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EX-32.2 - CERTIFICATION OF CFO PURSUANT TO SECTION 906 - TENNANT COexhibit_32-2.htm
EX-32.1 - CERTIFICATION OF CEO PURSUANT TO SECTION 906 - TENNANT COexhibit_32-1.htm
EX-31.2 - CERTIFICATION OF CFO PURSUANT TO SECTION 302 - TENNANT COexhibit_31-2.htm
EX-31.1 - CERTIFICATION OF CEO PURSUANT TO SECTION 302 - TENNANT COexhibit_31-1.htm

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
FORM 10-Q
[ü]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2016
OR
 
[   ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ___________ to __________
Commission File Number 1-16191
____________________________________
TENNANT COMPANY
(Exact name of registrant as specified in its charter)
Minnesota
41-0572550
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)

701 North Lilac Drive
P.O. Box 1452
Minneapolis, Minnesota 55440
(Address of principal executive offices)
(Zip Code) 
(763) 540-1200
(Registrant’s telephone number, including area code)
______________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes
ü
No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes
ü
No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
ü
 
Accelerated filer
 
Non-accelerated filer
 
(Do not check if a smaller reporting company)
Smaller reporting company
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
 
No
ü
As of July 15, 2016, there were 17,585,591 shares of Common Stock outstanding.
 

1


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


2


PART I – FINANCIAL INFORMATION
Item 1.
Financial Statements
TENNANT COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
 
 
Three Months Ended
 
Six Months Ended
(In thousands, except shares and per share data)
 
June 30
 
June 30
 
 
2016
 
2015
 
2016
 
2015
Net Sales
 
$
216,828

 
$
215,404

 
$
396,692

 
$
401,144

Cost of Sales
 
121,539

 
120,371

 
223,901

 
228,030

Gross Profit
 
95,289

 
95,033

 
172,791

 
173,114

 
 
 
 
 
 
 
 
 
Operating Expense:
 
 
 
 
 
 
 
 
Research and Development Expense
 
8,390

 
8,404

 
16,294

 
16,114

Selling and Administrative Expense
 
64,253

 
64,042

 
126,692

 
126,159

Loss on Sale of Business
 
87

 

 
149

 

Total Operating Expense
 
72,730

 
72,446

 
143,135


142,273

Profit from Operations
 
22,559

 
22,587

 
29,656


30,841

 
 
 
 
 
 
 
 
 
Other Income (Expense):
 
 
 
 
 
 
 
 
Interest Income
 
40

 
53

 
81

 
103

Interest Expense
 
(288
)
 
(419
)
 
(590
)
 
(796
)
Net Foreign Currency Transaction Gains (Losses)
 
597

 
(225
)
 
324

 
(668
)
Other Expense, Net
 
(314
)
 
(185
)
 
(350
)
 
(237
)
Total Other Income (Expense), Net
 
35

 
(776
)
 
(535
)

(1,598
)
 
 
 
 
 
 
 
 
 
Profit Before Income Taxes
 
22,594

 
21,811

 
29,121


29,243

Income Tax Expense
 
7,266

 
6,994

 
9,354

 
9,400

Net Earnings
 
$
15,328

 
$
14,817

 
$
19,767


$
19,843

 
 
 
 
 
 
 
 
 
Net Earnings per Share:
 
 
 
 
 
 
 
 
Basic
 
$
0.88

 
$
0.81

 
$
1.13

 
$
1.09

Diluted
 
$
0.85

 
$
0.79

 
$
1.10

 
$
1.06

 
 
 
 
 
 
 
 
 
Weighted Average Shares Outstanding:
 
 
 
 
 
 
 
 
Basic
 
17,508,022

 
18,197,431

 
17,526,107

 
18,240,027

Diluted
 
17,933,243

 
18,672,040

 
17,954,167

 
18,724,859

 
 
 
 
 
 
 
 
 
Cash Dividend Declared per Common Share
 
$
0.20

 
$
0.20

 
$
0.40

 
$
0.40


See accompanying Notes to the Condensed Consolidated Financial Statements.

3


TENNANT COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
Three Months Ended
 
Six Months Ended
(In thousands)
June 30
 
June 30
 
2016
 
2015
 
2016
 
2015
Net Earnings
$
15,328

 
$
14,817

 
$
19,767

 
$
19,843

Other Comprehensive Income (Loss):
 

 
 

 
 
 
 
Foreign currency translation adjustments
403

 
1,945

 
3,999

 
(6,196
)
Pension and retiree medical benefits
19

 
166

 
38

 
438

Cash flow hedge
18

 

 
(429
)
 

Income Taxes:
 
 
 
 
 
 
 
Foreign currency translation adjustments
(1
)
 

 
5

 
(1
)
Pension and retiree medical benefits
(7
)
 
(62
)
 
(14
)
 
(163
)
Cash flow hedge
(7
)
 

 
160

 

Total Other Comprehensive Income (Loss), net of tax
425

 
2,049

 
3,759


(5,922
)
Comprehensive Income
$
15,753

 
$
16,866

 
$
23,526

 
$
13,921

See accompanying Notes to the Condensed Consolidated Financial Statements.

4


TENNANT COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
June 30,
 
December 31,
(In thousands, except shares and per share data)
2016
 
2015
ASSETS
 
 
 
Current Assets:
 
 
 
Cash and Cash Equivalents
$
27,945

 
$
51,300

Restricted Cash
529

 
640

Accounts Receivable, less Allowances of $3,886 and $3,615, respectively
154,609

 
140,445

Inventories
82,520

 
77,292

Prepaid Expenses
10,289

 
14,656

Other Current Assets
1,790

 
2,485

Assets Held for Sale

 
6,826

Total Current Assets
277,682

 
293,644

Property, Plant and Equipment
295,849

 
276,811

Accumulated Depreciation
(190,763
)
 
(181,853
)
Property, Plant and Equipment, Net
105,086

 
94,958

Deferred Income Taxes
14,102

 
12,051

Goodwill
17,524

 
16,803

Intangible Assets, Net
2,979

 
3,195

Other Assets
15,508

 
11,644

Total Assets
$
432,881

 
$
432,295

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Current Liabilities:
 
 
 
Current Portion of Long-Term Debt
$
3,460

 
$
3,459

Accounts Payable
49,838

 
50,350

Employee Compensation and Benefits
30,137

 
34,528

Income Taxes Payable
3,950

 
1,398

Other Current Liabilities
40,792

 
43,027

Liabilities Held for Sale

 
454

Total Current Liabilities
128,177

 
133,216

Long-Term Liabilities:
 
 
 
Long-Term Debt
17,751

 
21,194

Employee-Related Benefits
21,245

 
21,508

Deferred Income Taxes
72

 
5

Other Liabilities
4,846

 
4,165

Total Long-Term Liabilities
43,914

 
46,872

Total Liabilities
172,091

 
180,088

Commitments and Contingencies (Note 11)


 


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

 

Common Stock, $0.375 par value; 60,000,000 shares authorized; 17,578,267 and 17,744,381 shares issued and outstanding, respectively
6,592

 
6,654

Additional Paid-In Capital

 

Retained Earnings
298,568

 
293,682

Accumulated Other Comprehensive Loss
(44,370
)
 
(48,129
)
Total Shareholders’ Equity
260,790

 
252,207

Total Liabilities and Shareholders’ Equity
$
432,881

 
$
432,295

See accompanying Notes to the Condensed Consolidated Financial Statements.

5


TENNANT COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Six Months Ended
(In thousands)
June 30
 
2016
 
2015
OPERATING ACTIVITIES
 
 
 
Net Earnings
$
19,767

 
$
19,843

Adjustments to reconcile Net Earnings to Net Cash Provided by Operating Activities:
 
 
 
Depreciation
8,655

 
8,155

Amortization
224

 
1,036

Deferred Income Taxes
(1,633
)
 
(1,754
)
Share-Based Compensation Expense
4,426

 
4,889

Allowance for Doubtful Accounts and Returns
606

 
1,246

Loss on Sale of Business
149

 

Other, Net
(63
)
 
(74
)
Changes in Operating Assets and Liabilities:
 
 
 
Receivables
(12,314
)
 
(1,717
)
Inventories
(3,941
)
 
(11,002
)
Accounts Payable
(389
)
 
(3,440
)
Employee Compensation and Benefits
(5,788
)
 
(5,970
)
Other Current Liabilities
(3,936
)
 
(3,174
)
Income Taxes
6,743

 
1,668

Other Assets and Liabilities
(65
)
 
(3,133
)
Net Cash Provided by Operating Activities
12,441

 
6,573

INVESTING ACTIVITIES
 
 
 
Purchases of Property, Plant and Equipment
(14,769
)
 
(7,594
)
Proceeds from Disposals of Property, Plant and Equipment
427

 
190

Proceeds from Sale of Business
285

 

Decrease (Increase) in Restricted Cash
120

 
(18
)
Net Cash Used in Investing Activities
(13,937
)
 
(7,422
)
FINANCING ACTIVITIES
 
 
 
Payments of Long-Term Debt
(3,444
)
 
(3,429
)
Purchases of Common Stock
(12,762
)
 
(14,229
)
Proceeds from Issuance of Common Stock
1,196

 
802

Excess Tax Benefit on Stock Plans
246

 
669

Dividends Paid
(7,058
)
 
(7,348
)
Net Cash Used in Financing Activities
(21,822
)
 
(23,535
)
Effect of Exchange Rate Changes on Cash and Cash Equivalents
(37
)
 
(940
)
Net Decrease in Cash and Cash Equivalents
(23,355
)
 
(25,324
)
Cash and Cash Equivalents at Beginning of Period
51,300

 
92,962

Cash and Cash Equivalents at End of Period
$
27,945

 
$
67,638

 
 
 
 
Supplemental Disclosure of Cash Flow Information:
 
 
 
Cash Paid for Income Taxes
$
3,174

 
$
8,702

Cash Paid for Interest
$
505

 
$
718

Supplemental Non-cash Investing and Financing Activities:
 
 
 
Capital Expenditures in Accounts Payable
$
1,538

 
$
3,652

See accompanying Notes to the Condensed Consolidated Financial Statements.

6


TENNANT COMPANY
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except shares and per share data)
1.
Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with the Securities and Exchange Commission (“SEC”) requirements for interim reporting, which allows certain footnotes and other financial information normally required by accounting principles generally accepted in the United States of America to be condensed or omitted. In our opinion, the Condensed Consolidated Financial Statements contain all adjustments (consisting of only normal recurring adjustments) necessary for the fair presentation of our financial position and results of operations.
These statements should be read in conjunction with the Consolidated Financial Statements and Notes included in our annual report on Form 10-K for the year ended December 31, 2015. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year.
2.
Management Actions
During the third quarter of 2015, we implemented a restructuring action to reduce our infrastructure costs that we anticipated would improve Selling and Administrative Expense operating leverage in future quarters. The pre-tax charge of $1,779 recognized in the third quarter of 2015 consisted primarily of severance, the majority of which was in Europe, and was included within Selling and Administrative Expense in the Condensed Consolidated Statements of Earnings. We believe the anticipated savings will offset the pre-tax charge in approximately one year from the date of the action. The charge impacted our Americas, Europe, Middle East and Africa (EMEA) and Asia Pacific (APAC) operating segments. We do not expect additional costs will be incurred related to this restructuring action.
During the fourth quarter of 2015, we implemented an additional restructuring action to reduce our infrastructure costs that we anticipated would improve Selling and Administrative Expense operating leverage in future quarters. The pre-tax charge of $1,965, including other associated costs of $481, consisted primarily of severance and was recorded in the fourth quarter of 2015. The pre-tax charge was included within Selling and Administrative Expense in the Condensed Consolidated Statements of Earnings. We believe the anticipated savings will offset the pre-tax charge in approximately 1.5 years from the date of the action. The charge impacted our Americas, EMEA and APAC operating segments. We do not expect additional costs will be incurred related to this restructuring action.
A reconciliation of the beginning and ending liability balances is as follows:
 
 
Severance and Related Costs
2015 restructuring actions
 
$
3,263

   Cash payments
 
(1,332
)
   Foreign currency adjustments
 
(19
)
December 31, 2015 balance
 
$
1,912

2016 utilization:
 
 
Cash payments
 
(871
)
Foreign currency adjustments
 
21

June 30, 2016 balance
 
$
1,062

3.
Divestiture
On August 19, 2015, we adopted a plan to sell assets and liabilities of the Green MachinesTM outdoor city cleaning line as a result of determining that the product line, which constituted approximately two percent of our total sales, did not sufficiently complement our core business. Further details regarding the assets and liabilities held for sale as of December 31, 2015 are described in Note 6 of our annual report on Form 10-K for the year ended December 31, 2015.

7


On January 19, 2016, we signed a Business Purchase Agreement (“BPA”) with Green Machines International GmbH and Green Machine Sweepers UK Limited, subsidiaries of M&F Management and Financing GmbH, which is also the parent company of the master distributor of our products in Central Eastern Europe, Middle East and Africa, TCS EMEA GmbH, for the sale of our Green Machines outdoor city cleaning line. Per the terms of the BPA, the sale closed on January 31, 2016. Subject to working capital adjustments, the aggregate consideration for the Green Machines business is $5,700. Under the BPA, the total aggregate consideration will be paid as follows:
Initial cash consideration of $285, which was received during the first quarter of 2016.
An estimated $1,015 will be received as a result of a working capital adjustment. The final working capital adjustment has not yet been finalized.
The remaining purchase price of $4,400, to be adjusted by the agreed upon closing working capital adjustment, will be financed and received in 13 equal installments on the last business day of each quarter, commencing with the quarter ending September 30, 2016.
In the first six months of 2016, as a result of this divestiture, we recorded a pre-tax loss of $149 in our Profit from Operations in the Condensed Consolidated Statements of Earnings. The impact of the recorded loss and the sale of Green Machines is not material to our earnings as Green Machines only accounted for approximately two percent of our total sales.
Subsequent to the closing date, we will act as a distributor for Green Machine Sweepers UK Limited by continuing to sell Green Machines in certain regions, primarily the Americas and APAC, and will also serve as the exclusive service provider for Green Machines worldwide. Net of this estimated revenue, the divestiture is anticipated to reduce Tennant's annual revenue by approximately one percent, with an immaterial impact on earnings.
We have identified Green Machines International GmbH as a variable interest entity (“VIE”) and have performed a qualitative assessment to determine if Tennant is the primary beneficiary of the VIE. We have determined that we are not the primary beneficiary of the VIE and consolidation of the VIE is not considered necessary.
4.
Inventories
Inventories are valued at the lower of cost or market. Inventories at June 30, 2016 and December 31, 2015 consisted of the following:
 
June 30,
2016
 
December 31,
2015
Inventories carried at LIFO:
 
 
 
Finished goods
$
44,354

 
$
41,225

Raw materials, production parts and work-in-process
22,354

 
22,158

LIFO reserve
(27,645
)
 
(27,645
)
Total LIFO inventories
39,063

 
35,738

Inventories carried at FIFO:
 

 
 

Finished goods
29,981

 
32,421

Raw materials, production parts and work-in-process
13,476

 
13,812

Inventories held for sale

 
(4,679
)
Total FIFO inventories
43,457

 
41,554

Total inventories
$
82,520

 
$
77,292

The LIFO reserve approximates the difference between LIFO carrying cost and FIFO.
5.
Goodwill and Intangible Assets
The changes in the carrying value of Goodwill for the six months ended June 30, 2016 were as follows:
 
Goodwill
 
Accumulated
Impairment
Losses
 
Total
Balance as of December 31, 2015
$
60,447

 
$
(43,644
)
 
$
16,803

Foreign currency fluctuations
(3,027
)
 
3,748

 
721

Balance as of June 30, 2016
$
57,420

 
$
(39,896
)
 
$
17,524


8


The balances of acquired Intangible Assets, excluding Goodwill, as of June 30, 2016 and December 31, 2015, were as follows:
 
Customer Lists and Service Contracts
 
Trade Name
 
Technology
 
Total
Balance as of June 30, 2016
 
 
 
 
 
 
 
Original cost
$
6,550

 
$

 
$
5,201

 
$
11,751

Accumulated amortization
(6,090
)
 

 
(2,682
)
 
(8,772
)
Carrying value
$
460

 
$

 
$
2,519

 
$
2,979

Weighted average original life (in years)
15

 

 
13

 
 

Balance as of December 31, 2015
 

 
 
 
 

 
 

Original cost
$
19,781

 
$
3,859

 
$
6,596

 
$
30,236

Accumulated amortization
(19,232
)
 
(3,859
)
 
(3,950
)
 
(27,041
)
Carrying value
$
549

 
$

 
$
2,646

 
$
3,195

Weighted average original life (in years)
15

 
14

 
13

 
 

The accumulated amortization balances for the year ended December 31, 2015 included fully impaired customer lists, trade name and technology intangible assets that were impaired as a result of our decision to hold the assets and liabilities of the Green Machines outdoor city cleaning line for sale in 2015.
Amortization expense on Intangible Assets for the three and six months ended June 30, 2016 was $112 and $224, respectively. Amortization expense on Intangible Assets for the three and six months ended June 30, 2015 was $516 and $1,036, respectively.
Estimated aggregate amortization expense based on the current carrying value of amortizable Intangible Assets for each of the five succeeding years and thereafter is as follows:
Remaining 2016
$
185

2017
316

2018
310

2019
310

2020
310

Thereafter
1,548

Total
$
2,979

6.
Debt
Debt outstanding is summarized as follows:
 
June 30,
2016
 
December 31,
2015
Long-Term Debt:
 
 
 
Credit facility borrowings
$
21,143

 
$
24,571

Capital lease obligations
68

 
82

Total Debt
21,211

 
24,653

Less: Current Portion
(3,460
)
 
(3,459
)
Long-Term Portion
$
17,751

 
$
21,194

As of June 30, 2016, we had committed lines of credit totaling $125,000 and uncommitted credit facilities totaling $87,210. There were $10,000 in outstanding borrowings under our JPMorgan facility (described below) and $11,143 in outstanding borrowings under our Prudential facility (described below) as of June 30, 2016. In addition, we had stand alone letters of credit and bank guarantees outstanding in the amount of $3,242. Commitment fees on unused lines of credit for the six months ended June 30, 2016 were $111.

9


Our most restrictive covenants are part of our Amended and Restated Credit Agreement with JPMorgan (as defined below), which are the same covenants in the Shelf Agreement (as defined below) with Prudential (as defined below), and require us to maintain an indebtedness to EBITDA ratio of not greater than 3.25 to 1 and to maintain an EBITDA to interest expense ratio of no less than 3.50 to 1 as of the end of each quarter. As of June 30, 2016, our indebtedness to EBITDA ratio was 0.34 to 1 and our EBITDA to interest expense ratio was 76.03 to 1.
Credit Facilities
JPMorgan Chase Bank, National Association
Details regarding our Amended and Restated Credit Agreement, dated as of June 30, 2015, between us and JPMorgan Chase Bank, N.A. ("JPMorgan"), as administrative agent and collateral agent, U.S. Bank National Association, as syndication agent, and Wells Fargo Bank, National Association, as documentation agent, and the Lenders (including JPMorgan) from time to time party thereto (the "Amended and Restated Credit Agreement") are described in Note 9 of our annual report on Form 10-K for the year ended December 31, 2015.
As of June 30, 2016, we were in compliance with all covenants under the Amended and Restated Credit Agreement. There were $10,000 in outstanding borrowings under this facility at June 30, 2016, with a weighted average interest rate of 1.53%. This facility, under the current terms of the Amended and Restated Credit Agreement, expires on June 30, 2020.
Prudential Investment Management, Inc.
Details regarding our Private Shelf Agreement, dated as of July 29, 2009, and amended on May 5, 2011, July 24, 2012 and June 30, 2015, with Prudential Investment Management, Inc. ("Prudential") and Prudential affiliates from time to time party thereto (the "Shelf Agreement") are described in Note 9 of our annual report on Form 10-K for the year ended December 31, 2015.
As of June 30, 2016, there were $11,143 in outstanding borrowings under the Shelf Agreement, consisting of $4,000 of Series A notes issued in March 2011 with a fixed interest rate of 4.00% and a term of seven years, with remaining serial maturities from 2017 to 2018, and the $7,143 Series B notes issued in June 2011 with a fixed interest rate of 4.10% and a term of 10 years, with remaining serial maturities from 2017 to 2021. The third payment of $2,000 on Series A notes was made during the first quarter of 2016. The second payment of $1,429 on Series B notes was made during the second quarter of 2016. We were in compliance with all covenants under the Shelf Agreement as of June 30, 2016. The issuance period, under the current terms of the Shelf Agreement, expires on June 30, 2018.
The Royal Bank of Scotland Citizens, N.A.
On September 14, 2010, we entered into an overdraft facility with The Royal Bank of Scotland Citizens, N.A. in the amount of €2,000, or approximately $2,210. There was no balance outstanding on this facility as of June 30, 2016.
HSBC Bank (China) Company Limited, Shanghai Branch
On June 20, 2012, we entered into a banking facility with the HSBC Bank (China) Company Limited, Shanghai Branch in the amount of $5,000. As of June 30, 2016, there were no outstanding borrowings on this facility.
7.
Warranty
We record a liability for warranty claims at the time of sale. The amount of the liability is based on the trend in the historical ratio of claims to sales, the historical length of time between the sale and resulting warranty claim, new product introductions and other factors. Warranty terms on machines generally range from one to four years. However, the majority of our claims are paid out within the first six to nine months following a sale. The majority of the liability for estimated warranty claims represents amounts to be paid out in the near term for qualified warranty issues, with immaterial amounts reserved to be paid for older equipment warranty issues.
The changes in warranty reserves for the six months ended June 30, 2016 and 2015 were as follows:
 
Six Months Ended
 
June 30
 
2016
 
2015
Beginning balance
$
10,093

 
$
9,686

Additions charged to expense
5,946

 
5,670

Foreign currency fluctuations
48

 
(118
)
Claims paid
(5,766
)
 
(5,209
)
Ending balance
$
10,321

 
$
10,029


10


8.
Derivatives
Hedge Accounting and Hedging Programs
We recognize all derivative instruments as either assets or liabilities in our Condensed Consolidated Balance Sheets and measure them at fair value. Gains and losses resulting from changes in fair value are accounted for depending on the use of the derivative and whether it is designated and qualifies for hedge accounting.
We evaluate hedge effectiveness on our hedges that are designated and qualify for hedge accounting at the inception of the hedge prospectively, as well as retrospectively, and record any ineffective portion of the hedging instruments in Net Foreign Currency Transaction Gains (Losses) in our Condensed Consolidated Statements of Earnings. The time value of purchased contracts is recorded in Net Foreign Currency Transaction Gains (Losses) in our Condensed Consolidated Statements of Earnings.
Balance Sheet Hedging – Hedges of Foreign Currency Assets and Liabilities
We hedge our net recognized foreign currency denominated assets and liabilities with foreign exchange forward contracts to reduce the risk that the value of these assets and liabilities will be adversely affected by changes in exchange rates. These contracts hedge assets and liabilities that are denominated in foreign currencies and are carried at fair value as either assets or liabilities on the Condensed Consolidated Balance Sheets with changes in the fair value recorded to Net Foreign Currency Transaction Gains (Losses) in our Condensed Consolidated Statements of Earnings. These contracts do not subject us to material balance sheet risk due to exchange rate movements because gains and losses on these derivatives are intended to offset gains and losses on the assets and liabilities being hedged. At June 30, 2016 and December 31, 2015, the notional amounts of foreign currency forward exchange contracts outstanding not designated as hedging instruments were $40,994 and $45,851, respectively.
Cash Flow Hedging – Hedges of Forecasted Foreign Currency Transactions
In countries outside the U.S., we transact business in U.S. dollars and in various other currencies. We may use foreign exchange option contracts or forward contracts to hedge certain cash flow exposures resulting from changes in these foreign currency exchange rates. These foreign exchange contracts, carried at fair value, have maturities of up to one year. We enter into these foreign exchange contracts to hedge a portion of our forecasted foreign currency denominated revenue in the normal course of business, and accordingly, they are not speculative in nature. The notional amounts of outstanding foreign currency forward contracts designated as cash flow hedges were $2,368 and $2,486 as of June 30, 2016 and December 31, 2015, respectively. The notional amounts of outstanding foreign currency option contracts designated as cash flow hedges were $8,770 and $11,271 as of June 30, 2016 and December 31, 2015, respectively.
To receive hedge accounting treatment, all hedging relationships are formally documented at the inception of the hedge, and the hedges must be highly effective in offsetting changes to future cash flows on hedged transactions. We record changes in the fair value of these cash flow hedges in Accumulated Other Comprehensive Loss in our Condensed Consolidated Balance Sheets, until the forecasted transaction occurs. When the forecasted transaction occurs, we reclassify the related gain or loss on the cash flow hedge to Net Sales in our Condensed Consolidated Statements of Earnings. In the event the hedge becomes ineffective, the underlying forecasted transaction does not occur, or it becomes probable that it will not occur, we reclassify the gain or loss on the related cash flow hedge from Accumulated Other Comprehensive Loss to Net Foreign Currency Transaction Gains (Losses) in our Condensed Consolidated Statements of Earnings at that time. If we do not elect hedge accounting, or the contract does not qualify for hedge accounting treatment, the changes in fair value from period to period are recorded in Net Foreign Currency Transaction Gains (Losses) in our Condensed Consolidated Statements of Earnings.
The fair value of derivative instruments on our Condensed Consolidated Balance Sheets as of June 30, 2016 and December 31, 2015 were as follows:
 
 
June 30, 2016
 
December 31, 2015
 
 
Fair Value Asset Derivatives
 
Fair Value Liability Derivatives
 
Fair Value Asset Derivatives
 
Fair Value Liability Derivatives
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
Foreign currency option contracts(1)(2)
 
$
103

 
$

 
$
387

 
$

Foreign currency forward contracts(1)
 

 
15

 
113

 

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
Foreign currency forward contracts(1)
 
$
14

 
$
689

 
$
171

 
$
7


11


(1) 
Contracts that mature within the next 12 months are included in Other Current Assets and Other Current Liabilities for asset derivatives and liabilities derivatives, respectively, on our Condensed Consolidated Balance Sheets.
(2) 
Contracts with a maturity greater than 12 months are included in Other Assets and Other Liabilities for asset derivatives and liability derivatives, respectively, on our Condensed Consolidated Balance Sheets.
As of June 30, 2016, we anticipate reclassifying approximately $260 of losses from Accumulated Other Comprehensive Loss to net earnings during the next 12 months.
The effect of foreign currency derivative instruments designated as cash flow hedges and of foreign currency derivative instruments not designated as hedges in our Condensed Consolidated Statements of Earnings for the three and six months ended June 30, 2016 was as follows:
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30, 2016
 
June 30, 2016
 
 
Foreign Currency Option Contracts
 
Foreign Currency Forward Contracts
 
Foreign Currency Option Contracts
 
Foreign Currency Forward Contracts
Derivatives in cash flow hedging relationships:
 
 
 
 
 
 
 
 
Net loss recognized in Other Comprehensive Income (Loss), net of
tax(1)
 
$
(44
)
 
$
(29
)
 
$
(230
)
 
$
(65
)
Net loss reclassified from Accumulated Other Comprehensive Loss into earnings, net of tax(2)
 

 
(84
)
 

 
(26
)
Net loss recognized in earnings(3)
 

 

 
(6
)
 

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
Net loss recognized in earnings(4)
 
$

 
$
(371
)
 
$

 
$
(2,062
)
The effect of foreign currency derivative instruments designated as cash flow hedges and of foreign currency derivative instruments not designated as hedges in our Condensed Consolidated Statements of Earnings for the three and six months ended June 30, 2015 was as follows:
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30, 2015
 
June 30, 2015
 
 
Foreign Currency Option Contracts
 
Foreign Currency Forward Contracts
 
Foreign Currency Option Contracts
 
Foreign Currency Forward Contracts
Derivatives in cash flow hedging relationships:
 
 
 
 
 
 
 
 
Net loss recognized in Other Comprehensive Income (Loss), net of
tax(1)
 
$

 
$

 
$

 
$

Net gain reclassified from Accumulated Other Comprehensive Loss into earnings, net of tax(2)
 

 

 

 

Net loss recognized in earnings(3)
 

 

 

 

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
Net (loss) gain recognized in earnings(4)
 
$

 
$
(1,378
)
 
$

 
$
1,753

(1) 
Net change in the fair value of the effective portion classified in Other Comprehensive Income (Loss).
(2) 
Effective portion classified as Net Sales.
(3) 
Ineffective portion and amount excluded from effectiveness testing classified in Net Foreign Currency Transaction Gains (Losses).
(4) 
Classified in Net Foreign Currency Transaction Gains (Losses).

12


9.
Fair Value Measurements
Estimates of fair value for financial assets and financial liabilities are based on the framework established in the accounting guidance for fair value measurements. The framework defines fair value, provides guidance for measuring fair value and requires certain disclosures. The framework discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow) and the cost approach (cost to replace the service capacity of an asset or replacement cost). The framework utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:
Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
Level 3: Unobservable inputs that reflect the reporting entity’s own assumptions.
Our population of assets and liabilities subject to fair value measurements at June 30, 2016 is as follows:
 
Fair
Value
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
Foreign currency forward exchange contracts
$
14

 
$

 
$
14

 
$

Foreign currency option contracts
103

 

 
103

 

Total Assets
$
117

 
$

 
$
117

 
$

Liabilities:
 

 
 

 
 

 
 

Foreign currency forward exchange contracts
$
704

 
$

 
$
704

 
$

Total Liabilities
$
704

 
$

 
$
704

 
$

Our foreign currency forward and option exchange contracts are valued using observable Level 2 market expectations at the measurement date and standard valuation techniques to convert future amounts to a single present value amount. Further details regarding our foreign currency forward exchange and option contracts are discussed in Note 8.
The carrying amounts reported in the Condensed Consolidated Balance Sheets for Cash and Cash Equivalents, Restricted Cash, Accounts Receivable, Other Current Assets, Accounts Payable and Other Current Liabilities approximate fair value due to their short-term nature.
The fair value of our Long-Term Debt approximates cost based on the borrowing rates currently available to us for bank loans with similar terms and remaining maturities.
From time to time, we measure certain assets at fair value on a non-recurring basis, including evaluation of long-lived assets, goodwill and other intangible assets for impairment using company-specific assumptions that would fall within Level 3 of the fair value hierarchy.

13


10.
Retirement Benefit Plans
Our defined benefit pension plans and postretirement medical plan are described in Note 13 of our annual report on Form 10-K for the year ended December 31, 2015. We have contributed $104 and $185 during the second quarter of 2016 and $209 and $464 during the first six months of 2016 to our pension plans and to our postretirement medical plan, respectively.
The components of the net periodic (benefit) cost for the three and six months ended June 30, 2016 and 2015 were as follows:
 
 
Three Months Ended
 
 
June 30
 
 
Pension Benefits
 
Postretirement
 
 
U.S. Plans
 
Non-U.S. Plans
 
Medical Benefits
 
 
2016
 
2015
 
2016
 
2015
 
2016
 
2015
Service cost
 
$
97

 
$
134

 
$
36

 
$
36

 
$
24

 
$
17

Interest cost
 
415

 
423

 
103

 
125

 
100

 
87

Expected return on plan assets
 
(603
)
 
(655
)
 
(97
)
 
(146
)
 

 

Amortization of net actuarial loss (gain)
 
8

 
192

 

 

 

 
(35
)
Amortization of prior service cost
 
10

 
10

 
32

 
65

 

 

Foreign currency
 

 

 
(16
)
 
118

 

 

Net periodic (benefit) cost
 
$
(73
)
 
$
104

 
$
58

 
$
198

 
$
124

 
$
69

 
 
Six Months Ended
 
 
June 30
 
 
Pension Benefits
 
Postretirement
 
 
U.S. Plans
 
Non-U.S. Plans
 
Medical Benefits
 
 
2016
 
2015
 
2016
 
2015
 
2016
 
2015
Service cost
 
$
177

 
$
240

 
$
72

 
$
72

 
$
48

 
$
48

Interest cost
 
830

 
855

 
208

 
248

 
199

 
196

Expected return on plan assets
 
(1,200
)
 
(1,307
)
 
(194
)
 
(290
)
 

 

Amortization of net actuarial loss
 
17

 
418

 

 

 

 

Amortization of prior service cost
 
21

 
21

 
64

 
130

 

 

Foreign currency
 

 

 
24

 
35

 

 

Net periodic (benefit) cost
 
$
(155
)
 
$
227

 
$
174

 
$
195

 
$
247

 
$
244

11.
Commitments and Contingencies
Certain operating leases for vehicles contain residual value guarantee provisions, which would become due at the expiration of the operating lease agreement if the fair value of the leased vehicles is less than the guaranteed residual value. As of June 30, 2016, of those leases that contain residual value guarantees, the aggregate residual value at lease expiration was $13,643, of which we have guaranteed $11,013. As of June 30, 2016, we have recorded a liability for the estimated end of term loss related to this residual value guarantee of $295 for certain vehicles within our fleet. Our fleet also contains vehicles we estimate will settle at a gain. Gains on these vehicles will be recognized at the end of the lease term.
During the first quarter of 2016, we entered into a distributor agreement with Green Machine Sweepers UK Limited, an affiliate of Green Machines International GmbH, for the exclusive right for Tennant to distribute, market, sell, rent and lease Green Machines products, aftermarket parts and consumables in the Americas and APAC. As part of this distributor agreement, we entered into a purchase commitment obligating us to purchase $12,000 of products and aftermarket parts and consumables annually for the next two years, for a total purchase commitment of $24,000.
On March 23, 2016, we entered into a four year Joint Development Agreement with a partner to develop software. As part of that agreement we have committed to spend $3,000 during the first year of the agreement and $8,000 over the life of the agreement, subject to regular time and materials billing and achievement of contract milestones.

14


12.
Accumulated Other Comprehensive Loss
Components of Accumulated Other Comprehensive Loss, net of tax, within the Condensed Consolidated Balance Sheets, are as follows:
 
June 30, 2016
 
December 31, 2015
Foreign currency translation adjustments
$
(40,581
)
 
$
(44,585
)
Pension and retiree medical benefits
(3,623
)
 
(3,647
)
Cash flow hedge
(166
)
 
103

Total Accumulated Other Comprehensive Loss
$
(44,370
)
 
$
(48,129
)
The changes in components of Accumulated Other Comprehensive Loss, net of tax, are as follows:
 
Foreign Currency Translation Adjustments
 
Pension and Post Retirement Benefits
 
Cash Flow Hedge
 
Total
December 31, 2015
$
(44,585
)
 
$
(3,647
)
 
$
103

 
$
(48,129
)
Other comprehensive income (loss) before reclassifications
4,004

 

 
(295
)
 
3,709

Amounts reclassified from Accumulated Other Comprehensive Loss

 
24

 
26

 
50

Net current period other comprehensive income (loss)
$
4,004

 
$
24

 
$
(269
)
 
$
3,759

June 30, 2016
$
(40,581
)
 
$
(3,623
)
 
$
(166
)
 
$
(44,370
)
13.
Income Taxes
We and our subsidiaries are subject to U.S. federal income tax as well as income tax of numerous state and foreign jurisdictions. We are generally no longer subject to U.S. federal tax examinations for taxable years before 2012 and, with limited exceptions, state and foreign income tax examinations for taxable years before 2007.
We recognize potential accrued interest and penalties related to unrecognized tax benefits in Income Tax Expense. In addition to the liability of $2,752 for unrecognized tax benefits as of June 30, 2016, there was approximately $561 for accrued interest and penalties. The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate as of June 30, 2016 was $2,368. To the extent interest and penalties are not assessed with respect to uncertain tax positions, amounts accrued will be revised and reflected as an adjustment of the Income Tax Expense.
We are currently undergoing income tax examinations in various state and foreign jurisdictions covering 2007 to 2014. Although the final outcome of these examinations cannot be currently determined, we believe that we have adequate reserves with respect to these examinations.
14.
Share-Based Compensation
Our share-based compensation plans are described in Note 17 of our annual report on Form 10-K for the year ended December 31, 2015. During the three months ended June 30, 2016 and 2015, we recognized total Share-Based Compensation Expense of $1,789 and $2,182, respectively. During the six months ended June 30, 2016 and 2015, we recognized total Share-Based Compensation Expense of $4,426 and $4,889, respectively. The total excess tax benefit recognized for share-based compensation arrangements during the six months ended June 30, 2016 and 2015 was $246 and $669, respectively.
During the first six months of 2016, we granted 27,921 restricted shares. The weighted average grant date fair value of each share awarded was $53.02. Restricted share awards generally have a three year vesting period from the effective date of the grant. The total fair value of shares vested during the six months ended June 30, 2016 and 2015 was $1,724 and $833, respectively.

15


15.
Earnings Per Share
The computations of Basic and Diluted Earnings per Share were as follows:
 
Three Months Ended
 
Six Months Ended
 
June 30
 
June 30
 
2016
 
2015
 
2016
 
2015
Numerator:
 
 
 
 
 
 
 
Net Earnings
$
15,328

 
$
14,817

 
$
19,767

 
$
19,843

Denominator:
 
 
 
 
 
 
 
Basic - Weighted Average Shares Outstanding
17,508,022

 
18,197,431

 
17,526,107

 
18,240,027

Effect of dilutive securities:
 
 
 
 
 
 
 
Share-based compensation plans
425,221

 
474,609

 
428,060

 
484,832

Diluted - Weighted Average Shares Outstanding
17,933,243

 
18,672,040

 
17,954,167

 
18,724,859

Basic Earnings per Share
$
0.88

 
$
0.81

 
$
1.13

 
$
1.09

Diluted Earnings per Share
$
0.85

 
$
0.79

 
$
1.10

 
$
1.06

 
Excluded from the dilutive securities shown above were options to purchase 408,979 and 237,405 shares of Common Stock during the three months ended June 30, 2016 and 2015, respectively. Excluded from the dilutive securities shown above were options to purchase 405,123 and 215,767 shares of Common Stock during the six months ended June 30, 2016 and 2015, respectively. These exclusions were made if the exercise prices of the options are greater than the average market price of our Common Stock for the period, if the number of shares we can repurchase under the treasury stock method exceeds the weighted average shares outstanding in the options or if we have a net loss, as these effects are anti-dilutive.
16.
Segment Reporting
We are organized into four operating segments: North America; Latin America; Europe, Middle East and Africa; and Asia Pacific. We combine our North America and Latin America operating segments into the “Americas” for reporting Net Sales by geographic area. In accordance with the objective and basic principles of the applicable accounting guidance, we aggregate our operating segments into one reportable segment that consists of the design, manufacture and sale of products used primarily in the maintenance of nonresidential surfaces.
Net Sales attributed to each geographic area for the three and six months ended June 30, 2016 and 2015 were as follows: 
 
Three Months Ended
 
Six Months Ended
 
June 30
 
June 30
 
2016
 
2015
 
2016
 
2015
Americas
$
163,857

 
$
161,429

 
$
297,410

 
$
295,432

Europe, Middle East and Africa
34,391

 
33,741

 
65,124

 
68,388

Asia Pacific
18,580

 
20,234

 
34,158

 
37,324

Total
$
216,828

 
$
215,404

 
$
396,692

 
$
401,144

 
Net Sales are attributed to each geographic area based on the country from which the product was shipped and are net of intercompany sales.
17.
Related Party Transactions
During the first quarter of 2008, we acquired Sociedade Alfa Ltda. and entered into lease agreements for certain properties owned by or partially owned by the former owners of this entity. Some of these individuals are current employees of Tennant. Lease payments made under these lease agreements are not material to our financial position or results of operations.
18.
Subsequent Event
On July 28, 2016, the Company signed an Asset Purchase Agreement and Real Estate Purchase Agreement with Crawford Laboratories, Inc. and affiliates thereof ("Sellers"), to purchase selected assets and liabilities of the Seller's commercial floor coatings business. The purchase price was $12,070, subject to customary working capital adjustments. The transaction closed on July 28, 2016.

16


Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Overview
Tennant Company is a world leader in designing, manufacturing and marketing solutions that empower customers to achieve quality cleaning performance, significantly reduce their environmental impact and help create a cleaner, safer, healthier world. Tennant is committed to creating and commercializing breakthrough, sustainable cleaning innovations to enhance its broad suite of products including: floor maintenance and outdoor cleaning equipment, detergent-free and other sustainable cleaning technologies, aftermarket parts and consumables, equipment maintenance and repair service, specialty surface coatings and asset management solutions. Tennant products are used in many types of environments including: Retail establishments, distribution centers, factories and warehouses, public venues such as arenas and stadiums, office buildings, schools and universities, hospitals and clinics, parking lots and streets, and more. Customers include contract cleaners to whom organizations outsource facilities maintenance, as well as businesses that perform facilities maintenance themselves. The Company reaches these customers through the industry's largest direct sales and service organization and through a strong and well-supported network of authorized distributors worldwide.
Net Earnings for the second quarter of 2016 were $15.3 million, or $0.85 per diluted share, as compared to Net Earnings of $14.8 million, or $0.79 per diluted share, in the second quarter of 2015. Operating Profit for the second quarter of 2016 was $22.6 million, or 10.4% of Net Sales, as compared to Operating Profit of $22.6 million, or 10.5% of Net Sales, in the second quarter of 2015. Operating Profit during the second quarter of 2016 was favorably impacted by higher Net Sales, despite impacts from unfavorable foreign currency exchange and a divestiture, which was offset by a 20 basis point decline in Gross Margin due primarily to the impact from foreign currency exchange. Due to the continued strength of the U.S. dollar relative to other currencies in the 2016 second quarter, foreign currency exchange reduced Operating Profit by approximately $1.1 million.
Net Earnings for the first six months of 2016 and 2015 were both $19.8 million, and $1.10 and $1.06 per diluted share, respectively. Operating Profit for the first six months of 2016 was $29.7 million, or 7.5% of Net Sales, as compared to Operating Profit of $30.8 million, or 7.7% of Net Sales, in the first six months of 2015. Operating Profit during the first six months of 2016 was unfavorably impacted by lower Net Sales due to the impacts from unfavorable foreign currency exchange and a divestiture, and lower Gross Profit due primarily to the impact from foreign currency exchange. Due to the continued strength of the U.S. dollar relative to other currencies in the first six months of 2016, foreign currency exchange reduced Operating Profit by approximately $2.2 million.
Net Earnings for the second quarter of 2015 were $14.8 million, or $0.79 per diluted share, as compared to Net Earnings of $15.5 million, or $0.83 per diluted share, in the second quarter of 2014. Operating Profit for the second quarter of 2015 was $22.6 million, or 10.5% of Net Sales, as compared to Operating Profit of $23.1 million, or 10.6% of Net Sales, in the second quarter of 2014. Operating Profit during the second quarter of 2015 was unfavorably impacted by lower Net Sales, due to an unfavorable foreign currency exchange, and higher Research and Development ("R&D") Expense, somewhat offset by lower Selling and Administrative ("S&A") Expense. Due to the strength of the U.S. dollar in the 2015 second quarter, foreign currency exchanged reduced Operating Profit by approximately $3.4 million.
Net Earnings for the first six months of 2015 were $19.8 million, or $1.06 per diluted share, as compared to Net Earnings of $21.3 million, or $1.14 per diluted share, in the first six months of 2014. Operating Profit for the first six months of 2015 was $30.8, or 7.7% of Net Sales, as compared to Operating Profit of $32.4 million, or 8.0% of Net Sales, in the first six months of 2014. Operating Profit during the first six months of 2015 was unfavorably impacted by lower Net Sales, due to an unfavorable foreign currency exchange, higher S&A Expense and higher R&D Expense. Due to the strength of the U.S. dollar in the first six months of 2015, foreign currency exchange reduced year to date Operating Profit by approximately $5.3 million.

17


Historical Results
The following table compares the historical results of operations for the three and six months ended June 30, 2016 and 2015, respectively, and as a percentage of Net Sales (in thousands, except per share data and percentages): 
 
Three Months Ended
 
Six Months Ended
 
June 30
 
June 30
 
2016
 
%
 
2015
 
%
 
2016
 
%
 
2015
 
%
Net Sales
$
216,828

 
100.0

 
$
215,404

 
100.0

 
$
396,692

 
100.0

 
$
401,144

 
100.0

Cost of Sales
121,539

 
56.1

 
120,371

 
55.9

 
223,901

 
56.4

 
228,030

 
56.8

Gross Profit
95,289

 
43.9

 
95,033

 
44.1

 
172,791

 
43.6

 
173,114

 
43.2

Operating Expense:
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
Research and Development Expense
8,390

 
3.9

 
8,404

 
3.9

 
16,294

 
4.1

 
16,114

 
4.0

Selling and Administrative Expense
64,253

 
29.6

 
64,042

 
29.7

 
126,692

 
31.9

 
126,159

 
31.4

Loss on Sale of Business
87

 

 

 

 
149

 

 

 

Total Operating Expense
72,730

 
33.5

 
72,446

 
33.6

 
143,135

 
36.1

 
142,273

 
35.5

Profit from Operations
22,559

 
10.4

 
22,587

 
10.5

 
29,656

 
7.5

 
30,841

 
7.7

Other Income (Expense):
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
Interest Income
40

 

 
53

 

 
81

 

 
103

 

Interest Expense
(288
)
 
(0.1
)
 
(419
)
 
(0.2
)
 
(590
)
 
(0.1
)
 
(796
)
 
(0.2
)
Net Foreign Currency Transaction Gains (Losses)
597

 
0.3

 
(225
)
 
(0.1
)
 
324

 
0.1

 
(668
)
 
(0.2
)
Other Expense, Net
(314
)
 
(0.1
)
 
(185
)
 
(0.1
)
 
(350
)
 
(0.1
)
 
(237
)
 
(0.1
)
Total Other Income (Expense), Net
35

 

 
(776
)
 
(0.4
)
 
(535
)
 
(0.1
)
 
(1,598
)
 
(0.4
)
Profit Before Income Taxes
22,594

 
10.4

 
21,811

 
10.1

 
29,121

 
7.3

 
29,243

 
7.3

Income Tax Expense
7,266

 
3.4

 
6,994

 
3.2

 
9,354

 
2.4

 
9,400

 
2.3

Net Earnings
$
15,328

 
7.1

 
$
14,817

 
6.9

 
$
19,767

 
5.0

 
$
19,843

 
4.9

Net Earnings per Diluted Share
$
0.85

 
 
 
$
0.79

 
 

 
$
1.10

 
 
 
$
1.06

 
 
Net Sales
Consolidated Net Sales for the second quarter of 2016 totaled $216.8 million, a 0.7% increase as compared to consolidated Net Sales of $215.4 million in the second quarter of 2015. Consolidated Net Sales for the first six months of 2016 totaled $396.7 million, a 1.1% decrease as compared to consolidated Net Sales of $401.1 million for the first six months of 2015.
The components of the consolidated Net Sales change for the three and six months ended June 30, 2016 as compared to the same period in 2015 were as follows:
 
2016 v. 2015
 
Three Months Ended
 
Six Months Ended
 
June 30
 
June 30
Organic Growth:
 
 
 
  Volume
2.4%
 
0.8%
  Price
—%
 
0.5%
Organic Growth
2.4%

1.3%
  Foreign Currency
(1.0%)
 
(1.5%)
  Divestiture
(0.7%)
 
(0.9%)
Total
0.7%
 
(1.1%)
 

18


The 0.7% increase in consolidated Net Sales in the second quarter of 2016 as compared to the same period in 2015 was driven by:
An organic sales increase of approximately 2.4% which excludes the effects of foreign currency exchange and acquisitions and divestitures, due to an approximate 2.4% volume increase (with a 0% price increase). The volume increase was primarily due to increased sales to strategic accounts in the Americas and the Europe, Middle East and Africa (“EMEA”) regions and sales of industrial equipment, which more than offset lower sales in the Asia Pacific (“APAC”) region. Sales of new products introduced within the past three years totaled 34% of equipment revenue for the second quarter of 2016. This compares to 16% of equipment revenue in the 2015 second quarter from sales of new products introduced within the past three years. There was essentially no price increase in the 2016 second quarter due to no significant new selling list price increases and now lapping the prior year selling price list increase with an effective date of February 1, 2015. We currently do not anticipate any significant inflation, and therefore, we do not anticipate any material selling list price increases in 2016 and we expect an immaterial increase to Net Sales for the 2016 full year.
An unfavorable direct foreign currency translation exchange impact of approximately 1.0%.
An unfavorable impact resulting from the sale of our Green Machines outdoor city cleaning line of 0.7%.
The 1.1% decrease in consolidated Net Sales in the first six months of 2016 as compared to the same period in 2015 was driven by:
An unfavorable direct foreign currency translation exchange impact of approximately 1.5%.
An unfavorable impact resulting from the sale of our Green Machines outdoor city cleaning line of 0.9%.
An organic sales increase of approximately 1.3% which excludes the effects of foreign currency exchange and acquisitions and divestitures, due to an approximate 0.8% volume increase and a 0.5% price increase. The volume increase was primarily due to solid sales to strategic accounts and higher sales of industrial equipment, particularly in the Americas and the EMEA regions, being somewhat offset by lower sales within the APAC region and lower sales of commercial equipment. Sales of new products introduced within the past three years totaled 35% of equipment revenue in the first six months of 2016. This compares to 15% of equipment revenue in the first six months of 2015 from sales of new products introduced within the past three years. The price increase, primarily occurring in the first quarter of 2016, was the result of selling list price increases, typically in the range of 2 percent to 4 percent in most geographies, with an effective date of February 1, 2015. The impact to gross margin is estimated to be minimal as these selling price increases were taken to offset inflation. We currently do not anticipate any significant inflation, and therefore, we do not anticipate any material selling list price increases in 2016 and we expect an immaterial increase to Net Sales for the 2016 full year.
The following table sets forth the Net Sales by geographic area for the three and six months ended June 30, 2016 and 2015 and the percentage change from the prior year (in thousands, except percentages):
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30
 
June 30
 
 
2016
 
2015
 
%
 
2016
 
2015
 
%
Americas
 
$
163,857

 
$
161,429

 
1.5
 
$
297,410

 
$
295,432

 
0.7
Europe, Middle East and Africa
 
34,391

 
33,741

 
1.9
 
65,124

 
68,388

 
(4.8)
Asia Pacific
 
18,580

 
20,234

 
(8.2)
 
34,158

 
37,324

 
(8.5)
Total
 
$
216,828

 
$
215,404

 
0.7
 
$
396,692

 
$
401,144

 
(1.1)
Americas
Net Sales in the Americas were $163.9 million and $297.4 million for the second quarter and first six months of 2016, an increase of 1.5% and 0.7%, respectively, from the second quarter and first six months of 2015. Organic sales in the second quarter and first six months of 2016 were driven by sales to strategic accounts, new products, and also sales of scrubbers equipped with ec-H2OTM technology in North America and solid sales in Latin America. The direct impact of foreign currency translation exchange effects within the Americas unfavorably impacted Net Sales by approximately 1.0% during the second quarter and 1.5% during the first six months of 2016. As a result, organic sales increased approximately 2.5% in the second quarter and 2.2% in the first six months of 2016.

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Europe, Middle East and Africa
In our markets within EMEA, Net Sales increased 1.9% to $34.4 million for the second quarter of 2016, compared to the second quarter of 2015. For the first six months of 2016, Net Sales decreased 4.8%, compared to the first six months of 2015. Organic sales in the second quarter and first six months of 2016 were favorably impacted by strong sales to strategic accounts, including sales of scrubbers equipped with ec-H2OTM technology, being partially offset by lower sales through distribution. For the second quarter and first six months of 2016, there was an unfavorable impact on Net Sales of approximately 4.4% and 5.4%, respectively, as a result of the sale of our Green Machines outdoor city cleaning line in January 2016. In addition, the direct impact of foreign currency translation exchange effects within EMEA unfavorably impacted Net Sales by a minimal amount in the second quarter of 2016 and by approximately 1.0% during the first six months of 2016. As a result, organic sales increased approximately 6.3% in the second quarter and 1.6% in the first six months of 2016.
Asia Pacific
Net Sales in the APAC region for the second quarter and first six months of 2016 totaled $18.6 million and $34.2 million, respectively, a decrease of 8.2% and 8.5% from the second quarter and first six months of 2015, respectively. Organic sales decreased approximately 7.2% in the second quarter and 6.5% in the first six months of 2016 with organic sales growth in Australia and Japan being more than offset by sales declines in other Asian countries. Direct foreign currency translation exchange unfavorably impacted Net Sales by approximately 1.0% and 2.0% in the second quarter and first six months of 2016, respectively.
Gross Profit
Gross Profit in the second quarter of 2016 was $95.3 million, or 43.9% of Net Sales, as compared to $95.0 million, or 44.1% of Net Sales, in the second quarter of 2015. Gross profit dollars increased 0.3% versus the prior year period due to higher Net Sales in the second quarter of 2016. Gross margin was 20 basis points lower in the second quarter of 2016 due primarily to the impact from foreign currency exchange.
Gross Profit in the first six months of 2016 was $172.8 million, or 43.6% of Net Sales, compared to $173.1 million, or 43.2% of Net Sales, in the first six months of 2015. Gross profit dollars decreased 0.2% versus the prior year period due to lower Net Sales in the first six months of 2016, partially offset by lower Cost of Sales. Gross margin was 40 basis points higher versus the prior year primarily due to a more favorable product mix (with relatively higher sales of industrial equipment and lower sales of commercial equipment) which was partially offset by foreign currency headwinds that unfavorably impacted gross margin by approximately 20 basis points.
Operating Expense
Research & Development Expense
R&D Expense in the second quarter of 2016 of $8.4 million was flat compared with the second quarter of 2015. R&D Expense as a percentage of Net Sales was 3.9% for the second quarter of 2016 and 2015.
R&D Expense for the first six months of 2016 was $16.3 million, an increase of 1.1% from $16.1 million in the same period in 2015. R&D Expense as a percentage of Net Sales was 4.1% for the first six months of 2016 as compared to 4.0% for the first six months of 2015.
We continue to invest in developing innovative new products for our traditional core business, as well as in our Orbio Technologies Group, which is focused on advancing a suite of sustainable cleaning technologies. New products are a key driver of sales growth. There were five new products and product variants launched in the first half of 2016 consisting of emerging market floor machines and two models of the M17 battery-powered sweeper-scrubber. For the full year 2016, we plan to introduce at least 14 new products, including several significant industrial machines.
Selling & Administrative Expense
S&A Expense in the second quarter of 2016 increased 0.3% to $64.3 million, as compared to $64.0 million in the second quarter of 2015. S&A Expense as a percentage of Net Sales was 29.6% for the second quarter of 2016, a decrease of 10 basis points from 29.7% in the comparable 2015 quarter.
S&A Expense for the first six months of 2016 increased 0.4% to $126.7 million, as compared to $126.2 million in the first six months of 2016. S&A Expense as a percentage of Net Sales was 31.9% for the first six months of 2016, an increase of 50 basis points from 31.4% in the first six months of 2015.

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The increase in S&A Expense in the second quarter and first six months of 2016 as compared to the same periods in the prior year was primarily due to investments, such as the digital transformation project to build and support our e-Business capabilities, that are anticipated to enhance our long-term sales growth. The expense incurred for these projects were somewhat offset by cost controls and improved operating efficiencies that favorably impacted S&A Expense.
Loss on Sale of Business
In the first six months of 2016, we completed the sale of our Green Machines outdoor city cleaning line. The $0.1 million loss recognized on the transaction was not material to our financial statements.
Other Income (Expense), Net
Interest Income
There was no significant change in Interest Income in the second quarter and first six months of 2016, as compared to the same periods in 2015.
Interest Expense
Interest Expense in the second quarter of 2016 was $0.3 million, as compared to $0.4 million in the second quarter of 2015. Interest Expense in the first six months of 2016 was $0.6 million as compared to $0.8 million in the first six months of 2015. The lower Interest Expense in the second quarter and first six months of 2016 as compared to the same periods in 2015 was primarily due to a lower level of debt.
Net Foreign Currency Transaction Gains (Losses)
Net Foreign Currency Transaction Gains in the second quarter of 2016 was $0.6 million, as compared to Net Foreign Currency Transaction Losses of $0.2 million in the second quarter of 2015. Net Foreign Currency Transaction Gains in the first six months of 2016 was $0.3 million, as compared to Net Foreign Currency Transaction Losses of $0.7 million in the first six months of 2015. The favorable change in the impact from foreign currency transactions in the second quarter and first six months of 2016 was due to fluctuations in foreign currency rates and settlement of transactional hedging activity in the normal course of business.
Other Expense, Net
Other Expense, Net in the second quarter of 2016 was $0.3 million, as compared to $0.2 million in the second quarter of 2015. Other Expense, Net in the first six months of 2016 was $0.4 million, as compared to $0.2 million in the first six months of 2015. The unfavorable change in Other Expense, Net in the second quarter and first six months 2016 was primarily due to higher contributions to the Tennant Foundation.
Income Taxes
The effective tax rate in the second quarter of 2016 was 32.2%, as compared to the effective rate in the second quarter of the prior year of 32.1%.
The year-to-date overall effective tax rate for the first six months of 2016 and 2015 was 32.1%.
The overall effective tax rate remained constant. The benefit of the Federal R&D tax credit in 2016, which was reenacted in December 2015, was offset by changes in the mix in expected full year taxable earnings by country. The 2015 second quarter and first six months year-to-date tax rates did not include any benefit for the Federal R&D tax credit as we were not allowed to consider the credit in our tax rate until it was formally reenacted.
We do not have any plans to repatriate the undistributed earnings of non-U.S. subsidiaries. Any repatriation from foreign subsidiaries that would result in incremental taxation is not being considered. It is management's belief that reinvesting these earnings outside the U.S. is the most efficient use of capital.
Liquidity and Capital Resources
Liquidity
Cash and Cash Equivalents totaled $27.9 million at June 30, 2016, as compared to $51.3 million as of December 31, 2015. Wherever possible, cash management is centralized and intercompany financing is used to provide working capital to subsidiaries as needed. Our current ratio was 2.2 as of June 30, 2016 and December 31, 2015, and our working capital was $149.5 million and $160.4 million, respectively. Our debt-to-capital ratio was 7.5% as of June 30, 2016, compared with 8.9% as of December 31, 2015.

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Cash Flow Summary
Cash used in our operating, investing and financing activities is summarized as follows (in thousands):
 
Six Months Ended
 
June 30
 
2016
 
2015
Operating Activities
$
12,441

 
$
6,573

Investing Activities:
 
 
 
Purchases of Property, Plant and Equipment, Net of Disposals
(14,342
)
 
(7,404
)
Proceeds from Sale of Business
285

 

Decrease (Increase) in Restricted Cash
120

 
(18
)
Financing Activities
(21,822
)
 
(23,535
)
Effect of Exchange Rate Changes on Cash and Cash Equivalents
(37
)
 
(940
)
Net Decrease in Cash and Cash Equivalents
$
(23,355
)
 
$
(25,324
)
Operating Activities
Operating activities provided $12.4 million of cash for the six months ended June 30, 2016. Cash provided by operating activities was driven primarily by cash inflows from Net Earnings of $19.8 million and Income Taxes of $6.7 million. These cash inflows were partially offset by cash outflows resulting from an increase in Accounts Receivable of $12.3 million, a decrease in Employee Compensation and Benefits liabilities of $5.8 million, an increase in Inventories of $3.9 million and a decrease in Other Current Liabilities of $3.9 million.
Operating activities provided $6.6 million of cash for the six months ended June 30, 2015. Cash provided by operating activities was driven primarily by cash inflows resulting from Net Earnings of $19.8 million, partially offset by cash outflows from an increase in Inventories of $11.0 million and a decrease in Employee Compensation and Benefits liabilities of $6.0 million.
Management evaluates how effectively we utilize two of our key operating assets, Accounts Receivable and Inventories, using Accounts Receivable “Days Sales Outstanding” (DSO) and “Days Inventory on Hand” (DIOH), on a FIFO basis. The metrics are calculated on a rolling three month basis in order to more readily reflect changing trends in the business. These metrics for the quarters ended were as follows (in days): 
 
June 30,
2016
 
December 31,
2015
 
June 30,
2015
DSO
60
 
61
 
62
DIOH
86
 
89
 
89
As of June 30, 2016, DSO decreased 2 days as compared to June 30, 2015 and decreased 1 day as compared to December 31, 2015. The decrease is primarily due to the trend of continued proactive management of our receivables by enforcing tighter credit limits and continuing to successfully collect past due balances having a larger unfavorable impact than the unfavorable variety of terms offered and mix of business.
As of June 30, 2016, DIOH decreased 3 days as compared to June 30, 2015 and December 31, 2015, primarily due to progress from inventory reduction initiatives, somewhat offset by increased levels of inventory in support of higher anticipated sales levels and the launches of new products.
Investing Activities
Investing activities during the six months ended June 30, 2016 used $13.9 million. Net capital expenditures used $14.3 million. This was partially offset by proceeds of $0.3 million from the sale of our Green Machines outdoor city cleaning line, as described further in Note 3, as well as proceeds of $0.1 million from a decrease in our Restricted Cash balance. Capital expenditures included investments in information technology process improvement projects, tooling related to new product development, and manufacturing equipment.
Investing activities, consisting of capital expenditures, used $7.4 million in cash during the six months ended June 30, 2015. Capital expenditures included investments in information technology process improvement projects, tooling related to new product development, and manufacturing equipment.

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Financing Activities
Net cash used in financing activities was $21.8 million during the first six months of 2016. The purchases of our Common Stock per our authorized repurchase program used $12.8 million, dividend payments used $7.1 million and the payments of Long-Term Debt used $3.4 million, partially offset by proceeds from the issuance of Common Stock of $1.2 million and the excess tax benefit on stock plans of $0.2 million.
Net cash used in financing activities was $23.5 million during the first six months of 2015. The purchases of our Common Stock per our authorized repurchase program used $14.2 million, dividend payments used $7.3 million and the payment of Long-Term Debt used $3.4 million, partially offset by cash inflows arising from the issuance of Common Stock of $0.8 million and the excess tax benefit on stock plans of $0.7 million.
Indebtedness
As of June 30, 2016, we had committed lines of credit totaling $125.0 million and uncommitted credit facilities totaling $87.2 million. There were $10.0 million in outstanding borrowings under our JPMorgan facility (described below) and $11.1 million in outstanding borrowings under our Prudential facility (described below) as of June 30, 2016. In addition, we had stand alone letters of credit and bank guarantees outstanding in the amount of $3.2 million. Commitment fees on unused lines of credit for the six months ended June 30, 2016 were $0.1 million.
Our most restrictive covenants are part of our Amended and Restated Credit Agreement with JPMorgan (as defined below), which are the same covenants in our Shelf Agreement (as defined below) with Prudential (as defined below), and require us to maintain an indebtedness to EBITDA ratio of not greater than 3.25 to 1 and to maintain an EBITDA to interest expense ratio of no less than 3.50 to 1 as of the end of each quarter. As of June 30, 2016, our indebtedness to EBITDA ratio was 0.34 to 1 and our EBITDA to interest expense ratio was 76.03 to 1.
Credit Facilities
JPMorgan Chase Bank, National Association
Details regarding our Amended and Restated Credit Agreement, dated as of June 30, 2015, between us and JPMorgan Chase Bank, N.A. ("JPMorgan"), as administrative agent and collateral agent, U.S. Bank National Association, as syndication agent, and Wells Fargo Bank, National Association, as documentation agent, and the Lenders (including JPMorgan) from time to time party thereto (the "Amended and Restated Credit Agreement") are described in Note 9 of our annual report on Form 10-K for the year ended December 31, 2015.
As of June 30, 2016, we were in compliance with all covenants under the Amended and Restated Credit Agreement. There were $10.0 million in outstanding borrowings under this facility at June 30, 2016, with a weighted average interest rate of 1.53%. This facility, under the current terms of the Amended and Restated Credit Agreement, expires on June 30, 2020.
Prudential Investment Management, Inc.
Details regarding our Private Shelf Agreement, dated as of July 29, 2009, and amended on May 5, 2011, July 24, 2012 and June 30, 2015, with Prudential Investment Management, Inc. ("Prudential") and Prudential affiliates from time to time party thereto (the "Shelf Agreement") are described in Note 9 of our annual report on Form 10-K for the year ended December 31, 2015.
As of June 30, 2016, there were $11.1 million in outstanding borrowings under the Shelf Agreement, consisting of $4.0 million of Series A notes issued in March 2011 with a fixed interest rate of 4.00% and a term of seven years, with remaining serial maturities from 2017 to 2018, and the $7.1 million Series B notes issued in June 2011 with a fixed interest rate of 4.10% and a term of 10 years, with remaining serial maturities from 2017 to 2021. The third payment of $2.0 million on Series A notes was made during the first quarter of 2016. The second payment of $1.4 million on Series B notes was made during the second quarter of 2016. We were in compliance with all covenants under the Shelf Agreement as of June 30, 2016. The issuance period, under the current terms of the Shelf Agreement, expires on June 30, 2018.
The Royal Bank of Scotland Citizens, N.A.
On September 14, 2010, we entered into an overdraft facility with The Royal Bank of Scotland Citizens, N.A. in the amount of €2.0 million, or approximately $2.2 million. There was no balance outstanding on this facility as of June 30, 2016.
HSBC Bank (China) Company Limited, Shanghai Branch
On June 20, 2012, we entered into a banking facility with the HSBC Bank (China) Company Limited, Shanghai Branch in the amount of $5.0 million. As of June 30, 2016, there were no outstanding borrowings on this facility.

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Contractual Obligations
During the first quarter of 2016, we entered into a distributor agreement with Green Machine Sweepers UK Limited, an affiliate of Green Machines International GmbH, for the exclusive right for Tennant to distribute, market, sell, rent and lease Green Machines products, aftermarket parts and consumables in the Americas and APAC. As part of this distributor agreement, we entered into a purchase commitment obligating us to purchase $12.0 million of products and aftermarket parts and consumables annually for the next two years, for a total purchase commitment of $24.0 million.
On March 23, 2016, we entered into a four year Joint Development Agreement with a partner to develop software. As part of that agreement we have committed to spend $3.0 million during the first year of the agreement and $8.0 million over the life of the agreement, subject to regular time and materials billing and achievement of contract milestones.
Other than the agreements noted above, there have been no material changes with respect to contractual obligations as disclosed in our annual report on Form 10-K for the year ended December 31, 2015.
Newly Issued Accounting Guidance
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606). This ASU will replace all existing revenue recognition standards and significantly expand the disclosure requirements for revenue arrangements. This guidance requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. This guidance provides a five-step analysis of transactions to determine when and how revenue is recognized. Other major provisions include capitalization of certain contract costs, consideration of time value of money in the transaction price, and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances. 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.
In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date