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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2022

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

____________________________________

 

tennantcompanylogo.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.)

 

10400 Clean Street

Eden Prairie, Minnesota 55344

(Address of principal executive offices)

(Zip Code)

(763) 540-1200

(Registrant’s telephone number, including area code)

______________________________________________

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

Common Stock, par value $0.375 per share

 

TNC

 

New York Stock Exchange

 

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

No

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes

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

 

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

Emerging growth company

 

 

 

 

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

 

As of July 29, 2022, there were 18,589,715 shares of common stock outstanding.

 

1

 

 

TABLE OF CONTENTS

 

PART I - FINANCIAL INFORMATION

Page

Item 1.

Financial Statements

3

 

Consolidated Statements of Income

3

 

Consolidated Statements of Comprehensive Income

3

 

Consolidated Balance Sheets

4

 

Consolidated Statements of Cash Flows

5

 

Consolidated Statements of Equity

6

 

Notes to Consolidated Financial Statements

7

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

18

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

23

Item 4.

Controls and Procedures

23

PART II - OTHER INFORMATION

 

Item 1.

Legal Proceedings

23

Item 1A.

Risk Factors

23

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

24

Item 6.

Exhibits

24

Signatures

 

25

 

2

 

 

PART I FINANCIAL INFORMATION

 

Item 1.

Financial Statements

 

TENNANT COMPANY

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

  

Three Months Ended

  

Six Months Ended

 

(In millions, except shares and per share data)

 

June 30,

  

June 30,

 
  

2022

  

2021

  

2022

  

2021

 

Net sales

 $280.2  $279.1  $538.3  $542.4 

Cost of sales

  174.1   164.2   333.3   314.2 

Gross profit

  106.1   114.9   205.0   228.2 

Selling and administrative expense

  79.1   86.2   155.7   165.6 

Research and development expense

  7.9   8.3   15.6   15.7 

Gain on sale of assets

  (3.7)     (3.7)  (9.8)

Operating income

  22.8   20.4   37.4   56.7 

Interest expense, net

  (1.2)  (2.1)  (1.5)  (6.0)

Net foreign currency transaction (loss) gain

  (1.0)     (0.4)  0.5 

Loss on extinguishment of debt

     (11.3)     (11.3)

Other (expense) income, net

  (0.3)  0.2   (0.5)  0.3 

Income before income taxes

  20.3   7.2   35.0   40.2 

Income tax expense (benefit)

  3.7   (2.6)  8.1   4.7 

Net income

 $16.6  $9.8  $26.9  $35.5 
                 

Net income per share

                

Basic

 $0.90  $0.53  $1.46  $1.92 

Diluted

 $0.89  $0.51  $1.44  $1.88 
                 

Weighted average shares outstanding

                

Basic

  18,507,073   18,547,276   18,485,367   18,501,930 

Diluted

  18,683,798   18,931,703   18,735,913   18,879,616 

 

 

 

TENNANT COMPANY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

  

Three Months Ended

  

Six Months Ended

 

(In millions)

 

June 30,

  

June 30,

 
  

2022

  

2021

  

2022

  

2021

 

Net income

 $16.6  $9.8  $26.9  $35.5 

Other comprehensive (loss) income:

                

Foreign currency translation adjustments (net of related tax expense of $1.0, $0.3, $1.4, and $0.2, respectively)

  (16.9)  4.9   (20.7)  (5.8)

Pension and postretirement medical benefits (net of related tax benefit of $0, $0.1, $0, and $0.1, respectively)

     0.1      0.1 

Cash flow hedge (net of related tax expense of $0.3, $0, $0.2, and $0, respectively)

  0.8   (0.1)  0.6   (0.1)

Total other comprehensive (loss) income, net of tax

  (16.1)  4.9   (20.1)  (5.8)
                 

Comprehensive income

 $0.5  $14.7  $6.8  $29.7 

 

See accompanying notes to consolidated financial statements.

 

3

 

 

TENNANT COMPANY

CONSOLIDATED BALANCE SHEETS

 

  (Unaudited)     

(In millions, except shares and per share data)

 

June 30,

  

December 31,

 
  

2022

  

2021

 

ASSETS

        

Cash, cash equivalents, and restricted cash

 $73.8  $123.6 

Receivables, less allowances of $5.3 and $5.3, respectively

  215.7   211.4 

Inventories

  188.6   160.6 

Prepaid and other current assets

  43.0   31.2 

Total current assets

  521.1   526.8 

Property, plant and equipment, less accumulated depreciation of $261.5 and $258.4, respectively

  169.3   172.8 

Operating lease assets

  36.9   41.3 

Goodwill

  180.3   193.1 

Intangible assets, net

  83.1   98.0 

Other assets

  34.5   29.7 

Total assets

 $1,025.2  $1,061.7 

LIABILITIES AND EQUITY

        

Current portion of long-term debt

 $5.2  $4.2 

Accounts payable

  120.4   121.5 

Employee compensation and benefits

  50.4   60.6 

Other current liabilities

  88.9   104.0 

Total current liabilities

  264.9   290.3 

Long-term debt

  260.6   263.4 

Long-term operating lease liabilities

  21.7   25.4 

Employee benefits

  15.4   16.3 

Deferred income taxes

 17.9  20.6 

Other liabilities

  10.7   10.6 

Total long-term liabilities

  326.3   336.3 

Total liabilities

 $591.2  $626.6 

Commitments and contingencies (Note 12)

          

Common Stock, $0.375 par value; 60,000,000 shares authorized; 18,589,675 and 18,535,116 shares issued and outstanding, respectively

 $7.0  $7.0 

Additional paid-in capital

  55.4   54.1 

Retained earnings

  428.3   410.6 

Accumulated other comprehensive loss

  (58.0)  (37.9)

Total Tennant Company shareholders' equity

  432.7   433.8 

Noncontrolling interest

  1.3   1.3 

Total equity

  434.0   435.1 

Total liabilities and total equity

 $1,025.2  $1,061.7 

 

See accompanying notes to consolidated financial statements.

 

4

 

 

TENNANT COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

  

Six Months Ended

 

(In millions)

 

June 30,

 
  

2022

  

2021

 

OPERATING ACTIVITIES

        

Net income

 $26.9  $35.5 

Adjustments to reconcile net income to net cash (used in) provided by operating activities:

        

Depreciation expense

  16.4   16.2 

Amortization expense

  8.4   10.3 

Deferred income tax benefit

  (4.4)  (5.9)

Share-based compensation expense

  2.7   7.0 

Bad debt and returns expense

  0.7   0.9 

Acquisition contingent consideration adjustment

     0.7 

Gain on sale of assets

  (3.7)  (9.8)

Debt extinguishment cost

     11.3 

Other, net

  0.5   1.3 

Changes in operating assets and liabilities:

        

Receivables

  (9.5)  (13.5)

Inventories

  (44.7)  (32.3)

Accounts payable

  6.5   16.9 

Employee compensation and benefits

  (8.7)  7.5 

Other assets and liabilities

  (14.7)  (8.3)

Net cash (used in) provided by operating activities

  (23.6)  37.8 

INVESTING ACTIVITIES

        

Purchases of property, plant and equipment

  (10.5)  (8.0)

Proceeds from sale of assets, net of cash divested

  4.1   24.7 

Investment in leased assets

  (4.0)   

Cash received from leased assets

  0.3    

Net cash (used in) provided by investing activities

  (10.1)  16.7 

FINANCING ACTIVITIES

        

Proceeds from borrowings

  15.0   315.8 

Repayments of borrowings

  (16.6)  (360.4)

Debt extinguishment payment

     (8.4)

Contingent consideration payments

     (0.5)

Change in finance lease obligations

     0.2 

(Repurchases) proceeds from exercise of stock options, net of employee tax withholdings obligations

  (1.4)  3.3 

Dividends paid

  (9.2)  (8.6)

Net cash used in financing activities

  (12.2)  (58.6)

Effect of exchange rate changes on cash, cash equivalents and restricted cash

  (3.9)  (1.8)

Net (decrease) in cash, cash equivalents and restricted cash

  (49.8)  (5.9)

Cash, cash equivalents and restricted cash at beginning of period

  123.6   141.0 

Cash, cash equivalents and restricted cash at end of period

 $73.8  $135.1 

 

SUPPLEMENTAL CASH FLOW INFORMATION

 

Six Months Ended

 
  

June 30,

 
  

2022

  

2021

 

Cash paid for income taxes

 $10.7  $9.5 

Cash paid for interest

  2.5   9.6 

Cash paid for amounts included in the measurement of lease liabilities:

        

Operating cash flows from operating leases

  9.5   10.5 

Lease assets obtained in exchange for new operating lease liabilities

  6.5   11.5 

Supplemental non-cash investing and financing activities:

        

Capital expenditures in accounts payable

  0.9   0.7 

 

See accompanying notes to consolidated financial statements.

 

5

 

 

TENNANT COMPANY

CONSOLIDATED STATEMENTS OF EQUITY

(Unaudited)

 

(In millions, except shares and per share data)

 

  

Tennant Company Shareholders

         
  

Common Shares

  

Common Stock

  

Additional Paid-in Capital

  

Retained Earnings

  

Accumulated Other Comprehensive Loss

  

Tennant Company Shareholders' Equity

  

Noncontrolling Interest

  

Total Equity

 

Balance, December 31, 2021

  18,535,116  $7.0  $54.1  $410.6  $(37.9) $433.8  $1.3  $435.1 

Net income

            10.3      10.3      10.3 

Other comprehensive loss

               (4.0)  (4.0)     (4.0)

Issue stock for directors, employee benefit and stock plans, net of related tax withholdings and repurchases of 24,025 shares

  44,700      (1.3)        (1.3)     (1.3)

Share-based compensation

         1.8         1.8      1.8 

Dividends paid $0.25 per common share

            (4.6)     (4.6)     (4.6)

Balance, March 31, 2022

  18,579,816  $7.0  $54.6  $416.3  $(41.9) $436.0  $1.3  $437.3 

Net income

            16.6      16.6      16.6 

Other comprehensive income

               (16.1)  (16.1)     (16.1)

Issue stock for directors, employee benefit and stock plans, net of related tax withholdings of 2,071 shares

  9,859      (0.1)        (0.1)     (0.1)

Share-based compensation

         0.9         0.9      0.9 

Dividends paid $0.25 per common share

            (4.6)     (4.6)     (4.6)

Balance, June 30, 2022

  18,589,675  $7.0  $55.4  $428.3  $(58.0) $432.7  $1.3  $434.0 

 

  

Tennant Company Shareholders

         
  

Common Shares

  

Common Stock

  

Additional Paid-in Capital

  

Retained Earnings

  

Accumulated Other Comprehensive Loss

  

Tennant Company Shareholders' Equity

  

Noncontrolling Interest

  

Total Equity

 

Balance, December 31, 2020

  18,503,805  $6.9  $54.7  $363.3  $(20.1) $404.8  $1.3  $406.1 

Net income

            25.7      25.7      25.7 

Other comprehensive loss

               (10.7)  (10.7)     (10.7)

Issue stock for directors, employee benefit and stock plans, net of related tax withholdings of 22,724 shares

  102,681   0.1   1.3         1.4      1.4 

Share-based compensation

         3.1         3.1      3.1 

Dividends paid $0.23 per common share

            (4.2)     (4.2)     (4.2)

Balance, March 31, 2021

  18,606,486  $7.0  $59.1  $384.8  $(30.8) $420.1  $1.3  $421.4 

Net income

            9.8      9.8      9.8 

Other comprehensive income

               4.9   4.9      4.9 

Issue stock for directors, employee benefit and stock plans, net of related tax withholdings of 3,305 shares

  58,579      1.9         1.9      1.9 

Share-based compensation

         3.9         3.9      3.9 

Dividends paid $0.23 per common share

            (4.4)     (4.4)     (4.4)

Balance, June 30, 2021

  18,665,065  $7.0  $64.9  $390.2  $(25.9) $436.2  $1.3  $437.5 

 

See accompanying notes to consolidated financial statements.

 

6

 

TENNANT COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(In millions, except shares and per share data)

 

 

1.

Summary of Significant Accounting Policies

 

Tennant Company ("the Company", "we", "us", or "our") is a world leader in designing, manufacturing and marketing solutions that empower customers to achieve quality cleaning performance, reduce environmental impact and help create a cleaner, safer, healthier world. The Company is committed to creating and commercializing breakthrough, sustainable cleaning innovations to enhance its broad suite of products, including floor maintenance and cleaning equipment, detergent-free and other sustainable cleaning technologies, aftermarket parts and consumables, equipment maintenance and repair service, and asset management solutions.

 

Our 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, and more.

 

Customers include contract cleaners to whom organizations outsource facilities maintenance as well as businesses that perform facilities maintenance themselves. The Company reaches these customers through the industry's largest direct sales and service organization and through a strong and well-supported network of authorized distributors worldwide.

 

Basis of Presentation The accompanying unaudited consolidated financial statements have been prepared in accordance with the U.S. Securities and Exchange Commission (“SEC”) requirements for interim reporting. In our opinion, the 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, 2021. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year.

 

 

2.

Newly Adopted Accounting Pronouncements

 

Reference Rate Reform

 

In  March 2020, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update (“ASU”) No. 2020-04, Reference Rate Reform (Topic 848). This ASU provides optional expedients to applying generally accepted accounting principles to certain contract modifications, hedging relationships, and other transactions affected by the reference rate reform, which affects the London Interbank Offered ("LIBO") Rate, if certain criteria are met. The amendments are effective  March 12, 2020 through  December 31, 2022. We continue to monitor our contracts and transactions for potential application of this ASU.

 

 

3.

Revenue

 

Disaggregation of Revenue

 

The following tables illustrate the disaggregation of revenue by geographic area, groups of similar products and services and sales channels:

 

Net sales by geographic area

 

  

Three Months Ended

  

Six Months Ended

 
  

June 30,

  

June 30,

 
  

2022

  

2021

  

2022

  

2021

 

Americas

  

$ 178.4

   

$ 167.2

   

$ 338.7

   

$ 325.0

 

Europe, Middle East and Africa

  

77.3

   

85.2

   

156.0

   

166.1

 

Asia Pacific

 

24.5

   

26.7

   

43.6

   

51.3

 

Total

  

$ 280.2

   

$ 279.1

   

$ 538.3

   

$ 542.4

 

 

Net sales are attributed to each geographic area based on the end-user country and are net of intercompany sales.

 

Net sales by groups of similar products and services

 

  

Three Months Ended

  

Six Months Ended

 
  

June 30,

  

June 30,

 
  

2022

  

2021

  

2022

  

2021

 

Equipment

 $172.1  $177.1  $330.2  $338.0 

Parts and consumables

  66.1   62.3   126.7   124.6 

Specialty surface coatings(a)

           1.5 

Service and other

  42.0   39.7   81.4   78.3 

Total

 $280.2  $279.1  $538.3  $542.4 

 

 

(a)

On February 1, 2021, we sold our Coatings business. Further details regarding the sale are discussed in Note 5.

 

 

7

 

Net sales by sales channel

 

  

Three Months Ended

  

Six Months Ended

 
  

June 30,

  

June 30,

 
  

2022

  

2021

  

2022

  

2021

 

Sales direct to consumer

 $179.7  $172.9  $343.5  $341.9 

Sales to distributors

  100.5   106.2   194.8   200.5 

Total

 $280.2  $279.1  $538.3  $542.4 

 

Contract Liabilities

 

Sales Returns

 

The right of return may exist explicitly or implicitly with our customers. When the right of return exists, we adjust the transaction price for the estimated effect of returns. We estimate the expected returns using the expected value method by assessing historical sales levels and the timing and magnitude of historical sales return levels as a percent of sales and projecting this experience into the future.

 

Sales Incentives

 

Our sales contracts may contain various customer incentives, such as volume-based rebates or other promotions. We reduce the transaction price for certain customer programs and incentive offerings that represent variable consideration. Sales incentives given to our customers are recorded using the most likely amount approach for estimating the amount of consideration to which the Company will be entitled. We forecast the most likely amount of the incentive to be paid at the time of sale, update this forecast quarterly, and adjust the transaction price accordingly to reflect the new amount of incentives expected to be earned by the customer. A majority of our customer incentives are settled within one year. We record our accruals for volume-based rebates and other promotions in other current liabilities on our consolidated balance sheets.

 

The change in our sales incentive accrual balance was as follows:

 

  

Six Months Ended

 
  

June 30,

 
  

2022

  

2021

 

Beginning balance

 $19.9  $12.1 

Additions to sales incentive accrual

  10.3   15.7 

Contract payments

  (16.4)  (13.0)

Foreign currency fluctuations

  (0.5)  (0.2)

Ending balance

 $13.3  $14.6 

 

Deferred Revenue

 

We sell separately priced prepaid contracts to our customers where we receive payment at the inception of the contract and defer recognition of the consideration received because we have to satisfy future performance obligations. Our deferred revenue balance is primarily attributed to prepaid maintenance contracts on our machines ranging from 12 months to 60 months. In circumstances where prepaid contracts are bundled with machines, we use an observable price to determine stand-alone selling price for separate performance obligations.

 

The change in the deferred revenue balance was as follows:

 

  

Six Months Ended

 
  

June 30,

 
  

2022

  

2021

 

Beginning balance

 $11.2  $9.3 

Increase in deferred revenue representing our obligation to satisfy future performance obligations

  15.6   17.8 

Decrease in deferred revenue for amounts recognized in net sales for satisfied performance obligations

  (14.8)  (17.1)

Foreign currency fluctuations

  (0.3)  0.1 

Ending balance

 $11.7  $10.1

 

 

At June 30, 2022, $8.4 million and $3.3 million of deferred revenue was reported in other current liabilities and other liabilities, respectively, on our consolidated balance sheets. Of these amounts, we expect to recognize the following approximate amounts in net sales in the following periods:

 

Remaining 2022

 $7.2 

2023

  2.4 

2024

  1.4 

2025

  0.5 

2026

  0.1 

Thereafter

  0.1 

Total

 $11.7 

 

At December 31, 2021, $7.7 million and $3.5 million of deferred revenue was reported in other current liabilities and other liabilities, respectively, on our consolidated balance sheets.

 

8

 
 

4.

Management Actions

 

Restructuring Actions

 

During the three and six months ended June 30, 2022 and June 30, 2021, we incurred restructuring expenses as part of our ongoing global reorganization efforts. The following pre-tax restructuring charges were included in selling and administrative expense in the consolidated statements of income:

 

  

Three Months Ended

  

Six Months Ended

 
  

June 30,

  

June 30,

 
  

2022

  

2021

  

2022

  

2021

 

Severance-related costs

 $0.1  $0.9  $0.3  $0.9 

Other costs

  0.3      0.3    

Total pre-tax restructuring costs

 $0.4  $0.9  $0.6  $0.9 

 

The charges in 2022 primarily impacted the Americas and APAC operating segments. The charges in 2021 primarily impacted the EMEA and APAC operating segments. Our restructuring actions represent the continued execution of a multi-year enterprise strategy to drive increased productivity throughout our operations.

 

A reconciliation of the beginning and ending liability balances for severance-related costs is as follows:

 

  

Six Months Ended

 
  

June 30,

 
  

2022

  

2021

 

Beginning balance

 $4.9  $4.5 

New charges

  0.9   0.9 

Cash payments

  (1.9)  (1.2)

Foreign currency fluctuations

  (0.5)  (0.1)

Adjustments to accrual

  (0.6)   

Ending balance

 $2.8  $4.1 

 

 

5.

Acquisition and Divestitures

 

Sale of building

 

During the second quarter of 2022, we sold a building located in Golden Valley, Minnesota. The resulting pre-tax gain was $3.7 million and is reflected within gain on sale of assets in the consolidated statements of income. Proceeds from sale of assets was $4.1 million.

 

Sale of Coatings business

 

During the first quarter of 2021, we sold the Coatings business. The resulting pre-tax gain was $9.8 million and is reflected within gain on sale of assets in the consolidated statements of income. Proceeds from sale of assets, net of cash divested, was $24.7 million.

 

Acquisition of Gaomei

 

On January 4, 2019, we completed the acquisition of Hefei Gaomei Cleaning Machines Co., Ltd. and Anhui Rongen Environmental Protection Technology Co., Ltd. (collectively "Gaomei"), privately held designers and manufacturers of commercial cleaning solutions based in China. The financial results for Gaomei have been included in our consolidated financial results since the date of closing. The purchase price included contingent consideration payments totaling $2.5 million paid in 2021.

 

9

 
 

6.

Inventories

 

Inventories are valued at the lower of cost or net realizable value and consisted of the following:

 

  

June 30,

  

December 31,

 
  

2022

  

2021

 

Inventories carried at LIFO:

        

Finished goods(a)

 $68.2  $54.0 

Raw materials and work-in-process

  50.5   42.4 

Excess of FIFO over LIFO cost(b)

  (49.0)  (43.0)

Total LIFO inventories

 $69.7  $53.4 
         

Inventories carried at FIFO:

        

Finished goods(a)

 $58.8  $53.8 

Raw materials and work-in-process

  60.1   53.4 

Total FIFO inventories

 $118.9  $107.2 

Total inventories

 $188.6  $160.6 

 

 

(a)

Finished goods include machines, parts and consumables and component parts that are used in our products.

 

(b)

The difference between replacement cost and the stated LIFO inventory value is not materially different from the reserve for the LIFO valuation method.

 

We are currently operating in a more volatile inflationary environment and we experienced higher product cost inflation in most categories during the second quarter of 2022. Our LIFO charge for the three and six months ended June 30, 2022 was $4.9 million and $6.0 million, respectively, compared to $2.4 million and $2.2 million in the three and six months ended June 30, 2021, respectively. The increase in each period was attributable to the broad effects of inflation on materials.

 

 

7.

Goodwill and Intangible Assets

 

The changes in the carrying amount of goodwill for the six months ended June 30, 2022 were as follows:

 

      

Accumulated

     
      

Impairment

     
  

Goodwill

  

Losses

  

Total

 

Balance as of December 31, 2021

 $233.9  $(40.8) $193.1 

Foreign currency fluctuations

  (16.7)  3.9   (12.8)

Balance as of June 30, 2022

 $217.2  $(36.9) $180.3 

 

The balances of acquired intangible assets, excluding goodwill, were as follows:

 

  

Customer Lists

  

Trade Names

  

Technology

  

Total

 

Balance as of June 30, 2022

                

Original cost

 $144.4  $28.0  $16.0  $188.4 

Accumulated amortization

  (80.4)  (14.2)  (10.7)  (105.3)

Carrying value

 $64.0  $13.8  $5.3  $83.1 

Weighted average original life (in years)

  15   10   11     
                 

Balance as of December 31, 2021

                

Original cost

 $155.4  $30.3  $17.0  $202.7 

Accumulated amortization

  (80.0)  (13.9)  (10.8)  (104.7)

Carrying value

 $75.4  $16.4  $6.2  $98.0 

Weighted average original life (in years)

  15   11   11     

 

Amortization expense on intangible assets for the three and six months ended June 30, 2022 was $3.9 million and $8.4 million, respectively. Amortization expense on intangible assets for the three and six months ended June 30, 2021 was $5.0 million and $10.3 million, 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 2022

 $7.7 

2023

  14.3 

2024

  12.9 

2025

  11.6 

2026

  10.3 

Thereafter

  26.3 

Total

 $83.1 

 

10

 
 

8.

Debt

 

2021 Credit Agreement

 

On  April 5, 2021, we and certain of our foreign subsidiaries entered into an Amended and Restated Credit Agreement (the “2021 Credit Agreement”) with JPMorgan Chase Bank, N.A. as administrative agent. The 2021 Credit Agreement provides us and certain of our foreign subsidiaries access to a senior secured credit facility until  April 3, 2026, consisting of a term loan facility in an amount up to $100.0 million and a revolving facility in an amount up to $450.0 million with an option to expand the credit facility by up to $275.0 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.

 

The fee for committed funds under the revolving facility of the 2021 Credit Agreement ranges from an annual rate of 0.15% to 0.30%, depending on our leverage ratio. Borrowings denominated in U.S. dollars under the 2021 Credit Agreement bear interest at a rate per annum equal to (a) the Adjusted LIBO Rate, as adjusted for statutory reserve requirements for eurocurrency liabilities, but in any case, not less than 0%, plus an additional spread of 1.10% to 1.70%, depending on our leverage ratio or (b) the Alternate Base Rate which is the greatest of (i) the prime rate, (ii) the federal funds rate plus 0.50% and (iii) the adjusted LIBO rate for a one-month period, but in any case, not less than 1.0%, plus, in any such case, 1.0%, plus an additional spread of 0.10% to 0.70%, depending on our leverage ratio.

 

In connection with the 2021 Credit Agreement, we reaffirmed our security interest in favor of the lenders in substantially all our personal property and pledged the stock of our domestic subsidiaries and 65% of the stock of our first-tier foreign subsidiaries. The obligations under the 2021 Credit Agreement are also guaranteed by certain of our first-tier domestic subsidiaries, and those subsidiaries also provided a security interest in their similar personal property.

 

Our 2021 Credit Agreement restricts the payment of dividends or repurchasing of stock requiring that, after giving effect to such payments, no default exists or would result from such payment. Additionally, cash dividends are restricted to $7.5 million per quarter and approved levels of other restricted payments range from $60.0 million to unlimited based on our net leverage ratio (not taking into account any acquisition holiday) after giving effect to such payment.

 

The 2021 Credit Agreement contains customary representations, warranties and covenants, including but not limited to covenants restricting our ability to incur indebtedness and liens and to merge or consolidate with another entity. Further, the 2021 Credit Agreement contains the following covenants:

 

 

• 

A covenant requiring us to maintain an indebtedness to EBITDA ratio, determined as of the end of each of our fiscal quarters, of no greater than 3.50 to 1.00, with certain alternative requirements for permitted acquisitions greater than $50.0 million;

 

• 

A covenant requiring us to maintain an EBITDA to interest expense ratio for a period of four consecutive fiscal quarters as of the end of each quarter of no less than 3.00 to 1.00; and

 

• 

A covenant restricting us from paying dividends or repurchasing 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 1.00, in such case limiting such payments to $60.0 million during any fiscal year.

 

Redemption of Senior Notes

 

In the second quarter of 2021, the Company redeemed $300.0 million principal amount outstanding of its 5.625% Senior Notes due 2025 ("Senior Notes"). We used the proceeds from the borrowings under the 2021 Credit Agreement to retire our Senior Notes and pay the $8.4 million call premium due upon redemption in the second quarter of 2021. In addition, we wrote off $2.9 million of unamortized debt issuance costs in the second quarter of 2021.

 

Debt Outstanding

 

Debt outstanding consisted of the following:

 

  

June 30,

  

December 31,

 
  

2022

  

2021

 

Credit facility borrowings:

        

Revolving credit facility borrowings

 $168.0  $168.0 

Term loan facility borrowings

  97.5   98.8 

Secured borrowings

  0.2   0.7 

Finance lease liabilities

  0.1   0.1 

Total debt

  265.8   267.6 

Less: current portion of long-term debt(a)

  (5.2)  (4.2)

Long-term debt

 $260.6  $263.4 

 

 

(a)

As of June 30, 2022, the Company is required to repay $5.0 million in outstanding credit facility borrowings and $0.2 million of current maturities of secured borrowings over the next 12 months.

 

As of June 30, 2022, we had outstanding borrowings of $168.0 million and $97.5 million under our revolving facility and term loan facility, respectively. We had letters of credit and bank guarantees outstanding in the amount of $2.9 million, leaving approximately $279.1 million of unused borrowing capacity on our revolving facility. Commitment fees on unused lines of credit for the six months ended June 30, 2022 were $0.4 million. The overall weighted average cost of debt is approximately 2.0% and net of related cross-currency swap instruments is approximately 0.9%. Further details regarding the cross-currency swap instrument are discussed in Note 10.

 

 

11

 
 

9.

Warranty

 

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

 

The changes in warranty reserves were as follows:

 

  

Six Months Ended

 
  

June 30,

 
  

2022

  

2021

 

Beginning balance

 $10.4  $11.1 

Additions charged to expense

  4.4   4.3 

Foreign currency fluctuations

  (0.1)  (0.1)

Claims paid

  (4.1)  (4.7)

Ending balance

 $10.6  $10.6 

 

 

12

 
 

10.

Derivatives

 

Hedge Accounting and Hedging Programs

 

We recognize all derivative instruments as either assets or liabilities in our consolidated balance sheets and measure them at fair value. Gains and losses resulting from changes in fair value are accounted for depending on the use of the derivative and whether it is designated and qualifies for hedge accounting.

 

We evaluate hedge effectiveness on our hedges that are designated and qualify for hedge accounting at the inception of the hedge prospectively, as well as retrospectively, and record any ineffective portion of the hedging instruments along with the time value of purchased contracts in the same line item of the income statement as the item being hedged on our consolidated statements of income.

 

Our hedging policy establishes maximum limits for each counterparty to mitigate any concentration of risk.

 

Balance Sheet Hedges

 

We hedge our net recognized foreign currency denominated assets and liabilities with foreign exchange forward contracts to reduce the risk that the value of these assets and liabilities will be adversely affected by changes in exchange rates. These contracts hedge assets and liabilities that are denominated in foreign currencies and are carried at fair value as either assets or liabilities on the consolidated balance sheets with changes in the fair value recorded to net foreign currency transaction gain in our consolidated statements of income. These contracts do not subject us to material balance sheet risk due to exchange rate movements because gains and losses on these derivatives are intended to offset gains and losses on the assets and liabilities being hedged. At June 30, 2022 and December 31, 2021, the notional amounts of foreign currency forward exchange contracts outstanding not designated as hedging instruments were $145.8 million and $45.0 million, respectively.

 

Cash Flow Hedges

 

We use foreign currency exchange rate derivatives to hedge our exposure to fluctuations in exchange rates for anticipated intercompany cash transactions between Tennant Company and its subsidiaries. We enter into these foreign exchange cross-currency swaps to hedge the foreign currency denominated cash flows associated with this intercompany loan, and accordingly, they are not speculative in nature. These cross-currency swaps are designated as cash flow hedges. The hedged cash flows as of December 31, 2021 included €152.4 million of total notional values. The loan and related swaps matured in April 2022.

 

Fair Value Hedges

 

On April 5, 2022, we entered into Euro to U.S. dollar foreign exchange cross-currency swaps associated with an intercompany loan from a wholly-owned European subsidiary. We enter into these foreign exchange cross-currency swaps to hedge the foreign currency risk associated with this intercompany loan, and accordingly, they are not speculative in nature. These cross-currency swaps are designated as fair value hedges. As of June 30, 2022 these cross-currency swaps included €85.9 million of total notional value. As of June 30, 2022, the aggregated scheduled interest payments over the course of the loan and related swaps amounted to €10.9 million. The scheduled maturity and principal payment of the loan and related swaps of €75.0 million are due in April 2027.

 

Net Investment Hedges

 

On April 5, 2022, we entered into Euro to U.S. dollar foreign exchange cross-currency swaps to hedge our exposure to adverse foreign currency exchange rate movements between Tennant Company and a wholly owned European subsidiary. We enter into these fixed-to-fixed cross-currency swap agreements to protect a designated monetary amount of the Company’s net investment in its Euro functional currency subsidiary against the risk of changes in the Euro to U.S. dollar foreign exchange rate. These cross-currency swaps are designated as net investment hedges. As of June 30, 2022, the cross-currency swaps included €75.0 million of total notional values. These swaps are scheduled to mature in April 2027.  

 

13

 

The fair value of derivative instruments on our consolidated balance sheets was as follows:

 

Derivative Assets

 

Derivative Liabilities

 
 

Balance Sheet Location

 June 30, 2022  

December 31, 2021

 

Balance Sheet Location

 June 30, 2022  

December 31, 2021

 

Derivatives designated as cash flow hedges:

                  

Foreign currency forward contracts

Other current assets

 $  $ 

Other current liabilities

 $  $10.4 

Derivatives designated as fair value hedges:

                  

Cross-currency swaps

Other current assets

  1.3    

Other current liabilities

      

Cross-currency swaps

Other assets

  1.2    

Other liabilities

      

Derivatives designated as net investment hedges:

                  

Cross-currency swaps

Other current assets

  1.1    

Other current liabilities

      

Cross-currency swaps

Other assets

  0.7    

Other liabilities

      

Derivatives not designated as hedging instruments:

                  

Foreign currency forward contracts

Other current assets

  0.5   0.3 

Other current liabilities

  0.2   0.4 

 

As of June 30, 2022, we anticipate reclassifying $1.2 million of gains from accumulated other comprehensive loss to net income during the next 12 months.

 

The following tables include the amounts in the consolidated statements of income in which the effects of derivatives designated as hedging instruments are recorded:

  

Three Months Ended

  

Six Months Ended

 
  

June 30,

  

June 30,

 
  

2022

  

2021

  

2022

  

2021

 
  

Total

  

Amount of Gain (Loss) on Hedging Activity

  

Total

  

Amount of Gain (Loss) on Hedging Activity

  

Total

  

Amount of Gain (Loss) on Hedging Activity

  

Total

  

Amount of Gain (Loss) on Hedging Activity

 

Derivatives designated as cash flow hedges:

                                

Net sales

 $280.2  $  $279.1  $(0.2) $538.3  $  $542.4  $(0.3)

Interest expense, net

  (1.2)     (2.1)  0.5   (1.5)  0.7   (6.0)  1.1 

Net foreign currency transaction (loss) gain

  (1.0)  0.2      (1.9)  (0.4)  4.7   0.5   5.4 

Derivatives designated as fair value hedges:

                                

Interest expense, net

  (1.2)  0.4   (2.1)     (1.5)  0.4   (6.0)   

Net foreign currency transaction (loss) gain

  (1.0)  4.3         (0.4)  4.3   0.5    

Derivatives designated as net investment hedges: