Attached files

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EX-10.5 - FORM OF TENNANT COMPANY 2017 NON-EMPLOYEE DIRECTOR RESTRICTED STOCK AGREEMENT - TENNANT COexhibit_10-5.htm
EX-32.2 - CERTIFICATION OF CFO PURSUANT TO SECTION 906 - TENNANT COexhibit_32-2.htm
EX-32.1 - CERTIFICATION OF CEO PURSUANT TO SECTION 906 - TENNANT COexhibit_32-1.htm
EX-31.2 - CERTIFICATION OF CFO PURSUANT TO SECTION 302 - TENNANT COexhibit_31-2.htm
EX-31.1 - CERTIFICATION OF CEO PURSUANT TO SECTION 302 - TENNANT COexhibit_31-1.htm
EX-10.6 - FORM OF TENNANT COMPANY 2017 RESTRICTED STOCK UNIT AGREEMENT - TENNANT COexhibit_10-6.htm
EX-10.4 - FORM OF TENNANT COMPANY 2017 STOCK INCENTIVE PLAN RESTRICTED STOCK AGREEMENT - TENNANT COexhibit_10-4.htm
EX-10.3 - FORM OF TENNANT COMPANY 2017 NON-STATUTORY STOCK OPTION AGREEMENT - TENNANT COexhibit_10-3.htm

 
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 June 30, 2017
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
____________________________________
tennantovallogoa05.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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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
 
(Do not check if a smaller reporting company)
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 July 31, 2017, there were 17,824,192 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
 
Six Months Ended
(In thousands, except shares and per share data)
 
June 30
 
June 30
 
 
2017
 
2016
 
2017
 
2016
Net Sales
 
$
270,791

 
$
216,828

 
$
461,850

 
$
396,692

Cost of Sales
 
166,237

 
121,539

 
277,560

 
223,901

Gross Profit
 
104,554

 
95,289

 
184,290

 
172,791

 
 
 
 
 
 
 
 
 
Operating Expense:
 
 
 
 
 
 
 
 
Research and Development Expense
 
7,886

 
8,390

 
16,332

 
16,294

Selling and Administrative Expense
 
87,513

 
64,253

 
161,416

 
126,692

Loss on Sale of Business
 

 
87

 

 
149

Total Operating Expense
 
95,399

 
72,730

 
177,748


143,135

Profit from Operations
 
9,155

 
22,559

 
6,542


29,656

 
 
 
 
 
 
 
 
 
Other Income (Expense):
 
 
 
 
 
 
 
 
Interest Income
 
793

 
40

 
877

 
81

Interest Expense
 
(11,833
)
 
(288
)
 
(12,627
)
 
(590
)
Net Foreign Currency Transaction (Losses) Gains
 
(336
)
 
597

 
(1,533
)
 
324

Other Expense, Net
 
(197
)
 
(314
)
 
(218
)
 
(350
)
Total Other (Expense) Income, Net
 
(11,573
)
 
35

 
(13,501
)

(535
)
 
 
 
 
 
 
 
 
 
(Loss) Profit Before Income Taxes
 
(2,418
)
 
22,594

 
(6,959
)

29,121

Income Tax Expense (Benefit)
 
238

 
7,266

 
(346
)
 
9,354

Net (Loss) Earnings Including Noncontrolling Interest
 
(2,656
)
 
15,328

 
(6,613
)
 
19,767

Net Loss Attributable to Noncontrolling Interest
 
(65
)
 

 
(65
)
 

Net (Loss) Earnings Attributable to Tennant Company
 
$
(2,591
)
 
$
15,328

 
$
(6,548
)

$
19,767

 
 
 
 
 
 
 
 
 
Net (Loss) Earnings Attributable to Tennant Company per Share:
 
 
 
 
 
 
 
 
Basic
 
$
(0.15
)
 
$
0.88

 
$
(0.37
)
 
$
1.13

Diluted
 
$
(0.15
)
 
$
0.85

 
$
(0.37
)
 
$
1.10

 
 
 
 
 
 
 
 
 
Weighted Average Shares Outstanding:
 
 
 
 
 
 
 
 
Basic
 
17,693,102

 
17,508,022

 
17,645,090

 
17,526,107

Diluted
 
17,693,102

 
17,933,243

 
17,645,090

 
17,954,167

 
 
 
 
 
 
 
 
 
Cash Dividend Declared per Common Share
 
$
0.21

 
$
0.20

 
$
0.42

 
$
0.40


See accompanying Notes to the Condensed Consolidated Financial Statements.

4


TENNANT COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
Three Months Ended
 
Six Months Ended
(In thousands)
June 30
 
June 30
 
2017
 
2016
 
2017
 
2016
Net (Loss) Earnings Including Noncontrolling Interest
$
(2,656
)
 
$
15,328

 
$
(6,613
)
 
$
19,767

Other Comprehensive Income:
 

 
 

 
 
 
 
Foreign currency translation adjustments
13,640

 
403

 
16,040

 
3,999

Pension and retiree medical benefits
152

 
19

 
162

 
38

Cash flow hedge
(4,506
)
 
18

 
(4,579
)
 
(429
)
Income Taxes:
 
 
 
 
 
 
 
Foreign currency translation adjustments

 
(1
)
 

 
5

Pension and retiree medical benefits
(4
)
 
(7
)
 
(22
)
 
(14
)
Cash flow hedge
1,681

 
(7
)
 
1,708

 
160

Total Other Comprehensive Income, Net of Tax
10,963

 
425

 
13,309


3,759

 
 
 
 
 
 
 
 
Total Comprehensive Income Including Noncontrolling Interest
8,307

 
15,753

 
6,696

 
23,526

Comprehensive Loss Attributable to Noncontrolling Interest
(65
)
 

 
(65
)
 

Comprehensive Income Attributable to Tennant Company
$
8,372

 
$
15,753

 
$
6,761

 
$
23,526

See accompanying Notes to the Condensed Consolidated Financial Statements.

5


TENNANT COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
June 30,
 
December 31,
(In thousands, except shares and per share data)
2017
 
2016
ASSETS
 
 
 
Current Assets:
 
 
 
Cash and Cash Equivalents
$
53,305

 
$
58,033

Restricted Cash
1,243

 
517

Accounts Receivable, less Allowances of $2,992 and $3,108, respectively
199,861

 
149,134

Inventories
141,579

 
78,622

Prepaid Expenses
25,198

 
9,204

Other Current Assets
5,461

 
2,412

Total Current Assets
426,647

 
297,922

Property, Plant and Equipment
373,254

 
298,500

Accumulated Depreciation
(195,248
)
 
(186,403
)
Property, Plant and Equipment, Net
178,006

 
112,097

Deferred Income Taxes
20,157

 
13,439

Goodwill
183,250

 
21,065

Intangible Assets, Net
166,198

 
6,460

Other Assets
22,953

 
19,054

Total Assets
$
997,211

 
$
470,037

LIABILITIES AND TOTAL EQUITY
 
 
 
Current Liabilities:
 
 
 
Short-Term Borrowings and Current Portion of Long-Term Debt
$
5,307

 
$
3,459

Accounts Payable
88,572

 
47,408

Employee Compensation and Benefits
35,789

 
35,997

Income Taxes Payable
6,753

 
2,348

Other Current Liabilities
58,189

 
43,617

Total Current Liabilities
194,610

 
132,829

Long-Term Liabilities:
 
 
 
Long-Term Debt
405,716

 
32,735

Employee-Related Benefits
25,581

 
21,134

Deferred Income Taxes
59,002

 
171

Other Liabilities
24,937

 
4,625

Total Long-Term Liabilities
515,236

 
58,665

Total Liabilities
709,846

 
191,494

Commitments and Contingencies (Note 14)


 


Equity:
 
 
 
Preferred Stock, $0.02 par value; 1,000,000 shares authorized; no shares issued or outstanding

 

Common Stock, $0.375 par value; 60,000,000 shares authorized; 17,823,292 and 17,688,350 shares issued and outstanding, respectively
6,684

 
6,633

Additional Paid-In Capital
9,915

 
3,653

Retained Earnings
304,170

 
318,180

Accumulated Other Comprehensive Loss
(36,614
)
 
(49,923
)
Total Tennant Company Shareholders' Equity
284,155

 
278,543

Noncontrolling Interest
3,210

 

Total Equity
287,365

 
278,543

Total Liabilities and Total Equity
$
997,211

 
$
470,037

See accompanying Notes to the Condensed Consolidated Financial Statements.

6


TENNANT COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Six Months Ended
(In thousands)
June 30
 
2017
 
2016
OPERATING ACTIVITIES
 
 
 
Net (Loss) Earnings Including Noncontrolling Interest
$
(6,613
)
 
$
19,767

Adjustments to Reconcile Net (Loss) Earnings to Net Cash (Used in) Provided by Operating Activities:
 
 
 
Depreciation
11,043

 
8,655

Amortization of Intangible Assets
3,780

 
224

Amortization of Debt Issuance Costs
466

 
77

Debt Issuance Cost Charges Related to Financing
6,200

 

Fair Value Step-Up Adjustment to Acquired Inventory
6,199

 

Deferred Income Taxes
(6,032
)
 
(1,633
)
Share-Based Compensation Expense
3,622

 
4,426

Allowance for Doubtful Accounts and Returns
697

 
606

Loss on Sale of Business

 
149

Other, Net
64

 
(63
)
Changes in Operating Assets and Liabilities:
 
 
 
Receivables
(6,016
)
 
(12,314
)
Inventories
(9,854
)
 
(3,941
)
Accounts Payable
6,190

 
(389
)
Employee Compensation and Benefits
(8,262
)
 
(5,788
)
Other Current Liabilities
5,252

 
(3,936
)
Income Taxes
(1,617
)
 
6,743

Other Assets and Liabilities
(7,614
)
 
(142
)
Net Cash (Used in) Provided by Operating Activities
(2,495
)
 
12,441

INVESTING ACTIVITIES
 
 
 
Purchases of Property, Plant and Equipment
(9,145
)
 
(14,769
)
Proceeds from Disposals of Property, Plant and Equipment
2,428

 
427

Issuance of Long-Term Note Receivable
(1,500
)
 

Acquisition of Businesses, Net of Cash Acquired
(354,073
)
 

Purchase of Intangible Asset
(2,500
)
 

Proceeds from Sale of Business

 
285

(Increase) Decrease in Restricted Cash
(118
)
 
120

Net Cash Used in Investing Activities
(364,908
)
 
(13,937
)
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
(58,471
)
 
(3,444
)
Payments of Debt Issuance Costs
(16,039
)
 

Purchases of Common Stock

 
(12,762
)
Proceeds from Issuances of Common Stock
3,843

 
1,196

Excess Tax Benefit on Stock Plans

 
246

Dividends Paid
(7,463
)
 
(7,058
)
Net Cash Provided by (Used in) Financing Activities
361,870

 
(21,822
)
Effect of Exchange Rate Changes on Cash and Cash Equivalents
805

 
(37
)
Net Decrease in Cash and Cash Equivalents
(4,728
)
 
(23,355
)
Cash and Cash Equivalents at Beginning of Period
58,033

 
51,300

Cash and Cash Equivalents at End of Period
$
53,305

 
$
27,945

 
 
 
 

7


Supplemental Disclosure of Cash Flow Information:
 
 
 
Cash Paid for Income Taxes
$
4,851

 
$
3,174

Cash Paid for Interest
$
2,463

 
$
505

Supplemental Non-cash Investing and Financing Activities:
 
 
 
Long-Term Note Receivable from Sale of Business
$

 
$
5,489

Capital Expenditures in Accounts Payable
$
1,440

 
$
1,538

Debt Issuance Costs Not Yet Paid, Recorded in Accounts Payable
$
417

 
$

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, 2016. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year.
Equity Method Investment – Investments in which we have the ability to exercise significant influence, but do not control, are accounted for under the equity method of accounting and are included in Other Assets on the Condensed Consolidated Balance Sheets. Under this method of accounting, our share of the net earnings or losses of the investee are presented as a component of Other Expense, Net on the Condensed Consolidated Statements of Operations. The details regarding our equity method investment in i-team North America B.V., a joint venture that operates as the distributor of the i-mop in North America, are further described in Note 3.
New Accounting Pronouncements – In accordance with Accounting Standards Update ("ASU") No. 2016-09, Compensation–Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, all excess tax benefits and tax deficiencies are recorded as a component of the provision for income taxes in the reporting period in which they occur. Additionally, we present excess tax benefits along with other income tax cash flows on the Condensed Consolidated Statements of Cash Flows as an operating activity rather than, as previously required, a financing activity. For further details regarding the implementation of this ASU and the impact on our financial statements, see 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, 2016. 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
On March 30, 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-09, Compensation–Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which amends Accounting Standards Codification ("ASC") Topic 718, Compensation – Stock Compensation. ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the Condensed Consolidated Statements of Cash Flows. Under the new standard, all excess tax benefits and tax deficiencies are recorded as a component of the provision for income taxes in the reporting period in which they occur. Additionally, ASU 2016-09 requires that the Company present excess tax benefits along with other income tax cash flows on the Condensed Consolidated Statements of Cash Flows as an operating activity rather than, as previously required, a financing activity. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016.
We have adopted ASU 2016-09 effective January 1, 2017 on a prospective basis where permitted by the new standard. As a result of this adoption:
For the three and six months ended June 30, 2017, we recognized discrete tax benefits of $742 and $1,144, respectively, in the Income Tax Expense (Benefit) line item of our Condensed Consolidated Statements of Operations related to excess tax benefits upon vesting or settlement in that period.
We elected to adopt the cash flow presentation of the excess tax benefits prospectively where the tax benefits are classified along with other income tax cash flows as operating cash flows in 2017. Our prior year's excess tax benefits are recognized as financing cash flows. However, other income tax cash flows are classified as operating cash flows.
We have elected to account for forfeitures as they occur, rather than electing to estimate the number of share-based awards expected to vest to determine the amount of compensation cost to be recognized in each period. The difference of such change is immaterial.

9


We excluded the excess tax benefits from the assumed proceeds available to repurchase shares in the computation of our diluted earnings per share for the three and six months ended June 30, 2017.
3.
Investment in Joint Venture
On February 13, 2017, the Company, through a Dutch subsidiary, and i-team Global, a Future Cleaning Technologies, B.V. company headquartered in The Netherlands, announced the January 1, 2017 formation of i-team North America B.V., a joint venture that will operate as the distributor of the i-mop in North America. The Company began selling and servicing the i-mop in the second quarter of 2017. The Company owns a 50% ownership interest in the joint venture and is accounted for under the equity method of accounting, with our proportionate share of income or loss presented as a component of Other Expense, Net on the Condensed Consolidated Statements of Operations.
As of June 30, 2017, the carrying value of the Company's investment in the joint venture was $57. In March 2017, the Company issued a $1,500 loan to the joint venture and, as a result, recorded a long-term note receivable in Other Assets on the Condensed Consolidated Balance Sheets.
4.
Management Action
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. We believe the anticipated savings will offset the pre-tax charge in approximately one year from the date of the action. We do not expect additional costs will be incurred related to this restructuring action.
A reconciliation to the ending liability balance of severance and related costs as of June 30, 2017 is as follows:
 
 
Severance and Related Costs
Q1 2017 restructuring action
 
$
7,057

   Cash payments
 
(5,297
)
   Foreign currency adjustments
 
110

June 30, 2017 balance
 
$
1,870

5.
Acquisitions
IP Cleaning S.p.A.
On April 6, 2017, we acquired 100 percent of the outstanding capital stock of IP Cleaning S.p.A. and its subsidiaries ("IPC Group") for a purchase price of $353,769, net of cash acquired of $10,652. The primary seller was Ambienta SGR S.p.A., a European private equity fund. IPC Group, based in Italy, is a designer and manufacturer of innovative professional cleaning equipment, cleaning tools and supplies. The acquisition strengthens our presence and market share in Europe and will allow us to better leverage our EMEA cost structure. We funded the acquisition of IPC Group, along with related fees, including refinancing of existing debt, with funds raised through borrowings under a senior secured credit facility in an aggregate principal amount of $420,000. Further details regarding our acquisition financing arrangements are discussed in Note 9.

10


The following table summarizes the preliminary fair value measurement of the assets acquired and liabilities assumed as of the date of acquisition:
ASSETS
 
 
Restricted Cash
 
538

Receivables
 
40,067

Inventories
 
54,222

Other Current Assets
 
4,362

Assets Held for Sale
 
2,247

Property, Plant and Equipment
 
62,845

Intangible Assets Subject to Amortization:
 
 
Trade Name
 
29,963

Customer Lists
 
115,571

Noncompete Agreements
 
3,210

Other Assets
 
4,168

Total Identifiable Assets Acquired
 
317,193

LIABILITIES
 
 
Accounts Payable
 
31,529

Accrued Expenses
 
15,756

Deferred Income Taxes
 
58,573

Other Liabilities
 
6,967

Total Identifiable Liabilities Assumed
 
112,825

Net Identifiable Assets Acquired
 
204,368

Noncontrolling Interest
 
(3,312
)
Goodwill
 
152,713

Total Estimated Purchase Price, net of Cash Acquired
 
$
353,769

The acquired assets, liabilities and operating results have been included in our Condensed Consolidated Financial Statements from the date of acquisition. During the three and six months ended June 30, 2017, we included Net Sales of $59,074 and a net loss of $5,187 from IPC Group in our Condensed Consolidated Statements of Operations. The net loss includes a $4,470 fair value adjustment, net of tax, to the acquired inventory of IPC Group. In addition, costs of $4,684, net of tax, associated with the acquisition of the IPC Group were expensed as incurred in the Condensed Consolidated Statements of Operations. The preliminary gross amount of the accounts receivable acquired is $43,785, of which $3,718 is expected to be uncollectible.
The fair value measurement was preliminary at June 30, 2017. During the measurement period, the Company expects to record adjustments relating to the finalization of Intangible Assets, Inventories, Restricted Cash and Property, Plant and Equipment valuations, and various income tax matters, amongst others. We expect the fair value measurement process to be completed as soon as possible, but no later than one year from the acquisition date.
Goodwill was calculated as the difference between the acquisition date fair value of the total purchase price consideration and the fair value of the net identifiable assets acquired, and represents the future economic benefits that we expect to achieve as a result of the acquisition. This resulted in an estimated purchase price in excess of the fair value of identifiable net assets acquired.
The estimated purchase price also included the fair value of other assets that were not identifiable and not separately recognizable under accounting rules (i.e. assembled workforce) or these assets were of immaterial value. In addition, there is a going concern element that represents our ability to earn a higher rate of return on the group of assets than would be expected on the separate assets as determined during the valuation process. Based on preliminary fair value measurement of the assets acquired and liabilities assumed, we allocated $152,713 to goodwill for the expected synergies from combining IPC Group with our existing business. None of the goodwill is expected to be deductible for income tax purposes. The assignment of Goodwill to reporting units is not complete, pending finalization of the valuation measurements.

11


The fair value of acquired identifiable intangible assets was primarily determined using discounted expected cash flows. The fair value of acquired identifiable tangible assets was primarily determined using the cost or market approach. The valuations were based on the information that was available as of the acquisition date and the expectations and assumptions that have been deemed reasonable by us. There are inherent uncertainties and management judgment required in these determinations. The fair value measurements of the assets acquired and liabilities assumed were based on valuations involving significant unobservable inputs, or Level 3 in the fair value hierarchy.
The preliminary fair value of the acquired intangible assets is $148,744. The expected lives of the acquired amortizable intangible assets are approximately 15 years for Customer Lists, 11 years for Trade Names and two years for Non-Compete Agreements and all are being amortized on a straight-line basis, pending finalization of fair value.
The following unaudited pro forma financial information presents the combined results of operations of Tennant Company as if the acquisition of IPC Group had occurred as of January 1, 2017 and 2016. The unaudited pro forma financial information is presented for informational purposes only. It is not necessarily indicative of what our consolidated results of operations actually would have been had the acquisition occurred at the beginning of each year, nor does it attempt to project the future results of operations of the combined company.
Pro Forma Financial Information (Unaudited)
 
Three Months Ended
 
Six Months Ended
(In thousands, except per share data)
June 30
 
June 30
 
2017
 
2016
 
2017
 
2016
Net Sales
 
 
 
 
 
 
 
Pro forma
$
270,791

 
$
269,689

 
$
517,163

 
$
497,896

As reported
270,791

 
216,828

 
461,850

 
396,692

 
 
 
 
 
 
 
 
Net Earnings (Loss) Attributable to Tennant Company
 
 
 
 
 
 
 
Pro forma
$
10,308

 
$
13,577

 
$
10,260

 
$
15,889

As reported
(2,591
)
 
15,328

 
(6,548
)
 
19,767

 
 
 
 
 
 
 
 
Net Earnings (Loss) Attributable to Tennant Company per Share
 
 
 
 
 
 
 
Pro forma
$
0.58

 
$
0.76

 
$
0.58

 
$
0.88

As reported
(0.15
)
 
0.85

 
(0.37
)
 
1.10

The unaudited pro forma financial information is based on certain assumptions which we believe are reasonable, directly attributable to the transaction, factually supportable and do not reflect any cost savings, operating synergies or revenue enhancements that we may achieve, nor the costs necessary to achieve those cost savings, operating synergies, revenue enhancements or integration efforts.
The unaudited pro forma financial information above gives effect to the following:
Incremental amortization and depreciation expense related to the estimated fair value of the identifiable intangible assets and property, plant and equipment from the preliminary purchase price allocation.
Exclusion of the purchase accounting impact of the inventory step up reported in cost of sales for the sale of acquired inventory of $6,199.
Incremental interest expense related to additional debt used to finance the acquisition.
Exclusion of non-recurring acquisition-related transaction and financing costs.
Pro forma adjustments tax affected based on the jurisdiction where the costs were incurred.

12


Other Acquisitions
On July 28, 2016, pursuant to an asset purchase agreement and real estate purchase agreement with Crawford Laboratories, Inc. and affiliates thereof ("Sellers"), we acquired selected assets and liabilities of the Seller's commercial floor coatings business, including the Florock® Polymer Flooring brand ("Florock"). Florock manufactures commercial floor coatings systems in Chicago, IL. The purchase price was $11,843, including working capital and other adjustments, and is comprised of $10,965 paid at closing, with the remaining $878 paid in two installments. We paid the first installment of $575 on October 14, 2016. The remaining amount was paid during the 2017 first quarter.
On September 1, 2016, we acquired selected assets and liabilities of Dofesa Barrido Mecanizado ("Dofesa") which was our largest distributor in Mexico over many decades. The operations are based in Aguascalientes, Mexico, and their addition allows us to expand our sales and service network in an important market. The purchase price was $5,000 less assumed liabilities of $3,448, subject to customary working capital adjustments. The net purchase price of $1,552 is comprised of $1,202 paid at closing, and a value added tax of $191, with the remaining $350 subject to working capital adjustments. The working capital adjustment is not yet finalized, but we do not expect to pay additional cash beyond the cash already paid.
The acquisitions have been accounted for as business combinations and the results of their operations have been included in the Condensed Consolidated Financial Statements since their respective dates of acquisition. The impact of the incremental revenue and earnings recorded as a result of the acquisitions are not material to our Condensed Consolidated Financial Statements. The purchase price allocation for the Florock acquisition is complete. The purchase price allocation for the Dofesa acquisition is complete except for a preliminary valuation of Intangible Assets and finalization of the working capital adjustment. We expect our valuation will be complete in the third quarter of 2017.
The preliminary components of the purchase price of the business combinations described above have been allocated as follows:
Current Assets
 
$
5,949

Property, Plant and Equipment, net
 
4,112

Identified Intangible Assets
 
6,055

Goodwill
 
1,739

Other Assets
 
7

Total Assets Acquired
 
17,862

Current Liabilities
 
4,764

Other Liabilities
 
53

Total Liabilities Assumed
 
4,817

Net Assets Acquired
 
$
13,045

6.
Divestiture
On January 19, 2016, we signed a Business Purchase Agreement (“BPA”) with Green Machines International GmbH and Green Machine Sweepers UK Limited ("the Buyers"), subsidiaries of M&F Management and Financing GmbH, which is also the parent company of the master distributor of our products in Central Eastern Europe, Middle East and Africa, TCS EMEA GmbH, for the sale of our Green Machines outdoor city cleaning line. The sale closed on January 31, 2016. Including working capital adjustments, the aggregate consideration for the Green Machines business was $5,774.
For additional information regarding the sale of our Green Machines outdoor city cleaning line, the distributor agreement with the Buyers and the subsequent amendments to the distributor agreement and BPA, refer to Note 4 of our Consolidated Financial Statements as disclosed in our 2016 annual report on Form 10-K for the year ended December 31, 2016.
In the first six months of 2016, as a result of this divestiture, we recorded a pre-tax loss of $149 in our Profit from Operations in the Condensed Consolidated Statements of Operations. The impact of the recorded loss and the sale of Green Machines was not material to our earnings as Green Machines only accounted for approximately two percent of our total sales.
We have identified Green Machines International GmbH as a variable interest entity (“VIE”) and have performed a qualitative assessment to determine if Tennant is the primary beneficiary of the VIE. We have determined that we are not the primary beneficiary of the VIE and consolidation of the VIE is not considered necessary.

13


7.
Inventories
Inventories are valued at the lower of cost or market. Inventories at June 30, 2017 and December 31, 2016 consisted of the following:
 
June 30,
2017
 
December 31,
2016
Inventories carried at LIFO:
 
 
 
Finished goods
$
45,562

 
$
39,142

Raw materials, production parts and work-in-process
25,107

 
23,980

LIFO reserve
(28,190
)
 
(28,190
)
Total LIFO inventories
42,479

 
34,932

Inventories carried at FIFO:
 

 
 

Finished goods
57,771

 
31,044

Raw materials, production parts and work-in-process
41,329

 
12,646

Total FIFO inventories
99,100

 
43,690

Total inventories
$
141,579

 
$
78,622

The LIFO reserve approximates the difference between LIFO carrying cost and FIFO.
8.
Goodwill and Intangible Assets
The changes in the carrying value of Goodwill for the six months ended June 30, 2017 were as follows:
 
Goodwill
 
Accumulated
Impairment
Losses
 
Total
Balance as of December 31, 2016
$
58,397

 
$
(37,332
)
 
$
21,065

Additions
152,713

 

 
152,713

Purchase accounting adjustments
(2,048
)
 

 
(2,048
)
Foreign currency fluctuations
13,736

 
(2,216
)
 
11,520

Balance as of June 30, 2017
$
222,798

 
$
(39,548
)
 
$
183,250

The balances of acquired Intangible Assets, excluding Goodwill, as of June 30, 2017 and December 31, 2016, were as follows:
 
Customer Lists
 
Trade Name
 
Technology
 
Noncompete Agreement
 
Total
Balance as of June 30, 2017
 
 
 
 
 
 
 
 
 
Original cost
$
136,503

 
$
33,954

 
$
5,247

 
$
3,424

 
$
179,128

Accumulated amortization
(8,697
)
 
(823
)
 
(2,982
)
 
(428
)
 
(12,930
)
Carrying value
$
127,806

 
$
33,131

 
$
2,265

 
$
2,996

 
$
166,198

Weighted average original life (in years)
15

 
11

 
14

 
2

 
 

Balance as of December 31, 2016
 

 
 
 
 

 
 
 
 

Original cost
$
8,016

 
$
2,000

 
$
5,136

 
$

 
$
15,152

Accumulated amortization
(5,948
)
 

 
(2,744
)
 

 
(8,692
)
Carrying value
$
2,068

 
$
2,000

 
$
2,392

 
$

 
$
6,460

Weighted average original life (in years)
15

 
15

 
13

 
0

 
 

The additions to Goodwill during the first six months of 2017 were based on the preliminary purchase price allocation of our acquisition of the IPC Group and adjustments to the preliminary purchase price allocation related to our acquisition of the Florock brand and the assets of Dofesa Barrido Mecanizado, as described further in Note 5.
As part of our acquisition of the IPC Group, we acquired a Trade Name, Customer Lists and a Noncompete Agreement for a preliminary fair value measurement of $148,744. Further details regarding the preliminary purchase price allocation of our acquisition of the IPC Group described is described further in Note 5.

14


As part of the formation of the i-team North America B.V. joint venture, we purchased the distribution rights to sell the i-mop in North America for $2,500. The distribution rights were recorded in Intangible Assets, Net as a customer list on the Condensed Consolidated Balance Sheets as of June 30, 2017. The i-mop distribution rights have a useful life of five years. Further details regarding the joint venture are discussed in Note 3.
Amortization expense on Intangible Assets for the three and six months ended June 30, 2017 was $3,536 and $3,780, respectively. Amortization expense on Intangible Assets for the three and six months ended June 30, 2016 was $112 and $224, 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 2017
$
7,043

2018
14,085

2019
12,801

2020
12,374

2021
12,374

Thereafter
107,521

Total
$
166,198

9.
Debt
JPMorgan Credit Facility
In order to finance the acquisition of the IPC Group, the Company and certain of our foreign subsidiaries entered into a Credit Agreement (the “2017 Credit Agreement”) with JPMorgan, as administrative agent, Goldman Sachs Bank USA, as syndication agent, Wells Fargo, National Association, U.S. Bank National Association, and HSBC Bank USA, National Association, as co-documentation agents, and the lenders (including JPMorgan) from time to time party thereto on April 4, 2017. The 2017 Credit Agreement provides the Company and certain of our foreign subsidiaries access to a senior secured credit facility until April 4, 2022, consisting of a multi-tranche term loan facility in an amount up to $400,000 and a revolving facility in an amount up to $200,000 with an option to expand the revolving facility by $150,000, 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 2017 Credit Agreement ranges from an annual rate of 0.175% to 0.35%, depending on the Company’s leverage ratio. Borrowings denominated in U.S. dollars under the 2017 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 LIBOR rate for a one month period, but in any case, not less than 0%, plus, in any such case, 1.00%, plus an additional spread of 0.075% to 0.90% for revolving loans and 0.25% to 1.25% for term loans, depending on the Company’s leverage ratio, or (b) the LIBOR Rate, as adjusted for statutory reserve requirements for eurocurrency liabilities, but in any case, not less than 0%, plus an additional spread of 1.075% to 1.90% for revolving loans and 1.25% to 2.25% for term loans, depending on the Company’s leverage ratio.
Upon entry into the 2017 Credit Agreement, the Company repaid $45,000 in outstanding borrowings under our Amended and Restated Credit Agreement, as described in Note 9 of our annual report on Form 10-K for the year ended December 31, 2016, and terminated the Amended and Restated Credit Agreement.
The 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 Credit Agreement also contains financial covenants, including the ratio of consolidated total indebtedness to consolidated earnings before income, taxes, depreciation and amortization ("EBITDA"), as well as the ratio of consolidated EBITDA to consolidated interest expense. These financial covenants may restrict our ability to pay dividends and purchase outstanding shares of our common stock. At June 30, 2017, we were in compliance with these financial covenants.
The full terms and conditions of the senior secured credit facility, including our financial covenants, are set forth in the 2017 Credit Agreement. A copy of the 2017 Credit Agreement was filed as Exhibit 10.1 to the Company's Current Report on Form 8-K filed April 5, 2017 and is incorporated by reference herein.

15


Issuance of 5.625% Senior Notes due 2025
On April 18, 2017, we issued and sold $300,000 in aggregate principal amount of our 5.625% Senior Notes due 2025 (the “Notes”), pursuant to an Indenture, dated as of April 18, 2017, among the Company, the Guarantors (as defined therein), and Wells Fargo Bank, National Association, a national banking association, as trustee. The Notes are guaranteed by Tennant Coatings, Inc. and Tennant Sales and Service Company (collectively, the “Guarantors”), which are wholly owned subsidiaries of the Company. 
The Notes will mature on May 1, 2025. Interest on the Notes will accrue at the rate of 5.625% per annum and will be payable semiannually in cash on each May 1 and November 1, commencing on November 1, 2017.
The Notes and the guarantees will constitute senior unsecured obligations of the Company and the Guarantors, respectively.  The Notes and the guarantees, respectively, will be: (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.
We used the net proceeds from this offering to refinance a $300,000 term loan under our 2017 Credit Agreement that we borrowed as part of the financing for the acquisition of the IPC Group and to pay related fees and expenses.
The full terms and conditions of the Indenture are set forth in Exhibit 4.1 to the Company's Current Report on Form 8-K filed April 24, 2017 and is incorporated by reference herein.
Registration Rights Agreement
In connection with the issuance and sale of the Notes, the Company entered into a Registration Rights Agreement, dated April 18, 2017, among the Company, the Guarantors and Goldman, Sachs & Co. and J.P. Morgan Securities LLC (the “Registration Rights Agreement”). Pursuant to the Registration Rights Agreement, the Company agreed (1) to use its commercially reasonable efforts to consummate an exchange offer to exchange the Notes for new registered notes (the “Exchange Notes”), with terms substantially identical in all material respects with the Notes (except that the Exchange Notes will not contain terms with respect to additional interest, registration rights or transfer restrictions) and (2) if required, to have a shelf registration statement declared effective with respect to resales of the Notes. If the Company fails to satisfy its obligations under the Registration Rights Agreement within 360 days, it will be required to pay additional interest to the holders of the Notes under certain circumstances.
The Registration Rights Agreement is incorporated by reference to Exhibit 4.2 to the Company's Current Report on Form 8-K filed April 24, 2017.
Debt outstanding at June 30, 2017 is summarized as follows:
 
June 30,
2017
 
December 31,
2016
Long-Term Debt:
 
 
 
Senior Unsecured Notes
$
300,000

 
$

Credit Facility Borrowings
117,750

 
36,143

Capital Lease Obligations
688

 
51

Total Long-Term Debt
418,438

 
36,194

Less: Unamortized Debt Issuance Costs
(7,415
)
 

Less: Current Maturities of Credit Facility Borrowings, Net of Debt Issuance Costs(1)
(4,905
)
 
(3,459
)
Less: Current Maturities of Capital Lease Obligations(1)
(402
)
 

Long-Term Portion, Net
$
405,716

 
$
32,735

(1) 
Current maturities of long-term debt includes $5,000 of current maturities, less $95 of unamortized debt issuance costs, under our 2017 Credit Agreement and $402 of current maturities of capital lease obligations.

16


As of June 30, 2017, we had outstanding borrowings under our 2017 Credit Agreement, totaling $97,750 under our term loan facility and $20,000 under our revolving facility. There were $300,000 in outstanding borrowings under the Notes as of June 30, 2017. In addition, we had stand alone letters of credit and bank guarantees outstanding in the amount of $4,645. Commitment fees on unused lines of credit for the six months ended June 30, 2017 were $200. The overall weighted average cost of debt is approximately 4.9% and, net of a related cross-currency swap instrument, is approximately 4.2%. Further details regarding the cross-currency swap instrument are discussed in Note 11.
Prudential Investment Management, Inc.
In March 2017, we repaid $11,143 of debt evidenced by the notes issued under our Private Shelf Agreement, as described in Note 9 of our annual report on Form 10-K for the year ended December 31, 2016, and terminated the Private Shelf Agreement.
HSBC Bank (China) Company Limited, Shanghai Branch
On June 20, 2012, we entered into a banking facility with the HSBC Bank (China) Company Limited, Shanghai Branch in the amount of $5,000. As of June 30, 2017, there were no outstanding borrowings on this facility.
10.
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 six months ended June 30, 2017 and 2016 were as follows:
 
Six Months Ended
 
June 30
 
2017
 
2016
Beginning balance
$
10,960

 
$
10,093

Additions charged to expense
5,815

 
5,946

Acquired warranty obligations
384

 

Foreign currency fluctuations
154

 
48

Claims paid
(5,872
)
 
(5,766
)
Ending balance
$
11,441

 
$
10,321

11.
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.
We evaluate hedge effectiveness on our hedges that are designated and qualify for hedge accounting at the inception of the hedge prospectively, as well as retrospectively, and record any ineffective portion of the hedging instruments in Net Foreign Currency Transaction (Losses) Gains in our Condensed Consolidated Statements of Operations. The time value of purchased contracts is recorded in Net Foreign Currency Transaction (Losses) Gains in our Condensed Consolidated Statements of Operations.

17


Balance Sheet Hedging
Hedges of Foreign Currency Assets and Liabilities
We hedge portions of our net recognized foreign currency denominated assets and liabilities with foreign exchange forward contracts to reduce the risk that the value of these assets and liabilities will be adversely affected by changes in exchange rates. These contracts hedge assets and liabilities that are denominated in foreign currencies and are carried at fair value as either assets or liabilities on the Condensed Consolidated Balance Sheets with changes in the fair value recorded to Net Foreign Currency Transaction (Losses) Gains in our Condensed Consolidated Statements of Operations. These contracts do not subject us to material balance sheet risk due to exchange rate movements because gains and losses on these derivatives are intended to offset gains and losses on the assets and liabilities being hedged. At June 30, 2017 and December 31, 2016, the notional amounts of foreign currency forward exchange contracts outstanding not designated as hedging instruments were $71,415 and $42,866, respectively.
During the first quarter of 2017, in connection with our acquisition of IPC Group, we entered into a foreign currency option contract not designated as a hedging instrument for a notional amount of €180,000. The option contract has since expired and there were no outstanding foreign currency option contracts not designated as hedging instruments as of June 30, 2017 and December 31, 2016.
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 $2,781 and $2,127 as of June 30, 2017 and December 31, 2016, respectively. The notional amounts of outstanding foreign currency option contracts designated as cash flow hedges were $8,989 and $8,522 as of June 30, 2017 and December 31, 2016, respectively.
To receive hedge accounting treatment, all hedging relationships are formally documented at the inception of the hedge, and the hedges must be highly effective in offsetting changes to future cash flows on hedged transactions. We record changes in the fair value of these cash flow hedges in Accumulated Other Comprehensive Loss in our Condensed Consolidated Balance Sheets, until the forecasted transaction occurs. When the forecasted transaction occurs, we reclassify the related gain or loss on the cash flow hedge to Net Sales in our Condensed Consolidated Statements of Operations. In the event the hedge becomes ineffective, the underlying forecasted transaction does not occur, or it becomes probable that it will not occur, we reclassify the gain or loss on the related cash flow hedge from Accumulated Other Comprehensive Loss to Net Foreign Currency Transaction (Losses) Gains in our Condensed Consolidated Statements of Operations at that time. If we do not elect hedge accounting, or the contract does not qualify for hedge accounting treatment, the changes in fair value from period to period are recorded in Net Foreign Currency Transaction (Losses) Gains in our Condensed Consolidated Statements of Operations.
Foreign Currency Derivatives
We use foreign currency exchange rate derivatives to hedge our exposure to fluctuations in exchange rates for anticipated intercompany cash transactions between Tennant Company and its subsidiaries. During the second quarter of 2017 we entered into Euro to US Dollar foreign exchange cross currency swaps for all of the anticipated cash flows associated with an intercompany loan from a wholly-owned European subsidiary. We entered into these foreign exchange cross currency swaps to hedge the foreign currency denominated cash flows associated with this intercompany loan, and accordingly, they are not speculative in nature. We designated these cross currency swaps as cash flow hedges. The hedged cash flows as of June 30, 2017 included €184,800 of total notional value. As of June 30, 2017, the aggregate scheduled interest payments over the course of the loan and related swaps amounted to €34,800. The scheduled maturity and principal payment of the loan and related swaps of €150,000 are due in April 2022. There were no cross currency swaps designated as cash flow hedges as of December 31, 2016.

18


The fair value of derivative instruments on our Condensed Consolidated Balance Sheets as of June 30, 2017 and December 31, 2016 were as follows:
 
 
June 30, 2017
 
December 31, 2016
 
 
Fair Value Asset Derivatives
 
Fair Value Liability Derivatives
 
Fair Value Asset Derivatives
 
Fair Value Liability Derivatives
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
Foreign currency option contracts(1)
 
$
78

 
$

 
$
184

 
$

Foreign currency forward contracts(1)
 
10,154

 
26,090

 

 
13

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
Foreign currency option contracts
 

 

 

 

Foreign currency forward contracts(1)
 
$
713

 
$
1,324

 
$
12

 
$
162

(1) 
Contracts that mature within the next 12 months are included in Other Current Assets and Other Current Liabilities for asset derivatives and liability derivatives, respectively, on our Condensed Consolidated Balance Sheets. Contracts with maturities greater than 12 months are included in Other Assets and Other Liabilities for asset derivatives and liability derivatives, respectively, on our Condensed Consolidated Balance Sheets. Amounts included in our Condensed Consolidated Balance Sheets are recorded net where a right of offset exists with the same derivative counterparty.
As of June 30, 2017, we anticipate reclassifying approximately $2,252 of losses from Accumulated Other Comprehensive Loss to net earnings during the next 12 months.
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 six months ended June 30, 2017 was as follows:
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30, 2017
 
June 30, 2017
 
 
Foreign Currency Option Contracts
 
Foreign Currency Forward Contracts
 
Foreign Currency Option Contracts
 
Foreign Currency Forward Contracts
Derivatives in cash flow hedging relationships:
 
 
 
 
 
 
 
 
Net loss recognized in Other Comprehensive Income, net of
tax(1)
 
$
(47
)
 
$
(9,517
)
 
$
(137
)
 
$
(9,534
)
Net gain (loss) reclassified from Accumulated Other Comprehensive Loss into earnings, net of tax, effective portion to Net Sales
 
43

 
(83
)
 
1

 
(102
)
Net gain reclassified from Accumulated Other Comprehensive Loss into earnings, net of tax, effective portion to Interest Income
 

 
449

 

 
449

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

 
(7,148
)
 

 
(7,148
)
Net (loss) gain recognized in earnings(2)
 
(4
)
 
3

 
(5
)
 
5

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

 
$
(3,939
)
 
$
(1,132
)
 
$
(5,307
)

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 Operations for the three and six months ended June 30, 2016 was as follows:
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30, 2016
 
June 30, 2016
 
 
Foreign Currency Option Contracts
 
Foreign Currency Forward Contracts
 
Foreign Currency Option Contracts
 
Foreign Currency Forward Contracts
Derivatives in cash flow hedging relationships:
 
 
 
 
 
 
 
 
Net loss recognized in Other Comprehensive Income, net of tax(1)
 
$
(44
)
 
$
(29
)
 
$
(230
)
 
$
(65
)
Net loss reclassified from Accumulated Other Comprehensive Loss into earnings, net of tax, effective portion to Net Sales
 

 
(84
)
 

 
(26
)
Net loss recognized in earnings(2)
 

 

 
(6
)
 

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

 
$
(371
)
 
$

 
$
(2,062
)
(1) 
Net change in the fair value of the effective portion classified in Other Comprehensive Income.
(2) 
Ineffective portion and amount excluded from effectiveness testing classified in Net Foreign Currency Transaction (Losses) Gains.
(3) 
Classified in Net Foreign Currency Transaction (Losses) Gains.
12.
Fair Value Measurements
Estimates of fair value for financial assets and financial liabilities are based on the framework established in the accounting guidance for fair value measurements. The framework defines fair value, provides guidance for measuring fair value and requires certain disclosures. The framework discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow) and the cost approach (cost to replace the service capacity of an asset or replacement cost). The framework utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:
Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
Level 3: Unobservable inputs that reflect the reporting entity’s own assumptions.
Our population of assets and liabilities subject to fair value measurements on a recurring basis at June 30, 2017 is as follows:
 
Fair
Value
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
Foreign currency forward exchange contracts
$
10,867

 
$

 
$
10,867

 
$

Foreign currency option contracts
78

 

 
78

 

Total Assets
$
10,945

 
$

 
$
10,945

 
$

Liabilities:
 

 
 

 
 

 
 

Foreign currency forward exchange contracts
$
27,414

 
$

 
$
27,414

 
$

Foreign currency option contracts
$

 

 

 

Total Liabilities
$
27,414

 
$

 
$
27,414

 
$

Our foreign currency forward and option 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 11.

20


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 value of our Long-Term Debt approximates cost based on the borrowing rates currently available to us for bank loans with similar terms and remaining maturities.
From time to time, we measure certain assets at fair value on a non-recurring basis, including evaluation of long-lived assets, goodwill and other intangible assets, as part of a business acquisition. These assets are measured and recognized at amounts equal to the fair value determined as of the date of acquisition. Fair value valuations are based on the information available as of the acquisition date and the expectations and assumptions that have been deemed reasonable by us. There are inherent uncertainties and management judgment required in these determinations. The fair value measurements of assets acquired and liabilities assumed as part of a business acquisition are based on valuations involving significant unobservable inputs, or Level 3, in the fair value hierarchy.
These assets are also subject to periodic impairment testing by comparing the respective carrying value of each asset to the estimated fair value of the reporting unit or asset group in which they reside. In the event we determine these assets to be impaired, we would recognize an impairment loss equal to the amount by which the carrying value of the reporting unit, impaired asset or asset group exceeds its estimated fair value. These periodic impairment tests utilize company-specific assumptions involving significant unobservable inputs, or Level 3, in the fair value hierarchy.
13.
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, 2016. We have contributed $186 and $86 during the second quarter of 2017 and $265 and $295 during the first six months of 2017 to our pension plans and postretirement medical plan, respectively.
The components of the net periodic cost (benefit) for the three and six months ended June 30, 2017 and 2016 were as follows:
 
 
Three Months Ended
 
 
June 30
 
 
Pension Benefits
 
Postretirement
 
 
U.S. Plans
 
Non-U.S. Plans
 
Medical Benefits
 
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
Service cost
 
$

 
$
97

 
$
24

 
$
36

 
$
20

 
$
24

Interest cost
 
390

 
415

 
129

 
103

 
90

 
100

Expected return on plan assets
 
(586
)
 
(603
)
 
(101
)
 
(97
)
 

 

Amortization of net actuarial loss
 
11

 
8

 

 

 

 

Amortization of prior service cost
 

 
10

 
49

 
32

 

 

Settlement charge
 
205

 

 

 

 

 

Foreign currency
 

 

 
234

 
(16
)
 

 

Net periodic cost (benefit)
 
$
20

 
$
(73
)
 
$
335

 
$
58

 
$
110

 
$
124


21


 
 
Six Months Ended
 
 
June 30
 
 
Pension Benefits
 
Postretirement
 
 
U.S. Plans
 
Non-U.S. Plans
 
Medical Benefits
 
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
Service cost
 
$

 
$
177

 
$
48

 
$
72

 
$
40

 
$
48

Interest cost
 
780

 
830

 
219

 
208

 
181

 
199

Expected return on plan assets
 
(1,171
)
 
(1,200
)
 
(197
)
 
(194
)
 

 

Amortization of net actuarial loss
 
21

 
17

 

 

 

 

Amortization of prior service cost
 

 
21

 
96

 
64

 

 

Settlement charge
 
205

 

 

 

 

 

Foreign currency
 

 

 
229

 
24

 

 

Net periodic (benefit) cost
 
$
(165
)
 
$
(155
)
 
$
395

 
$
174

 
$
221

 
$
247

14.
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 June 30, 2017, of those leases that contain residual value guarantees, the aggregate residual value at lease expiration was $14,700, of which we have guaranteed $13,319. As of June 30, 2017, we have recorded a liability for the estimated end of term loss related to this residual value guarantee of $374 for certain vehicles within our fleet. Our fleet also contains vehicles we estimate will settle at a gain. Gains on these vehicles will be recognized at the end of the lease term.
The minimum rentals for aggregate lease commitments as of June 30, 2017 were as follows:
Remaining 2017
 
$
7,702

2018
 
10,540

2019
 
7,074

2020
 
4,380

2021
 
2,488

Thereafter
 
4,183

Total
 
$
36,367

15.
Accumulated Other Comprehensive Loss
Components of Accumulated Other Comprehensive Loss, net of tax, within the Condensed Consolidated Balance Sheets, are as follows:
 
June 30, 2017
 
December 31, 2016
Foreign currency translation adjustments
$
(28,404
)
 
$
(44,444
)
Pension and retiree medical benefits
(5,251
)
 
(5,391
)
Cash flow hedge
(2,959
)
 
(88
)
Total Accumulated Other Comprehensive Loss
$
(36,614
)
 
$
(49,923
)

22


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, 2016
$
(44,444
)
 
$
(5,391
)
 
$
(88
)
 
$
(49,923
)
Other comprehensive income (loss) before reclassifications
16,040

 
127

 
(9,671
)
 
6,496

Amounts reclassified from Accumulated Other Comprehensive Loss

 
13

 
6,800

 
6,813

Net current period other comprehensive income (loss)
$
16,040

 
$
140

 
$
(2,871
)
 
$
13,309

June 30, 2017
$
(28,404
)
 
$
(5,251
)
 
$
(2,959
)
 
$
(36,614
)
16.
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 2013 and, with limited exceptions, state and foreign income tax examinations for taxable years before 2012.
We recognize potential accrued interest and penalties related to unrecognized tax benefits in Income Tax Expense. In addition to the liability of $2,790 for unrecognized tax benefits as of June 30, 2017, there was approximately $536 for accrued interest and penalties. The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate as of June 30, 2017 was $2,433. To the extent interest and penalties are not assessed with respect to uncertain tax positions, amounts accrued will be revised and reflected as an adjustment of the Income Tax Expense.
Unrecognized tax benefits were reduced by $138 during the first six months of 2017 as a result of the expiration of the statute of limitations in various jurisdictions and settlement with tax authorities.
We are currently 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.
17.
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, 2016. During the three months ended June 30, 2017 and 2016, we recognized total Share-Based Compensation Expense of $1,049 and $1,789, respectively. During the six months ended June 30, 2017 and 2016, we recognized total Share-Based Compensation Expense of $3,622 and $4,426, respectively. The total excess tax benefit recognized for share-based compensation arrangements during the six months ended June 30, 2017 and 2016 was $1,144 and $246, respectively.
During the first six months of 2017, we granted 19,971 restricted shares. The weighted average grant date fair value of each share awarded was $73.16. Restricted share awards generally have a three year vesting period from the effective date of the grant. The total fair value of shares vested during the six months ended June 30, 2017 and 2016 was $1,250 and $1,724, respectively.

23


18.
(Loss) Earnings Attributable to Tennant Company Per Share
The computations of Basic and Diluted (Loss) Earnings Attributable to Tennant Company per Share were as follows:
 
Three Months Ended
 
Six Months Ended
 
June 30
 
June 30
 
2017
 
2016
 
2017
 
2016
Numerator:
 
 
 
 
 
 
 
Net (Loss) Earnings Attributable to Tennant Company
$
(2,591
)
 
$
15,328

 
$
(6,548
)
 
$
19,767

Denominator:
 
 
 
 
 
 
 
Basic - Weighted Average Shares Outstanding
17,693,102

 
17,508,022

 
17,645,090

 
17,526,107

Effect of Dilutive Securities:
 
 
 
 
 
 
 
Share-Based Compensation Plans

 
425,221

 

 
428,060

Diluted - Weighted Average Shares Outstanding
17,693,102

 
17,933,243

 
17,645,090

 
17,954,167

Basic (Loss) Earnings per Share
$
(0.15
)
 
$
0.88

 
$
(0.37
)
 
$
1.13

Diluted (Loss) Earnings per Share
$
(0.15
)
 
$
0.85

 
$
(0.37
)
 
$
1.10

 
Excluded from the dilutive securities shown above were options to purchase 735,377 and 408,979 shares of Common Stock during the three months ended June 30, 2017 and 2016, respectively. Excluded from the dilutive securities shown above were options to purchase 716,401 and 405,123 shares of Common Stock during the six months ended June 30, 2017 and 2016, 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.
19.
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.
Net Sales attributed to each geographic area for the three and six months ended June 30, 2017 and 2016 were as follows: 
 
Three Months Ended
 
Six Months Ended
 
June 30
 
June 30
 
2017
 
2016
 
2017
 
2016
Americas
$
169,146

 
$
163,857

 
$
311,916

 
$
297,410

EMEA
77,356

 
34,391

 
110,632

 
65,124

APAC
24,289

 
18,580

 
39,302

 
34,158

Total
$
270,791

 
$
216,828

 
$
461,850

 
$
396,692

 
Net Sales are attributed to each geographic area based on the end user country and are net of intercompany sales.
20.
Related Party Transactions
During the first quarter of 2008, we acquired Sociedade Alfa Ltda. and entered into lease agreements for certain properties owned by or partially owned by the former owners of this entity. Some of these individuals are current employees of Tennant. Lease payments made under these lease agreements are not material to our financial position or results of operations.

24


Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Overview
Tennant Company is a world leader in designing, manufacturing and marketing solutions that empower customers to achieve quality cleaning performance, significantly reduce their environmental impact and help create a cleaner, safer, healthier world. Tennant is committed to creating and commercializing breakthrough, sustainable cleaning innovations to enhance its broad suite of products including: floor maintenance and outdoor cleaning equipment, detergent-free and other sustainable cleaning technologies, cleaning tools and supplies, aftermarket parts and consumables, equipment maintenance and repair service, specialty surface coatings and asset management solutions. Tennant products are used in many types of environments including: Retail establishments, distribution centers, factories and warehouses, public venues such as arenas and stadiums, office buildings, schools and universities, hospitals and clinics, parking lots and streets, and more. Customers include contract cleaners to whom organizations outsource facilities maintenance, as well as businesses that perform facilities maintenance themselves. The Company reaches these customers through the industry's largest direct sales and service organization and through a strong and well-supported network of authorized distributors worldwide.
Net Loss Attributable to Tennant Company for the second quarter of 2017 was $2.6 million, or $(0.15) per diluted share, as compared to Net Earnings of $15.3 million, or $0.85 per diluted share, in the second quarter of 2016. Operating Profit for the second quarter of 2017 was $9.2 million, or 3.4% of Net Sales, as compared to Operating Profit of $22.6 million, or 10.4% of Net Sales, in the second quarter of 2016. The second quarter of 2017 Operating Profit was $13.4 million lower than the second quarter of 2016 Operating Profit due primarily to the $6.2 million fair value inventory step-up flow through in our 2017 second quarter Cost of Sales and $4.7 million of acquisition costs in our 2017 second quarter Selling & Administrative ("S&A") Expense, both related to our acquisition of the IPC Group. In addition, the second quarter of 2017 Net Loss Attributable to Tennant Company also included $6.2 million pre-tax of financing costs in our 2017 second quarter Total Other (Expense) Income, Net reflecting the write-off of debt issuance costs related to the refinancing for our acquisition of the IPC Group.
Net Loss Attributable to Tennant Company for the first six months of 2017 was $6.5 million, or $(0.37) per diluted share, as compared to Net Earnings of $19.8 million, or $1.10 per diluted share, in the first six months of 2016. Operating Profit for the first six months of 2017 was $6.5 million, or 1.4% of Net Sales, as compared to Operating Profit of $29.7 million, or 7.5% of Net Sales, in the first six months of 2016. The first six months of 2017 Operating Profit was $23.2 million lower than the first six months of 2016 Operating Profit due primarily to the $6.2 million fair value inventory step-up flow through in our 2017 first six months Cost of Sales and $7.6 million of acquisition costs in our 2017 first six months S&A Expense, both related to our acquisition of the IPC Group. We also recorded an $8.0 million restructuring charge in the first six months of 2017 S&A Expense to better align our global resources and expense structure with a lower growth global economic environment. In addition, the first six months of 2017 Net Loss Attributable to Tennant Company also included $7.4 million pre-tax of financing costs related to our acquisition of the IPC Group.
Net Earnings for the second quarter of 2016 were $15.3 million, or $0.85 per diluted share, as compared to Net Earnings of $14.8 million, or $0.79 per diluted share, in the second quarter of 2015. Operating Profit for the second quarter of 2016 was $22.6 million, or 10.4% of Net Sales, as compared to Operating Profit of $22.6 million, or 10.5% of Net Sales, in the second quarter of 2015. Operating Profit during the second quarter of 2016 was favorably impacted by higher Net Sales, despite impacts from unfavorable foreign currency exchange and a divestiture, which was offset by a 20 basis point decline in Gross Margin due primarily to the impact from foreign currency exchange. Due to the continued strength of the U.S. dollar relative to other currencies in the 2016 second quarter, foreign currency exchange reduced Operating Profit by approximately $1.1 million.
Net Earnings for the first six months of 2016 and 2015 were both $19.8 million, and $1.10 and $1.06 per diluted share, respectively. Operating Profit for the first six months of 2016 was $29.7 million, or 7.5% of Net Sales, as compared to Operating Profit of $30.8 million, or 7.7% of Net Sales, in the first six months of 2015. Operating Profit during the first six months of 2016 was unfavorably impacted by lower Net Sales due to the impacts from unfavorable foreign currency exchange and a divestiture, and lower Gross Profit due primarily to the impact from foreign currency exchange. Due to the continued strength of the U.S. dollar relative to other currencies in the first six months of 2016, foreign currency exchange reduced Operating Profit by approximately $2.2 million.

25


Historical Results
The following table compares the historical results of operations for the three months ended June 30, 2017 and 2016, respectively, and as a percentage of Net Sales (in thousands, except per share data and percentages): 
 
Three Months Ended
 
Six Months Ended
 
June 30
 
June 30
 
2017
 
%
 
2016
 
%
 
2017
 
%
 
2016
 
%
Net Sales
$
270,791

 
100.0

 
$
216,828

 
100.0

 
$
461,850

 
100.0

 
$
396,692

 
100.0

Cost of Sales
166,237

 
61.4

 
121,539

 
56.1

 
277,560

 
60.1

 
223,901

 
56.4

Gross Profit
104,554

 
38.6

 
95,289

 
43.9

 
184,290

 
39.9

 
172,791

 
43.6

Operating Expense:
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
Research and Development Expense
7,886

 
2.9

 
8,390

 
3.9

 
16,332

 
3.5

 
16,294

 
4.1

Selling and Administrative Expense
87,513

 
32.3

 
64,253

 
29.6

 
161,416

 
34.9

 
126,692

 
31.9

Loss on Sale of Business

 

 
87

 

 

 

 
149

 

Total Operating Expense
95,399

 
35.2

 
72,730

 
33.5

 
177,748

 
38.5

 
143,135

 
36.1

Profit from Operations
9,155

 
3.4

 
22,559

 
10.4

 
6,542

 
1.4

 
29,656

 
7.5

Other Income (Expense):
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
Interest Income
793

 
0.3

 
40

 

 
877

 
0.2

 
81

 

Interest Expense
(11,833
)
 
(4.4
)
 
(288
)
 
(0.1
)
 
(12,627
)
 
(2.7
)
 
(590
)
 
(0.1
)
Net Foreign Currency Transaction (Losses) Gains
(336
)
 
(0.1
)
 
597

 
0.3

 
(1,533
)
 
(0.3
)
 
324

 
0.1

Other Expense, Net
(197
)
 
(0.1
)
 
(314
)
 
(0.1
)
 
(218
)
 

 
(350
)
 
(0.1
)
Total Other (Expense) Income, Net
(11,573
)
 
(4.3
)
 
35

 

 
(13,501
)
 
(2.9
)
 
(535
)
 
(0.1
)
(Loss) Profit Before Income Taxes
(2,418
)
 
(0.9
)
 
22,594

 
10.4

 
(6,959
)
 
(1.5
)
 
29,121

 
7.3

Income Tax Expense (Benefit)
238

 
0.1

 
7,266

 
3.4

 
(346
)
 
(0.1
)
 
9,354

 
2.4

Net (Loss) Earnings Including Noncontrolling Interest
(2,656
)
 
(1.0
)
 
15,328

 
7.1

 
(6,613
)
 
(1.4
)
 
19,767

 
5.0

Net Loss Attributable to Noncontrolling Interest
(65
)
 

 

 

 
(65
)
 

 

 

Net (Loss) Earnings Attributable to Tennant Company
$
(2,591
)
 
(1.0
)
 
$
15,328

 
7.1

 
$
(6,548
)
 
(1.4
)
 
$
19,767

 
5.0

Net (Loss) Earnings Attributable to Tennant Company per Diluted Share
$
(0.15
)
 
 
 
$
0.85

 
 

 
$
(0.37
)
 
 
 
$
1.10

 
 
Net Sales
Consolidated Net Sales for the second quarter of 2017 totaled $270.8 million, a 24.9% increase as compared to consolidated Net Sales of $216.8 million in the second quarter of 2016. Consolidated Net Sales for the first six months of 2017 totaled $461.9 million, a 16.4% increase as compared to consolidated Net Sales of $396.7 million for the first six months of 2016.

26


The components of the consolidated Net Sales change for the three and six months ended June 30, 2017 as compared to the same periods in 2016 were as follows:
 
2017 v. 2016
 
Three Months Ended
 
Six Months Ended
 
June 30
 
June 30
Organic Growth:
 
 
 
  Volume
(3.3%)
 
—%
  Price
1.0%
 
1.0%
Organic Growth
(2.3%)

1.0%
  Foreign Currency
(1.0%)
 
(0.5%)
  Acquisitions & Divestiture
28.2%
 
15.9%
Total
24.9%
 
16.4%
 
The 24.9% increase in consolidated Net Sales in the second quarter of 2017 as compared to the same period in 2016 was driven by:
An organic sales decrease of approximately 2.3% which excludes the effects of foreign currency exchange and acquisitions and divestitures, due to an approximate 3.3% volume decrease and a 1.0% price increase. The volume decrease was primarily due to decreased sales in the Americas and Europe, Middle East and Africa ("EMEA") regions. These decreases were partially offset by higher sales in the Asia Pacific ("APAC") region. Sales of new products introduced within the past three years totaled 49% of equipment revenue for the second quarter of 2017. This compares to 34% of equipment revenue in the 2016 second quarter from sales of new products introduced within the past three years. The price increase was the result of selling price increases, typically in the range of 2 percent to 4 percent in most geographies, with an effective date of February 1, 2017. We expect the increase in selling prices to increase Net Sales in the range of 1 percent to 2 percent for the 2017 full year. The impact to gross margin is estimated to be minimal as these selling price increases were taken to offset inflation.
An unfavorable direct foreign currency translation exchange impact of approximately 1.0%.
A favorable impact of 28.2% resulting from the April 2017 acquisition of the IPC Group and the expansion of our commercial floor coatings business through the August 2016 acquisition of the Florock® brand.
The 16.4% increase in consolidated Net Sales in the first six months of 2017 as compared to the same period in 2016 was driven by:
An organic sales increase of approximately 1.0% which excludes the effects of foreign currency exchange and acquisitions and divestitures, due to an approximate 0.0% volume increase and a 1.0% price increase. The volume increase in the EMEA region was offset by volume decreases in the Americas and APAC regions. Sales of new products introduced within the past three years totaled 45% of equipment revenue for the first six months of 2017. This compares to 35% of equipment revenue in the first six months of 2016 from sales of new products introduced within the past three years. The price increase was the result of selling price increases, typically in the range of 2 percent to 4 percent in most geographies, with an effective date of February 1, 2017. We expect the increase in selling prices to increase Net Sales in the range of 1 percent to 2 percent for the 2017 full year. The impact to gross margin is estimated to be minimal as these selling price increases were taken to offset inflation.
An unfavorable direct foreign currency translation exchange impact of approximately 0.5%.
A favorable net impact of 15.9% resulting from the April 2017 acquisition of the IPC Group and the expansion of our commercial floor coatings business through the August 2016 acquisition of the Florock brand, partially offset by the sale of our Green Machines outdoor city cleaning line in January 2016.

27


The following table sets forth the Net Sales by geographic area for the three months and six months ended June 30, 2017 and 2016 and the percentage change from the prior year (in thousands, except percentages):
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30
 
June 30
 
 
2017
 
2016
 
%
 
2017
 
2016
 
%
Americas
 
$
169,146

 
$
163,857

 
3.2
 
$
311,916

 
$
297,410

 
4.9
Europe, Middle East and Africa
 
77,356

 
34,391

 
124.9
 
110,632

 
65,124

 
69.9
Asia Pacific
 
24,289

 
18,580

 
30.7
 
39,302

 
34,158

 
15.1
Total
 
$
270,791

 
$
216,828

 
24.9
 
$
461,850

 
$
396,692

 
16.4
Americas
Net Sales in the Americas were $169.1 million for the second quarter of 2017, an increase of 3.2% from the second quarter of 2016. Organic sales in the second quarter decreased approximately 2.8%, excluding the direct impacts of the IPC Group and Florock acquisitions of 6.0%. The foreign currency translation exchange impact was essentially flat versus the prior year quarter. Sales of new products, particularly the M17 sweeper-scrubber, favorably impacted Net Sales, however this was more than offset by lower sales in the other product categories.
Net Sales in the Americas were $311.9 million for the first six months of 2017, an increase of 4.9% from first six months of 2016. Organic sales in the first six months increased approximately 0.4%, excluding the direct impacts of the IPC Group and Florock acquisitions of 4.0% and favorable foreign currency translation exchange effects of approximately 0.5%. The first quarter 2017 strong sales to strategic accounts and direct sales were more than offset by lower sales in channels and product categories in the 2017 second quarter.
Europe, Middle East and Africa
Net Sales in EMEA were $77.4 million for the second quarter of 2017, an increase of 124.9% from the second quarter of 2016. Organic sales in the second quarter decreased approximately 4.8%, excluding the direct impacts of the IPC Group acquisition of 133.2% and the unfavorable foreign currency translation exchange effects of approximately 3.5%. Solid sales performance in the Central Eastern Europe, Middle East and Africa ("CEEMEA") markets, through our Master Distributor for that area, was more than offset by declines in the other countries.
Net Sales in EMEA were $110.6 million for the first six months of 2017, an increase of 69.9% from first six months of 2016. Organic sales in the first six months increased approximately 4.3%, excluding the direct impacts of the April 2017 IPC Group acquisition and the divestiture of our Green Machines outdoor city cleaning line in January 2016 that had a net favorable effect of 70.1% and unfavorable foreign currency translation exchange effects of approximately 4.5%. Strong sales growth in the CEEMEA markets and many other European countries were partially offset by lower sales in the UK and France.
Asia Pacific
Net Sales in the APAC region were $24.3 million for the second quarter of 2017, an increase of 30.7% from the second quarter of 2016. Organic sales in the second quarter increased approximately 3.1%, excluding the direct impacts of the IPC Group acquisition of 29.6% and the unfavorable foreign currency translation exchange effects of approximately 2.0%. Robust sales growth in China and Southeast Asia were partially offset by sales declines in Australia and Japan.
Net Sales in the APAC were $39.3 million for the first six months of 2017, an increase of 15.1% from the first six months of 2016. Organic sales in the first six months decreased approximately 0.5%, excluding the direct impacts of the IPC Group acquisition of 16.1% and unfavorable foreign currency translation exchange effects of approximately 0.5%. Solid sales growth in China and Korea were more than offset by sales declines in Australia.
Gross Profit
Gross Profit in the second quarter of 2017 was $104.6 million, or 38.6% of Net Sales, as compared to $95.3 million, or 43.9% of Net Sales, in the second quarter of 2016. Gross margin was 530 basis points lower in the second quarter of 2017 due primarily to the $6.2 million fair value inventory step-up flow through related to our acquisition of the IPC Group, continued field service productivity challenges related to organizational changes from the restructuring, the near-term unfavorable impact from investments in manufacturing automation initiatives, and raw material cost inflation.

28


Gross Profit in the first six months of 2017 was $184.3 million, or 39.9% of Net Sales, as compared to $172.8 million, or 43.6% of net sales in the first six months of 2016. Gross margin was 370 basis points lower in the first six months of 2017 due primarily to the $6.2 million fair value inventory step-up flow through related to our acquisition of the IPC Group, field service productivity challenges related to organizational changes from the restructuring, the near-term unfavorable impact from investments in manufacturing automation initiatives, and raw material cost inflation.
Operating Expense
Research & Development Expense
R&D Expense for the second quarter of 2017 was $7.9 million, a decrease of 6.0% from $8.4 million in the second quarter of 2016. R&D Expense as a percentage of Net Sales was 2.9% for the second quarter of 2017 and 3.9% for the second quarter of 2016. The decrease in R&D spending was primarily due to the timing of new product development efforts.
R&D Expense for the first six months of 2017 and 2016 was $16.3 million. R&D Expense as a percentage of Net Sales was 3.5% for the first six months of 2017 and 4.1% for the first six months of 2016.
We continue to invest in developing innovative new products and technologies and the advancement of detergent-free products, fleet management and other sustainable technologies. New products are a key driver of sales growth. There were 27 new products and product variants launched in the first six months of 2017 consisting of a new family of T500 commercial walk-behind scrubbers, the enhanced IRIS® Web Based Fleet Management System, the i-mop and the V3e compact dry canister vacuum. For the full year 2017, we plan to introduce at least 32 new products and product variants, excluding IPC Group products.
Selling & Administrative Expense
S&A Expense in the second quarter of 2017 increased 36.2% to $87.5 million, as compared to $64.3 million in the second quarter of 2016. S&A Expense as a percentage of Net Sales was 32.3% for the second quarter of 2017, an increase of 270 basis points from 29.6% in the second quarter of 2016. S&A Expense in the 2017 second quarter was unfavorably impacted by $4.7 million (170 basis points) of acquisition costs related to our acquisition of the IPC Group.
S&A Expense for the first six months of 2017 increased 27.4% to $161.4 million, as compared to $126.7 million for the first six months of 2016. S&A Expense as a percentage of Net Sales was 34.9% for the first six months of 2017, an increase of 300 basis points from 31.9% in the first six months of 2016. S&A Expense in the first six months of 2017 was unfavorably impacted by $7.6 million (160 basis points) of acquisition costs related to our acquisition of the IPC Group. S&A Expense in the first six months of 2017 was also unfavorably impacted by the $8.0 million (170 basis points) restructuring charge taken in our 2017 first quarter to better align our global resources and expense structure with a lower growth global economic environment. Excluding these costs, S&A Expense was 30 basis points lower as we continued to balance disciplined spending control with investments in key growth initiatives.
Other Expense, Net
Interest Income
Interest Income in the second quarter of 2017 was $0.8 million, as compared to $0.04 million in the second quarter of 2016. Interest Income in the first six months of 2017 was $0.9 million, as compared to $0.1 million in the first six months of 2016. The higher Interest Income in the second quarter and first six months of 2017 as compared to the same periods in 2016 was primarily due to interest income related to foreign currency swap activities.
Interest Expense
Interest Expense in the second quarter of 2017 was $11.8 million, as compared to $0.3 million in the second quarter of 2016. Interest Expense in the first six months of 2017 was $12.6 million, as compared to $0.6 million in the first six months of 2016. The higher Interest Expense in the second quarter and first six months of 2017 as compared to the same periods in 2016 was primarily due to carrying a higher level of debt on our Condensed Consolidated Balance Sheets related to our acquisition activities, as well as a $6.2 million charge to expense the debt issuance costs for loans which were refinanced or repaid, as further described in the Liquidity and Capital Resources section that follows.
Net Foreign Currency Transaction Losses
Net Foreign Currency Transaction Losses in the second quarter of 2017 were $0.3 million, as compared to Net Foreign Currency Transaction Gains of $0.6 million in the second quarter of 2016. The unfavorable change in the impact from foreign currency transactions in the second quarter of 2017 was primarily due to fluctuations in foreign currency rates and settlement of transactional hedging activity in the normal course of business.

29


Net Foreign Currency Transaction Losses in the first six months of 2017 were $1.5 million, as compared to Net Foreign Currency Transaction Gains of $0.3 million in the first six months of 2016. The unfavorable change in the impact from foreign currency transactions in the first six months of 2017 was primarily due to a $1.1 million mark-to-market adjustment of a foreign exchange call option, an instrument held in connection with our acquisition of the IPC Group on April 6, 2017 and also fluctuations in foreign currency rates and settlement of transactional hedging activity in the normal course of business.
Other Expense, Net
There was no significant change in Other Expense, Net in the second quarter and first six months of 2017, as compared to the same periods in 2016.
Income Taxes
The effective tax rate in the second quarter of 2017 was (9.8%), as compared to the effective tax rate in the second quarter of the prior year of 32.2%. The tax expense for the second quarter of 2017 included a $0.05 million tax benefit associated with the $0.2 million pension settlement, a $2.3 million tax benefit associated with $10.9 million of acquisition costs and financing costs related to the IPC Group acquisition, and a $1.7 million tax benefit associated with $6.2 million of expense related to inventory step-up amortization. Excluding these items, the second quarter 2017 overall effective tax rate would have been 29.1%.
The net tax benefit for the first quarter of 2017 included a $2.2 million tax benefit associated with an $8.0 million restructuring charge and a $0.4 million tax benefit associated with $4.0 million of acquisition costs and financing costs related to the IPC Group acquisition.
The year-to-date overall effective tax rate was 5.0% for 2017 compared to 32.1% for 2016. Excluding the effects of 2017 special items, the 2017 year-to-date overall effective tax rate would have been 28.7%.
The decrease in the overall effective tax rate to 28.7% in 2017 compared to 32.1% in 2016, excluding the 2017 special items, was primarily related to the mix in expected full year taxable earnings by country and to the implementation of Accounting Standards Update ("ASU") 2016-09 in Q1 2017. See Note 2 to the Condensed Consolidated Financial Statements for further information regarding the implementation of ASU 2016-09.
We do not have any plans to repatriate the undistributed earnings of non-U.S. subsidiaries. Any repatriation from foreign subsidiaries that would result in incremental taxation is not being considered. It is management's belief that reinvesting these earnings outside the U.S. is the most efficient use of capital.
Liquidity and Capital Resources
Liquidity
Cash and Cash Equivalents totaled $53.3 million at June 30, 2017, as compared to $58.0 million as of December 31, 2016. Wherever possible, cash management is centralized and intercompany financing is used to provide working capital to subsidiaries as needed. Our current ratio was 2.2 as of June 30, 2017 and December 31, 2016, and our working capital was $232.0 million and $165.1 million, respectively. Our debt-to-capital ratio was 59.1% as of June 30, 2017, compared to 11.5% as of December 31, 2016.

30


Cash Flow Summary
Cash (used in) provided by our operating, investing and financing activities is summarized as follows (in thousands):
 
Six Months Ended
 
June 30
 
2017
 
2016
Operating Activities
$
(2,495
)
 
$
12,441

Investing Activities:
 
 
 
Purchases of Property, Plant and Equipment, Net of Disposals
(6,717
)
 
(14,342
)
Issuance of Long-Term Note Receivable
(1,500
)
 

Acquisition of Businesses, Net of Cash Acquired
(354,073
)
 

Purchase of Intangible Asset
(2,500
)
 

Proceeds from Sale of Business

 
285

(Increase) Decrease in Restricted Cash
(118
)
 
120

Financing Activities
361,870

 
(21,822
)
Effect of Exchange Rate Changes on Cash and Cash Equivalents
805

 
(37
)
Net Decrease in Cash and Cash Equivalents
$
(4,728
)
 
$
(23,355
)
Operating Activities
Operating activities used $2.5 million of cash for the six months ended June 30, 2017. Cash used in operating activities was driven primarily by cash outflows from an increase in Inventories of $9.9 million, a decrease in Employee Compensation and Benefits liabilities of $8.3 million, a net cash outflow from Other Assets and Liabilities of $7.6 million, a Net Loss of $6.6 million, an increase in Receivables of $6.0 million and a decrease in Income Taxes Payable of $1.6 million. These cash outflows were partially offset by cash inflows resulting from an increase in Accounts Payable and Other Current Liabilities of $6.2 million and $5.3 million, respectively.
Operating activities provided $12.4 million of cash for the six months ended June 30, 2016. Cash provided by operating activities was driven primarily by cash inflows from Net Earnings of $19.8 million and Income Taxes of $6.7 million. These cash inflows were partially offset by cash outflows resulting from an increase in Accounts Receivable of $12.3 million, a decrease in Employee Compensation and Benefits liabilities of $5.8 million, an increase in Inventories of $3.9 million and a decrease in Other Current Liabilities of $3.9 million.
Management evaluates how effectively we utilize two of our key operating assets, Accounts Receivable and Inventories, using Accounts Receivable “Days Sales Outstanding” (DSO) and “Days Inventory on Hand” (DIOH), on a FIFO basis. The metrics are calculated on a rolling three month basis in order to more readily reflect changing trends in the business. These metrics for the quarters ended were as follows (in days): 
 
June 30,
2017
 
December 31,
2016
 
June 30,
2016
DSO
63
 
59
 
60
DIOH
98
 
89
 
86
As of June 30, 2017, DSO increased 3 days compared to June 30, 2016 and increased 4 days compared to December 31, 2016. The increase was primarily due to the variety of terms offered and mix of business, somewhat offset by the trend of continued proactive management of our receivables by enforcing tighter credit limits and continuing to successfully collect past due balances.
As of June 30, 2017, DIOH increased 12 days as compared to June 30, 2016 and increased 9 days as compared to December 31, 2016. The increase was primarily due to a lower level of sales in the second quarter of 2017 than anticipated that resulted in higher levels of inventory, somewhat offset by progress from inventory reduction initiatives.

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Investing Activities
Investing activities during the six months ended June 30, 2017 used $364.9 million. We used $6.7 million and $2.5 million for net capital expenditures and for the purchase of the distribution rights to sell the i-mop, respectively. We also used $1.5 million as a result of a loan to i-team North America B.V., a joint venture that operates as the distributor of the i-mop in North America. The details regarding the joint venture and our distribution of the i-mop are described further in Note 3 to the Condensed Consolidated Financial Statements. In addition, we used $354.1 million in relation to our acquisition of the IPC group and the final installment payment for the acquisition of the Florock brand and used $0.1 million related to the increase in our Restricted Cash balance. Net capital expenditures included investments in information technology process improvement projects, tooling related to new product development, and manufacturing equipment.
Investing activities during the six months ended June 30, 2016 used $13.9 million. Net capital expenditures used $14.3 million. This was partially offset by proceeds of $0.3 million from the sale of our Green Machines outdoor city cleaning line, as described further in Note 6 to the Condensed Consolidated Financial Statements, as well as proceeds of $0.1 million from a decrease in our Restricted Cash balance. Capital expenditures included investments in information technology process improvement projects, tooling related to new product development, and manufacturing equipment.
Financing Activities
Net cash provided by financing activities was $361.9 million during the first six months of 2017. Proceeds from the incurrence of Long-Term Debt and the issuance of Common Stock provided $440.0 million and $3.8 million, respectively. These cash inflows were partially offset by cash outflows resulting from $58.5 million of Long-Term Debt payments, $16.0 million related to payments of debt issuance costs and Dividend payments of $7.5 million.
Net cash used in financing activities was $21.8 million during the first six months of 2016. The purchases of our Common Stock per our authorized repurchase program used $12.8 million, dividend payments used $7.1 million and the payments of Long-Term Debt used $3.4 million, partially offset by proceeds from the issuance of Common Stock of $1.2 million and the excess tax benefit on stock plans of $0.2 million.
Indebtedness
In order to finance the acquisition of the IPC Group, the Company and certain of our foreign subsidiaries entered into a Credit Agreement (the “2017 Credit Agreement”) with JPMorgan, as administrative agent, Goldman Sachs Bank USA, as syndication agent, Wells Fargo, National Association, U.S. Bank National Association, and HSBC Bank USA, National Association, as co-documentation agents, and the lenders (including JPMorgan) from time to time party thereto on April 4, 2017. The 2017 Credit Agreement provides the Company and certain of our foreign subsidiaries access to a senior secured credit facility until April 4, 2022, consisting of a multi-tranche term loan facility in an amount up to $400.0 million and a revolving facility in an amount up to $200.0 million with an option to expand the revolving facility by $150.0 million, with the consent of the lenders willing to provide additional borrowings in the form of increases to their revolving facility commitment or funding of incremental term loans. Borrowings may be denominated in U.S. dollars or certain other currencies.
Upon entry into the 2017 Credit Agreement, the Company repaid $45.0 million in outstanding borrowings under our Amended and Restated Credit Agreement, as described in Note 9 of our annual report on Form 10-K for the year ended December 31, 2016, and terminated the Amended and Restated Credit Agreement.
The 2017 Credit Agreement contains customary representations, warranties and covenants, including but not limited to covenants restricting the Company’s ability to incur indebtedness and liens and merge or consolidate with another entity. The Credit Agreement also contains financial covenants, including the ratio of consolidated total indebtedness to consolidated earnings before income, taxes, depreciation and amortization ("EBITDA"), as well as the ratio of consolidated EBITDA to consolidated interest expense. These financial covenants may restrict our ability to pay dividends and purchase outstanding shares of our common stock. At June 30, 2017, we were in compliance with these financial covenants.
Further details regarding our financing under the 2017 Credit Agreement are discussed in Note 9 to the Condensed Consolidated Financial Statements.
On April 18, 2017, we issued and sold $300.0 million in aggregate principal amount of our 5.625% Senior Notes due 2025 (the “Notes”), pursuant to an Indenture, dated as of April 18, 2017, among the Company, the Guarantors (as defined therein), and Wells Fargo Bank, National Association, a national banking association, as trustee. The Notes are guaranteed by Tennant Coatings, Inc. and Tennant Sales and Service Company (collectively, the “Guarantors”), which are wholly owned subsidiaries of the Company. 

32


The Notes will mature on May 1, 2025. Interest on the Notes will accrue at the rate of 5.625% per annum and will be payable semiannually in cash on each May 1 and November 1, commencing on November 1, 2017.
We used the net proceeds from this offering to refinance a $300.0 million term loan under our 2017 Credit Agreement that we borrowed as part of the financing for the acquisition of the IPC Group and to pay related fees and expenses.
Further details regarding our financing under the Notes are discussed in Note 9 to the Condensed Consolidated Financial Statements.
In connection with the issuance and sale of the Notes, the Company entered into a Registration Rights Agreement, dated April 18, 2017, among the Company, the Guarantors and Goldman, Sachs & Co. and J.P. Morgan Securities LLC (the “Registration Rights Agreement”). Pursuant to the Registration Rights Agreement, the Company agreed (1) to use its commercially reasonable efforts to consummate an exchange offer to exchange the Notes for new registered notes (the “Exchange Notes”), with terms substantially identical in all material respects with the Notes (except that the Exchange Notes will not contain terms with respect to additional interest, registration rights or transfer restrictions) and (2) if required, to have a shelf registration statement declared effective with respect to resales of the Notes. If the Company fails to satisfy its obligations under the Registration Rights Agreement within 360 days, it will be required to pay additional interest to the holders of the Notes under certain circumstances.
The Registration Rights Agreement is incorporated by reference to Exhibit 4.2 to the Company's Current Report on Form 8-K filed April 24, 2017.
As of June 30, 2017, we had outstanding borrowings under our 2017 Credit Agreement, totaling $97.8 million under our term loan facility and $20.0 million under our revolving facility. There were $300.0 million in outstanding borrowings under the Notes as of June 30, 2017. In addition, we had stand alone letters of credit and bank guarantees outstanding in the amount of $4.6 million. Commitment fees on unused lines of credit for the six months ended June 30, 2017 were $0.2 million. The overall weighted average cost of debt is approximately 4.9% and, net of a related cross-currency swap instrument, is approximately 4.2%. Further details regarding the cross-currency swap instrument are discussed in Note 11 to the Condensed Consolidated Financial Statements.
Prudential Investment Management, Inc.
In March 2017, we repaid $11.1 million of debt evidenced by the notes issued under our Private Shelf Agreement, as described in Note 9 of our annual report on Form 10-K for the year ended December 31, 2016, and terminated the Private Shelf Agreement.
HSBC Bank (China) Company Limited, Shanghai Branch
On June 20, 2012, we entered into a banking facility with the HSBC Bank (China) Company Limited, Shanghai Branch in the amount of $5.0 million. As of June 30, 2017, there were no outstanding borrowings on this facility.
Contractual Obligations
As of June 30, 2017, as a result of our acquisition of the IPC Group, there have been material changes in our contractual obligations related to our minimum rental payments for aggregate operating lease commitments as well as our long-term debt compared to our contractual obligations as disclosed in our annual report on Form 10-K for the year ended December 31, 2016. Further details regarding our contractual obligations related to our aggregate operating lease commitments and long-term debt are discussed in Notes 14 and 9, respectively, to the Condensed Consolidated Financial Statements.
Other than the contractual obligations identified above, there have been no material changes with respect to contractual obligations as disclosed in our annual report on Form 10-K for the year ended December 31, 2016.
Newly Issued Accounting Guidance
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers (Topic 606). This ASU will replace all existing revenue recognition standards and significantly expand the disclosure requirements for revenue arrangements. This guidance requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. This guidance provides a five-step analysis of transactions to determine when and how revenue is recognized. This guidance also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity's contracts with customers.

33


In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which defers the effective date of the new revenue recognition standard by one year from the original effective date specified in ASU No. 2014-09. The guidance now permits us to apply the new revenue recognition standard to annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, which is our fiscal 2018.
Management expects to adopt the revenue recognition standard using the modified retrospective approach. Under this approach, the new standard would only be applied to new contracts and those contracts that are not yet complete at January 1, 2018, with a cumulative catch-up adjustment recorded to beginning retained earnings for existing contracts that still require performance. We are utilizing a comprehensive approach to assess the impact of the standard on the Company by reviewing our current accounting policies and practices to identify potential differences that would result from applying the new requirements to our revenue contracts. We continue to make progress on our contract reviews and are also in the process of evaluating the impact, if any, on changes to our business processes, systems and controls to support recognition and disclosure under the new guidance.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). This ASU changes current U.S. GAAP for lessees to recognize lease assets and lease liabilities on the balance sheet for those leases classified as operating leases under previous U.S. GAAP. Under the new guidance, lessor accounting is largely unchanged. The amendments in this ASU are effective for annual periods beginning after December 15, 2018, including interim periods within that reporting period, which is our fiscal 2019. Early application is permitted. Lessees and lessors must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The transition approach would not require any transition accounting for leases that expired before the earliest comparative period presented. A full retrospective transition approach is prohibited for both lessees and lessors. We will adopt this ASU beginning in 2019. We are currently evaluating the impact of this amended guidance on our consolidated financial statements and related disclosures.
In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. This ASU clarifies the definition of a business when evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. This ASU is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, which is our fiscal 2018. We will apply this guidance to applicable transactions commencing in 2018.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which removes Step 2 of the goodwill impairment test. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. This ASU is effective for annual or any interim goodwill impairment tests beginning after December 15, 2019, which is our fiscal 2020. Early adoption of the standard is permitted for any interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We will apply this guidance to applicable goodwill impairment tests going forward.
In March 2017, the FASB issued ASU No. 2017-07, Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which requires employers to report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost/credit are required to be presented in the income statement separately from the service cost component in nonoperating expenses. In addition, the line items used in the income statement to present the other components of net benefit cost/credit must be disclosed. The amendments also allow only the service cost component to be eligible for capitalization when applicable. This ASU is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, which is our fiscal 2018. We are currently evaluating the impact that this standard is expected to have on our consolidated financial statements and related disclosures.

34


Cautionary Statement Relevant to Forward-Looking Information
This Form 10-Q, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 2, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “intend,” “estimate,” “anticipate,” “believe,” “project,” or “continue” or similar words or the negative thereof. These statements do not relate to strictly historical or current facts and provide current expectations or forecasts of future events. Any such expectations or forecasts of future events are subject to a variety of factors. Particular risks and uncertainties presently facing us include: geopolitical and economic uncertainty throughout the world; the competition in our business; our ability to attract, develop and retain key personnel; our ability to achieve operational efficiencies, including synergistic and other benefits of acquisitions; our substantial indebtedness could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry, expose us to interest rate risk to the extent of any variable rate debt, and prevent us from meeting our covenant and payment obligations related to our debt instruments; our ability to effectively manage organizational changes; our ability to successfully upgrade, evolve and protect our information technology systems; our ability to develop and commercialize new innovative products and services; unforeseen product liability claims or product quality issues; fluctuations in the cost, quality, or availability of raw materials and purchased components; foreign currency exchange rate fluctuations, particularly the relative strength of the U.S. dollar against other major currencies; the occurrence of a significant business interruption; our ability to comply with laws and regulations; and our ability to sufficiently remediate any material weaknesses or significant deficiencies in our internal control over financial reporting.
We caution that forward-looking statements must be considered carefully and that actual results may differ in material ways due to risks and uncertainties both known and unknown. Shareholders, potential investors and other readers are urged to consider these factors in evaluating forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. Additional information about factors that could materially affect our results can be found in Part I, Item 1A, Risk Factors in our annual report on Form 10-K for the year ended December 31, 2016 and Part II, Item 1A of this Form 10-Q.
We undertake no obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. Investors are advised to consult any further disclosures by us in our filings with the SEC and in other written statements on related subjects. It is not possible to anticipate or foresee all risk factors, and investors should not consider any list of such factors to be an exhaustive or complete list of all risks or uncertainties.
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes in our market risk since December 31, 2016. For additional information, refer to Item 7A of our 2016 annual report on Form 10-K for the year ended December 31, 2016.
Item 4.
Controls and Procedures
Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and our Principal Financial and Accounting Officer, have evaluated the effectiveness of our disclosure controls and procedures for the period ended June 30, 2017 (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)). Based on that evaluation, our Chief Executive Officer and our Principal Financial and Accounting Officer have concluded that, due to material weaknesses in internal control over financial reporting described in Part II, Item 9A of our 2016 annual report on Form 10-K for the year ended December 31, 2016, our disclosure controls and procedures were not effective as of June 30, 2017.
Changes in Internal Controls
There were no changes in our internal controls over financial reporting during the most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, other than as described below under the caption "Remediation Plan."
Remediation Plan
We began implementing a remediation plan to address the control deficiencies that led to the material weaknesses mentioned above. The remediation plan includes the following:
Sponsoring ongoing training related to the COSO 2013 Framework best practices for personnel that are accountable for internal control over financing reporting.
Performing a complete review of our accounting for revenue related to equipment maintenance and repair service to ensure the adequacy of the design and implementation of automated and manual controls.
Designing and implementing controls over the determination of technological feasibility and the capitalization of software development costs.

35


We are in the implementation phase of our remediation plan described above. The material weaknesses cannot be considered remediated until the controls have operated for a sufficient period of time and until management has concluded, through testing, that the control is operating effectively. Our goal is to remediate these material weaknesses by the end of 2017.
PART II – OTHER INFORMATION
Item 1.
Legal Proceedings
There are no material pending legal proceedings other than ordinary routine litigation incidental to our business.
Item 1A. Risk Factors
We documented our risk factors in Item 1A of Part I of our annual report on Form 10-K for the fiscal year ended December 31, 2016. Other than the risk factor identified below, there have been no material changes to our risk factors since the filing of that report.
We may not be able to generate sufficient cash to service all of our indebtedness, and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.
In April 2017, in connection with the acquisition of IPC Cleaning S.p.A., we entered into a new senior credit facility and indenture, and issued debt totaling approximately $400,000, consisting of a $100,000 term loan and $300,000 of senior notes, which funded the acquisition and replaced our current debt facility. The new senior credit facility also includes a revolving facility in an amount up to $200,000. We cannot provide assurance that our business will generate sufficient cash flow from operations to meet all our debt service requirements, to pay dividends, to repurchase shares of our common stock, and to fund our general corporate and capital requirements.
Our ability to satisfy our debt obligations will depend upon our future operating performance. We do not have complete control over our future operating performance because it is subject to prevailing economic conditions, and financial, business and other factors.
Our current and future debt service obligations and covenants could have important consequences. These consequences include, or may include, the following:
our ability to obtain financing for future working capital needs or acquisitions or other purposes may be limited;
our funds available for operations, expansions, dividends or other distributions, or stock repurchases may be reduced because we dedicate a significant portion of our cash flow from operations to the payment of principal and interest on our indebtedness;
our ability to conduct our business could be limited by restrictive covenants; and
our vulnerability to adverse economic conditions may be greater than less leveraged competitors and, thus, our ability to withstand competitive pressures may be limited.
Restrictive covenants in our senior credit facility and in our indenture place limits on our ability to conduct our business. Covenants in our senior credit facility and indenture include those that restrict our ability to make acquisitions, incur debt, encumber or sell assets, pay dividends, engage in mergers and consolidations, enter into transactions with affiliates, make investments and permit our subsidiaries to enter into certain restrictive agreements. The senior credit facility additionally contains certain financial covenants. We cannot provide assurance that we will be able to comply with these covenants in the future.
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
On October 31, 2016, the Board of Directors authorized the repurchase of an additional 1,000,000 shares of our common stock. This is in addition to the 393,965 shares remaining under our prior repurchase program as of June 30, 2017. Share repurchases are made from time to time in the open market or through privately negotiated transactions, primarily to offset the dilutive effect of shares issued through our share-based compensation programs. As of June 30, 2017, our 2017 Credit Agreement restricts the payment of dividends or repurchasing of stock if, after giving effect to such payments and assuming no default exists or would result from such payment, our leverage ratio is greater than 2.50 to 1, in such case limiting such payments to an amount ranging from $50.0 million to $75.0 million during any fiscal year based on our leverage ratio after giving effect to such payments.

36


For the Quarter Ended June 30, 2017
 
Total Number
of Shares
Purchased(1)
 
Average Price
Paid Per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
April 1 - 30, 2017
 
3,650

 
$
73.24

 

 
1,393,965

May 1 - 31, 2017
 

 

 

 
1,393,965

June 1 - 30, 2017
 
136

 
71.70

 

 
1,393,965

Total
 
3,786

 
$
73.18

 

 
1,393,965

(1) 
Includes 3,786 shares delivered or attested to in satisfaction of the exercise price and/or tax withholding obligations by employees who exercised stock options or restricted stock under employee share-based compensation plans.

37


Item 6.
Exhibits
Item #
 
Description
 
Method of Filing
3i

 
Restated Articles of Incorporation
 
Incorporated by reference to Exhibit 3i to the Company’s report on Form 10-Q for the quarterly period ended June 30, 2006.
3ii

 
Amended and Restated By-Laws
 
Incorporated by reference to Exhibit 3iii to the Company’s Current Report on Form 8-K dated December 14, 2010.
4.1

 
Indenture dated as of April 18, 2017
 
Incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K filed April 24, 2017.
4.2

 
Registration Rights Agreement dated April 18, 2017
 
Incorporated by reference to Exhibit 4.2 to the Company's Current Report on Form 8-K filed April 24, 2017.
10.1

 
Credit Agreement dated as of April 4, 2017
 
Incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed April 5, 2017 and the Company's Current Report on Form 8-K/A filed July 27, 2017.
10.2

 
2017 Stock Incentive Plan
 
Incorporated by reference to Appendix A on the Company's Proxy Statement for the 2017 Annual Meeting of Shareholders filed March 15, 2017.
10.3

 
Form of Tennant Company 2017 Stock Incentive Plan Non-Statutory Stock Option Agreement
 
Filed herewith electronically.
10.4

 
Form of Tennant Company 2017 Stock Incentive Plan Restricted Stock Agreement
 
Filed herewith electronically.
10.5

 
Form of Tennant Company 2017 Stock Incentive Plan Non-Employee Director Restricted Stock Agreement
 
Filed herewith electronically.
10.6

 
Form of Tennant Company 2017 Stock Incentive Plan Restricted Stock Unit Agreement
 
Filed herewith electronically.
31.1

 
Rule 13a-14(a)/15d-14(a) Certification of CEO
 
Filed herewith electronically.
31.2

 
Rule 13a-14(a)/15d-14(a) Certification of CFO
 
Filed herewith electronically.
32.1

 
Section 1350 Certification of CEO
 
Filed herewith electronically.
32.2

 
Section 1350 Certification of CFO
 
Filed herewith electronically.
101

 
The following financial information from Tennant Company's Quarterly Report on Form 10-Q for the period ended June 30, 2017, formatted in Extensible Business Reporting Language (XBRL): (i) Condensed Consolidated Statements of Earnings for the three and six months ended June 30, 2017 and 2016; (ii) Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2017 and 2016; (iii) Condensed Consolidated Balance Sheets as of June 30, 2017 and December 31, 2016; (iv) Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2017 and 2016; and (v) Notes to the Condensed Consolidated Financial Statements
 
Filed herewith electronically.

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
 
TENNANT COMPANY
 
 
 
 
 
Date:
 
August 9, 2017
 
                /s/ H. Chris Killingstad
 
 
 
 
H. Chris Killingstad
President and Chief Executive Officer
 
 
     
 
 
Date:
 
August 9, 2017
 
                /s/ Thomas Paulson
 
 
 
 
Thomas Paulson
Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)

 


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