NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In millions, except shares and per share data)
|
1.
|
Summary of Significant Accounting Policies
|
Tennant Company ("the Company, we, us or our") is a world leader in designing, manufacturing and marketing solutions that empower customers to achieve quality cleaning performance, significantly reduce environmental impact and help create a cleaner, safer, healthier world.
Basis of Presentation – The accompanying unaudited Consolidated Financial Statements have been prepared in accordance with the Securities and Exchange Commission (“SEC”) requirements for interim reporting. In our opinion, the Consolidated Financial Statements contain all adjustments (consisting of only normal recurring adjustments) necessary for the fair presentation of our financial position and results of operations.
These statements should be read in conjunction with the Consolidated Financial Statements and Notes included in our annual report on Form 10-K for the year ended December 31, 2020. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year.
Reclassification – We reclassified $1.3 million of costs from Selling and Administrative Expense to Cost of Sales in the Consolidated Statements of Income for the three months ended March 31, 2020 as part of a global alignment of cost across all regions.
We documented the summary of significant accounting policies in the Notes to Consolidated Financial Statements of our annual report on Form 10-K for the fiscal year ended December 31, 2020. Other than the accounting policies noted above, there have been no material changes to our accounting policies since the filing of that report.
|
2.
|
Newly Adopted Accounting Pronouncements
|
Income Taxes
On January 1, 2021, we adopted ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The impact of this amended guidance on our consolidated financial statements and related disclosures was immaterial.
Disaggregation of Revenue
The following tables illustrate the disaggregation of revenue by geographic area, groups of similar products and services and sales channels:
Net Sales by geographic area
|
|
|
Three Months Ended
|
|
|
|
|
March 31
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Americas
|
|
$
|
157.8
|
|
|
$
|
162.6
|
|
|
Europe, Middle East and Africa
|
|
|
80.9
|
|
|
|
72.0
|
|
|
Asia Pacific
|
|
|
24.6
|
|
|
|
17.5
|
|
|
Total
|
|
$
|
263.3
|
|
|
$
|
252.1
|
|
Net Sales are attributed to each geographic area based on the end user country and are net of intercompany sales.
Net Sales by groups of similar products and services
|
|
|
Three Months Ended
|
|
|
|
|
March 31
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Equipment
|
|
$
|
160.9
|
|
|
$
|
154.2
|
|
|
Parts and consumables
|
|
|
62.3
|
|
|
|
54.2
|
|
|
Specialty surface coatings(a)
|
|
|
1.5
|
|
|
|
6.1
|
|
|
Service and other
|
|
|
38.6
|
|
|
|
37.6
|
|
|
Total
|
|
$
|
263.3
|
|
|
$
|
252.1
|
|
(a) On February 1, 2021, we sold our coatings business. Further details regarding the sale are discussed in Note 5.
Net Sales by sales channel
|
|
|
Three Months Ended
|
|
|
|
|
March 31
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Sales direct to consumer
|
|
$
|
169.0
|
|
|
$
|
167.6
|
|
|
Sales to distributors
|
|
|
94.3
|
|
|
|
84.5
|
|
|
Total
|
|
$
|
263.3
|
|
|
$
|
252.1
|
|
Contract Liabilities
Sales Returns
The right of return may exist explicitly or implicitly with our customers. When the right of return exists, we adjust the transaction price for the estimated effect of returns. We estimate the expected returns using the expected value method by assessing historical sales levels and the timing and magnitude of historical sales return levels as a percent of sales and projecting this experience into the future.
Sales Incentives
Our sales contracts may contain various customer incentives, such as volume-based rebates or other promotions. We reduce the transaction price for certain customer programs and incentive offerings that represent variable consideration. Sales incentives given to our customers are recorded using the most likely amount approach for estimating the amount of consideration to which the Company will be entitled. We forecast the most likely amount of the incentive to be paid at the time of sale, update this forecast quarterly, and adjust the transaction price accordingly to reflect the new amount of incentives expected to be earned by the customer. A majority of our customer incentives are settled within one year. We record our accruals for volume-based rebates and other promotions in Other Current Liabilities on our Consolidated Balance Sheets.
The change in our sales incentive accrual balance was as follows:
|
|
|
Three Months Ended
|
|
|
|
|
March 31
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Beginning balance
|
|
$
|
12.1
|
|
|
$
|
13.7
|
|
|
Additions to sales incentive accrual
|
|
|
5.2
|
|
|
|
5.4
|
|
|
Contract payments
|
|
|
(5.7
|
)
|
|
|
(8.2
|
)
|
|
Foreign currency fluctuations
|
|
|
(0.2
|
)
|
|
|
(0.2
|
)
|
|
Divestiture of business
|
|
|
(0.1
|
)
|
|
|
—
|
|
|
Ending balance
|
|
$
|
11.3
|
|
|
$
|
10.7
|
|
Deferred Revenue
We sell separately priced prepaid contracts to our customers where we receive payment at the inception of the contract and defer recognition of the consideration received because we have to satisfy future performance obligations. Our deferred revenue balance is primarily attributed to prepaid maintenance contracts on our machines ranging from 12 months to 60 months. In circumstances where prepaid contracts are bundled with machines, we use an observable price to determine stand-alone selling price for separate performance obligations.
The change in the deferred revenue balance was as follows:
|
|
|
Three Months Ended
|
|
|
|
|
March 31
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Beginning balance
|
|
$
|
9.3
|
|
|
$
|
10.7
|
|
|
Increase in deferred revenue representing our obligation to satisfy future performance obligations
|
|
|
4.1
|
|
|
|
2.7
|
|
|
Decrease in deferred revenue for amounts recognized in Net Sales for satisfied performance obligations
|
|
|
(3.4
|
)
|
|
|
(2.5
|
)
|
|
Foreign currency fluctuations
|
|
|
—
|
|
|
|
(0.1
|
)
|
|
Ending balance
|
|
$
|
10.0
|
|
|
$
|
10.8
|
|
At March 31, 2021, $6.5 million and $3.5 million of deferred revenue was reported in Other Current Liabilities and Other Liabilities, respectively, on our Consolidated Balance Sheets. Of this, we expect to recognize the following approximate amounts in Net Sales in the following periods:
|
Remaining 2021
|
|
$
|
5.7
|
|
|
2022
|
|
|
2.3
|
|
|
2023
|
|
|
1.2
|
|
|
2024
|
|
|
0.6
|
|
|
2025
|
|
|
0.2
|
|
|
Thereafter
|
|
|
—
|
|
|
Total
|
|
$
|
10.0
|
|
At December 31, 2020, $5.9 million and $3.4 million of deferred revenue was reported in Other Current Liabilities and Other Liabilities, respectively, on our Consolidated Balance Sheets.
Restructuring Actions
In the fourth quarter of 2020, we implemented a restructuring action as part of our global reorganization efforts. The pre-tax charge of $3.5 million consisted of severance-related costs included in Selling and Administrative Expense in the Consolidated Statements of Income in 2020. The charge primarily impacted our Europe, Middle East and Africa ("EMEA") operating segment but also impacted the Americas and Asia Pacific ("APAC") operating segments. We expect no further charges related to this restructuring action. We estimate the savings will offset the pre-tax charge approximately one year from the date of the action.
In the third quarter of 2020, we implemented a restructuring action to consolidate our Gaomei business and our existing China business in order to deliver cost synergies and improve profitability. The pre-tax charge of $3.1 million consisted of $1.4 million of severance-related costs and $1.7 million of other costs in 2020. Of the restructuring costs, $1.2 million were included in Cost of Sales and $1.9 million in Selling and Administrative Expense in the Consolidated Statements of Income. The charge impacted our APAC operating segment. We expect no further charges related to this restructuring action. We estimate the savings will offset the pre-tax charge approximately one year from the date of the action.
In the first quarter of 2020, we implemented a restructuring action in an effort to streamline our operating model in Japan. The pre-tax charge of $2.0 million consisted of $1.3 million of severance-related costs and $0.7 million of other costs in 2020. Of the restructuring costs, $0.3 million were included in Cost of Sales and $1.7 million in Selling and Administrative Expense in the Consolidated Statements of Income. The charge impacted our APAC operating segment. We expect no further charges related to this restructuring action. We estimate the savings will offset the pre-tax charge approximately one year from the date of the action.
A reconciliation of the beginning and ending liability balances is as follows:
|
|
|
Severance-related Costs
|
|
|
December 31, 2019 balance
|
|
$
|
4.5
|
|
|
2020 activity:
|
|
|
|
|
|
New charges
|
|
|
6.2
|
|
|
Cash payments
|
|
|
(5.4
|
)
|
|
Foreign currency adjustments
|
|
|
0.2
|
|
|
Adjustments to accrual
|
|
|
(1.0
|
)
|
|
December 31, 2020 balance
|
|
$
|
4.5
|
|
|
2021 activity:
|
|
|
|
|
|
Cash payments
|
|
|
(0.9
|
)
|
|
Foreign currency fluctuations
|
|
|
(0.1
|
)
|
|
March 31, 2021 balance
|
|
$
|
3.5
|
|
Other Actions
In 2019, we made the decision to discontinue certain product lines. In the first quarter of 2020, we recorded an additional $1.7 million in Cost of Sales in the Consolidated Statements of Income to reflect our estimate of inventory that will not be sold.
|
5.
|
Acquisition and Divestiture
|
Coatings
During the first quarter of 2021, we sold the Coatings business. The resulting pre-tax gain was $9.8 million and is reflected within Selling and Administrative Expense in our Consolidated Statements of Income.
Gaomei
On January 4, 2019, we completed the acquisition of Hefei Gaomei Cleaning Machines Co., Ltd. and Anhui Rongen Environmental Protection Technology Co., Ltd. (collectively "Gaomei"), privately held designers and manufacturers of commercial cleaning solutions based in China. The financial results for Gaomei have been included in the consolidated financial results since the date of closing. The purchase price included contingent consideration. A payment of $0.5 million was paid in the first quarter of 2021. The final payment of $1.3 million is expected to be paid in the second quarter of 2021.
Inventories are valued at the lower of cost or net realizable value, and consisted of the following:
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Inventories carried at LIFO:
|
|
|
|
|
|
|
|
|
|
Finished goods
|
|
$
|
42.4
|
|
|
$
|
42.4
|
|
|
Raw materials, production parts and work-in-process
|
|
|
26.2
|
|
|
|
21.6
|
|
|
Excess of FIFO over LIFO cost(a)
|
|
|
(32.2
|
)
|
|
|
(31.4
|
)
|
|
Total LIFO inventories
|
|
$
|
36.4
|
|
|
$
|
32.6
|
|
|
Inventories carried at FIFO:
|
|
|
|
|
|
|
|
|
|
Finished goods
|
|
$
|
56.2
|
|
|
$
|
55.0
|
|
|
Raw materials, production parts and work-in-process
|
|
|
44.9
|
|
|
|
40.1
|
|
|
Total FIFO inventories
|
|
$
|
101.1
|
|
|
$
|
95.1
|
|
|
Total inventories
|
|
$
|
137.5
|
|
|
$
|
127.7
|
|
(a) Inventories of $36.4 million as of March 31, 2021, and $32.6 million as of December 31, 2020, 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.
|
7.
|
Goodwill and Intangible Assets
|
The changes in the carrying value of Goodwill for the three months ended March 31, 2021 were as follows:
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
Losses
|
|
|
Total
|
|
|
Balance as of December 31, 2020
|
|
$
|
249.5
|
|
|
$
|
(41.7
|
)
|
|
$
|
207.8
|
|
|
Divestitures
|
|
|
(1.7
|
)
|
|
|
—
|
|
|
|
(1.7
|
)
|
|
Foreign currency fluctuations
|
|
|
(6.9
|
)
|
|
|
—
|
|
|
|
(6.9
|
)
|
|
Balance as of March 31, 2021
|
|
$
|
240.9
|
|
|
$
|
(41.7
|
)
|
|
$
|
199.2
|
|
The balances of acquired Intangible Assets, excluding Goodwill, were as follows:
|
|
|
Customer Lists
|
|
|
Trade Names
|
|
|
Technology
|
|
|
Total
|
|
|
Balance as of March 31, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Original cost
|
|
$
|
159.1
|
|
|
$
|
31.2
|
|
|
$
|
17.5
|
|
|
$
|
207.8
|
|
|
Accumulated amortization
|
|
|
(71.3
|
)
|
|
|
(12.0
|
)
|
|
|
(9.9
|
)
|
|
|
(93.2
|
)
|
|
Carrying value
|
|
$
|
87.8
|
|
|
$
|
19.2
|
|
|
$
|
7.6
|
|
|
$
|
114.6
|
|
|
Weighted average original life (in years)
|
|
|
15
|
|
|
|
11
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Original cost
|
|
$
|
166.2
|
|
|
$
|
34.4
|
|
|
$
|
17.9
|
|
|
$
|
218.5
|
|
|
Accumulated amortization
|
|
|
(70.3
|
)
|
|
|
(12.3
|
)
|
|
|
(9.7
|
)
|
|
|
(92.3
|
)
|
|
Carrying value
|
|
$
|
95.9
|
|
|
$
|
22.1
|
|
|
$
|
8.2
|
|
|
$
|
126.2
|
|
|
Weighted average original life (in years)
|
|
|
15
|
|
|
|
11
|
|
|
|
11
|
|
|
|
|
|
The divestiture of Goodwill during the first quarter of 2021 was the result of the sale of the coatings business disclosed in Note 5.
During the first quarter of 2021, we divested Identified Intangible Assets, excluding Goodwill, with a carrying value of $0.9 million and $1.4 million in the categories of Customer Lists and Trade Names, respectively, as a result of the sale of the coatings business disclosed in Note 5.
Amortization expense on Intangible Assets for the three months ended March 31, 2021 and March 31, 2020 was $5.3 million and $5.0 million, respectively.
Estimated aggregate amortization expense based on the current carrying value of amortizable Intangible Assets for each of the five succeeding years and thereafter is as follows:
|
Remaining 2021
|
|
$
|
14.4
|
|
|
2022
|
|
17.4
|
|
|
2023
|
|
|
15.8
|
|
|
2024
|
|
|
14.2
|
|
|
2025
|
|
|
12.8
|
|
|
Thereafter
|
|
|
40.0
|
|
|
Total
|
|
$
|
114.6
|
|
Financial Covenants
In 2017, the Company and certain of our foreign subsidiaries entered into a secured 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, and expires in April 2022. The 2017 Credit Agreement also contains financial covenants requiring us to maintain a net leverage ratio of consolidated net 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 an interest coverage ratio of consolidated Adjusted EBITDA to consolidated interest expense of no less than 3.50 to 1 for the quarter ended March 31, 2021. The 2017 Credit Agreement also contains a financial covenant requiring us to maintain a senior secured net leverage ratio of consolidated senior secured net indebtedness to consolidated 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 March 31, 2021.
Senior Notes Guarantees
Our Senior Notes (the "Notes") are unconditionally and jointly and severally guaranteed by Tennant Sales and Service Company (the "Guarantor" or "Guarantor Subsidiary"), which is a 100% owned subsidiary of the Company.
The Notes and the guarantees constitute senior unsecured obligations of the Company and the Guarantor, respectively. The Notes and the guarantees, respectively, are: (a) equal in right of payment with all of the Company's and the Guarantor senior debt, without giving effect to collateral arrangements; (b) senior in right of payment to all of the Company's and the Guarantor future subordinated debt, if any; (c) effectively subordinated in right of payment to all of the Company's and the Guarantor 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 Guarantor subsidiary that do not guarantee the Notes.
In the second quarter of 2020, the Company early adopted the SEC's rule titled "Financial Disclosures about Guarantors and Issuers of Guaranteed Securities and Affiliates Whose Securities Collateralize a Registrant's Securities," which simplifies the disclosure requirements related to the Notes under Rule 3-10 of Regulation S-X. Under this amended rule, the Company is not required to disclose separate financial statements for the guarantee as it no longer has a reporting requirement. The Company has filed a Form 15 for the Guarantor to suspend the Company's duty to file reports on the guarantor financial statements.
Debt Outstanding
Debt outstanding consisted of the following:
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Senior unsecured notes
|
|
$
|
300.0
|
|
|
$
|
300.0
|
|
|
Credit facility borrowings
|
|
|
10.0
|
|
|
|
10.0
|
|
|
Secured borrowings
|
|
|
1.2
|
|
|
|
1.5
|
|
|
Finance lease liabilities
|
|
|
0.1
|
|
|
|
0.1
|
|
|
Unamortized debt issuance costs
|
|
|
(3.0
|
)
|
|
|
(3.1
|
)
|
|
Total debt
|
|
|
308.3
|
|
|
|
308.5
|
|
|
Less: current portion of long-term debt(a)
|
|
|
(36.4
|
)
|
|
|
(10.9
|
)
|
|
Long-term debt
|
|
$
|
271.9
|
|
|
$
|
297.6
|
|
|
|
(a)
|
The Company has the ability and intent to repay $35.6 million in outstanding credit facility borrowings, $0.7 million of current maturities of secured borrowings and $0.1 million of current maturities of finance lease liabilities over the next 12 months. Therefore, $36.4 million of debt has been classified as a current liability on the Consolidated Balance Sheet at March 31, 2021.
|
As of March 31, 2021, we had outstanding borrowings under our Senior Unsecured Notes of $300.0 million. In addition, we had outstanding borrowings of $10.0 million under our revolving facility and had letters of credit and bank guarantees outstanding in the amount of $3.2 million, leaving approximately $186.8 million of unused borrowing capacity on our revolving facility. Commitment fees on unused lines of credit for the three months ended March 31, 2021 were $0.2 million. The overall weighted average cost of debt is approximately 5.5% and net of a related cross-currency swap instrument is approximately 4.4%. Further details regarding the cross-currency swap instrument are discussed in Note 10.
In April 2021, we signed an agreement that restructured our existing credit agreement. In May 2021, we plan to use the proceeds from the amended agreement to retire our Senior Notes. See Note 17 to the Consolidated Financial Statements for more detail on the amended credit agreement.
We record a liability for warranty claims at the time of sale. The amount of the liability is based on the trend in the historical ratio of claims to sales, the historical length of time between the sale and resulting warranty claim, new product introductions and other factors. Warranty terms on machines generally range from one to four years. However, the majority of our claims are paid out within the first six to nine months following a sale. The majority of the liability for estimated warranty claims represents amounts to be paid out in the near term for qualified warranty issues, with immaterial amounts reserved to be paid for older equipment warranty issues.
The changes in warranty reserves were as follows:
|
|
|
Three Months Ended
|
|
|
|
|
March 31
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Beginning balance
|
|
$
|
11.1
|
|
|
$
|
12.7
|
|
|
Additions charged to expense
|
|
|
2.6
|
|
|
|
2.4
|
|
|
Foreign currency fluctuations
|
|
|
(0.1
|
)
|
|
|
(0.2
|
)
|
|
Claims paid
|
|
|
(2.9
|
)
|
|
|
(3.1
|
)
|
|
Ending balance
|
|
$
|
10.7
|
|
|
$
|
11.8
|
|
Hedge Accounting and Hedging Programs
We recognize all derivative instruments as either assets or liabilities in our Consolidated Balance Sheets and measure them at fair value. Gains and losses resulting from changes in fair value are accounted for depending on the use of the derivative and whether it is designated and qualifies for hedge accounting.
We evaluate hedge effectiveness on our hedges that are designated and qualify for hedge accounting at the inception of the hedge prospectively, as well as retrospectively, and record any ineffective portion of the hedging instruments along with the time value of purchased contracts in the same line item of the income statement as the item being hedged on our Consolidated Statements of Income.
Our hedging policy establishes maximum limits for each counterparty to mitigate any concentration of risk.
Balance Sheet Hedging
Hedges of Foreign Currency Assets and Liabilities
We hedge our net recognized foreign currency denominated assets and liabilities with foreign exchange forward contracts to reduce the risk that the value of these assets and liabilities will be adversely affected by changes in exchange rates. These contracts hedge assets and liabilities that are denominated in foreign currencies and are carried at fair value as either assets or liabilities on the Consolidated Balance Sheets with changes in the fair value recorded to Net Foreign Currency Transaction Gain (Loss) in our Consolidated Statements of Income. These contracts do not subject us to material balance sheet risk due to exchange rate movements because gains and losses on these derivatives are intended to offset gains and losses on the assets and liabilities being hedged. At March 31, 2021 and December 31, 2020, the notional amounts of foreign currency forward exchange contracts outstanding not designated as hedging instruments were $50.7 million and $57.3 million, respectively.
Cash Flow Hedging
Hedges of Forecasted Foreign Currency Transactions
In countries outside the U.S., we transact business in U.S. dollars and in various other currencies. We may use foreign exchange option contracts or forward contracts to hedge certain cash flow exposures resulting from changes in these foreign currency exchange rates. These foreign exchange contracts, carried at fair value, have maturities of up to one year. We enter into these foreign exchange contracts to hedge a portion of our forecasted foreign currency denominated revenue in the normal course of business, and accordingly, they are not speculative in nature. The notional amounts of outstanding foreign currency forward contracts designated as cash flow hedges were $2.8 million as of March 31, 2021 and $2.7 million as of December 31, 2020. The notional amounts of outstanding foreign currency option contracts designated as cash flow hedges were $7.6 million and $8.2 million as of March 31, 2021 and December 31, 2020, respectively.
Foreign Currency Derivatives
We use foreign currency exchange rate derivatives to hedge our exposure to fluctuations in exchange rates for anticipated intercompany cash transactions between Tennant Company and its subsidiaries. We entered into Euro to U.S. dollar foreign exchange cross-currency swaps for all of the anticipated cash flows associated with an intercompany loan from a wholly-owned European subsidiary. We enter into these foreign exchange cross-currency swaps to hedge the foreign currency denominated cash flows associated with this intercompany loan, and accordingly, they are not speculative in nature. These cross-currency swaps are designated as cash flow hedges. The hedged cash flows as of March 31, 2021 and December 31, 2020 included €157.8 million and €159.6 million of total notional values, respectively. As of March 31, 2021, the aggregate scheduled interest payments over the course of the loan and related swaps amounted to €7.8 million. The scheduled maturity and principal payment of the loan and related swaps of €150.0 million are due in April 2022. There were no new cross-currency swaps designated as cash flow hedges as of March 31, 2021.
The fair value of derivative instruments on our Consolidated Balance Sheets was as follows:
|
|
Derivative Assets
|
|
Derivative Liabilities
|
|
|
|
Balance Sheet Location
|
|
March 31, 2021
|
|
|
December 31, 2020
|
|
Balance Sheet Location
|
|
March 31, 2021
|
|
|
December 31, 2020
|
|
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
Other Current Assets
|
|
$
|
2.2
|
|
|
$
|
1.9
|
|
Other Current Liabilities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Foreign currency forward contracts
|
Other Assets
|
|
|
—
|
|
|
|
—
|
|
Other Liabilities
|
|
|
17.2
|
|
|
|
24.1
|
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
Other Current Assets
|
|
|
1.0
|
|
|
|
0.4
|
|
Other Current Liabilities
|
|
|
0.1
|
|
|
|
0.7
|
|
As of March 31, 2021, we anticipate reclassifying approximately $2.1 million of gains from Accumulated Other Comprehensive Loss to net income during the next 12 months.
The following tables include the amounts in the Consolidated Statements of Income in which the effects of cash flow hedges are recorded and the effects of cash flow hedge activity on these line items:
|
|
|
Three Months Ended
|
|
|
|
|
March 31
|
|
|
|
|
2021
|
|
|
2020
|
|
|
|
|
Total
|
|
|
Amount of Gain (Loss) on Cash Flow Hedge Activity
|
|
|
Total
|
|
|
Amount of Gain (Loss) on Cash Flow Hedge Activity
|
|
|
Net Sales
|
|
$
|
263.3
|
|
|
$
|
(0.1
|
)
|
|
$
|
252.1
|
|
|
$
|
—
|
|
|
Interest Income
|
|
|
0.7
|
|
|
|
0.6
|
|
|
|
0.9
|
|
|
|
0.7
|
|
|
Net Foreign Currency Transaction (Loss) Gain
|
|
|
0.5
|
|
|
|
7.3
|
|
|
|
(4.1
|
)
|
|
|
2.7
|
|
The effect of foreign currency derivative instruments designated as hedges and of foreign currency derivative instruments not designated as hedges in our Consolidated Statements of Income was as follows:
|
|
|
Three Months Ended
|
|
|
|
|
March 31, 2021
|
|
|
|
|
Foreign Currency Forward Contracts
|
|
|
Derivatives in cash flow hedging relationships:
|
|
|
|
|
|
Net gain recognized in Other Comprehensive Loss, net of tax(a)
|
|
$
|
6.0
|
|
|
Net gain reclassified from Accumulated Other Comprehensive Loss into income, net of tax, effective portion to Interest Income
|
|
|
0.4
|
|
|
Net gain reclassified from Accumulated Other Comprehensive Loss into income, net of tax, effective portion to Net Foreign Currency Transaction Gain
|
|
|
5.6
|
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
Net gain recognized in income(b)
|
|
|
2.1
|
|
|
|
|
Three Months Ended
|
|
|
|
|
March 31, 2020
|
|
|
|
|
Foreign Currency Option Contracts
|
|
|
Foreign Currency Forward Contracts
|
|
|
Derivatives in cash flow hedging relationships:
|
|
|
|
|
|
|
|
|
|
Net gain recognized in Other Comprehensive Income (Loss), net of tax(a)
|
|
$
|
0.3
|
|
|
$
|
6.0
|
|
|
Net gain reclassified from Accumulated Other Comprehensive Loss into income, net of tax, effective portion to Interest Income
|
|
|
—
|
|
|
|
0.5
|
|
|
Net gain reclassified from Accumulated Other Comprehensive Loss into income, net of tax, effective portion to Net Foreign Currency Transaction Loss
|
|
|
—
|
|
|
|
2.1
|
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
Net gain recognized in income(b)
|
|
|
—
|
|
|
|
2.2
|
|
|
|
(a)
|
Net change in the fair value of the effective portion classified in Other Comprehensive Loss.
|
|
|
(b)
|
Classified in Net Foreign Currency Transaction Gain (Loss).
|
|
11.
|
Fair Value Measurements
|
Estimates of fair value for financial assets and financial liabilities are based on the framework established in the accounting guidance for fair value measurements. The framework defines fair value, provides guidance for measuring fair value and requires certain disclosures. The framework discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow) and the cost approach (cost to replace the service capacity of an asset or replacement cost). The framework utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:
|
|
•
|
Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
|
|
|
•
|
Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
|
|
|
•
|
Level 3: Unobservable inputs that reflect the reporting entity’s own assumptions.
|
Our population of assets and liabilities subject to fair value measurements at March 31, 2021 is as follows:
|
|
|
Fair
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward exchange contracts
|
|
$
|
3.4
|
|
|
$
|
—
|
|
|
$
|
3.4
|
|
|
$
|
—
|
|
|
Total Assets
|
|
$
|
3.4
|
|
|
$
|
—
|
|
|
$
|
3.4
|
|
|
$
|
—
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward exchange contracts
|
|
$
|
17.5
|
|
|
$
|
—
|
|
|
$
|
17.5
|
|
|
$
|
—
|
|
|
Total Liabilities
|
|
$
|
17.5
|
|
|
$
|
—
|
|
|
$
|
17.5
|
|
|
$
|
—
|
|
Our population of assets and liabilities subject to fair value measurements at December 31, 2020 is as follows:
|
|
|
Fair
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward exchange contracts
|
|
$
|
3.0
|
|
|
$
|
—
|
|
|
$
|
3.0
|
|
|
$
|
—
|
|
|
Total Assets
|
|
$
|
3.0
|
|
|
$
|
—
|
|
|
$
|
3.0
|
|
|
$
|
—
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward exchange contracts
|
|
$
|
25.5
|
|
|
$
|
—
|
|
|
$
|
25.5
|
|
|
$
|
—
|
|
|
Contingent consideration
|
|
|
1.8
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1.8
|
|
|
Total Liabilities
|
|
$
|
27.3
|
|
|
$
|
—
|
|
|
$
|
25.5
|
|
|
$
|
1.8
|
|
Our foreign currency forward exchange contracts are valued using observable Level 2 market expectations at the measurement date and standard valuation techniques to convert future amounts to a single present value amount. Further details regarding our foreign currency forward exchange and option contracts are discussed in Note 10.
Contingent consideration is valued using a probability-weighted analysis of projected gross profit and integration milestones. Actual results may differ significantly from those used in the estimate above, which may affect future payments. Changes in future payments will be reflected in future operating results as they occur.
The carrying amounts reported in the Consolidated Balance Sheets for Cash and Cash Equivalents, Restricted Cash, Accounts Receivable, Other Current Assets, Accounts Payable and Other Current Liabilities approximate fair value due to their short-term nature.
The fair value and carrying value of total debt, including current portion, were $320.3 million and $308.3 million, respectively, as of March 31, 2021. The fair value and carrying value of total debt, including current portion, were $323.4 million and $308.5 million, respectively, as of December 31, 2020. The fair value was calculated based on the borrowing rates currently available to us for bank loans with similar terms and remaining maturities, which is a Level 2 in the fair value hierarchy.
|
12.
|
Commitments and Contingencies
|
In the ordinary course of business, we may become liable with respect to pending and threatened litigation, tax, environmental and other matters. While the ultimate results of current claims, investigations and lawsuits involving us are unknown at this time, we do not expect that these matters will have a material adverse effect on our consolidated financial position or results of operations. Legal costs associated with such matters are expensed as incurred.
|
13.
|
Accumulated Other Comprehensive Loss
|
Components of Accumulated Other Comprehensive Loss, net of tax, within the Consolidated Balance Sheets, are as follows:
|
|
|
March 31, 2021
|
|
|
December 31, 2020
|
|
|
Foreign currency translation adjustments
|
|
$
|
(29.8
|
)
|
|
$
|
(19.1
|
)
|
|
Pension and postretirement medical benefits
|
|
|
(1.7
|
)
|
|
|
(1.7
|
)
|
|
Cash flow hedge
|
|
|
0.7
|
|
|
|
0.7
|
|
|
Total Accumulated Other Comprehensive Loss
|
|
$
|
(30.8
|
)
|
|
$
|
(20.1
|
)
|
The changes in components of Accumulated Other Comprehensive Loss, net of tax, are as follows:
|
|
|
Foreign Currency Translation Adjustments
|
|
|
Pension and Post-Retirement Medical Benefits
|
|
|
Cash Flow Hedge
|
|
|
Total
|
|
|
December 31, 2020
|
|
$
|
(19.1
|
)
|
|
$
|
(1.7
|
)
|
|
$
|
0.7
|
|
|
$
|
(20.1
|
)
|
|
Other comprehensive (loss) income before reclassifications
|
|
|
(10.7
|
)
|
|
|
—
|
|
|
|
6.0
|
|
|
|
(4.7
|
)
|
|
Amounts reclassified from Accumulated Other Comprehensive Loss
|
|
|
—
|
|
|
|
—
|
|
|
|
(6.0
|
)
|
|
|
(6.0
|
)
|
|
Net current period other comprehensive (loss) income
|
|
|
(10.7
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(10.7
|
)
|
|
March 31, 2021
|
|
$
|
(29.8
|
)
|
|
$
|
(1.7
|
)
|
|
$
|
0.7
|
|
|
$
|
(30.8
|
)
|
We and our subsidiaries are subject to U.S. federal income tax as well as income tax of numerous state and foreign jurisdictions. We are generally no longer subject to U.S. federal tax examinations for taxable years before 2018 and, with limited exceptions, state and foreign income tax examinations for taxable years before 2015. We are currently undergoing income tax examinations in various foreign jurisdictions. Although the final outcome of these examinations cannot be currently determined, we believe that we have adequate reserves with respect to these examinations.
We recognize potential accrued interest and penalties related to unrecognized tax benefits in Income Tax Expense. In addition to the liability of $5.4 million for unrecognized tax benefits as of March 31, 2021, there was approximately $0.7 million for accrued interest and penalties. The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate as of March 31, 2021 was $5.3 million. To the extent interest and penalties are not assessed with respect to uncertain tax positions, amounts accrued will be revised and reflected as an adjustment of the Income Tax Expense.
|
15.
|
Share-Based Compensation
|
Our share-based compensation plans are described in Note 18 of our annual report on Form 10-K for the year ended December 31, 2020. During the three months ended March 31, 2021 and 2020, we recognized total Share-Based Compensation Expense of $3.1 million and $2.8 million, respectively. The total excess tax benefit recognized for share-based compensation arrangements during the three months ended March 31, 2021 and 2020 was $0.2 million and $0.4 million, respectively.
|
16.
|
Earnings Attributable to Tennant Company Per Share
|
The computations of Basic and Diluted Earnings per Share were as follows:
|
|
|
Three Months Ended
|
|
|
|
|
March 31
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
Net Income Attributable to Tennant Company
|
|
$
|
25.7
|
|
|
$
|
5.2
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
Basic - Weighted Average Shares Outstanding
|
|
|
18,456,079
|
|
|
|
18,286,816
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
Share-based compensation plans
|
|
|
375,344
|
|
|
|
379,422
|
|
|
Diluted - Weighted Average Shares Outstanding
|
|
|
18,831,423
|
|
|
|
18,666,238
|
|
|
Basic Earnings per Share
|
|
$
|
1.39
|
|
|
$
|
0.28
|
|
|
Diluted Earnings per Share
|
|
$
|
1.37
|
|
|
$
|
0.28
|
|
Excluded from the dilutive securities shown above were options to purchase and shares to be paid out under share-based compensation plans of 142,027 and 206,680 shares of common stock during the three months ended March 31, 2021 and 2020, respectively. These exclusions were made if the exercise prices of the options are greater than the average market price of our common stock for the period, if the number of shares we can repurchase under the treasury stock method exceeds the weighted average shares outstanding in the options or if we have a net loss, as these effects are anti-dilutive.
Credit Facility
On April 5, 2021, we and certain of our foreign subsidiaries entered into an Amended and Restated Credit Agreement (the “2021 Credit Agreement”) with JPMorgan Chase Bank, N.A. (“JPMorgan”), as administrative agent, U.S. Bank National Association, and HSBC Bank USA, National Association, as co-syndication agents, Bank of the West, BMO Harris Bank, N.A., and Wells Fargo Bank, National Association, as co-documentation agents, and the Lenders (including JPMorgan) as defined in the 2021 Credit Agreement (the “Lenders”). The 2021 Credit Agreement provides us and certain of our foreign subsidiaries access to a senior secured credit facility until April 3, 2026, consisting of a term loan facility in an amount up to $100.0 million and a revolving facility in an amount up to $450.0 million with an option to expand the credit facility by up to $275.0 million, with the consent of the Lenders willing to provide additional borrowings in the form of increases to their revolving facility commitment or funding of incremental term loans. Borrowings may be denominated in U.S. dollars or certain other currencies.
The fee for committed funds under the revolving facility of the 2021 Credit Agreement ranges from an annual rate of 0.15% to 0.30%, depending on our leverage ratio. Borrowings denominated in U.S. dollars under the 2021 Credit Agreement bear interest at a rate per annum equal to (a) the greatest of (i) the prime rate, (ii) the federal funds rate plus 0.50% and (iii) the adjusted LIBO rate for a one month period, but in any case, not less than 1%, plus, in any such case, 1.0%, plus an additional spread of 0.10% to 0.70%, depending on our leverage ratio, or (b) the LIBO Rate, as adjusted for statutory reserve requirements for eurocurrency liabilities, but in any case, not less than 0%, plus an additional spread of 1.10% to 1.70%, depending on our leverage ratio.
In connection with the 2021 Credit Agreement, we reaffirmed our security interest in favor of the lenders in substantially all our personal property, and pledged the stock of our domestic subsidiaries and 65% of the stock of our first tier foreign subsidiaries. The obligations under the 2021 Credit Agreement are also guaranteed by certain of our first tier domestic subsidiaries and those subsidiaries also provided a security interest in their similar personal property.
The 2021 Credit Agreement contains customary representations, warranties and covenants, including but not limited to covenants restricting our ability to incur indebtedness and liens and merge or consolidate with another entity. Further, the 2021 Credit Agreement contains the following covenants:
|
|
•
|
a covenant requiring us to maintain an indebtedness to EBITDA ratio, determined as of the end of each of its fiscal quarters, of no greater than 3.50 to 1.00, with certain alternative requirements for permitted acquisitions greater than $50.0 million;
|
|
|
•
|
a covenant requiring us to maintain an EBITDA to interest expense ratio for a period of four consecutive fiscal quarters as of the end of each quarter of no less than 3.00 to 1; and
|
|
|
•
|
a covenant restricting us from paying dividends or repurchasing stock if, after giving effect to such payments and assuming no default exists or would result from such payment, our leverage ratio is greater than 2.50 to 1, in such case limiting such payments to $60.0 million during any fiscal year.
|
Redemption of Senior Notes
On April 2, 2021, we issued a conditional notice of redemption for $300.0 million principal amount outstanding of our 5.625% Senior Notes due 2025 (CUSIP 880345 AB29) (the "Notes") in May 2021, subject to the satisfaction of the conditions. The redemption of the Notes is subject to and conditioned upon Tennant’s receipt prior to the redemption date of funds from its term and revolving loan facility, that together with cash on hand, are sufficient to pay, in the sole discretion of the Company, the redemption price. We plan to use the proceeds from the borrowings under the amended credit agreement to retire our Senior Notes and pay the $8.4 million call premium due upon redemption. In addition, at the time of redemption of the Senior Notes, we will be writing off $2.8 million of unamortized debt issuance costs.