The average contracted rate and notional amounts of the foreign currency derivative instruments outstanding at December 31, 2017, presented in U.S. dollar equivalents are as follows (dollars in thousands, except average contracted rate):
|
| | | | | |
| Notional Amount | Average Contracted Rate | Maximum Term (Months) |
Derivatives designated as hedging instrument: | | | |
Foreign currency option contracts: | | | |
Canadian dollar | $ | 8,619 |
| 1.301 | 12 |
Foreign currency forward contracts: | | | |
Euro | 207,076 |
| 1.168 | 51 |
Canadian dollar | 2,928 |
| 1.264 | 3 |
Derivatives not designated as hedging instruments: | | | |
Foreign currency forward contracts: | | | |
Australian dollar | $ | 3,061 |
| 1.287 | 6 |
Brazilian real | 4,862 |
| 3.329 | 1 |
Canadian dollar | 6,612 |
| 1.263 | 8 |
Euro | 38,068 |
| 0.831 | 11 |
Mexican peso | 8,255 |
| 20.312 | 8 |
consolidated financial statements.For details of the estimated effects of currency translation on the operations of our operating segments, see Part II, Item 7 – Management's"Management's Discussion and Analysis of Financial Condition and Results of Operations."
Other Matters –Management regularly reviews our business operations with the objective of improving financial performance and maximizing our return on investment.financial performance. As a result of this ongoing process to improve financial performance, we may incur additional restructuring charges in the future which, if taken, could be material to our financial results.
ITEM 8 – Financial Statements and Supplementary Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and boardthe Board of directorsDirectors of Tennant Company
Tennant Company:
OpinionsOpinion on the Consolidated Financial Statements and Internal Control Over Financial Reporting
We have audited the accompanying consolidated balance sheetssheet of Tennant Company and subsidiaries (the Company)"Company") as of December 31, 20172023 and 2016,2022, the related consolidated statements of operations,income, comprehensive income, equity,cash flows, and cash flowsequity, for each of the three years in the three-year period ended December 31, 2017,2023, and the related notes and the financial statement schedule listed in the Index at Item 15 (collectively referred to as included in Item 15.A.2 (collectively, the consolidated financial statements)"financial statements"). We also have audited the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 20172023 and 2016,2022, and the results of its operations and its cash flows for each of the three years in the three-year period ended December 31, 2017,2023, in conformity with U.S.accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 22, 2024, expressed an unqualified opinion on the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting principles. Alsofirm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Goodwill – EMEA Reporting Unit - Refer to Notes 1 and 8 of the consolidated financial statements
Critical Audit Matter Description
The Company performed a qualitative goodwill test on all reporting units. The tests indicated that there was no goodwill impairment as of the annual assessment date. The Company analyzed qualitative factors to determine whether it was more likely than not that the fair value of the reporting units was less than their carrying amounts as a basis for determining whether it is necessary to perform a quantitative goodwill impairment test.
Given the amount of goodwill within the EMEA reporting unit, the judgment used in the EMEA reporting unit’s qualitative assessment, and the difference between the most recent fair value estimate and the carrying amount of the EMEA reporting unit, auditing management’s conclusions related to the EMEA qualitative goodwill impairment assessment involved subjective judgment and an increased extent of effort, including the need to involve our fair value specialists.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to management’s qualitative assessment of goodwill impairment for the EMEA reporting unit included the following, among others:
•We tested the effectiveness of controls over goodwill, including those over management’s judgments related to macroeconomic conditions, industry and market considerations, overall financial performance, entity and reporting unit specific events, and capital markets pricing.
•We evaluated the reasonableness of management’s qualitative assessment of factors affecting forecasted revenue and profit margins by comparing the forecasts to (1) historical results, (2) internal communications between management and the Board of Directors, and (3) information included in Company press releases.
•With the assistance of our fair value specialists, we evaluated the reasonableness of management’s qualitative assessment by performing the following: (1) evaluated GDP growth, inflation and other macroeconomic variables, as well as industry growth rates, (2) estimated industry discount rates, (3) analyzed growth, margin, and valuation multiple trends of guideline public companies, (4) compared recent fair value estimate and carrying amount, and (5) analyzed the trend of market capitalization of the entity and public peer companies.
•Assessed for potential indicators of impairment such as macroeconomic and industry conditions, financial performance, and events affecting the reporting unit such as a change in the carrying amount of its net assets or asset impairments at components of the reporting unit.
•We evaluated the financial results of the EMEA reporting unit compared to forecasts from the October 1, 2023 annual measurement date to December 31, 2023.
/s/ Deloitte & Touche LLP
Minneapolis, Minnesota
February 22, 2024
We have served as the Company's auditor since 2019.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of Tennant Company
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Tennant Company and subsidiaries (the “Company”) as of December 31, 2023, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017,2023, based on criteria established in Internal Control -— Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the Committee of Sponsoring Organizationsstandards of the Treadway Commission.
ThePublic Company acquired IPC Group during 2017, and management excluded from its assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2017, IPC Group’s internal control over financial reporting associated with total assets of $509 million and total revenues of $174 million included inAccounting Oversight Board (United States) (PCAOB), the consolidated financial statements of the Company as of and for the year ended December 31, 2017. Our audit of internal control over financial reporting2023, of the Company also excludedand our report dated February 22, 2024, expressed an evaluation of the internal control overunqualified opinion on those financial reporting of IPC Group.statements.
Basis for Opinion
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits.audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”)PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our auditsaudit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the auditsaudit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also includedrisk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audits provideaudit provides a reasonable basis for our opinions.opinion.
Definition and Limitations of Internal Control Overover Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ KPMGDeloitte & Touche LLP
We have served as the Company's auditor since 1954.
Minneapolis, Minnesota
February 27, 201822, 2024
Consolidated Statements of OperationsIncome
TENNANT COMPANY AND SUBSIDIARIES
(In thousands,millions, except shares and per share data)
|
| | | | | | | | | | | |
Years ended December 31 | 2017 | | 2016 | | 2015 |
Net Sales | $ | 1,003,066 |
| | $ | 808,572 |
| | $ | 811,799 |
|
Cost of Sales | 598,645 |
| | 456,977 |
| | 462,739 |
|
Gross Profit | 404,421 |
| | 351,595 |
| | 349,060 |
|
Operating Expense: | |
| | |
| | |
|
Research and Development Expense | 32,013 |
| | 34,738 |
| | 32,415 |
|
Selling and Administrative Expense | 345,364 |
| | 248,210 |
| | 252,270 |
|
Impairment of Long-Lived Assets | — |
| | — |
| | 11,199 |
|
Loss on Sale of Business | — |
| | 149 |
| | — |
|
Total Operating Expense | 377,377 |
| | 283,097 |
| | 295,884 |
|
Profit from Operations | 27,044 |
| | 68,498 |
| | 53,176 |
|
Other Income (Expense): | |
| | |
| | |
|
Interest Income | 2,405 |
| | 330 |
| | 172 |
|
Interest Expense | (25,394 | ) | | (1,279 | ) | | (1,313 | ) |
Net Foreign Currency Transaction Losses | (3,387 | ) | | (392 | ) | | (954 | ) |
Other Expense, Net | (1,960 | ) | | (666 | ) | | (657 | ) |
Total Other Expense, Net | (28,336 | ) | | (2,007 | ) | | (2,752 | ) |
(Loss) Profit Before Income Taxes | (1,292 | ) | | 66,491 |
| | 50,424 |
|
Income Tax Expense | 4,913 |
| | 19,877 |
| | 18,336 |
|
Net (Loss) Earnings Including Noncontrolling Interest | (6,205 | ) | | 46,614 |
| | 32,088 |
|
Net Loss Attributable to Noncontrolling Interest | (10 | ) | | — |
| | — |
|
Net (Loss) Earnings Attributable to Tennant Company | $ | (6,195 | ) | | $ | 46,614 |
| | $ | 32,088 |
|
| | | | | |
Net (Loss) Earnings Attributable to Tennant Company per Share: | |
| | |
| | |
|
Basic | $ | (0.35 | ) | | $ | 2.66 |
| | $ | 1.78 |
|
Diluted | $ | (0.35 | ) | | $ | 2.59 |
| | $ | 1.74 |
|
| | | | | |
Weighted Average Shares Outstanding: | | | |
| | |
|
Basic | 17,695,390 |
| | 17,523,267 |
| | 18,015,151 |
|
Diluted | 17,695,390 |
| | 17,976,183 |
| | 18,493,447 |
|
| | | | | |
Cash Dividends Declared per Common Share | $ | 0.84 |
| | $ | 0.81 |
| | $ | 0.80 |
|
| | | | | | | | | | | | | | | | | |
Years ended December 31 | 2023 | | 2022 | | 2021 |
Net sales | $ | 1,243.6 | | | $ | 1,092.2 | | | $ | 1,090.8 | |
Cost of sales | 715.8 | | | 671.3 | | | 652.8 | |
Gross profit | 527.8 | | | 420.9 | | | 438.0 | |
Selling and administrative expense | 352.6 | | | 306.3 | | | 321.9 | |
Research and development expense | 36.6 | | | 31.1 | | | 32.2 | |
Gain on sale of assets | — | | | (3.7) | | | (9.8) | |
Operating income | 138.6 | | | 87.2 | | | 93.7 | |
Interest expense, net | (13.5) | | | (7.1) | | | (7.3) | |
Net foreign currency transaction gain (loss) | 0.3 | | | (1.2) | | | (0.7) | |
Loss on extinguishment of debt | — | | | — | | | (11.3) | |
Other (expense) income, net | (1.6) | | | 0.6 | | | (0.3) | |
Income before income taxes | 123.8 | | | 79.5 | | | 74.1 | |
Income tax expense | 14.3 | | | 13.2 | | | 9.2 | |
Net income | $ | 109.5 | | | $ | 66.3 | | | $ | 64.9 | |
| | | | | |
Net income per share | | | | | |
Basic | $ | 5.92 | | | $ | 3.58 | | | $ | 3.51 | |
Diluted | $ | 5.83 | | | $ | 3.55 | | | $ | 3.44 | |
| | | | | |
Weighted average shares outstanding: | | | | | |
Basic | 18,509,523 | | 18,494,356 | | 18,499,674 |
Diluted | 18,783,633 | | 18,697,255 | | 18,849,217 |
See accompanying Notesnotes to Consolidated Financial Statements.consolidated financial statements.
Consolidated Statements of Comprehensive Income
TENNANT COMPANY AND SUBSIDIARIES
(In thousands)millions)
|
| | | | | | | | | | | |
Years ended December 31 | 2017 | | 2016 | | 2015 |
Net (Loss) Earnings Including Noncontrolling Interest | $ | (6,205 | ) | | $ | 46,614 |
| | $ | 32,088 |
|
Other Comprehensive Income (Loss): | |
| | |
| | |
|
Foreign currency translation adjustments | 28,356 |
| | 109 |
| | (12,520 | ) |
Pension and retiree medical benefits | 5,868 |
| | (2,248 | ) | | 4,121 |
|
Cash flow hedge | (7,731 | ) | | (305 | ) | | 164 |
|
Income Taxes: | | | | | |
Foreign currency translation adjustments | 310 |
| | 32 |
| | 25 |
|
Pension and retiree medical benefits | (2,087 | ) | | 504 |
| | (1,265 | ) |
Cash flow hedge | 2,884 |
| | 114 |
| | (61 | ) |
Total Other Comprehensive Income (Loss), net of tax | 27,600 |
| | (1,794 | ) | | (9,536 | ) |
Total Comprehensive Income Including Noncontrolling Interest | 21,395 |
| | 44,820 |
| | 22,552 |
|
Comprehensive Loss Attributable to Noncontrolling Interest | (10 | ) | | — |
| | — |
|
Comprehensive Income Attributable to Tennant Company | $ | 21,405 |
| | $ | 44,820 |
| | $ | 22,552 |
|
| | | | | | | | | | | | | | | | | |
Years ended December 31 | 2023 | | 2022 | | 2021 |
Net income | $ | 109.5 | | | $ | 66.3 | | | $ | 64.9 | |
Other comprehensive income (loss): | | | | | |
Foreign currency translation adjustments (net of related tax benefit (expense) of $0.8, $(1.2), and $0.4, respectively) | 8.3 | | | (17.9) | | | (16.9) | |
Pension and postretirement medical benefits (net of related tax benefit (expense) of $(0.3), $(1.6), and $0.3, respectively) | 1.0 | | | 4.8 | | | (0.4) | |
Derivative financial instruments (net of tax (expense) benefit of $0.4, $(0.3), and $0.1, respectively) | (1.4) | | | 0.8 | | | (0.5) | |
Total other comprehensive income (loss), net of tax | 7.9 | | | (12.3) | | | (17.8) | |
| | | | | |
Comprehensive income | $ | 117.4 | | | $ | 54.0 | | | $ | 47.1 | |
See accompanying Notesnotes to Consolidated Financial Statements.consolidated financial statements.
Consolidated Balance Sheets
TENNANT COMPANY AND SUBSIDIARIES
(In thousands,millions, except shares and per share data)
|
| | | | | | | |
December 31 | 2017 | | 2016 |
ASSETS | | | |
Current Assets: | | | |
Cash and Cash Equivalents | $ | 58,398 |
| | $ | 58,033 |
|
Restricted Cash | 653 |
| | 517 |
|
Receivables: | |
| | |
|
Trade, less Allowances of $3,241 and $3,108, respectively | 203,280 |
| | 145,299 |
|
Other | 6,236 |
| | 3,835 |
|
Net Receivables | 209,516 |
| | 149,134 |
|
Inventories | 127,694 |
| | 78,622 |
|
Prepaid Expenses | 19,351 |
| | 9,204 |
|
Other Current Assets | 7,503 |
| | 2,412 |
|
Total Current Assets | 423,115 |
| | 297,922 |
|
Property, Plant and Equipment | 382,768 |
| | 298,500 |
|
Accumulated Depreciation | (202,750 | ) | | (186,403 | ) |
Property, Plant and Equipment, Net | 180,018 |
| | 112,097 |
|
Deferred Income Taxes | 11,134 |
| | 13,439 |
|
Goodwill | 186,044 |
| | 21,065 |
|
Intangible Assets, Net | 172,347 |
| | 6,460 |
|
Other Assets | 21,319 |
| | 19,054 |
|
Total Assets | $ | 993,977 |
| | $ | 470,037 |
|
LIABILITIES AND TOTAL EQUITY | |
| | |
|
Current Liabilities: | |
| | |
|
Current Portion of Long-Term Debt | $ | 30,883 |
| | $ | 3,459 |
|
Accounts Payable | 96,082 |
| | 47,408 |
|
Employee Compensation and Benefits | 37,257 |
| | 35,997 |
|
Income Taxes Payable | 2,838 |
| | 2,348 |
|
Other Current Liabilities | 69,447 |
| | 43,617 |
|
Total Current Liabilities | 236,507 |
| | 132,829 |
|
Long-Term Liabilities: | |
| | |
|
Long-Term Debt | 345,956 |
| | 32,735 |
|
Employee-Related Benefits | 23,867 |
| | 21,134 |
|
Deferred Income Taxes | 53,225 |
| | 171 |
|
Other Liabilities | 35,948 |
| | 4,625 |
|
Total Long-Term Liabilities | 458,996 |
| | 58,665 |
|
Total Liabilities | 695,503 |
| | 191,494 |
|
Commitments and Contingencies (Note 15) |
|
| |
|
|
Equity: | |
| | |
|
Common Stock, $0.375 par value per share, 60,000,000 shares authorized; 17,881,177 and 17,688,350 issued and outstanding, respectively | 6,705 |
| | 6,633 |
|
Additional Paid-In Capital | 15,089 |
| | 3,653 |
|
Retained Earnings | 297,032 |
| | 318,180 |
|
Accumulated Other Comprehensive Loss | (22,323 | ) | | (49,923 | ) |
Total Tennant Company Shareholders' Equity | 296,503 |
| | 278,543 |
|
Noncontrolling Interest | 1,971 |
| | — |
|
Total Equity | 298,474 |
| | 278,543 |
|
Total Liabilities and Total Equity | $ | 993,977 |
| | $ | 470,037 |
|
| | | | | | | | | | | |
December 31 | 2023 | | 2022 |
ASSETS | | | |
Cash, cash equivalents, and restricted cash | $ | 117.1 | | | $ | 77.4 | |
Receivables, less allowances of $7.2 and $6.1, respectively | 247.6 | | | 251.5 | |
Inventories | 175.9 | | | 206.6 | |
Prepaid and other current assets | 28.5 | | | 39.8 | |
Total current assets | 569.1 | | | 575.3 | |
Property, plant and equipment, less accumulated depreciation of $304.0 and $279.3, respectively | 187.7 | | | 179.9 | |
Operating lease assets | 41.7 | | | 31.8 | |
Goodwill | 187.4 | | | 182.0 | |
Intangible assets, net | 63.1 | | | 76.4 | |
Other assets | 64.4 | | | 39.7 | |
Total assets | $ | 1,113.4 | | | $ | 1,085.1 | |
LIABILITIES AND TOTAL EQUITY | | | |
Current portion of long-term debt | $ | 6.4 | | | $ | 5.2 | |
Accounts payable | 111.4 | | | 126.1 | |
Employee compensation and benefits | 67.3 | | | 44.0 | |
Other current liabilities | 88.6 | | | 86.3 | |
Total current liabilities | 273.7 | | | 261.6 | |
Long-term debt | 194.2 | | | 295.1 | |
Long-term operating lease liabilities | 27.4 | | | 17.1 | |
Employee-related benefits | 13.3 | | | 13.2 | |
Deferred income taxes | 5.0 | | | 11.5 | |
Other liabilities | 21.5 | | | 14.5 | |
Total long-term liabilities | 261.4 | | | 351.4 | |
Total liabilities | 535.1 | | | 613.0 | |
Commitments and contingencies (Note 16) | | | |
Common stock, $0.375 par value per share, 60,000,000 shares authorized; 18,631,384 and 18,521,485 issued and outstanding, respectively | 7.0 | | | 7.0 | |
Additional paid-in capital | 64.9 | | | 56.0 | |
Retained earnings | 547.4 | | | 458.0 | |
Accumulated other comprehensive loss | (42.3) | | | (50.2) | |
Total Tennant Company shareholders' equity | 577.0 | | | 470.8 | |
Noncontrolling interest | 1.3 | | | 1.3 | |
Total equity | 578.3 | | | 472.1 | |
Total liabilities and total equity | $ | 1,113.4 | | | $ | 1,085.1 | |
See accompanying Notesnotes to Consolidated Financial Statements.consolidated financial statements.
Consolidated Statements of Cash Flows
TENNANT COMPANY AND SUBSIDIARIES
(In thousands)millions) | | | | | | | | | | | | | | | | | |
Years ended December 31 | 2023 | | 2022 | | 2021 |
OPERATING ACTIVITIES | | | | | |
Net income | $ | 109.5 | | | $ | 66.3 | | | $ | 64.9 | |
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | | | | | |
Depreciation expense | 36.4 | | | 32.8 | | | 33.1 | |
Amortization expense | 14.7 | | | 15.9 | | | 20.0 | |
Deferred income tax benefit | (26.9) | | | (15.6) | | | (15.0) | |
Share-based compensation expense | 11.6 | | | 7.8 | | | 9.5 | |
Bad debt and returns expense | 3.4 | | | 2.3 | | | 1.5 | |
Gain on sale of assets | — | | | (3.7) | | | (9.8) | |
Debt extinguishment cost | — | | | — | | | 11.3 | |
Other, net | 1.3 | | | 1.0 | | | 2.3 | |
Changes in operating assets and liabilities: | | | | | |
Receivables | 4.1 | | | (46.3) | | | (20.3) | |
Inventories | 14.3 | | | (68.3) | | | (56.0) | |
Accounts payable | (15.3) | | | 7.7 | | | 19.1 | |
Employee compensation and benefits | 22.3 | | | (14.8) | | | 8.3 | |
Other assets and liabilities | 13.0 | | | (10.2) | | | 0.5 | |
Net cash provided by (used in) operating activities | 188.4 | | | (25.1) | | | 69.4 | |
INVESTING ACTIVITIES | | | | | |
Purchases of property, plant and equipment | (22.8) | | | (25.0) | | | (19.4) | |
Investment in leased assets | (1.2) | | | (4.3) | | | (3.7) | |
Cash received from leased assets | 0.8 | | | 0.6 | | | — | |
Proceeds from sale of assets, net of cash divested | — | | | 4.1 | | | 24.7 | |
Other, net | — | | | 0.1 | | | (0.1) | |
Net cash (used in) provided by investing activities | (23.2) | | | (24.5) | | | 1.7 | |
FINANCING ACTIVITIES | | | | | |
Proceeds from borrowings | 20.0 | | | 52.0 | | | 315.8 | |
Repayments of borrowings | (120.0) | | | (19.1) | | | (362.0) | |
Debt extinguishment payment | — | | | — | | | (8.4) | |
Contingent consideration payments | — | | | — | | | (2.5) | |
Change in finance lease obligations | 0.2 | | | — | | | 0.1 | |
Proceeds (repurchases) from exercise of stock options, net of employee tax withholdings obligations | 19.0 | | | (0.9) | | | 5.0 | |
Dividends paid | (20.1) | | | (18.9) | | | (17.5) | |
Repurchases of common stock | (21.7) | | | (5.0) | | | (15.0) | |
Net cash (used in) provided by financing activities | (122.6) | | | 8.1 | | | (84.5) | |
Effect of exchange rate changes on cash, cash equivalents and restricted cash | (2.9) | | | (4.7) | | | (4.0) | |
Net increase (decrease) in cash, cash equivalents and restricted cash | 39.7 | | | (46.2) | | | (17.4) | |
Cash, cash equivalents and restricted cash at beginning of year | 77.4 | | | 123.6 | | | 141.0 | |
Cash, cash equivalents and restricted cash at end of year | $ | 117.1 | | | $ | 77.4 | | | $ | 123.6 | |
|
| | | | | | | | | | | |
Years ended December 31 | 2017 | | 2016 | | 2015 |
OPERATING ACTIVITIES | | | | | |
Net (Loss) Earnings Including Noncontrolling Interest | $ | (6,205 | ) | | $ | 46,614 |
| | $ | 32,088 |
|
Adjustments to Reconcile Net (Loss) Earnings to Net Cash Provided by Operating Activities: | |
| | |
| | |
|
Depreciation | 26,199 |
| | 17,891 |
| | 16,550 |
|
Amortization of Intangible Assets | 17,054 |
| | 409 |
| | 1,481 |
|
Amortization of Debt Issuance Costs | 1,779 |
| | — |
| | — |
|
Debt Issuance Cost Charges Related to Short-Term Financing | 6,200 |
| | — |
| | — |
|
Fair Value Step-Up Adjustment to Acquired Inventory | 7,245 |
| | — |
| | — |
|
Impairment of Long-Lived Assets | — |
| | — |
| | 11,199 |
|
Deferred Income Taxes | (6,095 | ) | | (1,172 | ) | | (1,129 | ) |
Share-Based Compensation Expense | 5,891 |
| | 3,875 |
| | 8,222 |
|
Allowance for Doubtful Accounts and Returns | 1,602 |
| | 468 |
| | 1,089 |
|
Loss on Sale of Business | — |
| | 149 |
| | — |
|
Other, Net | 364 |
| | (345 | ) | | (100 | ) |
Changes in Operating Assets and Liabilities, Net of Assets Acquired: | |
| | |
| | |
|
Receivables, Net | (14,381 | ) | | (9,278 | ) | | 4,547 |
|
Inventories | (2,898 | ) | | 23 |
| | (10,190 | ) |
Accounts Payable | 10,849 |
| | (3,904 | ) | | (10,455 | ) |
Employee Compensation and Benefits | (7,780 | ) | | 124 |
| | 716 |
|
Other Current Liabilities | 14,560 |
| | (185 | ) | | (402 | ) |
Income Taxes | 285 |
| | 5,427 |
| | (4,283 | ) |
Other Assets and Liabilities | (495 | ) | | (2,218 | ) | | (4,101 | ) |
Net Cash Provided by Operating Activities | 54,174 |
| | 57,878 |
| | 45,232 |
|
INVESTING ACTIVITIES | |
| | |
| | |
|
Purchases of Property, Plant and Equipment | (20,437 | ) | | (26,526 | ) | | (24,780 | ) |
Proceeds from Disposals of Property, Plant and Equipment | 2,511 |
| | 615 |
| | 336 |
|
Proceeds from Principal Payments Received on Long-Term Note Receivable | 667 |
| | — |
| | — |
|
Issuance of Long-Term Note Receivable | (1,500 | ) | | (2,000 | ) | | — |
|
Acquisitions of Businesses, Net of Cash Acquired | (354,073 | ) | | (12,933 | ) | | — |
|
Purchase of Intangible Asset | (2,500 | ) | | — |
| | — |
|
Proceeds from Sale of Business | — |
| | 285 |
| | 1,185 |
|
(Increase) Decrease in Restricted Cash | (92 | ) | | 116 |
| | (322 | ) |
Net Cash Used in Investing Activities | (375,424 | ) | | (40,443 | ) | | (23,581 | ) |
FINANCING ACTIVITIES | |
| | |
| | |
|
Proceeds from Short-Term Debt | 303,000 |
| | — |
| | — |
|
Repayments of Short-Term Debt | (303,000 | ) | | — |
| | — |
|
Proceeds from Issuance of Long-Term Debt | 440,000 |
| | 15,000 |
| | — |
|
Payments of Long-Term Debt | (96,248 | ) | | (3,460 | ) | | (3,445 | ) |
Payments of Debt Issuance Costs | (16,482 | ) | | — |
| | — |
|
Change in Capital Lease Obligations | 311 |
| | — |
| | — |
|
Purchases of Common Stock | — |
| | (12,762 | ) | | (45,998 | ) |
Proceeds from Issuances of Common Stock | 6,875 |
| | 5,271 |
| | 1,677 |
|
Excess Tax Benefit on Stock Plans | — |
| | 686 |
| | 859 |
|
Purchase of Noncontrolling Owner Interest | (30 | ) | | — |
| | — |
|
Dividends Paid | (14,953 | ) | | (14,293 | ) | | (14,498 | ) |
Net Cash Provided by (Used in) Financing Activities | 319,473 |
| | (9,558 | ) | | (61,405 | ) |
Effect of Exchange Rate Changes on Cash and Cash Equivalents | 2,142 |
| | (1,144 | ) | | (1,908 | ) |
NET INCREASE IN CASH AND CASH EQUIVALENTS | 365 |
| | 6,733 |
| | (41,662 | ) |
Cash and Cash Equivalents at Beginning of Year | 58,033 |
| | 51,300 |
| | 92,962 |
|
CASH AND CASH EQUIVALENTS AT END OF YEAR | $ | 58,398 |
| | $ | 58,033 |
| | $ | 51,300 |
|
|
| | | | | | | | | | | |
SUPPLEMENTAL CASH FLOW INFORMATION | | | | | |
Cash Paid During the Year for: | | | | | |
Income Taxes | $ | 13,542 |
| | $ | 14,172 |
| | $ | 23,421 |
|
Interest | $ | 14,228 |
| | $ | 1,135 |
| | $ | 1,167 |
|
Supplemental Non-Cash Investing and Financing Activities: | | | | | |
Long-Term Note Receivable from Sale of Business | $ | — |
| | $ | 5,489 |
| | $ | — |
|
Capital Expenditures in Accounts Payable | $ | 2,167 |
| | $ | 2,045 |
| | $ | 1,830 |
|
| | | | | | | | | | | | | | | | | |
SUPPLEMENTAL CASH FLOW INFORMATION | | | | | |
Years ended December 31 | 2023 | | 2022 | | 2021 |
Cash paid for income taxes | $ | 39.5 | | | $ | 34.1 | | | $ | 19.5 | |
Cash paid for interest | $ | 17.1 | | | $ | 7.6 | | | $ | 11.7 | |
Supplemental non-cash investing and financing activities: | | | | | |
Capital expenditures in accounts payable | $ | 3.5 | | | $ | 4.1 | | | $ | 3.7 | |
See accompanying Notesnotes to Consolidated Financial Statements.consolidated financial statements.
Consolidated Statements of Equity
TENNANT COMPANY AND SUBSIDIARIES
(In thousands, except shares and per share data)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Tennant Company Shareholders | | |
| Common Shares | Common Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Tennant Company Shareholders' Equity | Noncontrolling Interest | Total Equity |
Balance, December 31, 2014 | 18,415,047 |
| $ | 6,906 |
| $ | 26,247 |
| $ | 286,091 |
| $ | (38,593 | ) | $ | 280,651 |
| $ | — |
| $ | 280,651 |
|
Net Earnings | — |
| — |
| — |
| 32,088 |
| — |
| 32,088 |
| — |
| 32,088 |
|
Other Comprehensive Loss | — |
| — |
| — |
| — |
| (9,536 | ) | (9,536 | ) | — |
| (9,536 | ) |
Issue Stock for Directors, Employee Benefit and Stock Plans, net of related tax withholdings of 23,160 shares | 93,380 |
| 35 |
| 384 |
| — |
| — |
| 419 |
| — |
| 419 |
|
Share-Based Compensation | — |
| — |
| 8,222 |
| — |
| — |
| 8,222 |
| — |
| 8,222 |
|
Dividends paid $0.80 per Common Share | — |
| — |
| — |
| (14,498 | ) | — |
| (14,498 | ) | — |
| (14,498 | ) |
Tax Benefit on Stock Plans | — |
| — |
| 859 |
| — |
| — |
| 859 |
| — |
| 859 |
|
Purchases of Common Stock | (764,046 | ) | (287 | ) | (35,712 | ) | (9,999 | ) | — |
| (45,998 | ) | — |
| (45,998 | ) |
Balance, December 31, 2015 | 17,744,381 |
| $ | 6,654 |
| $ | — |
| $ | 293,682 |
| $ | (48,129 | ) | $ | 252,207 |
| $ | — |
| $ | 252,207 |
|
Net Earnings | — |
| — |
| — |
| 46,614 |
| — |
| 46,614 |
| — |
| 46,614 |
|
Other Comprehensive Loss | — |
| — |
| — |
| — |
| (1,794 | ) | (1,794 | ) | — |
| (1,794 | ) |
Issue Stock for Directors, Employee Benefit and Stock Plans, net of related tax withholdings of 23,113 shares | 190,443 |
| 71 |
| 3,939 |
| — |
| — |
| 4,010 |
| — |
| 4,010 |
|
Share-Based Compensation | — |
| — |
| 3,875 |
| — |
| — |
| 3,875 |
| — |
| 3,875 |
|
Dividends paid $0.81 per Common Share | — |
| — |
| — |
| (14,293 | ) | — |
| (14,293 | ) | — |
| (14,293 | ) |
Tax Benefit on Stock Plans | — |
| — |
| 686 |
| — |
| — |
| 686 |
| — |
| 686 |
|
Purchases of Common Stock | (246,474 | ) | (92 | ) | (4,847 | ) | (7,823 | ) | — |
| (12,762 | ) | — |
| (12,762 | ) |
Balance, December 31, 2016 | 17,688,350 |
| $ | 6,633 |
| $ | 3,653 |
| $ | 318,180 |
| $ | (49,923 | ) | $ | 278,543 |
| $ | — |
| $ | 278,543 |
|
Net Loss | — |
| — |
| — |
| (6,195 | ) | — |
| (6,195 | ) | (10 | ) | (6,205 | ) |
Other Comprehensive Income | — |
| — |
| — |
| — |
| 27,600 |
| 27,600 |
| — |
| 27,600 |
|
Issue Stock for Directors, Employee Benefit and Stock Plans, net of related tax withholdings of 16,990 shares | 192,827 |
| 72 |
| 5,545 |
| — |
| — |
| 5,617 |
| — |
| 5,617 |
|
Share-Based Compensation | — |
| — |
| 5,891 |
| — |
| — |
| 5,891 |
| — |
| 5,891 |
|
Dividends paid $0.84 per Common Share | — |
| — |
| — |
| (14,953 | ) | — |
| (14,953 | ) | — |
| (14,953 | ) |
Recognition of Noncontrolling Interests | — |
| — |
| — |
| — |
| — |
| — |
| 2,028 |
| 2,028 |
|
Purchase of Noncontrolling Shareholder Interest | — |
| — |
| — |
| — |
| — |
| — |
| (30 | ) | (30 | ) |
Other | — |
| — |
| — |
| — |
| — |
| — |
| (17 | ) | (17 | ) |
Balance, December 31, 2017 | 17,881,177 |
| $ | 6,705 |
| $ | 15,089 |
| $ | 297,032 |
| $ | (22,323 | ) | $ | 296,503 |
| $ | 1,971 |
| $ | 298,474 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In millions, except shares and per share data) | Common Shares | | Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Tennant Company Shareholders' Equity | | Noncontrolling Interest | | Total Equity |
Balance, December 31, 2020 | 18,503,805 | | $ | 6.9 | | | $ | 54.7 | | | $ | 363.3 | | | $ | (20.1) | | | $ | 404.8 | | | $ | 1.3 | | | $ | 406.1 | |
Net income | — | | — | | | — | | | 64.9 | | | — | | | 64.9 | | | — | | | 64.9 | |
Other comprehensive loss | — | | — | | | — | | | — | | | (17.8) | | | (17.8) | | | — | | | (17.8) | |
Issue stock for directors, employee benefit and stock plans, net of related tax withholdings of 35,061 shares | 228,293 | | 0.1 | | | 4.9 | | | — | | | — | | | 5.0 | | | — | | | 5.0 | |
Share-based compensation | — | | — | | | 9.5 | | | — | | | — | | | 9.5 | | | — | | | 9.5 | |
Dividends paid $0.94 per common share | — | | — | | | — | | | (17.5) | | | — | | | (17.5) | | | — | | | (17.5) | |
Repurchases of common stock | (196,982) | | — | | | (15.0) | | | — | | | — | | | (15.0) | | | — | | | (15.0) | |
Other | — | | — | | | — | | | (0.1) | | | — | | | (0.1) | | | — | | | (0.1) | |
Balance, December 31, 2021 | 18,535,116 | | $ | 7.0 | | | $ | 54.1 | | | $ | 410.6 | | | $ | (37.9) | | | $ | 433.8 | | | $ | 1.3 | | | $ | 435.1 | |
Net income | — | | — | | | — | | | 66.3 | | | — | | | 66.3 | | | — | | | 66.3 | |
Other comprehensive loss | — | | — | | | — | | | — | | | (12.3) | | | (12.3) | | | — | | | (12.3) | |
Issue stock for directors, employee benefit and stock plans, net of related tax withholdings of 27,653 shares | 66,125 | | — | | | (0.9) | | | — | | | — | | | (0.9) | | | — | | | (0.9) | |
Share-based compensation | — | | — | | | 7.8 | | | — | | | — | | | 7.8 | | | — | | | 7.8 | |
Dividends paid $1.015 per common share | — | | — | | | — | | | (18.9) | | | — | | | (18.9) | | | — | | | (18.9) | |
Repurchases of common stock | (79,756) | | — | | | (5.0) | | | — | | | — | | | (5.0) | | | — | | | (5.0) | |
Balance, December 31, 2022 | 18,521,485 | | $ | 7.0 | | | $ | 56.0 | | | $ | 458.0 | | | $ | (50.2) | | | $ | 470.8 | | | $ | 1.3 | | | $ | 472.1 | |
Net income | — | | — | | | — | | | 109.5 | | | — | | | 109.5 | | | — | | | 109.5 | |
Other comprehensive income | — | | — | | | — | | | — | | | 7.9 | | | 7.9 | | | — | | | 7.9 | |
Issue stock for directors, employee benefit and stock plans, net of related tax withholdings of 23,622 shares | 400,819 | | — | | | 19.0 | | | — | | | — | | | 19.0 | | | — | | | 19.0 | |
Share-based compensation | — | | — | | | 11.6 | | | — | | | — | | | 11.6 | | | — | | | 11.6 | |
Dividends paid $1.075 per common share | — | | — | | | — | | | (20.1) | | | — | | | (20.1) | | | — | | | (20.1) | |
Repurchases of common stock | (290,920) | | — | | | (21.7) | | | — | | | — | | | (21.7) | | | — | | | (21.7) | |
Balance, December 31, 2023 | 18,631,384 | | $ | 7.0 | | | $ | 64.9 | | | $ | 547.4 | | | $ | (42.3) | | | $ | 577.0 | | | $ | 1.3 | | | $ | 578.3 | |
See accompanying Notesnotes to Consolidated Financial Statements.
consolidated financial statements.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands,Tables in millions, except shares and per share data)
| |
1. | Summary of Significant Accounting Policies |
1. Operations and Summary of Significant Accounting Policies
Nature of Operations – Tennant Company ("the Company", "we", "us", or "our") is a world leader in designing, manufacturing and marketing solutions that empower customers to achieve quality cleaning performance, significantly reduce environmental impact and help create a cleaner, safer, healthier world. Tennant offersThe Company is committed to creating and commercializing breakthrough, sustainable cleaning innovations to enhance its broad suite of products, including floor maintenance and solutions consisting of mechanized cleaning equipment, detergent-free and other sustainable cleaning technologies, aftermarket parts and consumables, equipment maintenance and repair service, specialty surface coatings, and business solutions such as financing, rental and leasing programs, and machine-to-machine asset management solutions. Tennant
Our products are used in many types of environments, including: Retailincluding 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.
In April 2017, the Company completed its acquisition of the IPC Group business. IPC manufactures a complete range of commercial cleaning products including mechanized cleaning equipment, wet & dry vacuum cleaners, cleaning tools & carts and high pressure washers. These products are sold into similar vertical market applications as those listed above, but also into office cleaning and hospitality vertical markets through a global direct sales and service organization and network of distributors. IPC markets products and services under the following valued brands: IPC, Gansow, Vaclensa, Portotecnica, Soteco and private-label brands.
Consolidation – The Consolidated Financial Statementsconsolidated financial statements include the accounts of Tennantthe Company and its subsidiaries. All intercompany transactions and balances have been eliminated. In these Notes to the Consolidated Financial Statements, Tennant Company is referred to as “Tennant,” “we,” “us,” or “our.”
Translation of Non-U.S. Currency – Foreign currency-denominated assets and liabilities have been translated to U.S. dollars at year-end exchange rates, while income and expense items are translated at average exchange rates prevailing during the year. Gains or losses resulting from translation are included as a separate component of Accumulated Other Comprehensive Loss.accumulated other comprehensive loss. The balance of cumulative foreign currency translation adjustments recorded within Accumulated Other Comprehensive Lossaccumulated other comprehensive loss as of December 31, 2017, 20162023, 2022 and 20152021 was a net loss of $15,778, $44,444$45.6 million, $53.9 million and $44,585,$36.0 million, respectively. The majority of translation adjustments are not adjusted for income taxes as substantially all translation adjustments relate to permanent investments in non-U.S. subsidiaries. Net Foreign Currency Transaction Lossesforeign currency transaction losses are included in Other Income (Expense).income before income taxes on the consolidated statements of income.
Use of Estimates – In preparing theThe preparation of our consolidated financial statements in conformity with U.S. generally accepted accounting principles ("(“U.S. GAAP"GAAP”), management must requires us to make decisionsestimates and assumptions that impactaffect the amounts reported amounts of assets, liabilities, revenues, expensesin these consolidated financial statements and the related disclosures, includingaccompanying notes, disclosures of contingent assets and liabilities. Such decisions includeliabilities at the selectiondate of the appropriate accounting principles to be appliedfinancial statements and the assumptions on which to base accounting estimates.reported amounts of revenues and expenses during the reporting period. Estimates are used in determining, among other items, sales promotions and incentives accruals, inventory valuation, warranty reserves, allowance for doubtful accounts, pension and postretirement accruals, useful lives for intangible assets, and future cash flows associated with impairment testing for Goodwillgoodwill and other long-lived assets. These estimates and assumptions are based on management’s best estimates and judgments. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors that management believes to be reasonable under the circumstances. We adjust such estimates and assumptions when facts and circumstances dictate. A number of these factors include, among others, economic conditions, credit markets, foreign currency, commodity cost volatility and consumer spending and confidence, all of which have combined to increase the uncertainty inherent in such estimates and assumptions. As future events and their effects cannot be determined with precision, actual amountsActual results could differ significantly from those estimated at the time the consolidated financial statements are prepared. Changes in those estimates resulting from continuing changes in the economic environment will be reflected in the financial statements in future periods.our estimates.
Cash and Cash Equivalents – We consider all highly liquid investments with original maturities of three months or less from the date of purchase to be cash equivalents.
Restricted Cash – We have a total of $653$0.2 million as of December 31, 20172023 and 2022 that serves as collateral backing certain bank guarantees and is therefore restricted. This money is invested in time deposits. Restricted cash is recorded in cash, cash equivalents and restricted cash on the consolidated balance sheets.
Receivables – Credit is granted to our customers in the normal course of business. Receivables are recorded at original carrying value less reserves for estimated uncollectible accounts and sales returns. To assess the collectability of these receivables, we perform ongoing credit evaluations of our customers’ financial condition. Through these evaluations, we may become aware of a situation where a customer may not be able to meet its financial obligations due to deterioration of its financial viability, credit ratings or bankruptcy. The reserve requirements are based on the best facts available to us and are reevaluated and adjusted as additional information becomes available.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Tables in millions, except shares and per share data)
Our reserves are also based on amounts determined by using percentages applied to trade receivables. These percentages are determinedreceivables, using a loss rate method. We considered the following in determining the expected loss rate: (1) historical loss rate, (2) macroeconomic factors, and (3) creditworthiness of customers. The historical loss rate is calculated by taking the yearly write-off expense, net of collections, as a varietypercentage of factors including, but not limited to, current economic trends, historical payment and bad debt write-off experience.the annual average balance of trade receivables for each of the past three years. An account is considered past-due or delinquent when it has not been paid within the contractual terms. Uncollectible accounts are written off against the reserves when it is deemed that a customer account is uncollectible.
Inventories – Inventories are valued at the lower of cost or net realizable value. Cost is determined on a first-in, first-out (“FIFO”) basis except for Inventoriesinventories in North America, which are determined on a last-in, first-out (“LIFO”) basis.
Property, Plant and Equipment – Property, plant and equipment is carried at cost. Additions and improvements that extend the lives of the assets are capitalized, while expenditures for repairs and maintenance are expensed as incurred. We generally depreciate buildings and improvements by the straight-line method over a life of 30 years. Other property, plant and equipment are generally depreciated using the straight-line method based on lives of 3 years to 15 years.
Leases – We assess whether an arrangement is a lease at inception.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except shares12 months or less are expensed as incurred as short-term lease cost. We have elected the practical expedient to not separate lease and per share data)
Equity Method Investment – Investmentsnon-lease components for all asset classes. Operating lease assets and operating lease liabilities are calculated based on the present value of the future lease payments over the lease term at the lease commencement date. When future lease payments are based on an index or rate, operating lease assets and operating lease liabilities are calculated using the prevailing index or rate at the lease commencement date. As the implicit rate is not readily determinable, we use our incremental borrowing rate based on the information available at the lease start date in determining the present value of future payments. Information used in determining the incremental borrowing rates for the Company's leases includes: (1) the market yield on the Company's traded bond, adjusted for the presence of collateral and the difference in terms of the bond and the leases, (2) consideration of the currency in which each lease was denominated, and (3) the lease term. The operating lease asset is increased by any lease payments made at or before the lease start date, increased by initial direct costs incurred, and reduced by lease incentives. The lease term includes options to renew or terminate the lease when it is reasonably certain that we havewill exercise that option. The exercise of lease renewal options is at our sole discretion. The useful life of lease assets and leasehold improvements are limited by the abilitylease term, unless there is a transfer of title or purchase option reasonably certain of exercise. Certain leases also include options to exercise significant influence, but dopurchase the leased asset. Lease expense for operating leases is recognized on a straight-line basis over the lease term. Certain leases contain variable lease payments for items such as index-based changes in rent, fuel and common area maintenance, which we expense as incurred as variable lease cost.
Finance leases are not control, are accounted for under the equity method of accounting and are included in Other Assets on the Consolidated Balance Sheets. Under this method of accounting,material to our share of the net earnings or losses of the investee are presented as a component of Other Expense, Net on the Consolidated Statements of Operations. The detail regarding our equity method investment in i-team North America B.V., a joint venture that operates as the distributor of the i-mop in North America, are further described in Note 3.consolidated financial statements.
Goodwill – Goodwill represents the excess of cost over the fair value of net assets of businesses acquired.acquired and is allocated to our reporting units at the time of the acquisition. We analyze Goodwillgoodwill on an annual basis as of year endOctober 1 and when an event occurs or circumstances change that may reduce the fair value of one of our reporting units below its carrying amount. A goodwill impairment occurs ifWe have the carrying amountoption of a reporting unit exceeds its fair value. In assessing the recoverability of Goodwill, we use an analysis offirst analyzing qualitative factors to determine whether it is more likely than not that the fair value of aany reporting unit is less than its carrying amount as a basis for determining whether it is necessaryamount. However, we may elect to perform a quantitative goodwill impairment test in lieu of the quantitativequalitative test.
In 2023, we performed a qualitative goodwill test on all reporting units. Our tests indicated that there was no goodwill impairment test.in any of our reporting units as of our annual assessment date.
Intangible Assets – Intangible Assetsassets consist of definite lived customer lists, trade names and technology. Generally, intangible assets classified as trade names are amortized on a straight-line basis and intangible assets classified as customer lists or technology are amortized using an accelerated method of amortization.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Tables in millions, except shares and per share data)
Impairment of Long-livedLong-Lived Assets and Assets Held for Sale – We periodically review our intangible and long-lived assets for impairment and assess whether events or circumstances indicate that the carrying amount of the assets may not be recoverable. We generally deem an asset group to be impaired if an estimate of undiscounted future operating cash flows is less than its carrying amount. If impaired, an impairment loss is recognized based on the excess of the carrying amount of the individual asset group over its fair value.
Assets held for sale are measured at the lower of their carrying value or fair value less costs to sell. Upon retirement or disposition, the asset cost and related accumulated depreciation or amortization are removed from the accounts and a gain or loss is recognized based on the difference between the fair value of proceeds received and carrying value of the assets held for sale. In fiscal 2015, we adopted a plan to sell assets and liabilities of our Green Machines™ outdoor city cleaning line as a result of determining that the product line does not sufficiently complement our core business. The long-lived assets involved were tested for recoverability in 2015; accordingly, a pre-tax impairment loss of $11,199 was recognized, which represents the amount by which the carrying values of the assets exceeded their fair value less costs to sell. The impairment charge is included in the caption "Impairment of Long-Lived Assets" in the accompanying Consolidated Statements of Operations.
Purchase of Common Stock – We repurchase our Common Stockcommon stock under 2016 and 2015 repurchase programsprogram authorized by our Board of Directors. These programs allowThis program allows us to repurchase up to an aggregate of 1,393,965821,413 shares of our Common Stock.common stock. Upon repurchase, the par value is charged to Common Stockcommon stock and the remaining purchase price is charged to Additional Paid-in Capital.additional paid-in capital. If the amount of the remaining purchase price causes the Additional Paid-in Capitaladditional paid-in capital account to be in a debitnegative position, this amount is then reclassified to Retained Earnings.retained earnings. Common Stockstock repurchased is included in shares authorized but is not included in shares outstanding.
Warranty – We record a liability for estimated warranty claims at the time of sale. The amount of the liability is based on the trend in the historical ratio of claims to sales, the historical length of time between the sale and resulting warranty claim, new product introductions and other factors. In the event we determine that our current or future product repair and replacement costs exceed our estimates, an adjustment to these reserves would be charged to earnings in the period such determination is made. Warranty terms on machines range from one to four years. However, the majority of our claims are paid out within the first six to nine months following a sale. The majority of the liability for estimated warranty claims represents amounts to be paid out in the near term for qualified warranty issues, with immaterial amounts reserved to be paid out for older equipment warranty issues.
Debt Issuance Costs – We record all applicable debt issuanceWarranty costs related to a recognized debt liability in the Consolidated Balance Sheets as a direct deduction from the carrying amount of the debt liability, if not a line-of-credit arrangement. All debt issuance costs related to line-of-credit arrangements are recorded as parta component of Other Assetsselling and administrative expense in the Consolidated Balance Sheets and subsequently amortized over the termconsolidated statements of the line-of-credit arrangement. We amortize our debt issuance costs using the effective interest method over the term of the debt instrument or line-of-credit arrangement. Amortization of these costs is included as part of Interest Expense in the Consolidated Statements of Operations.income.
Environmental – We record a liability for environmental clean-up on an undiscounted basis when a loss is probable and can be reasonably estimated.
Pension and Profit Sharing Plans – Substantially all U.S. employees are covered by various retirement benefit plans, including postretirement medical plans and defined contribution savings plans. Pension plan costsRetirement benefits for eligible employees in foreign locations are accrued based on actuarial estimates with the required pension cost funded annually, as needed. No new participants have entered theprincipally through defined benefit pension plan since 2000. For further details regarding our pension and profit sharing plans, see Note 13.annuity or government programs.
Postretirement Benefits – We accrue and recognize the cost of retiree health benefits over the employees’ period of service based on actuarial estimates. Benefits are only available for U.S. employees hired before January 1, 1999.
Derivative Financial Instruments – In countries outside the U.S., we transact business in U.S. dollarsThe Company uses cross-currency swaps, interest rate swaps and in various other currencies. We hedge our net recognized foreign currency denominated assetsexchange forward and liabilitiesoption contracts to manage risks generally associated with foreign exchange forward contracts to reduce the risk that the value of these assetsrate and liabilities will be adversely affected by changes in exchange rates. We may also use foreign exchange option contracts or forward contracts to hedge certain cash flow exposures resulting from changes in foreign currency exchange rates. We enter into these foreign exchange contracts to hedge a portion of our forecasted currency denominated revenue in the normal course of business, and accordingly, they are not speculative in nature.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except shares and per share data)
interest rate volatility. We account for our foreign currency hedging instruments as either assets or liabilities on the consolidated balance sheetsheets and measure them at fair value. Gains and losses resulting from changes in fair value are accounted for depending on the use of the derivative and whether it is designated and qualifies for hedge accounting. Gains and losses from foreign exchange forward contractsfor all instruments that do not qualify for hedge certain balance sheet positionsaccounting are recorded each period to Net Foreign Currency Transaction Lossesnet foreign currency transaction loss in our Consolidated Statementsconsolidated statements of Operations. Foreign exchange option contracts or forward contracts hedging forecasted foreign currency revenueincome. Changes in the fair value of designated hedges are designated as cash flow hedges under accounting for derivative instruments and hedging activities, with gains and losses recorded each period to Accumulated Other Comprehensive Lossreported in our Consolidated Balance Sheets, until the forecasted transaction occurs. When the forecasted transaction occurs, we reclassify the related gain oraccumulated other comprehensive loss on the cash flow hedge to Net Sales. In the eventconsolidated balance sheet until a related transaction occurs. If the underlying forecastedhedged 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 Lossceases to Net Foreign Currency Transaction Losses in our Consolidated Statements of Operations at that time. If we do not elect hedge accounting, or the contract does not qualify for hedge accounting treatment, theexist, all changes in fair value from period to periodof the related derivatives that have not been settled are recorded in Net Foreign Currency Transaction Lossesour consolidated statements of income.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Tables in our Consolidated Statements of Operations. See Note 11 for additional information regarding our hedging activities.millions, except shares and per share data)
Revenue Recognition – Revenue is recognized when control transfers under the terms of the contract with our customers. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services. Sales and other taxes we collect concurrent with revenue-producing activities are excluded from revenue. We recognize revenue when persuasive evidencedo not account for shipping and handling as a distinct performance obligation as we generally perform shipping and handling activities after we transfer control of an arrangement exists, title and risk of ownership have passedgoods to the customer. We have elected to account for shipping and handling costs associated with outbound freight after control of goods has transferred to a customer as a fulfillment cost. Incidental items that are immaterial in the sales pricecontext of the contract are not recognized as a separate performance obligation. We do not have any significantly extended payment terms as payment is fixed or determinablegenerally received within one year of the point of sale.
In general, we transfer control and collectability is reasonably assured. Generally, these criteria are metrecognize a sale at the point in time the product is shipped. Provisions for estimated returns, rebateswhen products are shipped from our manufacturing facilities both direct to consumers and discounts are provided for at the time the related revenue is recognized. Freight revenue billed to customers is included in Net Sales and the related shipping expense is included in Cost of Sales.distributors. Service revenue is recognized in the period the service is performed or ratably over the period of the related service contract.
Customers may obtain financing through third-party leasing companies to assist in their acquisition of our equipment products. Certain lease transactions classified as operating leases contain retained ownership provisions or guarantees, which results in recognition of revenue over the lease term. As a result, we defer the sale of these transactions and record the sales proceeds as collateralized borrowings or deferred revenue. The underlying equipment relating to operating leases is depreciated on a straight-line basis, not to exceed the equipment’s estimated useful life.
Revenues from contracts with multiple element arrangements are recognized as each element is earned. We offer service contracts in conjunction with equipment sales in addition to selling equipment and service contracts separately. Sales proceeds Consideration related to service contracts areis deferred if the proceeds are received in advance of the servicesatisfaction of the performance obligations and recognized ratably over the contract period.period as the performance obligation is met. We use an output method to measure progress toward completion for certain prepaid service contracts, as this method appropriately depicts performance toward satisfaction of the performance obligations.
For contracts with multiple performance obligations (i.e., a product and service component), we allocate the transaction price to the performance obligations in proportion to their stand-alone selling prices. We use an observable price to determine the stand-alone selling price for separate performance obligations. When allocating on a relative stand-alone selling price basis, any discounts contained within the contract are allocated proportionately to all of the performance obligations in the contract.
We generally expense the incremental costs of obtaining a contract when incurred because the amortization period would be less than one year. These costs relate primarily to sales commissions and are recorded in selling and administrative expense in the consolidated statements of income.
We do not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less. In May 2014,addition, we do not adjust 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 thepromised amount of revenue to which it expects to be entitledconsideration for the effects of a significant financing component if we expect, at contract inception, that the period between when we transfer ofa promised goodsgood or servicesservice to customers. This guidance provides a five-step analysis of transactions to determinecustomer and 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. We adopted the new standard effective January 1, 2018. The adoption of this ASU did not have a material impact on our financial condition, results of operationscustomer pays for that good or cash flows, other than additional disclosure requirements.service will be one year or less.
Share-basedShare-Based Compensation – We account for employee share-based compensation awards on a fair value basis. The estimated grant date fair value of each option award is recognized in income on a straight-line basis over the requisite service period (generally the vesting period). The estimated fair value of each option award is calculated using the Black-Scholes option-pricing model. From time to time, we have elected to modify the terms of the original grant. These modified grants are accounted for as a new award and measured using the fair value method, resulting in the inclusion of additional compensation expense in our consolidated statements of income.
Restricted share awards and units are recorded as compensation cost over the requisite service periods based method. Our share-basedon the market value on the date of grant. To determine the amount of compensation planscost to be recognized in each period for these awards and for option awards, we account for forfeitures as they occur.
Performance share awards (PSUs) are more fully described in Note 17stock awards where the ultimate number of shares issued will be contingent on the Company’s performance against certain performance goals. The Compensation Committee has the ability to adjust performance goals or modify the manner of measuring or evaluating a performance goal using its discretion. The fair value of each PSU is based on the market value on the date of grant. We recognize expense related to the estimated vesting of our PSUs granted. The estimated vesting of the Consolidated Financial Statements.PSUs is based on the probability of achieving certain performance metrics over the specified performance period. To determine the amount of compensation cost to be recognized in each period, we estimate forfeitures.
Research and Development – Research and development costs are expensed as incurred.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Tables in millions, except shares and per share data)
Advertising Costs –We advertise products, technologies and solutions to customers and prospective customers through a variety of marketing campaign and promotional efforts. These efforts include tradeshows, online advertising, e-mail marketing, mailings, sponsorships and telemarketing. Advertising costs are expensed as incurred. In 2017, 20162023, 2022 and 20152021, such activities amounted to $8,228, $7,269$4.6 million, $4.0 million and $7,418,$4.6 million, respectively.
Income Taxes – Deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the book and tax bases of existing assets and liabilities. A valuation allowance is provided when, in management’s judgment, it is more likely than not that some portion or all of the deferred tax asset will not be realized. We have established contingentuncertain tax liabilitiesposition accruals using management’s best judgment. We follow guidance provided by Accounting Standards Codification ("ASC") 740, Income Taxes, regarding uncertainty in income taxes, to record these contingent tax liabilities (refer to Note 16 of the Consolidated Financial Statements for additional information). We adjust these liabilitiesaccruals as facts and circumstances change. Interest Expenseexpense is recognized in the first period the interest would begin accruing. Penalties are recognized in the period we claim or expect to claim the position in our tax return. Interest and penaltiespenalty expenses are classified as an income tax expense.
Sales Tax –Sales taxes collected from customers and remitted to governmental authorities are presented on a net basis.
Earnings perPer Share – Basic (loss) earnings per share is computed by dividing Net (Loss) Earnings Attributablenet earnings attributable to Tennant Company by the Weighted Average Shares Outstandingweighted average shares outstanding during the period. Diluted earnings per share assumes conversion of potentially dilutive stock options, performance shares, restricted shares and restricted stock units. These conversions are not included in our computation of diluted earnings per share if we have a net loss attributable to Tennantthe Company in a reporting period asor if the instrument's effects are anti-dilutive.
New Accounting Pronouncements –In accordance with 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 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.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands,Tables in millions, except shares and per share data)
2. Newly Adopted Accounting Pronouncements
| |
2. | Newly Adopted Accounting Pronouncements |
On March 30, 2016,Income Taxes
In January 2021, we adopted Accounting Standards Update ("ASU") No. 2019-12, Income Taxes (Topic 740): Simplifying the FASB issued ASU 2016-09, Compensation–Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting for Income Taxes, which amends Accounting Standards Codification ("ASC") Topic 718, Compensation–Stock Compensation. ASU 2016-09 simplifies several aspects of the accounting for share-based payment transaction, includingincome taxes by removing certain exceptions to the income tax consequences, classificationgeneral principles in Topic 740. The impact of awardsthis amended guidance on our consolidated financial statements and related disclosures was immaterial.
Defined Benefit Plans
In December 2022, we adopted ASU No. 2018-14, Compensation-Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20): Disclosure Framework-Changes to the Disclosure Requirements for Defined Benefit Plans, which updates disclosure requirements for defined benefit pension and other postretirement plans. Adoption of this ASU did not have a material impact on our consolidated financial statements.
Reference Rate Reform
In March 2020, the Financial Accounting Standards Board ("FASB") issued ASU No. 2020-04,Reference Rate Reform (Topic 848). This ASU provides optional expedients to applying generally accepted accounting principles to certain contract modifications, hedging relationships, and other transactions affected by the reference rate reform, which affects the London Inter-bank Offered Rate ("LIBOR"), if certain criteria are met. The amendments were effective March 12, 2020 through December 31, 2022. There has been no material impact to our financial condition, results of operations, or cash flows from reference rate reform as either equity or liabilities and classificationof December 31, 2022. See Note 9 for information on the Consolidated Statementsreplacement of Cash Flows. UnderLIBOR with the new standard, all excess tax benefitsSecured Overnight Financing Rate ("SOFR") in our Credit Agreements (defined below) on November 17, 2022.
3. Revenue
Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products and tax deficienciesservices. Generally, these criteria are met at the time the product is shipped.
We also enter into contracts that can include combinations of products and services, which are generally capable of being distinct and are accounted for as separate performance obligations. Revenue is recognized net of allowances for returns and any taxes collected from customers, which are subsequently remitted to governmental authorities.
Disaggregation of Revenue
The following tables illustrate the disaggregation of revenue by geographic area, groups of similar products and services and sales channels for the years ended December 31:
Net sales by geographic area
| | | | | | | | | | | | | | | | | |
| 2023 | | 2022 | | 2021 |
Americas | $ | 840.3 | | | $ | 705.9 | | | $ | 658.3 | |
Europe, Middle East and Africa (EMEA) | 314.4 | | | 301.6 | | | 331.9 | |
Asia Pacific (APAC) | 88.9 | | | 84.7 | | | 100.6 | |
Total | $ | 1,243.6 | | | $ | 1,092.2 | | | $ | 1,090.8 | |
Net sales are attributed to each geographic area based on the end user country and are net of intercompany sales.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Tables in millions, except shares and per share data)
Net sales by groups of similar products and services
| | | | | | | | | | | | | | | | | |
| 2023 | | 2022 | | 2021 |
Equipment | $ | 776.4 | | | $ | 664.0 | | | $ | 679.9 | |
Parts and consumables | 279.5 | | | 263.1 | | | 249.3 | |
Specialty surface coatings(a) | — | | | — | | | 1.5 | |
Service and other | 187.7 | | | 165.1 | | | 160.1 | |
Total | $ | 1,243.6 | | | $ | 1,092.2 | | | $ | 1,090.8 | |
(a)On February 1, 2021, we sold our Coatings business. Further details regarding the sale are discussed in Note 5.
Net sales by sales channel
| | | | | | | | | | | | | | | | | |
| 2023 | | 2022 | | 2021 |
Sales direct to consumer | $ | 854.4 | | | $ | 712.6 | | | $ | 692.4 | |
Sales to distributors | 389.2 | | | 379.6 | | | 398.4 | |
Total | $ | 1,243.6 | | | $ | 1,092.2 | | | $ | 1,090.8 | |
Contract Liabilities
Sales Returns
The right of return may exist explicitly or implicitly with our customers. When the right of return exists, we adjust the transaction price for the estimated effect of returns. We estimate the expected returns using the expected value method by assessing historical sales levels and the timing and magnitude of historical sales return levels as a percent of sales and projecting this experience into the future.
Sales Incentives
Our sales contracts may contain various customer incentives, such as volume-based rebates or other promotions. We reduce the transaction price for certain customer programs and incentive offerings that represent variable consideration. Sales incentives given to our customers are recorded as a component ofusing the provisionmost likely amount approach 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 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:
In 2017, we recognized discrete tax benefits of $1,168 in the Income Tax Expense line item of our 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 2016 and 2015 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 determineestimating the amount of compensation costconsideration to which the Company will be entitled. We forecast the most likely amount of the incentive to be recognizedpaid at the time of sale, update this forecast quarterly, and adjust the transaction price accordingly to reflect the new amount of incentives expected to be earned by the customer. A majority of our customer incentives are settled within one year. We record our accruals for volume-based rebates and other promotions in each period. other current liabilities on our consolidated balance sheets.
The difference of such change is immaterial.in our sales incentive accrual balance for the years ended December 31, 2023 and 2022 was as follows:
| | | | | | | | | | | |
| 2023 | | 2022 |
Beginning balance | $ | 20.0 | | | $ | 19.9 | |
Additions to sales incentive accrual | 29.5 | | | 22.5 | |
Contract payments | (28.5) | | | (21.8) | |
Foreign currency fluctuations | 0.2 | | | (0.6) | |
Ending balance | $ | 21.2 | | | $ | 20.0 | |
| |
3. | Investment in Joint Venture |
On February 13, 2017,Deferred Revenue
We sell separately priced prepaid contracts to our customers where we receive payment at 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 distributorinception of the i-mopcontract and defer recognition of the consideration received because we have to satisfy future performance
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Tables in North America. We beganmillions, except shares and per share data)
obligations. Our deferred revenue balance is primarily attributed to prepaid maintenance contracts on our machines ranging from 12 months to 60 months. In circumstances where prepaid contracts are sold simultaneously with machines, we use an observable price to determine stand-alone selling and servicing the i-mopprice for separate performance obligations.
The change in the second quarterdeferred revenue balance for the years ended December 31, 2023and 2022 was as follows:
| | | | | | | | | | | |
| 2023 | | 2022 |
Beginning balance | $ | 9.3 | | | $ | 11.2 | |
Increase in deferred revenue representing our obligation to satisfy future performance obligations | 21.7 | | | 24.2 | |
Decrease in deferred revenue for amounts recognized in net sales for satisfied performance obligations | (20.8) | | | (25.5) | |
Foreign currency fluctuations | 0.1 | | | (0.6) | |
Ending balance | $ | 10.3 | | | $ | 9.3 | |
As of 2017. We own a 50% ownership interestDecember 31, 2023, $7.9 million and $2.4 million of deferred revenue was reported in other current liabilities and other liabilities, respectively, on our consolidated balance sheets. Of this, we expect to recognize the following approximate amounts in net sales in the joint venture, which is accounted for under the equity method of accounting, with our proportionate share of income or loss presented as a component of Other Expense, Net on the Consolidated Statements of Operations. In 2017, this amount is immaterial.following periods:
| | | | | |
2024 | $ | 7.9 | |
2025 | 1.2 | |
2026 | 0.7 | |
2027 | 0.3 | |
2028 | 0.1 | |
Thereafter | 0.1 | |
Total | $ | 10.3 | |
As of December 31, 2017, the carrying value2022, $6.6 million and $2.7 million of the company's investmentdeferred revenue was reported in other current liabilities and other liabilities, respectively, on our consolidated balance sheets.
4. Management Actions
Restructuring Actions
In 2023 and 2022, we incurred restructuring expenses as part of our ongoing global reorganization efforts. The following pre-tax restructuring charges were included in the joint venture was $75. In March 2017, we issued a $1,500 loan toconsolidated statements of income:
| | | | | | | | | | | |
| 2023 | | 2022 |
Severance-related costs - Selling and administrative expense | $ | 1.9 | | | $ | 2.2 | |
Severance-related costs - Cost of sales | 0.7 | | | — | |
Other costs - Selling and administrative expense(a) | 0.3 | | | 1.6 | |
Other costs - Cost of sales(a) | — | | | 0.3 | |
Total pre-tax restructuring costs | $ | 2.9 | | | $ | 4.1 | |
(a)Includes facility exit costs associated with facility moves.
The charges in 2023 impacted the joint venture and, as a result, recorded a long-term note receivable in Other Assets on the Consolidated Balance Sheets.
During the first quarter of 2017, we implemented a restructuring action to better align our global resources and expense structure with a lower growth global economic environment. The pre-tax charge of $8,018, including other associated costs of $961, consisted primarily of severance and was included within Selling and Administrative Expense in the Consolidated Statements of Operations. The charge impacted our Americas, Europe, Middle East and Africa ("EMEA")(EMEA) and Asia Pacific ("APAC")(APAC) operating segments. We believe the anticipated savings will offset the pre-tax chargeThe charges in approximately one year from the date of the action. We do not expect additional costs will be incurred related to this restructuring action.
During the fourth quarter of 2017, we implemented a restructuring action primarily driven by integration actions related to our acquisition of IP Cleaning S.p.A and its subsidiaries ("IPC Group"). See Note 5 for further details regarding our acquisition of the IPC Group. The restructuring action consisted primarily of severance and includes reductions in overall staffing to streamline and right-size the organization to support anticipated business requirements. The pre-tax charge of $2,501 was included within Selling and Administrative Expense in the Consolidated Statements of Operations. The charge2022 impacted our Americas, EMEA and APACall operating segments. We believeOur restructuring actions represent the anticipated savings will offset the pre-tax charge
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Tables in approximately one year from the datemillions, except shares and per share data)
continued execution of the action. We do not expect additional costs will be incurred relateda multi-year enterprise strategy to this restructuring action.drive increased productivity throughout our operations.
A reconciliation to the ending liability balance of severance and related costs as of December 31, 20172023 is as follows:
| | | | | | | | | | | |
| 2023 | | 2022 |
Beginning balance | $ | 1.7 | | | $ | 4.9 | |
New charges | 3.2 | | | 2.2 | |
Cash payments | (1.9) | | | (2.9) | |
Foreign currency adjustments | — | | | (0.5) | |
Adjustment to accrual | (0.6) | | | (2.0) | |
Ending balance | $ | 2.4 | | | $ | 1.7 | |
5. Acquisitions and Divestitures
|
| | | |
| Severance and Related Costs |
2017 restructuring actions | $ | 9,558 |
|
Cash payments | (6,312 | ) |
Foreign currency adjustments | 190 |
|
December 31, 2017 Balance | $ | 3,436 |
|
Sale of BuildingIP Cleaning S.p.A.During the second quarter of 2022, we sold a building located in Golden Valley, Minnesota. The resulting pre-tax gain was $3.7 million and is reflected within gain on sale of assets in the consolidated statements of income. Proceeds from sale of assets were $4.1 million.
On April 6, 2017,Sale of Coatings Business
During the first quarter of 2021, we acquired 100 percentsold the Coatings business. The resulting pre-tax gain was $9.8 million and is reflected within gain on sale of business in the outstanding capital stockconsolidated statements of IP Cleaning S.p.A. and its subsidiaries ("IPC Group") for a purchase priceincome. Proceeds from sale of $353,769,business, net of cash acquireddivested, were $24.7 million.
Acquisition of $8,804. The primary seller was Ambienta SGR S.p.A.Gaomei
On January 4, 2019, 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 we completed the acquisition of IPC Group, along withHefei Gaomei Cleaning Machines Co., Ltd. and Anhui Rongen Environmental Protection Technology Co., Ltd. (collectively "Gaomei"), privately held designers and manufacturers of commercial cleaning solutions based in China. The financial results for Gaomei have been included in the consolidated financial results since the date of closing. The total purchase price included $22.4 million of payments and related fees, including refinancing of existing debt, with funds raised through borrowings under a senior secured credit facilityadjustments paid in an aggregate principal amount of $420,000. Further details regarding our acquisition financing arrangements are discussed2019 and contingent consideration payments totaling $2.5 million paid in Note 9.
2021.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands,Tables in millions, except shares and per share data)
6. Inventories
The following table summarizes the preliminary fair value measurement of the assets acquired and liabilities assumed as of the date of acquisition:
|
| | | |
ASSETS | |
Receivables | $ | 39,984 |
|
Inventories | 46,442 |
|
Other Current Assets | 5,314 |
|
Assets Held for Sale | 2,247 |
|
Property, Plant and Equipment | 63,890 |
|
Intangible Assets Subject to Amortization: | |
Trade Name | 26,753 |
|
Customer Lists | 123,061 |
|
Technology | 9,631 |
|
Other Assets | 8,261 |
|
Total Identifiable Assets Acquired | 325,583 |
|
LIABILITIES | |
Accounts Payable | 32,227 |
|
Accrued Expenses | 15,611 |
|
Deferred Income Taxes | 60,433 |
|
Other Liabilities | 9,360 |
|
Total Identifiable Liabilities Assumed | 117,631 |
|
Net Identifiable Assets Acquired | 207,952 |
|
Noncontrolling Interest | (2,028 | ) |
Goodwill | 147,845 |
|
Total Estimated Purchase Price, net of Cash Acquired | $ | 353,769 |
|
The acquired assets, liabilities and operating results have been included in our Consolidated Financial Statements from the date of acquisition. During 2017, we included net sales of $174,444 and a net loss of $14,483 from IPC Group in our Consolidated Statements of Operations. The net loss includes a fair value adjustment, net of tax, of $5,237 to the acquired inventory of IPC Group. In addition, costs of $10,408, net of tax, associated with the acquisition of the IPC Group were expensed as incurred in the 2017 Consolidated Statement of Operations. The preliminary gross amount of the accounts receivable acquired is $44,654, of which $4,670 is expected to be uncollectible.
The fair value measurements were final at December 31, 2017, with the exception of the fair value of accounts receivable, inventory excess and obsolescence reserves, intangible assets subject to amortization, goodwill, warranty, income tax payable and deferred income taxes. We expect the fair value measurement process to be completed 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 (e.g., 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 $147,845 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.
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 $159,445. The expected lives of the acquired amortizable intangible assets are approximately 15 years for customer lists, 10 years for trade names and 10 years for technology. Trade names are being amortized on a straight-line basis while the customer lists and technology are being amortized on an accelerated basis. We recorded amortization expense of $15,746 in Selling and Administrative Expense on our Consolidated Statements of Operations for these acquired intangible assets in 2017.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except shares and per share data)
The following unaudited pro forma financial information presents the combined results of operations of Tennant Company as if the acquisition of IPC Group had occurred as of January 1, 2016:
|
| | | | | | | |
Years ended December 31 | 2017 | | 2016 |
Net Sales | | | |
Pro forma | $ | 1,057,127 |
| | $ | 1,013,710 |
|
As reported | 1,003,066 |
| | 808,572 |
|
| | | |
Net Earnings (Loss) Attributable to Tennant Company | | | |
Pro forma | $ | 12,288 |
| | $ | 30,412 |
|
As reported | (6,195 | ) | | 46,614 |
|
| | | |
Net Earnings (Loss) Attributable to Tennant Company per Diluted Share | | | |
Pro forma | $ | 0.68 |
| | $ | 1.69 |
|
As reported | (0.35 | ) | | 2.59 |
|
The unaudited pro forma financial information is presented for informational purposes only. It is not necessarily indicative of what our consolidated results of operations actually would have been had the acquisition occurred at the beginning of each year, nor does it attempt to project the future results of operations of the combined company.
The unaudited pro forma financial information above gives effect to the following:
Incremental depreciation expense related to the estimated fair value of the property, plant and equipment from the preliminary purchase price allocation.
Exclusion of the purchase accounting impact of the $7,245 inventory step-up reported in 2017 Cost of Sales on our Consolidated Statements of Operations related to the sale of acquired inventory.
Incremental interest expense related to additional debt used to finance the acquisition.
Exclusion of non-recurring acquisition-related transaction and financing costs.
Pro forma adjustments tax affected based on the jurisdiction where the costs were incurred.
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 in 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. 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 $4,650 less assumed liabilities of $3,448, subject to customary working capital adjustments. The net purchase price of $1,202 and a value added tax of $191 were paid at closing.
The acquisitions have been accounted for as business combinations and the results of their operations have been included in the 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 Consolidated Financial Statements. The purchase price allocations for both the Florock and Dofesa acquisitions are complete.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except shares and per share data)
The components of the final purchase price of the Florock and Dofesa acquisitions, as 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 |
|
Inventories as of December 31 consisted of the following:
| | | | | | | | | | | |
| 2023 | | 2022 |
Inventories carried at LIFO: | | | |
Finished goods(a) | $ | 74.7 | | | $ | 85.0 | |
Raw materials and work-in-process | 38.5 | | | 46.4 | |
Excess of FIFO over LIFO cost(b) | (47.7) | | | (49.7) | |
Total LIFO inventories | $ | 65.5 | | | $ | 81.7 | |
| | | |
Inventories carried at FIFO: | | | |
Finished goods(a) | $ | 52.8 | | | $ | 68.9 | |
Raw materials and work-in-process | 57.6 | | | 56.0 | |
Total FIFO inventories | $ | 110.4 | | | $ | 124.9 | |
Total inventories | $ | 175.9 | | | $ | 206.6 | |
|
| | | | | | | |
| 2017 | | 2016 |
Inventories carried at LIFO: | | | |
Finished goods | $ | 43,439 |
| | $ | 39,142 |
|
Raw materials, production parts and work-in-process | 23,694 |
| | 23,980 |
|
LIFO reserve | (28,429 | ) | | (28,190 | ) |
Total LIFO inventories | $ | 38,704 |
| | $ | 34,932 |
|
| | | |
Inventories carried at FIFO: | | | |
Finished goods | $ | 54,161 |
| | $ | 31,044 |
|
Raw materials, production parts and work-in-process | 34,829 |
| | 12,646 |
|
Total FIFO inventories | $ | 88,990 |
| | $ | 43,690 |
|
Total inventories | $ | 127,694 |
| | $ | 78,622 |
|
(a)Finished goods include machines, parts and consumables and component parts that are used in our products.(b)The LIFO reserve approximates the difference between LIFO carryingreplacement cost and FIFO.the stated LIFO inventory value is not materially different from the reserve for the LIFO valuation method.
| |
7. | Property, Plant and Equipment |
7. Property, Plant and Equipment
Property, plant and equipment and related Accumulated Depreciation,accumulated depreciation, including equipment under capitalfinance leases, as of December 31,consisted of the following:
| | | | | | | | | | | |
| 2023 | | 2022 |
Property, plant and equipment: | | | |
Land | $ | 21.0 | | | $ | 22.0 | |
Buildings and improvements | 137.6 | | | 149.0 | |
Machinery and manufacturing equipment | 209.5 | | | 171.1 | |
Office equipment | 116.0 | | | 107.7 | |
Construction in progress | 7.6 | | | 9.4 | |
Total property, plant and equipment | 491.7 | | | 459.2 | |
Less: accumulated depreciation | (304.0) | | | (279.3) | |
Property, plant and equipment, net | $ | 187.7 | | | $ | 179.9 | |
|
| | | | | | | |
| 2017 | | 2016 |
Property, Plant and Equipment: | | | |
Land | $ | 18,152 |
| | $ | 6,328 |
|
Buildings and improvements | 96,230 |
| | 58,577 |
|
Machinery and manufacturing equipment | 151,645 |
| | 116,221 |
|
Office equipment | 107,312 |
| | 89,838 |
|
Work in progress | 9,429 |
| | 27,536 |
|
Total Property, Plant and Equipment | 382,768 |
| | 298,500 |
|
Less: Accumulated Depreciation | (202,750 | ) | | (186,403 | ) |
Property, Plant and Equipment, Net | $ | 180,018 |
| | $ | 112,097 |
|
Depreciation expense was $26,199$36.4 million, $32.8 million and $33.1 million in 2017, $17,891 in 20162023, 2022 and $16,550 in 2015.
2021, respectively.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands,Tables in millions, except shares and per share data)
8. Goodwill and Intangible Assets
| |
8. | Goodwill and Intangible Assets |
For purposes of performing our goodwill impairment analysis, we have identified our reporting units as North America, Latin America, Coatings, EMEA and APAC. AsIn 2021, the Coatings reporting unit was sold and is no longer considered a reporting unit.
We have the option of December 31, 2017, 2016 and 2015, we performed an analysis offirst analyzing qualitative factors to determine whether it is more likely than not that the fair value of aany reporting unit is less than its carrying amount asamount.We may elect to perform a basis for determining whether it is necessaryquantitative goodwill impairment test in lieu of the qualitative test, and in 2023 we performed the qualitative goodwill test on all reporting units. In 2022, we elected to perform the quantitative goodwill impairment test.test on all reporting units. Based on our analysis, of qualitative factors, we determined that itthere was not necessary to perform the quantitativeno impairment of goodwill impairment test for anyas of our reporting units.December 31, 2023 and 2022.
The changes in the carrying amount of Goodwillgoodwill are as follows:
| | | | | | | | | | | | | | | | | |
| Goodwill | | Accumulated Impairment Losses | | Total |
Balance as of December 31, 2023 | $ | 220.7 | | | $ | (33.3) | | | $ | 187.4 | |
Foreign currency fluctuations | 1.9 | | | 3.5 | | | 5.4 | |
Balance as of December 31, 2022 | $ | 218.8 | | | $ | (36.8) | | | $ | 182.0 | |
Foreign currency fluctuations | (15.1) | | | 4.0 | | | (11.1) | |
Balance as of December 31, 2021 | $ | 233.9 | | | $ | (40.8) | | | $ | 193.1 | |
|
| | | | | | | | | | | |
| Goodwill | | Accumulated Impairment Losses | | Total |
Balance as of December 31, 2015 | $ | 60,447 |
| | $ | (43,644 | ) | | $ | 16,803 |
|
Additions | 3,787 |
| | — |
| | 3,787 |
|
Foreign currency fluctuations | (5,837 | ) | | 6,312 |
| | 475 |
|
Balance as of December 31, 2016 | $ | 58,397 |
| | $ | (37,332 | ) | | $ | 21,065 |
|
Additions | 147,845 |
| | — |
| | 147,845 |
|
Purchase accounting adjustments | (1,865 | ) | | — |
| | (1,865 | ) |
Foreign currency fluctuations | 22,847 |
| | (3,848 | ) | | 18,999 |
|
Balance as of December 31, 2017 | $ | 227,224 |
| | $ | (41,180 | ) | | $ | 186,044 |
|
The balances of acquired Intangible Assets,intangible assets, excluding Goodwill, as of December 31,goodwill, are as follows: | | | Customer Lists | | Trade Names | | Technology | | Total |
Balance as of December 31, 2017 | | | | | | | |
| Customer Lists | | | Customer Lists | | Trade Names | | Technology | | Total |
Balance as of December 31, 2023 | |
Original cost | |
Original cost | |
Original cost | $ | 149,355 |
| | $ | 31,968 |
| | $ | 14,589 |
| | $ | 195,912 |
|
Accumulated amortization | (17,870 | ) | | (2,436 | ) | | (3,259 | ) | | (23,565 | ) |
Carrying amount | $ | 131,485 |
| | $ | 29,532 |
| | $ | 11,330 |
| | $ | 172,347 |
|
Weighted-average original life (in years) | 15 |
| | 10 |
| | 11 |
| | |
|
| | | | | | | |
Balance as of December 31, 2016 | |
| | |
| | |
| | |
|
Balance as of December 31, 2022 | |
| Balance as of December 31, 2022 | |
| Balance as of December 31, 2022 | |
Original cost | |
Original cost | |
Original cost | $ | 8,016 |
| | $ | 2,000 |
| | $ | 5,136 |
| | $ | 15,152 |
|
Accumulated amortization | (5,948 | ) | | — |
| | (2,744 | ) | | (8,692 | ) |
Carrying amount | $ | 2,068 |
| | $ | 2,000 |
| | $ | 2,392 |
| | $ | 6,460 |
|
Weighted-average original life (in years) | 15 |
| | 15 |
| | 13 |
| | |
|
Estimated aggregate amortization expense based on the current carrying amount of amortizable Intangible Assetsintangible assets for each of the five succeeding years is as follows: