UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[
]
OR
[ ]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________.
Commission File Number 001-16191
TENNANT COMPANY
(Exact name of registrant as specified in its charter)
Minnesota
State or other jurisdiction of
incorporation or organization
41-0572550
(I.R.S. Employer
Identification No.)
701 North Lilac Drive, P.O. Box 1452
Minneapolis, Minnesota 55440
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code 763-540-1200
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, par value $0.375 per share
Name of exchange on which registered
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined by Rule 405 of the Securities Act.
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period
that the registrant was required to submit such files).
Yes
Yes
Yes
Yes
No
No
No
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is
not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
[ ]
1
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging
growth company. See definitions of “large accelerated filer,” "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2
of the Exchange Act.
Large accelerated filer
Non-accelerated filer
Accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange
Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
The aggregate market value of the voting and non-voting common equity held by non-affiliates as of June 29, 2018, was $1,404,892,960.
As of January 31, 2019, there were 18,119,093 shares of Common Stock outstanding.
Yes
[ ]
No
Portions of the registrant’s Proxy Statement for its 2019 annual meeting of shareholders (the “2019 Proxy Statement”) are incorporated by reference in Part III.
DOCUMENTS INCORPORATED BY REFERENCE
2
Tennant Company
Form 10–K
Table of Contents
PART I
PART II
Business
Item 1
Item 1A Risk Factors
Item 1B Unresolved Staff Comments
Item 2
Item 3
Item 4
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 5
Item 6
Item 7
Item 7A Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Item 8
Report of Independent Registered Public Accounting Firm
Consolidated Financial Statements
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income
Consolidated Balance Sheets
Consolidated Statements of Cash Flows
Consolidated Statements of Equity
Notes to the Consolidated Financial Statements
Summary of Significant Accounting Policies
Newly Adopted Accounting Pronouncements
Revision of Prior Period Financial Statements
Revenue from Contracts with Customers
Investment in Joint Venture
1
2
3
4
5
6 Management Actions
Acquisitions and Divestitures
7
Inventories
8
9
Property, Plant and Equipment
10 Goodwill and Intangible Assets
11 Debt
12 Other Current Liabilities
13 Derivatives
14 Fair Value Measurements
15 Retirement Benefit Plans
16 Shareholders' Equity
17 Commitments and Contingencies
18
19 Share-Based Compensation
20 Earnings (Loss) Attributable to Tennant Company Per Share
21 Segment Reporting
22 Consolidated Quarterly Data (Unaudited)
23 Separate Financial Information of Guarantor Subsidiaries
24 Subsequent Event
Income Taxes
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9
Item 9A Controls and Procedures
Item 9B Other Information
Executive Compensation
Item 10 Directors, Executive Officers and Corporate Governance
Item 11
Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
Item 13 Certain Relationships and Related Transactions, and Director Independence
Item 14 Principal Accountant Fees and Services
PART III
PART IV
Item 15 Exhibits and Financial Statement Schedules
Item 16
Form 10-K Summary
Signatures
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Table of Contents
ITEM 1 – Business
General Development of Business
TENNANT COMPANY
2018
ANNUAL REPORT
Form 10–K
(Pursuant to Securities Exchange Act of 1934)
PART I
Intellectual Property
Founded in 1870 by George H. Tennant, Tennant Company, a Minnesota
corporation incorporated in 1909, began as a one-man woodworking
business, evolved into a successful wood flooring and wood products
company, and eventually into a manufacturer of floor cleaning equipment.
Throughout its history, Tennant has remained focused on advancing our
industry by aggressively pursuing new technologies and creating a culture
that celebrates innovation.
Today, Tennant Company is a recognized leader of the cleaning industry.
We are passionate about developing innovative and sustainable solutions that
help our customers clean spaces more effectively, addressing indoor and
outdoor cleaning challenges. Tennant Company operates in three geographic
business units including the Americas, Europe, Middle East and Africa (EMEA)
and Asia Pacific (APAC).
Tennant Company is committed to empowering our customers to create
a cleaner, safer and healthier world with high-performance solutions that
minimize waste, reduce costs, improve safety and further sustainability goals.
Principal Products, Markets and Distribution
The Company offers products and solutions consisting of mechanized
cleaning equipment, detergent-free and other sustainable cleaning
technologies, aftermarket parts and consumables, equipment maintenance
and repair service, specialty surface coatings, and business solutions such
as financing, rental and leasing programs, and machine-to-machine asset
management solutions.
The Company's products are used in many types of environments
including: Retail establishments, distribution centers,
factories and
warehouses, public venues such as arenas and stadiums, office buildings,
schools and universities, hospitals and clinics, parking lots and streets, and
more. The Company markets its offerings under the following brands:
Tennant®, Nobles®, Alfa Uma Empresa Tennant™, IRIS®, VLX™, Superior
Anodes, Orbio®,, IPC brands and private-label brands. Orbio-branded
products and solutions are part of the emerging category of On-Site
Generation (OSG). OSG technologies create and dispense effective cleaning
and antimicrobial solutions on site within a facility. The Company's customers
include contract cleaners to whom organizations outsource facilities
maintenance, as well as businesses that perform facilities maintenance
themselves. The Company reaches these customers through the industry's
largest direct sales and service organization and through a strong and well-
supported network of authorized distributors worldwide.
Raw Materials
The Company has not experienced any significant or unusual problems
in the availability of raw materials or other product components. The Company
has sole-source vendors for certain components. A disruption in supply from
such vendors may disrupt the Company’s operations. However, the Company
believes that it can find alternate sources in the event there is a disruption in
supply from such vendors.
that
Although
the Company considers
its patents, proprietary
technologies and trade secrets, customer relationships, licenses, trademarks,
trade names and brand names in the aggregate constitute a valuable asset,
it does not regard its business as being materially dependent upon any single
item or category of intellectual property. We take appropriate measures to
protect our intellectual property to the extent such intellectual property can be
protected.
Seasonality
Although the Company’s business is not seasonal in the traditional
sense, the percentage of revenues in each quarter typically ranges from 22%
to 28% of the total year. The first quarter tends to be at the low end of the
range reflecting customers’ initial slow ramp up of capital purchases and the
Company’s efforts to close out orders at the end of each year. The second
and fourth quarters tend to be toward the high end of the range and the third
quarter is typically in the middle of the range.
Working Capital
The Company funds operations through a combination of cash and cash
equivalents and cash flows from operations. Wherever possible, cash
management is centralized and intercompany financing is used to provide
working capital to subsidiaries as needed. In addition, credit facilities are
available for additional working capital needs or investment opportunities.
Major Customers
The Company sells its products to a wide variety of customers, none of
which are of material importance in relation to the business as a whole. The
customer base includes several governmental entities which generally have
terms similar to other customers.
Backlog
The Company processes orders within two weeks, on average.
Therefore, no significant backlogs existed at December 31, 2018 and 2017.
Competition
Public industry data concerning global market share is limited; however,
through an assessment of validated third-party sources and sponsored third-
party market studies, the Company is confident in its position as a world-
leading manufacturer of floor maintenance and cleaning equipment. Several
global competitors compete with Tennant in virtually every geography of the
world. However, small regional competitors are also significant competitors
who vary by country, vertical market, product category or channel. The
Company competes primarily on the basis of offering a broad line of high-
quality, innovative products supported by an extensive sales and service
network in major markets.
Research and Development
Tennant Company has a history of developing innovative technologies
to create a cleaner, safer, healthier world. The Company is committed to its
innovation leadership position through fulfilling its goal to annually invest 3%
of annual sales to research and development. The Company’s innovation
efforts are focused on solving our customers’ needs holistically addressing a
4
and corporate leadership positions in the areas of compensation, talent
management, talent acquisition and general human resource management
from 2002 to 2014. Prior to ATK, she was with New Jersey-based NRG Energy,
Inc.
Mary E. Talbott, Senior Vice President, General Counsel and Corporate
Secretary
Mary E. Talbott (50) joined the Company in January 2019 as Senior Vice
President, General Counsel and Corporate Secretary. Prior to joining Tennant,
from 2017 to 2018, she was Vice President, Assistant General Counsel and
Assistant Corporate Secretary for General Cable Corporation, a global
manufacturer in the development, design, manufacture, marketing and
distribution of copper, aluminum and fiber optic wire and cable products for
use in the energy, industrial, construction, automotive, specialty and
communications markets. From 2016 to 2017, she was Vice President of Law
at Macy’s, Inc., and from 2006 to 2015, she held corporate leadership positions
with Scripps Networks Interactive, Inc. (which was spun off from The E.W.
Scripps Company in 2008), a developer of lifestyle-oriented content for linear
and interactive video platforms including television and the internet, most
recently as Senior Vice President, Deputy General Counsel and Corporate
Secretary.
Keith A. Woodward, Senior Vice President and Chief Financial Officer
Keith A. Woodward (54) joined the Company in December 2018 as
Senior Vice President and Chief Financial Officer. Prior to joining Tennant,
he was at General Mills, Inc, a global manufacturer and marketer of branded
consumer foods, for over 26 years holding various finance and corporate
leadership roles, most recently as Senior Vice President, Global Treasurer.
Prior to General Mills, Inc., he was with PriceWaterhouseCoopers.
Richard H. Zay, Senior Vice President, The Americas and R&D
Richard H. Zay (48) joined the Company in June 2010 as Vice President,
Global Marketing and was named Senior Vice President, Global Marketing in
October 2013. In 2014, he was named Senior Vice President of the Americas
business unit for Tennant and in 2018 he assumed responsibility for Tennant
Research and Development as well. From 2006 to 2010, he held various
positions with Whirlpool Corporation, a manufacturer of major home
appliances, most recently as General Manager, KitchenAid Brand. From 1993
to 2006, he held various positions with Maytag Corporation, including Vice
President, Jenn-Air Brand, Director of Marketing, Maytag Brand, and Director
of Cooking Category Management.
broad array of issues, such as managing labor costs, enhancing productivity,
and making cleaning processes more efficient and sustainable. Through core
product development, partnerships and technology enablement we are
creating new growth avenues for Tennant. These new avenues for growth go
beyond cleaning equipment into business insights and service solutions.
Environmental Compliance
Compliance with Federal, State and local provisions which have been
enacted or adopted regulating the discharge of materials into the environment,
or otherwise relating to the protection of the environment, has not had, and
the Company does not expect it to have, a material effect upon the Company’s
capital expenditures, earnings or competitive position.
Employees
The Company employed approximately 4,300 people in worldwide
operations as of December 31, 2018.
Available Information
The Company's internet address is www.tennantco.com. The Company
makes available free of charge, through the Investor Relations website at
investors.tennantco.com, its annual report on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K and amendments to those reports
filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as
soon as reasonably practicable when such material is filed electronically with,
or furnished to, the Securities and Exchange Commission (“SEC”).
Executive Officers of the Registrant
The list below identifies those persons designated as executive officers
of the Company, including their age, positions held with the Company and
their business experience during the past five or more years.
David W. Huml, Senior Vice President, EMEA, APAC, Global Marketing and
Operations
David W. Huml (50) joined the Company in November 2014 as Senior
Vice President, Global Marketing. In January 2016, he also assumed oversight
for the Company's APAC business unit. In January 2017, he assumed
oversight for the Company's EMEA business and in June 2018 he assumed
responsibility for Global Operations. From 2006 to October 2014, he held
various positions with Pentair plc, a global manufacturer of water and fluid
thermal
solutions, valves and controls, equipment protection and
management products, most recently as Vice President, Applied Water
Platform. From 1992 to 2006, he held various positions with Graco Inc., a
designer, manufacturer and marketer of systems and equipment to move,
measure, control, dispense and spray fluid and coating materials, including
Worldwide Director of Marketing, Contractor Equipment Division.
H. Chris Killingstad, President and Chief Executive Officer
H. Chris Killingstad (63) joined the Company in April 2002 as Vice
President, North America and was named President and CEO in 2005. From
1990 to 2002, he was employed by The Pillsbury Company, a consumer foods
manufacturer. From 1999 to 2002 he served as Senior Vice President and
General Manager of Frozen Products for Pillsbury North America; from 1996
to 1999 he served as Regional Vice President and Managing Director of
Pillsbury Europe, and from 1990 to 1996 was Regional Vice President of
Häagen-Dazs Asia Pacific. He held the position of International Business
Development Manager at PepsiCo Inc., from 1982-1990 and Financial
Manager for General Electric, from 1978-1980.
Carol E. McKnight, Senior Vice President, Chief Administrative Officer
Carol E. McKnight (51) joined the Company in June 2014 as Senior Vice
President of Global Human Resources. In 2017, Carol was named SVP and
Chief Administrative Officer. Prior to joining Tennant, she was Vice President
of Human Resources at ATK (Alliant Techsystems) where she held divisional
5
Table of Contents
ITEM 1A – Risk Factors
The following are significant factors known to us that could materially
adversely affect our business, financial condition or operating results.
We may not be able to develop or manage strategic planning and
growth processes or the related operational plans to deliver on our
strategies and establish a broad organization alignment, thereby
impairing our ability to achieve future performance expectations.
We are continuing to refine our global company strategy to guide our
next phase of performance as our structure has become more complex due
to recent acquisitions. We continue to consolidate and reallocate resources
as part of our ongoing efforts to optimize our cost structure and to drive
synergies and growth. Our operating results may be negatively impacted if
we are unable to implement new processes and manage organizational
changes, which includes changes to our go-to-market strategy, systems and
processes; simultaneous focus on expense control and growth; and
introduction of alternative cleaning methods. In addition, if we do not effectively
realize and sustain the benefits that these transformations are designed to
produce, we may not fully realize the anticipated savings of these actions or
they may negatively impact our ability to serve our customers or meet our
strategic objectives.
We may not be able to upgrade and evolve our information
technology systems as quickly as we wish and we may encounter
difficulties as we upgrade and evolve these systems to support our
growth strategy and business operations, which could adversely impact
our abilities to accomplish anticipated future cost savings and better
serve our customers.
We have many information technology systems that are important to the
operation of our business and are in need of upgrading in order to effectively
implement our growth strategy. Given our greater emphasis on customer-
facing technologies, we may not have adequate resources to upgrade our
systems at the pace which the current business environment demands.
Additionally, significantly upgrading and evolving the capabilities of our
existing systems could lead to inefficient or ineffective use of our technology
due to lack of training or expertise in these evolving technology systems.
These factors could lead to significant expenses, adversely impacting our
results of operations and hindering our ability to offer better technology
solutions to our customers.
Increases in the cost of, quality, or disruption in the availability of,
raw materials and components that we purchase or labor required to
manufacture our products could negatively impact our operating results
or financial condition.
Our sales growth, expanding geographical footprint and continued use
of sole-source vendors, coupled with suppliers’ potential credit issues, could
lead to an increased risk of a breakdown in our supply chain. Our use of sole-
source vendors creates a concentration risk. There is an increased risk of
defects due to the highly configured nature of our purchased component parts
that could result in quality issues, returns or production slow downs. In addition,
modularization may lead to more sole-sourced products and as we seek to
outsource the design of certain key components, we risk loss of proprietary
control and becoming more reliant on a sole source. There is also a risk that
the vendors we choose to supply our parts and equipment fail to comply with
our quality expectations, thus damaging our reputation for quality and
negatively impacting sales.
We have and may continue to experience higher than normal wage
inflation due to skilled labor shortages. In addition, we have incurred costs
associated with tariffs on certain raw materials used on our manufacturing
processes. The labor shortages and tariff costs have unfavorably impacted
our gross profit margins and could continue to do so if actions we are taking
are not effective at offsetting these rising costs. Changes and uncertainties
related to government fiscal and tax policies, including increased duties, tariffs,
6
or other restrictions, could adversely affect demand for our products, the cost
of the products we manufacture or our ability to cost-effectively source raw
materials, all of which could have a negative impact on our financial results.
We may encounter financial difficulties if the United States or other
global economies experience an additional or continued long-term
economic downturn, decreasing the demand for our products and
negatively affecting our sales growth.
Our product sales are sensitive to declines in capital spending by our
customers. Decreased demand for our products could result in decreased
revenues, profitability and cash flows and may impair our ability to maintain
our operations and fund our obligations to others. In the event of a continued
long-term economic downturn in the U.S. or other global economies, our
revenues could decline to the point that we may have to take cost-saving
measures, such as restructuring actions. In addition, other fixed costs would
have to be reduced to a level that is in line with a lower level of sales. A long-
term economic downturn that puts downward pressure on sales could also
negatively affect investor perception relative to our publicly stated growth
targets.
Our ability to effectively operate our Company could be adversely
affected if we are unable to attract and retain key personnel and other
highly skilled employees, provide employee development opportunities
and create effective succession planning strategies.
Our growth strategy, expanding global footprint, changing workforce
demographics and increased improvements in technology and business
processes designed to enhance the customer experience are putting
increased pressure on human capital strategies designed to recruit, retain
and develop top talent.
Our continued success will depend on, among other things, the skills
and services of our executive officers and other key personnel. Our ability to
attract and retain highly qualified managerial, technical, manufacturing,
research, sales and marketing personnel also impacts our ability to effectively
operate our business. As companies grow and increase their hiring activities,
there is an inherent risk of increased employee turnover and the loss of
valuable employees in key positions, especially in emerging markets. We
believe the increased loss of key personnel within a concentrated region could
adversely affect our sales growth.
In addition, there is a risk that we may not have adequate talent
acquisition resources and employee development resources to support our
future hiring needs and provide training and development opportunities to all
employees. This, in turn, could impede our workforce from embracing change
and leveraging the improvements we have made in technology and other
business process enhancements.
Inadequate funding or insufficient innovation of new technologies
may result in an inability to develop and commercialize new innovative
products and services.
We strive to develop new and innovative products and services to
differentiate ourselves in the marketplace. New product development relies
heavily on our financial and resource investments in both the short term and
long term. If we fail to adequately fund product development projects or fund
a project which ultimately does not gain the market acceptance we anticipated,
we risk not meeting our customers' expectations, which could result in
decreased revenues, declines in margin and loss of market share.
We may consider acquisition of suitable candidates to accomplish
our growth objectives. We may not be able to successfully integrate the
businesses we acquire to achieve operational efficiencies, including
synergistic and other benefits of acquisition.
We may consider, as part of our growth strategy, supplementing our
organic growth through acquisitions of complementary businesses or
products. We have engaged in acquisitions in the past, such as the acquisition
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of the IPC Group, and we believe future acquisitions may provide meaningful
opportunities to grow our business and improve profitability. Acquisitions allow
us to enhance the breadth of our product offerings and expand the market
and geographic participation of our products and services.
However, our success in growing by acquisition is dependent upon
identifying businesses to acquire, integrating the newly acquired businesses
with our existing businesses and complying with the terms of our credit
facilities. We may incur difficulties in the realignment and integration of
business activities when assimilating the operations and products of an
acquired business or in realizing projected efficiencies, cost savings, revenue
synergies and profit margins. Acquired businesses may not achieve the levels
of revenue, profit, productivity or otherwise perform as expected. We are also
subject to incurring unanticipated liabilities and contingencies associated with
an acquired entity that are not identified or fully understood in the due diligence
process. Current or future acquisitions may not be successful or accretive to
earnings if the acquired businesses do not achieve expected financial results.
In addition, we may record significant goodwill or other intangible assets
in connection with an acquisition. We are required to perform impairment tests
at least annually and whenever events indicate that the carrying value may
not be recoverable from future cash flows. If we determine that any intangible
asset values need to be written down to their fair values, this could result in
a charge that may be material to our operating results and financial condition.
We are subject to competitive risks associated with developing
innovative products and technologies, including but not limited to, not
expanding as rapidly or aggressively in the global market as our
competitors, our customers not continuing to pay for innovation and
competitive challenges to our products, technology and the underlying
intellectual property.
Our products are sold in competitive markets throughout the world.
Competition is based on product features and design, brand recognition,
reliability, durability, technology, breadth of product offerings, price, customer
relationships and after-sale service. Although we believe that the performance
and price characteristics of our products will produce competitive solutions
for our customers’ needs, our products are generally priced higher than our
competitors’ products. This is due to our dedication to innovation and
continued investments in research and development. We believe that
customers will pay for the innovations and quality in our products. However,
it may be difficult for us to compete with lower priced products offered by our
competitors and there can be no assurance that our customers will continue
to choose our products over products offered by our competitors. If our
products, markets and services are not competitive, we may experience a
decline in sales volume, an increase in price discounting and a loss of market
share, which adversely impacts revenues, margin and the success of our
operations.
Competitors may also initiate litigation to challenge the validity of our
patents or claims, allege that we infringe upon their patents, violate our patents
or they may use their resources to design comparable products that avoid
infringing our patents. Regardless of whether such litigation is successful,
such litigation could significantly increase our costs and divert management’s
attention from the operation of our business, which could adversely affect our
results of operations and financial condition.
We may encounter risks to our IT infrastructure, such as access
and security, that may not be adequately designed to protect critical data
and systems from theft, corruption, unauthorized usage, viruses,
sabotage or unintentional misuse.
incidents can
Global cybersecurity
from
threats and
uncoordinated individual attempts to gain unauthorized access to IT systems
to sophisticated and targeted measures known as advanced persistent
threats, directed at the Company, its products and its customers. We seek to
deploy comprehensive measures to deter, prevent, detect, react to and
mitigate these threats, including identity and access controls, data protection,
range
vulnerability assessments, continuous monitoring of our IT networks and
systems and maintenance of backup and protective systems.
Despite these efforts, cybersecurity incidents, depending on their nature
and scope, could potentially result in the misappropriation, destruction,
corruption or unavailability of critical data and confidential or proprietary
information (our own or that of third parties) and the disruption of business
operations. The potential consequences of a material cybersecurity incident
include financial loss, reputational damage, litigation with third parties, theft
of intellectual property, diminution in the value of our investment in research,
development and engineering, and increased cybersecurity protection and
remediation costs due to the increasing sophistication and proliferation of
threats, which in turn could adversely affect our competitiveness and results
of operations.
Actions of activist investors or others could disrupt our business.
Public companies have been the target of activist investors. One investor
which owns approximately 5% of our outstanding common stock filed a
Schedule 13D with the Securities and Exchange Commission in December
2017 which stated its belief that we should undertake a strategic review
process regarding a consolidation transaction with a third party. In the event
such investor or another third party, such as an activist investor, continues to
pursue such belief or proposes to change our governance policies, board of
directors, or other aspects of our operations, our review and consideration of
such proposals may create a significant distraction for our management and
employees. This could negatively impact our ability to execute our business
plans and may require our management to expend significant time and
resources. Such proposals may also create uncertainties with respect to our
financial position and operations and may adversely affect our ability to attract
and retain key employees.
We may be unable to conduct business if we experience a
in our computer systems,
significant business
manufacturing plants or distribution facilities for a significant period of
time.
interruption
We rely on our computer systems, manufacturing plants and distribution
facilities to efficiently operate our business. If we experience an interruption
in the functionality in any of these items for a significant period of time for any
reason, we may not have adequate business continuity planning
contingencies in place to allow us to continue our normal business operations
on a long-term basis. In addition, the increase in customer-facing technology
raises the risk of a lapse in business operations. Therefore, significant long-
term interruption in our business could cause a decline in sales, an increase
in expenses and could adversely impact our financial results.
Our global operations are subject to laws and regulations that
impose significant compliance costs and create reputational and legal
risk.
Due to the international scope of our operations, we are subject to a
complex system of commercial, tax and trade regulations around the world.
Recent years have seen an increase in the development and enforcement of
laws regarding trade, tax compliance, labor and safety and anti-corruption,
such as the U.S. Foreign Corrupt Practices Act, and similar laws from other
countries. Our numerous foreign subsidiaries and affiliates are governed by
laws, rules and business practices that differ from those of the U.S., but
because we are a U.S.-based company, oftentimes they are also subject to
U.S. laws which can create a conflict. Despite our due diligence, there is a
risk that we do not have adequate resources or comprehensive processes to
stay current on changes in laws or regulations applicable to us worldwide and
maintain compliance with those changes. Increased compliance requirements
may lead to increased costs and erosion of desired profit margin. As a result,
it is possible that the activities of these entities may not comply with U.S. laws
or business practices or our Business Ethics Guide. Violations of the U.S. or
local laws may result in severe criminal or civil sanctions, could disrupt our
business, and result in an adverse effect on our reputation, business and
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results of operations or financial condition. We cannot predict the nature,
scope or effect of future regulatory requirements to which our operations might
be subject or the manner in which existing laws might be administered or
interpreted.
to
the
foregoing,
In addition
the European Union adopted a
comprehensive General Data Privacy Regulation (the "GDPR") in May 2016
that has replaced the EU Data Protection Directive and related country-specific
legislation. The GDPR became effective in May 2018. GDPR requires
companies to satisfy new requirements regarding the handling of personal
and sensitive data, including its use, protection and the ability of persons
whose data is stored to correct or delete such data about themselves. Failure
to comply with GDPR requirements could result in penalties of up to 4% of
worldwide revenue.
The SEC has adopted rules regarding disclosure of the use of “conflict
minerals” (commonly referred to as tin, tantalum, tungsten and gold) which
are mined from the Democratic Republic of the Congo in products we
manufacture or contract to manufacture. These rules have required and will
continue to require due diligence and disclosure efforts.
We are subject to product liability claims and product quality issues
that could adversely affect our operating results or financial condition.
Our business exposes us to potential product liability risks that are
inherent in the design, manufacturing and distribution of our products. If
products are used incorrectly by our customers, injury may result leading to
product liability claims against us. Some of our products or product
improvements may have defects or risks that we have not yet identified that
may give rise to product quality issues, liability and warranty claims. Quality
issues may also arise due to changes in parts or specifications with suppliers
and/or changes in suppliers. If product liability claims are brought against us
for damages that are in excess of our insurance coverage or for uninsured
liabilities and it is determined we are liable, our business could be adversely
impacted. Any losses we suffer from any liability claims, and the effect that
any product liability litigation may have upon the reputation and marketability
of our products, may have a negative impact on our business and operating
results. We could experience a material design or manufacturing failure in our
products, a quality system failure, other safety issues, or heightened regulatory
scrutiny that could warrant a recall of some of our products. Any unforeseen
product quality problems could result in loss of market share, reduced sales
and higher warranty expense.
We may not be able to generate sufficient cash to service all of our
indebtedness, and may be forced to take other actions to satisfy our
obligations under our indebtedness, which may not be successful.
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 $400,000,000 consisting of a $100,000,000 term loan
and $300,000,000 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 $200,000,000. 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;
8
•
•
•
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.
Foreign currency exchange rate fluctuations, particularly the
strengthening of the U.S. dollar against other major currencies, could
result in declines in our reported net sales and net earnings.
We earn revenues, pay expenses, own assets and incur liabilities in
countries using functional currencies other than the U.S. dollar. Because our
consolidated financial statements are presented in U.S. dollars, we translate
revenues and expenses into U.S. dollars at the average exchange rate during
each reporting period, as well as assets and liabilities into US. dollars at
exchange rates in effect at the end of each reporting period. Therefore,
increases or decreases in the value of the U.S. dollar against other major
currencies will affect our net revenues, net earnings, earnings per share and
the value of balance sheet items denominated in foreign currencies as we
translate them into the U.S. dollar reporting currency. We use derivative
financial instruments to hedge our estimated transactional or translational
exposure to certain foreign currency-denominated assets and liabilities as
well as our foreign currency denominated revenue. While we actively manage
the exposure of our foreign currency market risk in the normal course of
business by utilizing various foreign exchange financial instruments, these
instruments involve risk and may not effectively limit our underlying exposure
from foreign currency exchange rate fluctuations or minimize the effects on
our net earnings and the cash volatility associated with foreign currency
exchange rate changes. Fluctuations in foreign currency exchange rates,
particularly the strengthening of the U.S. dollar against major currencies, could
materially affect our financial results.
ITEM 1B – Unresolved Staff Comments
None.
ITEM 2 – Properties
The Company’s corporate offices are owned by the Company and are
located in the Minneapolis, Minnesota, metropolitan area. Manufacturing
facilities located in Minneapolis, Minnesota; Holland, Michigan; Chicago,
Illinois; Uden, the Netherlands and the Italian cities of Venice, Cremona and
Reggio Emilia and in the Province of Padua are owned by the Company.
Manufacturing facilities located in Louisville, Kentucky; São Paulo, Brazil;
Shanghai, China, and another facility in the Province of Padua are leased to
the Company. In addition, IPC uses a dedicated, third-party plant in Germany
that specially manufactures heavy–duty stainless steel scrubbers and
sweepers to IPC designs. IPC also owns a minor tools and supplies assembly
operation in China to service local customers. The facilities are in good
operating condition, suitable for their respective uses and adequate for current
needs.
Sales offices, warehouse and storage facilities are leased in various
locations in the United States, Canada, Mexico, Portugal, Spain, Italy,
Germany, France, the Netherlands, Belgium, Norway, the United Kingdom,
Japan, China, India, Australia, New Zealand and Brazil. The Company’s
facilities are in good operating condition, suitable for their respective uses and
adequate for current needs.
Further information regarding the Company’s property and lease
commitments is included in the Contractual Obligations section of Item 7 and
in Note 17 to the Consolidated Financial Statements.
ITEM 3 – Legal Proceedings
There are no material pending legal proceedings other than ordinary
routine litigation incidental to the Company’s business.
ITEM 4 – Mine Safety Disclosures
Not applicable.
9
Table of Contents
PART II
ITEM 5 – Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
MARKET INFORMATION – Tennant's common stock is traded on the New York Stock Exchange, under the ticker symbol TNC. As of February 14, 2019,
there were 312 shareholders of record.
DIVIDEND INFORMATION – Cash dividends on Tennant’s common stock have been paid for 74 consecutive years. Tennant’s annual cash dividend payout
increased for the 47th consecutive year to $0.85 per share in 2018, an increase of $0.01 per share over 2017. Dividends are generally declared each quarter.
On February 14, 2019, the Company announced a quarterly cash dividend of $0.22 per share payable March 15, 2019, to shareholders of record on February
28, 2019.
DIVIDEND REINVESTMENT OR DIRECT DEPOSIT OPTIONS – Shareholders have the option of reinvesting quarterly dividends in additional shares of
Company stock or having dividends deposited directly to a bank account. The Transfer Agent should be contacted for additional information.
TRANSFER AGENT AND REGISTRAR – Shareholders with a change of address or questions about their account may contact:
Equiniti Trust Company
Shareowner Services
P.O. Box 64874
St. Paul, MN 55164-0854
(800) 468-9716
EQUITY COMPENSATION PLAN INFORMATION – The following table provides information about shares of the Company's Common Stock that may be
issued under the Company's equity compensation plans, as of December 31, 2018.
(a) Number of securities to be
issued upon exercise of
outstanding options, warrants and
rights(1)
(b) Weighted-average exercise
price of outstanding options,
warrants and rights(2)
(c) Number of securities
remaining available for future
issuance under equity
compensation plans (excluding
securities reflected in column (a))
1,313,569
—
1,313,569
$47.47
—
$47.47
761,382
—
761,382
Plan Category
Equity compensation plans approved
by security holders
Equity compensation plans not
approved by security holders
Total
(1)
Amount includes outstanding awards under the 1997 Non-Employee Director Stock Option Plan, the 2007 Stock Incentive Plan, the Amended and
Restated 2010 Stock Incentive Plan, each as amended, and the 2017 Stock Incentive Plan (the "Plans"). Amount includes shares of Common Stock
that may be issued upon exercise of outstanding stock options under the Plans. Amount also includes shares of Common Stock that may be paid
in cash upon exercise of outstanding stock appreciation rights under the Plans. Amount also includes shares of Common Stock that may be issued
upon settlement of restricted stock units and deferred stock units (phantom stock) under the Plans. Stock appreciation rights, restricted stock units
and deferred stock units may be settled in cash, stock or a combination of both. Column (a) includes the number of shares that could be issued upon
a complete distribution of all outstanding stock options and stock appreciation rights (1,084,567) and restricted stock units and deferred stock units
(230,554).
(2)
Column (b) includes the weighted-average exercise price for outstanding stock options and stock appreciation rights.
10
Table of Contents
SHARE REPURCHASES – On October 31, 2016, the Board of Directors authorized the repurchase of an additional 1,000,000 shares of our common
stock. This is in addition to the 392,892 shares remaining under our prior repurchase program. Share repurchases are made from time to time in the open
market or through privately negotiated transactions, primarily to offset the dilutive effect of shares issued through our share-based compensation programs. As
of December 31, 2018, our 2017 Credit Agreement restricts the payment of dividends or repurchasing of stock if, after giving effect to such payments and
assuming no default exists or would result from such payment, our leverage ratio is greater than 2.50 to 1, in such case limiting such payments to an amount
ranging from $50.0 million to $75.0 million during any fiscal year based on our leverage ratio after giving effect to such payment. Our Senior Notes due 2025
also contain certain restrictions, which are generally less restrictive than those contained in the 2017 Credit Agreement.
For the Quarter Ended
December 31, 2018
Total Number of Shares
Purchased(1)
Average Price Paid Per
Share
October 1–31, 2018
November 1–30, 2018
December 1–31, 2018
Total
86
267
407
760
$75.95
63.89
78.09
$72.86
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
—
—
—
—
1,392,892
1,392,892
1,392,892
1,392,892
(1)
Includes 760 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.
STOCK PERFORMANCE GRAPH – The following graph compares the cumulative total shareholder return on Tennant’s common stock to two indices:
S&P SmallCap 600 and Morningstar Industrials Sector. The graph below compares the performance for the last five fiscal years, assuming an investment of
$100 on December 31, 2013, including the reinvestment of all dividends.
5-YEAR CUMULATIVE TOTAL RETURN COMPARISON
Tennant Company
S&P SmallCap 600
Morningstar Industrials Sector
2013
$100
$100
$100
2014
$108
$106
$109
2015
$85
$104
$106
2016
$109
$102
$126
2017
$113
$115
$154
2018
$82
$105
$136
11
Table of Contents
ITEM 6 – Selected Financial Data
(In thousands, except shares and per share data)
Years Ended December 31
2018
2017
2016
2015
2014
Financial Results:
Net Sales
Cost of Sales
Gross Margin - %
Research and Development Expense
% of Net Sales
$ 1,123,511
$ 1,003,066
$
808,572
$
811,799
$
821,983
678,478
39.6
30,739
2.7
603,253
(2), (5)
39.9
32,013
3.2
456,977
43.5
34,738
4.3
462,739
43.0
32,415
4.0
469,556
42.9
29,432
3.6
Selling and Administrative Expense
356,316
(1), (4)
334,782
(2), (4), (5)
248,592
(4)
251,670
(3), (4)
250,695
(4)
% of Net Sales
Profit from Operations
% of Net Sales
Income Tax Expense
Effective Tax Rate - %
Net Earnings (Loss) Attributable to
Tennant Company
% of Net Sales
Per Share Data:
Basic Net Earnings (Loss)
Attributable to Tennant Company
Diluted Net Earnings (Loss)
Attributable to Tennant Company
31.7
33.4
30.7
31.0
30.5
57,978
(1), (4)
33,018
(2), (4), (5)
68,265
(4)
52,576
(3), (4)
71,894
(4)
5.2
2,304
(1)
6.4
(1)
33,412
3.0
3.3
4,913
(2)
(2)
(380.2)
(6,195)
(0.6)
8.4
19,877
29.9
46,614
5.8
6.6
18,336
(3)
36.4
32,088
4.0
8.8
18,887
27.2
50,651
6.2
$
$
1.86
(1)
1.82
(1)
$
$
(0.35)
(2)
(0.35)
(2)
$
$
2.66
2.59
$
$
1.78
(3)
1.74
(3)
$
$
2.78
2.70
Diluted Weighted Average Shares
18,338,569
17,695,390
17,976,183
18,493,447
18,740,858
Cash Dividends
Financial Position:
Total Assets
Total Debt
Total Tennant Company
Shareholders’ Equity
Current Ratio
Debt-to-Capital Ratio
Cash Flows:
Net Cash Provided by Operations
Capital Expenditures, Net of
Disposals
Free Cash Flow
Other Data:
$
$
0.85
992,544
355,065
314,422
1.9
53.0%
$
$
0.84
993,977
376,839
296,503
1.8
56.0%
$
$
0.81
470,037
36,194
278,543
$
$
0.80
432,295
24,653
252,207
2.2
11.5%
2.2
8.9%
$
$
0.78
486,932
28,137
280,651
2.4
9.1%
$
79,970
$
54,174
$
57,878
$
45,232
$
59,362
(18,668)
61,302
(17,926)
36,248
(25,911)
31,967
(24,444)
20,788
(19,292)
40,070
Depreciation and Amortization
$
54,420
$
43,253
$
18,300
$
18,031
$
20,063
Number of employees at year-end
4,341
4,297
3,236
3,164
3,164
The results of operations from our 2017 acquisition of the IPC Group have been included in the Selected Financial Data presented above since its acquisition
date on April 6, 2017.
(1)
(2)
2018 includes pre-tax acquisition and integration costs, restructuring charges, professional services, building design costs, and a gain on a sale of
business in selling and administrative expense of $6,869, $1,032, $1,914, $1,556, and $(955), respectively ($5,363, $874, $1,445, $1,175, and
$(721) after-tax, respectively, or $0.29, $0.05, $0.08, $0.06, $(0.04) per diluted share, respectively). Additionally, 2018 included a pre-tax pension
curtailment gain in other expense of $(165) ($(134) after-tax or $(0.01) per diluted share). In addition, 2018 net earnings attributable to Tennant
Company includes an acquisition-related tax adjustment of $883 and a mandatory repatriation tax expense of $362 ($0.05 and $0.02 per diluted
share, respectively).
2017 includes a fair value step-up adjustment to acquired inventory in cost of sales of $7,245 pre-tax ($5,237 after-tax, or $0.30 per diluted share),
pre-tax acquisition costs, restructuring charges and a pension settlement charge in selling and administrative expense of $10,560, $10,519 and
$6,373, respectively ($9,748, $7,559 and $4,020 after-tax, or $0.55, $0.43 and $0.23 per diluted share, respectively). 2017 also includes pre-tax
acquisition-related financing costs and acquisition costs in total other expense, net of $7,378 and $814, respectively ($4,619 and $660 after-tax, or
12
Table of Contents
$0.26 and $0.04 per diluted share, respectively). In addition, 2017 net loss attributable to Tennant Company includes a $2,388 net income tax expense
($0.14 per diluted share) as a result of the impacts of the 2017 tax reform legislation.
(3)
2015 includes restructuring charges of $3,744 pre-tax ($3,095 after-tax or $0.17 per diluted share) and a non-cash impairment of long-lived assets
of $11,199 pre-tax ($10,822 after-tax or $0.58 per diluted share).
(4) On January 1, 2018, we adopted ASU No. 2017-07, Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic
Pension Cost and Net Periodic Postretirement Benefit Cost. The components of net pension and postretirement benefit costs, except for service
costs, are required to be presented in the Condensed Consolidated Statements of Operations separately from the service cost component in
nonoperating expenses. See Note 2.
(5)
2017 was revised for misclassifications as discussed in Note 3.
13
Table of Contents
ITEM 7 – Management’s Discussion and Analysis of
Financial Condition and Results of Operations
Overview
Tennant Company is a world leader in designing, manufacturing and marketing
solutions that empower customers to achieve quality cleaning performance,
reduce environmental impact and help create a cleaner, safer, healthier world.
Tennant is committed to creating and commercializing breakthrough,
sustainable cleaning innovations to enhance its broad suite of products,
including floor maintenance and outdoor cleaning equipment, detergent-free
and other sustainable cleaning
technologies, aftermarket parts and
consumables, equipment maintenance and repair service, specialty surface
coatings and asset management solutions. Tennant products are used in many
types of environments, including retail establishments, distribution centers,
factories and warehouses, public venues such as arenas and stadiums, office
buildings, schools and universities, hospitals and clinics, parking lots and
to whom
streets, and more. Customers
organizations outsource facilities maintenance, as well as businesses that
perform facilities maintenance themselves. The company reaches these
customers through the industry's largest direct sales and service organization
and through a strong and well-supported network of authorized distributors
worldwide.
include contract cleaners
Historical Results
The following table compares the historical results of operations for the
years ended December 31, 2018, 2017 and 2016 in dollars and as a
percentage of Net Sales (in thousands, except per share amounts and
percentages):
2018
%
2017
%
2016
%
$1,123,511
100.0
$ 1,003,066
100.0
$ 808,572
100.0
678,478
445,033
60.4
39.6
603,253
399,813
60.1
39.9
456,977
351,595
56.5
43.5
30,739
2.7
32,013
3.2
34,738
4.3
356,316
31.7
334,782
33.4
248,592
30.7
387,055
34.5
366,795
36.6
283,330
35.0
57,978
5.2
33,018
3.3
68,265
8.4
Net Sales
Cost of Sales
Gross Profit
Operating Expense:
Research and
Development
Expense
Selling and
Administrative
Expense
Total
Operating
Expense
Profit from
Operations
Other Income
(Expense):
Interest Income
3,035
Interest Expense
(23,342)
0.3
(2.1)
2,405
(25,394)
0.2
(2.5)
330
—
(1,279)
(0.2)
Net Foreign
Currency
Transaction
Losses
Other Expense,
Net
Total Other
Expense, Net
Profit (Loss) Before
Income Taxes
Income Tax Expense
Net Earnings (Loss)
Including
Noncontrolling
Interest
Net Earnings (Loss)
Attributable to
Noncontrolling
Interest
Net Earnings (Loss)
Attributable to
Tennant Company
Net Earnings (Loss)
Attributable to
Tennant Company
per Share - Diluted
(1,100)
(0.1)
(3,387)
(0.3)
(392)
—
(729)
(0.1)
(7,934)
(0.8)
(433)
(0.1)
(22,136)
(2.0)
(34,310)
(3.4)
(1,774)
(0.2)
35,842
2,304
3.2
0.2
(1,292)
4,913
(0.1)
0.5
66,491
19,877
8.2
2.5
33,538
3.0
(6,205)
(0.6)
46,614
5.8
126
—
(10)
—
—
—
$
33,412
3.0
$
(6,195)
(0.6)
$ 46,614
5.8
$
1.82
$
(0.35)
$
2.59
14
Table of Contents
Net Sales
2018
%
2017
%
2016
Net Sales in 2018 totaled $1,123.5 million, a 12.0% increase as
Americas
$ 690,996
7.9
$ 640,274
5.5
$ 607,026
compared to Net Sales of $1,003.1 million in 2017.
The components of the consolidated Net Sales change for 2018 as
compared to 2017, and 2017 as compared to 2016, were as follows:
Europe, Middle East
and Africa
Asia Pacific
Total
335,603
96,912
22.6
8.8
273,738
112.1
129,046
89,054
22.8
24.1
72,500
$ 808,572
$1,123,511
12.0
$1,003,066
Growth Elements
Organic Growth:
Volume
Price
Organic Growth
Foreign Currency
Acquisitions
Total
2018 v. 2017
2017 v. 2016
3.9%
1.6%
5.5%
0.3%
6.2%
12.0%
(0.1%)
1.5%
1.4%
0.5%
22.2%
24.1%
The 12.0% increase in consolidated Net Sales for 2018 as compared to
2017 was driven by:
•
•
•
Organic sales increased approximately 5.5% which excludes the
effects of foreign currency translation exchange and acquisitions, due
to an approximate 3.9% volume increase and a 1.6% price increase.
The volume increase was driven by growth in all geographic regions,
with particular strength in the Americas from higher sales of
commercial equipment in the strategic account channel. Strong
organic sales in Germany and France and strength in China and
Australia also contributed to the strong organic sales growth. The
price increase was the result of selling price increases in most
geographies, with an effective date of February 1, 2018. The impact
to gross margin is estimated to be minimal as these selling price
increases were taken to offset inflation.
6.2% from the full year impact of the April 2017 acquisition of the IPC
Group.
A favorable impact from foreign currency exchange of approximately
0.3%.
The 24.1% increase in consolidated Net Sales for 2017 as compared to
2016 was primarily due to the following:
•
•
22.2% 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.
An organic sales increase of approximately 1.4% which excludes the
effects of foreign currency exchange and acquisitions, due to an
approximate 1.5% price increase, partially offset by a volume
decrease of 0.1%. 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. The impact to gross margin
was minimal as these selling price increases were taken to offset
inflation. The slight volume decrease was primarily due to increased
sales in Latin America and EMEA being more than offset by volume
decreases in North America. Sales of new products introduced from
2015 to 2017 totaled 48% of equipment revenue in 2017. This
compares to 37% of equipment revenue in 2016 from sales of new
products introduced from 2014 to 2016.
•
A favorable impact from foreign currency exchange of approximately
0.5%.
The following table sets forth annual Net Sales by geographic area and
the related percentage change from the prior year (in thousands, except
percentages):
15
Americas – In 2018, Americas Net Sales increased 7.9% to $691.0
million as compared with $640.3 million in 2017. The direct impact of the
second quarter 2017 acquisition of the IPC Group favorably impacted Net
Sales by approximately 1.1%. In addition, an unfavorable impact of foreign
currency translation exchange effects within the Americas impacted Net Sales
by approximately 0.7% in 2018. As a result, organic sales growth in the
Americas favorably impacted Net Sales by approximately 7.5% due to strong
equipment sales in North America resulting from increases in all channels,
particularly strategic accounts and the distribution channel. The Americas also
experienced increased parts and service sales in 2018 as well as strong sales
in Latin America, particularly Brazil.
In 2017, Americas Net Sales increased 5.5% to $640.3 million as
compared with $607.0 million in 2016. The direct impact of the IPC Group and
Florock acquisitions favorably impacted Net Sales by approximately 4.4%. In
addition, a favorable direct impact of foreign currency translation exchange
effects within the Americas impacted Net Sales by approximately 0.4% in
2017. As a result, organic sales growth in the Americas favorably impacted
Net Sales by approximately 0.7% due to strong sales performance in Latin
America, particularly Brazil and Mexico, from focused go-to-market strategies
in our direct channel. This was partially offset by lower sales in North America,
where sales growth through the distribution channel were more than offset by
service sales.
Europe, Middle East and Africa – EMEA Net Sales in 2018 increased
22.6% to $335.6 million as compared to 2017 Net Sales of $273.7 million. In
2018, the direct impact of the second quarter 2017 acquisition of the IPC
Group favorably impacted Net Sales by approximately 18.2%. In addition, a
favorable impact of foreign currency translation exchange effects within EMEA
impacted Net Sales by approximately 3.0% in 2018. As a result, organic sales
growth in EMEA favorably impacted Net Sales by approximately 1.3% due to
strong growth in Germany and France, partially offset by challenging
comparable sales performance in Italy.
EMEA Net Sales in 2017 increased 112.1% to $273.7 million as
compared to 2016 Net Sales of $129.0 million. In 2017, the direct impact of
the IPC Group acquisition favorably impacted Net Sales by approximately
105.3%. In addition, a favorable direct impact of foreign currency translation
exchange effects within EMEA impacted Net Sales by approximately 1.3% in
2017. As a result, organic sales growth in EMEA favorably impacted Net Sales
in 2017 by approximately 5.5% due to strong sales growth in most European
countries from strong demand in both the direct and distributor channels being
partially offset by lower sales in the UK.
Asia Pacific – APAC Net Sales in 2018 increased 8.8% to $96.9 million
as compared to 2017 Net Sales of $89.1 million. In 2018, the direct impact of
the second quarter 2017 acquisition of the IPC Group favorably impacted Net
Sales by approximately 6.3%. In addition, an unfavorable direct impact of
foreign currency translation exchange effects within APAC impacted Net Sales
by approximately 0.6% in 2018. As a result, organic sales growth in APAC
favorably impacted Net Sales by approximately 3.2% primarily due to sales
growth in China, India and Australia from strong commercial and industrial
product sales through the direct and strategic account channels slightly offset
by sales declines in Japan and Korea.
Table of Contents
APAC Net Sales in 2017 increased 22.8% to $89.1 million as compared
to 2016 Net Sales of $72.5 million. In 2017, the direct impact of the IPC Group
acquisition favorably impacted Net Sales by approximately 22.7%. In addition,
a favorable direct impact of foreign currency translation exchange effects
within APAC impacted Net Sales by approximately 0.1% in 2017. As a result,
organic sales growth in APAC was essentially flat due to sales growth in China
from strong sales through the direct and distributor channels being offset by
sales declines primarily in Korea and Singapore resulting from a challenging
economic environment.
Gross Profit
Gross Profit margin was 39.6%, or 25 basis points lower in 2018
compared to 2017. Gross Profit margin was unfavorably impacted by
manufacturing productivity issues associated with raw material and labor
shortages, robust strategic account sales which negatively impacted our mix,
higher freight costs and negative impacts from tariffs. The unfavorable Gross
Profit margin impacts were partially offset by improved operational
performance in both manufacturing and service as well as favorable pricing
in North America and EMEA. In addition, Gross Profit margin was favorably
impacted by a $7.2 million, or approximately 70 basis points, fair value
inventory step-up flow through related to our acquisition of the IPC Group in
2017 that did not repeat in 2018.
Gross Profit margin was 390 basis points lower in 2017 compared to
2016 due primarily to the $7.2 million, or approximately 70 basis points, fair
value inventory step-up flow through related to our acquisition of the IPC Group
and field service productivity challenges related to a high number of open
service trucks of $5.1 million, or approximately 50 basis points. In addition,
Gross Profit margin was unfavorably impacted by mix of sales by channel and
region, primarily resulting from higher sales through the distribution in North
America and lower gross margins from the IPC Group. The near-term
unfavorable impacts from investments in manufacturing automation initiatives
and high levels of raw material cost inflation also contributed to lower Gross
Profit margin in 2017.
Operating Expenses
Research and Development Expense – Tennant continues to invest
in innovative product development with 2.7% of 2018 Net Sales spent on
Research and Development ("R&D"). 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 and product variants launched in 2018 included the T600 series of
scrubbers and our first autonomous floor care machine.
R&D Expense decreased $1.3 million, or 4.0%, in 2018 as compared to
2017. As a percentage of Net Sales, 2018 R&D Expense decreased 46 basis
points compared to the prior year. The decrease in R&D as a percentage of
sales reflects the impact of higher revenue in 2018 and the timing of anticipated
project spend in 2018, including investment in our strategic relationship with
Brain Corp., to accelerate development of our autonomous floor cleaning
technology. We continue to invest in R&D at levels necessary to propel our
clear technology leadership position.
R&D Expense decreased $2.7 million, or 7.8%, in 2017 as compared to
2016. As a percentage of Net Sales, 2017 R&D Expense decreased 110 basis
points compared to the prior year. The decrease in R&D spending was
primarily due to headcount reduction related to the first quarter 2017
restructuring action.
Selling and Administrative Expense – Selling and Administrative
Expense ("S&A Expense") increased by $21.5 million, or 6.4%, in 2018
compared to 2017. As a percentage of Net Sales, 2018 S&A Expense
decreased 170 basis points to 31.7% from 33.4% in 2017. The primary drivers
of the increase were approximately $18.3 million of IPC-related S&A expense
due to an additional quarter in 2018 and $12.6 million in compensation-related
expenses. These increases were offset by a decrease of $9.5 million in
restructuring costs from 2017 to 2018.
Selling and Administrative Expense ("S&A Expense") increased by
$86.2 million, or 34.7%, in 2017 compared to 2016. As a percentage of Net
Sales, 2017 S&A Expense increased 270 basis points to 33.4% from 30.7%
in 2016. S&A Expense was unfavorably impacted by $15.7 million and $10.6
million of amortization expense and acquisition costs, respectively, related to
our acquisition of the IPC Group. In addition, S&A Expense was unfavorably
impacted by $10.5 million of restructuring charges taken in the 2017 first and
fourth quarters.
Total Other Expense, Net
Interest Income – Interest Income was $3.0 million in 2018, an increase
of $0.6 million from 2017. The increase between 2018 and 2017 was primarily
due to an extra quarter of interest income related to foreign currency swap
activities.
Interest Income was $2.4 million in 2017, an increase of $2.1 million
from 2016. The increase between 2017 and 2016 was primarily due to interest
income related to foreign currency swap activities.
Interest Expense – Interest Expense was $23.3 million in 2018, as
compared to $25.4 million in 2017. The lower Interest Expense in 2018 was
primarily due to carrying a lower level of debt on our Consolidated Balance
Sheets due to debt paydowns, as further described in the Liquidity and Capital
Resources section that follows.
Interest Expense was $25.4 million in 2017, as compared to $1.3 million
in 2016. The higher Interest Expense in 2017 was primarily due to carrying a
higher level of debt on our 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.
Net Foreign Currency Transaction Losses – Net Foreign Currency
Transaction Losses were $1.1 million in 2018 as compared to $3.4 million in
2017. The favorable change in the impact from foreign currency transactions
in 2018 was primarily due to fluctuations in foreign currency rates, specifically
between the Euro, Brazilian real and the U.S. dollar, and settlements of
transactional hedging activity in the normal course of business. Additionally
an unfavorable $1.1 million mark-to-market adjustment of a foreign exchange
call option was recorded in 2017 that did not recur in 2018. This instrument
was held in connection with our acquisition of the IPC Group in April 2017.
Net Foreign Currency Transaction Losses were $3.4 million in 2017 as
compared to $0.4 million in 2016. The unfavorable change in the impact from
foreign currency transactions in 2017 was primarily due to fluctuations in
foreign currency rates, specifically between the Euro and U.S. dollar,
settlements of transactional hedging activity in the normal course of business
and 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
in April 2017.
Other Expense, Net – Other Expense, Net was $0.7 million in 2018 as
compared to $7.9 million in 2017. The favorable change in Other Expense,
Net was due primarily to a pension settlement loss of $6.4 million in 2017 that
did not recur in 2018.
16
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Other Expense, Net was $7.9 million in 2017 as compared to $0.4 million
in 2016. The unfavorable change in Other Expense, Net was due primarily to
a pension settlement loss of $6.4 million and additional expense recorded as
a result of the acquisition of the IPC Group.
Income Taxes
The overall effective income tax rate was 6.4%, (380.2)% and 29.9% in
2018, 2017 and 2016, respectively.
The expense for 2018 included a $1.5 million tax benefit associated with
$6.9 million of acquisition and integration-related costs associated with our
integration of the IPC Group and pending acquisition of Gaomei Cleaning
Equipment Company, a $0.2 million tax benefit associated with $1.0 million
of restructuring charge, a $0.4 million tax benefit associated with $1.6 million
of building design costs, a $0.5 million tax benefit associated with $1.9 million
of costs related to non-operational professional service fees, a $0.2 million
tax expense associated with a $1.0 million gain on the sale of assets of our
Waterstar business, a $0.9 million benefit associated with an acquisition tax
adjustment, and a $0.4 million benefit related to finalizing the income tax effect
of the one-time transition tax on certain unrepatriated earnings. These special
items impacted the 2018 effective tax rate by (6.2%).
Our effective tax rate fluctuates from year to year due to the global nature
of our operations. The effective tax rate change from 2017 was primarily due
to the lower corporate tax rate provided by the Tax Act beginning in the first
quarter of 2018, the mix in full year taxable earnings by country, the tax
expense benefit related to the exercise of soon-to-expire stock options and a
favorable tax ruling from the Italian tax authorities related to the deductibility
of interest expense in Italy.
On December 22, 2017, legislation popularly referred to as the Tax Act
was enacted, resulting in significant changes from previous tax law, including,
but not limited to, requiring a one-time transition tax on certain unrepatriated
earnings of foreign subsidiaries and a reduction in the U.S. federal corporate
income tax rate from 35% to 21% and established new laws that impacted
2018.
ASC 740 requires a company to record the effects of a tax law change
in the period of enactment. ASU 2018-05 allowed a company to record a
provisional amount when it did not have the necessary information available,
prepared or analyzed in reasonable detail to complete its accounting for the
change in the law. The measurement period ends when the company has
obtained, prepared and analyzed the information necessary to finalize its
accounting, but cannot extend beyond one year.
During the third quarter of 2018, the accounting for the remeasurement
of the deferred taxes and transition tax was finalized. Adjustments to the
provisional amounts were not material to the consolidated financial
statements. The accounting for the income tax effects of the Tax Act is
complete as of December 31, 2018.
The tax expense for 2017 included a $3.7 million tax benefit associated
with $18.8 million of acquisition and financing costs related to the IPC Group
acquisition, a $3.0 million tax benefit associated with a $10.5 million
restructuring charge, a $2.4 million tax benefit associated with a $6.2 million
pension settlement, a $2.0 million tax benefit associated with $7.2 million of
expense related to inventory step-up amortization, a $2.0 million tax expense
related to the write-down of net U.S. deferred tax assets at the lower enacted
tax rates and $0.4 million tax expense related to the transition tax on cash
and cash equivalent balances related to accumulated earnings associated
with our international operations as a result of Tax Legislation. These special
items impacted the 2017 year-to-date overall effective tax rate by 412.9%.
Excluding the 2017 special items and the effect of the Tax Act, the tax
rate increased from 29.9% in 2016 due primarily to the mix in full year taxable
earnings by country.
There were no special items that affected the tax rate in 2016.
17
Other Comprehensive Income (Loss)
Foreign Currency Translation Adjustments – For the years ended
December 31, 2018 and 2017, we recorded a pre-tax foreign currency
translation loss of $16.2 million and a gain of $28.4 million, respectively. For
the year ended December 31, 2016, we recorded pre-tax foreign currency
translation gains of $0.1 million in Other Comprehensive Income (Loss). These
adjustments resulted from translating the financial statements of our non-U.S.
dollar functional currency subsidiaries into our reporting currency, which is the
U.S. dollar, as well as other adjustments permitted by ASC 830 – Foreign
Currency Matters.
During 2018, we recorded a pre-tax currency translation loss of $16.2
million. These adjustments were caused primarily by the strengthening of the
U.S. dollar to most currencies. In 2018, the U.S. dollar strengthened by
approximately 5% to the Euro and approximately 15% to the Brazilian Real.
During 2017, we recorded pre-tax currency translation gains of $28.4
million. These adjustments were caused primarily by the appreciation of the
Euro against the U.S. dollar. In 2017, the Euro appreciated against the U.S.
dollar by approximately 14%.
During 2016, we recorded translation gains of $3.4 million relating to the
Brazilian real, and translation losses of $1.3 million for the Euro, $1.0 million
for the Chinese renminbi, $0.9 million for the British pound and $0.1 million
for various other currencies. These adjustments were caused by the
appreciation of the U.S. dollar against these currencies of between 3% and
17%, and the strengthening of the Brazilian real of 22% in 2016.
Pension and Retiree Medical Benefits – The summarized changes in
Accumulated Other Comprehensive Loss for the three years ended December
31 were as follows:
Prior Service Costs
Net actuarial (gain) loss
Amortization of prior service cost
Amortization of net actuarial loss
Settlement Charge
Total recognized in other
comprehensive (income) loss
Pension and Postretirement
Medical Benefits
2018
2017
2016
$
109 $
— $
(1,699)
(19)
(87)
(49)
622
—
(117)
(6,373)
—
2,357
(41)
(68)
—
$
(1,745) $
(5,868) $
2,248
The $1.7 million gain in 2018 was primarily due to a $1.7 million actuarial
gain relating to an annual actuarial analysis resulting from a 67 basis point
increase in the U.S. pension discount rate, a 27 basis point increase in the
non-U.S. discount rate and a 69 basis point increase in the postretirement
discount rate.
The $5.9 million gain in 2017 was primarily due to a $6.4 million
settlement charge related to the termination of the U.S. Pension Plan and a
$0.1 million credit related to amortization of accumulated actuarial losses.
These gains were partially offset by $0.6 million of net actuarial losses relating
to an increase of $1.2 million in the pension benefit obligation in 2017 due to
changes in demographic experience and other changes, a $0.6 million
increase in the pension benefit obligation resulting from a 64 basis point
decrease in the U.S. pension discount rate, a 19 basis point decrease in the
non-U.S. discount rate and a 32 basis point decrease in the postretirement
discount rates and a $1.0 million decrease in the pension benefit obligation
due to a higher than expected actual return on assets.
The $2.2 million loss in 2016 was primarily due to a $2.4 net actuarial
loss relating to an increase of $3.2 million in the projected benefit obligation
resulting from a 16 basis point decrease in the U.S. pension discount rate, a
95 basis point decrease in the non-U.S. discount rate and a 12 basis point
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decrease in the postretirement discount rate. There was an approximate $0.6
million decrease in the pension benefit obligation in 2016 relating to
demographic experience and other changes, as well as a $0.2 million
decrease due to a higher than expected actual return on assets. The net
actuarial loss was partially offset by a $0.1 million credit relating to amortization
of accumulated actuarial losses and prior service costs.
Cash Flow Hedging – For the years ended December 31, 2018 and
2017, we recorded pre-tax adjustments on cash flow hedge financial
instruments of a gain of $1.3 million and a loss of $7.7 million, respectively,
in Other Comprehensive Income (Loss) as further disclosed in Note 13 to the
Company's Consolidated Financial Statements. For the year ended
December 31, 2016, we recorded a pre-tax loss of $0.3 million in Other
Comprehensive Income (Loss) for these items.
The $1.3 million gain in 2018 was primarily due to the strengthening of
the U.S. dollar relative to the Canadian dollar and Euro. During 2018, the U.S.
dollar strengthened approximately 8%
the Canadian dollar and
approximately 5% to the Euro.
to
The $7.7 million loss in 2017 was primarily due to $26.2 million of losses
recognized primarily as a result of our Euro to U.S. dollar foreign exchange
cross currency swaps to mitigate our Euro exposure on our cash flows
associated with an intercompany loan from a wholly-owned European
subsidiary. The loss was partially offset by $18.5 of losses reclassified from
Accumulated Other Comprehensive Loss to the Consolidated Statements of
Earnings.
The $0.3 million pre-tax loss in 2016 was driven by our cash flow exposure
to the Canadian dollar resulting from changes in this currency relative to the
U.S. dollar.
Liquidity and Capital Resources
Liquidity – Cash and Cash Equivalents totaled $85.6 million at
December 31, 2018, as compared to $58.4 million as of December 31, 2017.
Cash and Cash Equivalents held by our foreign subsidiaries totaled $59.2
million as of December 31, 2018, as compared to $39.1 million as of
December 31, 2017. Wherever possible, cash management is centralized and
intercompany financing is used to provide working capital to subsidiaries as
needed. Our current ratio was 1.9 as of December 31, 2018, and 1.8 as of
December 31, 2017, and our working capital was $219.8 million and $186.6
million, respectively.
Our Debt-to-Capital ratio was 53.0% as of December 31, 2018,
compared with 56.0% as of December 31, 2017. Our capital structure was
comprised of $355.1 million of Debt and $314.4 million of Tennant Company
Shareholders’ Equity as of December 31, 2018.
Operating Activities – Cash provided by operating activities was $80.0
million in 2018, $54.2 million in 2017 and $57.9 million in 2016. In 2018, cash
provided by operating activities was driven primarily by net earnings, after
adding back non-cash items, a $12.6 million increase in Employee
Compensation and Benefits liabilities and an increase in Accounts Payable
of $4.6 million due to timing of payments. These cash inflows were partially
offset by cash outflows resulting from an increase in Accounts Receivable of
$7.6 million resulting from higher sales levels, the variety of payment terms
offered and mix of business as well as a $16.6 million increase in Inventories
to support future sales growth.
In 2017, cash provided by operating activities was driven primarily by
net earnings, after adding back non-cash items, an increase in Other Current
Liabilities of $14.6 million due to additional accruals recorded as a result of
the IPC Group consolidation and the fourth quarter 2017 restructuring action
and an increase in Accounts Payable of $10.8 million due to timing of
payments. These cash inflows were partially offset by cash outflows resulting
from an increase in Accounts Receivable of $14.4 million resulting from higher
sales levels, the variety of payment terms offered and mix of business.
In 2016, cash provided by operating activities was driven primarily by
net earnings, after adding back non-cash items, partially offset by an increase
in Accounts Receivable of $9.3 million resulting from higher sales levels,
particularly in December 2016, the variety of payment terms offered and mix
of business.
Investing Activities – Net cash used in investing activities was $16.0
million in 2018, $375.3 million in 2017 and $40.6 million in 2016. In 2018, we
used $18.7 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 $2.8 million for the purchase of a technology license
and other intangibles. In addition, we received $4.0 million in proceeds from
the sale of assets of our Waterstar business.
In 2017, we used $354.1 million, net of cash acquired, in relation to our
acquisition of the IPC Group and the final installment payment for the
acquisition of the Florock brand and $17.9 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 a 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 5 to the Consolidated
Financial Statements.
In 2016, we used $25.9 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. In addition, our acquisition of the Florock brand
and the assets of Dofesa Barrdio Mecanizado, a long-time distributor based
in Central Mexico, used $12.9 million, net of cash acquired. We also used $2.0
million as a result of a non-interest bearing cash advance to TCS EMEA GmbH,
the master distributor of our products in Central Eastern Europe, Middle East
and Africa.
Financing Activities – Net cash used in financing activities was $32.8
million in 2018. Net cash provided by financing activities was $319.5 million
in 2017. Net cash used in financing activities was $9.6 million in 2016. In
2018, proceeds from the incurrence of Long-Term Debt associated with the
pending Gaomei acquisition and the issuance of Common Stock provided
$11.0 million and $5.9 million, respectively. These cash inflows were partially
offset by cash outflows resulting from $38.3 million of Long-Term Debt
payments and dividend payments of $15.3 million. Our annual cash dividend
payout increased for the 47th consecutive year to $0.85 per share in 2018, an
increase of $0.01 per share over 2017.
In 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 $6.9 million, respectively. These cash inflows were partially offset
by cash outflows resulting from $96.2 million of Long-Term Debt payments,
$16.5 million related to payments of debt issuance costs and dividend
payments of $15.0 million.
In 2016, dividend payments used $14.3 million, the purchases of our
common stock per our authorized repurchase program used $12.8 million and
the payment of Long-Term Debt used $3.5 million. These cash ouflows were
partially offset by proceeds resulting from the incurrence of Long-Term Debt
of $15.0 million, the issuance of Common Stock of $5.3 million and the excess
tax benefit on stock plans of $0.7 million.
On October 31, 2016, the Board of Directors authorized the repurchase
of an additional 1,000,000 shares of our common stock. At December 31,
2018, there were 1,392,892 remaining shares authorized for repurchase.
There were no shares repurchased in 2018 in the open market, no shares
repurchased in 2017 and 246,474 shares repurchased during 2016, at average
repurchase prices of $51.78 during 2016 . Our 2017 Credit Agreement restricts
18
Table of Contents
the payment of dividends or repurchasing of stock if, after giving effect to such
payments and assuming no default exists or would result from such payment,
our leverage ratio is greater than 2.50 to 1, in such case limiting such payments
to an amount ranging from $50.0 million to $75.0 million during any fiscal year
based on our leverage ratio after giving effect to such payment. Our Senior
Notes due 2025 also contain certain restrictions, which are generally less
restrictive than those contained in the 2017 Credit Agreement.
(2) Our retirement benefit plans, as described in Note 15 to the
Consolidated Financial Statements, require us to make contributions to the
plans from time to time. Contributions to the various plans are dependent upon
a number of factors including the market performance of plan assets, if any,
and future changes in interest rates, which impact the actuarial measurement
of plan obligations. As a result, we have only included our 2019 expected
contribution in the contractual obligations table.
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.
On April 18, 2017, we issued and sold $300,000,000 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.
For further details regarding our indebtedness, see Note 11 to the
Consolidated Financial Statements.
Contractual Obligations – Our contractual obligations as of
December 31, 2018, are summarized by period due in the following table (in
thousands):
Less
Than 1
Year
Total
1 - 3
Years
3 - 5
Years
More
Than 5
Years
(3) The unfunded deferred compensation arrangements covering
certain current and retired management employees totaled $5.1 million as of
December 31, 2018. Our estimated distributions in the contractual obligations
table are based upon a number of assumptions including termination dates
and participant distribution elections.
(4) Operating lease commitments consist primarily of office and
warehouse facilities, vehicles and office equipment as discussed in Note 17
to the Consolidated Financial Statements.
(5) Purchase obligations include all known open purchase orders,
contractual purchase commitments and contractual obligations as of
December 31, 2018.
(6) Other obligations include residual value guarantees as discussed
in Note 17 to the Consolidated Financial Statements.
Total contractual obligations exclude our gross unrecognized tax benefits
of $5.7 million and accrued interest and penalties of $0.4 million as of
December 31, 2018. We expect to make cash outlays in the future related to
uncertain tax positions. However, due to the uncertainty of the timing of future
cash flows, we are unable to make reasonably reliable estimates of the period
of cash settlement, if any, with the respective taxing authorities. For further
information related to unrecognized tax benefits, see Note 18 to the
Consolidated Financial Statements.
Newly Issued Accounting Guidance
$359,789
$ 12,066
$16,552
$ 31,171
$300,000
Leases
Long-term
debt(1)
Interest
payments on
long-term
debt(1)
Interest
payments on
capital leases
Retirement
benefit
plans(2)
Deferred
compensation
arrangements
(3)
Operating
leases(4)
Purchase
obligations(5)
Other(6)
Total
contractual
obligations
113,992
19,234
37,432
34,545
22,781
Capital leases
2,862
1,264
1,427
171
210
127
1,319
1,319
80
—
3
—
—
—
—
5,120
1,189
1,532
638
1,761
40,151
15,200
14,508
6,228
4,215
53,844
8,404
53,844
8,404
—
—
—
—
—
—
$585,691
$112,647
$71,531
$ 72,756
$328,757
(1) Long-term debt represents borrowings through our Notes and the
2017 Credit Agreement with JPMorgan. Interest on the Notes accrues at the
rate of 5.625% per annum and is payable semiannually in cash on each May 1
and November 1, commencing on November 1, 2017. Repayment of the
principal amount of the Senior Notes is due upon expiration of the agreement
in 2025. Interest payments on our 2017 Credit Agreement with JPMorgan were
calculated using the December 31, 2017 30-day LIBOR rate plus a spread.
19
In February 2016, the Financial Accounting Standards Board ("FASB") issued
Accounting Standards Update ("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 ASU are effective for annual
periods beginning after December 15, 2018, including interim periods within
that reporting period, which is our fiscal 2019. We expect the adoption of this
standard will have a material impact on the consolidated balance sheets for
recognition of operating lease related assets and liabilities. We do not expect
a material impact to the consolidated statements of operations. See FN 1 for
further discussion.
Derivatives and Hedging
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 in
financial statements and simplifies hedge accounting treatment. This ASU is
effective for fiscal years beginning after December 15, 2018, including interim
periods within those fiscal years, which is our fiscal 2019. We have determined
that the adoption of this standard will not have a material impact on our
consolidated financial statements and related disclosures.
No other new accounting pronouncements issued but not yet effective
have had, or are expected to have, a material impact on our results of
operations or financial position.
Critical Accounting Policies and Estimates
Our Consolidated Financial Statements are based on the selection and
application of accounting principles generally accepted in the United States
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of America, which require us to make estimates and assumptions about future
events that affect the amounts reported in our Consolidated Financial
Statements and the accompanying notes. Our significant accounting policies
are described in Note 1 to the Consolidated Financial Statements. Future
events and their effects cannot be determined with absolute certainty.
Therefore, the determination of estimates requires the exercise of judgment.
Actual results could differ from those estimates, and any such differences may
be material to the Consolidated Financial Statements. We believe that the
following policies may involve a higher degree of judgment and complexity in
their application and represent the critical accounting policies used in the
preparation of our Consolidated Financial Statements. If different assumptions
or conditions were to prevail, the results could be materially different from our
reported results.
Goodwill – Goodwill represents the excess of cost over the fair value
of net assets of businesses acquired and is allocated to our reporting units at
the time of the acquisition. We analyze Goodwill on an annual basis and when
an event occurs or circumstances change that may reduce the fair value of a
reporting unit below its carrying amount. An entity should recognize an
impairment charge for the amount by which the carrying amount exceeds the
reporting unit's fair value.
We performed an analysis of qualitative factors to determine whether it
is more likely than not that the fair value of a reporting unit is less than its
carrying amount as a basis for determining whether it is necessary to perform
the quantitative goodwill impairment test. The qualitative test is used as an
indicator to identify if there is potential goodwill impairment. If the qualitative
test indicates there may be an impairment, we perform the quantitative test,
which measures the amount of the goodwill impairment, if any. We perform
our goodwill impairment analysis as of year-end or when an event occurs or
circumstances change that may reduce the fair value of a reporting unit below
its carrying amount, and use our judgment to develop assumptions for the
discounted cash flow model that we use, if necessary. Management
assumptions include forecasting revenues and margins, estimating capital
expenditures, depreciation, amortization and discount rates.
If our goodwill impairment testing resulted in one or more of our reporting
units’ carrying amount exceeding its fair value, we would write down our
reporting units’ carrying amount to its fair value and would record an
impairment charge in our results of operations in the period such determination
is made. Subsequent reversal of goodwill impairment charges is not permitted.
Based on our analysis of qualitative factors, we determined that it was not
more likely than not that the fair value of the North America, Latin America,
EMEA and APAC reporting units was less than its respective carrying amount.
We elected to perform a quantitative analysis of the Coatings reporting unit.
Based on the quantitative analysis of that reporting unit, it was determined
there was no goodwill impairment at December 31, 2018. We had Goodwill
of $182.7 million as of December 31, 2018.
Income Taxes – We are required to estimate our income taxes in each
of the jurisdictions in which we operate. This process involves estimating our
actual current tax obligations based on expected income, statutory tax rates
and tax planning opportunities in the various jurisdictions. We also establish
reserves for uncertain tax matters that are complex in nature and uncertain
as to the ultimate outcome. Although we believe that our tax return positions
are fully supportable, we consider our ability to ultimately prevail in defending
these matters when establishing these reserves. We adjust our reserves in
light of changing facts and circumstances, such as the closing of a tax audit.
We believe that our current reserves are adequate. However, the ultimate
outcome may differ from our estimates and assumptions and could impact
the income tax expense reflected in our Consolidated Statements of
Operations.
Tax law requires certain items to be included in our tax return at different
times than the items are reflected in our results of operations. Some of these
differences are permanent, such as expenses that are not deductible in our
tax returns, and some differences will reverse over time, such as depreciation
expense on property, plant and equipment. These temporary differences result
in deferred tax assets and liabilities, which are included within our
Consolidated Balance Sheets. Deferred tax assets generally represent items
that can be used as a tax deduction or credit in our tax returns in future years
but have already been recorded as an expense in our Consolidated
Statements of Operations. We assess the likelihood that our deferred tax
assets will be recovered from future taxable income, and, based on
management’s judgment, to the extent we believe that recovery is not more
likely than not, we establish a valuation reserve against those deferred tax
assets. The deferred tax asset valuation allowance could be materially
different from actual results because of changes in the mix of future taxable
income, the relationship between book and taxable income and our tax
planning strategies. As of December 31, 2018, a valuation allowance of $11.5
million was recorded against foreign tax loss carryforwards, foreign tax credit
carryforwards and state credit carryforwards.
Cautionary Factors Relevant
Information
to Forward-Looking
This annual report on Form 10-K, including “Management’s Discussion
and Analysis of Financial Condition and Results of Operations” in Item 7,
contains certain statements that are considered “forward-looking statements”
within the meaning of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements generally can be identified by the use of forward-
looking terminology such as “may,” “will,” “expect,” “intend,” “estimate,”
“anticipate,” “believe,” “project,” or “continue” or similar words or the negative
thereof. These statements do not relate to strictly historical or current facts
and provide current expectations of forecasts of future events. Any such
expectations or forecasts of future events are subject to a variety of factors.
Particular risks and uncertainties presently facing us include:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
Ability to effectively manage strategic plans or growth processes.
Ability to successfully upgrade and evolve our information technology
systems.
Fluctuations in the cost, quality or availability of raw materials and
purchased components.
Geopolitical and economic uncertainty throughout the world.
Ability to attract, retain and develop key personnel and create
effective succession planning strategies.
Ability to develop and commercialize new innovative products and
services.
Ability to integrate acquisitions, including IPC.
Competition in our business.
Ability to successfully protect our information technology systems
from cyber security risks.
Potential disruption of our business from actions of activist investors
or others.
Occurrence of a significant business interruption.
Ability to comply with global laws and regulations.
Unforeseen product liability claims or product quality issues.
Ability to generate sufficient cash to satisfy our debt obligations.
Internal control over financial reporting risks resulting from our
acquisition of IPC.
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. Information about factors that could
materially affect our results can be found in Part I, Item 1A - Risk Factors.
Shareholders, potential investors and other readers are urged to consider
20
our net recognized foreign currency assets and liabilities with foreign
exchange forward contracts. We hedge these exposures to reduce the risk
that our net earnings and cash flows will be adversely affected by changes in
foreign exchange rates. We do not enter into any of these instruments for
speculative or trading purposes to generate revenue.
These contracts are carried at fair value and have maturities between
one and 12 months. The gains and losses on these contracts generally
approximate changes in the value of the related assets, liabilities or forecasted
transactions. Some of the derivative instruments we enter into do not meet
the criteria for cash flow hedge accounting treatment; therefore, changes in
fair value are recorded in Foreign Currency Transaction Losses on our
Consolidated Statements of Operations.
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 2017,
we entered into Euro to U.S. dollar foreign exchange cross currency swaps
for all of the anticipated cash flows associated with an intercompany loan from
a wholly-owned European subsidiary. We entered into these foreign exchange
cross currency swaps to hedge the foreign currency denominated cash flows
associated with this intercompany loan, and accordingly, they are not
speculative in nature. We designated these cross currency swaps as cash
flow hedges. The hedged cash flows as of December 31, 2018 included
€174,000 of total notional value. As of December 31, 2018, the aggregate
scheduled interest payments over the course of the loan and related swaps
amounted to €24,000. The scheduled maturity and principal payment of the
loan and related swaps of €150,000 are due in April 2022. There were no new
cross currency swaps designated as cash flow hedges as of December 31,
2018.
For further information regarding our foreign currency derivatives and
hedging programs, see Note 13 to the Consolidated Financial Statements.
For details of the estimated effects of currency translation on the
operations of our operating segments, see Item 7 – Management's Discussion
and Analysis of Financial Condition and Results of Operations.
Other Matters – Management regularly reviews our business operations
with the objective of improving financial performance and maximizing our
return on investment. As a result of this ongoing process to improve financial
performance, we may incur additional restructuring charges in the future
which, if taken, could be material to our financial results.
Table of Contents
these factors in evaluating forward-looking statements and are cautioned not
to place undue reliance on such forward-looking statements.
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 Securities and Exchange Commission
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.
ITEM 7A – Quantitative and Qualitative Disclosures About
Market Risk
Commodity Risk – We are subject to exposures resulting from potential
cost increases related to our purchase of raw materials or other product
components. We do not use derivative commodity instruments to manage our
exposures to changes in commodity prices such as steel, oil, gas, lead and
other commodities.
Various factors beyond our control affect the price of oil and gas,
including, but not limited to, worldwide and domestic supplies of oil and gas,
political instability or armed conflict in oil-producing regions, the price and level
of foreign imports, the level of consumer demand, the price and availability of
alternative fuels, domestic and foreign governmental regulation, weather-
related factors and the overall economic environment. We purchase
petroleum-related component parts for use in our manufacturing operations.
In addition, our freight costs associated with shipping and receiving product
and sales and service vehicle fuel costs are impacted by fluctuations in the
cost of oil and gas.
Fluctuations in worldwide demand and other factors affect the price for
lead, steel and related products. We do not maintain an inventory of raw or
fabricated steel or batteries in excess of near-term production requirements.
As a result, increases in the price of lead or steel can significantly increase
the cost of our lead- and steel-based raw materials and component parts.
During 2018, we experienced inflation on our raw materials and other
purchased component costs. We continue to focus on mitigating the risk of
future raw material or other product component cost increases through
supplier negotiations, ongoing optimization of our supply chain, the
continuation of cost reduction actions and product pricing. The success of
these efforts will depend upon our ability to leverage our commodity spend in
the current global economic environment. If the commodity prices increase
significantly and we are not able to offset the increases with higher selling
prices, our results may continue to be unfavorably impacted in 2019.
Foreign Currency Exchange Rate Risk – Due to the global nature of
our operations, we are subject to exposures resulting from foreign currency
exchange fluctuations in the normal course of business. Our primary exchange
rate exposures are with the Euro, Australian and Canadian dollars, British
pound, Japanese yen, Chinese renminbi, Brazilian real and Mexican peso
against the U.S. dollar. The direct financial impact of foreign currency
exchange includes the effect of translating profits from local currencies to U.S.
dollars, the impact of currency fluctuations on the transfer of goods between
our operations in the United States and our international operations and
transaction gains and losses. In addition to the direct financial impact, foreign
currency exchange has an indirect financial impact on our results, including
the effect on sales volume within local economies and the impact of pricing
actions taken as a result of foreign exchange rate fluctuations.
In the normal course of business, we actively manage the exposure of
our foreign currency exchange rate market risk by entering into various
hedging instruments with counterparties that are highly rated financial
institutions. We may use foreign exchange purchased options or forward
contracts to hedge our foreign currency denominated forecasted revenues or
forecasted sales to wholly-owned foreign subsidiaries. Additionally, we hedge
21
Table of Contents
ITEM 8 – Financial Statements and Supplementary Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and board of directors
Tennant Company:
Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting
We have audited the accompanying consolidated balance sheets of Tennant Company, and subsidiaries (the Company) as of December 31, 2018 and 2017,
the related consolidated statements of operations, comprehensive income, equity, and cash flows for each of the years in the three-year period ended
December 31, 2018, and the related notes and financial statement schedules included in Item 15.A.2 (collectively, the consolidated financial statements). We
also have audited the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control -
Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of
December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2018, in
conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2018 based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission.
Change in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, the Company has changed its method of accounting for revenue in 2018 due to the adoption
of FASB Accounting Standards Codification (Topic 606), Revenue from Contracts with Customers.
Basis for Opinion
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and
for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control
over Financial Reporting. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s
internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board
(United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable
assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective
internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used
and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal
control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness
exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing
such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
/s/ KPMG LLP
We have served as the Company's auditor since 1954.
Minneapolis, Minnesota
February 28, 2019
22
Table of Contents
Consolidated Statements of Operations
TENNANT COMPANY AND SUBSIDIARIES
(In thousands, except shares and per share data)
Years ended December 31
Net Sales
Cost of Sales
Gross Profit
Operating Expense:
Research and Development Expense
Selling and Administrative Expense
Total Operating Expense
Profit from Operations
Other Income (Expense):
Interest Income
Interest Expense
Net Foreign Currency Transaction Losses
Other Expense, Net
Total Other Expense, Net
Profit (Loss) Before Income Taxes
Income Tax Expense
Net Earnings (Loss) Including Noncontrolling Interest
Net Earnings (Loss) Attributable to Noncontrolling Interest
Net Earnings (Loss) Attributable to Tennant Company
Net Earnings (Loss) Attributable to Tennant Company per Share:
Basic
Diluted
Weighted Average Shares Outstanding:
Basic
Diluted
Cash Dividends Declared per Common Share
See accompanying Notes to Consolidated Financial Statements.
2018
2017
2016
$
1,123,511
$
1,003,066
$
678,478
445,033
30,739
356,316
387,055
57,978
3,035
(23,342)
(1,100)
(729)
(22,136)
35,842
2,304
33,538
126
603,253
399,813
32,013
334,782
366,795
33,018
2,405
(25,394)
(3,387)
(7,934)
(34,310)
(1,292)
4,913
(6,205)
(10)
33,412
$
(6,195) $
808,572
456,977
351,595
34,738
248,592
283,330
68,265
330
(1,279)
(392)
(433)
(1,774)
66,491
19,877
46,614
—
46,614
1.86
1.82
$
$
(0.35) $
(0.35) $
2.66
2.59
17,940,438
18,338,569
17,695,390
17,695,390
17,523,267
17,976,183
0.85
$
0.84
$
0.81
$
$
$
$
23
Table of Contents
Consolidated Statements of Comprehensive Income
TENNANT COMPANY AND SUBSIDIARIES
(In thousands)
Years ended December 31
Net Earnings (Loss) Including Noncontrolling Interest
Other Comprehensive (Loss) Income:
Foreign currency translation adjustments
Pension and retiree medical benefits
Cash flow hedge
Income Taxes:
Foreign currency translation adjustments
Pension and retiree medical benefits
Cash flow hedge
Total Other Comprehensive (Loss) Income, net of tax
Total Comprehensive Income Including Noncontrolling Interest
Comprehensive Income (Loss) Attributable to Noncontrolling Interest
Comprehensive Income Attributable to Tennant Company
See accompanying Notes to Consolidated Financial Statements.
2018
2017
2016
$
33,538
$
(6,205) $
46,614
(16,221)
1,745
1,341
168
(467)
(1,437)
(14,871)
18,667
126
28,356
5,868
(7,731)
310
(2,087)
2,884
27,600
21,395
(10)
$
18,541
$
21,405
$
109
(2,248)
(305)
32
504
114
(1,794)
44,820
—
44,820
24
Table of Contents
Consolidated Balance Sheets
TENNANT COMPANY AND SUBSIDIARIES
(In thousands, except shares and per share data)
December 31
ASSETS
Current Assets:
Cash and Cash Equivalents
Restricted Cash
Receivables:
Trade, less Allowances of $2,516 and $3,241, respectively
Other
Net Receivables
Inventories
Prepaid Expenses
Other Current Assets
Total Current Assets
Property, Plant and Equipment
Accumulated Depreciation
Property, Plant and Equipment, Net
Deferred Income Taxes
Goodwill
Intangible Assets, Net
Other Assets
Total Assets
LIABILITIES AND TOTAL EQUITY
Current Liabilities:
Current Portion of Long-Term Debt
Accounts Payable
Employee Compensation and Benefits
Income Taxes Payable
Other Current Liabilities
Total Current Liabilities
Long-Term Liabilities:
Long-Term Debt
Employee-Related Benefits
Deferred Income Taxes
Other Liabilities
Total Long-Term Liabilities
Total Liabilities
Commitments and Contingencies (Note 17)
Equity:
Common Stock, $0.375 par value per share, 60,000,000 shares authorized; 18,125,201 and 17,881,177 issued and
outstanding, respectively
Additional Paid-In Capital
Retained Earnings
Accumulated Other Comprehensive Loss
Total Tennant Company Shareholders' Equity
Noncontrolling Interest
Total Equity
Total Liabilities and Total Equity
See accompanying Notes to Consolidated Financial Statements.
25
2018
2017
$
$
85,609
525
58,398
653
207,948
8,222
216,170
135,133
22,141
9,066
468,644
386,641
(223,194)
163,447
15,489
182,671
146,546
15,747
992,544
27,005
98,398
49,453
2,123
71,895
248,874
328,060
21,110
46,018
32,130
427,318
676,192
$
$
203,280
6,236
209,516
127,694
19,351
7,503
423,115
382,768
(202,750)
180,018
11,134
186,044
172,347
21,319
993,977
30,883
96,082
37,257
2,838
69,447
236,507
345,956
23,867
53,225
35,948
458,996
695,503
6,797
28,550
316,269
(37,194)
314,422
1,930
316,352
992,544
$
6,705
15,089
297,032
(22,323)
296,503
1,971
298,474
993,977
$
$
$
Table of Contents
Consolidated Statements of Cash Flows
TENNANT COMPANY AND SUBSIDIARIES
(In thousands)
Years ended December 31
OPERATING ACTIVITIES
2018
2017
2016
Net Earnings (Loss) Including Noncontrolling Interest
Adjustments to Reconcile Net Earnings (Loss) to Net Cash Provided by Operating Activities:
$
33,538
$
(6,205) $
46,614
Depreciation
Amortization of Intangible Assets
Amortization of Debt Issuance Costs
Debt Issuance Cost Charges Related to Short-Term Financing
Fair Value Step-Up Adjustment to Acquired Inventory
Deferred Income Taxes
Share-Based Compensation Expense
Allowance for Doubtful Accounts and Returns
Other, Net
Changes in Operating Assets and Liabilities, Net of Assets Acquired:
Receivables, Net
Inventories
Accounts Payable
Employee Compensation and Benefits
Other Current Liabilities
Income Taxes
Other Assets and Liabilities
Net Cash Provided by Operating Activities
INVESTING ACTIVITIES
Purchases of Property, Plant and Equipment
Proceeds from Disposals of Property, Plant and Equipment
Proceeds from Principal Payments Received on Long-Term Note Receivable
Issuance of Long-Term Note Receivable
Acquisitions of Businesses, Net of Cash Acquired
Purchase of Intangible Asset
Proceeds from Sale of Business
Net Cash Used in Investing Activities
FINANCING ACTIVITIES
Proceeds from Short-Term Debt
Repayments of Short-Term Debt
Proceeds from Issuance of Long-Term Debt
Payments of Long-Term Debt
Payments of Debt Issuance Costs
Change in Capital Lease Obligations
Purchases of Common Stock
Proceeds from Issuances of Common Stock
Excess Tax Benefit on Stock Plans
Purchase of Noncontrolling Owner Interest
Dividends Paid
Net Cash (Used in) Provided by Financing Activities
Effect of Exchange Rate Changes on Cash, Cash Equivalents and Restricted Cash
NET INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH
Cash, Cash Equivalents and Restricted Cash at Beginning of Year
CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT END OF YEAR
$
26
32,291
22,129
2,353
—
—
(10,862)
8,314
768
(436)
(7,618)
(16,557)
4,569
12,649
722
(1,383)
(507)
79,970
(18,780)
112
1,416
—
—
(2,775)
4,000
(16,027)
3,926
—
11,000
(38,255)
—
14
—
5,880
—
—
(15,343)
(32,778)
(4,082)
27,083
59,051
86,134
$
26,199
17,054
1,779
6,200
7,245
(6,095)
5,891
1,602
364
(14,381)
(2,898)
10,849
(7,780)
14,560
285
(495)
54,174
(20,437)
2,511
667
(1,500)
(354,073)
(2,500)
—
(375,332)
303,000
(303,000)
440,000
(96,248)
(16,482)
311
—
6,875
—
(30)
(14,953)
319,473
2,186
501
58,550
59,051
$
17,891
409
—
—
—
(1,172)
3,875
468
(196)
(9,278)
23
(3,904)
124
(185)
5,427
(2,218)
57,878
(26,526)
615
—
(2,000)
(12,933)
—
285
(40,559)
—
—
15,000
(3,460)
—
—
(12,762)
5,271
686
—
(14,293)
(9,558)
(1,150)
6,611
51,939
58,550
Table of Contents
SUPPLEMENTAL CASH FLOW INFORMATION
Cash Paid During the Year for:
Income Taxes
Interest
Supplemental Non-Cash Investing and Financing Activities:
Long-Term Note Receivable from Sale of Business
Capital Expenditures in Accounts Payable
See accompanying Notes to Consolidated Financial Statements.
$
$
$
$
11,132
22,367
$
$
13,542
14,228
$
$
14,172
1,135
— $
$
2,311
— $
$
2,167
5,489
2,045
27
Table of Contents
Consolidated Statements of Equity
TENNANT COMPANY AND SUBSIDIARIES
(In thousands, except shares and per share data)
Tennant Company Shareholders
Common
Shares
Common
Stock
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Loss
Tennant
Company
Shareholders'
Equity
Noncontrolling
Interest
Total
Equity
Balance, December 31, 2015
17,744,381 $
6,654 $
— $ 293,682 $
(48,129) $
252,207 $
— $ 252,207
Purchases of Common Stock
(246,474)
(92)
(4,847)
(7,823)
Balance, December 31, 2016
17,688,350 $
6,633 $
3,653 $ 318,180 $
(49,923) $
278,543 $
Net Earnings
Other Comprehensive Loss
Issue Stock for Directors,
Employee Benefit and Stock
Plans, net of related tax
withholdings of 23,113
shares
Share-Based Compensation
Dividends paid $0.81 per
Common Share
Tax Benefit on Stock Plans
—
—
190,443
—
—
—
—
—
71
—
—
—
Net Loss
Other Comprehensive Income
Issue Stock for Directors,
Employee Benefit and Stock
Plans, net of related tax
withholdings of 16,990
shares
Share-Based Compensation
Dividends paid $0.84 per
Common Share
Recognition of Noncontrolling
Interests
Purchase of Noncontrolling
Shareholder Interest
Other
—
—
192,827
—
—
—
—
—
—
—
72
—
—
—
—
—
—
—
46,614
—
—
(1,794)
46,614
(1,794)
3,939
3,875
—
—
—
686
(14,293)
—
—
—
—
—
—
4,010
3,875
(14,293)
686
(12,762)
—
—
(6,195)
—
—
27,600
(6,195)
27,600
—
—
—
—
46,614
(1,794)
4,010
3,875
— (14,293)
—
686
— (12,762)
— $ 278,543
(10)
—
(6,205)
27,600
5,545
5,891
—
—
—
—
—
—
(14,953)
—
—
—
—
—
—
—
—
—
5,617
5,891
—
—
5,617
5,891
(14,953)
— (14,953)
—
—
—
2,028
2,028
(30)
(17)
(30)
(17)
Balance, December 31, 2017
17,881,177 $
6,705 $
15,089 $ 297,032 $
(22,323) $
296,503 $
1,971 $ 298,474
Net Earnings
Other Comprehensive Loss
Issue Stock for Directors,
Employee Benefit and Stock
Plans, net of related tax
withholdings of 9,598 shares
Share-Based Compensation
Dividends paid $0.85 per
Common Share
Recognition of Noncontrolling
Interests
Adjustments to beginning
Retained Earnings resulting
from newly adopted
accounting pronouncements
(see FN 2)
Other
—
—
244,024
—
—
—
—
—
—
—
92
—
—
—
—
—
—
—
5,147
8,314
—
—
—
—
33,412
—
—
—
(15,343)
—
1,168
—
—
(14,871)
33,412
(14,871)
126
33,538
— (14,871)
—
—
—
—
—
—
5,239
8,314
—
—
5,239
8,314
(15,343)
— (15,343)
—
(132)
(132)
1,168
—
—
(35)
1,168
(35)
Balance, December 31, 2018
18,125,201 $
6,797 $
28,550 $ 316,269 $
(37,194) $
314,422 $
1,930 $ 316,352
See accompanying Notes to Consolidated Financial Statements.
28
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except shares and per share data)
1. Summary of Significant Accounting Policies
Nature of Operations – Tennant Company is a world leader in designing, manufacturing and marketing solutions that empower customers to achieve
quality cleaning performance, significantly reduce environmental impact and help create a cleaner, safer, healthier world. Tennant offers products and solutions
consisting of mechanized cleaning equipment, detergent-free and other sustainable cleaning technologies, aftermarket parts and consumables, equipment
maintenance and repair service, specialty surface coatings, and business solutions such as financing, rental and leasing programs, and machine-to-machine
asset management solutions. Tennant products are used in many types of environments including: Retail establishments, distribution centers, factories and
warehouses, public venues such as arenas and stadiums, office buildings, schools and universities, hospitals and clinics, parking lots and streets, and more.
Customers include contract cleaners to whom organizations outsource facilities maintenance, as well as businesses that perform facilities maintenance
themselves. The Company reaches these customers through the industry's largest direct sales and service organization and through a strong and well-supported
network of authorized distributors worldwide.
Consolidation – The Consolidated Financial Statements include the accounts of Tennant Company and its subsidiaries. All intercompany transactions
and balances have been eliminated. In these Notes to the Consolidated Financial Statements, Tennant Company is referred to as “Tennant,” “we,” “us,” or “our.”
Translation of Non-U.S. Currency – Foreign currency-denominated assets and liabilities have been translated to U.S. dollars at year-end exchange
rates, while income and expense items are translated at average exchange rates prevailing during the year. Gains or losses resulting from translation are
included as a separate component of Accumulated Other Comprehensive Loss. The balance of cumulative foreign currency translation adjustments recorded
within Accumulated Other Comprehensive Loss as of December 31, 2018, 2017 and 2016 was a net loss of $31,831, $15,778 and $44,444, respectively. The
majority of translation adjustments are not adjusted for income taxes as substantially all translation adjustments relate to permanent investments in non-U.S.
subsidiaries. Net Foreign Currency Transaction Losses are included in Other Income (Expense).
Use of Estimates – In preparing the consolidated financial statements in conformity with U.S. generally accepted accounting principles ("U.S. GAAP"),
management must make decisions that impact the reported amounts of assets, liabilities, revenues, expenses and the related disclosures, including disclosures
of contingent assets and liabilities. Such decisions include the selection of the appropriate accounting principles to be applied and the assumptions on which
to base accounting estimates. Estimates are used in determining, among other items, sales promotions and incentives accruals, inventory valuation, warranty
reserves, allowance for doubtful accounts, pension and postretirement accruals, useful lives for intangible assets, and future cash flows associated with impairment
testing for Goodwill and other long-lived assets. These estimates and assumptions are based on management’s best estimates and judgments. Management
evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors that management believes to be reasonable under
the circumstances. We adjust such estimates and assumptions when facts and circumstances dictate. A number of these factors include, among others, economic
conditions, credit markets, foreign currency, commodity cost volatility and consumer spending and confidence, all of which have combined to increase the
uncertainty inherent in such estimates and assumptions. As future events and their effects cannot be determined with precision, actual amounts could differ
significantly from those estimated at the time the consolidated financial statements are prepared. Changes in those estimates resulting from continuing changes
in the economic environment will be reflected in the financial statements in future periods.
Cash and Cash Equivalents – We consider all highly liquid investments with maturities of three months or less from the date of purchase to be cash
equivalents.
Restricted Cash – We have a total of $525 as of December 31, 2018 that serves as collateral backing certain bank guarantees and is therefore restricted.
This money is invested in time deposits.
Receivables – Credit is granted to our customers in the normal course of business. Receivables are recorded at original carrying value less reserves for
estimated uncollectible accounts and sales returns. To assess the collectability of these receivables, we perform ongoing credit evaluations of our customers’
financial condition. Through these evaluations, we may become aware of a situation where a customer may not be able to meet its financial obligations due to
deterioration of its financial viability, credit ratings or bankruptcy. The reserve requirements are based on the best facts available to us and are reevaluated and
adjusted as additional information becomes available. Our reserves are also based on amounts determined by using percentages applied to trade receivables.
These percentages are determined by a variety of factors including, but not limited to, current economic trends, historical payment and bad debt write-off
experience. An account is considered past-due or delinquent when it has not been paid within the contractual terms. Uncollectible accounts are written off against
the reserves when it is deemed that a customer account is uncollectible.
Inventories – Inventories are valued at the lower of cost or net realizable value. Cost is determined on a first-in, first-out (“FIFO”) basis except for Inventories
in North America, which are determined on a last-in, first-out (“LIFO”) basis.
Property, Plant and Equipment – Property, plant and equipment is carried at cost. Additions and improvements that extend the lives of the assets are
capitalized while expenditures for repairs and maintenance are expensed as incurred. We generally depreciate buildings and improvements by the straight-line
method over a life of 30 years. Other property, plant and equipment are generally depreciated using the straight-line method based on lives of 3 years to 15
years.
29
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except shares and per share data)
Equity Method Investment – Investments in which we have the ability to exercise significant influence, but do not control, are accounted for under the
equity method of accounting and are included in Other Assets on the Consolidated Balance Sheets. Under this method of accounting, our share of the net
earnings or losses of the investee are presented as a component of Other Expense, Net on the Consolidated Statements of Operations. The detail regarding
our equity method investment in i-team North America B.V., a joint venture that operates as the distributor of the i-mop in North America, is further described in
Note 5.
Goodwill – Goodwill represents the excess of cost over the fair value of net assets of businesses acquired. We analyze Goodwill on an annual basis as
of year-end and when an event occurs or circumstances change that may reduce the fair value of one of our reporting units below its carrying amount. A goodwill
impairment occurs if the carrying amount of a reporting unit exceeds its fair value. In assessing the recoverability of Goodwill, we use an analysis of qualitative
factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it
is necessary to perform the quantitative impairment test.
Intangible Assets – Intangible Assets consist of definite lived customer lists, trade names and technology. Generally, intangible assets classified as trade
names are amortized on a straight-line basis and intangible assets classified as customer lists or technology are amortized using an accelerated method of
amortization.
Impairment of Long-lived Assets and Assets Held for Sale – We periodically review our intangible and long-lived assets for impairment and assess
whether events or circumstances indicate that the carrying amount of the assets may not be recoverable. We generally deem an asset group to be impaired if
an estimate of undiscounted future operating cash flows is less than its carrying amount. If impaired, an impairment loss is recognized based on the excess of
the carrying amount of the individual asset group over its fair value.
Assets held for sale are measured at the lower of their carrying value or fair value less costs to sell. Upon retirement or disposition, the asset cost and
related accumulated depreciation or amortization are removed from the accounts and a gain or loss is recognized based on the difference between the fair value
of proceeds received and carrying value of the assets held for sale.
Purchase of Common Stock – We repurchase our Common Stock under 2016 and 2015 repurchase programs authorized by our Board of Directors.
These programs allow us to repurchase up to an aggregate of 1,392,892 shares of our Common Stock. Upon repurchase, the par value is charged to Common
Stock and the remaining purchase price is charged to Additional Paid-in Capital. If the amount of the remaining purchase price causes the Additional Paid-in
Capital account to be in a debit position, this amount is then reclassified to Retained Earnings. Common Stock repurchased is included in shares authorized
but is not included in shares outstanding.
Warranty – We record a liability for estimated 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. In the event we determine
that our current or future product repair and replacement costs exceed our estimates, an adjustment to these reserves would be charged to earnings in the
period such determination is made. Warranty terms on machines 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 out for older equipment warranty issues. Warranty costs are recorded as a component of Selling
and Administrative Expense in the Consolidated Statements of Operations.
Debt Issuance Costs – We record all applicable debt issuance costs related to a recognized debt liability in the Consolidated Balance Sheets as a direct
deduction from the carrying amount of the debt liability, if not a line-of-credit arrangement. All debt issuance costs related to line-of-credit arrangements are
recorded as part of Other Assets in the Consolidated Balance Sheets and subsequently amortized over the term of the line-of-credit arrangement. We amortize
our debt issuance costs using the effective interest method over the term of the debt instrument or line-of-credit arrangement. Amortization of these costs is
included as part of Interest Expense in the Consolidated Statements of Operations.
Environmental – We record a liability for environmental clean-up on an undiscounted basis when a loss is probable and can be reasonably estimated.
Pension and Profit Sharing Plans – Substantially all U.S. employees are covered by various retirement benefit plans, including postretirement medical
plans and defined contribution savings plans. Pension plan costs are accrued based on actuarial estimates with the required pension cost funded annually, as
needed. No new participants have entered the defined benefit pension plan since 2000 and no new participants have entered the postretirement medical plan
since 1998. For further details regarding our pension and profit sharing plans, see Note 15.
Postretirement Benefits – We accrue and recognize the cost of retiree health benefits over the employees’ period of service based on actuarial estimates.
Benefits are only available for U.S. employees hired before January 1, 1999.
Derivative Financial Instruments – In countries outside the U.S., we transact business in U.S. dollars and in various other currencies. We hedge our net
recognized foreign currency denominated assets and liabilities with foreign exchange forward contracts to reduce the risk that the value of these assets and
liabilities will be adversely affected by changes in exchange rates. We may also use foreign exchange option contracts or forward contracts to hedge certain
cash flow exposures resulting from changes in foreign currency exchange rates. We enter into these foreign exchange contracts to hedge a portion of our
forecasted currency denominated revenue in the normal course of business, and accordingly, they are not speculative in nature.
30
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except shares and per share data)
We account for our foreign currency hedging instruments as either assets or liabilities on the balance sheet 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. Gains and losses from foreign exchange forward contracts that hedge certain balance sheet positions are recorded each period to Net Foreign
Currency Transaction Losses in our Consolidated Statements of Operations. Foreign exchange option contracts or forward contracts hedging forecasted foreign
currency revenue are designated as cash flow hedges under accounting for derivative instruments and hedging activities, with gains and losses recorded each
period to Accumulated Other Comprehensive Loss in our Consolidated Balance Sheets, until the forecasted transaction occurs. When the forecasted transaction
occurs, we reclassify the related gain or loss on the cash flow hedge to Net Sales. In the event the underlying forecasted transaction does not occur, or it
becomes probable that it will not occur, we reclassify the gain or loss on the related cash flow hedge from Accumulated Other Comprehensive Loss to Net
Foreign Currency Transaction Losses in our Consolidated Statements of Operations at that time. If we do not elect hedge accounting, or the contract does not
qualify for hedge accounting treatment, the changes in fair value from period to period are recorded in Net Foreign Currency Transaction Losses in our Consolidated
Statements of Operations. See Note 13 for additional information regarding our hedging activities.
Revenue Recognition – Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the
consideration we expect to receive in exchange for those products and services. Generally, these criteria are met at the time the product is shipped.
We also enter into contracts that can include combinations of products and services, which are generally capable of being distinct and are accounted for as
separate performance obligations. Revenue is recognized net of allowances for returns and any taxes collected from customers, which are subsequently remitted
to governmental authorities.
Further details regarding revenue recognition are discussed in Notes 2 and 4.
Share-based Compensation – We account for employee share-based compensation using the fair value based method. Our share-based compensation
plans are more fully described in Note 19.
Research and Development – Research and development costs are expensed as incurred.
Advertising Costs – We advertise products, technologies and solutions to customers and prospective customers through a variety of marketing campaign
and promotional efforts. These efforts include tradeshows, online advertising, e-mail marketing, mailings, sponsorships and telemarketing. Advertising costs are
expensed as incurred. In 2018, 2017 and 2016, such activities amounted to $8,767, $8,228 and $7,269, respectively.
Income Taxes – Deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the book
and tax bases of existing assets and liabilities. A valuation allowance is provided when, in management’s judgment, it is more likely than not that some portion
or all of the deferred tax asset will not be realized. We have established contingent tax liabilities using management’s best judgment. We follow guidance provided
by Accounting Standards Codification ("ASC") 740, Income Taxes, regarding uncertainty in income taxes, to record these contingent tax liabilities (refer to Note
18 for additional information). We adjust these liabilities as facts and circumstances change. Interest Expense is recognized in the first period the interest would
begin accruing. Penalties are recognized in the period we claim or expect to claim the position in our tax return. Interest and penalty expenses are classified as
an income tax expense.
Sales Tax – Sales taxes collected from customers and remitted to governmental authorities are presented on a net basis.
Earnings per Share – Basic earnings (loss) per share is computed by dividing Net Earnings (Loss) Attributable to Tennant Company by the Weighted
Average Shares Outstanding during the period. Diluted earnings per share assumes conversion of potentially dilutive stock options, performance shares,
restricted shares and restricted stock units. These conversions are not included in our computation of diluted earnings per share if we have a net loss attributable
to Tennant Company in a reporting period, as the effects are anti-dilutive.
New Accounting Pronouncements - In February 2016, the FASB 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 ASU are effective for annual periods beginning after December 15, 2018,
including interim periods within that reporting period, which is our fiscal 2019.
We have elected to apply the standard on a prospective basis with an adjustment to retained earnings in the first period of adoption. We have also elected
the package of practical expedients, which permits us not to reassess our prior conclusions about lease identification, lease classification and initial direct costs.
In addition, we have elected the short-term lease recognition whereby we will not recognize operating lease related assets or liabilities for leases with a lease
term less than one year. We have also elected to not separate lease and non-lease components for all of our leases. We will not be electing the hindsight
practical expedient to determine the reasonably certain term of existing leases.
We are continuing to evaluate the impact of this amended guidance on our consolidated financial statements and related disclosures. We expect the
adoption of this standard will have a material impact on the consolidated balance sheets for recognition of operating lease related assets and liabilities. We do
not expect a material impact to the consolidated statements of operations. We are unable to quantify the impact at this time as the lease software required to
calculate the impact due to the volume of our lease data has not yet been implemented. We are also in the process of implementing controls to ensure compliance
with the new lease accounting standard. We expect to be complete with implementation activities by the end of the first quarter of 2019 and will provide appropriate
disclosures at that time.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except shares and per share data)
2. Newly Adopted Accounting Pronouncements
Revenue from Contracts with Customers
On January 1, 2018, we adopted Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers (Topic 606) and all the
related amendments ("new revenue standard") to all contracts not completed at the date of initial application using the modified retrospective method. The
cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of retained earnings was not material to the company.
The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods, and there are no
material differences between the reported results under the new revenue standard and those that would have been reported under legacy U.S. GAAP.
The new revenue standard also required us to record a refund liability and a corresponding asset for our right to recover products from customers upon
settling the refund liability to account for the transfer of products with a right of return. The impact of this provision of the new revenue standard is immaterial to
our financial statements. The new revenue standard also provided additional clarity that resulted in a reclassification from the Accounts Receivable to Other
Current Liabilities to reflect a change in the presentation of our sales return reserves on the balance sheet, which were previously recorded net of Accounts
Receivable. Provisions for estimated sales returns will continue to be recorded at the time the related revenue is recognized.
The reclassification from Accounts Receivable to Other Current Liabilities in accordance with the detail described above impacted the Condensed
Consolidated Balance Sheet as of December 31, 2018, as follows (in thousands):
ASSETS
Accounts Receivable
Total Current Assets
Total Assets
LIABILITIES
Other Current Liabilities
Total Current Liabilities
Total Liabilities
As Reported
Balance Without
Adoption of
ASC 606
Effect of Change
Higher/(Lower)
$
$
$
$
216,170
$
468,644
992,544
$
71,895
$
248,874
676,192
$
214,858
467,332
991,232
70,583
247,562
674,880
$
$
$
$
$
$
1,312
1,312
1,312
1,312
1,312
1,312
Intra-Entity Transfers of Assets Other than Inventory
On January 1, 2018, we adopted ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other than Inventory. The ASU requires
the tax effects of all intra-entity sales of assets other than inventory to be recognized in the period in which the transaction occurs. The adoption of this ASU
resulted in a $94 cumulative effect adjustment recorded in Retained Earnings as of the beginning of 2018 that reflects a $1,281 reduction in a long-term deferred
charge, mostly offset by the establishment of deferred tax assets of $1,187. The reduction in the long-term asset and establishment of the deferred tax asset
impacted Other Assets and Deferred Income Taxes, respectively, on our Condensed Consolidated Balance Sheets.
Statement of Cash Flows – Restricted Cash
On January 1, 2018, we adopted ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. The ASU requires companies to explain the
changes in the combined total of restricted and unrestricted balances in the Condensed Consolidated Statements of Cash Flows. Therefore, amounts generally
described as restricted cash or restricted cash equivalents should be combined with unrestricted cash and cash equivalents when reconciling the beginning
and end of period balances on the Condensed Consolidated Statement of Cash Flows. In accordance with the ASU, we adopted the standard on a retrospective
basis to all periods presented.
Compensation – Retirement Benefits
On January 1, 2018, we adopted ASU No. 2017-07, Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension
Cost and Net Periodic Postretirement Benefit Cost. The ASU requires employers to report the service cost component of net pension and postretirement benefit
costs 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 pension and postretirement benefit costs are required to be presented in the Condensed Consolidated Statements of Operations separately
from the service cost component in nonoperating expenses. In accordance with the ASU, we adopted the standard on a retrospective basis to all periods
presented. As a result, we reclassified $5,974 of net benefit costs and $233 of net benefit credits from Selling and Administrative Expense to Other Expense,
Net on the Condensed Consolidated Statements of Operations for the twelve months ended December 31, 2017 and December 31, 2016, respectively. The
reclassification represents the other components of net pension and postretirement benefit costs that are now presented in the Condensed Consolidated
Statements of Operations separately from the service cost in Total Other Expense, Net. As a basis for the retrospective application of the ASU, we used the
practical expedient that permits us to use the amounts disclosed for the various components of net benefit cost in Note 15.
Income Statement – Reporting Comprehensive Income
On January 1, 2018, we elected to adopt early ASU No. 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220). The ASU gives
companies the option to reclassify stranded tax effects caused by the newly enacted legislation referred to as the Tax Cuts and Jobs Act (the "Tax Act") from
Accumulated Other Comprehensive Loss to Retained Earnings. The adoption resulted in a $1,262 cumulative effect adjustment which increased Retained
32
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except shares and per share data)
Earnings as of the beginning of 2018 and reduced the deferred income tax benefits in Accumulated Other Comprehensive Loss relating to cash flow hedges
and pension and retiree medical benefits.
Income Taxes
In March 2018, we adopted ASU No. 2018-05, Income Taxes (Topic 740): Amendments to SEC paragraphs Pursuant to SEC Staff Accounting Bulletin No.
118. The ASU updates the income tax accounting in U.S. GAAP to reflect the SEC interpretive guidance released on December 22, 2017, when the Tax Act
was signed into law. Additional information regarding the adoption of this standard is contained in Note 18.
3. Revision of Prior Period Financial Statements
Subsequent to the issuance of our consolidated financial statements for the quarter and year-to-date periods ended September 30, 2018, management
identified misclassifications between Cost of Sales and Selling and Administrative Expense in our Consolidated Statements of Operations. As a result of revising
prior period financial statement amounts for these misclassifications, Cost of Sales increased $4,608 and Selling and Administrative Expense decreased $4,608
for the year ended December 31, 2017. There were no misclassifications identified for the year ended December 31, 2016. These revisions had no impact on
Profit (Loss) Before Income Taxes. The revisions also had no impact on our Consolidated Statements of Comprehensive Income, Consolidated Statements of
Equity, Consolidated Balance Sheets, or Consolidated Statements of Cash Flow. Management evaluated the materiality of the revisions from a quantitative and
qualitative perspective and concluded that the revisions are immaterial to our consolidated financial statements.
Revisions to amounts in previously filed quarterly financial statements from 2018 and 2017 are reflected in Note 22.
4. Revenue from Contracts with Customers
Under the new revenue standard, revenue is recognized when control transfers under the terms of the contract with our customers. Revenue is measured
as the amount of consideration we expect to receive in exchange for transferring goods or providing services. Sales and other taxes we collect concurrent with
revenue-producing activities are excluded from revenue. We do not account for shipping and handling as a distinct performance obligation as we generally
perform shipping and handling activities after we transfer control of goods to the customer. We have elected to account for shipping and handling costs associated
with outbound freight after control of goods has transferred to a customer as a fulfillment cost. Incidental items that are immaterial in the context of the contract
are not recognized as a separate performance obligation. We do not have any significantly extended payment terms as payment is generally received within
one year of the point of sale.
In general, we transfer control and recognize a sale at the point in time when products are shipped from our manufacturing facilities both direct to consumers
and to distributors. Service revenue is recognized in the period the service is performed or ratably over the period of the related service contract. Consideration
related to service contracts is deferred if the proceeds are received in advance of the satisfaction of the performance obligations and recognized over the contract
period as the performance obligation is met. We use an output method to measure progress toward completion for certain prepaid service contracts, as this
method appropriately depicts performance towards satisfaction of the performance obligations.
For contracts with multiple performance obligations (i.e., a product and service component), we allocate the transaction price to the performance obligations
in proportion to their stand-alone selling prices. We use an observable price to determine the stand-alone selling price for separate performance obligations.
When allocating on a relative stand-alone selling price basis, any discounts contained within the contract are allocated proportionately to all of the performance
obligations in the contract.
Disaggregation of Revenue
The following tables illustrate the disaggregation of revenue by geographic area, groups of similar products and services and sales channels for the
twelve months ended December 31, 2018, 2017 and 2016 (in thousands):
Net Sales by geographic area
Americas
Europe, Middle East and Africa
Asia Pacific
Total
Twelve Months Ended
December 31
2018
2017
2016
$
690,996
$
640,274
$
335,603
96,912
273,738
89,054
607,026
129,046
72,500
$
1,123,511
$
1,003,066
$
808,572
Net Sales are attributed to each geographic area based on the end user country and are net of intercompany sales.
33
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except shares and per share data)
Net Sales by groups of similar products and services
Equipment
Parts and Consumables
Specialty Surface Coatings
Service and Other
Total
Net Sales by sales channel
Sales Direct to Consumer
Sales to Distributors
Total
Contract Liabilities
Sales Returns
Twelve Months Ended
December 31
2018
2017
2016
$
729,993
$
636,875
$
222,345
29,827
141,346
202,452
31,407
132,332
$
1,123,511
$
1,003,066
$
491,075
173,632
29,146
114,719
808,572
Twelve Months Ended
December 31
2018
2017
2016
$
$
735,244
$
674,495
388,267
328,571
1,123,511
$
1,003,066
$
$
609,538
199,034
808,572
The right of return may exist explicitly or implicitly with our customers. When the right of return exists, we adjust the transaction price for the estimated
effect of returns. We estimate the expected returns using the expected value method by assessing historical sales levels and the timing and magnitude of
historical sales return levels as a percent of sales and projecting this experience into the future.
Sales Incentives
Our sales contracts may contain various customer incentives, such as volume-based rebates or other promotions. We reduce the transaction price for
certain customer programs and incentive offerings that represent variable consideration. Sales incentives given to our customers are recorded using the most
likely amount approach for estimating the amount of consideration to which the company will be entitled. We forecast the most likely amount of the incentive to
be paid at the time of sale, update this forecast quarterly, and adjust the transaction price accordingly to reflect the new amount of incentives expected to be
earned by the customer. A majority of our customer incentives are settled within one year. We record our accruals for volume-based rebates and other promotions
in Other Current Liabilities on our Condensed Consolidated Balance Sheets.
The change in our sales incentive accrual balance for the twelve months ended December 31, 2018 was as follows:
Beginning balance
Additions to sales incentive accrual
Contract payments
Foreign currency fluctuations
Ending balance
Deferred Revenue
Twelve Months Ended
December 31
2018
$
$
13,466
30,458
(26,992)
(280)
16,652
We sell separately priced prepaid contracts to our customers where we receive payment at the inception of the contract and defer recognition of the
consideration received because we have to satisfy future performance obligations. Our deferred revenue balance is primarily attributed to prepaid maintenance
contracts on our machines ranging from 12 months to 60 months. In circumstances where prepaid contracts are sold simultaneously with machines, we use an
observable price to determine stand-alone selling price for separate performance obligations.
34
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except shares and per share data)
The change in the deferred revenue balance for the twelve months ended December 31, 2018 was as follows:
Beginning balance
Increase in deferred revenue representing our obligation to satisfy future performance obligations
Decrease in deferred revenue for amounts recognized in Net Sales for satisfied performance obligations
Foreign currency fluctuations
Ending balance
Twelve Months Ended
December 31
2018
$
$
7,787
14,650
(13,755)
(157)
8,525
At December 31, 2018, $5,021 and $3,504 of deferred revenue was reported in Other Current Liabilities and Other Liabilities, respectively, on our Condensed
Consolidated Balance Sheets. Of this, we expect to recognize the following approximate amounts in Net Sales in the following periods:
2019
2020
2021
2022
2023
Thereafter
Total
$
5,021
1,865
1,044
442
153
—
$
8,525
At December 31, 2017, $5,815 and $2,483 of deferred revenue was reported in Other Current Liabilities and Other Liabilities, respectively, on our Condensed
Consolidated Balance Sheets.
Practical Expedients and Exemptions
We generally expense the incremental costs of obtaining a contract when incurred because the amortization period would be less than one year. These
costs relate primarily to sales commissions and are recorded in Selling and Administrative Expense in the Condensed Consolidated Statements of Operations.
We do not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less. In addition, we do
not adjust the promised amount of consideration for the effects of a significant financing component if we expect, at contract inception, that the period between
when we transfer a promised good or service to a customer and when the customer pays for that good or service will be one year or less.
5.
Investment in Joint Venture
On February 13, 2017, the Company, through a Dutch subsidiary, together with Future Cleaning Technologies, B.V., a company headquartered in the
Netherlands, announced the January 1, 2017 formation of i-team North America B.V., a joint venture that operates as the distributor of the i-mop in North America.
We began selling and servicing the i-mop in the second quarter of 2017. We own a 50% ownership interest in the joint venture, which is accounted for under
the equity method of accounting, with our proportionate share of income or loss presented as a component of Other Expense, Net on the Consolidated Statements
of Operations. In 2018, this amount was immaterial.
As of December 31, 2018, the carrying value of the company's investment in the joint venture was $32. In March 2017, we issued a $1,500 loan to the
joint venture and, as a result, recorded a long-term note receivable in Other Assets on the Consolidated Balance Sheets.
6. Management Actions
During the first quarter of 2017, we implemented a restructuring action to better align our global resources and expense structure with a lower growth
global economic environment. The pre-tax charge of $8,018, including other associated costs of $961, consisted primarily of severance and was included within
Selling and Administrative Expense in the Consolidated Statements of Operations. The charge impacted our Americas, Europe, Middle East and Africa ("EMEA")
and Asia Pacific ("APAC") operating segments. We estimated the savings would offset the pre-tax charge approximately one year from the date of the action.
No additional costs will be incurred related to this restructuring action.
During the fourth quarter of 2017, we implemented a restructuring action primarily driven by integration actions related to our acquisition of IP Cleaning
S.p.A and its subsidiaries ("IPC Group"). See Note 7 for further details regarding our acquisition of the IPC Group. The restructuring action consisted primarily
of severance and includes reductions in overall staffing to streamline and right-size the organization to support anticipated business requirements. The pre-tax
charge of $2,501 was included within Selling and Administrative Expense in the Consolidated Statements of Operations. The charge impacted our Americas,
EMEA and APAC operating segments. We estimated the savings would offset the pre-tax charge approximately one year from the date of the action.
35
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except shares and per share data)
During the fourth quarter of 2018, we implemented a restructuring action consisting of severance to further our integration efforts related to the IPC Group.
The pre-tax charge of $1,032 was included within Selling and Administrative Expense in the Consolidated Statements of Operations. The charge impacted our
EMEA and APAC operating segments. We estimate the savings will offset the pre-tax charge approximately one year from the date of the action.
A reconciliation to the ending liability balance of severance and related costs as of December 31, 2018 is as follows:
2017 restructuring actions
Cash payments
Foreign currency adjustments
December 31, 2017 Balance
2018 charges and utilization:
New charges
Cash payments
Foreign currency adjustments
December 31, 2018 Balance
7. Acquisitions and Divestitures
Waterstar
Severance and
Related Costs
9,558
(6,312)
190
3,436
1,032
(2,123)
(97)
2,248
$
$
During the third quarter of 2018, we sold substantially all of the assets of our Waterstar business for $4,000 in cash. The resulting gain was approximately
$1,000 and is reflected within Selling and Administrative Expense in operating profit in our Consolidated Statements of Operations.
IP Cleaning S.p.A.
On April 6, 2017, we acquired nearly 100 percent of the outstanding capital stock of 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 11.
The following table summarizes the final fair value measurement of the assets acquired and liabilities assumed as of the date of acquisition:
36
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except shares and per share data)
ASSETS
Receivables
Inventories
Other Current Assets
Assets Held for Sale
Property, Plant and Equipment
Intangible Assets Subject to Amortization:
Trade Name
Customer Lists
Technology
Other Assets
Total Identifiable Assets Acquired
LIABILITIES
Accounts Payable
Accrued Expenses
Deferred Income Taxes
Other Liabilities
Total Identifiable Liabilities Assumed
Net Identifiable Assets Acquired
Noncontrolling Interest
Goodwill
Total Estimated Purchase Price, net of Cash Acquired
$
$
39,984
46,442
7,456
2,247
63,890
26,753
123,061
9,631
2,000
321,464
32,227
18,130
56,950
10,964
118,271
203,193
(1,896)
152,472
353,769
Based on the final fair value measurement of the assets acquired and liabilities assumed, we allocated $152,472 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. In connection with the finalization
of the fair value measurements in the first quarter of 2018, we recorded a measurement period adjustment, which increased goodwill by $4,627 with offsetting
adjustments to various income tax assets and liabilities.
The final 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. We recorded amortization expense of $20,794 in Selling and Administrative Expense on our
Consolidated Statements of Operations for these acquired intangible assets for the twelve months ended December 31, 2018.
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, 2016:
Years ended December 31
Net Sales
Pro forma
As reported
Net Earnings (Loss) Attributable to Tennant Company
Pro forma
As reported
Net Earnings (Loss) Attributable to Tennant Company per Diluted Share
Pro forma
As reported
37
2017
2016
1,057,127
$
1,013,710
1,003,066
808,572
12,288
$
(6,195)
30,412
46,614
0.68
$
(0.35)
1.69
2.59
$
$
$
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except shares and per share data)
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.
•
•
•
•
•
The unaudited pro forma financial information above gives effect to the following:
Incremental depreciation and amortization expense related to the fair value of the property, plant and equipment and identified intangible assets;
Exclusion of the purchase accounting impact of the inventory step-up related to the sale of acquired inventory;
Incremental interest expense related to additional debt used to finance the acquisition;
Exclusion of non-recurring acquisition-related transaction and financing costs; and
Pro forma adjustments tax affected based on the jurisdiction where the costs were incurred.
8.
Inventories
Inventories as of December 31 consisted of the following:
Inventories carried at LIFO:
Finished goods
Raw materials, production parts and work-in-process
Excess of FIFO over LIFO cost (a)
Total LIFO inventories
Inventories carried at FIFO:
Finished goods
Raw materials, production parts and work-in-process
Total FIFO inventories
Total inventories
2018
2017
48,607
$
28,581
(31,199)
45,989
$
43,439
23,694
(28,429)
38,704
53,520
35,624
89,144
135,133
$
$
$
54,161
34,829
88,990
127,694
$
$
$
$
$
(a) Inventories of $45,989 as of December 31, 2018, and $38,704 as of December 31, 2017, were valued at LIFO. The difference between replacement
cost and the stated LIFO inventory value is not materially different from the reserve for the LIFO valuation method.
9. Property, Plant and Equipment
Property, Plant and Equipment and related Accumulated Depreciation, including equipment under capital leases, as of December 31, consisted
of the following:
Property, Plant and Equipment:
Land
Buildings and improvements
Machinery and manufacturing equipment
Office equipment
Work in progress
Total Property, Plant and Equipment
Less: Accumulated Depreciation
Property, Plant and Equipment, Net
Depreciation expense was $32,291 in 2018, $26,199 in 2017 and $17,891 in 2016.
38
2018
2017
$
17,857
$
93,729
154,118
111,219
9,718
386,641
(223,194)
18,152
96,230
151,645
107,312
9,429
382,768
(202,750)
$
163,447
$
180,018
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except shares and per share data)
10. Goodwill and Intangible Assets
For purposes of performing our goodwill impairment analysis, we have identified our reporting units as North America, Latin America, Coatings, EMEA and
APAC. As of December 31, 2018, 2017 and 2016, we performed an analysis of qualitative factors to determine whether it is more likely than not that the fair
value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the quantitative goodwill impairment test.
Based on our analysis of qualitative factors, we determined that it was not more likely than not that the fair value of the North America, Latin America, EMEA
and APAC reporting units was less than its respective carrying amount. We elected to perform a quantitative analysis of the Coatings reporting unit. Based on
the quantitative analysis of that reporting unit, it was determined there was no goodwill impairment at December 31, 2018.
The changes in the carrying amount of Goodwill are as follows:
Balance as of December 31, 2016
Additions
Purchase accounting adjustments
Foreign currency fluctuations
Balance as of December 31, 2017
Additions
Purchase accounting adjustments
Foreign currency fluctuations
Balance as of December 31, 2018
Goodwill
Accumulated
Impairment
Losses
58,397
$
(37,332) $
147,845
(1,865)
22,847
—
—
(3,848)
Total
21,065
147,845
(1,865)
18,999
227,224
$
(41,180) $
186,044
—
4,627
(10,141)
—
—
2,142
—
4,627
(8,000)
221,710
$
(39,038) $
182,671
$
$
$
The balances of acquired Intangible Assets, excluding Goodwill, as of December 31, are as follows:
Balance as of December 31, 2018
Original cost
Accumulated amortization
Carrying amount
Weighted-average original life (in years)
Balance as of December 31, 2017
Original cost
Accumulated amortization
Carrying amount
Weighted-average original life (in years)
Customer Lists
Trade
Names
Technology
Total
$
$
$
$
$
$
$
$
143,059
(33,714)
109,345
15
149,355
(17,870)
131,485
15
$
$
$
$
30,592
(5,327)
25,265
10
31,968
(2,436)
29,532
10
$
$
$
$
17,436
(5,500)
11,936
10
14,589
(3,259)
11,330
11
191,087
(44,541)
146,546
195,912
(23,565)
172,347
The purchase accounting adjustments recorded during the first quarter of 2018 were based on the fair value adjustments related to our acquisition of the
IPC Group, as described further in Note 7.
In 2018, our purchased intangible assets were $2,775, which was primarily due to a technology license. The license was recorded in Intangible Assets,
Net as technology on the Condensed Consolidated Balance Sheets as of December 31, 2018.
Amortization expense on Intangible Assets was $22,129, $17,054 and $409 for the years ended December 31, 2018, 2017 and 2016, respectively.
39
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except shares and per share data)
Estimated aggregate amortization expense based on the current carrying amount of amortizable Intangible Assets for each of the five succeeding
years is as follows:
2019
2020
2021
2022
2023
Thereafter
Total
11. Debt
Credit Facility Borrowings
2017 Credit Agreement
$
21,297
19,873
18,092
15,913
14,352
57,019
$
146,546
In 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 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 4.00 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 year ended December 31, 2018. 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 December 31, 2018.
In October 2018, the Company signed Amendment No. 1 to the 2017 Credit Agreement, which clarified that the adoption of the new lease accounting
standard in 2019 would have no effect on any financial covenant calculations.
Effective with our fiscal year ended December 31, 2018, we are 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.
Our Senior Notes also contain certain restrictions, which are generally less restrictive than those contained in the 2017 Credit Agreement.
Senior Unsecured Notes
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. Separate financial information of the Guarantors is presented in Note 23.
The Notes will mature on May 1, 2025. Interest on the Notes accrues at the rate of 5.625% per annum and is 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 Indenture governing the Notes contains covenants that limit, among other things, our ability and the ability of our restricted subsidiary to incur additional
indebtedness (including guarantees thereof); incur or create liens on assets securing indebtedness; make certain restricted payments; make certain investments;
dispose of certain assets; allow to exist certain restrictions on the ability of our restricted subsidiaries to pay dividends or make other payments to us; engage
in certain transactions with affiliates; and consolidate or merge with or into other companies. If we experience certain kinds of changes of control, we may be
required to repurchase the Notes at a price equal to 101% of the principal amount of the Notes, plus accrued and unpaid interest, if any, to, but excluding, the
date of repurchase. If we make certain asset sales and do not use the net proceeds for specified purposes, we may be required to offer to repurchase the Notes
at a price equal to 100% of the principal amount, plus accrued and unpaid interest, if any, to, but excluding, the date of repurchase.
40
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except shares and per share data)
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 original Senior Notes for
new registered notes (the "Exchange Notes"), with terms substantially identical in all material respects with the Original 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 Senior Notes.
On January 22, 2018, we commenced the exchange offer required by the Registration Rights Agreement. The exchange offer closed on February 23,
2018. We did not incur any additional indebtedness as a result of the exchange offer. As a result, we were not required to pay additional interest on the Senior
Notes.
Capital Lease Obligations
Capital lease obligations outstanding are primarily related to sale-leaseback transactions with third-party leasing companies whereby we sell our
manufactured equipment to the leasing company and lease it back. The equipment covered by these leases is rented to our customers over the lease term.
Debt outstanding at December 31, consisted of the following:
Bank Borrowings
Senior Unsecured Notes
Credit Facility Borrowings
Capital Lease Obligations
Unamortized Debt Issuance Costs
Total Debt
Less: Current Maturities of Credit Facility Borrowings, Net of Debt Issuance Costs(1)
Long-term portion
2018
2017
$
3,926
$
300,000
53,000
2,863
(4,724)
355,065
(27,005)
—
300,000
80,000
3,279
(6,440)
376,839
(30,883)
$
328,060
$
345,956
(1)
Current maturities of debt include $25,927 of current maturities, less $184 of unamortized debt issuance costs, under our 2017 Credit Agreement
and $1,262 of current maturities of capital lease obligations.
As of December 31, 2018, we had outstanding borrowings under our Senior Unsecured Notes of $300,000. We had outstanding borrowings under our
2017 Credit Agreement, totaling $22,000 under our term loan facility and $31,000 under our revolving facility. In addition, we had letters of credit and bank
guarantees outstanding in the amount of $3,279, leaving approximately $165,721 of unused borrowing capacity on our revolving facility. Although we are only
required to make a minimum principal payment of $6,875 during 2019, we have both the intent and the ability to pay an additional $15,125 during 2019. As
such, we have classified $22,000 as current maturities of long-term debt. Commitment fees on unused lines of credit for the year ended December 31, 2018
were $595. The overall weighted average cost of debt is approximately 5.4% and, net of a related cross-currency swap instrument, is approximately 4.5%.
Further details regarding the cross-currency swap instrument are discussed in Note 13.
The aggregate maturities of our outstanding debt, excluding unamortized debt issuance costs, as of December 31, 2018, are as follows:
2019
2020
2021
2022
2023
Thereafter
Total aggregate maturities
$
$
12,066
10,297
6,255
31,171
—
300,000
359,789
41
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except shares and per share data)
12. Other Current Liabilities
Other Current Liabilities as of December 31 consisted of the following:
Other Current Liabilities:
Taxes, other than income taxes
Warranty
Deferred revenue
Rebates
Freight
Restructuring
Miscellaneous accrued expenses
Other
Total Other Current Liabilities
The changes in warranty reserves for the three years ended December 31 were as follows:
Beginning balance
Product warranty provision
Acquired warranty obligations
Foreign currency
Claims paid
Ending balance
13. Derivatives
Hedge Accounting and Hedging Programs
2018
2017
$
12,763
$
13,062
5,021
16,652
4,475
2,248
13,117
4,557
$
71,895
$
14,760
12,676
5,815
13,466
3,208
4,267
10,779
4,476
69,447
2018
2017
2016
$
12,676
$
10,960
$
13,172
—
(172)
12,124
1,208
274
(12,614)
(11,890)
$
13,062
$
12,676
$
10,093
12,413
42
82
(11,670)
10,960
In 2015, we expanded our foreign currency hedging programs to include foreign exchange purchased options and forward contracts to hedge our foreign
currency denominated revenue. We recognize all derivative instruments as either assets or liabilities in our Consolidated Balance Sheets and measure them
at fair value. Gains and losses resulting from changes in fair value are accounted for depending on the use of the derivative and whether it is designated and
qualifies for hedge accounting.
We evaluate hedge effectiveness on our hedges that are designated and qualify for hedge accounting at the inception of the hedge prospectively, as well
as retrospectively, and record any ineffective portion of the hedging instruments in Net Foreign Currency Transaction Losses on our Consolidated Statements
of Operations. The time value of purchased contracts is recorded in Net Foreign Currency Transaction Losses in our Consolidated Statements of Operations.
Our hedging policy establishes maximum limits for each counterparty to mitigate any concentration of risk.
Balance Sheet Hedging
Hedges of Foreign Currency Assets and Liabilities
We hedge our net recognized foreign currency denominated assets and liabilities with foreign exchange forward contracts to reduce the risk that the value
of these assets and liabilities will be adversely affected by changes in exchange rates. These contracts hedge assets and liabilities that are denominated in
foreign currencies and are carried at fair value as either assets or liabilities on the Consolidated Balance Sheets with changes in the fair value recorded to Net
Foreign Currency Transaction Losses in our Consolidated Statements of Operations. These contracts do not subject us to material balance sheet risk due to
exchange rate movements because gains and losses on these derivatives are intended to offset gains and losses on the assets and liabilities being hedged.
At December 31, 2018 and December 31, 2017, the notional amounts of foreign currency forward exchange contracts outstanding not designated as hedging
instruments were $63,410 and $60,858, respectively.
During the first quarter of 2017, in connection with our acquisition of IPC Group, we entered into a foreign currency option contract not designated as a
hedging instrument for a notional amount of €180,000. The option contract has since expired and there were no outstanding foreign currency option contracts
not designated as hedging instruments as of December 31, 2018 and December 31, 2017.
42
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except shares and per share data)
Cash Flow Hedging
Hedges of Forecasted Foreign Currency Transactions
In countries outside the U.S., we transact business in U.S. dollars and in various other currencies. We may use foreign exchange option contracts or
forward contracts to hedge certain cash flow exposures resulting from changes in these foreign currency exchange rates. These foreign exchange contracts,
carried at fair value, have maturities of up to one year. We enter into these foreign exchange contracts to hedge a portion of our forecasted foreign currency
denominated revenue in the normal course of business, and accordingly, they are not speculative in nature. The notional amount of outstanding foreign currency
forward contracts designated as cash flow hedges were $0 and $2,928 as of December 31, 2018 and December 31, 2017, respectively. The notional amount
of outstanding foreign currency option contracts designated as cash flow hedges was $8,436 and $8,619 as of December 31, 2018 and December 31, 2017,
respectively.
Foreign Currency Derivatives
We use foreign currency exchange rate derivatives to hedge our exposure to fluctuations in exchange rates for anticipated intercompany cash transactions
between Tennant Company and its subsidiaries. During 2017, we entered into Euro to U.S. dollar foreign exchange cross currency swaps for all of the anticipated
cash flows associated with an intercompany loan from a wholly-owned European subsidiary. We entered into these foreign exchange cross currency swaps to
hedge the foreign currency denominated cash flows associated with this intercompany loan, and accordingly, they are not speculative in nature. We designated
these cross currency swaps as cash flow hedges. The hedged cash flows as of December 31, 2018 included €174,000 of total notional value. As of December 31,
2018, the aggregate scheduled interest payments over the course of the loan and related swaps amounted to €24,000. The scheduled maturity and principal
payment of the loan and related swaps of €150,000 are due in April 2022. There were no new cross currency swaps designated as cash flow hedges as of
December 31, 2018.
To receive hedge accounting treatment, all hedging relationships are formally documented at the inception of the hedge, and the hedges must be highly
effective in offsetting changes to future cash flows on hedged transactions. We record changes in the fair value of these cash flow hedges in Accumulated Other
Comprehensive Loss in our Consolidated Balance Sheets, until the forecasted transaction occurs. When the forecasted transaction occurs, we reclassify the
related gain or loss on the cash flow hedge to Net Sales. In the event the underlying forecasted transaction does not occur, or it becomes probable that it will
not occur, we reclassify the gain or loss on the related cash flow hedge from Accumulated Other Comprehensive Loss to Net Foreign Currency Transaction
Losses in our Consolidated Statements of Operations at that time. If we do not elect hedge accounting, or the contract does not qualify for hedge accounting
treatment, the changes in fair value from period to period are recorded in Net Foreign Currency Transaction Losses in our Consolidated Statements of Operations.
The fair value of derivative instruments on our Consolidated Balance Sheets as of December 31 consisted of the following:
Derivatives designated as hedging instruments:
Foreign currency option contracts(1)
Foreign currency forward contracts(1)
Derivatives not designated as hedging instruments:
Foreign currency forward contracts(1)
2018
2017
Fair Value
Asset
Derivatives
Fair Value
Liability
Derivatives
Fair Value
Asset
Derivatives
Fair Value
Liability
Derivatives
$
$
245
$
— $
86
$
6,987
25,415
7,218
—
34,961
223
$
— $
442
$
425
(1)
Contracts that mature within the next 12 months are included in Other Current Assets and Other Current Liabilities for asset derivatives and liabilities
derivatives, respectively, on our 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, in our Consolidated Balance Sheets. Amounts included in our Consolidated
Balance Sheets are recorded net where a right of offset exists with the same derivative counterparty.
As of December 31, 2018, we anticipate reclassifying approximately $2,367 of gains from Accumulated Other Comprehensive Loss to net earnings during
the next 12 months.
43
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except shares and per share data)
The effect of foreign currency derivative instruments designated as cash flow hedges and foreign currency derivative instruments not designated
as hedges in our Consolidated Statements of Earnings for the three years ended December 31 were as follows:
Derivatives in cash flow hedging relationships:
Net gain (loss) recognized in Other Comprehensive Income (Loss), net
of tax(1)
Net (loss) gain reclassified from Accumulated Other Comprehensive
Loss into earnings, net of tax, effective portion to Net Sales
Net gain reclassified from Accumulated Other Comprehensive Loss in
earnings, net of tax, effective portion to Interest Income
Net gain (loss) reclassified from Accumulated Other Comprehensive
Loss into earnings, net of tax, effective portion to Net Foreign Currency
Transaction Losses
Net gain (loss) recognized in earnings(2)
Derivatives not designated as hedging instruments:
2018
2017
2016
Foreign
Currency
Option
Contracts
Foreign
Currency
Forward
Contracts
Foreign
Currency
Option
Contracts
Foreign
Currency
Forward
Contracts
Foreign
Currency
Option
Contracts
Foreign
Currency
Forward
Contracts
$
100
$
9,025
$
(193) $ (16,226) $
(259) $
(73)
(110)
(18)
(178)
(37)
(148)
—
—
8
1,870
—
1,198
—
6,353
12
—
(13)
(12,555)
10
—
(11)
7
—
—
2
Net loss recognized in earnings(3)
$
— $
(2,518) $
— $
(6,161) $
— $
(890)
(1)
(2)
(3)
Net change in the fair value of the effective portion classified in Other Comprehensive Income (Loss).
Ineffective portion and amount excluded from effectiveness testing classified in Net Foreign Currency Transaction Losses.
Classified in Net Foreign Currency Transaction Losses.
14. 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 December 31, 2018 is as follows:
Assets:
Foreign currency forward exchange contracts
Foreign currency option contracts
Total Assets
Liabilities:
Foreign currency forward exchange contracts
Total Liabilities
Fair Value
Level 1
Level 2
Level 3
$
$
$
$
7,210
245
7,455
25,415
25,415
$
$
$
$
— $
—
— $
— $
— $
7,210
245
7,455
25,415
25,415
$
$
$
$
—
—
—
—
—
44
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except shares and per share data)
Our population of assets and liabilities subject to fair value measurements at December 31, 2017 is as follows:
Assets:
Foreign currency forward exchange contracts
Foreign currency option contracts
Total Assets
Liabilities:
Foreign currency forward exchange contracts
Total Liabilities
Fair Value
Level 1
Level 2
Level 3
$
$
$
$
7,660
86
7,746
35,386
35,386
$
$
$
$
— $
—
— $
— $
— $
7,660
86
7,746
35,386
35,386
$
$
$
$
—
—
—
—
—
Our foreign currency forward exchange and option contracts are valued using observable Level 2 market expectations at the measurement date and
standard valuation techniques to convert future amounts to a single present value amount. Further details regarding our foreign currency forward exchange and
option contracts are discussed in Note 13.
The carrying amounts reported in the Consolidated Balance Sheets for Cash and Cash Equivalents, Restricted Cash, Receivables, Other Current Assets,
Accounts Payable and Other Current Liabilities approximate fair value due to their short-term nature.
The fair market value of our Long-Term Debt approximates cost based on the borrowing rates currently available to us for bank loans with similar terms
and remaining maturities.
From time to time, we measure certain assets at fair value on a non-recurring basis, including evaluation of long-lived assets, goodwill and other intangible
assets, as part of a business acquisition. These assets are measured and recognized at amounts equal to the fair value determined as of the date of acquisition.
Fair value valuations are based on the information available as of the acquisition date and the expectations and assumptions that have been deemed reasonable
by us. There are inherent uncertainties and management judgment required in these determinations. The fair value measurements of assets acquired and
liabilities assumed as part of a business acquisition are based on valuations involving significant unobservable inputs, or Level 3, in the fair value hierarchy.
These assets are also subject to periodic impairment testing by comparing the respective carrying value of each asset to the estimated fair value of the
reporting unit or asset group in which they reside. In the event we determine these assets to be impaired, we would recognize an impairment loss equal to the
amount by which the carrying value of the reporting unit, impaired asset or asset group exceeds its estimated fair value. These periodic impairment tests utilize
company-specific assumptions involving significant unobservable inputs, or Level 3, in the fair value hierarchy.
15. Retirement Benefit Plans
Substantially all U.S. employees are covered by various retirement benefit plans, including postretirement medical plans and defined contribution savings
plans. Retirement benefits for eligible employees in foreign locations are funded principally through defined benefit plans, annuity or government programs. The
total cost of benefits for our plans was $11,926, $13,253 and $12,108 in 2018, 2017 and 2016, respectively.
We had a qualified, funded defined benefit retirement plan (the “U.S. Pension Plan”) covering certain current and retired employees in the U.S. During
2015, the plan was amended to freeze benefits for all participants effective January 31, 2017. On February 15, 2017, the Board of Directors approved the
termination of the U.S. Pension Plan, effective May 15, 2017. Participants who elected an immediate lump sum distribution were paid out in December 2017.
Assets for participants who elected or are currently receiving annuity payments and those who have elected to defer their benefits were transferred to the annuity
company, Pacific Life, in December 2017. Excess assets were transferred from the Tennant Company Pension Trust to the Tennant Company Retirement
Savings Plan to deliver future discretionary benefits to plan participants. As of December 31, 2018, we held excess assets of $6,408 for future discretionary
benefit payments.
We have a U.S. postretirement medical benefit plan (the “U.S. Retiree Plan”) to provide certain healthcare benefits for U.S. employees hired before January
1, 1999. Eligibility for those benefits is based upon a combination of years of service with us and age upon retirement.
Our defined contribution savings plan (“401(k)”) covers substantially all U.S. employees. Under this plan, we match up to 3% of the employee’s annual
compensation in cash to be invested per their election. We also make a profit sharing contribution to the 401(k) plan for employees with more than one year of
service in accordance with our Profit Sharing Plan. This contribution is based upon our financial performance and can be funded in the form of Tennant stock,
cash or a combination of both. Expenses for the 401(k) plan were $8,073, $4,404 and $8,359 during 2018, 2017 and 2016, respectively.
We have a U.S. nonqualified supplemental benefit plan (the “U.S. Nonqualified Plan”) to provide additional retirement benefits for certain employees whose
benefits under our 401(k) plan or U.S. Pension Plan are limited by either the Employee Retirement Income Security Act or the Internal Revenue Code.
We also have defined benefit pension plans in the United Kingdom and Germany (the “U.K. Pension Plan” and the “German Pension Plan”). The U.K.
Pension Plan and German Pension Plan cover certain current and retired employees and both plans are closed to new participants. In December 2018, the
U.K. Pension Plan was amended to close all future accrual of benefits to existing active members, resulting in a curtailment gain of $165 relating to past service
benefits.
We expect to contribute approximately $146 to our U.S. Nonqualified Plan, $779 to our U.S. Retiree Plan, $360 to our U.K. Pension Plan and $34 to our
German Pension Plan in 2019.
45
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except shares and per share data)
Weighted-average asset allocations by asset category of the U.K. Pension Plan and the Tennant Company Retirement Savings Plan as of
December 31, 2018 are as follows:
Asset Category
Cash and Cash Equivalents
Investment Account held by Pension Plan(1)
Total
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Fair Value
$
$
6,408
10,842
17,250
$
$
6,408
—
6,408
$
$
— $
—
— $
—
10,842
10,842
(1)
This category is comprised of investments in insurance contracts.
Weighted-average asset allocations by asset category of the U.K. Pension Plan and the Tennant Company Retirement Savings Plan as of
December 31, 2017 are as follows:
Asset Category
Cash and Cash Equivalents
Investment Account held by Pension Plan(1)
Total
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Fair Value
$
$
6,305
$
11,163
17,468
$
6,305
$
—
6,305
$
— $
—
— $
—
11,163
11,163
(1)
This category is comprised of investments in insurance contracts.
Estimates of the fair value of the U.K Pension Plan and the Tennant Company Retirement Savings Plan assets are based on the framework established
in the accounting guidance for fair value measurements. A brief description of the three levels can be found in Note 14. The Investment Account held by the
U.K. Pension Plan invests in insurance contracts for purposes of funding the U.K. Pension Plan and is classified as Level 3. The fair value of the Investment
Account is the cash surrender values as determined by the provider which are the amounts the plan would receive if the contracts were cashed out at year end.
The underlying assets held by these contracts are primarily invested in assets traded in active markets.
A reconciliation of the beginning and ending balances of the Level 3 investments of our U.K. Pension Plan during the years ended December
31 are as follows:
Fair value at beginning of year
Purchases, sales, issuances and settlements, net
Net gain
Foreign currency
Fair value at end of year
2018
2017
11,163
$
(856)
1,138
(603)
10,842
$
9,562
(535)
1,190
946
11,163
$
$
The primary objective of our U.K. Pension Plan is to meet retirement income commitments to plan participants at a reasonable cost to us and to maintain
a sound actuarially funded status. This objective is accomplished through growth of capital and safety of funds invested. Assets are invested in securities to
achieve growth of capital over inflation through appreciation and accumulation and reinvestment of dividend and interest income. Investments are diversified
to control risk. The U.K. Pension Plan is invested in insurance contracts with underlying investments primarily in equity and fixed income securities. Our German
Pension Plan is unfunded, which is customary in that country.
Weighted-average assumptions used to determine benefit obligations as of December 31 are as follows:
U.S. Pension Benefits
2018
2017
Non-U.S.
Pension Benefits
Postretirement
Medical Benefits
2018
2017
2018
2017
Discount rate
Rate of compensation increase
3.95%
—%
3.28%
—%
2.72%
3.50%
2.45%
3.50%
3.95%
—
3.26%
—
46
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except shares and per share data)
Weighted-average assumptions used to determine net periodic benefit costs as of December 31 are as follows:
U.S. Pension Benefits
Non-U.S.
Pension Benefits
Postretirement
Medical Benefits
2018
2017
2016
2018
2017
2016
2018
2017
2016
Discount rate
Expected long-term rate of return on plan assets
Rate of compensation increase
3.28%
—%
—%
3.92%
5.10%
—%
4.08%
5.20%
3.00%
2.45%
3.80%
3.50%
2.64%
3.90%
3.50%
3.59%
4.60%
3.50%
3.26%
3.58%
3.70%
—
—
—
—
—
—
The discount rate is used to discount future benefit obligations back to today’s dollars. Our discount rates were determined based on high-quality fixed
income investments. The resulting discount rates are consistent with the duration of plan liabilities. The FTSE (formerly known as Citigroup) Above Median Spot
Rates for high-quality corporate bonds are used in determining the discount rate for the U.S. Plans. The expected return on assets assumption on the investment
portfolios for the pension plans is based on the long-term expected returns for the investment mix of assets currently in the portfolio. Management uses historic
return trends of the asset portfolio combined with recent market conditions to estimate the future rate of return.
The accumulated benefit obligations as of December 31 for all defined benefit plans are as follows:
U.S. Pension Plans
U.K. Pension Plan
German Pension Plan
2018
2017
$
1,267
$
9,264
950
1,414
11,131
1,013
Information for our plans with an accumulated benefit obligation in excess of plan assets as of December 31 is as follows:
Accumulated benefit obligation
Fair value of plan assets
2018
2017
$
2,217
$
—
2,427
—
As of December 31, 2018 and 2017, the U.S. Nonqualified and the German Pension Plans had an accumulated benefit obligation in excess of plan assets.
Information for our plans with a projected benefit obligation in excess of plan assets as of December 31 is as follows:
Projected benefit obligation
Fair value of plan assets
2018
2017
$
2,217
$
—
2,427
—
As of December 31, 2018 and 2017, the U.S. Nonqualified and the German Pension Plans had a projected benefit obligation in excess of plan assets.
Assumed healthcare cost trend rates as of December 31 are as follows:
Healthcare cost trend rate assumption for the next year
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate)
Year that the rate reaches the ultimate trend rate
2018
2017
6.38%
5.00%
2032
6.56%
5.00%
2032
Assumed healthcare cost trend rates have a significant effect on the amounts reported for healthcare plans. To illustrate, a one-percentage-point change
in assumed healthcare cost trends would have the following effects:
Effect on total of service and interest cost components
Effect on postretirement benefit obligation
1-Percentage-
Point
Decrease
1-Percentage-
Point
Increase
$
$
(26) $
(599) $
29
672
47
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except shares and per share data)
Summaries related to changes in benefit obligations and plan assets and to the funded status of our defined benefit and postretirement medical
benefit plans are as follows:
Change in benefit obligation:
Benefit obligation at beginning of year
$
1,414
$
40,961
$
12,144
$
11,136
$
9,604
$
10,540
U.S. Pension Benefits
Non-U.S.
Pension Benefits
Postretirement
Medical Benefits
2018
2017
2018
2017
2018
2017
Service cost
Interest cost
Plan participants' contributions
Plan amendments
Actuarial loss (gain)
Foreign exchange
Benefits paid
Settlement
Curtailment
—
43
—
—
35
—
(149)
(76)
—
Benefit obligation at end of year
$
1,267
$
Change in fair value of plan assets and net accrued liabilities:
Fair value of plan assets at beginning of year
$
— $
Actual return on plan assets
Employer contributions
Plan participants' contributions
Excess assets transferred to Defined Contribution Plan
Foreign exchange
Benefits paid
Settlement
Fair value of plan assets at end of year
—
225
—
—
—
(149)
(76)
—
—
1,538
—
—
1,811
—
(1,950)
(40,946)
—
1,414
46,389
2,536
276
—
(6,305)
—
(1,950)
(40,946)
—
$
$
Funded status at end of year
$
(1,267) $
(1,414) $
Amounts recognized in the Consolidated Balance Sheets consist of:
126
280
13
109
(514)
(583)
(1,196)
—
(165)
10,214
11,163
1,138
327
13
—
(603)
(1,196)
—
10,842
628
$
$
$
$
132
298
14
—
327
1,097
(860)
—
—
12,144
9,562
1,189
313
14
—
945
(860)
—
11,163
$
$
45
293
—
—
(485)
—
(844)
—
—
60
363
—
—
(524)
—
(835)
—
—
8,613
$
9,604
— $
—
844
—
—
—
(844)
—
—
—
—
835
—
—
—
(835)
—
—
(981) $
(8,613) $
(9,604)
—
(771)
(8,833)
(9,604)
—
(41)
(41)
Noncurrent Other Assets
Current Liabilities
Long-Term Liabilities
Net accrued (liability) asset
$
$
— $
— $
1,578
(146)
(1,121)
(140)
(1,274)
(34)
(916)
— $
— $
(36)
(945)
(779)
(7,834)
(1,267) $
(1,414) $
628
$
(981) $
(8,613) $
Amounts recognized in Accumulated Other Comprehensive Loss consist of:
Prior service cost
Net actuarial (loss) gain
Accumulated Other Comprehensive (Loss) Income
$
$
— $
— $
(109) $
— $
(852)
(915)
42
(1,245)
(852) $
(915) $
(67) $
(1,245) $
— $
444
444
$
48
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except shares and per share data)
The components of the net periodic benefit (credit) cost for the three years ended December 31 were as follows:
U.S. Pension Benefits
Non-U.S.
Pension Benefits
Postretirement
Medical Benefits
2018
2017
2016
2018
2017
2016
2018
2017
2016
Service cost
Interest cost
Expected return on plan assets
Amortization of net actuarial loss
Amortization of prior service cost
Foreign currency
Net periodic benefit cost (credit)
Curtailment
Settlement
$
— $
— $
354
$
1,538
1,659
$
126
280
$
132
298
103
358
$
45
$
60
$
293
363
43
—
49
—
—
92
—
49
(2,336)
(2,400)
(403)
(379)
(452)
43
—
—
(755)
—
6,373
41
41
—
(305)
—
—
38
—
35
76
(165)
—
74
—
(1)
124
—
—
27
—
97
133
—
—
—
—
—
—
338
—
—
—
—
—
—
423
—
—
Net benefit cost (credit)
$
141
$ 5,618
$
(305) $
(89) $
124
$
133
$
338
$
423
$
472
The changes in Accumulated Other Comprehensive Loss for the three years ended December 31 were as follows:
U.S. Pension Benefits
Non-U.S.
Pension Benefits
Postretirement
Medical Benefits
2018
2017
2016
2018
2017
2016
2018
2017
2016
Prior service cost
Net actuarial loss (gain)
Amortization of prior service cost
Amortization of net actuarial loss
Settlement
$
— $
— $
— $
109
$
— $
— $
— $
— $
35
—
(49)
(49)
1,611
—
(43)
(6,373)
633
(41)
(41)
—
(1,249)
(465)
1,718
(485)
(524)
(19)
(38)
—
—
(74)
—
—
(27)
—
—
—
—
—
—
—
Total recognized in other comprehensive
(income) loss
Total recognized in net benefit cost (credit) and
other comprehensive (income) loss
$
$
(63) $ (4,805) $
551
$ (1,197) $
(539) $ 1,691
78
$
813
$
246
$ (1,286) $
(415) $ 1,824
$
$
(485) $
(524) $
(147) $
(101) $
478
76
396
—
—
—
—
472
—
—
—
6
—
—
—
6
The following benefit payments, which reflect expected future service, are expected to be paid for our U.S. and Non-U.S. plans:
2019
2020
2021
2022
2023
2024 to 2028
Total
U.S. Pension
Benefits
Non-U.S.
Pension Benefits
Postretirement
Medical Benefits
$
$
$
146
138
129
121
112
468
1,114
$
$
243
249
257
265
275
1,511
2,800
$
779
830
752
755
715
3,424
7,255
The following amounts are included in Accumulated Other Comprehensive Loss as of December 31, 2018 and are expected to be recognized
as components of net periodic benefit cost during 2019:
Net actuarial loss
Transition obligation
49
Pension
Benefits
$
Postretirement
Medical
Benefits
104
$
4
—
—
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except shares and per share data)
16. Shareholders' Equity
Authorized Shares
We are authorized to issue an aggregate of 60,000,000 shares, all of which are designated as Common Stock having a par value of $0.375 per share.
The Board of Directors is authorized to establish one or more series of preferred stock, setting forth the designation of each such series, and fixing the relative
rights and preferences of each such series.
Accumulated Other Comprehensive Loss
Components of Accumulated Other Comprehensive Loss, net of tax, within the Consolidated Balance Sheets and Consolidated Statements of
Equity as of December 31 are as follows:
Foreign currency translation adjustments
Pension and retiree medical benefits
Cash flow hedge
Total Accumulated Other Comprehensive Loss
2018
2017
2016
$
$
(31,831) $
(15,778) $
(332)
(5,031)
(1,610)
(4,935)
(37,194) $
(22,323) $
(44,444)
(5,391)
(88)
(49,923)
The changes in components of Accumulated Other Comprehensive Loss, net of tax, are as follows:
Foreign Currency
Translation
Adjustments
Pension and
Postretirement
Benefits
Cash Flow Hedge
Total
December 31, 2017
Other comprehensive (loss) income before reclassifications
Amounts reclassified from Accumulated Other Comprehensive Loss
Adjustments to Accumulated Other Comprehensive Loss for
disproportionate income tax effects recognized from the adoption of
ASU 2018-02
Net current period other comprehensive (loss) income
December 31, 2018
$
$
(15,778) $
(16,053)
—
—
(16,053)
(31,831) $
(1,610) $
(4,935) $
1,293
122
(137)
1,278
9,125
(8,095)
(1,126)
(96)
(332) $
(5,031) $
(22,323)
(5,635)
(7,973)
(1,263)
(14,871)
(37,194)
Accumulated Other Comprehensive Loss associated with pension and postretirement benefits and cash flow hedges are included in Notes 15 and 13,
respectively.
17. Commitments and Contingencies
We lease office and warehouse facilities, vehicles and office equipment under operating lease agreements, which include both monthly and longer-term
arrangements. Leases with initial terms of one year or more expire at various dates through 2028 and generally provide for extension options. Rent expense
under the leasing agreements (exclusive of real estate taxes, insurance and other expenses payable under the leases) amounted to $23,348, $21,566 and
$18,640 in 2018, 2017 and 2016, respectively.
The minimum rentals for aggregate lease commitments as of December 31, 2018 were as follows:
2019
2020
2021
2022
2023
Thereafter
Total
$
15,200
8,973
5,535
3,592
2,636
4,215
$
40,151
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. The aggregate residual value at lease expiration of those leases
is $14,043, of which we have guaranteed $8,404. As of December 31, 2018, we have recorded a liability for the estimated end-of-term loss related to this residual
value guarantee of $243 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.
50
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except shares and per share data)
In the ordinary course of business, we may become liable with respect to pending and threatened litigation, tax, environmental and other matters. While
the ultimate results of current claims, investigations and lawsuits involving us are unknown at this time, we do not expect that these matters will have a material
adverse effect on our consolidated financial position or results of operations. Legal costs associated with such matters are expensed as incurred.
As of December 31, 2018, we hold a note receivable of $5,360, including accrued interest, on our Consolidated Balance Sheet. There is some uncertainty
about the collectability of this note receivable; however, we are not able to determine an appropriate allowance, if any, as of December 31, 2018.
18. Income Taxes
On December 22, 2017, the Tax Act was signed into law. The Tax Act made broad and complex changes to the U.S. tax code which included a lowering
of the U.S. federal corporate income tax rate from 35% to 21% effective January 1, 2018, accelerated expensing of qualified capital investments for a specific
period, limitations of the deductibility of interest expense and executive compensation, and a transition from a worldwide to a territorial tax system, which required
companies to pay a one-time transition tax on certain unrepatriated earnings from foreign subsidiaries.
ASC 740, Income Taxes, requires a company to record the effects of a tax law change in the period of enactment. ASU 2018-05 allowed a company to
record a provisional amount when it did not have the necessary information available, prepared or analyzed in reasonable detail to complete its accounting for
the change in the tax law. The measurement period ends when the company has obtained, prepared and analyzed the information necessary to finalize its
accounting, but could not extend beyond one year. In the fourth quarter of 2017, we included a provisional amount for the one-time transition tax on certain
unrepatriated earnings. The accounting for the income tax effect of the one-time transition tax on certain unrepatriated earnings was finalized in the third quarter
of 2018, impacting the year-to-date overall effective tax rate by (1.3)%. In the fourth quarter of 2017, we remeasured our deferred taxes at the reduced corporate
tax rate of 21% and recognized the change as a discrete income tax expense.
The accounting for the remeasurement of the deferred taxes and transition tax was finalized in the third quarter of 2018. Adjustments to the provisional
amounts were not material to the consolidated financial statements. The accounting for the income tax effects of the Tax Act is complete as of December 31,
2018.
Income from continuing operations for the three years ended December 31 was as follows:
U.S. operations
Foreign operations
Total
Income tax expense (benefit) for the three years ended December 31 was as follows:
Current:
Federal
Foreign
State
Deferred:
Federal
Foreign
State
Total:
Federal
Foreign
State
Total Income Tax Expense
2018
2017
2016
23,913
11,929
35,842
$
$
7,465
$
(8,757)
(1,292) $
54,018
12,473
66,491
2018
2017
2016
3,731
$
2,590
$
7,030
1,033
8,701
812
11,794
$
12,103
(3,135) $
(6,012)
(343)
1,640
(8,699)
(131)
$
$
(9,490) $
(7,190) $
596
$
4,230
$
1,018
690
2
681
2,304
$
4,913
$
15,962
3,035
1,859
20,856
(472)
(434)
(73)
(979)
15,490
2,601
1,786
19,877
$
$
$
$
$
$
$
$
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 and that position has not changed following incurring the transition tax under the Tax Act. Accordingly, no deferred taxes have been
provided for withholding taxes or other taxes that would result upon repatriation of our approximately $1,572 of undistributed earnings from foreign
subsidiaries to the United States as those earnings continue to be permanently reinvested.
51
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except shares and per share data)
Our effective income tax rate varied from the U.S. federal statutory tax rate for the three years ended December 31 as follows:
Tax at statutory rate
(Decreases) increases in the tax rate from:
State and local taxes, net of federal benefit
Effect of foreign operations
Transaction costs
Effect of 2017 deferred rate change
Transition Tax
Effect of changes in valuation allowances
Domestic production activities deduction
Share-based payments
Research & Development credit
Other, net
Effective income tax rate
Deferred tax assets and liabilities were comprised of the following as of December 31:
2018
2017
2016
21.0%
35.0 %
35.0%
1.4
(4.3)
(4.2)
(1.0)
(1.0)
6.6
0.4
(5.7)
(3.6)
(3.2)
(21.1)
(70.8)
(226.3)
(154.3)
(28.0)
(126.5)
28.3
90.4
82.9
10.2
1.7
(5.5)
—
—
—
1.9
(2.2)
—
(1.3)
0.3
6.4%
(380.2)%
29.9%
2018
2017
Deferred Tax Assets:
Inventories, principally due to changes in inventory reserves
$
3,335
$
Employee wages and benefits, principally due to accruals for financial reporting purposes
Warranty reserves accrued for financial reporting purposes
Receivables, principally due to allowance for doubtful accounts and tax accounting method for equipment rentals
Tax loss carryforwards
Tax credit carryforwards
Other
Gross Deferred Tax Assets
Less: valuation allowance
Total Net Deferred Tax Assets
Deferred Tax Liabilities:
Property, Plant and Equipment, principally due to differences in depreciation and related gains
Goodwill and Intangible Assets
Total Deferred Tax Liabilities
Net Deferred Tax Liabilities
$
$
$
$
11,642
2,610
1,728
7,765
4,708
4,712
36,500
(11,519)
24,981
$
$
9,882
45,628
55,510
$
4,757
11,031
2,578
2,138
11,383
1,575
3,630
37,092
(9,691)
27,401
9,042
60,450
69,492
(30,529) $
(42,091)
Tax credit carryforwards consist of $1,812 foreign tax credits, $1,268 state tax credits, and $1,628 of Netherlands tax credits. We have non-U.S. cumulative
tax losses of $35,593 in various countries. Cumulative losses can be used to offset the income tax liabilities on future income in these countries. $18,649 of
these losses have unlimited carryforward periods. $16,944 of these losses have a limited carryforward period which must be utilized during 2019 to 2026.
The valuation allowance at December 31, 2018 principally applies to the Netherlands tax loss and tax credit carryforwards, a Sweden tax loss carryforward,
and state tax credit carryforwards that, in the opinion of management, are more likely than not to expire unutilized. However, to the extent that tax benefits
related to these carryforwards are realized in the future, the reduction in the valuation allowance will reduce income tax expense. A valuation allowance for the
remaining tax loss carryforwards is not required since it is more likely than not that they will be realized through carryback to taxable income in prior years, future
reversals of existing taxable temporary differences and future taxable income.
52
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except shares and per share data)
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
Balance at January 1
Increases as a result of tax positions taken during a prior period
Increases as a result of tax positions taken during the current year
Increase related to prior period tax positions of acquired entities
Decreases relating to settlement with tax authorities
Reductions as a result of a lapse of the applicable statute of limitations
Increases as a result of foreign currency fluctuations
Balance at December 31
2018
2017
$
2,232
$
2,477
74
370
3,833
—
(1,274)
418
—
329
236
(68)
(770)
28
$
5,653
$
2,232
Included in the balance of unrecognized tax benefits at December 31, 2018 and 2017 are potential benefits of $5,473 and $1,992, respectively, that if
recognized, would affect the effective tax rate from continuing operations.
We recognize potential accrued interest and penalties related to unrecognized tax benefits as a component of income tax expense. In addition to the
liability of $5,653 and $2,232 for unrecognized tax benefits as of December 31, 2018 and 2017, there was approximately $416 and $482, respectively, for
accrued interest and penalties. To the extent interest and penalties are not assessed with respect to uncertain tax positions, the amounts accrued will be revised
and reflected as an adjustment to income tax expense.
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 2015 and, with limited exceptions, state and foreign income tax examinations for taxable
years before 2014.
The Internal Revenue Service completed its examination of the U.S. income tax return for the 2015 tax year during the third quarter of 2018. The IRS's
adjustments to certain tax positions were not material. 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.
We do not anticipate that total unrecognized tax benefits will change significantly within the next 12 months.
19. Share-Based Compensation
We have four plans under which we have awarded share-based compensation grants: The 1997 Non-Employee Directors Option Plan ("1997 Plan"), which
provided for stock option grants to our non-employee Directors, the 2007 Stock Incentive Plan (“2007 Plan”), the Amended and Restated 2010 Stock Incentive
Plan, as Amended (“2010 Plan”) and the 2017 Stock Incentive Plan ("2017 Plan"), which were adopted as a continuing step toward aggregating our equity
compensation programs to reduce the complexity of our equity compensation programs.
The 2010 Plan, originally approved by our shareholders on April 28, 2010 and amended and restated by our shareholders on April 25, 2012, terminated
our rights to grant awards under the 2007 Plan; however, any awards granted under the 2007 or 2010 Plans that do not result in the issuance of shares of
Common Stock may again be used for an award under the 2010 Plan. The 2010 Plan was amended and restated by our shareholders on April 24, 2013,
increasing the number of shares available under the amended 2010 Plan from 1,500,000 shares to 2,600,000 shares.
The 2017 Plan approved by our shareholders on April 26, 2017 terminated our rights to grant awards under previous plans; however, any awards granted
under previous plans that do not result in the issuance of shares of Common Stock may again be used for an award under the 2017 Plan. There were 1,200,000
shares made available under the approved 2017 Plan.
As of December 31, 2018, there were 897,315 shares reserved for issuance under the 2007 Plan and the 2010 Plan for outstanding compensation awards.
There were 761,382 shares available for issuance under the 2017 Plan for current and future equity awards as of December 31, 2018. The Compensation
Committee of the Board of Directors determines the number of shares awarded and the grant date, subject to the terms of our equity award policy.
We recognized total Share-Based Compensation Expense of $8,314, $5,891 and $3,875, respectively, during the years ended 2018, 2017 and 2016. The
total excess tax benefit recognized for share-based compensation arrangements during the years ended 2018, 2017 and 2016 was $2,060, $1,168 and $686,
respectively.
53
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except shares and per share data)
Stock Option Awards
We determined the fair value of our stock option awards using the Black-Scholes valuation model that uses the assumptions noted in the table below. The
expected term selected for stock options granted during the year represents the period of time that the stock options are expected to be outstanding based on
historical data of stock option holder exercise and termination behavior of similar grants. The risk-free interest rate for periods within the contractual life of the
stock option is based on the U.S. Treasury rate over the expected life at the time of grant. Expected volatilities are based upon historical volatility of our stock
over a period equal to the expected life of each stock option grant. Dividend yield is estimated over the expected life based on our dividend policy and historical
dividends paid. To determine the amount of compensation cost to be recognized in each period, we account for forfeitures as they occur.
The following table illustrates the valuation assumptions used for the 2018, 2017 and 2016 grants:
Expected volatility
Weighted-average expected volatility
Expected dividend yield
Weighted-average expected dividend yield
Expected term, in years
Risk-free interest rate
2018
25%
25%
1.2%
1.2%
5
2017
25 - 26%
26%
2016
29 -32%
32%
1.2 - 1.3%
1.3 - 1.5%
1.3%
5
1.3%
5
2.6 - 2.9%
1.7 - 2.0%
1.1 - 1.4%
New stock option awards granted vest one-third each year over a three year period and have a ten year contractual term. Compensation expense equal
to the grant date fair value is recognized for these awards on a straight-line basis over the awards' vesting period. Stock options granted to employees are
subject to accelerated expensing if the option holder meets the retirement definition set forth in the 2017 and 2010 Plans.
The following table summarizes the activity during the year ended December 31, 2018 for stock option awards:
Outstanding at beginning of year
Granted
Exercised
Forfeited
Outstanding at end of year
Exercisable at end of year
Shares
Weighted-Average
Exercise Price
1,135,608
$
202,623
(223,352)
(30,312)
1,084,567
711,499
$
$
47.47
67.85
26.33
66.06
55.11
48.94
The weighted-average grant date fair value of stock options granted during the years ended December 31, 2018, 2017 and 2016 was $16.07, $16.39 and
$13.61, respectively. The total intrinsic value of stock options exercised during the years ended December 31, 2018, 2017 and 2016 was $10,305, $4,450 and
$3,408, respectively. The aggregate intrinsic value of options outstanding and exercisable at December 31, 2018 was $5,987. The weighted-average remaining
contractual life for options outstanding and exercisable as of December 31, 2018 was 5.9 years and 4.5 years, respectively. As of December 31, 2018, there
was unrecognized compensation cost for nonvested options of $1,944, which is expected to be recognized over a weighted-average period of 1.3 years.
Restricted Share Awards
Restricted share awards for employees generally have a three year vesting period from the effective date of the grant. Restricted share awards to non-
employee directors vest upon a change of control or upon termination of service as a director occurring at least six months after grant date of the award so long
as termination is for one of the following reasons: death; disability; retirement in accordance with Tennant policy (e.g., age, term limits, etc.); resignation at
request of Board (other than for gross misconduct); resignation following at least six months’ advance notice; failure to be renominated (unless due to unwillingness
to serve) or reelected by shareholders; or removal by shareholders. We use the closing share price the day before the grant date to determine the fair value of
our restricted share awards. Expenses on these awards are recognized over the vesting period.
54
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except shares and per share data)
The following table summarizes the activity during the year ended December 31, 2018 for nonvested restricted share awards:
Nonvested at beginning of year
Granted
Vested
Forfeited
Nonvested at end of year
Shares
Weighted-Average
Grant Date Fair
Value
99,789
$
16,377
(14,384)
(1,561)
100,221
$
53.11
67.70
68.00
67.39
53.52
The total fair value of restricted stock units vested during the years ended December 31, 2018, 2017 and 2016 was $978, $1,463 and $1,970, respectively.
As of December 31, 2018, there was $1,196 of total unrecognized compensation cost related to nonvested restricted stock units which is expected to be
recognized over a weighted-average period of 1.6 years.
Performance Share Awards
We grant performance share awards to key employees as a part of our long-term management compensation program. These awards are earned based
upon achievement of certain financial performance targets over a three year period. The number of shares of common stock a participant receives will be
increased (up to 200 percent of target levels) or reduced (down to zero) based on the level of achievement of the financial performance targets. We use the
closing share price the day before the grant date to determine the fair value of our performance share awards. Expenses on these awards are recognized over
a three year performance period. Performance shares are granted in restricted stock units. They are payable in stock and vest solely upon achievement of
certain financial performance targets during this three year period.
The following table summarizes the activity during the year ended December 31, 2018 for nonvested performance share awards:
Nonvested at beginning of year
Granted
Forfeited
Nonvested at end of year
Shares
Weighted-Average
Grant Date Fair
Value
123,024
$
47,997
(43,974)
127,047
$
63.09
67.84
66.23
63.80
The total fair value of performance shares vested during the years ended December 31, 2017 and 2016 was $1,240 and $1,703, respectively. No performance
shares vested during the year ended December 31, 2018. As of December 31, 2018, we expect to recognize $3,287 of total compensation costs over a weighted-
average period of 1.8 years.
Restricted Stock Units
We grant restricted stock units to employees and non-employee directors, which generally vest within three years from the date of the grant. Vested
restricted stock units are paid out in stock. We use the closing share price the day before the grant date to determine the fair value of our restricted stock units.
Expenses on these awards are recognized on a straight-line basis over the vesting period of the award.
The following table summarizes the activity during the year ended December 31, 2018 for nonvested restricted stock units:
Nonvested at beginning of year
Granted
Vested
Forfeited
Nonvested at end of year
Shares
Weighted-Average
Grant Date Fair
Value
43,125
$
83,380
(15,427)
(9,123)
101,955
$
64.67
66.83
58.27
66.60
67.23
The total fair value of shares vested during the years ended December 31, 2018 and 2017 was $899 and $962, respectively. As of December 31, 2018,
there was $4,473 of total unrecognized compensation cost related to nonvested shares which is expected to be recognized over a weighted-average period of
2.0 years.
55
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except shares and per share data)
Share-Based Liabilities
As of December 31, 2018 and 2017, we had $213 and $175 in total share-based liabilities recorded on our Consolidated Balance Sheets, respectively.
During the years ended December 31, 2018, 2017 and 2016, we paid out $32, $45 and $62 related to share-based liability awards, respectively.
20. Earnings (Loss) Attributable to Tennant Company Per Share
The computations of Basic and Diluted Earnings (Loss) Attributable to Tennant Company per Share for the years ended December 31 were
as follows:
Numerator:
2018
2017
2016
Net Earnings (Loss) Attributable to Tennant Company
$
33,412
$
(6,195) $
46,614
Denominator:
Basic - Weighted Average Shares Outstanding
Effect of dilutive securities
Diluted - Weighted Average Shares Outstanding
Basic Earnings (Loss) per Share
Diluted Earnings (Loss) per Share
17,940,438
17,695,390
17,523,267
398,131
—
452,916
18,338,569
17,695,390
17,976,183
$
$
1.86
1.82
$
$
(0.35) $
(0.35) $
2.66
2.59
Excluded from the dilutive securities shown above were options to purchase and shares to be paid out under share-based compensation plans of 293,356,
711,212 and 356,598 shares of common stock during 2018, 2017 and 2016, respectively. These exclusions were 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 under the treasury stock method
exceeds the weighted shares outstanding in the options or if we have a net loss, as the effects are anti-dilutive.
21. Segment Reporting
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.
The following table presents Net Sales by geographic area for the years ended December 31:
Net Sales:
Americas
Europe, Middle East, Africa
Asia Pacific
Total
The following table presents long-lived assets by geographic area as of December 31:
Long-lived assets:
Americas
Europe, Middle East, Africa
Asia Pacific
Total
2018
2017
2016
$
690,996
$
640,274
$
335,603
96,912
273,738
89,054
$
1,123,511
$
1,003,066
$
607,026
129,046
72,500
808,572
2018
2017
2016
$
$
118,609
$
132,659
$
134,737
385,659
4,145
422,338
4,731
19,606
4,334
508,413
$
559,728
$
158,677
Accounting policies of the operations in the various operating segments are the same as those described in Note 1. Net Sales are attributed to each
operating segment based on the end user country and are net of intercompany sales. No single customer represents more than 10% of our consolidated Net
Sales.
Long-lived assets consist of Property, Plant and Equipment, Goodwill, Intangible Assets and certain other assets. Long-lived assets located in Italy totaled
$355,460 and $393,917, respectively, at December 31, 2018 and 2017, as a result of our acquisition of IPC Group. We did not have long-lived assets located
56
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except shares and per share data)
in Italy for 2016. There are no other individual foreign locations which have long-lived assets which represent more than 10% of our consolidated long-lived
assets.
The following table presents revenues for groups of similar products and services for the years ended December 31:
Net Sales:
Equipment
Parts and consumables
Service and other
Specialty surface coatings
Total
2018
2017
2016
$
729,993
$
636,875
$
222,345
141,346
29,827
202,452
132,332
31,407
$
1,123,511
$
1,003,066
$
491,075
173,632
114,719
29,146
808,572
22. Consolidated Quarterly Data (Unaudited)
Net Sales
Gross Profit
Net Earnings Attributable to Tennant Company
Basic Earnings Attributable to Tennant Company per Share
Diluted Earnings Attributable to Tennant Company per Share
2018
Q1
Q2
Q3
$
$
$
272,847
109,116 (a)
3,274
0.18
0.18
$
$
$
292,197
117,225 (a)
12,744
0.71
0.69
$
$
$
273,255
106,509 (a)
9,676
0.54
0.52
$
$
$
Q4
285,212
112,172
7,717
0.43
0.42
(a) Amounts have been revised for misclassifications between Cost of Sales and Selling and Administrative Expense. See Note 3 for further information.
Gross Profit was reduced by $1,521, $1,574, and $1,576 for Q1 2018, Q2 2018 and Q3 2018, respectively, and Selling and Administrative Expense was
decreased by the same amounts during those periods.
Net Sales
Gross Profit
Net (Loss) Earnings Attributable to Tennant Company
Basic (Loss) Earnings Attributable to Tennant Company per Share
Diluted (Loss) Earnings Attributable to Tennant Company per Share
2017
Q1
191,059
79,736
(3,957)
(0.22)
(0.22)
$
$
$
Q2
Q3
Q4
$
$
$
270,791
103,130 (a)
(2,591)
(0.15)
(0.15)
$
$
$
261,921
$
279,295
103,081 (a)
113,866 (a)
3,559
0.20
0.20
$
$
(3,206)
(0.18)
(0.18)
(a) Amounts have been revised for misclassifications between Cost of Sales and Selling and Administrative Expense. See Note 3 for further information.
Gross Profit was reduced by $1,424, $1,523, and $1,661 for Q2 2017, Q3 2017 and Q4 2017, respectively, and Selling and Administrative Expense was
decreased by the same amounts during those periods.
The summation of quarterly data may not equate to the calculation for the full fiscal year as quarterly calculations are performed on a discrete basis.
Regular quarterly dividends aggregated to $0.85 per share in 2018, or $0.21 per share for the first three quarters and $0.22 per share for the last quarter
of 2018, and $0.84 per share in 2017, or $0.21 per share per quarter.
23. Separate Financial Information of Guarantor Subsidiaries
The following condensed consolidated guarantor financial information is presented to comply with the requirements of Rule 3-10 of Regulation S-X.
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 below), and Wells Fargo Bank, National Association, a national banking association,
as trustee. The Notes are unconditionally and jointly and severally guaranteed by Tennant Coatings, Inc. and Tennant Sales and Service Company (collectively,
the “Guarantors” or "Guarantor Subsidiaries"), which are wholly-owned subsidiaries of the company.
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
57
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except shares and per share data)
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 following condensed consolidated financial information presents the Condensed Consolidated Statements of Earnings, Comprehensive Income and
Cash Flows for each of the years in the three year period ended December 31, 2018, and the related Condensed Consolidated Balance Sheets as of December 31,
2018 and 2017, of Tennant Company ("Parent"), the Guarantor Subsidiaries on a combined basis, the Non-Guarantor Subsidiaries on a combined basis and
elimination entries necessary to consolidate the Parent with the Guarantor and Non-Guarantor Subsidiaries. The following condensed consolidated financial
statements should be read in conjunction with the consolidated financial statements of the company and notes thereto of which this note is an integral part.
Condensed Consolidated Statement of Earnings
For the year ended December 31, 2018
Parent
Guarantor
Subsidiaries
Non-
Guarantor
Subsidiaries
Eliminations
Total Tennant
Company
$
494,341
$
634,341
$
570,627
$
(575,798) $
1,123,511
(in thousands)
Net Sales
Cost of Sales
Gross Profit
Operating Expense:
Research and Development Expense
Selling and Administrative Expense
Total Operating Expense
Profit (Loss) from Operations
Other Income (Expense):
Equity in Earnings of Affiliates
Interest (Expense) Income, Net
Intercompany Interest Income (Expense)
Net Foreign Currency Transaction Losses
Other (Expense) Income, Net
Total Other Income (Expense), Net
Profit (Loss) Before Income Taxes
Income Tax Expense (Benefit)
Net Earnings (Loss) Including Noncontrolling Interest
Net Earnings Attributable to Noncontrolling Interest
336,398
157,943
24,455
116,528
140,983
16,960
27,409
(20,466)
14,597
(370)
(2,288)
18,882
35,842
2,304
33,538
126
533,800
100,541
1,090
76,623
77,713
22,828
2,249
—
(5,760)
(21)
(2,434)
(5,966)
16,862
4,022
12,840
—
383,010
187,617
5,194
161,911
167,105
20,512
5,374
196
(8,837)
(709)
2,862
(1,114)
19,398
388
19,010
126
(574,730)
(1,068)
—
1,254
1,254
(2,322)
(35,032)
(37)
—
—
1,131
(33,938)
(36,260)
(4,410)
(31,850)
(126)
678,478
445,033
30,739
356,316
387,055
57,978
—
(20,307)
—
(1,100)
(729)
(22,136)
35,842
2,304
33,538
126
33,412
Net Earnings (Loss) Attributable to Tennant Company
$
33,412
$
12,840
$
18,884
$
(31,724) $
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except shares and per share data)
Condensed Consolidated Statement of Earnings
For the year ended December 31, 2017
(in thousands)
Net Sales
Cost of Sales
Gross Profit
Operating Expense:
Research and Development Expense
Selling and Administrative Expense
Total Operating Expense
Profit (Loss) from Operations
Other Income (Expense):
Equity in Earnings of Affiliates
Interest Expense, Net
Intercompany Interest Income (Expense)
Net Foreign Currency Transaction Gains (Losses)
Other (Expense) Income, Net
Total Other (Expense) Income, Net
(Loss) Profit Before Income Taxes
Income Tax Expense (Benefit)
Net (Loss) Earnings Including Noncontrolling Interest
Net Loss Attributable to Noncontrolling Interest
Net (Loss) Earnings Attributable to Tennant Company
(in thousands)
Net Sales
Cost of Sales
Gross Profit
Operating Expense:
Research and Development Expense
Selling and Administrative Expense
Total Operating Expense
Profit from Operations
Other Income (Expense):
Equity in Earnings of Affiliates
Interest (Expense) Income, Net
Intercompany Interest Income (Expense)
Net Foreign Currency Transaction Gains (Losses)
Other (Expense) Income, Net
Total Other Income (Expense), Net
Profit Before Income Taxes
Income Tax Expense
Parent
Guarantor
Subsidiaries
Non-
Guarantor
Subsidiaries
Eliminations
Total Tennant
Company
$
454,703
$
594,405
$
471,559
$
(517,601) $
1,003,066
311,897
142,806
27,219
110,414
137,633
5,173
12,754
(22,659)
12,519
857
(9,936)
(6,465)
(1,292)
4,913
488,972
105,433
315
78,516
78,831
26,602
2,004
—
(5,776)
—
(736)
(4,508)
22,094
8,070
321,759
149,800
4,479
145,852
150,331
(531)
28,855
(299)
(6,743)
(4,244)
2,841
20,410
19,879
(98)
(519,375)
1,774
—
—
—
1,774
(43,613)
(31)
—
—
(103)
(43,747)
(41,973)
(7,972)
$
$
$
(6,205) $
14,024
$
19,977
$
(34,001) $
(10) $
— $
(10) $
10
$
(6,195) $
14,024
$
19,987
$
(34,011) $
603,253
399,813
32,013
334,782
366,795
33,018
—
(22,989)
—
(3,387)
(7,934)
(34,310)
(1,292)
4,913
(6,205)
(10)
(6,195)
Condensed Consolidated Statement of Earnings
For the year ended December 31, 2016
Parent
Guarantor
Subsidiaries
Non-
Guarantor
Subsidiaries
Eliminations
Total Tennant
Company
$
455,375
$
587,815
$
290,349
$
(524,967) $
483,075
104,740
199,336
91,013
299,459
155,916
32,378
95,340
127,718
28,198
34,068
(1,204)
7,157
648
(2,376)
38,293
66,491
19,877
429
74,643
75,072
29,668
2,192
—
(5,570)
(652)
(573)
(4,603)
25,065
9,443
(524,893)
(74)
—
—
—
(74)
(36,260)
—
—
—
—
(36,260)
(36,334)
(11,870)
$
(24,464) $
1,931
78,609
80,540
10,473
—
255
(1,587)
(388)
2,516
796
11,269
2,427
8,842
808,572
456,977
351,595
34,738
248,592
283,330
68,265
—
(949)
—
(392)
(433)
(1,774)
66,491
19,877
46,614
Net Earnings (Loss) Attributable to Tennant Company
$
46,614
$
15,622
$
59
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except shares and per share data)
Condensed Consolidated Statement of Comprehensive Income
For the year ended December 31, 2018
(in thousands)
Parent
Guarantor
Subsidiaries
Non-
Guarantor
Subsidiaries
Eliminations
Total Tennant
Company
Net Earnings (Loss) Including Noncontrolling Interest
$
33,538
$
12,840
$
19,010
$
(31,850) $
33,538
Other Comprehensive Income (Loss):
Foreign currency translation adjustments
Pension and retiree medical benefits
Cash flow hedge
Income Taxes:
Foreign currency translation adjustments
Pension and retiree medical benefits
Cash flow hedge
Total Other Comprehensive (Loss) Income, net of tax
Total Comprehensive Income (Loss) Including Noncontrolling Interest
Comprehensive Income Attributable to Noncontrolling Interest
(16,221)
1,745
1,341
168
(467)
(1,437)
(14,871)
18,667
126
(961)
(21,422)
—
—
—
—
—
(961)
11,879
—
1,197
—
168
(205)
—
(20,262)
(1,252)
126
22,383
(1,197)
—
(168)
205
—
21,223
(10,627)
(126)
Comprehensive Income (Loss) Attributable to Tennant Company
$
18,541
$
11,879
$
(1,378) $
(10,501) $
(16,221)
1,745
1,341
168
(467)
(1,437)
(14,871)
18,667
126
18,541
Condensed Consolidated Statement of Comprehensive Income
For the year ended December 31, 2017
(in thousands)
Net (Loss) Earnings
Other Comprehensive Income (Loss):
Foreign currency translation adjustments
Pension and retiree medical benefits
Cash flow hedge
Income Taxes:
Foreign currency translation adjustments
Pension and retiree medical benefits
Cash flow hedge
Total Other Comprehensive Income (Loss), net of tax
Total Comprehensive Income Including Noncontrolling Interest
Comprehensive Loss Attributable to Noncontrolling Interest
Parent
Guarantor
Subsidiaries
Non-
Guarantor
Subsidiaries
Eliminations
Total Tennant
Company
$
(6,205) $
14,024
$
19,977
$
(34,001) $
(6,205)
28,356
5,868
(7,731)
310
(2,087)
2,884
27,600
21,395
(10)
1,215
—
—
—
—
—
1,215
15,239
—
2,960
538
—
310
(99)
—
3,709
23,686
(10)
(4,175)
(538)
—
(310)
99
—
(4,924)
(38,925)
10
28,356
5,868
(7,731)
310
(2,087)
2,884
27,600
21,395
(10)
21,405
Comprehensive Income
$
21,405
$
15,239
$
23,696
$
(38,935) $
60
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except shares and per share data)
(in thousands)
Net Earnings
Other Comprehensive (Loss) Income:
Foreign currency translation adjustments
Pension and retiree medical benefits
Cash flow hedge
Income Taxes:
Foreign currency translation adjustments
Pension and retiree medical benefits
Cash flow hedge
Condensed Consolidated Statement of Comprehensive Income
For the year ended December 31, 2016
Parent
Guarantor
Subsidiaries
Non-
Guarantor
Subsidiaries
Eliminations
Total Tennant
Company
$
46,614
$
15,622
$
8,842
$
(24,464) $
46,614
109
(2,248)
(305)
32
504
114
270
—
—
—
—
—
3,534
(1,691)
—
32
296
—
2,171
(3,804)
1,691
—
(32)
(296)
—
(2,441)
109
(2,248)
(305)
32
504
114
(1,794)
44,820
Total Other Comprehensive (Loss) Earnings, net of tax
(1,794)
270
Comprehensive Income (Loss)
$
44,820
$
15,892
$
11,013
$
(26,905) $
61
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except shares and per share data)
(in thousands)
ASSETS
Current Assets:
Cash and Cash Equivalents
Restricted Cash
Net Receivables
Intercompany Receivables
Inventories
Prepaid Expenses
Other Current Assets
Total Current Assets
Property, Plant and Equipment
Accumulated Depreciation
Property, Plant and Equipment, Net
Deferred Income Taxes
Investment in Affiliates
Intercompany Loans
Goodwill
Intangible Assets, Net
Other Assets
Total Assets
LIABILITIES AND TOTAL EQUITY
Current Liabilities:
Current Portion of Long-Term Debt
Accounts Payable
Intercompany Payables
Employee Compensation and Benefits
Income Taxes Payable
Other Current Liabilities
Total Current Liabilities
Long-Term Liabilities:
Long-Term Debt
Intercompany Loans
Employee-Related Benefits
Deferred Income Taxes
Other Liabilities
Total Long-Term Liabilities
Total Liabilities
Equity:
Common Stock
Additional Paid-In Capital
Retained Earnings
Accumulated Other Comprehensive Loss
Total Tennant Company Shareholders’ Equity
Noncontrolling Interest
Total Equity
Total Liabilities and Total Equity
Condensed Consolidated Balance Sheet
As of December 31, 2018
Parent
Guarantor
Subsidiaries
Non-
Guarantor
Subsidiaries
Eliminations
Total
Tennant
Company
1,610
—
94,763
148,961
13,381
782
396
259,893
12,677
(6,913)
5,764
3,072
12,142
—
1,726
2,684
(2)
285,279
$
$
— $
4,982
—
16,890
—
17,939
39,811
—
128,000
2,015
—
2,899
132,914
172,725
—
77,551
36,633
(1,630)
112,554
—
112,554
285,279
$
59,220
525
120,541
—
94,680
9,282
3,735
287,983
144,138
(56,937)
87,201
8,382
20,768
3,205
168,075
139,850
8,762
724,226
5,189
52,425
29,477
18,616
1,984
31,390
139,081
1,600
173,555
8,054
46,018
4,583
233,810
372,891
11,131
399,459
(2,532)
(58,653)
349,405
1,930
351,335
724,226
$
$
$
$
— $
—
—
(178,937)
(10,082)
(488)
—
(189,507)
—
—
—
—
(453,807)
(304,760)
—
—
—
(948,074) $
— $
—
(178,937)
—
(667)
179
(179,425)
—
(304,760)
—
—
—
(304,760)
(484,185)
(11,131)
(477,010)
(34,101)
60,283
(461,959)
(1,930)
(463,889)
(948,074) $
85,609
525
216,170
—
135,133
22,141
9,066
468,644
386,641
(223,194)
163,447
15,489
—
—
182,671
146,546
15,747
992,544
27,005
98,398
—
49,453
2,123
71,895
248,874
328,060
—
21,110
46,018
32,130
427,318
676,192
6,797
28,550
316,269
(37,194)
314,422
1,930
316,352
992,544
$
$
$
$
24,779
—
866
29,976
37,154
12,565
4,935
110,275
229,826
(159,344)
70,482
4,035
420,897
301,555
12,870
4,012
6,987
931,113
21,816
40,991
149,460
13,947
806
22,387
249,407
326,460
3,205
11,041
—
24,648
365,354
614,761
6,797
28,550
316,269
(37,194)
314,422
1,930
316,352
931,113
$
$
$
$
62
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except shares and per share data)
(in thousands)
ASSETS
Current Assets:
Cash and Cash Equivalents
Restricted Cash
Net Receivables
Intercompany Receivables
Inventories
Prepaid Expenses
Other Current Assets
Total Current Assets
Property, Plant and Equipment
Accumulated Depreciation
Property, Plant and Equipment, Net
Deferred Income Taxes
Investment in Affiliates
Intercompany Loans
Goodwill
Intangible Assets, Net
Other Assets
Total Assets
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current Portion of Long-Term Debt
Accounts Payable
Intercompany Payables
Employee Compensation and Benefits
Income Taxes Payable
Other Current Liabilities
Total Current Liabilities
Long-Term Liabilities:
Long-Term Debt
Intercompany Loans
Employee-Related Benefits
Deferred Income Taxes
Other Liabilities
Total Long-Term Liabilities
Total Liabilities
Shareholders' Equity:
Common Stock
Additional Paid-In Capital
Retained Earnings
Accumulated Other Comprehensive Loss
Total Tennant Company Shareholders’ Equity
Noncontrolling Interest
Total Equity
Total Liabilities and Total Equity
Condensed Consolidated Balance Sheet
As of December 31, 2017
Parent
Guarantor
Subsidiaries
Non-
Guarantor
Subsidiaries
Eliminations
Total
Tennant
Company
507
—
88,629
133,778
12,695
1,172
—
236,781
12,155
(6,333)
5,822
2,669
11,273
—
1,739
2,898
—
261,182
$
$
— $
3,018
1,963
10,355
—
15,760
31,096
—
128,000
3,992
—
2,483
134,475
165,571
—
72,483
23,797
(669)
95,611
—
95,611
261,182
$
39,422
653
120,204
—
94,542
9,405
3,473
267,699
145,549
(50,097)
95,452
7,157
20,811
4,983
171,436
167,344
10,956
745,838
1,470
53,137
51,481
18,591
2,472
33,504
160,655
1,809
181,805
8,715
53,225
1,677
247,231
407,886
11,131
384,460
(21,219)
(38,391)
335,981
1,971
337,952
745,838
$
$
$
$
— $
—
—
(187,222)
(8,993)
—
—
(196,215)
—
—
—
—
(424,570)
(309,805)
—
—
—
(930,590) $
— $
—
(187,222)
—
—
—
(187,222)
—
(309,805)
—
—
—
(309,805)
(497,027)
(11,131)
(456,943)
(2,578)
39,060
(431,592)
(1,971)
(433,563)
(930,590) $
58,398
653
209,516
—
127,694
19,351
7,503
423,115
382,768
(202,750)
180,018
11,134
—
—
186,044
172,347
21,319
993,977
30,883
96,082
—
37,257
2,838
69,447
236,507
345,956
—
23,867
53,225
35,948
458,996
695,503
6,705
15,089
297,032
(22,323)
296,503
1,971
298,474
993,977
$
$
$
$
18,469
—
683
53,444
29,450
8,774
4,030
114,850
225,064
(146,320)
78,744
1,308
392,486
304,822
12,869
2,105
10,363
917,547
29,413
39,927
133,778
8,311
366
20,183
231,978
344,147
—
11,160
—
31,788
387,095
619,073
6,705
15,089
297,032
(22,323)
296,503
1,971
298,474
917,547
$
$
$
$
63
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except shares and per share data)
Condensed Consolidated Statement of Cash Flows
For the year ended December 31, 2018
Parent
Guarantor
Subsidiaries
Non-
Guarantor
Subsidiaries
Eliminations
Total
Tennant
Company
(in thousands)
OPERATING ACTIVITIES
Net Cash Provided by Operating Activities
$
68,082
$
1,202
$
10,888
$
(202) $
79,970
INVESTING ACTIVITIES
Purchases of Property, Plant and Equipment
Proceeds from Disposals of Property, Plant and Equipment
Proceeds from Principal Payments Received on Long-Term Note
Receivable
Proceeds from Sale of Business
Purchases of Intangible Asset
Change in Investments in Subsidiaries
Loan Payments Received by Parent from Subsidiary
Loan Payments Received by Subsidiary from Parent
Net Cash Used in Investing Activities
FINANCING ACTIVITIES
Proceeds from Short-Term Debt
Loan Repayments made to Parent from Subsidiary
Loan Repayments made to Subsidiary from Parent
Change in Subsidiary Equity
Proceeds from Issuance of Long-Term Debt
Payments of Long-Term Debt
Change in Capital Lease Obligations
Proceeds from Issuances of Common Stock
Dividends Paid
Net Cash (Used in) Provided by Financing Activities
Effect of Exchange Rate Changes on Cash, Cash Equivalents and
Restricted Cash
NET INCREASE IN CASH, CASH EQUIVALENTS AND
RESTRICTED CASH
Cash, Cash Equivalents and Restricted Cash at Beginning of Year
CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT END
OF YEAR
(6,832)
21
—
—
(2,500)
(15,622)
1,218
—
(23,715)
—
—
(1,778)
—
11,000
(38,000)
—
5,880
(15,343)
(38,241)
184
6,310
18,469
(99)
—
—
—
—
—
—
—
(99)
—
—
—
—
—
—
—
—
—
—
—
1,103
507
(11,849)
91
1,416
4,000
(275)
—
—
1,778
(4,839)
3,926
(1,218)
—
15,622
—
(255)
14
—
(202)
17,887
(4,266)
19,670
40,075
—
—
—
—
—
15,622
(1,218)
(1,778)
12,626
—
1,218
1,778
(15,622)
—
—
—
—
202
(12,424)
—
—
—
(18,780)
112
1,416
4,000
(2,775)
—
—
—
(16,027)
3,926
—
—
—
11,000
(38,255)
14
5,880
(15,343)
(32,778)
(4,082)
27,083
59,051
$
24,779
$
1,610
$
59,745
$
— $
86,134
64
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except shares and per share data)
Condensed Consolidated Statement of Cash Flows
For the year ended December 31, 2017
Parent
Guarantor
Subsidiaries
Non-
Guarantor
Subsidiaries
Eliminations
Total
Tennant
Company
(in thousands)
OPERATING ACTIVITIES
Net Cash Provided by Operating Activities
$
26,992
$
280
$
27,711
$
(809) $
54,174
INVESTING ACTIVITIES
Purchases of Property, Plant and Equipment
Proceeds from Disposals of Property, Plant and Equipment
Proceeds from Principal Payments received on Long-Term Note
Receivable
Acquisition of Businesses, Net of Cash Acquired
Issuance of Long-Term Note Receivable
Purchase of Intangible Asset
Change in Investments in Subsidiaries
Loan Borrowings (Payments) from Subsidiaries
Net Cash (Used in) Provided by Investing Activities
FINANCING ACTIVITIES
Proceeds from Short-Term Debt
Repayments of Short-Term Debt
Loan Borrowings (Payments) from Parent
Change in Subsidiary Equity
Payments of Long-Term Debt
Proceeds from Issuance of Long-Term Debt
Payments of Debt Issuance Costs
Change in Capital Lease Obligations
Proceeds from Issuances of Common Stock
Purchase of Noncontrolling Owner Interest
Dividends Paid
Net Cash Provided by Financing Activities
Effect of Exchange Rate Changes on Cash and Cash Equivalents
NET (DECREASE) INCREASE IN CASH, CASH EQUIVALENTS
AND RESTRICTED CASH
Cash, Cash Equivalents and Restricted Cash at Beginning of Year
CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT END
OF YEAR
(9,558)
23
—
(304)
—
(2,500)
(199,028)
(159,780)
(371,147)
303,000
(303,000)
4,983
—
(96,142)
440,000
(16,482)
—
6,875
—
(14,953)
324,281
(141)
(20,015)
38,484
—
1
—
—
—
—
—
—
1
—
—
—
—
—
—
—
—
—
—
—
—
—
281
226
(10,879)
2,487
667
(353,769)
(1,500)
—
—
(4,983)
(367,977)
—
—
159,780
199,028
(106)
—
—
311
—
(30)
(809)
358,174
2,327
20,235
19,840
—
—
—
—
—
—
199,028
164,763
363,791
—
—
(164,763)
(199,028)
—
—
—
—
—
—
809
(362,982)
—
—
—
(20,437)
2,511
667
(354,073)
(1,500)
(2,500)
—
—
(375,332)
303,000
(303,000)
—
—
(96,248)
440,000
(16,482)
311
6,875
(30)
(14,953)
319,473
2,186
501
58,550
$
18,469
$
507
$
40,075
$
— $
59,051
65
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except shares and per share data)
Condensed Consolidated Statement of Cash Flows
For the year ended December 31, 2016
Parent
Guarantor
Subsidiaries
Non-
Guarantor
Subsidiaries
Eliminations
Total
Tennant
Company
(in thousands)
OPERATING ACTIVITIES
Net Cash Provided by Operating Activities
$
44,147
$
239
$
14,090
$
(598) $
57,878
INVESTING ACTIVITIES
Purchases of Property, Plant and Equipment
Proceeds from Disposals of Property, Plant and Equipment
Acquisition of Businesses, Net of Cash Acquired
Issuance of Long-Term Note Receivable
Loan Borrowings (Payments) from Subsidiaries
Proceeds from Sale of Business
Change in Investments in Subsidiaries
Net Cash Used in Investing Activities
FINANCING ACTIVITIES
Loan (Payments) Borrowings from Parent
Change in Subsidiary Entity
Payments of Long-Term Debt
Proceeds from Issuance of Long-Term Debt
Purchases of Common Stock
Proceeds from Issuances of Common Stock
Excess Tax Benefit on Stock Plans
Dividends Paid
Net Cash (Used in) Provided by Financing Activities
Effect of Exchange Rate Changes on Cash and Cash Equivalents
NET INCREASE IN CASH, CASH EQUIVALENTS AND
RESTRICTED CASH
Cash, Cash Equivalents and Restricted Cash at Beginning of Year
CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT END
OF YEAR
24. Subsequent Event
(21,507)
377
—
—
8,690
—
(19,594)
(32,034)
—
—
(3,429)
15,000
(12,762)
5,271
686
(14,293)
(9,527)
63
2,649
35,835
(13)
—
(11,539)
—
—
—
—
(11,552)
7,969
3,570
—
—
—
—
—
—
11,539
—
226
—
(5,006)
238
(1,394)
(2,000)
—
285
—
(7,877)
(16,659)
16,024
(31)
—
—
—
—
(598)
(1,264)
(1,213)
3,736
16,104
—
—
—
—
(8,690)
—
19,594
10,904
8,690
(19,594)
—
—
—
—
—
598
(10,306)
—
—
—
(26,526)
615
(12,933)
(2,000)
—
285
—
(40,559)
—
—
(3,460)
15,000
(12,762)
5,271
686
(14,293)
(9,558)
(1,150)
6,611
51,939
$
38,484
$
226
$
19,840
$
— $
58,550
On September 4, 2018, we signed a definitive agreement to acquire 100% of the outstanding capital stock of Hefei Gaomei Cleaning Machines Co., Ltd.
and 99% of the outstanding capital stock of Anhui Rongen Environmental Protection Technology Co., Ltd. (collectively "Gaomei"), privately held designers and
manufacturers of commercial cleaning solutions based in China. The acquisition closed on January 4, 2019. The purchase price includes cash and contingent
consideration which will be paid out over the next few years. The purchase price and net assets acquired are not significant to our consolidated financial
statements.
ITEM 9 – Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure
None.
ITEM 9A – Controls and Procedures
Disclosure Controls and Procedures
Our management, including our Chief Executive Officer and Principal
Financial and Accounting Officer, have conducted an evaluation of the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act
of 1934, as amended (the Exchange Act)) as of December 31, 2018. Based
on that evaluation, our Chief Executive Officer and Principal Financial and
Accounting Officer concluded that, as of December 31, 2018, our disclosure
controls and procedures were effective.
66
For purposes of Rule 13a-15(e), the term disclosure controls and
procedures means controls and other procedures of an issuer that are
designed to ensure that information required to be disclosed by the issuer in
the reports that it files or submits under the Exchange Act (15 U.S.C. 78a et
seq.) is recorded, processed, summarized and reported within the time periods
specified in the SEC’s rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by an issuer in the reports that it files or
submits under the Exchange Act is accumulated and communicated to the
issuer’s management, including its Chief Executive Officer and Principal
Financial and Accounting Officer, or persons performing similar functions, as
appropriate to allow timely decisions regarding required disclosure.
Management’s Report on Internal Control over Financial Reporting
Information required under this item with respect to directors is contained
in the sections entitled “Board of Directors” and “Section 16(a) Beneficial
Ownership Reporting Compliance” as part of our 2019 Proxy Statement and
is incorporated herein by reference. See also Item 1, Executive Officers of the
Registrant in Part I hereof.
Business Ethics Guide
We have adopted the Tennant Company Business Ethics Guide, which
applies to all of our employees, directors, consultants, agents and anyone
else acting on our behalf. The Business Ethics Guide includes particular
provisions applicable to our senior financial management, which includes our
Chief Executive Officer, Chief Financial Officer, Controller and other
employees performing similar functions. A copy of our Business Ethics Guide
is available on the Investor Relations website at investors.tennantco.com. We
intend to post on our website any amendment to, or waiver from, a provision
of our Business Ethics Guide that applies to our Principal Executive Officer,
Principal Financial Officer, Principal Accounting Officer, Controller and other
persons performing similar functions promptly following the date of such
amendment or waiver. In addition, we have also posted copies of our Corporate
Governance Principles and the Charters for our Audit, Compensation,
Governance and Executive Committees on our website.
ITEM 11 – Executive Compensation
Information required under this item is contained in the sections entitled
“Director Compensation," “Executive Compensation Information,” and "Pay
Ratio" as part of our 2019 Proxy Statement and is incorporated herein by
reference.
ITEM 12 – Security Ownership of Certain Beneficial Owners
and Management and Related Shareholder Matters
Information required under this item is contained in the section entitled
“Security Ownership of Certain Beneficial Owners and Management” as part
of our 2019 Proxy Statement and is incorporated herein by reference. The
section entitled "Equity Compensation Plan Information" can be found within
Item 5, Market for Registrant's Common Equity, Related Shareholder Matters
and Issuer Purchases of Equity Securities in Part II hereof.
ITEM 13 – Certain Relationships and Related Transactions,
and Director Independence
Information required under this item is contained in the sections entitled
“Director Independence” and “Related-Person Transaction Approval Policy”
as part of our 2019 Proxy Statement and is incorporated herein by reference.
ITEM 14 – Principal Accountant Fees and Services
Information required under this item is contained in the section entitled
“Fees Paid to Independent Registered Public Accounting Firm” as part of our
2019 Proxy Statement and is incorporated herein by reference.
Table of Contents
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting, as such term is defined in
Rule 13a-15(f) under the Exchange Act.
The Company’s internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company’s
internal control over financial reporting includes those policies and procedures
that:
(i) Pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the
assets of the company;
(ii) Provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and
(iii) Provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the
company’s assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls
may become inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
A material weakness is a deficiency, or combination of deficiencies, in
internal control over financial reporting such that there is a reasonable
possibility that a material misstatement of the Company’s annual or interim
financial statements will not be prevented or detected on a timely basis.
Under the supervision of the Audit Committee of the Board of Directors
and with the participation of our management, including our Chief Executive
Officer and Principal Financial and Accounting Officer, we conducted an
evaluation of the effectiveness of our internal control over financial reporting
using the criteria established in Internal Control - Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Based on our assessment and those criteria, our Chief
Executive Officer and Principal Financial and Accounting Officer concluded
that our internal control over financial reporting was effective as of December
31, 2018.
KPMG, LLP, an independent registered public accounting firm, has
audited the effectiveness of the Company's internal control over financial
reporting as of December 31, 2018 and has issued a report which is included
in Item 8 of this Annual Report on Form 10-K.
Changes in Internal Control Over Financial Reporting
We have completed our testing of the operating effectiveness of internal
control over financial reporting of our acquired entity, IPC Group. There were
no significant changes in the Company's internal control over financial
reporting during the quarter ended December 31, 2018 that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
ITEM 9B – Other Information
None.
PART III
ITEM 10 – Directors, Executive Officers and Corporate
Governance
67
Table of Contents
ITEM 15 – Exhibits and Financial Statement Schedules
A. The following documents are filed as a part of this report:
1.
Financial Statements
PART IV
Consolidated Financial Statements filed as part of this report are contained in Item 8 of this annual report on Form 10-K.
2.
Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts
(In thousands)
Allowance for Doubtful Accounts:
Balance at beginning of year
Charged to costs and expenses
Reclassification(1)
Charged to other accounts(2)
Deductions(3)
Balance at end of year
Sales Returns Reserve:
Balance at beginning of year
Charged to costs and expenses
Charged to other accounts(2)
Deductions(3)
Balance at end of year
Inventory Reserves:
Balance at beginning of year
Charged to costs and expenses
Charged to other accounts(2)
Deductions(4)
Balance at end of year
Valuation Allowance for Deferred Tax Assets:
Balance at beginning of year
Charged to costs and expenses
Charged to other accounts(2)
Balance at end of year
2018
2017
2016
$
2,428
$
375
772
(222)
(837)
2,516
813
688
10
(198)
1,313
4,107
1,916
(139)
(246)
5,638
9,691
2,373
(545)
$
$
$
$
$
$
11,519
$
$
$
$
$
$
$
$
2,570
1,183
(526)
80
(879)
2,428
$
$
538 (5) $
419 (5)
31 (5)
(175) (5)
813 (5) $
3,644
1,698
183
(1,418)
4,107
6,865
1,634
1,192
9,691
$
$
$
$
2,929
649
—
(4)
(1,004)
2,570
686 (5)
(88) (5)
(15) (5)
(45) (5)
538 (5)
3,540
1,455
(50)
(1,301)
3,644
5,884
1,295
(314)
6,865
(1)
(2)
(3)
(4)
(5)
Includes amount reclassified between Allowance for Doubtful Accounts and Other Receivables related to a customer's open receivables balance
which was resolved in 2018, as well as acquisition-related adjustments.
Primarily includes impact from foreign currency fluctuations.
Includes accounts determined to be uncollectible and charged against reserves, net of collections on accounts previously charged against reserves.
Includes inventory identified as excess, slow moving or obsolete and charged against reserves.
These balances were included in the Allowance for Doubtful Accounts in 2017 and 2016. Due to the adoption of ASC 606, the Sales Returns Reserve
is now included in Other Current Liabilities. Please see Note 2 for further discussion.
All other schedules are omitted because they are not applicable or the required information is shown in the Consolidated Financial Statements or notes
thereto.
68
Table of Contents
3. Exhibits
Item #
2.1
3.1
3.2
3.3
4.1
4.2
4.3
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
Description
Method of Filing
Share Purchase Agreement dated as of February 22, 2017,
among Tennant Company, Ambienta SGR S.p.A., Federico De
Angelis, Pietro Corsano Annibaldi, Antonio Perosa and Giulio
Vernazza
Restated Articles of Incorporation
Amended and Restated By-Laws
Incorporated by reference to Exhibit 2.1 to the Company's Current
Report on Form 8-K filed February 28, 2017.
Incorporated by reference to Exhibit 3i to the Company’s Form
10-Q for the quarter ended June 30, 2006.
Incorporated by reference to Exhibit 3iii to the Company’s Current
Report on Form 8-K dated December 14, 2010.
Articles of Amendment of Restated Articles of Incorporation of
Tennant Company
Incorporated by reference to Exhibit 3iii to the Company's Form
10-Q for the quarter ended March 31, 2018.
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.
Form 5.625% Senior Note due 2025
Incorporated by reference to Exhibit 4(b)(1) to the Company's
Registration Statement on Form S-4 filed January 8, 2018.
Tennant Company Executive Nonqualified Deferred
Compensation Plan, as restated effective January 1, 2009, as
amended*
Incorporated by reference to Exhibit 10.1 to the Company’s Form
10-Q for the quarter ended September 30, 2012.
Form of Amended and Restated Management Agreement and
Executive Employment Agreement*
Incorporated by reference to Exhibit 10.3 to the Company's Form
10-K for the year ended December 31, 2011.
Schedule of parties to Management and Executive Employment
Agreement
Filed herewith electronically.
Tennant Company Non-Employee Director Stock Option Plan (as
amended and restated effective May 6, 2004)*
Incorporated by reference to Exhibit 10.6 to the Company’s Form
10-Q for the quarter ended June 30, 2004.
Tennant Company Amended and Restated 1999 Stock Incentive
Plan*
Tennant Company 2007 Stock Incentive Plan*
Deferred Stock Unit Agreement (awards in and after 2008)*
Tennant Company 2014 Short-Term Incentive Plan*
Amended and Restated 2010 Stock Incentive Plan, as Amended*
Credit Agreement dated as of April 4, 2017
2017 Stock Incentive Plan
Incorporated by reference to Appendix A to the Company’s Proxy
Statement for the 2006 Annual Meeting of Shareholders filed on
March 15, 2006.
Incorporated by reference to Appendix A to the Company’s Proxy
Statement for the 2007 Annual Meeting of Shareholders filed on
March 15, 2007.
Incorporated by reference to Exhibit 10.17 to the Company's Form
10-K for the year ended December 31, 2007.
Incorporated by reference to Appendix B to the Company's Proxy
Statement for the 2013 Annual Meeting of Shareholders filed on
March 11, 2013.
Incorporated by reference to Appendix A to the Company's Proxy
Statement for the 2013 Annual Meeting of Shareholders filed on
March 11, 2013.
Incorporated by reference to Exhibit 10.1 to the Company's
Current Report on Form 8-K filed April 5, 2017.
Incorporated by reference to Appendix A on the Company's Proxy
Statement for the 2017 Annual Meeting of Shareholders filed
March 15, 2017.
Form of Tennant Company 2017 Stock Incentive Plan Non-
Statutory Stock Option Agreement
Incorporated by reference to Exhibit 10.3 to the Company's Form
10-Q for the quarter ended June 30, 2017.
Form of Tennant Company 2017 Stock Incentive Plan Restricted
Stock Agreement
Incorporated by reference to Exhibit 10.4 to the Company's Form
10-Q for the quarter ended June 30, 2017.
Form of Tennant Company 2017 Stock Incentive Plan Non-
Employee Director Restricted Stock Agreement
Incorporated by reference to Exhibit 10.5 to the Company's Form
10-Q for the quarter ended June 30, 2017.
Form of Tennant Company 2017 Stock Incentive Plan Restricted
Stock Unit Agreement
Incorporated by reference to Exhibit 10.6 to the Company's Form
10-Q for the quarter ended June 30, 2017.
Form of Tennant Company 2017 Stock Incentive Plan Non-
Employee Director Restricted Stock Unit Agreement*
Incorporated by reference to Exhibit 10.1 to the Company's Form
10-Q for the quarter ended June 30, 2018.
69
Table of Contents
10.17
10.18
21
23.1
24.1
31.1
31.2
32.1
32.2
101
Tennant Company Executive Officer Cash Incentive Plan*
Incorporated by reference to Exhibit 10.1 to the Company's
Current Report on Form 8-K filed August 20, 2018.
Tennant Company Executive Officer Severance Plan and
Summary Plan Description*
Incorporated by reference to Exhibit 10.1 to the Company's
Current Report on Form 8-K filed October 10, 2018.
Subsidiaries of the Registrant
Consent of KPMG, LLP Independent Registered Public
Accounting Firm
Powers of Attorney
Filed herewith electronically.
Filed herewith electronically.
Included on signature page.
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
Filed herewith electronically.
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
Filed herewith electronically.
Filed herewith electronically.
Filed herewith electronically.
Filed herewith electronically.
Section 1350 Certification of Chief Executive Officer
Section 1350 Certification of Chief Financial Officer
The following financial information from Tennant Company’s
annual report on Form 10-K for the period ended December 31,
2018, filed with the SEC on February 28, 2019, formatted in
Extensible Business Reporting Language (XBRL): (i) the
Consolidated Statements of Operations for the years ended
December 31, 2018, 2017 and 2016, (ii) the Consolidated
Statements of Comprehensive Income for the years ended
December 31, 2018, 2017 and 2016, (iii) the Consolidated
Balance Sheets as of December 31, 2018 and 2017, (iv) the
Consolidated Statements of Cash Flows for the years ended
December 31, 2018, 2017 and 2016, (v) the Consolidated
Statements of Equity for the years ended December 31, 2018,
2017 and 2016, and (vi) Notes to the Consolidated Financial
Statements.
* Management contract or compensatory plan or arrangement required to be filed as an exhibit to this annual report on Form 10-K.
70
Table of Contents
ITEM 16 – Form 10-K Summary
None.
71
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
TENNANT COMPANY
By
Date
/s/ H. Chris Killingstad
H. Chris Killingstad
President, CEO and
Board of Directors
February 28, 2019
Each of the undersigned hereby appoints H. Chris Killingstad and Mary E. Talbott, and each of them (with full power to act alone), as attorneys and agents
for the undersigned, with full power of substitution, for and in the name, place and stead of the undersigned, to sign and file with the Securities and Exchange
Commission under the Securities Exchange Act of 1934, any and all amendments and exhibits to this annual report on Form 10-K and any and all applications,
instruments, and other documents to be filed with the Securities and Exchange Commission pertaining to this annual report on Form 10-K or any amendments
thereto, with full power and authority to do and perform any and all acts and things whatsoever requisite and necessary or desirable.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated.
By
Date
By
Date
By
Date
By
Date
By
Date
/s/ H. Chris Killingstad
H. Chris Killingstad
President, CEO and
Board of Directors
February 28, 2019
/s/ Keith A. Woodward
Keith A. Woodward
Senior Vice President and Chief Financial Officer
February 28, 2019
/s/ Azita Arvani
Azita Arvani
Board of Directors
February 28, 2019
/s/ William F. Austen
William F. Austen
Board of Directors
February 28, 2019
/s/ Carol S. Eicher
Carol S. Eicher
Board of Directors
February 28, 2019
By
Date
By
Date
By
Date
By
Date
/s/ Donal L. Mulligan
Donal L. Mulligan
Board of Directors
February 28, 2019
/s/ Steven A. Sonnenberg
Steven A. Sonnenberg
Board of Directors
February 28, 2019
/s/ David S. Wichmann
David S. Wichmann
Board of Directors
February 28, 2019
/s/ David Windley
David Windley
Board of Directors
February 28, 2019
72