designated monetary amount of the Company’s net investment in its Euro functional currency subsidiary against the risk of changes in the Euro to U.S. dollar foreign exchange rate. These cross-currency swaps are designated as cash flow hedges asnet investment hedges. As of September 30, 2023 and December 31, 2016.
2022, the cross-currency swaps included €75.0 million of total notional value. These swaps are scheduled to mature in April 2027.
The fair value of derivative instruments on our Condensed Consolidated Balance Sheets as of September 30, 2017 and December 31, 2016 wereconsolidated balance sheets was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Derivative Assets | | Derivative Liabilities |
| Balance Sheet Location | | September 30, 2023 | | December 31, 2022 | | Balance Sheet Location | | September 30, 2023 | | December 31, 2022 |
| Derivatives designated as cash flow hedges: | | | | | | | | | | | |
| Interest rate swaps | Other current assets | | $ | 1.5 | | | $ | 0.8 | | | Other current liabilities | | $ | — | | | $ | — | |
| Interest rate swaps | Other assets | | 0.2 | | | — | | | Other liabilities | | — | | | 1.8 | |
| Derivatives designated as fair value hedges: | | | | | | | | | | | |
| Cross-currency swaps | Other current assets | | 1.4 | | | 1.4 | | | Other current liabilities | | — | | | — | |
| Cross-currency swaps | Other assets | | 0.2 | | | 0.8 | | | Other liabilities | | — | | | — | |
| Derivatives designated as net investment hedges: | | | | | | | | | | | |
| Cross-currency swaps | Other current assets | | 1.2 | | | 1.2 | | | Other current liabilities | | — | | | — | |
| Cross-currency swaps | Other assets | | — | | | 0.5 | | | Other liabilities | | 0.1 | | | — | |
| Derivatives not designated as hedging instruments: | | | | | | | | | | | |
| Foreign currency forward contracts | Other current assets | | $ | 1.0 | | | $ | 0.1 | | | Other current liabilities | | $ | 0.1 | | | $ | 0.3 | |
|
| | | | | | | | | | | | | | | | |
| | | September 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) | | $ | 67 |
| | $ | — |
| | $ | 184 |
| | $ | — |
|
Foreign currency forward contracts(1) | | 8,346 |
| | 31,921 |
| | — |
| | 13 |
|
| Derivatives not designated as hedging instruments: | | | | | | | | |
| Foreign currency option contracts | | — |
| | — |
| | — |
| | — |
|
Foreign currency forward contracts(1) | | $ | 539 |
| | $ | 2,010 |
| | $ | 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 September 30, 2017,2023, we anticipate reclassifying approximately $2,004$2.4 million of gains from Accumulated Other Comprehensive Lossaccumulated other comprehensive loss to net earningsincome during the next 12 months.
The following tables include the amounts in the consolidated statements of income in which the effects of derivatives designated as hedging instruments are recorded:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, |
| 2023 | | 2022 |
| Total | | Gain (Loss) on Hedging | | Total | | Gain (Loss) on Hedging |
| Derivatives designated as cash flow hedges: | | | | | | | |
| Interest expense, net | $ | (3.3) | | | $ | 0.3 | | | $ | (2.2) | | | $ | — | |
| Net foreign currency transaction gain (loss) | (0.4) | | | — | | | — | | | — | |
| Derivatives designated as fair value hedges: | | | | | | | |
| Interest expense, net | (3.3) | | | 0.3 | | | (2.2) | | | 0.4 | |
| Net foreign currency transaction gain (loss) | (0.4) | | | 2.0 | | | — | | | 5.6 | |
| Derivatives designated as net investment hedges: | | | | | | | |
| Interest expense, net | $ | (3.3) | | | $ | 0.2 | | | $ | (2.2) | | | $ | 0.3 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended
September 30, |
| 2023 | | 2022 |
| Total | | Gain (Loss) on Hedging | | Total | | Gain (Loss) on Hedging |
| Derivatives designated as cash flow hedges: | | | | | | | |
| Interest expense, net | $ | (11.0) | | | $ | 0.6 | | | $ | (3.7) | | | $ | 0.7 | |
| Net foreign currency transaction gain (loss) | 0.5 | | | — | | | (0.4) | | | 4.7 | |
| Derivatives designated as fair value hedges: | | | | | | | |
| Interest expense, net | (11.0) | | | 1.7 | | | (3.7) | | | 0.8 | |
| Net foreign currency transaction gain (loss) | 0.5 | | | 2.8 | | | (0.4) | | | 9.9 | |
| Derivatives designated as net investment hedges: | | | | | | | |
| Interest expense, net | $ | (11.0) | | | $ | 1.4 | | | $ | (3.7) | | | $ | 0.6 | |
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 Statementsconsolidated statements of Operations for the three and nine months ended September 30, 2017income was as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
| Derivatives designated as cash flow hedges: | | | | | | | |
Net gain recognized in other comprehensive income, net of tax(a) | $ | 1.2 | | | $ | — | | | $ | 2.6 | | | $ | 3.8 | |
| Net gain reclassified from accumulated other comprehensive loss into income, net of tax, effective portion to interest expense, net | 0.3 | | | — | | | 0.6 | | | 0.5 | |
| Net gain reclassified from accumulated other comprehensive loss into income, net of tax, effective portion to net foreign currency transaction gain (loss) | — | | | — | | | — | | | 3.6 | |
| Derivatives designated as fair value hedges: | | | | | | | |
Net (loss) gain recognized in other comprehensive income (loss), net of tax(a) | (0.5) | | | 0.2 | | | (0.5) | | | 1.4 | |
| Net gain reclassified from accumulated other comprehensive loss into income, net of tax, effective portion to interest expense, net | 0.2 | | | 0.3 | | | 0.8 | | | 0.6 | |
| Net gain reclassified from accumulated other comprehensive loss into income, net of tax, effective portion to net foreign currency transaction gain (loss) | — | | | — | | | — | | | — | |
| Derivatives designated as net investment hedges: | | | | | | | |
Net (loss) gain recognized in other comprehensive income (loss), net of tax(a) | 1.3 | | | 3.9 | | | 0.2 | | | 7.8 | |
| Net gain reclassified from accumulated other comprehensive loss into income, net of tax, effective portion to interest expense, net | 0.2 | | | 0.3 | | | 0.7 | | | 0.5 | |
| Derivatives not designated as hedging instruments: | | | | | | | |
Net gain recognized in income(b) | $ | 0.1 | | | $ | 4.0 | | | $ | 1.0 | | | $ | 6.6 | |
|
| | | | | | | | | | | | | | | | |
| | | Three Months Ended | | Nine Months Ended |
| | | September 30, 2017 | | September 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) | | $ | (40 | ) | | $ | (4,492 | ) | | $ | (177 | ) | | $ | (14,026 | ) |
| Net (loss) gain reclassified from Accumulated Other Comprehensive Loss into earnings, net of tax, effective portion to Net Sales | | (141 | ) | | 26 |
| | (140 | ) | | (76 | ) |
| Net gain reclassified from Accumulated Other Comprehensive Loss into earnings, net of tax, effective portion to Interest Income | | — |
| | 374 |
| | — |
| | 823 |
|
| Net loss reclassified from Accumulated Other Comprehensive Loss into earnings, net of tax, effective portion to Net Foreign Currency Transaction (Losses) Gains | | — |
| | (3,705 | ) | | — |
| | (10,853 | ) |
Net (loss) gain recognized in earnings(2) | | (7 | ) | | 3 |
| | (12 | ) | | 8 |
|
| Derivatives not designated as hedging instruments: | | | | | | | | |
Net loss recognized in earnings(3) | | $ | — |
| | $ | (2,062 | ) | | $ | (1,132 | ) | | $ | (7,369 | ) |
The effect of(b)Classified in net 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 nine months ended September 30, 2016 was as follows:transaction gain (loss).
10. Fair Value Measurements
|
| | | | | | | | | | | | | | | | |
| | | Three Months Ended | | Nine Months Ended |
| | | September 30, 2016 | | September 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) | | $ | (20 | ) | | $ | (9 | ) | | $ | (250 | ) | | $ | (74 | ) |
| Net (loss) gain reclassified from Accumulated Other Comprehensive Loss into earnings, net of tax, effective portion to Net Sales | | (88 | ) | | 37 |
| | (88 | ) | | 11 |
|
Net (loss) gain recognized in earnings(2) | | (11 | ) | | 1 |
| | (17 | ) | | 1 |
|
| Derivatives not designated as hedging instruments: | | | | | | | | |
Net loss recognized in earnings(3) | | $ | — |
| | $ | (330 | ) | | $ | — |
| | $ | (2,392 | ) |
| |
(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. |
| |
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 on a recurring basis at September 30, 2017 is2023 was as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Fair
Value | | Level 1 | | Level 2 | | Level 3 |
| Assets: | | | | | | | |
| Foreign currency forward exchange contracts | $ | 1.0 | | | $ | — | | | $ | 1.0 | | | $ | — | |
| Cross-currency swaps | 2.8 | | | — | | | 2.8 | | | — | |
| Interest rate swaps | 1.7 | | | — | | | 1.7 | | | — | |
| Total assets | 5.5 | | | — | | | 5.5 | | | — | |
| Liabilities: | | | | | | | |
| Foreign currency forward exchange contracts | 0.1 | | | — | | | 0.1 | | | — | |
| Interest rate swaps | — | | | — | | | — | | | — | |
| Total liabilities | $ | 0.1 | | | $ | — | | | $ | 0.1 | | | $ | — | |
|
| | | | | | | | | | | | | | | |
| | Fair Value | | Level 1 | | Level 2 | | Level 3 |
| Assets: | | | | | | | |
| Foreign currency forward exchange contracts | $ | 8,885 |
| | $ | — |
| | $ | 8,885 |
| | $ | — |
|
| Foreign currency option contracts | 67 |
| | — |
| | 67 |
| | — |
|
| Total Assets | $ | 8,952 |
| | $ | — |
| | $ | 8,952 |
| | $ | — |
|
| Liabilities: | |
| | |
| | |
| | |
|
| Foreign currency forward exchange contracts | $ | 33,931 |
| | $ | — |
| | $ | 33,931 |
| | $ | — |
|
| Foreign currency option contracts | $ | — |
| | — |
| | — |
| | — |
|
| Total Liabilities | $ | 33,931 |
| | $ | — |
| | $ | 33,931 |
| | $ | — |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Fair
Value | | Level 1 | | Level 2 | | Level 3 |
| Assets: | | | | | | | |
| Foreign currency forward exchange contracts | $ | 0.1 | | | $ | — | | | $ | 0.1 | | | $ | — | |
| Cross-currency swaps | 3.9 | | | — | | | 3.9 | | | — | |
| Interest rate swaps | 0.8 | | | — | | | 0.8 | | | — | |
| Total assets | 4.8 | | | — | | | 4.8 | | | — | |
| Liabilities: | | | | | | | |
| Foreign currency forward exchange contracts | 0.3 | | | — | | | 0.3 | | | — | |
| Interest rate swaps | 1.8 | | | — | | | 1.8 | | | — | |
| Total liabilities | $ | 2.1 | | | $ | — | | | $ | 2.1 | | | $ | — | |
Our foreign currency forward and option exchange contracts, cross-currency swaps and interest rate swaps are valued using observable Level 2 market expectations at the measurement date and standard valuation techniques to convert future amounts to a single present value amount. Further details regarding our foreign currency forward exchange and option contractsderivative instruments are discussed in Note 10.
9.
The carrying amounts reported in the Condensed Consolidated Balance Sheetsconsolidated balance sheets for Cashcash and Cash Equivalents, Restricted Cash, Accounts Receivable, Other Current Assets, Accounts Payablecash equivalents, restricted cash, accounts receivable, other current assets, accounts payable and Other Current Liabilitiesother current liabilities approximate fair value due to their short-term nature.
The fair value and carrying value of our Long-Term Debt approximates costtotal debt, including current portion, was $221.3 million and $221.8 million, respectively, as of September 30, 2023. The fair value and carrying value of total debt, including current portion, was $301.8 million and $300.3 million, respectively, as of December 31, 2022. The fair value was calculated based on the borrowing rates currently available to us for bank loans with similar terms and remaining maturities.
From time to time, we measure certain assets at fair value onmaturities, which is 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 3,2 in the fair value hierarchy.
These assets are also subject to periodic impairment testing by comparing the respective carrying value
11. Commitments and Contingencies
In the eventordinary course of business, we determinemay 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 assets to be impaired, we would recognize an impairment loss equal to the amount by which the carrying valuematters will have a material adverse effect on our consolidated financial position or results 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.
| |
12. | Retirement Benefit Plans |
Our defined benefit pension plans and postretirement medical planoperations. Legal costs associated with such matters are described in Note 13 of our annual report on Form 10-K for the year ended December 31, 2016. We have contributed $145 and $198 during the third quarter of 2017 and $410 and $493 during the first nine months of 2017 to our pension plans and postretirement medical plan, respectively.
The components of the net periodic (benefit) cost for the three and nine months ended September 30, 2017 and 2016 wereexpensed as follows:incurred.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended |
| | | September 30 |
| | | Pension Benefits | | Postretirement |
| | | U.S. Plans | | Non-U.S. Plans | | Medical Benefits |
| | | 2017 | | 2016 | | 2017 | | 2016 | | 2017 | | 2016 |
| Service cost | | $ | — |
| | $ | 88 |
| | $ | 124 |
| | $ | 32 |
| | $ | 6 |
| | $ | 25 |
|
| Interest cost | | 373 |
| | 414 |
| | 96 |
| | 96 |
| | 91 |
| | 99 |
|
| Expected return on plan assets | | (581 | ) | | (599 | ) | | (101 | ) | | (89 | ) | | — |
| | — |
|
| Amortization of net actuarial loss | | 12 |
| | 13 |
| | — |
| | — |
| | — |
| | — |
|
| Amortization of prior service cost | | — |
| | 10 |
| | 50 |
| | 29 |
| | — |
| | — |
|
| Foreign currency | | — |
| | — |
| | 135 |
| | (57 | ) | | — |
| | — |
|
| Net periodic (benefit) cost | | $ | (196 | ) | | $ | (74 | ) | | $ | 304 |
| | $ | 11 |
| | $ | 97 |
| | $ | 124 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Nine Months Ended |
| | | September 30 |
| | | Pension Benefits | | Postretirement |
| | | U.S. Plans | | Non-U.S. Plans | | Medical Benefits |
| | | 2017 | | 2016 | | 2017 | | 2016 | | 2017 | | 2016 |
| Service cost | | $ | — |
| | $ | 265 |
| | $ | 172 |
| | $ | 104 |
| | $ | 46 |
| | $ | 73 |
|
| Interest cost | | 1,153 |
| | 1,244 |
| | 315 |
| | 304 |
| | 272 |
| | 298 |
|
| Expected return on plan assets | | (1,752 | ) | | (1,799 | ) | | (298 | ) | | (283 | ) | | — |
| | — |
|
| Amortization of net actuarial loss | | 33 |
| | 30 |
| | — |
| | — |
| | — |
| | — |
|
| Amortization of prior service cost | | — |
| | 31 |
| | 146 |
| | 93 |
| | — |
| | — |
|
| Settlement charge | | 205 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Foreign currency | | — |
| | — |
| | 364 |
| | (33 | ) | | — |
| | — |
|
| Net periodic (benefit) cost | | $ | (361 | ) | | $ | (229 | ) | | $ | 699 |
| | $ | 185 |
| | $ | 318 |
| | $ | 371 |
|
| |
13. | 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 September 30, 2017, of those leases that contain residual value guarantees, the aggregate residual value at lease expiration was $14,630, of which we have guaranteed $11,820. As of September 30, 2017, we have recorded a liability for the estimated end of term loss related to this residual value guarantee of $458 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 September 30, 2017 are as follows:
|
| | | | |
| Remaining 2017 | | $ | 4,033 |
|
| 2018 | | 11,835 |
|
| 2019 | | 7,828 |
|
| 2020 | | 4,826 |
|
| 2021 | | 2,710 |
|
| Thereafter | | 4,360 |
|
| Total | | $ | 35,592 |
|
| |
14. | Accumulated Other Comprehensive Loss |
Components of Accumulated Other Comprehensive Loss, net of tax, within the Condensed Consolidated Balance Sheets, are as follows:
|
| | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
| Foreign currency translation adjustments | $ | (19,371 | ) | | $ | (44,444 | ) |
| Pension and retiree medical benefits | (5,010 | ) | | (5,391 | ) |
| Cash flow hedge | (4,045 | ) | | (88 | ) |
| Total Accumulated Other Comprehensive Loss | $ | (28,426 | ) | | $ | (49,923 | ) |
The changes in components of Accumulated Other Comprehensive Loss,accumulated other comprehensive loss, net of tax, are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2023 |
| Foreign Currency
Translation
Adjustments | | Pension and Post-
Retirement Medical
Benefits | | Derivative Financial Instruments | | Total |
| Beginning balance | $ | (53.9) | | | $ | 2.7 | | | $ | 1.0 | | | $ | (50.2) | |
| Other comprehensive (loss) income before reclassifications | (4.5) | | | — | | | 2.1 | | | (2.4) | |
| Amounts reclassified from accumulated other comprehensive loss | (0.7) | | | — | | | (1.4) | | | (2.1) | |
| Net current period other comprehensive income | (5.2) | | | — | | | 0.7 | | | (4.5) | |
| Ending balance | $ | (59.1) | | | $ | 2.7 | | | $ | 1.7 | | | $ | (54.7) | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2022 |
| Foreign Currency
Translation
Adjustments | | Pension and Post-
Retirement Medical
Benefits | | Derivative Financial Instruments | | Total |
| Beginning balance | $ | (36.0) | | | $ | (2.1) | | | $ | 0.2 | | | $ | (37.9) | |
| Other comprehensive (loss) income before reclassifications | (40.3) | | | — | | | 5.2 | | | (35.1) | |
| Amounts reclassified from accumulated other comprehensive loss | (0.5) | | | — | | | (4.7) | | | (5.2) | |
| Net current period other comprehensive (loss) income | (40.8) | | | — | | | 0.5 | | | (40.3) | |
| Ending balance | $ | (76.8) | | | $ | (2.1) | | | $ | 0.7 | | | $ | (78.2) | |
|
| | | | | | | | | | | | | | | |
| | 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 | 25,073 |
| | 361 |
| | (14,203 | ) | | 11,231 |
|
| Amounts reclassified from Accumulated Other Comprehensive Loss | — |
| | 20 |
| | 10,246 |
| | 10,266 |
|
| Net current period other comprehensive income (loss) | $ | 25,073 |
| | $ | 381 |
| | $ | (3,957 | ) | | $ | 21,497 |
|
| September 30, 2017 | $ | (19,371 | ) | | $ | (5,010 | ) | | $ | (4,045 | ) | | $ | (28,426 | ) |
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 2014 and, with limited exceptions,2018. The number of years which remain open for audit for U.S. state andor foreign tax purposes varies by jurisdiction but generally ranges from three to five years. We are currently undergoing income tax examinations for taxable years before 2012.in various foreign jurisdictions. Although the outcome of these examinations cannot be currently determined, we believe that we have adequate reserves with respect to these examinations.
We recognize potential accrued interest and penalties related to unrecognized tax benefits in Income Tax Expense.income tax expense. In addition to the liability of $2,475$3.6 million for unrecognized tax benefits as of September 30, 2017,2023, there was approximately $426$0.4 million for accrued interest and penalties. The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate as of September 30, 20172023 was $2,130.$3.3 million. To the extent interest and penalties are not assessed with respect to uncertain tax positions, amounts accrued will be revised and reflected as an adjustment of the Income Tax Expense.
Unrecognized tax benefits were reduced by $688 during the first nine 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 under examination by the Internal Revenue Service for the 2015 tax year. Although the outcome of this matter cannot currently be determined, we believe adequate provision has been made for any potential unfavorable financial statement impact. 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.expense.
| |
16. | Share-Based Compensation |
14. Share-Based Compensation
Our share-based compensation plans are described in Note 1718 of our annual report on Form 10-K for the year ended December 31, 2016.2022. During the three months ended September 30, 20172023 and 2016,2022, we recognized total Share-Based Compensation Expenseshare-based compensation expense of $1,293$4.7 million and $1,321,$1.7 million, respectively. During the nine months ended September 30, 20172023 and 2016,2022, we recognized total Share-Based Compensation Expenseshare-based compensation expense of $4,915$8.6 million and $5,747,$4.4 million, respectively. The total excess tax benefit recognized for share-based compensation arrangements during the nine months ended September 30, 20172023 and 20162022 was $1,149a tax expense of $0.1 million and $447,tax benefit of $0.3 million, respectively.
During the first nine 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 nine months ended September 30, 2017 and 2016 was $1,295 and $1,835, respectively.
15. Earnings Per Share
| |
17. | Earnings (Loss) Attributable to Tennant Company Per Share |
The computations of Basicbasic and Diluted Earnings (Loss) Attributable to Tennant Companydiluted earnings per Shareshare were as follows:
|
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30 | | September 30 |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Numerator: | | | | | | | |
| Net Earnings (Loss) Attributable to Tennant Company | $ | 3,559 |
| | $ | 11,477 |
| | $ | (2,989 | ) | | $ | 31,244 |
|
| Denominator: | | | | | | | |
| Basic - Weighted Average Shares Outstanding | 17,729,857 |
| | 17,498,808 |
| | 17,673,656 |
| | 17,516,941 |
|
| Effect of Dilutive Securities: | | | | | | | |
| Share-Based Compensation Plans | 441,587 |
| | 474,398 |
| | — |
| | 438,558 |
|
| Diluted - Weighted Average Shares Outstanding | 18,171,444 |
| | 17,973,206 |
| | 17,673,656 |
| | 17,955,499 |
|
| Basic Earnings (Loss) per Share | $ | 0.20 |
| | $ | 0.66 |
| | $ | (0.17 | ) | | $ | 1.78 |
|
| Diluted Earnings (Loss) per Share | $ | 0.20 |
| | $ | 0.64 |
| | $ | (0.17 | ) | | $ | 1.74 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
| Numerator: | | | | | | | |
| Net income | $ | 22.9 | | | $ | 15.6 | | | $ | 78.5 | | | $ | 42.5 | |
| Denominator: | | | | | | | |
| Basic - weighted average shares outstanding | 18,570,293 | | 18,515,851 | | 18,485,806 | | 18,495,640 |
| Effect of dilutive securities | 308,018 | | 176,065 | | 261,322 | | 217,697 |
| Diluted - weighted average shares outstanding | 18,878,311 | | 18,691,916 | | 18,747,128 | | 18,713,337 |
| Basic earnings per share | $ | 1.23 | | | $ | 0.84 | | | $ | 4.25 | | | $ | 2.30 | |
| Diluted earnings per share | $ | 1.21 | | | $ | 0.83 | | | $ | 4.19 | | | $ | 2.27 | |
Excluded from the dilutive securities shown above were options to purchase and shares to be paid out under share-based compensation plans of 340,239169,458 and 313,711766,235 shares of common stock during the three months ended September 30, 20172023 and 2016,2022, respectively. Excluded from the dilutive securities shown above were options to purchase and shares to be paid out under share-based compensation plans of 714,687325,862 and 382,075425,920 shares of common stock during the nine months ended September 30, 20172023 and 2016,2022, respectively. These exclusions were made if the exercise prices of the options are greater than the average market price of our common stock for the period, if the number of shares we can repurchase under the treasury stock method exceeds the weighted average shares outstanding in the options or if we have a net loss, as these effects arewould be 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.ContentsNet Sales attributed to each geographic area for the three and nine months ended September 30, 2017 and 2016 were as follows:
|
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30 | | September 30 |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Americas | $ | 161,037 |
| | $ | 152,294 |
| | $ | 472,953 |
| | $ | 449,704 |
|
| EMEA | 78,851 |
| | 29,309 |
| | 189,483 |
| | 94,433 |
|
| APAC | 22,033 |
| | 18,531 |
| | 61,335 |
| | 52,689 |
|
| Total | $ | 261,921 |
| | $ | 200,134 |
| | $ | 723,771 |
| | $ | 596,826 |
|
Net Sales are attributed to each geographic area based on the end user country and are net of intercompany sales.
| |
19. | 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.
| |
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations |
Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations
The following Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) provides a comparison of the Company's results of operations, as well as liquidity and capital resources for the quarters ended September 30, 2023 and 2022. The MD&A should be read in conjunction with the Company's consolidated financial statements and notes included in Item 1 of this Quarterly Report. Throughout this MD&A, the Company refers to measures used by management to evaluate performance, including financial measures that are not defined under generally accepted accounting principles (GAAP) in the U.S. Net sales excluding foreign currency translation (i.e., organic sales) is not a measure of financial performance under GAAP; however, the Company believes it is useful in understanding its financial results and provides comparable measures for understanding the operating results of the Company between different periods.
Overview
Tennant Company is a world leader in designing, manufacturing and marketing solutions that empower customers to achieve quality cleaning performance, significantly reduce their environmental impact and help create a cleaner, safer, healthier world. TennantThe Company is committed to creating and commercializing breakthrough, sustainable cleaning innovations to enhance its broad suite of products, including:including floor maintenance and outdoor cleaning equipment, detergent-free and other sustainable cleaning technologies, cleaning tools and supplies, aftermarket parts and consumables, equipment maintenance and repair service, specialty surface coatings and asset management solutions. TennantOur products are used in many types of environments, including:including retail establishments, distribution centers, factories and warehouses, public venues such as arenas and stadiums, office buildings, schools and universities, hospitals and clinics, parking lots and streets.more. Customers include contract cleaners to whom organizations outsource facilities maintenance as well as businesses that perform facilities maintenance themselves. The companyCompany 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.
Historical Macroeconomic Events
Supply chain challenges continue to impact the global economy. Our operating performance throughout 2023 has benefited from fewer supply chain disruptions enabling us to obtain key component parts, increase production and reduce backlog. If there are additional disruptions in our supply chain, or we continue to experience certain supply shortages, it could materially or adversely impact our operating results and financial condition. We continue to address and adapt to these temporary supply chain disruptions.
As described in Part I, Item 1A - Risk Factors in the annual report on Form 10-K for the fiscal year ended December 31, 2022, we may encounter financial difficulties if the U.S. or other global economies experience an additional or continued long-term economic downturn as our product sales are sensitive to declines in capital spending by our customers. Any sustained adverse impacts to our business, the industries in which we operate, market demand for our products, and/or certain suppliers or customers may also affect our future results of operations, financial position, or cash flows. We are actively monitoring the global macroeconomic environment, including geopolitical conflict, the potential impact of global supply chain constraints on material inflation, and change in demand for our products.
Outlook
We continued to deliver strong net sales and net income growth in the third quarter of 2023. Our performance reflects actions and investments we made beginning in 2022 and have continued to execute upon throughout 2023 and into 2024. Global economic conditions continue to be highly volatile and uncertainty remains regarding supply chain challenges, inflationary trends, and overall business environment. We remain confident in the long-term growth trends for our products and services in the markets we serve.
Results
The following table compares the historical results of operations for the three and nine months ended September 30, 20172023 and 2016,2022, respectively and as a percentage of Net Sales (in thousands,millions, except per share data and percentages):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| 2023 | | % | | 2022 | | % | | 2023 | | % | | 2022 | | % |
| Net sales | $ | 304.7 | | | 100.0 | | | $ | 262.9 | | | 100.0 | | | $ | 932.2 | | | 100.0 | | | $ | 801.2 | | | 100.0 | |
| Cost of sales | 172.7 | | | 56.7 | | | 162.2 | | | 61.7 | | | 535.2 | | | 57.4 | | | 495.5 | | | 61.8 | |
| Gross profit | 132.0 | | | 43.3 | | | 100.7 | | | 38.3 | | | 397.0 | | | 42.6 | | | 305.7 | | | 38.2 | |
| Selling and administrative expense | 88.2 | | | 28.9 | | | 71.4 | | | 27.2 | | | 256.9 | | | 27.6 | | | 227.1 | | | 28.3 | |
| Research and development expense | 9.1 | | | 3.0 | | | 7.9 | | | 3.0 | | | 26.0 | | | 2.8 | | | 23.5 | | | 2.9 | |
| Gain on sale of assets | — | | | — | | | — | | | — | | | — | | | — | | | (3.7) | | | (0.5) | |
| Operating income | 34.7 | | | 11.4 | | | 21.4 | | | 8.1 | | | 114.1 | | | 12.2 | | | 58.8 | | | 7.3 | |
| Interest expense, net | (3.3) | | | (1.1) | | | (2.2) | | | (0.8) | | | (11.0) | | | (1.2) | | | (3.7) | | | (0.5) | |
| Net foreign currency transaction (loss) gain | (0.4) | | | (0.1) | | | — | | | — | | | 0.5 | | | 0.1 | | | (0.4) | | | — | |
| Other (expense) income, net | (1.1) | | | (0.4) | | | 0.6 | | | 0.2 | | | (1.8) | | | (0.2) | | | 0.1 | | | — | |
| Income before income taxes | 29.9 | | | 9.8 | | | 19.8 | | | 7.5 | | | 101.8 | | | 10.9 | | | 54.8 | | | 6.8 | |
| Income tax expense | 7.0 | | | 2.3 | | | 4.2 | | | 1.6 | | | 23.3 | | | 2.5 | | | 12.3 | | | 1.5 | |
| Net income | $ | 22.9 | | | 7.5 | | | $ | 15.6 | | | 5.9 | | | $ | 78.5 | | | 8.4 | | | $ | 42.5 | | | 5.3 | |
| Net income per share - diluted | $ | 1.21 | | | | | $ | 0.83 | | | | | $ | 4.19 | | | | | $ | 2.27 | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30 | | September 30 |
| | 2017 | | % | | 2016 | | % | | 2017 | | % | | 2016 | | % |
| Net Sales | $ | 261,921 |
| | 100.0 |
| | $ | 200,134 |
| | 100.0 |
| | $ | 723,771 |
| | 100.0 |
| | $ | 596,826 |
| | 100.0 |
|
| Cost of Sales | 157,317 |
| | 60.1 |
| | 114,839 |
| | 57.4 |
| | 434,877 |
| | 60.1 |
| | 338,740 |
| | 56.8 |
|
| Gross Profit | 104,604 |
| | 39.9 |
| | 85,295 |
| | 42.6 |
| | 288,894 |
| | 39.9 |
| | 258,086 |
| | 43.2 |
|
| Operating Expense: | |
| | |
| | |
| | |
| | | | | | | | |
| Research and Development Expense | 7,907 |
| | 3.0 |
| | 8,418 |
| | 4.2 |
| | 24,239 |
| | 3.3 |
| | 24,712 |
| | 4.1 |
|
| Selling and Administrative Expense | 85,651 |
| | 32.7 |
| | 60,623 |
| | 30.3 |
| | 247,067 |
| | 34.1 |
| | 187,315 |
| | 31.4 |
|
| Loss on Sale of Business | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 149 |
| | — |
|
| Total Operating Expense | 93,558 |
| | 35.7 |
| | 69,041 |
| | 34.5 |
| | 271,306 |
| | 37.5 |
| | 212,176 |
| | 35.6 |
|
| Profit from Operations | 11,046 |
| | 4.2 |
| | 16,254 |
| | 8.1 |
| | 17,588 |
| | 2.4 |
| | 45,910 |
| | 7.7 |
|
| Other Income (Expense): | |
| | |
| | |
| | |
| | | | | | | | |
| Interest Income | 698 |
| | 0.3 |
| | 107 |
| | 0.1 |
| | 1,575 |
| | 0.2 |
| | 188 |
| | — |
|
| Interest Expense | (6,093 | ) | | (2.3 | ) | | (329 | ) | | (0.2 | ) | | (18,720 | ) | | (2.6 | ) | | (919 | ) | | (0.2 | ) |
| Net Foreign Currency Transaction (Losses) Gains | (842 | ) | | (0.3 | ) | | (149 | ) | | (0.1 | ) | | (2,375 | ) | | (0.3 | ) | | 175 |
| | — |
|
| Other Expense, Net | (482 | ) | | (0.2 | ) | | (10 | ) | | — |
| | (700 | ) | | (0.1 | ) | | (360 | ) | | (0.1 | ) |
| Total Other Expense, Net | (6,719 | ) | | (2.6 | ) | | (381 | ) | | (0.2 | ) | | (20,220 | ) | | (2.8 | ) | | (916 | ) | | (0.2 | ) |
| Profit (Loss) Before Income Taxes | 4,327 |
| | 1.7 |
| | 15,873 |
| | 7.9 |
| | (2,632 | ) | | (0.4 | ) | | 44,994 |
| | 7.5 |
|
| Income Tax Expense | 731 |
| | 0.3 |
| | 4,396 |
| | 2.2 |
| | 385 |
| | 0.1 |
| | 13,750 |
| | 2.3 |
|
| Net Earnings (Loss) Including Noncontrolling Interest | 3,596 |
| | 1.4 |
| | 11,477 |
| | 5.7 |
| | (3,017 | ) | | (0.4 | ) | | 31,244 |
| | 5.2 |
|
| Net Earnings (Loss) Attributable to Noncontrolling Interest | 37 |
| | — |
| | — |
| | — |
| | (28 | ) | | — |
| | — |
| | — |
|
| Net Earnings (Loss) Attributable to Tennant Company | $ | 3,559 |
| | 1.4 |
| | $ | 11,477 |
| | 5.7 |
| | $ | (2,989 | ) | | (0.4 | ) | | $ | 31,244 |
| | 5.2 |
|
| Net Earnings (Loss) Attributable to Tennant Company per Diluted Share | $ | 0.20 |
| | | | $ | 0.64 |
| | |
| | $ | (0.17 | ) | | | | $ | 1.74 |
| | |
Net Sales
Consolidated Net Salesnet sales for the third quarter of 20172023 totaled $261.9$304.7 million, a 30.9%15.9% increase as compared to consolidated Net Salesnet sales of $200.1$262.9 million in the third quarter of 2016. Consolidated Net Sales for the first nine months of 2017 totaled $723.8 million, a 21.3% increase as compared to consolidated Net Sales of $596.8 million for the first nine months of 2016.
2022. The components of the consolidated Net Salesnet sales change for the three and nine months ended September 30, 2017 as compared to the same periods in 2016 were as follows:
|
| | | |
| | 2017 v. 2016 |
| | Three Months Ended | | Nine Months Ended |
| | September 30 | | September 30 |
| Organic Growth: | | | |
| Volume | 0.3% | | 0.1% |
| Price | 1.0% | | 1.0% |
| Organic Growth | 1.3% |
| 1.1% |
| Foreign Currency | 1.2% | | 0.1% |
| Acquisitions & Divestiture | 28.4% | | 20.1% |
| Total | 30.9% | | 21.3% |
| | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2023 vs. 2022 |
| Price | | 8.9% | | 9.6% |
| Volume | | 5.0% | | 7.0% |
| Organic growth | | 13.9% | | 16.6% |
| Foreign currency | | 2.0% | | (0.2)% |
| Total growth | | 15.9% | | 16.4% |
The 30.9% 15.9% increase in consolidated Net Salesnet sales in the third quarter of 20172023 as compared to the same period in 20162022 was driven by:
28.4% from the April 2017 acquisition
•Organic sales growth of the IPC Group and the expansion of our commercial floor coatings business through the August 2016 acquisition of the Florock® brand.
A favorable direct foreign currency translation exchange impact of approximately 1.2%.
An organic sales increase of approximately 1.3%13.9%, which excludes the effects of foreign currency exchange and acquisitions and divestitures, due to an approximate 1.0% price increase and a 0.3% volume increase.exchange. The price increase was the result of selling price increases, typically in the range of 2% to 4% in most geographies, with an effective date of February 1, 2017. We expect the increase in selling prices to increase Net Sales in the range of 1% to 2% for the 2017 full year. The impact to gross margin is estimated to be minimal as these selling price increases were taken to offset inflation. The volume increaseorganic sales growth was primarily due to increasedequipment sales in the EMEA, partially offset by volume decreases in the APAC region. Sales of new products introduced within the past three years totaled 52% of equipment revenue for the third quarter of 2017. This compares to 40% of equipment revenue in the 2016 third quarter from sales of new products introduced within the past three years.
The 21.3% increase in consolidated Net Sales in the first nine months of 2017 as compared to the same period in 2016 was driven by:
20.1% from the April 2017 acquisition of the IPC Group and the expansion of our commercial floor coatings business through the August 2016 acquisition of the Florock® brand, partially offset by the sale of our Green Machines outdoor city cleaning line in January 2016.
An organic sales increase of approximately 1.1% which excludes the effects of foreign currency exchange and acquisitions and divestitures, due to an approximate 1.0% price increase and a 0.1% volume increase. The impact to gross margin is estimated to be minimal as these selling price increases were taken to offset inflation. The volume increase was primarily due to increased sales in the EMEA region, partially offset by volume decreasesgrowth in the Americas and APAC regions. Sales of new products introduced within the past three years totaled 47% of equipment revenue for the first nine months of 2017. This compares to 37% of equipment revenuepartly offset by volume declines in the first nine months of 2016EMEA; and
•A net favorable impact from sales of new products introduced within the past three years.
A favorable direct foreign currency translation exchange impactacross all regions of approximately 0.1%2.0%.
The following table sets forth the Net Sales by geographic area for the three months and nine months ended September 30, 2017 and 2016 and the percentage change from the prior year (in thousands, except percentages):
|
| | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended | | Nine Months Ended |
| | | September 30 | | September 30 |
| | | 2017 | | 2016 | | % | | 2017 | | 2016 | | % |
| Americas | | $ | 161,037 |
| | $ | 152,294 |
| | 5.7 | | $ | 472,953 |
| | $ | 449,704 |
| | 5.2 |
| Europe, Middle East and Africa | | 78,851 |
| | 29,309 |
| | 169.0 | | 189,483 |
| | 94,433 |
| | 100.7 |
| Asia Pacific | | 22,033 |
| | 18,531 |
| | 18.9 | | 61,335 |
| | 52,689 |
| | 16.4 |
| Total | | $ | 261,921 |
| | $ | 200,134 |
| | 30.9 | | $ | 723,771 |
| | $ | 596,826 |
| | 21.3 |
Americas
Net SalesThe 16.4% increase in the Americas were $161.0 million for the third quarter of 2017, an increase of 5.7% from the third quarter of 2016. Organic sales in the third quarter decreased approximately 0.2%, excluding the direct impacts of the IPC Group and Florock acquisitions of 5.5% and favorable foreign currency translation exchange effects of approximately 0.4%. Strong sales growth in Latin America, particularly Mexico, favorably impacted Net Sales, however this was more than offset by lower sales in North America, driven by lower volume from the strategic account channel.
Net Sales in the Americas were $473.0 million for the first nine months of 2017, an increase of 5.2% from first nine months of 2016. Organic sales in the first nine months increased approximately 0.3%, excluding the direct impacts of the IPC Group and Florock acquisitions of 4.5% and favorable foreign currency translation exchange effects of approximately 0.4%. Solid sales performance in Latin America was partially offset by lower sales in North America, where sales through our direct and distribution sales channels were more than offset by sales declines through strategic accounts.
Europe, Middle East and Africa
Net Sales in EMEA were $78.9 million for the third quarter of 2017, an increase of 169.0% from the third quarter of 2016. Organic sales in the third quarter increased approximately 14.6%, excluding the direct impacts of the IPC Group acquisition of 148.7% and the favorable foreign currency translation exchange effects of approximately 5.7%. Solid sales performance in Western European countries driven by volume in the strategic account channel was partially offset by sales declines in the Central Eastern Europe, Middle East and Africa ("CEEMEA") markets.
Net Sales in EMEA were $189.5 million for the first nine months of 2017, an increase of 100.7% from the first nine months of 2016. Organic sales in the first nine months increased approximately 7.5%, excluding the direct impacts of the April 2017 IPC Group acquisition and the divestiture of our Green Machines outdoor city cleaning line in January 2016 that had a net favorable effect of 94.5% and unfavorable foreign currency translation exchange effects of approximately 1.3%. Strong sales growth in most European countries were partially offset by lower sales in the UK.
Asia Pacific
Net Sales in the APAC region were $22.0 million for the third quarter of 2017, an increase of 18.9% from the third quarter of 2016. Organic sales in the third quarter decreased approximately 8.5%, excluding the direct impacts of the IPC Group acquisition of 27.0% and the favorable foreign currency translation exchange effects of approximately 0.4%. Sales in the APAC region reflected declines primarily driven by Korea, China and the Southeast Asia regions.
Net Sales in the APAC region were $61.3 million for the first nine months of 2017, an increase of 16.4% from the first nine months of 2016. Organic sales in the first nine months decreased approximately 3.2%, excluding the direct impacts of the IPC Group acquisition of 19.9% and unfavorable foreign currency translation exchange effects of approximately 0.3%. Sales growth in China and Korea was more than offset by sales declines in Australia and Southeast Asia.
Gross Profit
Gross Profit in the third quarter of 2017 was $104.6 million, or 39.9% of net sales, as compared to $85.3 million, or 42.6% of net sales, in the third quarter of 2016. Gross margin was 270 basis points lower in the third quarter of 2017 due primarily to the $2.2 million, or 86 basis points, fair value inventory step-up flow through related to our acquisition of the IPC Group, a 68 basis point dilutive impact of the IPC acquisition, 32 basis points from a higher mix of EMEA region sales, which are ordinarily lower margin, raw material inflation, which reduced gross margins by 26 basis points, and continued field service productivity challenges related to organization changes from the restructuring and the near-term unfavorable impact from investments in manufacturing automation initiatives.
Gross Profit in the first nine months of 2017 was $288.9 million, or 39.9% of net sales, as compared to $258.1 million, or 43.2% ofconsolidated net sales in the first nine months of 2016. 2023 as compared to the same period in 2022 was driven by:
•Organic sales growth of 16.6%, which excludes the effects of foreign currency exchange. The organic sales increase was primarily due to growth across all regions and product categories, led by strong sales growth in the Americas region; partly offset by
•A net unfavorable impact from foreign currency exchange across all regions of approximately 0.2%.
The following table sets forth the net sales by geographic area for the three and nine months ended September 30, 2023 and 2022 (in millions, except percentages):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| 2023 | | 2022 | | % Change | | 2023 | | 2022 | | % Change |
| Americas | $ | 211.2 | | | $ | 174.0 | | | 21.4 | % | | $ | 632.2 | | | $ | 512.7 | | | 23.3 | % |
| Europe, Middle East and Africa | 72.0 | | | 69.0 | | | 4.3 | % | | 234.1 | | | 225.0 | | | 4.0 | % |
| Asia Pacific | 21.5 | | | 19.9 | | | 8.0 | % | | 65.9 | | | 63.5 | | | 3.8 | % |
| Total | $ | 304.7 | | | $ | 262.9 | | | 15.9 | % | | $ | 932.2 | | | $ | 801.2 | | | 16.4 | % |
Americas
Americas net sales were $211.2 million for the third quarter of 2023, an increase of 21.4% from the third quarter of 2022 driven by:
•Organic sales growth of 20.8% driven nearly equally by price realization and volume increases in equipment sales and service across the region; and
•A net favorable impact from foreign currency exchange of approximately 0.6%.
Americas net sales were $632.2 million for the first nine months of 2023, an increase of 23.3% from the first nine months of 2022 driven by:
•Organic sales growth of 23.3% driven nearly equally by price realization and volume increases in all product categories across the region.
Europe, Middle East and Africa ("EMEA")
EMEA net sales were $72.0 million for the third quarter of 2023, an increase of 4.3% from the third quarter of 2022 driven by:
•Organic sales decline of 2.8% driven by volume declines in both equipment and parts and consumables partly offset by price realization in all product categories; and
•A net favorable impact from foreign currency exchange of approximately 7.1%.
EMEA net sales were $234.1 million for the first nine months of 2023, an increase of 4.0% from the first nine months of 2022 driven by:
•Organic sales growth of 3.6% driven by price realization partly offset by volume declines across all product categories. The organic growth was led by price realization on equipment sales across our direct geographies, especially in Iberia; and
•A net favorable impact from foreign currency exchange of approximately 0.4%.
Asia Pacific ("APAC")
APAC net sales were $21.5 million for the third quarter of 2023, an increase of 8.0% from the third quarter of 2022 driven by:
•Organic sales growth of 11.8% driven primarily by price realization on equipment sales in Australia and volume growth in equipment sales in China; partly offset by
•A net unfavorable impact from foreign currency exchange of approximately 3.8%.
APAC net sales were $65.9 million for the first nine months of 2023, an increase of 3.8% from the first nine months of 2022 driven by:
•Organic sales growth of 8.3% driven by price realization on equipment sales across our direct geographies, especially Australia, China and India; partly offset by
•A net unfavorable impact from foreign currency exchange of approximately 4.5%.
Gross Profit
Gross profit margin of 43.3% was 330500 basis points lowerhigher in the third quarter of 2023 compared to the third quarter of 2022. Gross profit margin of 42.6% was 440 basis points higher in the first nine months of 2017 due primarily2023 compared to the $8.4first nine months of 2022. The increase in both periods was driven by pricing realization, more than offsetting the impact of multi-year inflation.
The LIFO impact for the three and nine months ended September 30, 2023 was a charge of $0.7 million or approximately 120 basis points, fair value inventory step-up flow through relatedand a benefit of $2.5 million, respectively, compared to our acquisitiona LIFO charge of $2.1 million and $8.1 million in the IPC Group, field service productivity challenges relatedthree and nine months ended September 30, 2022, respectively. The change in LIFO impact was attributable to organizational changes from the restructuring, the near-term unfavorable impact from investmentsa stabilized inflationary environment on materials in manufacturing automation initiatives, and raw material cost inflation.2023.
Operating Expense
Research & DevelopmentSelling and Administrative Expense
R&D ExpenseSelling and administrative expense ("S&A expense") was $88.2 million for the third quarter of 2017 was $7.92023, an increase of $16.8 million a decrease of 6.1% from $8.4 million incompared to the third quarter of 2016. R&D Expense as2022. As a percentage of Net Sales was 3.0%net sales, S&A expense for the third quarter of 2017 and 4.2% for2023 increased 170 basis points to 28.9% from 27.2% in the third quarter of 2016.2022. The decreaseS&A expense increase in R&D spendingeach period was primarily due to headcount reduction related to the first quarter 2017 restructuring action.driven by higher variable costs associated with increased operating performance.
R&D ExpenseS&A expense was $256.9 million for the first nine months of 20172023, an increase of $29.8 million compared to the first nine months of 2022. The increase was $24.2primarily driven by higher variable costs associated with increased operating performance and investments in strategic initiatives. S&A expense as a percentage of net sales for the first nine months of 2023 decreased 70 basis points to 27.6% from 28.3% in the first nine months of 2022. The decrease as a percentage of net sales was driven by our sales growth in the comparable periods, as well as our cost-containment initiatives.
Research and Development Expense
Research and development expense ("R&D expense") was $9.1 million, or 3.0% of net sales, for the third quarter of 2023, with R&D expense as a decreasepercentage of 1.9% from $24.7net sales remaining flat as compared to the third quarter of 2022. R&D expense was $26.0 million, or 2.8% of net sales, for the first nine months of 2023, essentially flat compared to the first nine months of 2022.
We continue to invest in developing innovative products and technologies at levels necessary to propel our technology and innovation leadership position.
Total Other Expense, Net
Interest Expense, Net
Interest expense, net was $3.3 million in the third quarter of 2023 compared to $2.2 million in the same period of 2022. The increase was the result of higher interest rates on our variable interest debt. Interest expense, net was $11.0 million in the first nine months of 2016. R&D Expense as a percentage of Net Sales was 3.3% for the first nine months of 2017 and 4.1% for the first nine months of 2016. The decrease in R&D spending was primarily due2023 compared to headcount reduction related to the first quarter 2017 restructuring action.
We continue to invest in developing innovative new products and technologies and the advancement of detergent-free products, fleet management and other sustainable technologies. New products are a key driver of sales growth. There were 32 new products and product variants launched$3.7 million in the first nine months of 2017 consisting2022. The increase was the result of higher debt levels coupled with rising interest rates on our variable interest rate debt. The following table compares the debt levels, average interest rate, interest income and interest expense for the three and nine months ended September 30, 2023 and 2022, respectively (in millions, except percentages):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
| Weighted Average Outstanding Borrowings | $ | 262.4 | | | $ | 269.3 | | | $ | 291.3 | | | $ | 269.4 | |
| Average interest rate | 6.48 | % | | 3.34 | % | | 6.19 | % | | 2.26 | % |
| Interest expense | 4.3 | | | 2.2 | | | 13.5 | | | 4.6 | |
| Interest income | (1.0) | | | — | | | (2.5) | | | (0.9) | |
| Interest expense, net | $ | 3.3 | | | $ | 2.2 | | | $ | 11.0 | | | $ | 3.7 | |
Our debt portfolio as of September 30, 2023 was comprised of debt predominately in U.S. dollars. The Company manages its floating rate debt exposure using fixed rate interest rate swaps to reduce the Company's risk of the possibility of increased interest costs. The Company has an aggregate $120 million notional amount of interest rate swaps that exchange a new familyvariable rate of T500 commercial walk-behind scrubbers,interest for a fixed rate of interest of 4.076% over the enhanced IRIS® Web Based Fleet Management System,term of the i-mop, the V3e compact dry canister vacuum, the T350 stand-on commercial scrubber and the A140 micro-scrubber.agreements.
Selling & Administrative ExpenseNet Foreign Currency Transaction Gain (Loss)
S&A Expense in the third quarter of 2017 increased 41.3% to $85.7 million, as compared to $60.6Net foreign currency transaction loss was $0.4 million in the third quarter of 2016. S&A Expense as a percentage of Net Sales was 32.7% for the third quarter of 2017, an increase of 240 basis points from 30.3% in the third quarter of 2016. S&A Expense in the 2017 third quarter was unfavorably impacted by $7.3 million, or 280 basis points, and $0.9 million, or 30 basis points, of amortization expense and acquisition costs, respectively, related to our acquisition of the IPC Group. The 2017 third quarter amortization expense includes a catch-up adjustment of $2.0 million to reflect an accelerated amortization method used by the company as a result of an adjustment to our preliminary valuation of intangible assets as part of our acquisition of the IPC Group. Excluding these costs, S&A Expense was 70 basis points lower in the third quarter of 20172023 compared to the same period in 2016 due primarily to the lower relative IPC S&A Expense to revenue percentage and our continued balance of disciplined spending control with investments in key growth initiatives.
S&A Expense for the first nine months of 2017 increased 31.9% to $247.1 million, as compared to $187.3 million for the first nine months of 2016. S&A Expense as a percentage of Net Sales was 34.1% for the first nine months of 2017, an increase of 270 basis points from 31.4% in the first nine months of 2016. S&A Expense in the first nine months of 2017 was unfavorably impacted by $10.4 million, or 140 basis points, and $8.4 million, or 120 basis points, of amortization expense and acquisition costs, respectively, related to our acquisition of the IPC Group and an $8.0 million, or 110 basis points, restructuring charge taken in our 2017 first quarter to better align our global resources and expense structure with a lower growth global economic environment. Excluding these costs, S&A Expense was 100 basis points lower for the first nine months of 2017 compared to the same period in 2016 due primarily to the lower relative IPC S&A Expense to revenue percentage and our continued balance of disciplined spending control with investments in key growth initiatives.
Profit from Operations
Operating Profit for the third quarter of 2017 was $11.0 million, or 4.2% of Net Sales, as compared to Operating Profit of $16.3 million, or 8.1% of Net Sales, in the third quarter of 2016. The third quarter 2017 Operating Profit was $5.3 million lowerless than the third quarter of 2016 Operating Profit due primarily to $7.3 million of amortization expense related to IPC intangible assets, the $2.2 million fair value inventory step-up flow through and $0.9 million of acquisition costs, all related to our acquisition of the IPC Group. These decreases were partially offset by Operating Profit obtained from the IPC acquisition and reduced expenses resulting from our first quarter 2017 restructuring charge.
Operating Profit for the first nine months of 2017 was $17.6 million, or 2.4% of Net Sales, as compared to Operating Profit of $45.9 million, or 7.7% of Net Sales, in the first nine months of 2016. The first nine months of 2017 Operating Profit was $28.3 million lower than the first nine months of 2016 Operating Profit due primarily to $10.4 million of amortization expense related to IPC intangible assets, the $8.4 million fair value inventory step-up flow through and $8.4 million of acquisition costs, all related to our acquisition of the IPC Group. We also recorded an $8.0 million restructuring charge in the first nine months of 2017 to better align our global resources and expense structure with a lower growth global economic environment.These decreases were partially offset by Operating Profit obtained from the IPC acquisition and reduced expenses resulting from our first quarter 2017 restructuring charge.
Other Expense, Net
Interest Income
Interest Income in the third quarter of 2017 was $0.7 million, as compared to $0.1 million in the third quarter of 2016. Interest Income in2022. The unfavorable impact was primarily due to the first nine monthsstrengthening of 2017the U.S. dollar relative to the Brazilian real and Mexican peso. Net foreign currency transaction gain was $1.6 million, as compared to $0.2$0.5 million in the first nine months of 2016. The higher Interest Income in the third quarter and first nine months of 2017 as2023 compared to the same periods in 2016 was primarily due to interest income related to foreign currency swap activities.
Interest Expense
Interest Expense in the third quartera loss of 2017 was $6.1 million, as compared to $0.3 million in the third quarter of 2016. The higher Interest Expense in the third quarter of 2017 as compared to the same period in 2016 was primarily due to carrying a higher level of debt on our Condensed Consolidated Balance Sheets related to our acquisition activities.
Interest Expense in the first nine months of 2017 was $18.7 million, as compared to $0.9$0.4 million in the first nine months of 2016.2022. The higher Interest Expense in the first nine months of 2017 as compared to the same period in 2016favorable impact was primarily due to carrying a higher level of debthedging gains on our Condensed Consolidated Balance Sheets related to our acquisition activities as well as a $6.2 million charge to expense the debt issuance costs for loans which were refinanced or repaid, as further described in the Liquidity and Capital Resources section that follows.foreign denominated receivables.
Net Foreign Currency Transaction (Losses) Gains
Net Foreign Currency Transaction Losses in the third quarter of 2017 were $0.8 million, as compared to Net Foreign Currency Transaction Losses of $0.1 million in the third quarter of 2016. The unfavorable change in the impact from foreign currency transactions in the third quarter of 2017 was primarily due to fluctuations in foreign currency rates, driven by changes in the Euro, and settlement of transactional hedging activity in the normal course of business.
Net Foreign Currency Transaction Losses in the first nine months of 2017 were $2.4 million, as compared to Net Foreign Currency Transaction Gains of $0.2 million in the first nine months of 2016. The unfavorable change in the impact from foreign currency transactions in the first nine months of 2017 was primarily due to a $1.1 million mark-to-market adjustment of a foreign exchange call option, an instrument held in connection with our acquisition of the IPC Group on April 6, 2017, and also fluctuations in foreign currency rates, specifically between the Euro and US dollar, and settlement of transactional hedging activity in the normal course of business.
Other Expense, Net
There was no significant change in Other Expense, Net in the third quarter and first nine months of 2017, as compared to the same periods in 2016.
Income Taxes
The effective tax rate in the third quarter of 2017 was 16.9%, as compared to the effective tax rate in the third quarter of the prior year of 27.7%. The tax expense for the third quarter of 2017 included a $0.6 million tax benefit associated with $2.2 million of expense related2023 was 23.4% compared to inventory step-up amortization and a $0.3 million tax benefit associated with $0.9 million of acquisition costs related to the IPC Group acquisition. Excluding these items,21.2% for the third quarter 2017 overallof 2022. The increase was primarily due to a decrease in discrete tax benefits recognized during the quarter.
The effective tax rate would have been 21.7%.
The decrease in the overall effective tax rate to 21.7% in the third quarter 2017 compared to 27.7% in the third quarter 2016, excluding the 2017 special items, was primarily related to mix of third quarter taxable earnings by country.
The year-to-date overall effective tax rate was (14.6%) for 2017 compared to 30.6% for 2016. The tax expense for the first nine months of 2017 included a $3.0 million tax benefit associated with $15.8 million of acquisition and financing costs related to the IPC Group acquisition, a $2.4 million tax benefit associated with $8.4 million of expense related to inventory step-up amortization and a $2.2 million tax benefit associated with an $8.0 million restructuring charge. Excluding the effects of 2017 special items, the 2017 year-to-date overall effective tax rate would have been 26.9%.
The decrease in the overall effective tax rate to 26.9% in 20172023 was 22.9% compared to 30.6% in 2016, excluding the 2017 special items, was primarily related to the mix in expected full year taxable earnings by country and to the implementation of Accounting Standards Update (“ASU”) 2016-09 in Q1 2017. See Note 2 to the Condensed Consolidated Financial Statements for further information regarding the implementation of ASU 2016-09.
We do not have any plans to repatriate the undistributed earnings of non-U.S. subsidiaries. Any repatriation from foreign subsidiaries that would result in incremental taxation is not being considered. We believe that reinvesting these earnings outside the U.S. is the most efficient use of capital.
Net Earnings (Loss) and Earnings (Loss) Per Share
Net Earnings Attributable to Tennant Company for the third quarter of 2017 were $3.6 million, or $0.20 per diluted share, as compared to Net Earnings of $11.5 million, or $0.64 per diluted share, in the third quarter of 2016. The third quarter 2017 Net Earnings Attributable to Tennant Company included $1.6 million, net of tax, or $0.09 per share, from the fair value inventory step-up flow through related to our acquisition of the IPC Group and $0.6 million, net of tax, or $0.03 per share, for acquisition costs related to our acquisition of the IPC Group. The decrease in earnings per share was driven by higher amortization expense related to the IPC acquisition and higher interest expense, partially offset by earnings from the recently acquired IPC Group.
Net Loss Attributable to Tennant Company22.4% for the first nine months of 20172022. The increase was $3.0driven by a decrease in discrete tax benefits recognized, as well as unfavorable changes in the mix of forecasted earnings by jurisdiction.
In general, it is our practice and intention to permanently reinvest the earnings of our foreign subsidiaries and repatriate earnings only when the tax impact is zero or immaterial. No deferred taxes have been provided for withholding taxes or other taxes that would result upon repatriation of our foreign investments to the U.S.
Backlog
Backlog is one of the many indicators of business conditions in the Company's markets. Our order backlog was $213.9 million or $(0.17) per diluted share, asat September 30, 2023 compared to Net Earnings of $31.2$326.4 million or $1.74 per diluted share, inat December 31, 2022. The decrease was the first nine months of 2016. The first nine months of 2017 Net Loss Attributable to Tennant Company included $8.1 million, net of tax, or $0.47 per share, $7.5 million, net of tax, or $0.43 per share, $6.1 million, net of tax, or $0.34 per share, and $4.6 million, net of tax, or $0.26 per share, for acquisition costs, amortization expense, the fair value inventory step-up flow through and financing costs, respectively, all related to our acquisitionresult of the IPC Group. In addition, Net Loss AttributableCompany's ability to Tennant Company forobtain key component parts and increase production levels. Backlog includes orders that can be cancelled or postponed at the first nine monthsoption of 2017 included a $5.8 million, net of tax, or $0.32 per share, restructuring charge taken in our 2017 first quarter and a $0.2 million, net of tax, or $0.01 per share, pension settlement charge.the customer at any time without penalty.
Liquidity and Capital Resources
Liquidity
Cash, cash equivalents and Cash Equivalentsrestricted cash totaled $55.9$97.0 million at September 30, 2017, as2023 compared to $58.0$77.4 million as of December 31, 2016.2022. Wherever possible, cash management is centralized and intercompany financing is used to provide working capital to subsidiaries as needed. Our current ratio was 2.3 as of September 30, 2023 and 2.2 as of December 31, 2022. Our primary working capital, which is comprised of accounts receivable, inventories and accounts payables, was 2.1 and $220.8$328.0 million respectively, as of September 30, 2017 compared to a current ratio2023 and working capital of 2.2 and $165.1$332.0 million respectively, as of December 31, 2016.2022. Our debt-to-capital ratio was 56.9%28.9% as of September 30, 2017,2023 compared to 11.5%38.9% as of December 31, 2016. The increase in the debt-to-capital ratio was driven by the borrowings related to the IPC acquisition.
Cash Flow Summary
Cash provided by (used in) our operating, investing and financing activities is summarized as follows (in thousands):
|
| | | | | | | |
| | Nine Months Ended |
| | September 30 |
| | 2017 | | 2016 |
| Operating Activities | $ | 32,123 |
| | $ | 33,282 |
|
| Investing Activities: | | | |
| Purchases of Property, Plant and Equipment, Net of Disposals | (13,783 | ) | | (21,940 | ) |
| Proceeds from Principal Payments Received on Long-Term Note Receivable | 500 |
| | — |
|
| Issuance of Long-Term Note Receivable | (1,500 | ) | | — |
|
| Acquisition of Businesses, Net of Cash Acquired | (354,073 | ) | | (12,358 | ) |
| Purchase of Intangible Asset | (2,500 | ) | | — |
|
| Proceeds from Sale of Business | — |
| | 285 |
|
| (Increase) Decrease in Restricted Cash | (133 | ) | | 116 |
|
| Financing Activities | 335,797 |
| | (8,457 | ) |
| Effect of Exchange Rate Changes on Cash and Cash Equivalents | 1,483 |
| | 55 |
|
| Net Decrease in Cash and Cash Equivalents | $ | (2,086 | ) | | $ | (9,017 | ) |
Operating Activities
Operating activities provided$32.1 million of cash for the nine months ended September 30, 2017. Cash provided by operating activities was driven primarily by strong earnings, adding back non-cash items, partially offset by $9.9 million increase in inventory to support anticipated revenue growth.
Operating activities provided $33.3 million of cash for the nine months ended September 30, 2016. Cash provided by operating activities was driven primarily by cash inflows from Net Earnings of $31.2 million and a decrease in Accounts Receivable of $5.8 million from strong collections, partially offset by cash outflows resulting from a decrease in Accounts Payable due to the general timing of payments of $6.4 million.
Management evaluates how effectively we utilize two of our key operating assets, Accounts Receivable and Inventories, using Accounts Receivable “Days Sales Outstanding” (DSO) and “Days Inventory on Hand” (DIOH), on a FIFO basis. The metrics are calculated on a rolling three month basis in order to more readily reflect changing trends in the business. These metrics for the quarters ended were as follows (in days):
|
| | | |
| | September 30,
2017 | | December 31,
2016 |
| DSO | 66 | | 59 |
| DIOH | 104 | | 89 |
As of September 30, 2017, DSO increased 7 days compared to December 31, 2016. The increase was primarily due to the variety of terms offered and mix of business, somewhat offset by the trend of continued proactive management of our receivables by enforcing tighter credit limits and continuing to successfully collect past due balances.
As of September 30, 2017, DIOH increased 15 days as compared to December 31, 2016. The increase was primarily due to a lower level of sales than anticipated that resulted in higher levels of inventory, somewhat offset by progress from inventory reduction initiatives.
Investing Activities
Investing activities during the nine months ended September 30, 2017 used $371.5 million. We used $354.1 million in relation to our acquisition of the IPC group and the final installment payment for the acquisition of the Florock brand and $13.8 million for net capital expenditures. Net capital expenditures included investments in information technology process improvement projects, tooling related to new product development, and manufacturing equipment. We also used $2.5 million for the purchase of the distribution rights to sell the i-mop and $1.5 million as a result of a loan to i-team North America B.V., a joint venture that operates as the distributor of the i-mop in North America. The details regarding the joint venture and our distribution of the i-mop are described further in Note 3 to the Condensed Consolidated Financial Statements.
Investing activities during the nine months ended September 30, 2016 used $33.9 million. Net capital expenditures used $21.9 million and our acquisition of the Florockbrand and the assets of Dofesa Barrido Mecanizado, a long-time distributor based in central Mexico, used $12.4 million, net of cash acquired, as described further in Note 5. Capital expenditures included investments in information technology process improvement projects, tooling related to new product development, and manufacturing equipment.
Financing Activities
Net cash provided by financing activities was $335.8 million during the first nine months of 2017. Proceeds from the incurrence of Long-Term Debt associated with the IPC acquisition and the issuance of Common Stock provided $440.0 million and $4.7 million, respectively. These cash inflows were partially offset by cash outflows resulting from $81.3 million of Long-Term Debt payments, $16.5 million related to payments of debt issuance costs and dividend payments of $11.2 million.
Net cash used in financing activities was $8.5 million during the first nine months of 2016. The purchases of our Common Stock per our authorized repurchase program used $12.8 million, dividend payments used $10.6 million and the payments of Long-Term Debt used $3.5 million, partially offset by proceeds from the incurrence of Long-Term Debt of $15.0 million, the issuance of Common Stock of $2.9 million and the excess tax benefit on stock plans of $0.4 million.
Indebtedness
In order to finance the acquisition of the IPC Group, on April 4, 2017, 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. 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 $400.0 million and a revolving facility in an amount up to $200.0 million with an option to expand the revolving facility by $150.0 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.
Upon entry into the 2017 Credit Agreement, the company repaid $45.0 million 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 2017 Credit Agreement also contains financial covenants, requiring us to maintain a ratio of consolidated total indebtedness to consolidated earnings before income, taxes, depreciation and amortization, subject to certain adjustments ("Adjusted EBITDA") of not greater than 4.25 to 1, as well as requiring us to maintain a ratio of consolidated Adjusted EBITDA to consolidated interest expense of no less than 3.50 to 1 for the quarter ended September 30, 2017. The 2017 Credit Agreement also contains a financial covenant requiring us to maintain a senior secured net indebtedness to Adjusted EBITDA ratio of not greater than 3.50 to 1. These financial covenants may restrict our ability to pay dividends and purchase outstanding shares of our common stock. We were in compliance with our financial covenants at September 30, 2017.
We will be required to repay the senior credit agreement with 25% to 50% of our excess cash flow from the preceding fiscal year, as defined in the agreement, unless our net leverage ratio for such preceding fiscal year is less than or equal to 3.00 to 1, which will be first measured using our fiscal year ended December 31, 2018.
Further details regarding our financing under the 2017 Credit Agreement are discussed in Note 8 to the Condensed Consolidated Financial Statements.
On April 18, 2017,2023, we issued and sold $300.0 million 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 contain customary representations, warranties and covenants, and are less restrictive than those contained in the 2017 Credit Agreement.
We used the net proceeds from this offering to refinance a $300.0 million 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.
Further details regarding our financing under the Notes are discussed in Note 8 to the Condensed Consolidated Financial Statements.
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 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.
As of September 30, 2017, we had outstanding borrowings under our 2017 Credit Agreement, totaling $75.0 million under our term loan facility and $20.0 million under our revolving facility. There were $300.0 million in outstanding borrowings under the Notes as of September 30, 2017. In addition, we had stand alone letters of credit and bank guarantees outstanding in the amount of $4.7 million. Commitment fees$3.1 million, leaving approximately $316.9 million of unused borrowing capacity on unused linesour revolving facility.
Cash Flow from Operating Activities
Net cash provided by operating activities during the nine months ended September 30, 2017 were $0.4 million.2023 was $124.6 million compared to net cash used by operating activities of $38.8 million during the nine months ended September 30, 2022. The overall weighted average costincrease was the result of debt is approximately 5.0%improved operating performance and moderating investments in working capital.
Cash Flow from Investing Activities
Net cash used in investing activities during the nine months ended September 30, 2023 was $15.2 million compared to net cash used by investing activities of a related cross-currency swap instrument, is approximately 4.2%. Further details regarding$19.0 million during the cross-currency swap instrument are discussednine months ended September 30, 2022. The decrease in Note 10 to the Condensed Consolidated Financial Statements.
Prudential Investment Management, Inc.
In March 2017, we repaid $11.1 million of debt evidencedcash outflows was primarily driven by the notes issued under our Private Shelf Agreement,timing of property, plant and equipment investments as describedthe Company continues to deploy cash flow toward operational capital needs.
Cash Flow from Financing Activities
Net cash used in Note 9 of our annual report on Form 10-K forfinancing activities during the yearnine months ended December 31, 2016, and terminated the Private Shelf Agreement.
Contractual Obligations
As of September 30, 2017, as a result of our acquisition of the IPC Group, there have been material changes in our contractual obligations related to our minimum rental payments for aggregate operating lease commitments as well as our long-term debt2023 was $87.1 million compared to net cash used by financing activities of $1.2 million during the nine months ended September 30, 2022. The increase in cash outflows was primarily driven by repayments of borrowings and share purchases. The Company repurchased 165,098 shares of common stock for $11.7 million during the first nine months of 2023 as we continued to focus on returning capital to shareholders in line with our contractual obligations as disclosed in our annual report on Form 10-K for the year ended December 31, 2016. Further details regarding our contractual obligations related to our aggregate operating lease commitments and long-term debt are discussed in Notes 13 and 8, respectively, to the Condensed Consolidated Financial Statements.capital allocation priorities.
Other than the contractual obligations identified above, there have been no material changes with respect to contractual obligations as disclosed in our annual report on Form 10-K for the year ended December 31, 2016.
Newly Issued Accounting Guidance
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers (Topic 606). This ASU will replace all existing revenue recognition standards and significantly expand the disclosure requirements for revenue arrangements. This guidance requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. This guidance provides a five-step analysis of transactions to determine when and how revenue is recognized. This guidance also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity's contracts with customers.
In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which defers the effective date of the new revenue recognition standard by one year from the original effective date specified in ASU No. 2014-09. The guidance now permits us to apply the new revenue recognition standard to annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, which is our fiscal 2018.
Management will adopt the revenue recognition standard using the modified retrospective approach. Under this approach, the new standard would only be applied to new contracts and those contracts that are not yet complete at January 1, 2018, with a cumulative catch-up adjustment recorded to beginning retained earnings for existing contracts that still require performance. We are utilizing a comprehensive approach to assess the impact of the standard on the company by reviewing our current accounting policies and practices to identify potential difference that would result from applying the new requirements to our revenue contracts. We are finalizing our contract reviews and, at this time, we have not identified any impacts to our financial statements that we believe will be material in the year of adoption. We anticipate the primary impact of the standard to be the additional required disclosures around revenue recognition in the notesSee Note 2 to the consolidated financial statements. We continue to developstatements for information on new accounting policies and assess changes to the relevant business processes and the control activities within them as a result of the provisions of this standard.pronouncements.
In February 2016, the FASBNo other new accounting pronouncements issued ASU No. 2016-02, Leases (Topic 842). This ASU changes current U.S. GAAP for lessees to recognize lease assets and lease liabilities on the balance sheet for those leases classified as operating leases under previous U.S. GAAP. Under the new guidance, lessor accounting is largely unchanged. The amendments in this ASUbut not yet effective have had, or are effective for annual periods beginning after December 15, 2018, including interim periods within that reporting period, which is our fiscal 2019. Early application is permitted. Lessees and lessors must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The transition approach would not require any transition accounting for leases that expired before the earliest comparative period presented. A full retrospective transition approach is prohibited for both lessees and lessors. We will adopt this ASU beginning in 2019. We are currently evaluating the impact of this amended guidance on our consolidated financial statements and related disclosures.
In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. This ASU clarifies the definition of a business when evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. This ASU is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, which is our fiscal 2018. We will apply this guidance to applicable transactions commencing in 2018.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which removes Step 2 of the goodwill impairment test. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. This ASU is effective for annual or any interim goodwill impairment tests beginning after December 15, 2019, which is our fiscal 2020. Early adoption of the standard is permitted for any interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We will apply this guidance to applicable goodwill impairment tests going forward.
In March 2017, the FASB issued ASU No. 2017-07, Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which requires employers to report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost/credit are required to be presented in the income statement separately from the service cost component in nonoperating expenses. In addition, the line items used in the income statement to present the other components of net benefit cost/credit must be disclosed. The amendments also allow only the service cost component to be eligible for capitalization when applicable. This ASU is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, which is our fiscal 2018. We are currently evaluating the impact that this standard is expected to have, a material impact on our consolidated financial statements and related disclosures.
In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, which better aligns accounting rules with a company's risk management activities, better reflects the economic results of hedging inoperations or financial statements and simplifies hedge accounting treatment. This ASU is effective for fiscal years beginning after after December 15, 2018, including interim periods within those fiscal years, which is our fiscal 2019. We are currently evaluating the impact that this standard is expected to have on our consolidated financial statements and related disclosures.position.
Cautionary Statement Relevant to Forward-Looking Information
This Quarterly Report, on 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 orof 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; our ability to attract, develop and retain key personnel; our ability to achieve operational efficiencies, including synergistic and other benefits of acquisitions; our substantial indebtedness could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry, expose us to interest rate risk to the extent of any variable rate debt, and prevent us from meeting our covenant and payment obligations related to our debt instruments; our ability to effectively manage organizational changes; our ability to successfully upgrade, evolve and protect our information technology systems; our ability to develop and commercialize new innovative products and services; unforeseen product liability claims or product quality issues; fluctuations in the cost, quality or availability of raw materials and purchased components; foreign currency exchange rate fluctuations, particularlyour 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 relative strength of the U.S. dollar against other major currencies;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 comply with lawsmaintain the health and regulations;safety of our workers; our ability to integrate acquisitions; and our ability to sufficiently remediate any material weaknesses or significant deficiencies in our internal control over financial reporting.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, 2016 and Part II, Item 1A of this Form 10-Q.2022.
We undertake no obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as required by law. Investors are advised to consult any further disclosures by us in our filings with the SEC and in other written statements on related subjects. It is not
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 |
Item 3.Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes in our market risk since December 31, 2016.2022. For additional information, refer to Item 7A of our 2016 annual report on Form 10-K for the year ended December 31, 2016.2022.
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Item 4. | Controls and Procedures |
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, havehas evaluated the effectiveness of our disclosure controls and procedures for the period ended as of September 30, 20172023 (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 due to material weaknesses in internal control over financial reporting described in Part II, Item 9A of our 2016 annual report on Form 10-K for the year ended December 31, 2016, our disclosure controls and procedures were notare 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 of September 30, 2017.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, other than as described below.
Remediation Plan
We began implementing a remediation plan to address the control deficiencies that led to the material weaknesses mentioned above. The remediation plan includes the following:
Sponsoring ongoing training related to the COSO 2013 Framework best practices for personnel that are accountable for internal control over financing reporting.
Performing a complete review of our accounting for revenue related to equipment maintenance and repair service to ensure the adequacy of the design and implementation of automated and manual controls.
Designing and implementing controls over the determination of technological feasibility and the capitalization of software development costs.
We are in the implementation phase of our remediation plan described above. The material weaknesses cannot be considered remediated until the controls have operated for a sufficient period of time and until management has concluded, through testing, that the control is operating effectively. Our goal is to remediate these material weaknesses by the end of 2017.
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 fiscal year ended December 31, 2016. Other than the risk factor identified below, there2022. There have been no material changes to our risk factors since the filing of that report.
We may not be able to generate sufficient cash to service all
In April 2017, in connection with the acquisition of IPC Cleaning S.p.A., we entered into a new senior credit facility and indenture, and issued debt totaling approximately $400,000, consisting of a $100,000 term loan and $300,000 of senior notes, which funded the acquisition and replaced our current debt facility. The new senior credit facility also includes a revolving facility in an amount up to $200,000. We cannot provide assurance that our business will generate sufficient cash flow from operations to meet all our debt service requirements, to pay dividends, to repurchase shares of our common stock, and to fund our general corporate and capital requirements.
Our ability to satisfy our debt obligations will depend upon our future operating performance. We do not have complete control over our future operating performance because it is subject to prevailing economic conditions, and financial, business and other factors.
Our current and future debt service obligations and covenants could have important consequences. These consequences include, or may include, the following:
our ability to obtain financing for future working capital needs or acquisitions or other purposes may be limited;
our funds available for operations, expansions, dividends or other distributions, or stock repurchases may be reduced because we dedicate a significant portion of our cash flow from operations to the payment of principal and interest on our indebtedness;
our ability to conduct our business could be limited by restrictive covenants; and
our vulnerability to adverse economic conditions may be greater than less leveraged competitors and, thus, our ability to withstand competitive pressures may be limited.
Restrictive covenants in our senior credit facility and in our indenture place limits on our ability to conduct our business. Covenants in our senior credit facility and indenture include those that restrict our ability to make acquisitions, incur debt, encumber or sell assets, pay dividends, engage in mergers and consolidations, enter into transactions with affiliates, make investments and permit our subsidiaries to enter into certain restrictive agreements. The senior credit facility additionally contains certain financial covenants. We cannot provide assurance that we will be able to comply with these covenants in the future.
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Item 2. | Item 2.Unregistered Sales of Equity Securities and Use of Proceeds |
On October 31, 2016, the Board of Directors authorized the repurchaseEquity Securities and Use of an additional 1,000,000 shares of our common stock. This is in addition to the 393,965 shares remaining under our prior repurchase program as of September 30, 2017. Proceeds
Share repurchases are made from time to time in the open market or through privately negotiated transactions, primarilytransactions. 947,235 shares remain authorized under the most recent share repurchase program approved by the Board of Directors on October 31, 2016.
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For the Quarter Ended
September 30, 2023 | Total Number of Shares Purchased(1) | Average Price Paid
Per Share | Total Number of Shares Purchased as Part of
Publicly Announced Plans or
Programs | Maximum Number of Shares that May Yet Be
Purchased Under the Plans or
Programs |
| July 1-31, 2023 | 8,665 | $ | 79.15 | | 8,660 | 960,368 |
| August 1-31, 2023 | 2,163 | $ | 79.50 | | 2,020 | 958,348 |
| September 1-30, 2023 | 11,113 | $ | 76.59 | | 11,113 | 947,235 |
| Total | 21,941 | $ | 71.70 | | 21,793 | 947,235 |
(1)Includes 148 shares delivered or attested to offsetin satisfaction of the dilutive effect of shares issued through ourexercise price and/or tax withholding obligations by employees who exercised stock options or restricted stock under employee share-based compensation programs. As ofplans.
Item 5. Other Information
During the three months ended September 30, 2017, our 2017 Credit Agreement restricts2023, no director or officer of the paymentCompany adopted, modified or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) of dividends or repurchasingRegulation S-K.
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| | | | | | | | | | | | | |
| For the Quarter Ended June 30, 2017 | | Total Number of Shares Purchased(1) | | Average Price Paid Per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs |
| July 1 - 31, 2017 | | 603 |
| | $ | 74.95 |
| | — |
| | 1,393,965 |
|
| August 1 - 31, 2017 | | 101 |
| | 65.70 |
| | — |
| | 1,393,965 |
|
| September 1 - 30, 2017 | | 176 |
| | 60.40 |
| | — |
| | 1,393,965 |
|
| Total | | 880 |
| | $ | 70.98 |
| | — |
| | 1,393,965 |
|
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(1)
| Includes 880 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
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| Item # | | Description | | Method of Filing |
|
| | | | Incorporated by reference to Exhibit 3i to the Company’s report on Form 10-Q for the quarterly period ended June 30, 2006. |
|
| | | | Incorporated by reference to Exhibit 3,2 to the Company’s Form 8-K dated January 19, 2023. |
| 3iii | | | | Incorporated by reference to Exhibit 3iii to the Company’s Current ReportCompany's report on Form 8-K dated December 14, 2010.10-Q for the quarterly period ended March 31, 2018. |
| 31.1 |
| | Indenture dated as of April 18, 2017 | | Incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K filed April 24, 2017. |
|
| | Registration Rights Agreement dated April 18, 2017 | | Incorporated by reference to Exhibit 4.2 to the Company's Current Report on Form 8-K filed April 24, 2017. |
|
| | Rule 13a-14(a)/15d-14(a) Certification of CEO | | Filed herewith electronically. |
|
| | | | Filed herewith electronically. |
|
| | | | Filed herewith electronically. |
|
| | | | Filed herewith electronically. |
| 101 |
| | The following financial information from Tennant Company's Quarterly Report on Form 10-Q for the period ended September 30, 2017,2023, formatted in ExtensibleInline eXtensible Business Reporting Language (XBRL)(iXBRL): (i) Condensed Consolidated Statements of OperationsIncome for the three and nine months ended September 30, 20172023 and 2016;2022; (ii) Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 20172023 and 2016;2022; (iii) Condensed Consolidated Balance Sheets as of September 30, 20172023 and December 31, 2016;2022; (iv) Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 20172023 and 2016;2022; (v) Consolidated Statements of Equity for the nine months ended September 30, 2023 and (v)2022; and (vi) Notes to the Condensed Consolidated Financial Statements | | Filed herewith electronically. |
| 104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | | Filed herewith electronically. |
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.
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| | | | TENNANT COMPANY |
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| Date: | | October 31, 2023 | | TENNANT COMPANY/s/ Fay West |
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Date: | | November 9, 2017 | | /s/ H. Chris Killingstad |
| | | | H. Chris Killingstad
President and Chief Executive Officer
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| | | | |
Date: | | November 9, 2017 | | /s/ Thomas Paulson |
| | | | Thomas PaulsonFay West
Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) |
HIDDEN IXBRL
