Company Quick10K Filing
Quick10K
Tennant
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$58.73 18 $1,060
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
8-K 2018-11-27 Officers, Exhibits
8-K 2018-10-24 Earnings, Exhibits
8-K 2018-10-04 Officers, Exhibits
8-K 2018-08-14 Officers, Exhibits
8-K 2018-07-25 Earnings, Exhibits
8-K 2018-07-25 Officers, Exhibits
8-K 2018-05-22 Officers
8-K 2018-04-25 Shareholder Vote
8-K 2018-04-23 Earnings, Exhibits
8-K 2018-02-22 Earnings, Exhibits
8-K 2018-01-08 Other Events, Exhibits
ROP Roper Technologies
OC Owens Corning
CW Curtiss Wright
TPIC TPI Composites
KAI Kadant
TAYD Taylor Devices
LGL LGL Group
CVV CVD Equipment
SVT Servotronics
SMIT Schmitt Industries
TNC 2018-09-30
Part I - Financial Information
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 6. Exhibits
EX-31.1 exhibit_31-1.htm
EX-31.2 exhibit_31-2.htm
EX-32.1 exhibit_32-1.htm
EX-32.2 exhibit_32-2.htm

Tennant Earnings 2018-09-30

TNC 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 form10-q.htm FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2018 Document


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
FORM 10-Q
[ü]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2018
OR
 
[   ]
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 1-16191
____________________________________
image2a03.jpg
TENNANT COMPANY
(Exact name of registrant as specified in its charter)
Minnesota
41-0572550
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)

701 North Lilac Drive
P.O. Box 1452
Minneapolis, Minnesota 55440
(Address of principal executive offices)
(Zip Code) 
(763) 540-1200
(Registrant’s telephone number, including area code)
______________________________________________
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.
Yes
ü
No
 
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
ü
No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the 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
ü
 
Accelerated filer
 
Non-accelerated filer
 
 
Smaller reporting company
 
Emerging growth company
 
 
 
 


1



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 Exchange Act).
Yes
 
No
ü
As of October 19, 2018, there were 18,125,000 shares of Common Stock outstanding.
 


2


TABLE OF CONTENTS
 PART I - FINANCIAL INFORMATION
 
 
Page
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
Item 3.
 
Item 4.
 
 
PART II - OTHER INFORMATION
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
Item 6.
 
 
 
 
 
 
 


3



PART I – FINANCIAL INFORMATION
Item 1.
Financial Statements
TENNANT COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
 
Three Months Ended
 
Nine Months Ended
(In thousands, except shares and per share data)
 
September 30
 
September 30
 
 
2018
 
2017
 
2018
 
2017
Net Sales
 
$
273,255

 
$
261,921

 
$
838,299

 
$
723,771

Cost of Sales
 
165,170

 
157,317

 
500,778

 
434,877

Gross Profit
 
108,085

 
104,604

 
337,521

 
288,894

 
 
 
 
 
 
 
 
 
Operating Expense:
 
 
 
 
 
 
 
 
Research and Development Expense
 
7,506

 
7,907

 
23,408

 
24,239

Selling and Administrative Expense
 
85,140

 
85,711

 
269,273

 
246,993

Total Operating Expense
 
92,646

 
93,618

 
292,681


271,232

Profit from Operations
 
15,439

 
10,986

 
44,840


17,662

 
 
 
 
 
 
 
 
 
Other Income (Expense):
 
 
 
 
 
 
 
 
Interest Income
 
839

 
698

 
2,540

 
1,575

Interest Expense
 
(5,986
)
 
(6,093
)
 
(17,736
)
 
(18,720
)
Net Foreign Currency Transaction Losses
 
(295
)
 
(842
)
 
(1,381
)
 
(2,375
)
Other Expense, Net
 
(130
)
 
(422
)
 
(890
)
 
(774
)
Total Other Expense, Net
 
(5,572
)
 
(6,659
)
 
(17,467
)

(20,294
)
 
 
 
 
 
 
 
 
 
Profit (Loss) Before Income Taxes
 
9,867

 
4,327

 
27,373


(2,632
)
Income Tax Expense
 
158

 
731

 
1,598

 
385

Net Earnings (Loss) Including Noncontrolling Interest
 
9,709

 
3,596

 
25,775


(3,017
)
Net Earnings (Loss) Attributable to Noncontrolling Interest
 
33

 
37

 
81

 
(28
)
Net Earnings (Loss) Attributable to Tennant Company
 
$
9,676

 
$
3,559

 
$
25,694

 
$
(2,989
)
 
 
 
 
 
 
 
 
 
Net Earnings (Loss) Attributable to Tennant Company per Share:
 
 
 
 
 
 
 
 
Basic
 
$
0.54

 
$
0.20

 
$
1.43

 
$
(0.17
)
Diluted
 
$
0.52

 
$
0.20

 
$
1.40

 
$
(0.17
)
 
 
 
 
 
 
 
 
 
Weighted Average Shares Outstanding:
 
 
 
 
 
 
 
 
Basic
 
17,998,917

 
17,729,857

 
17,911,880

 
17,673,656

Diluted
 
18,439,621

 
18,171,444

 
18,344,813

 
17,673,656

 
 
 
 
 
 
 
 
 
Cash Dividend Declared per Common Share
 
$
0.21

 
$
0.21

 
$
0.63

 
$
0.63


See accompanying Notes to the Condensed Consolidated Financial Statements.

4



TENNANT COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
Three Months Ended
 
Nine Months Ended
(In thousands)
September 30
 
September 30
 
2018
 
2017
 
2018
 
2017
Net Earnings (Loss) Including Noncontrolling Interest
$
9,709

 
$
3,596

 
$
25,775

 
$
(3,017
)
Other Comprehensive (Loss) Income:
 

 
 

 
 
 
 
Foreign currency translation adjustments
(3,110
)
 
9,033

 
(14,202
)
 
25,073

Pension and retiree medical benefits
12

 
379

 
105

 
541

Cash flow hedge
(28
)
 
(1,732
)
 
(1,367
)
 
(6,311
)
Income Taxes:
 
 
 
 
 
 
 
Foreign currency translation adjustments
280

 

 
524

 

Pension and retiree medical benefits
(2
)
 
(138
)
 
(156
)
 
(160
)
Cash flow hedge
6

 
646

 
(814
)
 
2,354

Total Other Comprehensive (Loss) Income, net of tax
(2,842
)
 
8,188

 
(15,910
)

21,497

 
 
 
 
 
 
 
 
Total Comprehensive Income Including Noncontrolling Interest
6,867

 
11,784

 
9,865

 
18,480

Comprehensive Income (Loss) Attributable to Noncontrolling Interest
33

 
37

 
81

 
(28
)
Comprehensive Income Attributable to Tennant Company
$
6,834

 
$
11,747

 
$
9,784

 
$
18,508

See accompanying Notes to the Condensed Consolidated Financial Statements.

5



TENNANT COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
September 30,
 
December 31,
(In thousands, except shares and per share data)
2018
 
2017
ASSETS
 
 
 
Current Assets:
 
 
 
Cash and Cash Equivalents
$
53,473

 
$
58,398

Restricted Cash
534

 
653

Accounts Receivable, less Allowances of $2,203 and $3,241, respectively
208,119

 
209,516

Inventories
139,793

 
127,694

Prepaid Expenses
28,356

 
19,351

Other Current Assets
8,865

 
7,503

Total Current Assets
439,140

 
423,115

Property, Plant and Equipment
381,443

 
382,768

Accumulated Depreciation
(217,625
)
 
(202,750
)
Property, Plant and Equipment, Net
163,818

 
180,018

Deferred Income Taxes
15,062

 
11,134

Goodwill
184,619

 
186,044

Intangible Assets, Net
152,974

 
172,347

Other Assets
14,953

 
21,319

Total Assets
$
970,566

 
$
993,977

LIABILITIES AND TOTAL EQUITY
 
 
 
Current Liabilities:
 
 
 
Current Portion of Long-Term Debt
$
30,999

 
$
30,883

Accounts Payable
90,778

 
96,082

Employee Compensation and Benefits
42,157

 
37,257

Income Taxes Payable
2,972

 
2,838

Other Current Liabilities
71,842

 
69,447

Total Current Liabilities
238,748

 
236,507

Long-Term Liabilities:
 
 
 
Long-Term Debt
316,937

 
345,956

Employee-Related Benefits
21,828

 
23,867

Deferred Income Taxes
48,491

 
53,225

Other Liabilities
35,479

 
35,948

Total Long-Term Liabilities
422,735

 
458,996

Total Liabilities
661,483

 
695,503

Commitments and Contingencies (Note 13)


 


Equity:
 
 
 
Common Stock, $0.375 par value; 60,000,000 shares authorized; 18,122,576 and 17,881,177 shares issued and outstanding, respectively
6,796

 
6,705

Additional Paid-In Capital
26,087

 
15,089

Retained Earnings
312,539

 
297,032

Accumulated Other Comprehensive Loss
(38,233
)
 
(22,323
)
Total Tennant Company Shareholders' Equity
307,189

 
296,503

   Noncontrolling Interest
1,894

 
1,971

Total Equity
309,083

 
298,474

Total Liabilities and Total Equity
$
970,566

 
$
993,977

See accompanying Notes to the Condensed Consolidated Financial Statements.

6



TENNANT COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Nine Months Ended
(In thousands)
September 30
 
2018
 
2017
OPERATING ACTIVITIES
 
 
 
Net Earnings (Loss) Including Noncontrolling Interest
$
25,775

 
$
(3,017
)
Adjustments to Reconcile Net Earnings (Loss) to Net Cash Provided by Operating Activities:
 
 
 
Depreciation
24,090

 
18,515

Amortization of Intangible Assets
17,378

 
11,430

Amortization of Debt Issuance Costs
1,883

 
896

Debt Issuance Cost Charges Related to Short-Term Financing

 
6,200

Fair Value Step-Up Adjustment to Acquired Inventory

 
8,445

Deferred Income Taxes
(9,908
)
 
(4,848
)
Share-Based Compensation Expense
6,008

 
4,915

Allowance for Doubtful Accounts and Returns
835

 
983

Other, Net
(459
)
 
175

Changes in Operating Assets and Liabilities, Net of Assets Acquired:
 
 
 
Receivables, Net
(342
)
 
(524
)
Inventories
(19,550
)
 
(9,866
)
Accounts Payable
(1,756
)
 
5,747

Employee Compensation and Benefits
5,186

 
(9,462
)
Other Current Liabilities
(138
)
 
10,019

Income Taxes
(1,105
)
 
4,149

Other Assets and Liabilities
(4,428
)
 
(11,634
)
Net Cash Provided by Operating Activities
43,469

 
32,123

INVESTING ACTIVITIES
 
 
 
Purchases of Property, Plant and Equipment
(12,768
)
 
(16,239
)
Proceeds from Disposals of Property, Plant and Equipment
108

 
2,456

Proceeds from Principal Payments Received on Long-Term Note Receivable
828

 
500

Issuance of Long-Term Note Receivable

 
(1,500
)
Proceeds from Sale of Business
4,000

 

Acquisition of Businesses, Net of Cash, Cash Equivalents and Restricted Cash Acquired

 
(353,535
)
Purchase of Intangible Assets
(2,607
)
 
(2,500
)
Net Cash Used in Investing Activities
(10,439
)
 
(370,818
)
FINANCING ACTIVITIES
 
 
 
Proceeds from Short-Term Debt

 
300,000

Repayments of Short-Term Debt

 
(300,000
)
Proceeds from Issuance of Long-Term Debt

 
440,000

Payments of Long-Term Debt
(30,216
)
 
(81,262
)
Payments of Debt Issuance Costs

 
(16,465
)
Change in Capital Lease Obligations
7

 

Proceeds from Issuance of Common Stock
5,735

 
4,728

Dividends Paid
(11,356
)
 
(11,204
)
Net Cash (Used in) Provided by Financing Activities
(35,830
)
 
335,797

Effect of Exchange Rate Changes on Cash, Cash Equivalents and Restricted Cash
(2,244
)
 
1,587

Net Decrease in Cash, Cash Equivalents and Restricted Cash
(5,044
)
 
(1,311
)
Cash, Cash Equivalents and Restricted Cash at Beginning of Period
59,051

 
58,550

Cash, Cash Equivalents and Restricted Cash at End of Period
$
54,007

 
$
57,239

 
 
 
 

7



Supplemental Disclosure of Cash Flow Information:
 
 
 
Cash Paid for Income Taxes
$
7,314

 
$
8,127

Cash Paid for Interest
$
11,297

 
$
3,741

Supplemental Non-cash Investing and Financing Activities:
 
 
 
Capital Expenditures in Accounts Payable
$
635

 
$
1,265

See accompanying Notes to the Condensed Consolidated Financial Statements.

8



TENNANT COMPANY
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except shares and per share data)
1.
Summary of Significant Accounting Policies
Basis of Presentation – The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with the Securities and Exchange Commission (“SEC”) requirements for interim reporting, which allows certain footnotes and other financial information normally required by accounting principles generally accepted in the United States of America to be condensed or omitted. In our opinion, the Condensed Consolidated Financial Statements contain all adjustments (consisting of only normal recurring adjustments) necessary for the fair presentation of our financial position and results of operations.
These statements should be read in conjunction with the Consolidated Financial Statements and Notes included in our annual report on Form 10-K for the year ended December 31, 2017. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year.
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 3.
New Accounting Pronouncements – Further details regarding the adoption of new accounting standards are discussed in Note 2.
We documented the summary of significant accounting policies in the Notes to the Consolidated Financial Statements of our annual report on Form 10-K for the fiscal year ended December 31, 2017. 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
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 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.    

9



The reclassification from Accounts Receivable to Other Current Liabilities in accordance with the detail described above impacted the Condensed Consolidated Balance Sheet as of September 30, 2018, as follows (in thousands):
 
As Reported
 
Balances Without Adoption of ASC 606
 
Effect of Change
Higher/(Lower)
ASSETS
 
 
 
 
 
Accounts Receivable
$
208,119

 
$
206,960

 
$
1,159

Total Current Assets
439,140

 
437,981

 
1,159

Total Assets
$
970,566

 
$
969,407

 
$
1,159

LIABILITIES
 
 
 
 
 
Other Current Liabilities
$
71,842

 
$
70,683

 
$
1,159

Total Current Liabilities
238,748

 
237,589

 
1,159

Total Liabilities
$
661,483

 
$
660,324

 
$
1,159

For additional disclosures regarding the new revenue standard, see Note 3.
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 a deferred tax asset 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 Statements 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 $60 of net benefit credits and $74 of net benefit costs from Selling and Administrative Expense to Other Expense, Net on the Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2017, 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 12.
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 $1,263 cumulative effect adjustment which increased Retained 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.

10



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 15.
3.
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 three and nine months ended September 30, 2018 and 2017 (in thousands):
Net Sales by geographic area
 
Three Months Ended
 
Nine Months Ended
 
September 30
 
September 30
 
2018
 
2017
 
2018
 
2017
Americas
$
175,341

 
$
161,037

 
$
516,731

 
$
472,953

Europe, Middle East and Africa
74,254

 
78,851

 
250,480

 
189,483

Asia Pacific
23,660

 
22,033

 
71,088

 
61,335

Total
$
273,255

 
$
261,921

 
$
838,299

 
$
723,771

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
 
Nine Months Ended
 
September 30
 
September 30
 
2018
 
2017
 
2018
 
2017
Equipment
$
178,165

 
$
165,203

 
$
542,317

 
$
455,311

Parts and Consumables
53,639

 
53,535

 
168,491

 
149,260

Specialty Surface Coatings
7,139

 
8,007

 
21,434

 
22,491

Service and Other
34,312

 
35,176

 
106,057

 
96,709

Total
$
273,255

 
$
261,921

 
$
838,299

 
$
723,771


11



Net Sales by sales channel
 
Three Months Ended
 
Nine Months Ended
 
September 30
 
September 30
 
2018
 
2017
 
2018
 
2017
Sales Direct to Consumer
$
180,901

 
$
172,484

 
$
547,079

 
$
490,533

Sales to Distributors
92,354

 
89,437

 
291,220

 
233,238

Total
$
273,255

 
$
261,921

 
$
838,299

 
$
723,771

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 Condensed Consolidated Balance Sheets.
The change in our sales incentive accrual balance for the nine months ended September 30, 2018 was as follows:
 
Nine Months Ended
 
September 30
 
2018
Beginning balance
$
13,466
 
Additions to sales incentive accrual
22,078
 
Contract payments
(21,677
)
Foreign currency fluctuations
(239
)
Ending balance
$
13,628
 
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 for the nine months ended September 30, 2018 was as follows:
 
Nine Months Ended
 
September 30
 
2018
Beginning balance
$
7,787
 
Increase in deferred revenue representing our obligation to satisfy future performance obligations
11,032
 
Decrease in deferred revenue for amounts recognized in Net Sales for satisfied performance obligations
(10,475
)
Foreign currency fluctuations
(140
)
Ending balance
$
8,204
 

12



At September 30, 2018, $5,064 and $3,140 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:
Remaining 2018
$
2,502

2019
2,958

2020
1,595

2021
692

2022
381

Thereafter
76

Total
$
8,204

At December 31, 2017, $5,304 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.
4.
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 Condensed Consolidated Statements of Operations. The charge impacted our Americas, Europe, Middle East and Africa (EMEA) and Asia Pacific (APAC) operating segments. The savings offset the pre-tax charge approximately one year from the date of the action. Additional costs will not 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 the IPC Group. The restructuring action consisted primarily of severance and included 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 Condensed Consolidated Statements of Operations. The charge impacted our Americas, EMEA and APAC operating segments. We believe the anticipated savings will offset the pre-tax charge in approximately one year from the date of the action. Additional costs will not be incurred related to this restructuring action.
A reconciliation of the beginning and ending liability balances is as follows:
 
 
Severance and Related Costs
2017 restructuring actions
 
$
9,558

   Cash payments
 
(6,312
)
   Foreign currency adjustments
 
190

December 31, 2017 balance
 
$
3,436

2018 utilization:
 
 
Cash payments
 
(1,694
)
Foreign currency adjustments
 
(64
)
September 30, 2018 balance
 
$
1,678


13



5.
Acquisitions and Divestitures
On September 4, 2018, we signed a definitive agreement to acquire 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. We expect the acquisition to be completed in the first quarter of 2019. The purchase price and net assets to be acquired are not significant to our consolidated financial statements.
During the third quarter of 2018, we sold 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 Condensed Consolidated Statements of Operations.
On April 6, 2017, we acquired the outstanding capital stock of IP Cleaning S.p.A. and its subsidiaries ("IPC Group") for a purchase price of $353,769, net of cash acquired of $8,804. The primary seller was Ambienta SGR S.p.A., a European private equity fund. IPC Group, based in Italy, is a designer and manufacturer of innovative professional cleaning equipment, cleaning tools and supplies. The acquisition strengthens our presence and market share in Europe and allows us to better leverage our EMEA cost structure. We funded the acquisition of IPC Group, along with related fees, including refinancing of existing debt, with funds raised through borrowings under a senior secured credit facility in an aggregate principal amount of $420,000. Further details regarding our acquisition financing arrangements are discussed in Note 8.
The following table summarizes the final fair value measurement of the assets acquired and liabilities assumed as of the date of acquisition:
ASSETS
 
 
Receivables
 
$
39,984

Inventories
 
46,442

Other Current Assets
 
7,456

Assets Held for Sale
 
2,247

Property, Plant and Equipment
 
63,890

Intangible Assets Subject to Amortization:
 
 
Trade Name
 
26,753

Customer Lists
 
123,061

Technology
 
9,631

Other Assets
 
2,000

Total Identifiable Assets Acquired
 
321,464

LIABILITIES
 
 
Accounts Payable
 
32,227

Accrued Expenses
 
18,130

Deferred Income Taxes
 
56,950

Other Liabilities
 
10,964

Total Identifiable Liabilities Assumed
 
118,271

Net Identifiable Assets Acquired
 
203,193

Noncontrolling Interest
 
(1,896
)
Goodwill
 
152,472

Total Purchase Price, net of Cash Acquired
 
$
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.

14



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 $5,401 and $16,424 in Selling and Administrative Expense on our Condensed Consolidated Statements of Operations for these acquired intangible assets for the three and nine months ended September 30, 2018, respectively.
The following unaudited pro forma financial information presents the combined results of operations of Tennant Company as if the 2017 acquisition of the IPC Group had occurred as of January 1, 2016. The unaudited pro forma financial information is presented for informational purposes only. It is not necessarily indicative of what our consolidated results of operations actually would have been had the acquisition occurred at the beginning of fiscal 2016. No pro forma results are presented for the three or nine months ended September 30, 2018, as the results of the acquired company are included in the actual results.
Pro Forma Financial Information (Unaudited)
 
Three Months Ended
 
Nine Months Ended
(In thousands, except per share data)
September 30
 
September 30
 
2017
 
2017
Net Sales
 
 
 
Pro forma
$
261,921

 
$
777,832

As reported
261,921

 
723,771

 
 
 
 
Net Earnings (Loss) Attributable to Tennant Company
 
 
 
Pro forma
$
5,800

 
$
14,875

As reported
3,559

 
(2,989
)
 
 
 
 
Net Earnings (Loss) Attributable to Tennant Company per Share
 
 
 
Pro forma
$
0.32

 
$
0.84

As reported
0.20

 
(0.17
)
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.

15



6.
Inventories
Inventories are valued at the lower of cost or market. Inventories at September 30, 2018 and December 31, 2017 consisted of the following:
 
September 30,
2018
 
December 31,
2017
Inventories carried at LIFO:
 
 
 
Finished goods
$
48,471

 
$
43,439

Raw materials, production parts and work-in-process
28,994

 
23,694

LIFO reserve
(30,668
)
 
(28,429
)
Total LIFO inventories
46,797

 
38,704

Inventories carried at FIFO:
 

 
 

Finished goods
53,138

 
54,161

Raw materials, production parts and work-in-process
39,858

 
34,829

Total FIFO inventories
92,996

 
88,990

Total inventories
$
139,793

 
$
127,694

The LIFO reserve approximates the difference between LIFO carrying cost and FIFO.
7.
Goodwill and Intangible Assets
The changes in the carrying value of Goodwill for the nine months ended September 30, 2018 were as follows:
 
Goodwill
 
Accumulated
Impairment
Losses
 
Total
Balance as of December 31, 2017
$
227,224

 
$
(41,180
)
 
$
186,044

Purchase accounting adjustments
4,627

 

 
4,627

Foreign currency fluctuations
(7,542
)
 
1,490

 
(6,052
)
Balance as of September 30, 2018
$
224,309

 
$
(39,690
)
 
$
184,619

The balances of acquired Intangible Assets, excluding Goodwill, as of September 30, 2018 and December 31, 2017, were as follows:
 
Customer Lists
 
Trade Names
 
Technology
 
Total
Balance as of September 30, 2018
 
 
 
 
 
 
 
Original cost
$
144,760

 
$
30,945

 
$
17,134

 
$
192,839

Accumulated amortization
(29,908
)
 
(4,631
)
 
(5,326
)
 
(39,865
)
Carrying value
$
114,852

 
$
26,314

 
$
11,808

 
$
152,974

Weighted average original life (in years)
15

 
10

 
11

 
 

Balance as of December 31, 2017
 

 
 
 
 

 
 

Original cost
$
149,355

 
$
31,968

 
$
14,589

 
$
195,912

Accumulated amortization
(17,870
)
 
(2,436
)
 
(3,259
)
 
(23,565
)
Carrying value
$
131,485

 
$
29,532

 
$
11,330

 
$
172,347

Weighted average original life (in years)
15

 
10

 
11

 
 

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 5.
During the first nine months of 2018, we purchased a technology license for $2,500. The license was recorded in Intangible Assets, Net as technology on the Condensed Consolidated Balance Sheets as of September 30, 2018.
Amortization expense on Intangible Assets for the three and nine months ended September 30, 2018 was $5,720 and $17,378, respectively. Amortization expense on Intangible Assets for the three and nine months ended September 30, 2017 was $7,650 and $11,430, respectively.

16



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 2018
$
5,456

2019
21,268

2020
19,827

2021
18,244

2022
15,965

Thereafter
72,214

Total
$
152,974

8.
Debt
Financial Covenants
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 quarter ended September 30, 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 September 30, 2018.
We will be required to repay the senior credit agreement with 25% to 50% of our excess cash flow from the preceding fiscal year, as defined in the agreement, unless our net leverage ratio for such preceding fiscal year is less than or equal to 3.00 to 1, which will be first measured using our fiscal year ended December 31, 2018.
Our Senior Notes also contain certain restrictions, which are generally less restrictive than those contained in the 2017 Credit Agreement.
Registration Rights Agreement
In connection with the issuance and sale of the Senior 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 Senior Notes for new registered notes (the “Exchange Notes”), with terms substantially identical in all material respects with the Senior 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 are not required to pay additional interest on the Senior Notes.

17



Debt Outstanding
Debt outstanding at September 30, 2018 and December 31, 2017 consisted of the following:
 
September 30,
2018
 
December 31,
2017
Long-Term Debt:
 
 
 
Senior unsecured notes
$
300,000

 
$
300,000

Credit facility borrowings
50,000

 
80,000

Capital lease obligations
2,955

 
3,279

Total Long-Term Debt
352,955

 
383,279

Less: unamortized debt issuance costs
(5,020
)
 
(6,440
)
Less: current maturities of credit facility borrowings, net of debt issuance costs(1)
(29,704
)
 
(29,413
)
Less: current maturities of capital lease obligations(1)
(1,294
)
 
(1,470
)
Long-term portion
$
316,937

 
$
345,956

(1) 
Current maturities of long-term debt include $30,000 of current maturities, less $296 of unamortized debt issuance costs, under our 2017 Credit Agreement and $1,294 of current maturities of capital lease obligations.
As of September 30, 2018, we had outstanding borrowings under our Senior Unsecured Notes of $300,000. We had outstanding borrowings under our 2017 Credit Agreement, totaling $30,000 under our term loan facility and $20,000 under our revolving facility, leaving $180,000 of unused borrowing capacity on our revolving facility. Although we are only required to make a minimum principal payment of $6,250 during the next year, we have both the intent and the ability to pay an additional $23,750 during the next year on our term loan facility. As such, we have classified $30,000 as current maturities of long-term debt. In addition, we had letters of credit and bank guarantees outstanding in the amount of $5,724, leaving approximately $174,276 of unused borrowing capacity on our revolving facility. Commitment fees on unused lines of credit for the nine months ended September 30, 2018 were $455. 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 10.
9.
Warranty
We record a liability for warranty claims at the time of sale. The amount of the liability is based on the trend in the historical ratio of claims to sales, the historical length of time between the sale and resulting warranty claim, new product introductions and other factors. Warranty terms on machines generally range from one to four years. However, the majority of our claims are paid out within the first six to nine months following a sale. The majority of the liability for estimated warranty claims represents amounts to be paid out in the near term for qualified warranty issues, with immaterial amounts reserved to be paid for older equipment warranty issues.
The changes in warranty reserves for the nine months ended September 30, 2018 and 2017 were as follows:
 
Nine Months Ended
 
September 30
 
2018
 
2017
Beginning balance
$
12,676

 
$
10,960

Additions charged to expense
10,883

 
8,879

Acquired warranty obligations

 
384

Foreign currency fluctuations
(193
)
 
225

Claims paid
(9,805
)
 
(8,912
)
Ending balance
$
13,561

 
$
11,536

10.
Derivatives
Hedge Accounting and Hedging Programs
We recognize all derivative instruments as either assets or liabilities in our Condensed Consolidated Balance Sheets and measure them at fair value. Gains and losses resulting from changes in fair value are accounted for depending on the use of the derivative and whether it is designated and qualifies for hedge accounting.

18



Balance Sheet Hedging
Hedges of Foreign Currency Assets and Liabilities
We hedge portions of our net recognized foreign currency denominated assets and liabilities with foreign exchange forward contracts to reduce the risk that the value of these assets and liabilities will be adversely affected by changes in exchange rates. At September 30, 2018 and December 31, 2017, the notional amounts of foreign currency forward exchange contracts outstanding not designated as hedging instruments were $47,614 and $60,858, 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 $2,952 and $2,928 as of September 30, 2018 and December 31, 2017, respectively. The notional amounts of outstanding foreign currency option contracts designated as cash flow hedges were $8,737 and $8,619 as of September 30, 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. 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 September 30, 2018 and December 31, 2017 included €175,800 and €181,200 of total notional values, respectively. As of September 30, 2018, the aggregate scheduled interest payments over the course of the loan and related swaps amounted to €25,800. The scheduled maturity and principal payment of the loan and related swaps of €150,000 are due in April 2022.
The fair value of derivative instruments on our Condensed Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017 was as follows:
 
 
September 30, 2018
 
December 31, 2017
 
 
Fair Value Asset Derivatives
 
Fair Value Liability Derivatives
 
Fair Value Asset Derivatives
 
Fair Value Liability Derivatives
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
Foreign currency option contracts(1)
 
$
113

 
$

 
$
86

 
$

Foreign currency forward contracts(1)
 
7,038

 
29,868

 
7,218

 
34,961

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
Foreign currency forward contracts(1)
 
$
653

 
$
358

 
$
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 liability derivatives, respectively, on our Condensed Consolidated Balance Sheets. Contracts with maturities greater than 12 months are included in Other Assets and Other Liabilities for asset derivatives and liability derivatives, respectively, in our Condensed Consolidated Balance Sheets. Amounts included in our Condensed Consolidated Balance Sheets are recorded net where a right of offset exists with the same derivative counterparty.
As of September 30, 2018, we anticipate reclassifying approximately $2,129 of gains from Accumulated Other Comprehensive Loss to net earnings during the next 12 months.

19



The effect of foreign currency derivative instruments designated as cash flow hedges and of foreign currency derivative instruments not designated as hedges in our Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2018 was as follows:
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30, 2018
 
September 30, 2018
 
 
Foreign Currency Option Contracts
 
Foreign Currency Forward Contracts
 
Foreign Currency Option Contracts
 
Foreign Currency Forward Contracts
Derivatives in cash flow hedging relationships:
 
 
 
 
 
 
 
 
Net (loss) gain recognized in Other Comprehensive (Loss) Income, net of tax(1)
 
$
(89
)
 
$
1,253

 
$
(40
)
 
$
4,929

Net loss reclassified from Accumulated Other Comprehensive Loss into earnings, net of tax, effective portion to Net Sales
 
(7
)
 
(33
)
 
(91
)
 
(34
)
Net gain reclassified from Accumulated Other Comprehensive Loss into earnings, net of tax, effective portion to Interest Income
 

 
487

 

 
1,345

Net gain reclassified from Accumulated Other Comprehensive Loss into earnings, net of tax, effective portion to Net Foreign Currency Transaction Losses
 

 
739

 

 
4,724

Net (loss) gain recognized in earnings(2)
 
(5
)
 
2

 
3

 
8

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
Net (loss) gain recognized in earnings(3)
 
$

 
$
(658
)
 
$

 
$
1,174

The effect of foreign currency derivative instruments designated as cash flow hedges and of foreign currency derivative instruments not designated as hedges in our Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2017 was as follows:
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30, 2017
 
September 30, 2017
 
 
Foreign Currency Option Contracts
 
Foreign Currency Forward Contracts
 
Foreign Currency Option Contracts
 
Foreign Currency Forward Contracts
Derivatives in cash flow hedging relationships:
 
 
 
 
 
 
 
 
Net loss recognized in Other Comprehensive (Loss) Income, net of tax(1)
 
$
(40
)
 
$
(4,492
)
 
$
(177
)
 
$
(14,026
)
Net (loss) gain reclassified from Accumulated Other Comprehensive Loss into earnings, net of tax, effective portion to Net Sales
 
(141
)
 
26

 
(140
)
 
(76
)
Net gain reclassified from Accumulated Other Comprehensive Loss into earnings, net of tax, effective portion to Interest Income
 

 
374

 

 
823

Net loss reclassified from Accumulated Other Comprehensive Loss into earnings, net of tax, effective portion to Net Foreign Currency Transaction Losses
 

 
(3,705
)
 

 
(10,853
)
Net (loss) gain recognized in earnings(2)
 
(7
)
 
3

 
(12
)
 
8

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
Net loss recognized in earnings(3)
 
$

 
$
(2,062
)
 
$
(1,132
)
 
$
(7,369
)
(1) 
Net change in the fair value of the effective portion classified in Other Comprehensive (Loss) Income.
(2) 
Ineffective portion and amount excluded from effectiveness testing classified in Net Foreign Currency Transaction Losses.
(3) 
Classified in Net Foreign Currency Transaction Losses.

20



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 September 30, 2018 is as follows:
 
Fair
Value
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
Foreign currency forward exchange contracts
$
7,691

 
$

 
$
7,691

 
$

Foreign currency option contracts
113

 

 
113

 

Total Assets
$
7,804

 
$

 
$
7,804

 
$

Liabilities:
 

 
 

 
 

 
 

Foreign currency forward exchange contracts
$
30,226

 
$

 
$
30,226

 
$

Total Liabilities
$
30,226

 
$

 
$
30,226

 
$

Our population of assets and liabilities subject to fair value measurements at December 31, 2017 is as follows:
 
Fair
Value
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
Foreign currency forward exchange contracts
$
7,660

 
$

 
$
7,660

 
$

Foreign currency option contracts
86

 

 
86

 

Total Assets
$
7,746

 
$

 
$
7,746

 
$

Liabilities:
 

 
 

 
 

 
 

Foreign currency forward exchange contracts
$
35,386

 
$

 
$
35,386

 
$

Total Liabilities
$
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 10.
The carrying amounts reported in the Condensed Consolidated Balance Sheets for Cash and Cash Equivalents, Restricted Cash, Accounts Receivable, Other Current Assets, Accounts Payable and Other Current Liabilities approximate fair value due to their short-term nature.
The fair 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 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.

21



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, impairment asset or asset group exceeds its estimated fair value. These periodic impairment tests utilize company-specific assumptions involving unobservable inputs, or Level 3, in the fair value hierarchy.
12.
Retirement Benefit Plans
Our defined benefit pension plans and postretirement medical plan are described in Note 13 of our annual report on Form 10-K for the year ended December 31, 2017. We have contributed $36 and $139 during the third quarter of 2018 and $187 and $695 during the first nine months of 2018 to our pension plans and postretirement medical plan, respectively.
The components of the net benefit cost for the three and nine months ended September 30, 2018 and 2017 were as follows:
 
 
Three Months Ended
 
 
September 30
 
 
Pension Benefits
 
Postretirement
 
 
U.S. Plans
 
Non-U.S. Plans
 
Medical Benefits
 
 
2018
 
2017
 
2018
 
2017
 
2018
 
2017
Service cost
 
$

 
$

 
$
33

 
$
124

 
$
6

 
$
6

Interest cost
 
10

 
373

 
82

 
96

 
70

 
91

Expected return on plan assets
 

 
(581
)
 
(77
)
 
(101
)
 

 

Amortization of net actuarial loss
 
13

 
12

 

 

 

 

Amortization of prior service cost
 

 

 
54

 
50

 

 

Foreign currency
 

 

 
(118
)
 
135

 

 

Net periodic benefit cost (credit)
 
23

 
(196
)
 
(26
)
 
304

 
76

 
97

Net benefit cost (credit)
 
$
23

 
$
(196
)
 
$
(26
)
 
$
304

 
$
76

 
$
97

 
 
Nine Months Ended
 
 
September 30
 
 
Pension Benefits
 
Postretirement
 
 
U.S. Plans
 
Non-U.S. Plans
 
Medical Benefits
 
 
2018
 
2017
 
2018
 
2017
 
2018
 
2017
Service cost
 
$

 
$

 
$
105

 
$
172

 
$
34

 
$
46

Interest cost
 
32

 
1,153

 
240

 
315

 
220

 
272

Expected return on plan assets
 

 
(1,752
)
 
(268
)
 
(298
)
 

 

Amortization of net actuarial loss
 
37

 
33

 

 

 

 

Amortization of prior service cost
 

 

 
160

 
146

 

 

Foreign currency
 

 

 
(212
)
 
364

 

 

Net periodic benefit cost (credit)
 
69

 
(566
)
 
25

 
699

 
254

 
318

Settlement charge
 
50

 
205

 

 

 

 

Net benefit cost (credit)
 
$
119

 
$
(361
)
 
$
25

 
$
699

 
$
254

 
$
318

13.
Commitments and Contingencies
Certain operating leases for vehicles contain residual value guarantee provisions, which would become due at the expiration of the operating lease agreement if the fair value of the leased vehicles is less than the guaranteed residual value. As of September 30, 2018, of those leases that contain residual value guarantees, the aggregate residual value at lease expiration was $13,990, of which we have guaranteed $8,371. As of September 30, 2018, we have recorded a liability for the estimated end of term loss related to this residual value guarantee of $317 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.

22



14.
Accumulated Other Comprehensive Loss
Components of Accumulated Other Comprehensive Loss, net of tax, within the Condensed Consolidated Balance Sheets, are as follows:
 
September 30, 2018
 
December 31, 2017
Foreign currency translation adjustments
$
(29,456
)
 
$
(15,778
)
Pension and retiree medical benefits
(1,661
)
 
(1,610
)
Cash flow hedge
(7,116
)
 
(4,935
)
Total Accumulated Other Comprehensive Loss
$
(38,233
)
 
$
(22,323
)
The changes in components of Accumulated Other Comprehensive Loss, net of tax, are as follows:
 
Foreign Currency Translation Adjustments
 
Pension and Post Retirement Benefits
 
Cash Flow Hedge
 
Total
December 31, 2017
$
(15,778
)
 
$
(1,610
)
 
$
(4,935
)
 
$
(22,323
)
Other comprehensive (loss) income before reclassifications
(13,678
)
 
19

 
4,889

 
(8,770
)
Amounts reclassified from Accumulated Other Comprehensive Loss

 
67

 
(5,944
)
 
(5,877
)
Adjustments to Accumulated Other Comprehensive Loss for disproportionate income tax effects recognized from the adoption of ASU 2018-02

 
(137
)
 
(1,126
)
 
(1,263
)
Net current period other comprehensive loss
(13,678
)
 
(51
)
 
(2,181
)
 
(15,910
)
September 30, 2018
$
(29,456
)
 
$
(1,661
)
 
$
(7,116
)
 
$
(38,233
)
15.
Income Taxes
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 2016 and, with limited exceptions, state and foreign income tax examinations for taxable years before 2013.
We recognize potential accrued interest and penalties related to unrecognized tax benefits in Income Tax Expense. In addition to the liability of $6,067 for unrecognized tax benefits as of September 30, 2018, there was approximately $489 for accrued interest and penalties. The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate as of September 30, 2018 was $5,842. 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.
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 and were fully reserved. 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.
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 includes 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 requires companies to pay a one-time transition tax on certain unrepatriated earnings from foreign subsidiaries.

23



ASC 740, Income Taxes, requires a company to record the effects of a tax law change in the period of enactment. ASU 2018-05 allows a company to record a provisional amount when it does 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 cannot 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 was finalized in the third quarter of 2018, and the impact to the year-to-date overall effective tax rate was immaterial.
We recorded income tax expense of $158 during the third quarter of 2018, or 1.6% of earnings before income taxes. During the first nine months of 2018, we recorded income tax expense of $1,598, or 5.8% of earnings before income taxes. This amount primarily reflects two items: (1) the Tax Act resulted in a lower tax rate beginning in the first quarter of 2018. This includes the estimated impacts of requiring a current inclusion in U.S. federal income of certain earnings of controlled foreign corporations, allowing a domestic corporation an immediate deduction in the U.S. taxable income for a portion of its foreign-derived intangible income, the base erosion anti-abuse tax, and limitations on the deductibility of executive compensation. These estimates had an immaterial impact on our effective income tax rate for 2018; and (2) during 2018, we recorded discrete income tax items to adjust our finalized transition tax liability by $(362), and we realized two discrete tax benefits, totaling $3,568, resulting from the exercise of soon-to-expire stock options and a favorable tax ruling from Italian tax authorities related to the deductibility of interest expense in Italy. We will continue to monitor and evaluate guidance and clarifications from the Internal Revenue Service as it relates to the Tax Act and will record adjustments as necessary.
16.
Share-Based Compensation
Our share-based compensation plans are described in Note 17 of our annual report on Form 10-K for the year ended December 31, 2017. During the three months ended September 30, 2018 and 2017, we recognized total Share-Based Compensation Expense of $1,893 and $1,293, respectively. During the nine months ended September 30, 2018 and 2017, we recognized total Share-Based Compensation Expense of $6,008 and $4,915, respectively. The total excess tax benefit recognized for share-based compensation arrangements during the nine months ended September 30, 2018 and 2017 was $2,073 and $1,149, respectively.
During the first nine months of 2018, we issued 16,377 restricted shares. The weighted average grant date fair value of each share awarded was $67.70. Restricted share awards generally have a three year vesting period from the effective date of the grant. The total fair value of shares vested during the nine months ended September 30, 2018 and 2017 was $863 and $1,295, respectively.
17.
Earnings (Loss) Attributable to Tennant Company Per Share
The computations of Basic and Diluted Earnings (Loss) per Share were as follows:
 
Three Months Ended
 
Nine Months Ended
 
September 30
 
September 30
 
2018
 
2017
 
2018
 
2017
Numerator:
 
 
 
 
 
 
 
Net Earnings (Loss) Attributable to Tennant Company
$
9,676

 
$
3,559

 
$
25,694

 
$
(2,989
)
Denominator:
 
 
 
 
 
 
 
Basic - Weighted Average Shares Outstanding
17,998,917

 
17,729,857

 
17,911,880

 
17,673,656

Effect of dilutive securities:
 
 
 
 
 
 
 
Share-based compensation plans
440,704

 
441,587

 
432,933

 

Diluted - Weighted Average Shares Outstanding
18,439,621

 
18,171,444

 
18,344,813

 
17,673,656

Basic Earnings (Loss) per Share
$
0.54

 
$
0.20

 
$
1.43

 
$
(0.17
)
Diluted Earnings (Loss) per Share
$
0.52

 
$
0.20

 
$
1.40

 
$
(0.17
)
 

24



Excluded from the dilutive securities shown above were options to purchase and shares to be paid out under share-based compensation plans of 139,106 and 340,239 shares of common stock during the three months ended September 30, 2018 and 2017, respectively. Excluded from the dilutive securities shown above were options to purchase and shares to be paid out under share-based compensation plans of 214,605 and 714,687 shares of common stock during the nine months ended September 30, 2018 and 2017, 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.
18.
Segment Reporting
We are organized into four operating segments: North America, Latin America, EMEA and APAC. We combine our North America and Latin America operating segments into the “Americas” for reporting Net Sales by geographic area. In accordance with the objective and basic principles of the applicable accounting guidance, we aggregate our operating segments into one reportable segment that consists of the design, manufacture and sale of products used primarily in the maintenance of nonresidential surfaces.
Further disclosures regarding our net sales by geographic area are discussed in Note 3.
19.
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.
In 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"), 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 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 Operations and the Condensed Consolidated Statements of Comprehensive Income for each of the three and nine months ended September 30, 2018 and September 30, 2017, the related Condensed Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017, and the related Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2018 and September 30, 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.

25



Condensed Consolidated Statement of Operations
For the three months ended September 30, 2018
(in thousands)
Parent
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Total Tennant Company
Net Sales
$
126,110

 
$
160,226

 
$
131,418

 
$
(144,499
)
 
$
273,255

Cost of Sales
86,781

 
135,058

 
87,707

 
(144,376
)
 
165,170

Gross Profit
39,329

 
25,168

 
43,711

 
(123
)
 
108,085

 
 

 
 

 
 

 
 
 
 
Operating Expense:
 
 
 
 
 
 
 
 
 
Research and Development Expense
6,096

 
279

 
1,131

 

 
7,506

Selling and Administrative Expense
26,765

 
18,091

 
39,473

 
811

 
85,140

Total Operating Expense
32,861

 
18,370

 
40,604