The LIFO reserve approximates the difference between LIFO carrying cost and FIFO.
The changes in the carrying value of Goodwill for the three months ended March 31, 2012 were as follows:
The balances of acquired Intangible Assets, excluding Goodwill, as of March 31, 2012 and December 31, 2011 were as follows:
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:
| | | March 31, | | | December 31, | |
| | | 2012 | | | 2011 | |
| Long-Term Debt: | | | | | | |
| Bank borrowings | | $ | 42 | | | $ | 49 | |
| Credit facility borrowings | | | 30,000 | | | | 30,000 | |
| Notes payable | | | 1,500 | | | | 1,500 | |
| Collateralized borrowings | | | 86 | | | | 127 | |
| Capital lease obligations | | | 4,364 | | | | 4,779 | |
| Total Long-Term Debt | | | 35,992 | | | | 36,455 | |
| Less: Current Portion | | | 4,156 | | | | 4,166 | |
| Long-Term Portion | | $ | 31,836 | | | $ | 32,289 | |
As of March 31, 2012, we had committed lines of credit totaling $125,000 and uncommitted lines of credit totaling $82,669. There was $10,000 in outstanding borrowings under our JPMorgan facility and $20,000 in outstanding borrowings under our Prudential facility as of March 31, 2012. In addition, we had stand alone letters of credit of $1,764 outstanding and bank guarantees in the amount of $1,048. Commitment fees on unused lines of credit for the three months ended March 31, 2012 were $79.
Our most restrictive covenants are part of our 2011 Credit Agreement (as defined below) with JPMorgan (as defined below), which are the same covenants in the Shelf Agreement (as defined below) with Prudential (as defined below), and require us to maintain an indebtedness to EBITDA ratio of not greater than 3.00 to 1 and to maintain an EBITDA to interest expense ratio of no less than 3.50 to 1 as of the end of each quarter. As of March 31, 2012, our indebtedness to EBITDA ratio was 0.54 to 1 and our EBITDA to interest expense ratio was 28.73 to 1.
Credit Facilities
JPMorgan Chase Bank, National Association
On May 5, 2011, we entered into a Credit Agreement (the “2011 Credit Agreement”) with JPMorgan Chase Bank, N. A. (“JPMorgan”), as administrative agent and collateral agent, U.S. Bank National Association, as syndication agent, Wells Fargo Bank, National Association, and RBS Citizens, N.A., as co-documentation agents, and the Lenders (including JPMorgan) from time to time party thereto. Upon entry into the 2011 Credit Agreement, we repaid and terminated our June 19, 2007 Credit Agreement. The 2011 Credit Agreement provides us and certain of our foreign subsidiaries access to a senior unsecured credit facility until May 5, 2016, in the amount of $125,000, with an option to expand by up to $62,500 to a total of $187,500. Borrowings may be denominated in U.S. Dollars or certain other currencies. The 2011 Credit Agreement contains a $100,000 sublimit on borrowings by foreign subsidiaries.
The fee for committed funds under the 2011 Credit Agreement ranges from an annual rate of 0.25% to 0.40%, depending on our leverage ratio. Borrowings under the 2011 Credit Agreement bear interest at a rate per annum equal to the greatest of (a) the prime rate, (b) the federal funds rate plus 0.50% and (c) the adjusted LIBOR rate for a one month period plus 1.0%, plus, in any such case, an additional spread of 0.50% to 1.10%, depending on our leverage ratio.
The 2011 Credit Agreement gives the lenders a pledge of 65% of the stock of certain first tier foreign subsidiaries. The obligations under the 2011 Credit Agreement are also guaranteed by our first tier domestic subsidiaries.
The 2011 Credit Agreement contains customary representations, warranties and covenants, including but not limited to covenants restricting our ability to incur indebtedness and liens and merge or consolidate with another entity. Further, the 2011 Credit Agreement contains the following covenants:
| · | a covenant requiring us to maintain an indebtedness to EBITDA ratio as of the end of each quarter of not greater than 3.00 to 1; |
| · | a covenant requiring us to maintain an EBITDA to interest expense ratio as of the end of each quarter of no less than 3.50 to 1; |
| · | a covenant restricting us from paying dividends or repurchasing stock if, after giving effect to such payments, our leverage ratio is greater than 2.00 to 1, in such case limiting such payments to an amount ranging from $50,000 to $75,000 during any fiscal year based on our leverage ratio after giving effect to such payments; and |
| · | a covenant restricting our ability to make acquisitions, if, after giving pro-forma effect to such acquisition, our leverage ratio is greater than 2.75 to 1, in such case limiting acquisitions to $25,000. |
As of March 31, 2012, we were in compliance with all covenants under the 2011 Credit Agreement. There was $10,000 in outstanding borrowings under this facility at March 31, 2012, with a weighted average interest rate of 1.77%.
Prudential Investment Management, Inc.
On May 5, 2011, we entered into Amendment No. 1 to our Private Shelf Agreement (the “Amendment”), which amends the Private Shelf Agreement, dated as of July 29, 2009, with Prudential Investment Management, Inc. (“Prudential”) and Prudential affiliates from time to time party thereto (the “Shelf Agreement”).
The Amendment principally provides the following changes to the Shelf Agreement:
| · | elimination of the security interest in our personal property and subsidiaries; |
| · | an amendment to the Maximum Leverage Ratio to not greater than 3.00 to 1 for any period ending on or after March 31, 2011; |
| · | an amendment to our restriction regarding the payment of dividends or repurchase of stock to restrict us from paying dividends or repurchasing stock if, after giving effect to such payments, our leverage ratio is greater than 2.00 to 1, in such case limiting such payments to an amount ranging from $50,000 to $75,000 during any fiscal year based on our leverage ratio after giving effect to such payments; and |
| · | an amendment to Permitted Acquisitions restricting our ability to make acquisitions, if, after giving pro-forma effect to such acquisition, our leverage ratio is greater than 2.75 to 1, in such case limiting acquisitions to $25,000. |
As of March 31, 2012, there was $20,000 in outstanding borrowings under this facility; the $10,000 Series A notes issued in March 2011 with a fixed interest rate of 4.00% and a 7 year term serially maturing from 2014 to 2018; and the $10,000 Series B notes issued in June 2011 with a fixed interest rate of 4.10% and a 10 year term serially maturing from 2015 to 2021. We were in compliance with all covenants of the Shelf Agreement as of March 31, 2012.
The Royal Bank of Scotland Citizens, N.A.
On September 14, 2010, we entered into an overdraft facility with The Royal Bank of Scotland Citizens, N.A., in the amount of 2,000 Euros or approximately $2,669. There was no balance outstanding on this facility as of March 31, 2012.
Notes Payable
On May 31, 2011, we incurred $1,500 in debt related to installment payments due to the former owners of Water Star in connection with our acquisition of Water Star, which remains outstanding as of March 31, 2012.
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.
The changes in warranty reserves for the three months ended March 31, 2012 and 2011 were as follows:
| | | Three Months Ended | |
| | | March 31 | |
| | | 2012 | | | 2011 | |
| Beginning balance | | $ | 8,759 | | | $ | 7,043 | |
| Additions charged to expense | | | 2,927 | | | | 2,880 | |
| Foreign currency fluctuations | | | 53 | | | | 50 | |
| Claims paid | | | (2,929 | ) | | | (2,590 | ) |
| Ending balance | | $ | 8,810 | | | $ | 7,383 | |
9. Fair Value Measurements
Estimates of fair value for financial assets and financial liabilities are based on the framework established in the accounting guidance for fair value measurements. The framework defines fair value, provides guidance for measuring fair value and requires certain disclosures. The framework discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow) and the cost approach (cost to replace the service capacity of an asset or replacement cost). The framework utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:
| · | Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities. |
| · | Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active. |
| · | Level 3: Unobservable inputs that reflect the reporting entity’s own assumptions. |
Our population of assets and liabilities subject to fair value measurements at March 31, 2012 is as follows:
| | | Fair | | | | | | | | | | |
| | | Value | | | Level 1 | | | Level 2 | | | Level 3 | |
| Assets: | | | | | | | | | | | | |
| Foreign currency forward exchange contracts | | | 115 | | | | - | | | | 115 | | | | - | |
| Total Assets | | $ | 115 | | | $ | - | | | $ | 115 | | | $ | - | |
| Liabilities: | | | | | | | | | | | | | | | | |
| Foreign currency forward exchange contracts | | $ | 420 | | | $ | - | | | $ | 420 | | | $ | - | |
| Total Liabilities | | $ | 420 | | | $ | - | | | $ | 420 | | | $ | - | |
Our foreign currency forward exchange contracts are valued based on quoted forward foreign exchange prices at the reporting date.
We use derivative instruments to manage exposures to foreign currency only in an attempt to limit underlying exposures from currency fluctuations and not for trading purposes. Gains or losses on forward foreign exchange contracts to economically hedge foreign currency-denominated assets and liabilities are recognized in Other Current Assets and Other Current Liabilities within the Condensed Consolidated Balance Sheets and are recognized in Other Income (Expense), Net under Net Foreign Currency Transaction (Losses) Gains within the Condensed Consolidated Statements of Earnings. As of March 31, 2012, the fair value of such contracts outstanding was an asset of $115 and a liability of $420. As of March 31, 2011, the fair value of such contracts outstanding was an asset of $28 and a liability of $222. We recognized a net gain of $645 and a net loss of $2,412 on these contracts during the first three months of 2012 and 2011, respectively. At March 31, 2012 and 2011, the notional amounts of foreign currency forward exchange contracts outstanding were $41,247 and $44,923, respectively.
The carrying amounts reported in the Condensed Consolidated Balance Sheets for Cash and Cash Equivalents, Accounts Receivable, Other Current Assets, Accounts Payable and Other Current Liabilities approximate fair value.
The fair value of our Long-Term Debt approximates cost based on the borrowing rates currently available to us for bank loans with similar terms and remaining maturities.
10. Retirement Benefit Plans
Our defined benefit pension plans and postretirement medical plan are described in Note 11 of the 2011 annual report on Form 10-K. We have contributed $921 and $134 during the first quarter of 2012 to our pension plans and to our postretirement medical plan, respectively.
The components of the net periodic benefit cost for the three months ended March 31, 2012 and 2011 were as follows:
| | | Three Months Ended | |
| | | March 31 | |
| | | Pension Benefits | | | Postretirement | |
| | | U.S. Plans | | | Non-U.S. Plans | | | Medical Benefits | |
| | | 2012 | | | 2011 | | | 2012 | | | 2011 | | | 2012 | | | 2011 | |
| Service cost | | $ | 165 | | | $ | 166 | | | $ | 33 | | | $ | 25 | | | $ | 35 | | | $ | 33 | |
| Interest cost | | | 478 | | | | 513 | | | | 130 | | | | 122 | | | | 140 | | | | 162 | |
| Expected return on plan assets | | | (571 | ) | | | (580 | ) | | | (117 | ) | | | (108 | ) | | | - | | | | - | |
| Amortization of net actuarial loss | | | 286 | | | | 26 | | | | - | | | | - | | | | 17 | | | | 15 | |
| Amortization of prior service cost | | | 97 | | | | 137 | | | | 38 | | | | 39 | | | | (145 | ) | | | (145 | ) |
| Foreign currency | | | - | | | | - | | | | (22 | ) | | | 61 | | | | - | | | | - | |
| Net periodic cost | | $ | 455 | | | $ | 262 | | | $ | 62 | | | $ | 139 | | | $ | 47 | | | $ | 65 | |
11. 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 March 31, 2012, of those leases that contain residual value guarantees, the aggregate residual value at lease expiration was $7,644, of which we have guaranteed $5,964. As of March 31, 2012, we have recorded a liability for the estimated end of term loss related to this residual value guarantee of $1,030 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.
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 2008 and with limited exceptions, state and foreign income tax examinations for taxable years before 2004.
We recognize potential accrued interest and penalties related to unrecognized tax benefits in Income Tax Expense. Included in the liability of $3,476 for unrecognized tax benefits as of March 31, 2012 was approximately $406 for accrued interest and penalties. The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate as of March 31, 2012 was $3,258. 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 $61 during the first three months of 2012 for expiration of the statute of limitations in various jurisdictions.
We are currently under examination by the Internal Revenue Service for the 2009 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 foreign jurisdictions covering 2004 to 2008 for which settlement is expected prior to year end. Although the final outcome of these examinations cannot be currently determined, we believe that we have adequate reserves with respect to these examinations.
13. Stock-Based Compensation
Our stock-based compensation plans are described in Note 15 of the 2011 annual report on Form 10-K. During the three months ended March 31, 2012 and 2011 we recognized total Stock-Based Compensation Expense of $1,690 and $1,299, respectively. The total income tax benefit recognized in the income statement for share-based compensation arrangements during the three months ended March 31, 2012 and 2011 was $612 and $377, respectively.
During the first three months of 2012 we granted 22,449 restricted shares. The weighted average grant date fair value of each share awarded was $43.65. Restricted share awards generally have a 3 year vesting period from the effective date of the grant. The total fair value of shares vested during the three months ended March 31, 2012 and 2011 was $293 and $592, respectively.
The computations of Basic and Diluted Earnings per Share were as follows:
| | | Three Months Ended | |
| | | March 31 | |
| | | 2012 | | | 2011 | |
| Numerator: | | | | | | |
| Net Earnings | | $ | 5,324 | | | $ | 5,866 | |
| Denominator: | | | | | | | | |
| Basic - Weighted Average Shares Outstanding | | | 18,722,156 | | | | 18,963,177 | |
| Effect of dilutive securities: | | | | | | | | |
| Employee stock options | | | 506,116 | | | | 592,859 | |
| Diluted - Weighted Average Shares Outstanding | | | 19,228,272 | | | | 19,556,036 | |
| Basic Earnings per Share | | $ | 0.28 | | | $ | 0.31 | |
| Diluted Earnings per Share | | $ | 0.28 | | | $ | 0.30 | |
Excluded from the dilutive securities shown above were options to purchase 177,414 and 83,368 shares of Common Stock during the three months ended March 31, 2012 and 2011, respectively. These exclusions are made if the exercise prices of these options are greater than the average market price of our Common Stock for the period, if the number of shares we can repurchase exceeds the weighted shares outstanding in the options, or if we have a net loss, as the effects are anti-dilutive.
We are organized into four operating segments: North America; Latin America; Europe, Middle East, Africa; and Asia Pacific. We combine our North America and Latin America operating segments into the “Americas” for reporting Net Sales by geographic area. In accordance with the objective and basic principles of the applicable accounting guidance, we aggregate our operating segments into one reportable segment that consists of the design, manufacture and sale of products used primarily in the maintenance of nonresidential surfaces.
Net Sales attributed to each geographic area for the three months ended March 31, 2012 and 2011 were as follows:
| | | Three Months Ended | |
| | | March 31 | |
| | | 2012 | | | 2011 | |
| Americas | | $ | 111,413 | | | $ | 108,142 | |
| Europe, Middle East, Africa | | | 43,804 | | | | 45,610 | |
| Asia Pacific | | | 18,495 | | | | 18,839 | |
| Total | | $ | 173,712 | | | $ | 172,591 | |
Net Sales are attributed to each geographic area based on the country from which the product was shipped and are net of intercompany sales.
16. Related Party Transactions
Our May 31, 2011 acquisition of Water Star includes installment payments totaling $1,500 to the former owners of Water Star, as further discussed in Note 4. The former owners of Water Star are current employees of Tennant.
We have an exclusive technology license agreement with Global Opportunities Investment Group, LLC. A current employee of Tennant owns a minority interest in Global Opportunities Investment Group, LLC. Royalties under this license agreement are not material to our financial position or results of operations.
During the second 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 these entities. 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.
