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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 September 30, 2017
OR
 
[   ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ___________ to __________
Commission File Number 1-16191
____________________________________
tennantovallogoa08.jpg
TENNANT COMPANY
(Exact name of registrant as specified in its charter)
Minnesota
41-0572550
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)

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

1


If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
 
No
ü
As of October 30, 2017, there were 17,851,541 shares of Common Stock outstanding.
 


2


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


3


PART I – FINANCIAL INFORMATION
Item 1.
Financial Statements
TENNANT COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
 
Three Months Ended
 
Nine Months Ended
(In thousands, except shares and per share data)
 
September 30
 
September 30
 
 
2017
 
2016
 
2017
 
2016
Net Sales
 
$
261,921

 
$
200,134

 
$
723,771

 
$
596,826

Cost of Sales
 
157,317

 
114,839

 
434,877

 
338,740

Gross Profit
 
104,604

 
85,295

 
288,894

 
258,086

 
 
 
 
 
 
 
 
 
Operating Expense:
 
 
 
 
 
 
 
 
Research and Development Expense
 
7,907

 
8,418

 
24,239

 
24,712

Selling and Administrative Expense
 
85,651

 
60,623

 
247,067

 
187,315

Loss on Sale of Business
 

 

 

 
149

Total Operating Expense
 
93,558

 
69,041

 
271,306


212,176

Profit from Operations
 
11,046

 
16,254

 
17,588


45,910

 
 
 
 
 
 
 
 
 
Other Income (Expense):
 
 
 
 
 
 
 
 
Interest Income
 
698

 
107

 
1,575

 
188

Interest Expense
 
(6,093
)
 
(329
)
 
(18,720
)
 
(919
)
Net Foreign Currency Transaction (Losses) Gains
 
(842
)
 
(149
)
 
(2,375
)
 
175

Other Expense, Net
 
(482
)
 
(10
)
 
(700
)
 
(360
)
Total Other Expense, Net
 
(6,719
)
 
(381
)
 
(20,220
)

(916
)
 
 
 
 
 
 
 
 
 
Profit (Loss) Before Income Taxes
 
4,327

 
15,873

 
(2,632
)

44,994

Income Tax Expense
 
731

 
4,396

 
385

 
13,750

Net Earnings (Loss) Including Noncontrolling Interest
 
3,596

 
11,477

 
(3,017
)
 
31,244

Net Earnings (Loss) Attributable to Noncontrolling Interest
 
37

 

 
(28
)
 

Net Earnings (Loss) Attributable to Tennant Company
 
$
3,559

 
$
11,477

 
$
(2,989
)

$
31,244

 
 
 
 
 
 
 
 
 
Net Earnings (Loss) Attributable to Tennant Company per Share:
 
 
 
 
 
 
 
 
Basic
 
$
0.20

 
$
0.66

 
$
(0.17
)
 
$
1.78

Diluted
 
$
0.20

 
$
0.64

 
$
(0.17
)
 
$
1.74

 
 
 
 
 
 
 
 
 
Weighted Average Shares Outstanding:
 
 
 
 
 
 
 
 
Basic
 
17,729,857

 
17,498,808

 
17,673,656

 
17,516,941

Diluted
 
18,171,444

 
17,973,206

 
17,673,656

 
17,955,499

 
 
 
 
 
 
 
 
 
Cash Dividend Declared per Common Share
 
$
0.21

 
$
0.20

 
$
0.63

 
$
0.60


See accompanying Notes to the Condensed Consolidated Financial Statements.

4


TENNANT COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
Three Months Ended
 
Nine Months Ended
(In thousands)
September 30
 
September 30
 
2017
 
2016
 
2017
 
2016
Net Earnings (Loss) Including Noncontrolling Interest
$
3,596

 
$
11,477

 
$
(3,017
)
 
$
31,244

Other Comprehensive Income:
 

 
 

 
 
 
 
Foreign currency translation adjustments
9,033

 
381

 
25,073

 
4,380

Pension and retiree medical benefits
379

 
23

 
541

 
61

Cash flow hedge
(1,732
)
 
35

 
(6,311
)
 
(394
)
Income Taxes:
 
 
 
 
 
 
 
Foreign currency translation adjustments

 
10

 

 
15

Pension and retiree medical benefits
(138
)
 
(9
)
 
(160
)
 
(23
)
Cash flow hedge
646

 
(13
)
 
2,354

 
147

Total Other Comprehensive Income, Net of Tax
8,188

 
427

 
21,497


4,186

 
 
 
 
 
 
 
 
Total Comprehensive Income Including Noncontrolling Interest
11,784

 
11,904

 
18,480

 
35,430

Comprehensive Income (Loss) Attributable to Noncontrolling Interest
37

 

 
(28
)
 

Comprehensive Income Attributable to Tennant Company
$
11,747

 
$
11,904

 
$
18,508

 
$
35,430

See accompanying Notes to the Condensed Consolidated Financial Statements.

5


TENNANT COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
September 30,
 
December 31,
(In thousands, except shares and per share data)
2017
 
2016
ASSETS
 
 
 
Current Assets:
 
 
 
Cash and Cash Equivalents
$
55,947

 
$
58,033

Restricted Cash
1,292

 
517

Accounts Receivable, less Allowances of $2,972 and $3,108, respectively
193,725

 
149,134

Inventories
141,519

 
78,622

Prepaid Expenses
26,281

 
9,204

Other Current Assets
4,909

 
2,412

Total Current Assets
423,673

 
297,922

Property, Plant and Equipment
389,391

 
298,500

Accumulated Depreciation
(207,882
)
 
(186,403
)
Property, Plant and Equipment, Net
181,509

 
112,097

Deferred Income Taxes
19,857

 
13,439

Goodwill
179,048

 
21,065

Intangible Assets, Net
175,752

 
6,460

Other Assets
22,959

 
19,054

Total Assets
$
1,002,798

 
$
470,037

LIABILITIES AND TOTAL EQUITY
 
 
 
Current Liabilities:
 
 
 
Short-Term Borrowings and Current Portion of Long-Term Debt
$
5,281

 
$
3,459

Accounts Payable
88,618

 
47,408

Employee Compensation and Benefits
35,085

 
35,997

Income Taxes Payable
10,599

 
2,348

Other Current Liabilities
63,327

 
43,617

Total Current Liabilities
202,910

 
132,829

Long-Term Liabilities:
 
 
 
Long-Term Debt
383,252

 
32,735

Employee-Related Benefits
25,247

 
21,134

Deferred Income Taxes
62,167

 
171

Other Liabilities
32,686

 
4,625

Total Long-Term Liabilities
503,352

 
58,665

Total Liabilities
706,262

 
191,494

Commitments and Contingencies (Note 13)


 


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; 17,840,854 and 17,688,350 shares issued and outstanding, respectively
6,690

 
6,633

Additional Paid-In Capital
12,062

 
3,653

Retained Earnings
303,987

 
318,180

Accumulated Other Comprehensive Loss
(28,426
)
 
(49,923
)
Total Tennant Company Shareholders' Equity
294,313

 
278,543

Noncontrolling Interest
2,223

 

Total Equity
296,536

 
278,543

Total Liabilities and Total Equity
$
1,002,798

 
$
470,037

See accompanying Notes to the Condensed Consolidated Financial Statements.

6


TENNANT COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Nine Months Ended
(In thousands)
September 30
 
2017
 
2016
OPERATING ACTIVITIES
 
 
 
Net (Loss) Earnings Including Noncontrolling Interest
$
(3,017
)
 
$
31,244

Adjustments to Reconcile Net (Loss) Earnings to Net Cash Provided by Operating Activities:
 
 
 
Depreciation
18,515

 
13,150

Amortization of Intangible Assets
11,430

 
323

Amortization of Debt Issuance Costs
896

 

Debt Issuance Cost Charges Related to Short-Term Financing
6,200

 

Fair Value Step-Up Adjustment to Acquired Inventory
8,445

 

Deferred Income Taxes
(4,848
)
 
(676
)
Share-Based Compensation Expense
4,915

 
5,747

Allowance for Doubtful Accounts and Returns
983

 
779

Loss on Sale of Business

 
149

Other, Net
175

 
(418
)
Changes in Operating Assets and Liabilities:
 
 
 
Receivables
(524
)
 
5,752

Inventories
(9,866
)
 
(4,873
)
Accounts Payable
5,747

 
(6,415
)
Employee Compensation and Benefits
(9,462
)
 
(5,448
)
Other Current Liabilities
10,019

 
(3,097
)
Income Taxes
4,149

 
2,248

Other Assets and Liabilities
(11,634
)
 
(5,183
)
Net Cash Provided by Operating Activities
32,123

 
33,282

INVESTING ACTIVITIES
 
 
 
Purchases of Property, Plant and Equipment
(16,239
)
 
(22,499
)
Proceeds from Disposals of Property, Plant and Equipment
2,456

 
559

Proceeds from Principal Payments Received on Long-Term Note Receivable
500

 

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

Acquisition of Businesses, Net of Cash Acquired
(354,073
)
 
(12,358
)
Purchase of Intangible Asset
(2,500
)
 

Proceeds from Sale of Business

 
285

(Increase) Decrease in Restricted Cash
(133
)
 
116

Net Cash Used in Investing Activities
(371,489
)
 
(33,897
)
FINANCING ACTIVITIES
 
 
 
Proceeds from Short-Term Debt
300,000

 

Repayments of Short-Term Debt
(300,000
)
 

Proceeds from Issuance of Long-Term Debt
440,000

 
15,000

Payments of Long-Term Debt
(81,262
)
 
(3,452
)
Payments of Debt Issuance Costs
(16,465
)
 

Purchases of Common Stock

 
(12,762
)
Proceeds from Issuances of Common Stock
4,728

 
2,893

Excess Tax Benefit on Stock Plans

 
447

Dividends Paid
(11,204
)
 
(10,583
)
Net Cash Provided by (Used in) Financing Activities
335,797

 
(8,457
)
Effect of Exchange Rate Changes on Cash and Cash Equivalents
1,483

 
55

Net Decrease in Cash and Cash Equivalents
(2,086
)
 
(9,017
)
Cash and Cash Equivalents at Beginning of Period
58,033

 
51,300

Cash and Cash Equivalents at End of Period
$
55,947

 
$
42,283

 
 
 
 

7


Supplemental Disclosure of Cash Flow Information:
 
 
 
Cash Paid for Income Taxes
$
8,127

 
$
11,329

Cash Paid for Interest
$
3,741

 
$
796

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

 
$
5,489

Capital Expenditures in Accounts Payable
$
1,265

 
$
1,322

See accompanying Notes to the Condensed Consolidated Financial Statements.

8


TENNANT COMPANY
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except shares and per share data)
1.
Summary of Significant Accounting Policies
Basis of Presentation – The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with the Securities and Exchange Commission (“SEC”) requirements for interim reporting, which allows certain footnotes and other financial information normally required by accounting principles generally accepted in the United States of America to be condensed or omitted. In our opinion, the Condensed Consolidated Financial Statements contain all adjustments (consisting of only normal recurring adjustments) necessary for the fair presentation of our financial position and results of operations.
These statements should be read in conjunction with the Consolidated Financial Statements and Notes included in our annual report on Form 10-K for the year ended December 31, 2016. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year.
Equity Method Investment – Investments in which we have the ability to exercise significant influence, but do not control, are accounted for under the equity method of accounting and are included in Other Assets on the Condensed Consolidated Balance Sheets. Under this method of accounting, our share of the net earnings or losses of the investee are presented as a component of Other Expense, Net on the Condensed Consolidated Statements of Operations. The details regarding our equity method investment in i-team North America B.V., a joint venture that operates as the distributor of the i-mop in North America, are further described in Note 3.
New Accounting Pronouncements – In accordance with Accounting Standards Update ("ASU") No. 2016-09, Compensation–Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, all excess tax benefits and tax deficiencies are recorded as a component of the provision for income taxes in the reporting period in which they occur. Additionally, we present excess tax benefits along with other income tax cash flows on the Condensed Consolidated Statements of Cash Flows as an operating activity rather than, as previously required, a financing activity. For further details regarding the implementation of this ASU and the impact on our financial statements, see Note 2.
We documented the summary of significant accounting policies in the Notes to the Consolidated Financial Statements of our annual report on Form 10-K for the fiscal year ended December 31, 2016. Other than the accounting policies noted above, there have been no material changes to our accounting policies since the filing of that report.
2.
Newly Adopted Accounting Pronouncements
On March 30, 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-09, Compensation–Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which amends Accounting Standards Codification ("ASC") Topic 718, Compensation – Stock Compensation. ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the Condensed Consolidated Statements of Cash Flows. Under the new standard, all excess tax benefits and tax deficiencies are recorded as a component of the provision for income taxes in the reporting period in which they occur. Additionally, ASU 2016-09 requires that the company present excess tax benefits along with other income tax cash flows on the Condensed Consolidated Statements of Cash Flows as an operating activity rather than, as previously required, a financing activity. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016.
We have adopted ASU 2016-09 effective January 1, 2017 on a prospective basis where permitted by the new standard. As a result of this adoption:
For the three and nine months ended September 30, 2017, we recognized discrete tax benefits of $5 and $1,149, respectively, in the Income Tax Expense line item of our Condensed Consolidated Statements of Operations related to excess tax benefits upon vesting or settlement in that period.
We elected to adopt the cash flow presentation of the excess tax benefits prospectively where the tax benefits are classified along with other income tax cash flows as operating cash flows in 2017. Our prior year's excess tax benefits are recognized as financing cash flows. However, other income tax cash flows are classified as operating cash flows.
We have elected to account for forfeitures as they occur, rather than electing to estimate the number of share-based awards expected to vest to determine the amount of compensation cost to be recognized in each period. The difference of such change is immaterial.

9


We excluded the excess tax benefits from the assumed proceeds available to repurchase shares in the computation of our diluted earnings per share for the three and nine months ended September 30, 2017.
3.
Investment in Joint Venture
On February 13, 2017, the company, through a Dutch subsidiary, and i-team Global, a Future Cleaning Technologies, B.V. company headquartered in The Netherlands, announced the January 1, 2017 formation of i-team North America B.V., a joint venture that will operate as the distributor of the i-mop in North America. We began selling and servicing the i-mop in the second quarter of 2017. We own a 50% ownership interest 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 Condensed Consolidated Statements of Operations.
As of September 30, 2017, the carrying value of the company's investment in the joint venture was $66. In March 2017, we issued a $1,500 loan to the joint venture and, as a result, recorded a long-term note receivable in Other Assets on the Condensed Consolidated Balance Sheets.
4.
Management Action
During the first quarter of 2017, we implemented a restructuring action to better align our global resources and expense structure with a lower growth global economic environment. The pre-tax charge of $8,018, including other associated costs of $961, consisted primarily of severance and was included within Selling and Administrative Expense in the Condensed Consolidated Statements of Operations. The charge impacted our Americas, Europe, Middle East and Africa ("EMEA") and Asia Pacific ("APAC") operating segments. We believe the anticipated savings will offset the pre-tax charge in approximately one year from the date of the action. We do not expect additional costs will be incurred related to this restructuring action.
A reconciliation to the ending liability balance of severance and related costs as of September 30, 2017 is as follows:
 
 
Severance and Related Costs
Q1 2017 restructuring action
 
$
7,057

   Cash payments
 
(5,792
)
   Foreign currency adjustments
 
164

September 30, 2017 balance
 
$
1,429

5.
Acquisitions
IP Cleaning S.p.A.
On April 6, 2017, we acquired 100 percent of the outstanding capital stock of IP Cleaning S.p.A. and its subsidiaries ("IPC Group") for a purchase price of $353,769, net of cash acquired of $8,804. The primary seller was Ambienta SGR S.p.A., a European private equity fund. IPC Group, based in Italy, is a designer and manufacturer of innovative professional cleaning equipment, cleaning tools and supplies. The acquisition strengthens our presence and market share in Europe and will allow us to better leverage our EMEA cost structure. We funded the acquisition of IPC Group, along with related fees, including refinancing of existing debt, with funds raised through borrowings under a senior secured credit facility in an aggregate principal amount of $420,000. Further details regarding our acquisition financing arrangements are discussed in Note 8.

10


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

Receivables
 
40,067

Inventories
 
54,256

Other Current Assets
 
4,362

Assets Held for Sale
 
2,247

Property, Plant and Equipment
 
63,256

Intangible Assets Subject to Amortization:
 
 
Trade Name
 
26,753

Customer Lists
 
123,061

Technology
 
9,631

Other Assets
 
4,168

Total Identifiable Assets Acquired
 
328,339

LIABILITIES
 
 
Accounts Payable
 
31,529

Accrued Expenses
 
15,756

Deferred Income Taxes
 
61,694

Other Liabilities
 
6,967

Total Identifiable Liabilities Assumed
 
115,946

Net Identifiable Assets Acquired
 
212,393

Noncontrolling Interest
 
(2,266
)
Goodwill
 
143,642

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

The acquired assets, liabilities and operating results have been included in our Condensed Consolidated Financial Statements from the date of acquisition. During the three months ended September 30, 2017, we included net sales of $56,110 and a net loss of $6,850 from IPC Group in our Condensed Consolidated Statements of Operations. During the nine months ended September 30, 2017, we included net sales of $115,184 and a net loss of $12,037 from IPC Group in our Condensed Consolidated Statements of Operations. For the three and nine months ended September 30, 2017, the net loss includes a fair value adjustment, net of tax, of $1,619 and $6,089, respectively, to the acquired inventory of IPC Group. In addition, costs of $622 and $8,180, net of tax, associated with the acquisition of the IPC Group were expensed as incurred in the Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2017, respectively. The preliminary gross amount of the accounts receivable acquired is $43,785, of which $3,718 is expected to be uncollectible.
Amortization expense recorded for acquired intangible assets for the three and nine months ended September 30, 2017 was $7,331 and $10,438, respectively. For the three months ended September 30, 2017, amortization expense includes a $1,999 measurement period adjustment resulting from updates to the provisional fair values of the acquired intangible assets recorded in the second quarter of 2017 as well as the use of an accelerated method of amortization for the acquired customer lists and technology. This charge affected selling and administrative expense in the Condensed Consolidated Statements of Operations, along with an associated reduction to income tax expense of $553.
The fair value measurement was preliminary at September 30, 2017. During the measurement period, we expect to record adjustments relating to the finalization of intangible assets, inventories, restricted cash and property, plant and equipment valuations, and various income tax matters, among others. We expect the fair value measurement process to be completed not 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.

11


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 $143,642 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.
The following unaudited pro forma financial information presents the combined results of operations of Tennant Company as if the acquisition of IPC Group had occurred as of January 1, 2017 and 2016. The unaudited pro forma financial information is presented for informational purposes only. It is not necessarily indicative of what our consolidated results of operations actually would have been had the acquisition occurred at the beginning of each year, nor does it attempt to project the future results of operations of the combined company.
Pro Forma Financial Information (Unaudited)
 
Three Months Ended
 
Nine Months Ended
(In thousands, except per share data)
September 30
 
September 30
 
2017
 
2016
 
2017
 
2016
Net Sales
 
 
 
 
 
 
 
Pro forma
$
261,921

 
$
250,050

 
$
777,832

 
$
747,943

As reported
261,921

 
200,134

 
723,771

 
596,826

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

 
$
7,696

 
$
14,875

 
$
20,659

As reported
3,559

 
11,477

 
(2,989
)
 
31,244

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

 
$
0.43

 
$
0.84

 
$
1.15

As reported
0.20

 
0.64

 
(0.17
)
 
1.74

The unaudited pro forma financial information is based on certain assumptions which we believe are reasonable, directly attributable to the transaction, factually supportable and do not reflect any cost savings, operating synergies or revenue enhancements that we may achieve, nor the costs necessary to achieve those cost savings, operating synergies, revenue enhancements or integration efforts.

12


The unaudited pro forma financial information above gives effect to the following:
Incremental amortization and depreciation expense related to the estimated fair value of the identifiable intangible assets and property, plant and equipment from the preliminary purchase price allocation.
Exclusion of the purchase accounting impact of the inventory step-up reported in cost of sales for the three and nine months ended September 30, 2017 related to the sale of acquired inventory of $2,246 and $8,445, respectively.
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 Sellers' commercial floor coatings business, including the Florock® Polymer Flooring brand ("Florock"). Florock manufactures commercial floor coatings systems in Chicago, IL. The purchase price was $11,843, including working capital and other adjustments, and is comprised of $10,965 paid at closing, with the remaining $878 paid in two installments. We paid the first installment of $575 on October 14, 2016. The remaining amount was paid during the 2017 first quarter.
On September 1, 2016, we acquired selected assets and liabilities of Dofesa Barrido Mecanizado ("Dofesa") which was our largest distributor in Mexico. 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 Condensed Consolidated Financial Statements since their respective dates of acquisition. The impact of the incremental revenue and earnings recorded as a result of the acquisitions are not material to our Condensed Consolidated Financial Statements. The purchase price allocations for both the Florock and Dofesa acquisitions are complete.
The components of the final purchase price of the business combinations described above have been allocated as follows:
Current Assets
 
$
5,949

Property, Plant and Equipment, net
 
4,112

Identified Intangible Assets
 
6,055

Goodwill
 
1,739

Other Assets
 
7

Total Assets Acquired
 
17,862

Current Liabilities
 
4,764

Other Liabilities
 
53

Total Liabilities Assumed
 
4,817

Net Assets Acquired
 
$
13,045


13


6.
Inventories
Inventories are valued at the lower of cost or market. Inventories at September 30, 2017 and December 31, 2016 consisted of the following:
 
September 30,
2017
 
December 31,
2016
Inventories carried at LIFO:
 
 
 
Finished goods
$
47,734

 
$
39,142

Raw materials, production parts and work-in-process
24,275

 
23,980

LIFO reserve
(28,190
)
 
(28,190
)
Total LIFO inventories
43,819

 
34,932

Inventories carried at FIFO:
 

 
 

Finished goods
56,477

 
31,044

Raw materials, production parts and work-in-process
41,223

 
12,646

Total FIFO inventories
97,700

 
43,690

Total inventories
$
141,519

 
$
78,622

The LIFO reserve approximates the difference between LIFO carrying cost and FIFO.
7.
Goodwill and Intangible Assets
The changes in the carrying value of goodwill for the nine months ended September 30, 2017 were as follows:
 
Goodwill
 
Accumulated
Impairment
Losses
 
Total
Balance as of December 31, 2016
$
58,397

 
$
(37,332
)
 
$
21,065

Additions
143,642

 

 
143,642

Purchase accounting adjustments
(1,865
)
 

 
(1,865
)
Foreign currency fluctuations
19,632

 
(3,426
)
 
16,206

Balance as of September 30, 2017
$
219,806

 
$
(40,758
)
 
$
179,048

The balances of acquired intangible assets, excluding goodwill, as of September 30, 2017 and December 31, 2016, were as follows:
 
Customer Lists
 
Trade Names
 
Technology
 
Total
Balance as of September 30, 2017
 
 
 
 
 
 
 
Original cost
$
147,582

 
$
31,515

 
$
14,425

 
$
193,522

Accumulated amortization
(13,492
)
 
(1,631
)
 
(2,647
)
 
(17,770
)
Carrying value
$
134,090

 
$
29,884

 
$
11,778

 
$
175,752

Weighted average original life (in years)
15

 
10

 
11

 
 

 
 
 
 
 
 
 
 
Balance as of December 31, 2016
 

 
 
 
 

 
 

Original cost
$
8,016

 
$
2,000

 
$
5,136

 
$
15,152

Accumulated amortization
(5,948
)
 

 
(2,744
)
 
(8,692
)
Carrying value
$
2,068

 
$
2,000

 
$
2,392

 
$
6,460

Weighted average original life (in years)
15

 
15

 
13

 
 

The additions to goodwill during the first nine months of 2017 were based on the preliminary purchase price allocation of our acquisition of the IPC Group, as described further in Note 5.
As part of our acquisition of the IPC Group, we acquired customer lists, trade names and technology for a preliminary fair value measurement of $159,445. Further details regarding the preliminary purchase price allocation of our acquisition of the IPC Group are described further in Note 5.

14


As part of the formation of the i-team North America B.V. joint venture, we purchased the distribution rights to sell the i-mop in North America for $2,500. The distribution rights were recorded in intangible assets, net as a customer list on the Condensed Consolidated Balance Sheets as of September 30, 2017. The i-mop distribution rights have a useful life of five years. Further details regarding the joint venture are discussed in Note 3.
Amortization expense on intangible assets for the three and nine months ended September 30, 2017 was $7,650 and $11,430, respectively. Amortization expense on intangible assets for the three and nine months ended September 30, 2016 was $99 and $323, respectively.
Estimated aggregate amortization expense based on the current carrying value of amortizable intangible assets for each of the five succeeding years and thereafter is as follows:
Remaining 2017
$
5,635

2018
22,042

2019
21,398

2020
19,928

2021
18,315

Thereafter
88,434

Total
$
175,752

8.
Debt
JPMorgan Credit Facility
In order to finance the acquisition of the IPC Group, on April 4, 2017, the Company and certain of our foreign subsidiaries entered into a Credit Agreement (the “2017 Credit Agreement”) with JPMorgan, as administrative agent, Goldman Sachs Bank USA, as syndication agent, Wells Fargo, National Association, U.S. Bank National Association, and HSBC Bank USA, National Association, as co-documentation agents, and the lenders (including JPMorgan) from time to time party thereto. The 2017 Credit Agreement provides the company and certain of our foreign subsidiaries access to a senior secured credit facility until April 4, 2022, consisting of a multi-tranche term loan facility in an amount up to $400,000 and a revolving facility in an amount up to $200,000 with an option to expand the revolving facility by $150,000, with the consent of the lenders willing to provide additional borrowings in the form of increases to their revolving facility commitment or funding of incremental term loans. Borrowings may be denominated in U.S. dollars or certain other currencies.
The fee for committed funds under the revolving facility of the 2017 Credit Agreement ranges from an annual rate of 0.175% to 0.35%, depending on the company’s leverage ratio. Borrowings denominated in U.S. dollars under the 2017 Credit Agreement bear interest at a rate per annum equal to (a) the greatest of (i) the prime rate, (ii) the federal funds rate plus 0.50% and (iii) the adjusted LIBOR rate for a one month period, but in any case, not less than 0%, plus, in any such case, 1.00%, plus an additional spread of 0.075% to 0.90% for revolving loans and 0.25% to 1.25% for term loans, depending on the company’s leverage ratio, or (b) the LIBOR Rate, as adjusted for statutory reserve requirements for eurocurrency liabilities, but in any case, not less than 0%, plus an additional spread of 1.075% to 1.90% for revolving loans and 1.25% to 2.25% for term loans, depending on the company’s leverage ratio.
Upon entry into the 2017 Credit Agreement, the company repaid $45,000 in outstanding borrowings under our Amended and Restated Credit Agreement, as described in Note 9 of our annual report on Form 10-K for the year ended December 31, 2016, and terminated the Amended and Restated Credit Agreement.
The 2017 Credit Agreement contains customary representations, warranties and covenants, including, but not limited to, covenants restricting the company’s ability to incur indebtedness and liens and merge or consolidate with another entity. The 2017 Credit Agreement also contains financial covenants, requiring us to maintain a ratio of consolidated total indebtedness to consolidated earnings before income, taxes, depreciation and amortization, subject to certain adjustments ("Adjusted EBITDA") of not greater than 4.25 to 1, as well as requiring us to maintain a ratio of consolidated Adjusted EBITDA to consolidated interest expense of no less than 3.50 to 1 for the quarter ended September 30, 2017. The 2017 Credit Agreement also contains a financial covenant requiring us to maintain a senior secured net indebtedness to Adjusted EBITDA ratio of not greater than 3.50 to 1. These financial covenants may restrict our ability to pay dividends and purchase outstanding shares of our common stock. We were in compliance with our financial covenants at September 30, 2017.

We will be required to repay the senior credit agreement with 25% to 50% of our excess cash flow from the preceding fiscal year, as defined in the agreement, unless our net leverage ratio for such preceding fiscal year is less than or equal to 3.00 to 1, which will be first measured using our fiscal year ended December 31, 2018.


15


The full terms and conditions of the senior secured credit facility, including our financial covenants, are set forth in the 2017 Credit Agreement. A copy of the 2017 Credit Agreement was filed as Exhibit 10.1 to the company's Current Report on Form 8-K filed April 5, 2017, as amended on Form 8-K/A filed July 27, 2017.
Issuance of 5.625% Senior Notes due 2025
On April 18, 2017, we issued and sold $300,000 in aggregate principal amount of our 5.625% Senior Notes due 2025 (the “Notes”), pursuant to an Indenture, dated as of April 18, 2017, among the company, the Guarantors (as defined therein), and Wells Fargo Bank, National Association, a national banking association, as trustee. The Notes are guaranteed by Tennant Coatings, Inc. and Tennant Sales and Service Company (collectively, the “Guarantors”), which are wholly owned subsidiaries of the company. 
The Notes will mature on May 1, 2025. Interest on the Notes will accrue at the rate of 5.625% per annum and will be payable semiannually in cash on each May 1 and November 1, commencing on November 1, 2017.
The Notes and the guarantees constitute senior unsecured obligations of the company and the Guarantors, respectively.  The Notes and the guarantees, respectively, are: (a) equal in right of payment with all of the company’s and the Guarantors’ senior debt, without giving effect to collateral arrangements; (b) senior in right of payment to all of the company’s and the Guarantors’ future subordinated debt, if any; (c) effectively subordinated in right of payment to all of the company’s and the Guarantors’ debt and obligations that are secured, including borrowings under the company’s senior secured credit facilities for so long as the senior secured credit facilities are secured, to the extent of the value of the assets securing such liens; and (d) structurally subordinated in right of payment to all liabilities (including trade payables) of the company’s and the Guarantors’ subsidiaries that do not guarantee the Notes. The Notes also contain customary representations, warranties and covenants, and are less restrictive than those contained in the 2017 Credit Agreement.
We used the net proceeds from this offering to refinance a $300,000 term loan under our 2017 Credit Agreement that we borrowed as part of the financing for the acquisition of the IPC Group and to pay related fees and expenses.
The full terms and conditions of the Indenture are set forth in Exhibit 4.1 to the Company's Current Report on Form 8-K filed April 24, 2017.
Registration Rights Agreement
In connection with the issuance and sale of the Notes, the company entered into a Registration Rights Agreement, dated April 18, 2017, among the company, the Guarantors and Goldman, Sachs & Co. and J.P. Morgan Securities LLC (the “Registration Rights Agreement”). Pursuant to the Registration Rights Agreement, the company agreed (1) to use its commercially reasonable efforts to consummate an exchange offer to exchange the Notes for new registered notes (the “Exchange Notes”), with terms substantially identical in all material respects with the Notes (except that the Exchange Notes will not contain terms with respect to additional interest, registration rights or transfer restrictions) and (2) if required, to have a shelf registration statement declared effective with respect to resales of the Notes. If the company fails to satisfy its obligations under the Registration Rights Agreement within 360 days, it will be required to pay additional interest to the holders of the Notes under certain circumstances.
The full terms and conditions of the the Registration Rights Agreement are set forth in Exhibit 4.2 to the company's Current Report on Form 8-K filed April 24, 2017.

16


Debt outstanding at September 30, 2017 is summarized as follows:
 
September 30,
2017
 
December 31,
2016
Long-Term Debt:
 
 
 
Senior Unsecured Notes
$
300,000

 
$

Credit Facility Borrowings
95,000

 
36,143

Capital Lease Obligations
671

 
51

Total Long-Term Debt
395,671

 
36,194

Less: Unamortized Debt Issuance Costs
(7,138
)
 

Less: Current Maturities of Credit Facility Borrowings, Net of Debt Issuance Costs(1)
(4,887
)
 
(3,459
)
Less: Current Maturities of Capital Lease Obligations(1)
(394
)
 

Long-Term Portion, Net
$
383,252

 
$
32,735

(1) 
Current maturities of long-term debt include $5,000 of current maturities, less $113 of unamortized debt issuance costs, under our 2017 Credit Agreement and $394 of current maturities of capital lease obligations.
As of September 30, 2017, we had outstanding borrowings under our 2017 Credit Agreement, totaling $75,000 under our term loan facility and $20,000 under our revolving facility. There were $300,000 in outstanding borrowings under the Notes as of September 30, 2017. In addition, we had stand alone letters of credit and bank guarantees outstanding in the amount of $4,721. Commitment fees on unused lines of credit for the nine months ended September 30, 2017 were $353. The overall weighted average cost of debt is approximately 5.0% and, net of a related cross-currency swap instrument, is approximately 4.2%. Further details regarding the cross-currency swap instrument are discussed in Note 10.
Prudential Investment Management, Inc.
In March 2017, we repaid $11,143 of debt evidenced by the notes issued under our Private Shelf Agreement, as described in Note 9 of our annual report on Form 10-K for the year ended December 31, 2016, and terminated the Private Shelf Agreement.
The aggregate maturities of our outstanding debt, including capital lease obligations as of September 30, 2017, are as follows:
Remaining 2017
 
$
1,348

2018
 
5,386

2019
 
7,062

2020
 
9,375

2021
 
11,875

Thereafter
 
360,625

Total aggregate maturities
 
$
395,671

9.
Warranty
We record a liability for warranty claims at the time of sale. The amount of the liability is based on the trend in the historical ratio of claims to sales, the historical length of time between the sale and resulting warranty claim, new product introductions and other factors. Warranty terms on machines generally range from one to four years. However, the majority of our claims are paid out within the first six to nine months following a sale. The majority of the liability for estimated warranty claims represents amounts to be paid out in the near term for qualified warranty issues, with immaterial amounts reserved to be paid for older equipment warranty issues.

17


The changes in warranty reserves for the nine months ended September 30, 2017 and 2016 were as follows:
 
Nine Months Ended
 
September 30
 
2017
 
2016
Beginning balance
$
10,960

 
$
10,093

Additions charged to expense
8,879

 
8,888

Acquired warranty obligations
384

 

Foreign currency fluctuations
225

 
85

Claims paid
(8,912
)
 
(8,707
)
Ending balance
$
11,536

 
$
10,359

10.
Derivatives
Hedge Accounting and Hedging Programs
We recognize all derivative instruments as either assets or liabilities in our Condensed Consolidated Balance Sheets and measure them at fair value. Gains and losses resulting from changes in fair value are accounted for depending on the use of the derivative and whether it is designated and qualifies for hedge accounting.
Balance Sheet Hedging
Hedges of Foreign Currency Assets and Liabilities
We hedge portions of our net recognized foreign currency denominated assets and liabilities with foreign exchange forward contracts to reduce the risk that the value of these assets and liabilities will be adversely affected by changes in exchange rates. At September 30, 2017 and December 31, 2016, the notional amounts of foreign currency forward exchange contracts outstanding not designated as hedging instruments were $67,672 and $42,866, respectively.
During the first quarter of 2017, in connection with our acquisition of IPC Group, we entered into a foreign currency option contract not designated as a hedging instrument for a notional amount of €180,000. The option contract has since expired and there were no outstanding foreign currency option contracts not designated as hedging instruments as of September 30, 2017 and December 31, 2016.
Cash Flow Hedging
Hedges of Forecasted Foreign Currency Transactions
In countries outside the United States, 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 $3,033 and $2,127 as of September 30, 2017 and December 31, 2016, respectively. The notional amounts of outstanding foreign currency option contracts designated as cash flow hedges were $8,870 and $8,522 as of September 30, 2017 and December 31, 2016, respectively.
Foreign Currency Derivatives
We use foreign currency exchange rate derivatives to hedge our exposure to fluctuations in exchange rates for anticipated intercompany cash transactions between Tennant Company and its subsidiaries. During the second quarter of 2017 we entered into Euro to U.S. dollar foreign exchange cross currency swaps for all of the anticipated cash flows associated with an intercompany loan from a wholly-owned European subsidiary. We entered into these foreign exchange cross currency swaps to hedge the foreign currency denominated cash flows associated with this intercompany loan, and accordingly, they are not speculative in nature. We designated these cross currency swaps as cash flow hedges. The hedged cash flows as of September 30, 2017 included €183,000 of total notional value. As of September 30, 2017, the aggregate scheduled interest payments over the course of the loan and related swaps amounted to €33,000. The scheduled maturity and principal payment of the loan and related swaps of €150,000 are due in April 2022. There were no cross currency swaps designated as cash flow hedges as of December 31, 2016.

18


The fair value of derivative instruments on our Condensed Consolidated Balance Sheets as of September 30, 2017 and December 31, 2016 were as follows:
 
 
September 30, 2017
 
December 31, 2016
 
 
Fair Value Asset Derivatives
 
Fair Value Liability Derivatives
 
Fair Value Asset Derivatives
 
Fair Value Liability Derivatives
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
Foreign currency option contracts(1)
 
$
67

 
$

 
$
184

 
$

Foreign currency forward contracts(1)
 
8,346

 
31,921

 

 
13

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
Foreign currency option contracts
 

 

 

 

Foreign currency forward contracts(1)
 
$
539

 
$
2,010

 
$
12

 
$
162

(1) 
Contracts that mature within the next 12 months are included in Other Current Assets and Other Current Liabilities for asset derivatives and liability derivatives, respectively, on our Condensed Consolidated Balance Sheets. Contracts with maturities greater than 12 months are included in Other Assets and Other Liabilities for asset derivatives and liability derivatives, respectively, on our Condensed Consolidated Balance Sheets. Amounts included in our Condensed Consolidated Balance Sheets are recorded net where a right of offset exists with the same derivative counterparty.
As of September 30, 2017, we anticipate reclassifying approximately $2,004 of gains from Accumulated Other Comprehensive Loss to net earnings during the next 12 months.
The effect of foreign currency derivative instruments designated as cash flow hedges and of foreign currency derivative instruments not designated as hedges in our Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2017 was as follows:
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30, 2017
 
September 30, 2017
 
 
Foreign Currency Option Contracts
 
Foreign Currency Forward Contracts
 
Foreign Currency Option Contracts
 
Foreign Currency Forward Contracts
Derivatives in cash flow hedging relationships:
 
 
 
 
 
 
 
 
Net loss recognized in Other Comprehensive Income, net of
tax(1)
 
$
(40
)
 
$
(4,492
)
 
$
(177
)
 
$
(14,026
)
Net (loss) gain reclassified from Accumulated Other Comprehensive Loss into earnings, net of tax, effective portion to Net Sales
 
(141
)
 
26

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

 
374

 

 
823

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

 
(3,705
)
 

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

 
(12
)
 
8

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

 
$
(2,062
)
 
$
(1,132
)
 
$
(7,369
)

19


The effect of foreign currency derivative instruments designated as cash flow hedges and of foreign currency derivative instruments not designated as hedges in our Condensed Consolidated Statements Operations for the three and nine months ended September 30, 2016 was as follows:
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30, 2016
 
September 30, 2016
 
 
Foreign Currency Option Contracts
 
Foreign Currency Forward Contracts
 
Foreign Currency Option Contracts
 
Foreign Currency Forward Contracts
Derivatives in cash flow hedging relationships:
 
 
 
 
 
 
 
 
Net loss recognized in Other Comprehensive Income, net of tax(1)
 
$
(20
)
 
$
(9
)
 
$
(250
)
 
$
(74
)
Net (loss) gain reclassified from Accumulated Other Comprehensive Loss into earnings, net of tax, effective portion to Net Sales
 
(88
)
 
37

 
(88
)
 
11

Net (loss) gain recognized in earnings(2)
 
(11
)
 
1

 
(17
)
 
1

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

 
$
(330
)
 
$

 
$
(2,392
)
(1) 
Net change in the fair value of the effective portion classified in Other Comprehensive Income.
(2) 
Ineffective portion and amount excluded from effectiveness testing classified in Net Foreign Currency Transaction (Losses) Gains.
(3) 
Classified in Net Foreign Currency Transaction (Losses) Gains.
11.
Fair Value Measurements
Estimates of fair value for financial assets and financial liabilities are based on the framework established in the accounting guidance for fair value measurements. The framework defines fair value, provides guidance for measuring fair value and requires certain disclosures. The framework discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow) and the cost approach (cost to replace the service capacity of an asset or replacement cost). The framework utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:
Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
Level 3: Unobservable inputs that reflect the reporting entity’s own assumptions.
Our population of assets and liabilities subject to fair value measurements on a recurring basis at September 30, 2017 is as follows:
 
Fair
Value
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
Foreign currency forward exchange contracts
$
8,885

 
$

 
$
8,885

 
$

Foreign currency option contracts
67

 

 
67

 

Total Assets
$
8,952

 
$

 
$
8,952

 
$

Liabilities:
 

 
 

 
 

 
 

Foreign currency forward exchange contracts
$
33,931

 
$

 
$
33,931

 
$

Foreign currency option contracts
$

 

 

 

Total Liabilities
$
33,931

 
$

 
$
33,931

 
$

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 10.

20


The carrying amounts reported in the Condensed Consolidated Balance Sheets for Cash and Cash Equivalents, Restricted Cash, Accounts Receivable, Other Current Assets, Accounts Payable and Other Current Liabilities approximate fair value due to their short-term nature.
The fair value of our Long-Term Debt approximates cost based on the borrowing rates currently available to us for bank loans with similar terms and remaining maturities.
From time to time, we measure certain assets at fair value on a non-recurring basis, including evaluation of long-lived assets, goodwill and other intangible assets, as part of a business acquisition. These assets are measured and recognized at amounts equal to the fair value determined as of the date of acquisition. Fair value valuations are based on the information available as of the acquisition date and the expectations and assumptions that have been deemed reasonable by us. There are inherent uncertainties and management judgment required in these determinations. The fair value measurements of assets acquired and liabilities assumed as part of a business acquisition are based on valuations involving significant unobservable inputs, or Level 3, in the fair value hierarchy.
These assets are also subject to periodic impairment testing by comparing the respective carrying value of each asset to the estimated fair value of the reporting unit or asset group in which they reside. In the event we determine these assets to be impaired, we would recognize an impairment loss equal to the amount by which the carrying value of the reporting unit, impaired asset or asset group exceeds its estimated fair value. These periodic impairment tests utilize company-specific assumptions involving significant unobservable inputs, or Level 3, in the fair value hierarchy.
12.
Retirement Benefit Plans
Our defined benefit pension plans and postretirement medical plan are described in Note 13 of our annual report on Form 10-K for the year ended December 31, 2016. We have contributed $145 and $198 during the third quarter of 2017 and $410 and $493 during the first nine months of 2017 to our pension plans and postretirement medical plan, respectively.
The components of the net periodic (benefit) cost for the three and nine months ended September 30, 2017 and 2016 were as follows:
 
 
Three Months Ended
 
 
September 30
 
 
Pension Benefits
 
Postretirement
 
 
U.S. Plans
 
Non-U.S. Plans
 
Medical Benefits
 
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
Service cost
 
$

 
$
88

 
$
124

 
$
32

 
$
6

 
$
25

Interest cost
 
373

 
414

 
96

 
96

 
91

 
99

Expected return on plan assets
 
(581
)
 
(599
)
 
(101
)
 
(89
)
 

 

Amortization of net actuarial loss
 
12

 
13

 

 

 

 

Amortization of prior service cost
 

 
10

 
50

 
29

 

 

Foreign currency
 

 

 
135

 
(57
)
 

 

Net periodic (benefit) cost
 
$
(196
)
 
$
(74
)
 
$
304

 
$
11

 
$
97

 
$
124


21


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

 
$
265

 
$
172

 
$
104

 
$
46

 
$
73

Interest cost
 
1,153

 
1,244

 
315

 
304

 
272

 
298

Expected return on plan assets
 
(1,752
)
 
(1,799
)
 
(298
)
 
(283
)
 

 

Amortization of net actuarial loss
 
33

 
30

 

 

 

 

Amortization of prior service cost
 

 
31

 
146

 
93

 

 

Settlement charge
 
205

 

 

 

 

 

Foreign currency
 

 

 
364

 
(33
)
 

 

Net periodic (benefit) cost
 
$
(361
)
 
$
(229
)
 
$
699

 
$
185

 
$
318

 
$
371

13.
Commitments and Contingencies
Certain operating leases for vehicles contain residual value guarantee provisions, which would become due at the expiration of the operating lease agreement if the fair value of the leased vehicles is less than the guaranteed residual value. As of September 30, 2017, of those leases that contain residual value guarantees, the aggregate residual value at lease expiration was $14,630, of which we have guaranteed $11,820. As of September 30, 2017, we have recorded a liability for the estimated end of term loss related to this residual value guarantee of $458 for certain vehicles within our fleet. Our fleet also contains vehicles we estimate will settle at a gain. Gains on these vehicles will be recognized at the end of the lease term.
The minimum rentals for aggregate lease commitments as of September 30, 2017 are as follows:
Remaining 2017
 
$
4,033

2018
 
11,835

2019
 
7,828

2020
 
4,826

2021
 
2,710

Thereafter
 
4,360

Total
 
$
35,592

14.
Accumulated Other Comprehensive Loss
Components of Accumulated Other Comprehensive Loss, net of tax, within the Condensed Consolidated Balance Sheets, are as follows:
 
September 30, 2017
 
December 31, 2016
Foreign currency translation adjustments
$
(19,371
)
 
$
(44,444
)
Pension and retiree medical benefits
(5,010
)
 
(5,391
)
Cash flow hedge
(4,045
)
 
(88
)
Total Accumulated Other Comprehensive Loss
$
(28,426
)
 
$
(49,923
)

22


The changes in components of Accumulated Other Comprehensive Loss, net of tax, are as follows:
 
Foreign Currency Translation Adjustments
 
Pension and Post Retirement Benefits
 
Cash Flow Hedge
 
Total
December 31, 2016
$
(44,444
)
 
$
(5,391
)
 
$
(88
)
 
$
(49,923
)
Other comprehensive income (loss) before reclassifications
25,073

 
361

 
(14,203
)
 
11,231

Amounts reclassified from Accumulated Other Comprehensive Loss

 
20

 
10,246

 
10,266

Net current period other comprehensive income (loss)
$
25,073

 
$
381

 
$
(3,957
)
 
$
21,497

September 30, 2017
$
(19,371
)
 
$
(5,010
)
 
$
(4,045
)
 
$
(28,426
)
15.
Income Taxes
We and our subsidiaries are subject to U.S. federal income tax as well as income tax of numerous state and foreign jurisdictions. We are generally no longer subject to U.S. federal tax examinations for taxable years before 2014 and, with limited exceptions, state and foreign income tax examinations for taxable years before 2012.
We recognize potential accrued interest and penalties related to unrecognized tax benefits in Income Tax Expense. In addition to the liability of $2,475 for unrecognized tax benefits as of September 30, 2017, there was approximately $426 for accrued interest and penalties. The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate as of September 30, 2017 was $2,130. To the extent interest and penalties are not assessed with respect to uncertain tax positions, amounts accrued will be revised and reflected as an adjustment of the Income Tax Expense.
Unrecognized tax benefits were reduced by $688 during the first nine months of 2017 as a result of the expiration of the statute of limitations in various jurisdictions and settlement with tax authorities.
We are currently under examination by the Internal Revenue Service for the 2015 tax year. Although the outcome of this matter cannot currently be determined, we believe adequate provision has been made for any potential unfavorable financial statement impact. We are currently undergoing income tax examinations in various state and foreign jurisdictions covering 2014 to 2016. Although the final outcome of these examinations cannot be currently determined, we believe that we have adequate reserves with respect to these examinations.
16.
Share-Based Compensation
Our share-based compensation plans are described in Note 17 of our annual report on Form 10-K for the year ended December 31, 2016. During the three months ended September 30, 2017 and 2016, we recognized total Share-Based Compensation Expense of $1,293 and $1,321, respectively. During the nine months ended September 30, 2017 and 2016, we recognized total Share-Based Compensation Expense of $4,915 and $5,747, respectively. The total excess tax benefit recognized for share-based compensation arrangements during the nine months ended September 30, 2017 and 2016 was $1,149 and $447, respectively.
During the first nine months of 2017, we granted 19,971 restricted shares. The weighted average grant date fair value of each share awarded was $73.16. Restricted share awards generally have a three year vesting period from the effective date of the grant. The total fair value of shares vested during the nine months ended September 30, 2017 and 2016 was $1,295 and $1,835, respectively.

23


17.
Earnings (Loss) Attributable to Tennant Company Per Share
The computations of Basic and Diluted Earnings (Loss) Attributable to Tennant Company per Share were as follows:
 
Three Months Ended
 
Nine Months Ended
 
September 30
 
September 30
 
2017
 
2016
 
2017
 
2016
Numerator:
 
 
 
 
 
 
 
Net Earnings (Loss) Attributable to Tennant Company
$
3,559

 
$
11,477

 
$
(2,989
)
 
$
31,244

Denominator:
 
 
 
 
 
 
 
Basic - Weighted Average Shares Outstanding
17,729,857

 
17,498,808

 
17,673,656

 
17,516,941

Effect of Dilutive Securities:
 
 
 
 
 
 
 
Share-Based Compensation Plans
441,587

 
474,398

 

 
438,558

Diluted - Weighted Average Shares Outstanding
18,171,444

 
17,973,206

 
17,673,656

 
17,955,499

Basic Earnings (Loss) per Share
$
0.20

 
$
0.66

 
$
(0.17
)
 
$
1.78

Diluted Earnings (Loss) per Share
$
0.20

 
$
0.64

 
$
(0.17
)
 
$
1.74

 
Excluded from the dilutive securities shown above were options to purchase and shares to be paid out under share-based compensation plans of 340,239 and 313,711 shares of common stock during the three months ended September 30, 2017 and 2016, respectively. Excluded from the dilutive securities shown above were options to purchase and shares to be paid out under share-based compensation plans of 714,687 and 382,075 shares of common stock during the nine months ended September 30, 2017 and 2016, respectively. These exclusions were made if the exercise prices of the options are greater than the average market price of our common stock for the period, if the number of shares we can repurchase under the treasury stock method exceeds the weighted average shares outstanding in the options or if we have a net loss, as these effects are anti-dilutive.
18.
Segment Reporting
We are organized into four operating segments: North America, Latin America, EMEA and APAC. We combine our North America and Latin America operating segments into the “Americas” for reporting Net Sales by geographic area. In accordance with the objective and basic principles of the applicable accounting guidance, we aggregate our operating segments into one reportable segment that consists of the design, manufacture and sale of products used primarily in the maintenance of nonresidential surfaces.
Net Sales attributed to each geographic area for the three and nine months ended September 30, 2017 and 2016 were as follows: 
 
Three Months Ended
 
Nine Months Ended
 
September 30
 
September 30
 
2017
 
2016
 
2017
 
2016
Americas
$
161,037

 
$
152,294

 
$
472,953

 
$
449,704

EMEA
78,851

 
29,309

 
189,483

 
94,433

APAC
22,033

 
18,531

 
61,335

 
52,689

Total
$
261,921

 
$
200,134

 
$
723,771

 
$
596,826

 
Net Sales are attributed to each geographic area based on the end user country and are net of intercompany sales.
19.
Related Party Transactions
During the first quarter of 2008, we acquired Sociedade Alfa Ltda. and entered into lease agreements for certain properties owned by or partially owned by the former owners of this entity. Some of these individuals are current employees of Tennant. Lease payments made under these lease agreements are not material to our financial position or results of operations.

24


Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Overview
Tennant Company is a world leader in designing, manufacturing and marketing solutions that empower customers to achieve quality cleaning performance, significantly reduce their environmental impact and help create a cleaner, safer, healthier world. Tennant is committed to creating and commercializing breakthrough, sustainable cleaning innovations to enhance its broad suite of products, including: floor maintenance and outdoor cleaning equipment, detergent-free and other sustainable cleaning technologies, cleaning tools and supplies, aftermarket parts and consumables, equipment maintenance and repair service, specialty surface coatings and asset management solutions. Tennant products are used in many types of environments, including: retail establishments, distribution centers, factories and warehouses, public venues, such as arenas and stadiums, office buildings, schools and universities, hospitals and clinics, parking lots and streets. 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.
Historical Results
The following table compares the historical results of operations for the three and nine months ended September 30, 2017 and 2016, respectively, and as a percentage of Net Sales (in thousands, except per share data and percentages): 
 
Three Months Ended
 
Nine Months Ended
 
September 30
 
September 30
 
2017
 
%
 
2016
 
%
 
2017
 
%
 
2016
 
%
Net Sales
$
261,921

 
100.0

 
$
200,134

 
100.0

 
$
723,771

 
100.0

 
$
596,826

 
100.0

Cost of Sales
157,317

 
60.1

 
114,839

 
57.4

 
434,877

 
60.1

 
338,740

 
56.8

Gross Profit
104,604

 
39.9

 
85,295

 
42.6

 
288,894

 
39.9

 
258,086

 
43.2

Operating Expense:
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
Research and Development Expense
7,907

 
3.0

 
8,418

 
4.2

 
24,239

 
3.3

 
24,712

 
4.1

Selling and Administrative Expense
85,651

 
32.7

 
60,623

 
30.3

 
247,067

 
34.1

 
187,315

 
31.4

Loss on Sale of Business

 

 

 

 

 

 
149

 

Total Operating Expense
93,558

 
35.7

 
69,041

 
34.5

 
271,306

 
37.5

 
212,176

 
35.6

Profit from Operations
11,046

 
4.2

 
16,254

 
8.1

 
17,588

 
2.4

 
45,910

 
7.7

Other Income (Expense):
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
Interest Income
698

 
0.3

 
107

 
0.1

 
1,575

 
0.2

 
188

 

Interest Expense
(6,093
)
 
(2.3
)
 
(329
)
 
(0.2
)
 
(18,720
)
 
(2.6
)
 
(919
)
 
(0.2
)
Net Foreign Currency Transaction (Losses) Gains
(842
)
 
(0.3
)
 
(149
)
 
(0.1
)
 
(2,375
)
 
(0.3
)
 
175

 

Other Expense, Net
(482
)
 
(0.2
)
 
(10
)
 

 
(700
)
 
(0.1
)
 
(360
)
 
(0.1
)
Total Other Expense, Net
(6,719
)
 
(2.6
)
 
(381
)
 
(0.2
)
 
(20,220
)
 
(2.8
)
 
(916
)
 
(0.2
)
Profit (Loss) Before Income Taxes
4,327

 
1.7

 
15,873

 
7.9

 
(2,632
)
 
(0.4
)
 
44,994

 
7.5

Income Tax Expense
731

 
0.3

 
4,396

 
2.2

 
385

 
0.1

 
13,750

 
2.3

Net Earnings (Loss) Including Noncontrolling Interest
3,596

 
1.4

 
11,477

 
5.7

 
(3,017
)
 
(0.4
)
 
31,244

 
5.2

Net Earnings (Loss) Attributable to Noncontrolling Interest
37

 

 

 

 
(28
)
 

 

 

Net Earnings (Loss) Attributable to Tennant Company
$
3,559

 
1.4

 
$
11,477

 
5.7

 
$
(2,989
)
 
(0.4
)
 
$
31,244

 
5.2

Net Earnings (Loss) Attributable to Tennant Company per Diluted Share
$
0.20

 
 
 
$
0.64

 
 

 
$
(0.17
)
 
 
 
$
1.74

 
 
Net Sales
Consolidated Net Sales for the third quarter of 2017 totaled $261.9 million, a 30.9% increase as compared to consolidated Net Sales of $200.1 million in the third quarter of 2016. Consolidated Net Sales for the first nine months of 2017 totaled $723.8 million, a 21.3% increase as compared to consolidated Net Sales of $596.8 million for the first nine months of 2016.

25


The components of the consolidated Net Sales change for the three and nine months ended September 30, 2017 as compared to the same periods in 2016 were as follows:
 
2017 v. 2016
 
Three Months Ended
 
Nine Months Ended
 
September 30
 
September 30
Organic Growth:
 
 
 
  Volume
0.3%
 
0.1%
  Price
1.0%
 
1.0%
Organic Growth
1.3%

1.1%
  Foreign Currency
1.2%
 
0.1%
  Acquisitions & Divestiture
28.4%
 
20.1%
Total
30.9%
 
21.3%
 
The 30.9% increase in consolidated Net Sales in the third quarter of 2017 as compared to the same period in 2016 was driven by:
28.4% from the April 2017 acquisition of the IPC Group and the expansion of our commercial floor coatings business through the August 2016 acquisition of the Florock® brand.
A favorable direct foreign currency translation exchange impact of approximately 1.2%.
An organic sales increase of approximately 1.3% which excludes the effects of foreign currency exchange and acquisitions and divestitures, due to an approximate 1.0% price increase and a 0.3% volume increase. The price increase was the result of selling price increases, typically in the range of 2% to 4% in most geographies, with an effective date of February 1, 2017. We expect the increase in selling prices to increase Net Sales in the range of 1% to 2% for the 2017 full year. The impact to gross margin is estimated to be minimal as these selling price increases were taken to offset inflation. The volume increase was primarily due to increased sales in the EMEA, partially offset by volume decreases in the APAC region. Sales of new products introduced within the past three years totaled 52% of equipment revenue for the third quarter of 2017. This compares to 40% of equipment revenue in the 2016 third quarter from sales of new products introduced within the past three years.
The 21.3% increase in consolidated Net Sales in the first nine months of 2017 as compared to the same period in 2016 was driven by:
20.1% from the April 2017 acquisition of the IPC Group and the expansion of our commercial floor coatings business through the August 2016 acquisition of the Florock® brand, partially offset by the sale of our Green Machines outdoor city cleaning line in January 2016.
An organic sales increase of approximately 1.1% which excludes the effects of foreign currency exchange and acquisitions and divestitures, due to an approximate 1.0% price increase and a 0.1% volume increase. The impact to gross margin is estimated to be minimal as these selling price increases were taken to offset inflation. The volume increase was primarily due to increased sales in the EMEA region, partially offset by volume decreases in the Americas and APAC regions. Sales of new products introduced within the past three years totaled 47% of equipment revenue for the first nine months of 2017. This compares to 37% of equipment revenue in the first nine months of 2016 from sales of new products introduced within the past three years.
A favorable direct foreign currency translation exchange impact of approximately 0.1%.

26


The following table sets forth the Net Sales by geographic area for the three months and nine months ended September 30, 2017 and 2016 and the percentage change from the prior year (in thousands, except percentages):
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30
 
September 30
 
 
2017
 
2016
 
%
 
2017
 
2016
 
%
Americas
 
$
161,037

 
$
152,294

 
5.7
 
$
472,953

 
$
449,704

 
5.2
Europe, Middle East and Africa
 
78,851

 
29,309

 
169.0
 
189,483

 
94,433

 
100.7
Asia Pacific
 
22,033

 
18,531

 
18.9
 
61,335

 
52,689

 
16.4
Total
 
$
261,921

 
$
200,134

 
30.9
 
$
723,771

 
$
596,826

 
21.3
Americas
Net Sales in the Americas were $161.0 million for the third quarter of 2017, an increase of 5.7% from the third quarter of 2016. Organic sales in the third quarter decreased approximately 0.2%, excluding the direct impacts of the IPC Group and Florock acquisitions of 5.5% and favorable foreign currency translation exchange effects of approximately 0.4%. Strong sales growth in Latin America, particularly Mexico, favorably impacted Net Sales, however this was more than offset by lower sales in North America, driven by lower volume from the strategic account channel.
Net Sales in the Americas were $473.0 million for the first nine months of 2017, an increase of 5.2% from first nine months of 2016. Organic sales in the first nine months increased approximately 0.3%, excluding the direct impacts of the IPC Group and Florock acquisitions of 4.5% and favorable foreign currency translation exchange effects of approximately 0.4%. Solid sales performance in Latin America was partially offset by lower sales in North America, where sales through our direct and distribution sales channels were more than offset by sales declines through strategic accounts.
Europe, Middle East and Africa
Net Sales in EMEA were $78.9 million for the third quarter of 2017, an increase of 169.0% from the third quarter of 2016. Organic sales in the third quarter increased approximately 14.6%, excluding the direct impacts of the IPC Group acquisition of 148.7% and the favorable foreign currency translation exchange effects of approximately 5.7%. Solid sales performance in Western European countries driven by volume in the strategic account channel was partially offset by sales declines in the Central Eastern Europe, Middle East and Africa ("CEEMEA") markets.
Net Sales in EMEA were $189.5 million for the first nine months of 2017, an increase of 100.7% from the first nine months of 2016. Organic sales in the first nine months increased approximately 7.5%, excluding the direct impacts of the April 2017 IPC Group acquisition and the divestiture of our Green Machines outdoor city cleaning line in January 2016 that had a net favorable effect of 94.5% and unfavorable foreign currency translation exchange effects of approximately 1.3%. Strong sales growth in most European countries were partially offset by lower sales in the UK.
Asia Pacific
Net Sales in the APAC region were $22.0 million for the third quarter of 2017, an increase of 18.9% from the third quarter of 2016. Organic sales in the third quarter decreased approximately 8.5%, excluding the direct impacts of the IPC Group acquisition of 27.0% and the favorable foreign currency translation exchange effects of approximately 0.4%. Sales in the APAC region reflected declines primarily driven by Korea, China and the Southeast Asia regions.
Net Sales in the APAC region were $61.3 million for the first nine months of 2017, an increase of 16.4% from the first nine months of 2016. Organic sales in the first nine months decreased approximately 3.2%, excluding the direct impacts of the IPC Group acquisition of 19.9% and unfavorable foreign currency translation exchange effects of approximately 0.3%. Sales growth in China and Korea was more than offset by sales declines in Australia and Southeast Asia.
Gross Profit
Gross Profit in the third quarter of 2017 was $104.6 million, or 39.9% of net sales, as compared to $85.3 million, or 42.6% of net sales, in the third quarter of 2016. Gross margin was 270 basis points lower in the third quarter of 2017 due primarily to the $2.2 million, or 86 basis points, fair value inventory step-up flow through related to our acquisition of the IPC Group, a 68 basis point dilutive impact of the IPC acquisition, 32 basis points from a higher mix of EMEA region sales, which are ordinarily lower margin, raw material inflation, which reduced gross margins by 26 basis points, and continued field service productivity challenges related to organization changes from the restructuring and the near-term unfavorable impact from investments in manufacturing automation initiatives.

27


Gross Profit in the first nine months of 2017 was $288.9 million, or 39.9% of net sales, as compared to $258.1 million, or 43.2% of net sales in the first nine months of 2016. Gross margin was 330 basis points lower in the first nine months of 2017 due primarily to the $8.4 million, or approximately 120 basis points, fair value inventory step-up flow through related to our acquisition of the IPC Group, field service productivity challenges related to organizational changes from the restructuring, the near-term unfavorable impact from investments in manufacturing automation initiatives, and raw material cost inflation.
Operating Expense
Research & Development Expense
R&D Expense for the third quarter of 2017 was $7.9 million, a decrease of 6.1% from $8.4 million in the third quarter of 2016. R&D Expense as a percentage of Net Sales was 3.0% for the third quarter of 2017 and 4.2% for the third quarter of 2016. The decrease in R&D spending was primarily due to headcount reduction related to the first quarter 2017 restructuring action.
R&D Expense for the first nine months of 2017 was $24.2 million, a decrease of 1.9% from $24.7 million in the first nine months of 2016. R&D Expense as a percentage of Net Sales was 3.3% for the first nine months of 2017 and 4.1% for the first nine months of 2016. The decrease in R&D spending was primarily due to headcount reduction related to the first quarter 2017 restructuring action.
We continue to invest in developing innovative new products and technologies and the advancement of detergent-free products, fleet management and other sustainable technologies. New products are a key driver of sales growth. There were 32 new products and product variants launched in the first nine months of 2017 consisting of a new family of T500 commercial walk-behind scrubbers, the enhanced IRIS® Web Based Fleet Management System, the i-mop, the V3e compact dry canister vacuum, the T350 stand-on commercial scrubber and the A140 micro-scrubber.
Selling & Administrative Expense
S&A Expense in the third quarter of 2017 increased 41.3% to $85.7 million, as compared to $60.6 million in the third quarter of 2016. S&A Expense as a percentage of Net Sales was 32.7% for the third quarter of 2017, an increase of 240 basis points from 30.3% in the third quarter of 2016. S&A Expense in the 2017 third quarter was unfavorably impacted by $7.3 million, or 280 basis points, and $0.9 million, or 30 basis points, of amortization expense and acquisition costs, respectively, related to our acquisition of the IPC Group. The 2017 third quarter amortization expense includes a catch-up adjustment of $2.0 million to reflect an accelerated amortization method used by the company as a result of an adjustment to our preliminary valuation of intangible assets as part of our acquisition of the IPC Group. Excluding these costs, S&A Expense was 70 basis points lower in the third quarter of 2017 compared to the same period in 2016 due primarily to the lower relative IPC S&A Expense to revenue percentage and our continued balance of disciplined spending control with investments in key growth initiatives.
S&A Expense for the first nine months of 2017 increased 31.9% to $247.1 million, as compared to $187.3 million for the first nine months of 2016. S&A Expense as a percentage of Net Sales was 34.1% for the first nine months of 2017, an increase of 270 basis points from 31.4% in the first nine months of 2016. S&A Expense in the first nine months of 2017 was unfavorably impacted by $10.4 million, or 140 basis points, and $8.4 million, or 120 basis points, of amortization expense and acquisition costs, respectively, related to our acquisition of the IPC Group and an $8.0 million, or 110 basis points, restructuring charge taken in our 2017 first quarter to better align our global resources and expense structure with a lower growth global economic environment. Excluding these costs, S&A Expense was 100 basis points lower for the first nine months of 2017 compared to the same period in 2016 due primarily to the lower relative IPC S&A Expense to revenue percentage and our continued balance of disciplined spending control with investments in key growth initiatives.
Profit from Operations
Operating Profit for the third quarter of 2017 was $11.0 million, or 4.2% of Net Sales, as compared to Operating Profit of $16.3 million, or 8.1% of Net Sales, in the third quarter of 2016. The third quarter 2017 Operating Profit was $5.3 million lower than the third quarter of 2016 Operating Profit due primarily to $7.3 million of amortization expense related to IPC intangible assets, the $2.2 million fair value inventory step-up flow through and $0.9 million of acquisition costs, all related to our acquisition of the IPC Group. These decreases were partially offset by Operating Profit obtained from the IPC acquisition and reduced expenses resulting from our first quarter 2017 restructuring charge.

28


Operating Profit for the first nine months of 2017 was $17.6 million, or 2.4% of Net Sales, as compared to Operating Profit of $45.9 million, or 7.7% of Net Sales, in the first nine months of 2016. The first nine months of 2017 Operating Profit was $28.3 million lower than the first nine months of 2016 Operating Profit due primarily to $10.4 million of amortization expense related to IPC intangible assets, the $8.4 million fair value inventory step-up flow through and $8.4 million of acquisition costs, all related to our acquisition of the IPC Group. We also recorded an $8.0 million restructuring charge in the first nine months of 2017 to better align our global resources and expense structure with a lower growth global economic environment. These decreases were partially offset by Operating Profit obtained from the IPC acquisition and reduced expenses resulting from our first quarter 2017 restructuring charge.
Other Expense, Net
Interest Income
Interest Income in the third quarter of 2017 was $0.7 million, as compared to $0.1 million in the third quarter of 2016. Interest Income in the first nine months of 2017 was $1.6 million, as compared to $0.2 million in the first nine months of 2016. The higher Interest Income in the third quarter and first nine months of 2017 as compared to the same periods in 2016 was primarily due to interest income related to foreign currency swap activities.
Interest Expense
Interest Expense in the third quarter of 2017 was $6.1 million, as compared to $0.3 million in the third quarter of 2016. The higher Interest Expense in the third quarter of 2017 as compared to the same period in 2016 was primarily due to carrying a higher level of debt on our Condensed Consolidated Balance Sheets related to our acquisition activities.
Interest Expense in the first nine months of 2017 was $18.7 million, as compared to $0.9 million in the first nine months of 2016. The higher Interest Expense in the first nine months of 2017 as compared to the same period in 2016 was primarily due to carrying a higher level of debt on our Condensed Consolidated Balance Sheets related to our acquisition activities as well as a $6.2 million charge to expense the debt issuance costs for loans which were refinanced or repaid, as further described in the Liquidity and Capital Resources section that follows.
Net Foreign Currency Transaction (Losses) Gains
Net Foreign Currency Transaction Losses in the third quarter of 2017 were $0.8 million, as compared to Net Foreign Currency Transaction Losses of $0.1 million in the third quarter of 2016. The unfavorable change in the impact from foreign currency transactions in the third quarter of 2017 was primarily due to fluctuations in foreign currency rates, driven by changes in the Euro, and settlement of transactional hedging activity in the normal course of business.
Net Foreign Currency Transaction Losses in the first nine months of 2017 were $2.4 million, as compared to Net Foreign Currency Transaction Gains of $0.2 million in the first nine months of 2016. The unfavorable change in the impact from foreign currency transactions in the first nine months of 2017 was primarily due to a $1.1 million mark-to-market adjustment of a foreign exchange call option, an instrument held in connection with our acquisition of the IPC Group on April 6, 2017, and also fluctuations in foreign currency rates, specifically between the Euro and US dollar, and settlement of transactional hedging activity in the normal course of business.
Other Expense, Net
There was no significant change in Other Expense, Net in the third quarter and first nine months of 2017, as compared to the same periods in 2016.
Income Taxes
The effective tax rate in the third quarter of 2017 was 16.9%, as compared to the effective tax rate in the third quarter of the prior year of 27.7%. The tax expense for the third quarter of 2017 included a $0.6 million tax benefit associated with $2.2 million of expense related to inventory step-up amortization and a $0.3 million tax benefit associated with $0.9 million of acquisition costs related to the IPC Group acquisition. Excluding these items, the third quarter 2017 overall effective tax rate would have been 21.7%.
The decrease in the overall effective tax rate to 21.7% in the third quarter 2017 compared to 27.7% in the third quarter 2016, excluding the 2017 special items, was primarily related to mix of third quarter taxable earnings by country.
The year-to-date overall effective tax rate was (14.6%) for 2017 compared to 30.6% for 2016. The tax expense for the first nine months of 2017 included a $3.0 million tax benefit associated with $15.8 million of acquisition and financing costs related to the IPC Group acquisition, a $2.4 million tax benefit associated with $8.4 million of expense related to inventory step-up amortization and a $2.2 million tax benefit associated with an $8.0 million restructuring charge. Excluding the effects of 2017 special items, the 2017 year-to-date overall effective tax rate would have been 26.9%.

29


The decrease in the overall effective tax rate to 26.9% in 2017 compared to 30.6% in 2016, excluding the 2017 special items, was primarily related to the mix in expected full year taxable earnings by country and to the implementation of Accounting Standards Update (“ASU”) 2016-09 in Q1 2017. See Note 2 to the Condensed Consolidated Financial Statements for further information regarding the implementation of ASU 2016-09.
We do not have any plans to repatriate the undistributed earnings of non-U.S. subsidiaries. Any repatriation from foreign subsidiaries that would result in incremental taxation is not being considered. We believe that reinvesting these earnings outside the U.S. is the most efficient use of capital.
Net Earnings (Loss) and Earnings (Loss) Per Share
Net Earnings Attributable to Tennant Company for the third quarter of 2017 were $3.6 million, or $0.20 per diluted share, as compared to Net Earnings of $11.5 million, or $0.64 per diluted share, in the third quarter of 2016. The third quarter 2017 Net Earnings Attributable to Tennant Company included $1.6 million, net of tax, or $0.09 per share, from the fair value inventory step-up flow through related to our acquisition of the IPC Group and $0.6 million, net of tax, or $0.03 per share, for acquisition costs related to our acquisition of the IPC Group. The decrease in earnings per share was driven by higher amortization expense related to the IPC acquisition and higher interest expense, partially offset by earnings from the recently acquired IPC Group.
Net Loss Attributable to Tennant Company for the first nine months of 2017 was $3.0 million, or $(0.17) per diluted share, as compared to Net Earnings of $31.2 million, or $1.74 per diluted share, in the first nine months of 2016. The first nine months of 2017 Net Loss Attributable to Tennant Company included $8.1 million, net of tax, or $0.47 per share, $7.5 million, net of tax, or $0.43 per share, $6.1 million, net of tax, or $0.34 per share, and $4.6 million, net of tax, or $0.26 per share, for acquisition costs, amortization expense, the fair value inventory step-up flow through and financing costs, respectively, all related to our acquisition of the IPC Group. In addition, Net Loss Attributable to Tennant Company for the first nine months of 2017 included a $5.8 million, net of tax, or $0.32 per share, restructuring charge taken in our 2017 first quarter and a $0.2 million, net of tax, or $0.01 per share, pension settlement charge.
Liquidity and Capital Resources
Liquidity
Cash and Cash Equivalents totaled $55.9 million at September 30, 2017, as compared to $58.0 million as of December 31, 2016. Wherever possible, cash management is centralized and intercompany financing is used to provide working capital to subsidiaries as needed. Our current ratio and working capital was 2.1 and $220.8 million, respectively, as of September 30, 2017 compared to a current ratio and working capital of 2.2 and $165.1 million, respectively, as of December 31, 2016. Our debt-to-capital ratio was 56.9% as of September 30, 2017, compared to 11.5% as of December 31, 2016. The increase in the debt-to-capital ratio was driven by the borrowings related to the IPC acquisition.
Cash Flow Summary
Cash provided by (used in) our operating, investing and financing activities is summarized as follows (in thousands):
 
Nine Months Ended
 
September 30
 
2017
 
2016
Operating Activities
$
32,123

 
$
33,282

Investing Activities:
 
 
 
Purchases of Property, Plant and Equipment, Net of Disposals
(13,783
)
 
(21,940
)
Proceeds from Principal Payments Received on Long-Term Note Receivable
500

 

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

Acquisition of Businesses, Net of Cash Acquired
(354,073
)
 
(12,358
)
Purchase of Intangible Asset
(2,500
)
 

Proceeds from Sale of Business

 
285

(Increase) Decrease in Restricted Cash
(133
)
 
116

Financing Activities
335,797

 
(8,457
)
Effect of Exchange Rate Changes on Cash and Cash Equivalents
1,483

 
55

Net Decrease in Cash and Cash Equivalents
$
(2,086
)
 
$
(9,017
)

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Operating Activities
Operating activities provided $32.1 million of cash for the nine months ended September 30, 2017. Cash provided by operating activities was driven primarily by strong earnings, adding back non-cash items, partially offset by $9.9 million increase in inventory to support anticipated revenue growth.
Operating activities provided $33.3 million of cash for the nine months ended September 30, 2016. Cash provided by operating activities was driven primarily by cash inflows from Net Earnings of $31.2 million and a decrease in Accounts Receivable of $5.8 million from strong collections, partially offset by cash outflows resulting from a decrease in Accounts Payable due to the general timing of payments of $6.4 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): 
 
September 30,
2017
 
December 31,
2016
DSO
66
 
59
DIOH
104
 
89
As of September 30, 2017, DSO increased 7 days compared to December 31, 2016. The increase was primarily due to the variety of terms offered and mix of business, somewhat offset by the trend of continued proactive management of our receivables by enforcing tighter credit limits and continuing to successfully collect past due balances.
As of September 30, 2017, DIOH increased 15 days as compared to December 31, 2016. The increase was primarily due to a lower level of sales than anticipated that resulted in higher levels of inventory, somewhat offset by progress from inventory reduction initiatives.
Investing Activities
Investing activities during the nine months ended September 30, 2017 used $371.5 million. We used $354.1 million in relation to our acquisition of the IPC group and the final installment payment for the acquisition of the Florock brand and $13.8 million for net capital expenditures. Net capital expenditures included investments in information technology process improvement projects, tooling related to new product development, and manufacturing equipment. We also used $2.5 million for the purchase of the distribution rights to sell the i-mop and $1.5 million as a result of a loan to i-team North America B.V., a joint venture that operates as the distributor of the i-mop in North America. The details regarding the joint venture and our distribution of the i-mop are described further in Note 3 to the Condensed Consolidated Financial Statements.
Investing activities during the nine months ended September 30, 2016 used $33.9 million. Net capital expenditures used $21.9 million and our acquisition of the Florock brand and the assets of Dofesa Barrido Mecanizado, a long-time distributor based in central Mexico, used $12.4 million, net of cash acquired, as described further in Note 5. Capital expenditures included investments in information technology process improvement projects, tooling related to new product development, and manufacturing equipment.
Financing Activities
Net cash provided by financing activities was $335.8 million during the first nine months of 2017. Proceeds from the incurrence of Long-Term Debt associated with the IPC acquisition and the issuance of Common Stock provided $440.0 million and $4.7 million, respectively. These cash inflows were partially offset by cash outflows resulting from $81.3 million of Long-Term Debt payments, $16.5 million related to payments of debt issuance costs and dividend payments of $11.2 million.
Net cash used in financing activities was $8.5 million during the first nine months of 2016. The purchases of our Common Stock per our authorized repurchase program used $12.8 million, dividend payments used $10.6 million and the payments of Long-Term Debt used $3.5 million, partially offset by proceeds from the incurrence of Long-Term Debt of $15.0 million, the issuance of Common Stock of $2.9 million and the excess tax benefit on stock plans of $0.4 million.

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Indebtedness
In order to finance the acquisition of the IPC Group, on April 4, 2017, the Company and certain of our foreign subsidiaries entered into a Credit Agreement (the “2017 Credit Agreement”) with JPMorgan, as administrative agent, Goldman Sachs Bank USA, as syndication agent, Wells Fargo, National Association, U.S. Bank National Association, and HSBC Bank USA, National Association, as co-documentation agents, and the lenders (including JPMorgan) from time to time party thereto. The 2017 Credit Agreement provides the company and certain of our foreign subsidiaries access to a senior secured credit facility until April 4, 2022, consisting of a multi-tranche term loan facility in an amount up to $400.0 million and a revolving facility in an amount up to $200.0 million with an option to expand the revolving facility by $150.0 million, with the consent of the lenders willing to provide additional borrowings in the form of increases to their revolving facility commitment or funding of incremental term loans. Borrowings may be denominated in U.S. dollars or certain other currencies.
Upon entry into the 2017 Credit Agreement, the company repaid $45.0 million in outstanding borrowings under our Amended and Restated Credit Agreement, as described in Note 9 of our annual report on Form 10-K for the year ended December 31, 2016, and terminated the Amended and Restated Credit Agreement.
The 2017 Credit Agreement contains customary representations, warranties and covenants, including, but not limited to, covenants restricting the company’s ability to incur indebtedness and liens and merge or consolidate with another entity. The 2017 Credit Agreement also contains financial covenants, requiring us to maintain a ratio of consolidated total indebtedness to consolidated earnings before income, taxes, depreciation and amortization, subject to certain adjustments ("Adjusted EBITDA") of not greater than 4.25 to 1, as well as requiring us to maintain a ratio of consolidated Adjusted EBITDA to consolidated interest expense of no less than 3.50 to 1 for the quarter ended September 30, 2017. The 2017 Credit Agreement also contains a financial covenant requiring us to maintain a senior secured net indebtedness to Adjusted EBITDA ratio of not greater than 3.50 to 1. These financial covenants may restrict our ability to pay dividends and purchase outstanding shares of our common stock. We were in compliance with our financial covenants at September 30, 2017.
We will be required to repay the senior credit agreement with 25% to 50% of our excess cash flow from the preceding fiscal year, as defined in the agreement, unless our net leverage ratio for such preceding fiscal year is less than or equal to 3.00 to 1, which will be first measured using our fiscal year ended December 31, 2018.
Further details regarding our financing under the 2017 Credit Agreement are discussed in Note 8 to the Condensed Consolidated Financial Statements.
On April 18, 2017, we issued and sold $300.0 million in aggregate principal amount of our 5.625% Senior Notes due 2025 (the “Notes”), pursuant to an Indenture, dated as of April 18, 2017, among the company, the Guarantors (as defined therein), and Wells Fargo Bank, National Association, a national banking association, as trustee. The Notes are guaranteed by Tennant Coatings, Inc. and Tennant Sales and Service Company (collectively, the “Guarantors”), which are wholly owned subsidiaries of the company. 
The Notes will mature on May 1, 2025. Interest on the Notes will accrue at the rate of 5.625% per annum and will be payable semiannually in cash on each May 1 and November 1, commencing on November 1, 2017.
The Notes contain customary representations, warranties and covenants, and are less restrictive than those contained in the 2017 Credit Agreement.
We used the net proceeds from this offering to refinance a $300.0 million term loan under our 2017 Credit Agreement that we borrowed as part of the financing for the acquisition of the IPC Group and to pay related fees and expenses.
Further details regarding our financing under the Notes are discussed in Note 8 to the Condensed Consolidated Financial Statements.
In connection with the issuance and sale of the Notes, the company entered into a Registration Rights Agreement, dated April 18, 2017, among the company, the Guarantors and Goldman, Sachs & Co. and J.P. Morgan Securities LLC (the “Registration Rights Agreement”). Pursuant to the Registration Rights Agreement, the company agreed (1) to use its commercially reasonable efforts to consummate an exchange offer to exchange the Notes for new registered notes (the “Exchange Notes”), with terms substantially identical in all material respects with the Notes (except that the Exchange Notes will not contain terms with respect to additional interest, registration rights or transfer restrictions) and (2) if required, to have a shelf registration statement declared effective with respect to resales of the Notes. If the Company fails to satisfy its obligations under the Registration Rights Agreement within 360 days, it will be required to pay additional interest to the holders of the Notes under certain circumstances.
The full terms and conditions of the Indenture are set forth in Exhibit 4.1 to the company's Current Report on Form 8-K filed April 24, 2017.

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As of September 30, 2017, we had outstanding borrowings under our 2017 Credit Agreement, totaling $75.0 million under our term loan facility and $20.0 million under our revolving facility. There were $300.0 million in outstanding borrowings under the Notes as of September 30, 2017. In addition, we had stand alone letters of credit and bank guarantees outstanding in the amount of $4.7 million. Commitment fees on unused lines of credit for the nine months ended September 30, 2017 were $0.4 million. The overall weighted average cost of debt is approximately 5.0% and, net of a related cross-currency swap instrument, is approximately 4.2%. Further details regarding the cross-currency swap instrument are discussed in Note 10 to the Condensed Consolidated Financial Statements.
Prudential Investment Management, Inc.
In March 2017, we repaid $11.1 million of debt evidenced by the notes issued under our Private Shelf Agreement, as described in Note 9 of our annual report on Form 10-K for the year ended December 31, 2016, and terminated the Private Shelf Agreement.
Contractual Obligations
As of September 30, 2017, as a result of our acquisition of the IPC Group, there have been material changes in our contractual obligations related to our minimum rental payments for aggregate operating lease commitments as well as our long-term debt compared to our contractual obligations as disclosed in our annual report on Form 10-K for the year ended December 31, 2016. Further details regarding our contractual obligations related to our aggregate operating lease commitments and long-term debt are discussed in Notes 13 and 8, respectively, to the Condensed Consolidated Financial Statements.
Other than the contractual obligations identified above, there have been no material changes with respect to contractual obligations as disclosed in our annual report on Form 10-K for the year ended December 31, 2016.
Newly Issued Accounting Guidance
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers (Topic 606). This ASU will replace all existing revenue recognition standards and significantly expand the disclosure requirements for revenue arrangements. This guidance requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. This guidance provides a five-step analysis of transactions to determine when and how revenue is recognized. This guidance also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity's contracts with customers.
In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which defers the effective date of the new revenue recognition standard by one year from the original effective date specified in ASU No. 2014-09. The guidance now permits us to apply the new revenue recognition standard to annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, which is our fiscal 2018.
Management will adopt the revenue recognition standard using the modified retrospective approach. Under this approach, the new standard would only be applied to new contracts and those contracts that are not yet complete at January 1, 2018, with a cumulative catch-up adjustment recorded to beginning retained earnings for existing contracts that still require performance. We are utilizing a comprehensive approach to assess the impact of the standard on the company by reviewing our current accounting policies and practices to identify potential difference that would result from applying the new requirements to our revenue contracts. We are finalizing our contract reviews and, at this time, we have not identified any impacts to our financial statements that we believe will be material in the year of adoption. We anticipate the primary impact of the standard to be the additional required disclosures around revenue recognition in the notes to the consolidated financial statements. We continue to develop accounting policies and assess changes to the relevant business processes and the control activities within them as a result of the provisions of this standard.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). This ASU changes current U.S. GAAP for lessees to recognize lease assets and lease liabilities on the balance sheet for those leases classified as operating leases under previous U.S. GAAP. Under the new guidance, lessor accounting is largely unchanged. The amendments in this ASU are effective for annual periods beginning after December 15, 2018, including interim periods within that reporting period, which is our fiscal 2019. Early application is permitted. Lessees and lessors must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The transition approach would not require any transition accounting for leases that expired before the earliest comparative period presented. A full retrospective transition approach is prohibited for both lessees and lessors. We will adopt this ASU beginning in 2019. We are currently evaluating the impact of this amended guidance on our consolidated financial statements and related disclosures.

33


In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. This ASU clarifies the definition of a business when evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. This ASU is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, which is our fiscal 2018. We will apply this guidance to applicable transactions commencing in 2018.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which removes Step 2 of the goodwill impairment test. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. This ASU is effective for annual or any interim goodwill impairment tests beginning after December 15, 2019, which is our fiscal 2020. Early adoption of the standard is permitted for any interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We will apply this guidance to applicable goodwill impairment tests going forward.
In March 2017, the FASB issued ASU No. 2017-07, Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which requires employers to report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost/credit are required to be presented in the income statement separately from the service cost component in nonoperating expenses. In addition, the line items used in the income statement to present the other components of net benefit cost/credit must be disclosed. The amendments also allow only the service cost component to be eligible for capitalization when applicable. This ASU is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, which is our fiscal 2018. We are currently evaluating the impact that this standard is expected to have on our consolidated financial statements and related disclosures.
In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, which better aligns accounting rules with a company's risk management activities, better reflects the economic results of hedging in financial statements and simplifies hedge accounting treatment. This ASU is effective for fiscal years beginning after after December 15, 2018, including interim periods within those fiscal years, which is our fiscal 2019. We are currently evaluating the impact that this standard is expected to have on our consolidated financial statements and related disclosures.
Cautionary Statement Relevant to Forward-Looking Information
This Quarterly Report on Form 10-Q, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 2, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “intend,” “estimate,” “anticipate,” “believe,” “project,” or “continue” or similar words or the negative thereof. These statements do not relate to strictly historical or current facts and provide current expectations or forecasts of future events. Any such expectations or forecasts of future events are subject to a variety of factors. Particular risks and uncertainties presently facing us include: geopolitical and economic uncertainty throughout the world; the competition in our business; our ability to attract, develop and retain key personnel; our ability to achieve operational efficiencies, including synergistic and other benefits of acquisitions; our substantial indebtedness could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry, expose us to interest rate risk to the extent of any variable rate debt, and prevent us from meeting our covenant and payment obligations related to our debt instruments; our ability to effectively manage organizational changes; our ability to successfully upgrade, evolve and protect our information technology systems; our ability to develop and commercialize new innovative products and services; unforeseen product liability claims or product quality issues; fluctuations in the cost, quality, or availability of raw materials and purchased components; foreign currency exchange rate fluctuations, particularly the relative strength of the U.S. dollar against other major currencies; the occurrence of a significant business interruption; our ability to comply with laws and regulations; and our ability to sufficiently remediate any material weaknesses or significant deficiencies in our internal control over financial reporting.
We caution that forward-looking statements must be considered carefully and that actual results may differ in material ways due to risks and uncertainties both known and unknown. Shareholders, potential investors and other readers are urged to consider these factors in evaluating forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. Additional information about factors that could materially affect our results can be found in Part I, Item 1A, Risk Factors in our annual report on Form 10-K for the year ended December 31, 2016 and Part II, Item 1A of this Form 10-Q.
We undertake no obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as required by law. Investors are advised to consult any further disclosures by us in our filings with the SEC and in other written statements on related subjects. It is not possible to anticipate or foresee all risk factors, and investors should not consider any list of such factors to be an exhaustive or complete list of all risks or uncertainties.

34


Item 3.
Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes in our market risk since December 31, 2016. For additional information, refer to Item 7A of our 2016 annual report on Form 10-K for the year ended December 31, 2016.
Item 4.
Controls and Procedures
Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and our Principal Financial and Accounting Officer, have evaluated the effectiveness of our disclosure controls and procedures for the period ended September 30, 2017 (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)). Based on that evaluation, our Chief Executive Officer and our Principal Financial and Accounting Officer have concluded that, due to material weaknesses in internal control over financial reporting described in Part II, Item 9A of our 2016 annual report on Form 10-K for the year ended December 31, 2016, our disclosure controls and procedures were not effective as of September 30, 2017.
Changes in Internal Controls
There were no changes in our internal controls over financial reporting during the most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, other than as described below.
Remediation Plan
We began implementing a remediation plan to address the control deficiencies that led to the material weaknesses mentioned above. The remediation plan includes the following:
Sponsoring ongoing training related to the COSO 2013 Framework best practices for personnel that are accountable for internal control over financing reporting.
Performing a complete review of our accounting for revenue related to equipment maintenance and repair service to ensure the adequacy of the design and implementation of automated and manual controls.
Designing and implementing controls over the determination of technological feasibility and the capitalization of software development costs.
We are in the implementation phase of our remediation plan described above. The material weaknesses cannot be considered remediated until the controls have operated for a sufficient period of time and until management has concluded, through testing, that the control is operating effectively. Our goal is to remediate these material weaknesses by the end of 2017.
PART II – OTHER INFORMATION
Item 1.
Legal Proceedings
There are no material pending legal proceedings other than ordinary routine litigation incidental to our business.
Item 1A. Risk Factors
We documented our risk factors in Item 1A of Part I of our annual report on Form 10-K for the fiscal year ended December 31, 2016. Other than the risk factor identified below, there have been no material changes to our risk factors since the filing of that report.
We may not be able to generate sufficient cash to service all of our indebtedness, and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.
In April 2017, in connection with the acquisition of IPC Cleaning S.p.A., we entered into a new senior credit facility and indenture, and issued debt totaling approximately $400,000, consisting of a $100,000 term loan and $300,000 of senior notes, which funded the acquisition and replaced our current debt facility. The new senior credit facility also includes a revolving facility in an amount up to $200,000. We cannot provide assurance that our business will generate sufficient cash flow from operations to meet all our debt service requirements, to pay dividends, to repurchase shares of our common stock, and to fund our general corporate and capital requirements.
Our ability to satisfy our debt obligations will depend upon our future operating performance. We do not have complete control over our future operating performance because it is subject to prevailing economic conditions, and financial, business and other factors.

35


Our current and future debt service obligations and covenants could have important consequences. These consequences include, or may include, the following:
our ability to obtain financing for future working capital needs or acquisitions or other purposes may be limited;
our funds available for operations, expansions, dividends or other distributions, or stock repurchases may be reduced because we dedicate a significant portion of our cash flow from operations to the payment of principal and interest on our indebtedness;
our ability to conduct our business could be limited by restrictive covenants; and
our vulnerability to adverse economic conditions may be greater than less leveraged competitors and, thus, our ability to withstand competitive pressures may be limited.
Restrictive covenants in our senior credit facility and in our indenture place limits on our ability to conduct our business. Covenants in our senior credit facility and indenture include those that restrict our ability to make acquisitions, incur debt, encumber or sell assets, pay dividends, engage in mergers and consolidations, enter into transactions with affiliates, make investments and permit our subsidiaries to enter into certain restrictive agreements. The senior credit facility additionally contains certain financial covenants. We cannot provide assurance that we will be able to comply with these covenants in the future.
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
On October 31, 2016, the Board of Directors authorized the repurchase of an additional 1,000,000 shares of our common stock. This is in addition to the 393,965 shares remaining under our prior repurchase program as of September 30, 2017. Share repurchases are made from time to time in the open market or through privately negotiated transactions, primarily to offset the dilutive effect of shares issued through our share-based compensation programs. As of September 30, 2017, our 2017 Credit Agreement restricts the payment of dividends or repurchasing of stock if, after giving effect to such payments and assuming no default exists or would result from such payment, our leverage ratio is greater than 2.50 to 1, in such case limiting such payments to an amount ranging from $50.0 million to $75.0 million during any fiscal year based on our leverage ratio after giving effect to such payments. Our Senior Notes due 2025 also contain certain restrictions, which are generally less restrictive than those contained in the 2017 Credit Agreement.
For the Quarter Ended June 30, 2017
 
Total Number
of Shares
Purchased(1)
 
Average Price
Paid Per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
July 1 - 31, 2017
 
603

 
$
74.95

 

 
1,393,965

August 1 - 31, 2017
 
101

 
65.70

 

 
1,393,965

September 1 - 30, 2017
 
176

 
60.40

 

 
1,393,965

Total
 
880

 
$
70.98

 

 
1,393,965

(1) 
Includes 880 shares delivered or attested to in satisfaction of the exercise price and/or tax withholding obligations by employees who exercised stock options or restricted stock under employee share-based compensation plans.

36


Item 6.
Exhibits
Item #
 
Description
 
Method of Filing

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

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

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

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

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

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

 
Section 1350 Certification of CEO
 
Filed herewith electronically.

 
Section 1350 Certification of CFO
 
Filed herewith electronically.
101

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

37


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

 


38