10-K 1 form_10-k.htm FORM 10-K FILED FEBRUARY 28, 2014 Form 10-K (12/31/2013)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K
(Mark One)
[ü]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2013
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 001-16191
TENNANT COMPANY
(Exact name of registrant as specified in its charter)
Minnesota
 
41-0572550
State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization
 
Identification No.)
701 North Lilac Drive, P.O. Box 1452
Minneapolis, Minnesota 55440
(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code 763-540-1200
 
Securities registered pursuant to Section 12(b) of the Act: 
Title of each class
 
  Name of exchange on which registered
Common Stock, par value $0.375 per share
 
New York Stock Exchange
Preferred Share Purchase Rights
 
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
 
 
 
 
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined by Rule 405 of the Securities Act.
ü
Yes
 
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
 
Yes
ü
No
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.
ü
Yes
 
No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, 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).
ü
Yes
 
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
 
 
[ ]
 



Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer 
ü
 
Accelerated filer
 
 
Non-accelerated filer 
 
(Do not check if a smaller reporting company)
  Smaller reporting company
 
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
 
Yes
ü
No
The aggregate market value of the voting and non-voting common equity held by non-affiliates as of June 30, 2013, was $873,991,079.
As of January 31, 2014, there were 18,493,836 shares of Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Proxy Statement for its 2014 annual meeting of shareholders (the “2014 Proxy Statement”) are incorporated by reference in Part III.





Tennant Company
Form 10–K
Table of Contents
PART I
 
 
 
 
Page
 
 
 
 
 
 
PART II
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PART III
 
 
 
 
 
 
 
 
 
 
PART IV
 
 
 
 
 
 

2


TENNANT COMPANY
2013
ANNUAL REPORT
Form 10–K
(Pursuant to Securities Exchange Act of 1934)
PART I
ITEM 1 – Business
General Development of Business
Tennant Company, a Minnesota corporation that was founded in 1870 and incorporated in 1909, is a world leader in designing, manufacturing and marketing solutions that help create a cleaner, safer, healthier world. The Company’s floor maintenance and outdoor cleaning equipment, chemical-free and other sustainable cleaning technologies, coatings and related products are used to clean and coat surfaces in factories, transportation facilities, public venues, warehouses, retail, education, healthcare, office buildings, parking lots and streets, and other environments. Customers include building service contract cleaners to whom organizations outsource facilities maintenance, as well as end-user businesses, healthcare facilities, schools and local, state and federal governments that handle 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.
Segment and Geographic Area Financial Information
The Company has one reportable business segment. Sales to customers geographically located in the United States were $422.6 million, $406.2 million and $392.5 million for the years ended December 31, 2013, 2012 and 2011, respectively. Long-lived assets located in the United States were $82.7 million and $74.0 million as of the years ended December 31, 2013 and 2012, respectively. Additional financial information on the Company’s segment and geographic areas is provided throughout Item 8 and Note 17 of the Consolidated Financial Statements.
Principal Products, Markets and Distribution
The Company offers products and solutions mainly consisting of mechanized cleaning equipment targeted at manufacturing, warehouse and logistics, transportation facilities, public venues, retail, healthcare and education markets; parts, consumables and service maintenance and repair; business solutions such as rental and leasing programs; and sustainable cleaning technologies that reduce the need for chemicals in the cleaning process. Adjacent products include surface coatings and floor preservation products. The Company’s suite of offerings are marketed and sold under the following brands: Tennant®, Nobles®, Green Machines™, Alfa Uma Empresa Tennant™ and Orbio®. The Orbio brand of products and solutions is developed and managed by Orbio Technologies, a group created by Tennant to focus on expanding the opportunities for water-based sustainable technologies such as ec-H2O™ and Orbio 5000-Sc. Tennant Company’s products are sold through direct and distribution channels in various regions around the world. In North America, Brazil, Australia, China and most of Western Europe, products are sold through a direct sales organization and independent distributors. In more than 80 other countries, the Company relies on a broad network of independent distributors.

 
Raw Materials
The Company has not experienced any significant or unusual problems in the availability of raw materials or other product components. The Company has sole-source vendors for certain components. A disruption in supply from such vendors may disrupt the Company’s operations. However, the Company believes that it can find alternate sources in the event there is a disruption in supply from such vendors.
Intellectual Property
Although the Company considers that its patents, proprietary technologies, customer relationships, licenses, trademarks, trade names and brand names in the aggregate constitute a valuable asset, it does not regard its business as being materially dependent upon any single intellectual property.
Seasonality
Although the Company’s business is not seasonal in the traditional sense, the percentage of revenues in each quarter typically ranges from 22% to 28% of the total year. The first quarter tends to be at the low end of the range reflecting customers’ initial slow ramp up of capital purchases and the Company’s efforts to close out orders at the end of each year. The second and fourth quarters tend to be towards the high end of the range and the third quarter is typically in the middle of the range.
Working Capital
The Company funds operations through a combination of cash and cash equivalents and cash flows from operations. Wherever possible, cash management is centralized and intercompany financing is used to provide working capital to subsidiaries as needed. In addition, credit facilities are available for additional working capital needs or investment opportunities.
Major Customers
The Company sells its products to a wide variety of customers, none of which is of material importance in relation to the business as a whole. The customer base includes several governmental entities which generally have terms similar to other customers.
Backlog
The Company processes orders within two weeks on average. Therefore, no significant backlogs existed at December 31, 2013 and 2012.


3


Competition
While there is no publicly available industry data concerning market share, the Company believes, through its own market research, that it is a world-leading manufacturer of floor maintenance and cleaning equipment. Significant competitors exist in all key geographic regions. However, the key competitors vary by region. The Company competes primarily on the basis of offering a broad line of high-quality, innovative products supported by an extensive sales and service network in major markets.
Certain of the Company’s competitors initiated legal and/or regulatory challenges in 2010 and 2011 in multiple jurisdictions challenging Tennant’s advertising claims pertaining to its ec-H2O water-based technology. The majority of these claims have been closed with no material impact to the Company. The Company does not currently view the outstanding proceedings as material and does not expect the outcome to have a material adverse effect on the Company's operating results, financial condition or cash flows.
Research and Development
The Company strives to be an industry leader in innovation and is committed to investing in research and development. The Company’s Global Innovation Center in Minnesota and engineers throughout the global locations are dedicated to various activities including researching new technologies to create meaningful product differentiation, development of new products, improvements of existing product design or manufacturing processes and exploring new product applications with customers. In 2013, 2012 and 2011, the Company spent $30.5 million, $29.3 million and $27.9 million on research and development, respectively.
Environmental Compliance
Compliance with Federal, State and local provisions which have been enacted or adopted regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, has not had, and the Company does not expect it to have, a material effect upon the Company’s capital expenditures, earnings or competitive position.
Employees
The Company employed 2,931 people in worldwide operations as of December 31, 2013.
Available Information
The Company makes available free of charge, through the Company’s website at www.tennantco.com, its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable when such material is filed electronically with, or furnished to, the Securities and Exchange Commission (“SEC”).
ITEM 1A – Risk Factors
The following are significant factors known to us that could materially adversely affect our business, financial condition or operating results.
We may encounter financial difficulties if the United States or other global economies experience an additional or continued significant long-term economic downturn, decreasing the demand for our products.
Our product sales are sensitive to declines in capital spending by our customers. Decreased demand for our products could result in decreased revenues, profitability and cash flows and may impair our ability to maintain our operations and fund our obligations to others. In the event of a continued significant long-term economic downturn in the U.S. or other global economies, our revenues could decline to the point that we may have to take cost-saving measures to reduce our fixed costs to a level that is in line with a lower level of sales in order to stay in business long-term in a depressed economic environment.
 
We are subject to competitive risks associated with developing innovative products and technologies, including but not limited to, the risk that customers do not continue to pay for innovation and the risk of competitive challenges to our products and technology and the underlying intellectual property.
Our products are sold in competitive markets throughout the world. Competition is based on product features and design, brand recognition, reliability, durability, technology, breadth of product offerings, price, customer relationships and after-sale service. Although we believe that the performance and price characteristics of our products will produce competitive solutions for our customers’ needs, because of our dedication to innovation and continued investments in research and development, our products generally cost more than our competitors’ products. We believe that customers will pay for the innovations and quality in our products; however, in the current economic environment, it may be difficult for us to compete with lower cost products offered by our competitors and there can be no assurance that our customers will continue to choose our products over products offered by our competitors. If our products, markets and services are not competitive, we may experience a decline in sales, pricing and market share, which adversely impacts revenues, margin and the success of our operations.
In addition, we may be vulnerable to competitors who attempt to challenge our technology and our products or diminish the reputation of our brand, all of which could adversely affect our business. Certain of our competitors have previously initiated legal and regulatory actions against us and while we do not view these challenges to be material, defense of such claims may require substantial commitment of time and money and could potentially influence new customers from readily accepting our products, such as those with our ec-H2O technology, which could adversely affect our business.
Competitors may also initiate litigation to challenge the validity of our patents or claims, allege that we infringe upon their patents, violate our patents or they may use their resources to design comparable products that avoid infringing our patents. Regardless of whether such litigation is successful, such litigation could significantly increase our costs and divert management’s attention from the operation of our business, which could adversely affect our results of operations and financial condition.
Our ability to effectively operate our Company could be adversely affected if we are unable to attract and retain key personnel and other highly skilled employees.
Our continued success will depend on, among other things, the skills and services of our executive officers and other key personnel. Our ability to attract and retain other highly qualified managerial, technical, manufacturing, research, sales and marketing personnel also impacts our ability to effectively operate our business. As the economy recovers and companies grow and increase their hiring activities, there is an inherent risk of increased employee turnover and the loss of valuable employees in key positions, especially in emerging markets throughout the world. We believe the increased loss of key personnel within a concentrated region could adversely affect our sales growth.


4


We may not be able to upgrade and evolve our information technology systems as quickly as we wish and we may encounter difficulties as we upgrade and evolve these systems, which could adversely impact our abilities to accomplish anticipated future cost savings, better serve our customers and protect against information system disruption, corruption or intrusions.
We have many information technology systems that are important to the operation of our business and we have many information technology systems that are in need of upgrading. We may not have adequate resources to upgrade our systems at the pace which the current business environment demands. Inability to upgrade systems on a timely basis could increase our risk of a cybersecurity incident which could lead to interruptions, delays or cessation of systems, misappropriation of confidential information and corruption of data. Additionally, significantly upgrading and evolving the capabilities of our existing systems could lead to inefficient or ineffective use of our technology due to lack of training or expertise in these evolving technology systems. These factors could lead to significant expenses, adversely impacting our results of operations and hinder our ability to offer better technology solutions to our customers.
We may not be able to effectively manage organizational changes which could negatively impact our operating results or financial condition.
We are continuing to implement global standardized processes in our business despite lean staffing levels. We continue to consolidate and reallocate resources as part of our ongoing efforts to optimize our cost structure in the current economy. Our operating results may be negatively impacted if we are unable to implement new processes and manage organizational changes. In addition, if we do not effectively manage the implementation of new processes and organizational changes, we may not fully realize the anticipated savings of these actions or they may negatively impact our ability to serve our customers or meet our strategic objectives.
Inadequate or improper funding of new technologies may result in an inability to develop and commercialize new innovative products and services.
We strive to develop new and innovative products and services to differentiate ourselves in the marketplace. New product development relies heavily on our financial and resource investments in both the short term and long term. If we fail to adequately fund product development projects or fund a project which ultimately does not gain the market acceptance we anticipated, we risk not meeting our customers' expectations, which could result in decreased revenues, declines in margin and loss of market share.
Our global operations are subject to laws and regulations that impose significant compliance costs and create reputational and legal risk.
Due to the international scope of our operations, we are subject to a complex system of commercial, tax and trade regulations around the world. Recent years have seen an increase in the development and enforcement of laws regarding trade, tax compliance and anti-corruption such as the U.S. Foreign Corrupt Practices Act and similar laws from other countries. Our numerous foreign subsidiaries and affiliates are governed by laws, rules and business practices that differ from those of the U.S., but because we are a U.S. based company oftentimes they are also subject to U.S. laws, which can create a conflict. Despite our due diligence, it is possible that the activities of these entities may not comply with U.S. laws or business practices or our Business Ethics Guide. Violations of the U.S. or local laws may result in severe criminal or civil sanctions, could disrupt our business, and result in an adverse effect on our reputation, business and results of operations or financial condition. We cannot predict the nature, scope or effect of future regulatory requirements to which our operations might be subject or the manner in which existing laws might be administered or interpreted.
 
Increases in the cost, or disruption in the availability, of raw materials and components that we purchase could negatively impact our operating results or financial condition.
Our expanding geographical footprint and our continued use of sole source vendors coupled with suppliers’ potential credit issues could lead to an increased risk of a break-down in our supply chain. Purchased component parts are essential to our products and any defects in such parts could lead to quality issues, returns, production slow-downs or product liability risk. Modularization may lead to more sole sourced products and as we seek to outsource the design of certain key components, we risk loss of proprietary control and become more reliant on a sole source. The risk also exists that we will not be able to obtain adequate information from suppliers in order to comply with global disclosure requirements.
The SEC has adopted rules, with which we are required to comply, regarding the disclosure of the use of “conflict minerals” (commonly referred to as tin, tantalum, tungsten and gold) which are mined from the Democratic Republic of the Congo in products we manufacture or contract to manufacture. These minerals are present in a number of the Company's products. The discover and disclosure obligations are complex, and there is little formal guidance with respect to their application. Since our supply chain is complex, ultimately we may not be able to sufficiently discover the origin of the conflict minerals used in our products through the due diligence procedures that we implement, which may impact our ability to file a timely and/or accurate report with the SEC subjecting us to potential SEC enforcement risks. Additionally, if we are unable to or chose not to certify that our products are conflict mineral free, customers may choose not to purchase our products. Alternatively, if we chose to use only suppliers offering conflict free minerals, we cannot be sure that we will be able to obtain metals, if necessary, from such suppliers in sufficient quantities or at competitive prices. Any one or a combination of these various factors could harm our business, reduce market demand for our products, and adversely affect our profit margins, net sales, and overall financial results.
We are subject to product liability claims and product quality issues that could adversely affect our operating results or financial condition.
Our business exposes us to potential product liability risks that are inherent in the design, manufacturing and distribution of our products. If products are used incorrectly by our customers, injury may result leading to product liability claims against us. Some of our products or product improvements may have defects or risks that we have not yet identified that may give rise to product quality issues, liability and warranty claims. If product liability claims are brought against us for damages that are in excess of our insurance coverage or for uninsured liabilities and it is determined we are liable, our business could be adversely impacted. Any losses we suffer from any liability claims, and the effect that any product liability litigation may have upon the reputation and marketability of our products, may have a negative impact on our business and operating results. We could experience a material design or manufacturing failure in our products, a quality system failure, other safety issues, or heightened regulatory scrutiny that could warrant a recall of some of our products. Any unforeseen product quality problems could result in loss of market share, reduced sales, and higher warranty expense.


5


We may be unable to conduct business if we experience a significant business interruption in our computer systems, manufacturing plants or distribution facilities for a significant period of time.
We rely on our computer systems, manufacturing plants and distribution facilities to efficiently operate our business. If we experience an interruption in the functionality in any of these items for a significant period of time, we may not have adequate business continuity planning contingencies in place to allow us to continue our normal business operations on a long-term basis. Significant long-term interruption in our business could cause a decline in sales, an increase in expenses and could adversely impact our operating results.
ITEM 1B – Unresolved Staff Comments
None.
ITEM 2 – Properties
The Company’s corporate offices are owned by the Company and are located in the Minneapolis, Minnesota, metropolitan area. Manufacturing facilities are located in Minneapolis, Minnesota; Holland, Michigan; Louisville, Kentucky; Uden, The Netherlands; Falkirk, United Kingdom; São Paulo, Brazil; and Shanghai, China. Sales offices, warehouse and storage facilities are leased in various locations in North America, Europe, Japan, China, Asia, Australia, New Zealand and Latin America. The Company’s facilities are in good operating condition, suitable for their respective uses and adequate for current needs. Further information regarding the Company’s property and lease commitments is included in the Contractual Obligations section of Item 7 and in Note 13 of the Consolidated Financial Statements.
ITEM 3 – Legal Proceedings
There are no material pending legal proceedings other than ordinary routine litigation incidental to the Company’s business.
ITEM 4 – Mine Safety Disclosures
Not applicable.


6


PART II
ITEM 5 – Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
MARKET INFORMATION – Tennant's common stock is traded on the New York Stock Exchange, under the ticker symbol TNC. As of January 31, 2014, there were 412 shareholders of record. The common stock price was $64.13 per share on January 31, 2014.The accompanying chart shows the high and low sales prices for the Company’s shares for each full quarterly period over the past two years as reported by the New York Stock Exchange:
 
2013
 
2012
 
High
 
Low
 
High
 
Low
First
$
49.82

 
$
44.07

 
$
44.00

 
$
37.75

Second
51.62

 
44.50

 
48.45

 
37.82

Third
62.50

 
49.64

 
44.25

 
36.16

Fourth
68.70

 
58.05

 
43.95

 
35.30

DIVIDEND INFORMATION – Cash dividends on Tennant’s common stock have been paid for 69 consecutive years. Tennant’s annual cash dividend payout increased for the 42nd consecutive year to $0.72 per share in 2013, an increase of $0.03 per share over 2012. Dividends are generally declared each quarter. On February 19, 2014, the Company announced a quarterly cash dividend of $0.18 per share payable March 17, 2014, to shareholders of record on March 3, 2014.
DIVIDEND REINVESTMENT OR DIRECT DEPOSIT OPTIONS – Shareholders have the option of reinvesting quarterly dividends in additional shares of Company stock or having dividends deposited directly to a bank account. The Transfer Agent should be contacted for additional information.
TRANSFER AGENT AND REGISTRAR – Shareholders with a change of address or questions about their account may contact:
Wells Fargo Bank, N.A.
Shareowner Services
P.O. Box 64874
St. Paul, MN 55164-0854
(800) 468-9716
EQUITY COMPENSATION PLAN INFORMATION – Information regarding equity compensation plans required by Regulation S-K Item 201(d) is incorporated by reference in Item 12 of this annual report on Form 10-K from the 2014 Proxy Statement.
SHARE REPURCHASES – On April 25, 2012, the Board of Directors authorized the repurchase of 1,000,000 shares of our common stock. This was in addition to the 618,050 shares remaining under our current repurchase program at that time. 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. Our credit agreements and Private Shelf Agreement restrict the payment of dividends or repurchasing of stock if, after giving effect to such payments, our leverage ratio is greater than 2.00 to 1, in such case limiting such payments to an amount ranging from $50.0 million to $75.0 million during any fiscal year.
For the Quarter Ended
December 31, 2013
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
October 1–31, 2013
15,778

 
$
60.42

 
15,687

 
706,450

November 1–30, 2013
75,847

 
60.08

 
75,847

 
630,603

December 1–31, 2013

 

 

 
630,603

Total
91,625

 
$
60.14

 
91,534

 
630,603

(1) Includes 91 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.

7


STOCK PERFORMANCE GRAPH – The following graph compares the cumulative total shareholder return on Tennant’s common stock to two indices: S&P SmallCap 600 and Morningstar Industrials Sector. The graph below compares the performance for the last five fiscal years, assuming an investment of $100 on December 31, 2008, including the reinvestment of all dividends.

5-YEAR CUMULATIVE TOTAL RETURN COMPARISON
 
2008
 
2009
 
2010
 
2011
 
2012
 
2013
Tennant Company
$100
 
$175
 
$262
 
$269
 
$310
 
$484
S&P SmallCap 600
$100
 
$126
 
$159
 
$160
 
$186
 
$263
Morningstar Industrials Sector
$100
 
$124
 
$154
 
$153
 
$176
 
$250

8


ITEM 6 – Selected Financial Data
(In thousands, except shares and per share data)
Years Ended December 31
2013
 
 
2012
 
 
2011
 
 
2010
 
 
2009
 
Financial Results:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Sales
$
752,011

 
 
$
738,980

 
 
$
753,998

 
 
$
667,667

 
 
$
595,875

 
Cost of Sales
426,103

 
 
413,684

 
 
434,817

(3)
 
383,341

(4)
 
349,767

 
Gross Margin - %
43.3

 
 
44.0

 
 
42.3

 
 
42.6

 
 
41.3

 
Research and Development Expense
30,529

 
 
29,263

 
 
27,911

 
 
25,957

 
 
22,978

 
% of Net Sales
4.1

 
 
4.0

 
 
3.7

 
 
3.9

 
 
3.9

 
Selling and Administrative Expense
232,976

(1)
 
234,114

(2)
 
241,625

(3)
 
221,235

(4)
 
245,623

(5)
% of Net Sales
31.0

 
 
31.7

 
 
32.0

 
 
33.1

 
 
41.2

 
Gain on Sale of Business

 
 
(784
)
(2)
 

 
 

 
 

 
% of Net Sales

 
 
(0.1
)
 
 

 
 

 
 

 
Profit (Loss) from Operations
62,403

(1)
 
62,703

(2)
 
49,645

(3)
 
37,134

(4)
 
(22,493
)
(5)
% of Net Sales
8.3

 
 
8.5

 
 
6.6

 
 
5.6

 
 
(3.8
)
 
Total Other Expense, Net
(2,525
)
 
 
(2,813
)
 
 
(915
)
 
 
(2,407
)
 
 
(1,827
)
 
Profit (Loss) Before Income Taxes
59,878

(1)
 
59,890

(2)
 
48,730

(3)
 
34,727

(4)
 
(24,320
)
(5)
% of Net Sales
8.0

 
 
8.1

 
 
6.5

 
 
5.2

 
 
(4.1
)
 
Income Tax Expense (Benefit)
19,647

(1)
 
18,306

(2)
 
16,017

(3)
 
(76
)
(4)
 
1,921

(5)
Effective Tax Rate - %
32.8

 
 
30.6

 
 
32.9

 
 
(0.2
)
 
 
7.9

 
Net Earnings (Loss)
40,231

(1)
 
41,584

(2)
 
32,713

(3)
 
34,803

(4)
 
(26,241
)
(5)
% of Net Sales
5.3

 
 
5.6

 
 
4.3

 
 
5.2

 
 
(4.4
)
 
Per Share Data:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic Net Earnings (Loss)
$
2.20

(1)
 
$
2.24

(2)
 
$
1.74

(3)
 
$
1.85

(4)
 
$
(1.42
)
(5)
Diluted Net Earnings (Loss)
$
2.14

(1)
 
$
2.18

(2)
 
$
1.69

(3)
 
$
1.80

(4)
 
$
(1.42
)
(5)
Diluted Weighted Average Shares
18,833,453

 
 
19,102,016

 
 
19,360,428

 
 
19,332,103

 
 
18,507,772

 
Cash Dividends
$
0.72

 
 
$
0.69

 
 
$
0.68

 
 
$
0.59

 
 
$
0.53

 
Financial Position:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Assets
$
456,306

 
 
$
420,760

 
 
$
424,262

 
 
$
403,668

 
 
$
377,726

 
Total Debt
31,803

 
 
32,323

 
 
36,455

 
 
30,828

 
 
34,211

 
Total Shareholders’ Equity
263,846

 
 
235,054

 
 
220,852

 
 
216,133

 
 
184,279

 
Current Ratio
2.4

 
 
2.2

 
 
2.2

 
 
2.1

 
 
1.9

 
Debt-to-Capital Ratio
10.8
%
 
 
12.1
%
 
 
14.2
%
 
 
12.5
%
 
 
15.7
%
 
Cash Flows:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Cash Provided by Operations
$
59,814

 
 
$
47,566

 
 
$
56,909

 
 
$
42,530

 
 
$
75,185

 
Capital Expenditures, Net of Disposals
(14,655
)
 
 
(14,595
)
 
 
(13,301
)
 
 
(9,934
)
 
 
(11,172
)
 
Free Cash Flow
45,159

 
 
32,971

 
 
43,608

 
 
32,596

 
 
64,013

 
Other Data:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Depreciation and Amortization
$
20,246

 
 
$
20,872

 
 
$
21,418

 
 
$
21,192

 
 
$
22,803

 
Number of employees at year-end
2,931

 
 
2,816

 
 
2,865

 
 
2,793

 
 
2,786

 
The results of operations from our 2011 and 2009 acquisitions have been included in the Consolidated Financial Statements, as well as the Selected Financial Data presented above, since each of their respective dates.
(1) 2013 includes restructuring charges of $3,017 pre-tax ($2,938 after-tax or $0.15 per diluted share) and a tax benefit of $582 (or $0.03 per diluted share) related to the retroactive reinstatement of the 2012 U.S. Federal Research and Development ("R&D") Tax Credit.
(2) 2012 includes a gain on sale of business of $784 pre-tax ($508 after-tax or $0.03 per diluted share), a restructuring charge of $760 pre-tax ($670 after-tax or $0.04 per diluted share) and tax benefits from an international entity restructuring of $2,043 (or $0.11 per diluted share).
(3) 2011 includes a Product Line Obsolescence charge of $4,300 pre-tax ($3,811 after-tax or $0.20 per diluted share) and an international executive severance charge of $1,217 (or $0.06 per diluted share).

9


(4) 2010 includes a tax benefit from the international entity restructuring of $10,913 (or $0.56 per diluted share), a workforce redeployment charge of $1,671 pre-tax ($1,196 after-tax or $0.06 per diluted share), inventory revaluation from change in functional currency designation due to international entity restructuring of $647 pre-tax ($453 after-tax or $0.02 per diluted share) and a revision of our 2008 workforce reduction reserve of $277 pre-tax ($173 after-tax or $0.01 per diluted share).
(5) 2009 includes a goodwill impairment charge of $43,363 pre-tax ($42,289 after-tax or $2.29 per diluted share), a benefit from a revision during the first quarter of 2009 to the 2008 workforce reduction charge of $1,328 pre-tax ($1,249 after-tax or $0.07 per diluted share) and a net tax benefit, primarily from a United Kingdom business reorganization, of $1,864 (or $0.10 per diluted share).
ITEM 7 – 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 help create a cleaner, safer, healthier world. Our products include equipment for maintaining surfaces in industrial, commercial and outdoor environments; chemical-free and other sustainable cleaning technologies; and coatings for protecting, repairing and upgrading floors and other surfaces. We sell our products through our direct sales and service organization and a network of authorized distributors worldwide. Geographically, our customers are located in North America, Latin America, Europe, the Middle East, Africa and Asia Pacific. We strive to be an innovator in our industry through our commitment to understanding our customers’ needs and using our expertise to create innovative products and solutions.
Net Sales in 2013 totaled $752.0 million, up from $739.0 million in the prior year primarily due to increased sales of industrial equipment and high demand for newly introduced products which were somewhat offset by lower sales of city cleaning equipment. 2013 organic sales growth, excluding the impact of foreign currency exchange, was up approximately 2.8% with growth in North America, Latin America and Asia Pacific being somewhat offset by declines in Europe due to challenging economic conditions. 2013 Gross Profit margin decreased 70 basis points to 43.3% from 44.0% in 2012 due to changes in selling channel mix and mix of products sold. Selling and Administrative Expense (“S&A Expense”) decreased 0.5%, or 70 basis points as a percentage of Net Sales, from $234.1 million in 2012 to $233.0 million in 2013 due to continued tight cost controls and improved operating leverage. Operating Profit decreased 0.5% and Operating Profit margin declined 20 basis points to 8.3% in 2013 from 8.5% in 2012 due to two restructuring charges taken during 2013 totaling $3.0 million and increased investment in R&D activities. Net Earnings for 2013 were favorably impacted by a tax benefit of $0.6 million related to the 2012 R&D tax credit which was retroactively enacted in January of 2013.
Net Earnings for 2012 were $8.9 million greater than 2011 despite a Net Sales decline of 2.0%. 2012 Gross Profit margin increased 170 basis points to 44.0% from 42.3% in 2011 due to favorable product mix, stable commodity costs and production efficiencies. Net Sales in 2012 totaled $739.0 million, which was down from $754.0 million in the prior year primarily due to lower sales unit volume in Europe stemming from weak economic conditions. 2012 organic sales growth, excluding the impact of foreign currency exchange, was essentially flat with growth in the Americas and emerging markets being offset by declines in the mature international markets. S&A Expense decreased 3.1%, or 30 basis points as a percentage of Net Sales, from $241.6 million in 2011 to $234.1 million in 2012 due to continued tight cost controls and improved operating leverage. Operating Profit increased 26.3% and Operating Profit margin improved 190 basis points to 8.5% in 2012 from 6.6% in 2011 due to higher Gross Profits and improved operating leverage. Net Earnings for 2012 were also favorably impacted by a $2.0 million tax benefit from an international entity restructuring.
Tennant continues to invest in innovative product development with 4.1% of 2013 Net Sales spent on R&D. During 2013 there were increased investments in developing innovative new products for our traditional core business, as well as our Orbio business.
 
We ended 2013 with a Debt-to-Capital ratio of 10.8%, $81.0 million in Cash and Cash Equivalents compared to $53.9 million at the end of 2012, and Shareholders’ Equity of $263.8 million. During 2013, we generated operating cash flows of $59.8 million. Total debt was $31.8 million as of December 31, 2013 compared to $32.3 million at the end of 2012.
Historical Results
The following table compares the historical results of operations for the years ended December 31, 2013, 2012 and 2011 in dollars and as a percentage of Net Sales (in thousands, except per share amounts and percentages):
 
2013
 
%
 
2012
 
%
 
2011
 
%
Net Sales
$
752,011

 
100.0

 
$
738,980

 
100.0

 
$
753,998

 
100.0

Cost of Sales
426,103

 
56.7

 
413,684

 
56.0

 
434,817

 
57.7

Gross Profit
325,908

 
43.3

 
325,296

 
44.0

 
319,181

 
42.3

Operating Expense:
 
 
 
 
 
 
 
 
 
 
 
Research and Development Expense
30,529

 
4.1

 
29,263

 
4.0

 
27,911

 
3.7

Selling and Administrative Expense
232,976

 
31.0

 
234,114

 
31.7

 
241,625

 
32.0

Gain on Sale of Business

 

 
(784
)
 
(0.1
)
 

 

Total Operating Expenses
263,505

 
35.0

 
262,593

 
35.5

 
269,536

 
35.7

Profit from Operations
62,403

 
8.3

 
62,703

 
8.5

 
49,645

 
6.6

Other Income (Expense):
 
 
 
 
 
 
 
 
 
 
 
Interest Income
390

 
0.1

 
1,069

 
0.1

 
752

 
0.1

Interest Expense
(1,761
)
 
(0.2
)
 
(2,517
)
 
(0.3
)
 
(2,238
)
 
(0.3
)
Net Foreign Currency Transaction (Losses) Gains
(671
)
 
(0.1
)
 
(1,403
)
 
(0.2
)
 
559

 
0.1

Other (Expense) Income, Net
(483
)
 
(0.1
)
 
38

 

 
12

 

Total Other Expense, Net
(2,525
)
 
(0.3
)
 
(2,813
)
 
(0.4
)
 
(915
)
 
(0.1
)
Profit Before Income Taxes
59,878

 
8.0

 
59,890

 
8.1

 
48,730

 
6.5

Income Tax Expense
19,647

 
2.6

 
18,306

 
2.5

 
16,017

 
2.1

Net Earnings
$
40,231

 
5.3

 
$
41,584

 
5.6

 
$
32,713

 
4.3

Net Earnings per Diluted Share
$
2.14

 
 
 
$
2.18

 
 

 
$
1.69

 
 



10


Consolidated Financial Results
Net Earnings for 2013 were $40.2 million, or $2.14 per diluted share, compared to $41.6 million, or $2.18 per diluted share for 2012. Net Earnings were impacted by:
An increase in Net Sales of 1.8%, primarily due to increased sales of industrial equipment and high demand for newly introduced products which were somewhat offset by lower sales of city cleaning equipment.
A 70 basis point decrease in Gross Profit margin due to changes in selling channel mix and mix of products sold.
A decrease in S&A Expense as a percentage of Net Sales of 70 basis points due to continued tight cost controls and improved operating efficiencies.
Two restructuring actions totaling $3.0 million (pre-tax) during 2013 or 40 basis points as a percentage of Net Sales.
A $0.6 million tax benefit related to the 2012 R&D tax credit which was retroactively enacted in January 2013.
Net Earnings for 2012 were $41.6 million, or $2.18 per diluted share, compared to $32.7 million, or $1.69 per diluted share for 2011. Net Earnings were impacted by:
A decrease in Net Sales of 2.0%, primarily due to lower sales unit volume in Europe stemming from weak economic conditions.
A 170 basis point increase in Gross Profit margin due to favorable product mix, stable commodity costs and production efficiencies.
A decrease in S&A Expense as a percentage of Net Sales of 30 basis points due to continued tight cost controls and improved operating efficiencies.
A tax benefit from an international entity restructuring contributed $0.11 per diluted share.
Net Sales
In 2013, consolidated Net Sales were $752.0 million, an increase of 1.8% as compared to 2012. Consolidated Net Sales were $739.0 million in 2012, a decrease of 2.0% as compared to 2011.
The components of the consolidated Net Sales change for 2013 as compared to 2012, and 2012 as compared to 2011, were as follows:
Growth Elements
2013 v. 2012
 
2012 v. 2011
Organic Growth:
 
 
 
Volume
1.8%
 
(1.0%)
Price
1.0%
 
1.0%
Organic Growth
2.8%
 
0%
Foreign Currency
(1.0%)
 
(2.0%)
Total
1.8%
 
(2.0%)
The 1.8% increase in consolidated Net Sales for 2013 as compared to 2012 was primarily due to sales volume increases due to increased sales of industrial equipment and demand for newly introduced products.
The 2.0% decrease in consolidated Net Sales for 2012 as compared to 2011 was primarily due to the impact of an unfavorable foreign currency exchange.
 
The following table sets forth annual Net Sales by operating segment and the related percentage change from the prior year (in thousands, except percentages):
 
2013
 
%
 
2012
 
%
 
2011
Americas
$
514,544

 
4.7

 
$
491,661

 
2.1

 
$
481,426

Europe, Middle East and Africa
157,208

 
(5.4
)
 
166,208

 
(11.8
)
 
188,338

Asia Pacific
80,259

 
(1.1
)
 
81,111

 
(3.7
)
 
84,234

Total
$
752,011

 
1.8

 
$
738,980

 
(2.0
)
 
$
753,998

Americas – In 2013, Americas Net Sales increased 4.7% to $514.5 million as compared with $491.7 million in 2012. The primary driver of the increase in Net Sales was attributable to higher sales of equipment in North America, including scrubbers equipped with ec-H2O technology and sweepers, and continued growth in Latin America. Unfavorable direct foreign currency translation exchange effects decreased Net Sales by approximately 1.0%.
In 2012, Americas Net Sales increased 2.1% to $491.7 million as compared with $481.4 million in 2011. The primary driver of the increase in Net Sales was attributable to sales unit volume increases with higher sales to strategic accounts, continued growth of scrubbers equipped with our ec-H2O technology and double-digit growth in Latin America. Unfavorable direct foreign currency translation exchange effects decreased Net Sales by approximately 1.0%.
Europe, Middle East and Africa – Europe, Middle East and Africa (“EMEA”) Net Sales in 2013 decreased 5.4% to $157.2 million as compared to 2012 Net Sales of $166.2 million. An organic sales decrease of approximately 7.4% was primarily due to decreases in sales of city cleaning equipment due to tight municipal spending in Europe, somewhat offset by increased sales to strategic accounts. Favorable direct foreign currency exchange effects increased EMEA Net Sales by approximately 2.0% in 2013.
EMEA Net Sales in 2012 decreased 11.8% to $166.2 million as compared to 2011 Net Sales of $188.3 million. An organic sales decrease of approximately 6.3% was primarily due to sales unit volume decreases, particularly industrial equipment, due to continued economic uncertainty. Unfavorable direct foreign currency exchange effects decreased EMEA Net Sales by approximately 5.5% in 2012.
Asia Pacific – Asia Pacific Net Sales in 2013 decreased 1.1% to $80.3 million as compared to 2012 Net Sales of $81.1 million. An organic sales increase of approximately 4.4% was primarily due to increased sales of equipment in China and also sales growth in Australia and Japan. Unfavorable direct foreign currency exchange effects decreased Net Sales by approximately 5.5% in 2013.
Asia Pacific Net Sales in 2012 decreased 3.7% to $81.1 million over 2011 Net Sales of $84.2 million. An organic sales decrease of approximately 4.2% was primarily due to sales unit volume decreases in mature markets, particularly Australia, somewhat offset by growth in China. Favorable direct foreign currency exchange effects increased Net Sales by approximately 0.5% in 2012.
Gross Profit
Gross Profit margin was 43.3% in 2013, a decrease of 70 basis points as compared to 2012. Gross Profit margin in 2013 was unfavorably impacted by changes in selling channel mix and the mix of products sold.
Gross Profit margin was 44.0% in 2012, an increase of 170 basis points as compared to 2011. Gross Profit margin in 2012 was favorably impacted by favorable product mix, stable commodity costs and production efficiencies.


11


Operating Expenses
Research and Development Expense – R&D Expense increased $1.3 million, or 4.3%, in 2013 as compared to 2012. As a percentage of Net Sales, 2013 R&D Expense increased 10 basis points to 4.1% in 2013 from 4.0% in the prior year. R&D Expense increased in 2013 as we made additional investments in developing innovative new products for our traditional core business, as well as our Orbio business.
R&D Expense increased $1.4 million, or 4.8%, in 2012 as compared to 2011. As a percentage of Net Sales, 2012 R&D Expense increased 30 basis points to 4.0% in 2012 from 3.7% in the prior year. R&D Expense increased in 2012 as we made additional investments in our chemical-free and other sustainable cleaning technologies as well as our core business including the work to redesign our large equipment portfolio.
Selling and Administrative Expense – S&A Expense decreased by $1.1 million, or 0.5%, in 2013 compared to 2012. As a percentage of Net Sales, 2013 S&A Expense decreased 70 basis points to 31.0% due to continued tight cost controls and improved operating efficiencies. Included in the lower S&A Expense during 2013 were two restructuring actions totaling $3.0 million, or 40 basis points as a percentage of Net Sales.
S&A Expense decreased by $7.5 million, or 3.1%, in 2012 compared to 2011. As a percentage of Net Sales, 2012 S&A Expense decreased 30 basis points to 31.7% due to continued tight cost controls and improved operating efficiencies.
Other Income (Expense)
Interest Income – Interest Income was $0.4 million in 2013, a decrease of $0.7 million from 2012. The decrease between 2013 and 2012 was due to decreases in interest rates on cash invested.
Interest Income was $1.1 million in 2012, an increase of $0.3 million from 2011. The increase between 2012 and 2011 was due to an increase in cash invested.
Interest Expense – Interest Expense was $1.8 million in 2013 as compared to $2.5 million in 2012. This decrease was primarily due to lower interest rates on long-term adjustable rate borrowings.
Interest Expense was $2.5 million in 2012 as compared to $2.2 million in 2011. This increase was primarily due to a higher interest rate related to long-term fixed rate borrowings initiated in 2011.
Net Foreign Currency Transaction (Losses) Gains – Net Foreign Currency Transaction Losses were $0.7 million in 2013 as compared to Losses of $1.4 million in 2012. The favorable decrease from the prior year was due to fluctuations in foreign currency rates in the normal course of business.
Net Foreign Currency Transaction Losses were $1.4 million in 2012 as compared to Gains of $0.6 million in 2011. The unfavorable decrease from the prior year was due to fluctuations in foreign currency rates in the normal course of business.
Income Taxes
The overall effective income tax rate was 32.8%, 30.6% and 32.9% in 2013, 2012 and 2011, respectively. The tax expense for 2013 includes a $0.1 million tax benefit associated with restructuring charges of $3.0 million. The tax expense also includes a first quarter discrete tax benefit of $0.6 million for the enactment of the Federal R&D credit retroactively impacting the tax year ended December 31, 2012. Excluding these special items, the overall effective tax rate would have been 32.3%.
The tax expense for 2012 included a $2.0 million tax benefit associated with an international entity restructuring which materially decreased the overall effective tax rate. Excluding this tax benefit, the overall effective tax rate would have been 34.0%.
 
The decrease in the 2013 overall effective tax rate as compared to the prior year, excluding the effect of these special items, was primarily related to the mix in our full year taxable earnings by country and more favorable discrete items in 2013.
The 2011 net tax expense included only a $0.5 million tax benefit in the second quarter associated with the $5.5 million pre-tax charges related to Hofmans product obsolescence and international executive severance, materially impacting the overall effective rate. Excluding these charges, the 2011 overall rate would have been 30.4%.
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 U.S. taxation is not being considered. It is management's belief that reinvesting these earnings outside the U.S. is the most efficient use of capital.
Liquidity and Capital Resources
Liquidity – Cash and Cash Equivalents totaled $81.0 million at December 31, 2013, as compared to $53.9 million as of December 31, 2012. Cash and Cash Equivalents held by our foreign subsidiaries totaled $13.4 million as of December 31, 2013 as compared to $10.6 million as of December 31, 2012. Wherever possible, cash management is centralized and intercompany financing is used to provide working capital to subsidiaries as needed. Our current ratio was 2.4 as of December 31, 2013 and 2.2 as of December 31, 2012, and our working capital was $183.8 million and $151.8 million, respectively.
Our Debt-to-Capital ratio was 10.8% as of December 31, 2013, compared with 12.1% as of December 31, 2012. Our capital structure was comprised of $31.8 million of Debt and $263.8 million of Shareholders’ Equity as of December 31, 2013.
Cash Flow Summary – Cash provided by (used in) our operating, investing and financing activities is summarized as follows (in thousands):
 
2013
 
2012
 
2011
Operating Activities
$
59,814

 
$
47,566

 
$
56,909

Investing Activities:
 
 
 
 
 
Purchases of Property, Plant and Equipment, Net of Disposals
(14,655
)
 
(14,595
)
 
(13,301
)
Acquisitions of Businesses, Net of Cash Acquired
(750
)
 
(750
)
 
(2,917
)
Proceeds from Sale of Business
4,261

 
1,014

 

(Increase) Decrease in Restricted Cash
(253
)
 
3,089

 
(3,279
)
Financing Activities
(21,495
)
 
(34,932
)
 
(24,247
)
Effect of Exchange Rate Changes on Cash and Cash Equivalents
122

 
209

 
(355
)
Net Increase in Cash and Cash Equivalents
$
27,044

 
$
1,601

 
$
12,810

Operating Activities – Cash provided by operating activities was $59.8 million in 2013, $47.6 million in 2012 and $56.9 million in 2011. In 2013, cash provided by operating activities was driven by $40.2 million of Net Earnings and an increase in Accounts Payable, somewhat offset by increases in Inventories and Receivables. The increase in Inventories was in support of the launches of many new products. The increase in Receivables was due to a variety of terms offered and mix of business. Cash provided by operating activities was $12.2 million higher in 2013 as compared to 2012 primarily due to a $15.0 million discretionary contribution made to the U.S. Pension Plan in 2012 and there were no contributions made in 2013.


12


In 2012, cash provided by operating activities was driven by $41.6 million of Net Earnings and an increase in Accounts Receivable, somewhat offset by a decrease in accrued Employee Compensation and Benefits. The increase in Accounts Receivables was due to a variety of terms offered and mix of business. Cash provided by operating activities was $9.3 million lower in 2012 as compared to 2011 primarily due to a $15.0 million discretionary contribution made to the U.S. Pension Plan in December 2012.
For 2013, we used operating profit and operating profit margin as key indicators of financial performance and the primary metrics for performance-based incentives.
Two metrics used by management to evaluate how effectively we utilize our net assets are “Accounts Receivable Days Sales Outstanding” (“DSO”) and “Days Inventory on Hand” (“DIOH”), on a first-in, first-out (“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 December 31 were as follows (in days):
 
2013
 
2012
 
2011
DSO
61
 
60
 
58
DIOH
81
 
78
 
88
DSO increased 1 day in 2013 as compared to 2012 primarily due to the variety of terms offered and mix of business having a larger unfavorable impact than the favorable trend of continued proactive management of our receivables by enforcing tighter credit limits and continuing to successfully collect past due balances.
DIOH increased 3 days in 2013 as compared to 2012 primarily due to increased levels of inventory in support of the launches of many new products somewhat offset by progress from inventory reduction initiatives.
Investing Activities – Net cash used for investing activities was $11.4 million in 2013, $11.2 million in 2012 and $19.5 million in 2011. Net capital expenditures were $14.7 million during 2013 as compared to $14.6 million in 2012 and $13.3 million in 2011. Our 2013 capital expenditures included investments in tooling related to new product development, and manufacturing and information technology process improvement projects. Proceeds from Sale of Business provided $4.3 million in 2013 and $1.0 million in 2012.
Capital expenditures in 2012 included tooling related to new product development, manufacturing equipment and information technology process improvement projects. Capital expenditures in 2011 included tooling related to new product development, investments in our facilities including the new plant in China, technology upgrades, and manufacturing and lab equipment.
Financing Activities – Net cash used for financing activities was $21.5 million in 2013, $34.9 million in 2012 and $24.2 million in 2011. In 2013, payments of dividends used $13.2 million and payments of Long-Term Debt used $1.1 million, partially offset by Short-Term Borrowings of $1.5 million. In 2012, payments of Long-Term Debt used $3.0 million and payments of dividends used $12.8 million. In 2011, payments of Long-Term Debt used $19.3 million, which was more than offset by a $20.0 million issuance of fixed rate Long-Term Debt, and payments of dividends used $12.9 million. Our annual cash dividend payout increased for the 42nd consecutive year to $0.72 per share in 2013, an increase of $0.03 per share over 2012.
Proceeds from the issuance of Common Stock generated $8.3 million in 2013, $4.2 million in 2012 and $4.2 million in 2011.
On April 25, 2012, the Board of Directors authorized the repurchase of 1,000,000 shares of our common stock. This was in addition to the 618,050 shares remaining under our current repurchase program at that time. At December 31, 2013, there were 630,603 remaining shares authorized for repurchase.
 
There were 434,118 shares repurchased in 2013 in the open market, 621,340 shares repurchased in 2012 and 469,304 shares repurchased during 2011, at average repurchase prices of $51.04 during 2013, $40.78 during 2012 and $37.51 during 2011. Our Credit Agreement with JPMorgan Chase Bank limits the payment of dividends and repurchases of stock to amounts ranging from $50.0 million to $75.0 million per fiscal year based on our leverage ratio after giving effect to such payments for the life of the agreement.
Indebtedness – As of December 31, 2013, we had committed lines of credit totaling approximately $125.0 million and uncommitted lines of credit totaling approximately $87.8 million. There were $10.0 million outstanding borrowings under our JPMorgan facility, $20.0 million outstanding borrowings under our Prudential facility and $1.5 million outstanding under the facility with HSBC Shanghai as of December 31, 2013. In addition, we had stand alone letters of credit of approximately $2.1 million outstanding and bank guarantees in the amount of approximately $0.5 million. Commitment fees on unused lines of credit for the year ended December 31, 2013 were $0.3 million.
Our most restrictive covenants are part of our Credit Agreement with JPMorgan, which are the same covenants in our Shelf Agreement with Prudential described below, and require us to maintain an indebtedness to EBITDA ratio of not greater than 3.00 to 1 and to maintain an EBITDA to interest expense ratio of no less than 3.50 to 1 as of the end of each quarter. As of December 31, 2013, our indebtedness to EBITDA ratio was 0.41 to 1 and our EBITDA to interest expense ratio was 48.00 to 1.
Credit Facilities
JPMorgan Chase Bank, National Association
On April 25, 2013, we entered into Amendment No. 1 to our 2011 Credit Agreement which amends the Credit Agreement, dated as of May 5, 2011, with JPMorgan Chase Bank, N. A. (“JPMorgan”), as administrative agent and collateral agent, U.S. Bank National Association, as syndication agent, Wells Fargo Bank, National Association, and RBS Citizens, N.A., as co-documentation agents, and the Lenders (including JPMorgan) from time to time party thereto (the “2011 Credit Agreement”). Under the original terms, the 2011 Credit Agreement provides us and certain of our foreign subsidiaries access to a senior unsecured credit facility until May 5, 2016, in the amount of $125.0 million, with an option to expand by up to $62.5 million to a total of $187.5 million. Borrowings may be denominated in U.S. Dollars or certain other currencies. The 2011 Credit Agreement contains a $100.0 million sublimit on borrowings by foreign subsidiaries.
Under the original terms of the 2011 Credit Agreement, the fee for committed funds ranges from an annual rate of 0.25% to 0.40%, depending on our leverage ratio. Eurocurrency borrowings under the 2011 Credit Agreement bear interest at a rate per annum equal to adjusted LIBOR plus an additional spread of 1.50% to 2.10%, depending on our leverage ratio. Alternate Base Rate (“ABR”) borrowings bear interest at a rate per annum equal to the greatest of (a) the prime rate, (b) the federal funds rate plus 0.50% and (c) the adjusted LIBOR rate for a one month period plus 1.0%, plus, in any such case, an additional spread of 0.50% to 1.10%, depending on our leverage ratio.


13


Effective April 25, 2013, Amendment No. 1 to the 2011 Credit Agreement principally provides the following changes to the 2011 Credit Agreement:
extends the maturity date of the 2011 Credit Agreement to March 1, 2018;
changes the fees for committed funds under the 2011 Credit Agreement to an annual rate ranging from 0.20% to 0.35%, depending on our leverage ratio;
changes the per annum interest rate on Eurocurrency borrowings to adjusted LIBOR plus an additional spread of 1.30% to 1.90%, depending on our leverage ratio;
changes the ABR rate at which borrowings bear interest to a rate per annum equal to the greatest of (a) the prime rate, (b) the federal funds rate plus 0.50% and (c) the adjusted LIBOR rate for a one month period plus 1.0%, plus, in any such case, an additional spread of 0.30% to 0.90%, depending on our leverage ratio; and
changes related to new or recently revised financial regulations.
The 2011 Credit Agreement gives the Lenders a pledge of 65% of the stock of certain first tier foreign subsidiaries. The obligations under the 2011 Credit Agreement are also guaranteed by certain of our first tier domestic subsidiaries.
The 2011 Credit Agreement contains customary representations, warranties and covenants, including but not limited to covenants restricting our ability to incur indebtedness and liens and merge or consolidate with another entity. Further, the 2011 Credit Agreement contains the following covenants:
a covenant requiring us to maintain an indebtedness to EBITDA ratio as of the end of each quarter of not greater than 3.00 to 1;
a covenant requiring us to maintain an EBITDA to interest expense ratio as of the end of each quarter of no less than 3.50 to 1;
a covenant restricting us from paying dividends or repurchasing stock if, after giving effect to such payments, our leverage ratio is greater than 2.00 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; and
a covenant restricting our ability to make acquisitions, if, after giving pro-forma effect to such acquisition, our leverage ratio is greater than 2.75 to 1, in such case limiting acquisitions to $25.0 million.
As of December 31, 2013 we were in compliance with all covenants under the Credit Agreement. There was $10.0 million in outstanding borrowings under this facility at December 31, 2013, with a weighted average interest rate of 1.47%.
Prudential Investment Management, Inc.
On July 29, 2009, we entered into a Private Shelf Agreement (the “Shelf Agreement”) with Prudential Investment Management, Inc. (“Prudential”) and Prudential affiliates from time to time party thereto. The Shelf Agreement provides us and our subsidiaries access to an uncommitted, senior secured, maximum aggregate principal amount of $80.0 million of debt capital. The Shelf Agreement contains 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. The Shelf Agreement limits the payment of dividends or repurchases of stock to an amount ranging from $12.0 million to $40.0 million based on our leverage ratio after giving effect to such payments.

 
On May 5, 2011, we entered into Amendment No. 1 to our Private Shelf Agreement (the “Amendment”).
The Amendment principally provides the following changes to the Shelf Agreement:
elimination of the security interest in our personal property and subsidiaries;
an amendment to the maximum leverage ratio to not greater than 3.00 to 1 for any period ending on or after March 31, 2011;
an amendment to our restriction regarding the payment of dividends or repurchase of stock to restrict us from paying dividends or repurchasing stock if, after giving effect to such payments, our leverage ratio is greater than 2.00 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; and
an amendment to Permitted Acquisitions restricting our ability to make acquisitions, if, after giving pro-forma effect to such acquisition, our leverage ratio is greater than 2.75 to 1, in such case limiting acquisitions to $25.0 million.
On July 24, 2012, we entered into Amendment No. 2 to our Private Shelf Agreement (“Amendment No. 2”), which amends the Shelf Agreement. The principal change effected by Amendment No. 2 is an extension of the Issuance Period for Shelf Notes under the Shelf Agreement. The Issuance Period now expires on July 24, 2015.
As of December 31, 2013, there was $20.0 million in outstanding borrowings under this facility; the $10.0 million Series A notes issued in March 2011 with a fixed interest rate of 4.00% and a 7 year term serially maturing from 2014 to 2018; and the $10.0 million Series B notes issued in June 2011 with a fixed interest rate of 4.10% and a 10 year term serially maturing from 2015 to 2021. We were in compliance with all covenants of the Shelf Agreement as of December 31, 2013.
The Royal Bank of Scotland Citizens, N.A.
On September 14, 2010, we entered into an overdraft facility with The Royal Bank of Scotland Citizens, N.A. in the amount of 2.0 million Euros or approximately $2.8 million. There was no balance outstanding on this facility as of December 31, 2013.
HSBC Bank (China) Company Limited, Shanghai Branch
On June 20, 2012, we entered into a banking facility with the HSBC Bank (China) Company Limited, Shanghai Branch in the amount of $5.0 million. There was $1.5 million in outstanding borrowings on this facility as of December 31, 2013, with a fixed interest rate of 5.1%.
Notes Payable
On May 31, 2011, we incurred $1.5 million in debt related to installment payments due to the former owners of Water Star, Inc. ("Water Star") in connection with our acquisition of Water Star, of which none remains outstanding as of December 31, 2013.
Collateralized Borrowings
Collateralized borrowings represent deferred sales proceeds on certain leasing transactions with third-party leasing companies. These transactions are accounted for as borrowings, with the related assets capitalized as property, plant and equipment and depreciated straight-line over the lease term.


14


Capital Lease Obligations
Capital lease obligations outstanding are primarily related to sale-leaseback transactions with third-party leasing companies whereby we sell our manufactured equipment to the leasing company and lease it back. The equipment covered by these leases is rented to our customers over the lease term.
Contractual Obligations – Our contractual obligations as of December 31, 2013, are summarized by period due in the following table (in thousands):
 
Total
 
Less Than 1 Year
 
1 - 3 Years
 
3 - 5 Years
 
More Than 5 Years
Short-term Borrowings(1)
$
1,500

 
$
1,500

 
$

 
$

 
$

Long-term debt(2)
30,009

 
2,009

 
6,857

 
16,857

 
4,286

Interest payments on long-term
debt(2)
3,360

 
898

 
1,438

 
760

 
264

Capital leases
283

 
283

 

 

 

Interest payments on capital leases
17

 
17

 

 

 

Retirement benefit plans(3)
1,346

 
1,346

 

 

 

Deferred compensation arrangements(4)
7,628

 
588

 
530

 
208

 
6,302

Operating
leases(5)
19,886

 
8,398

 
8,507

 
2,670

 
311

Purchase obligations(6)
54,262

 
53,419

 
843

 

 

Other(7)
7,670

 
7,670

 

 

 

Total contractual obligations
$
125,961

 
$
76,128

 
$
18,175

 
$
20,495

 
$
11,163

(1)Short-term debt represents bank borrowings from our banking facility with HSBC Bank (China) Company Limited, Shanghai Branch. Amounts drawn on the facility are due within 1 year with a fixed interest rate of 5.1%.
(2)Long-term debt represents bank borrowings and borrowings through our Credit Agreement with JPMorgan and our Shelf Agreement with Prudential. Our Credit Agreement with JPMorgan does not have specified repayment terms; therefore, repayment is due upon expiration of the agreement on March 1, 2018. Interest payments on our Credit Agreement were calculated using the December 31, 2013 LIBOR rate based on the assumption that the principal would be repaid in full upon the expiration of the agreement. Our borrowings under our Shelf Agreement with Prudential have 7 and 10 year terms, serially maturing from 2014 to 2021 with fixed interest rates of 4.00% and 4.10%, respectively.
(3)Our retirement benefit plans, as described in Note 11 of the Consolidated Financial Statements, require us to make contributions to the plans from time to time. Our plan obligations totaled $5.9 million as of December 31, 2013. Contributions to the various plans are dependent upon a number of factors including the market performance of plan assets, if any, and future changes in interest rates, which impact the actuarial measurement of plan obligations. As a result, we have only included our 2014 expected contribution in the contractual obligations table.
(4)The unfunded deferred compensation arrangements covering certain current and retired management employees totaled $7.6 million as of
 
December 31, 2013. Our estimated distributions in the contractual obligations table are based upon a number of assumptions including termination dates and participant distribution elections.
(5)Operating lease commitments consist primarily of office and warehouse facilities, vehicles and office equipment as discussed in Note 13 of the Consolidated Financial Statements.
(6)Purchase obligations include all known open purchase orders, contractual purchase commitments and contractual obligations as of December 31, 2013.
(7)Other obligations include collateralized borrowings as discussed in Note 8 of the Consolidated Financial Statements and residual value guarantees as discussed in Note 13 of the Consolidated Financial Statements.
Total contractual obligations exclude our gross unrecognized tax benefits of $3.7 million and accrued interest and penalties of $0.5 million as of December 31, 2013. We expect to make cash outlays in the future related to uncertain tax positions. However, due to the uncertainty of the timing of future cash flows, we are unable to make reasonably reliable estimates of the period of cash settlement, if any, with the respective taxing authorities. For further information related to unrecognized tax benefits, see Note 14 of the Consolidated Financial Statements.
Newly Issued Accounting Guidance
Presentation of Unrecognized Tax Benefits
In July 2013, the Financial Accounting Standards Board issued amendments to guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss or a tax credit carryforward exists. The amendments require entities to present an unrecognized tax benefit netted against certain deferred tax assets when specific requirements are met. The amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013; however, early adoption is permitted. We do not expect this guidance to have a material impact on our results of operations or financial position.
No other new accounting pronouncements issued during 2013 but not yet effective has had, or is expected to have, a material impact on our results of operations or financial position.


15


Critical Accounting Policies and Estimates
Our Consolidated Financial Statements are based on the selection and application of accounting principles generally accepted in the United States of America, which require us to make estimates and assumptions about future events that affect the amounts reported in our Consolidated Financial Statements and the accompanying notes. Our significant accounting policies are described in Note 1 of the Consolidated Financial Statements. Future events and their effects cannot be determined with absolute certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results could differ from those estimates, and any such differences may be material to the Consolidated Financial Statements. We believe that the following policies may involve a higher degree of judgment and complexity in their application and represent the critical accounting policies used in the preparation of our Consolidated Financial Statements. If different assumptions or conditions were to prevail, the results could be materially different from our reported results.
Allowance for Doubtful Accounts – We record a reserve for accounts receivable that are potentially uncollectible. A considerable amount of judgment is required in assessing the realization of these receivables including the current creditworthiness of each customer and related aging of the past-due balances. In order to assess the collectibility of these receivables, we perform ongoing credit evaluations of our customers’ financial condition. Through these evaluations, we may become aware of a situation where a customer may not be able to meet its financial obligations due to deterioration of its financial viability, credit ratings or bankruptcy. The reserve requirements are based on the best facts available to us and are reevaluated and adjusted as additional information becomes available. Our reserves are also based on amounts determined by using percentages applied to trade receivables. These percentages are determined by a variety of factors including, but not limited to, current economic trends, historical payment and bad debt write-off experience. We are not able to predict changes in the financial condition of our customers and if circumstances related to these customers deteriorate, our estimates of the recoverability of accounts receivable could be materially affected and we may be required to record additional allowances. Alternatively, if more allowances are provided than are ultimately required, we may reverse a portion of such provisions in future periods based on the actual collection experience. Bad debt write-offs as a percentage of Net Sales were approximately 0.2% in 2013, 0.3% in 2012 and 0.2% in 2011. As of December 31, 2013, we had $4.5 million reserved against Accounts Receivable for doubtful accounts.
Inventory Reserves – We value our inventory at the lower of the cost of inventory or fair market value through the establishment of a reserve for excess, slow moving and obsolete inventory. In assessing the ultimate realization of inventories, we are required to make judgments as to future demand requirements compared with inventory levels. Reserve requirements are developed by comparing our inventory levels to our projected demand requirements based on historical demand, market conditions and technological and product life cycle changes. It is possible that an increase in our reserve may be required in the future if there are significant declines in demand for certain products. This reserve creates a new cost basis for these products and is considered permanent. As of December 31, 2013, we had $3.3 million reserved against Inventories.
Goodwill – Goodwill represents the excess of cost over the fair value of net assets of businesses acquired and is allocated to our reporting units at the time of the acquisition. We analyze Goodwill on an annual basis and when an event occurs or circumstances change that may reduce the fair value of one of our reporting units below its carrying amount. A goodwill impairment loss occurs if the carrying amount of a reporting unit’s goodwill exceeds its fair value.
We performed an analysis of qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform
 
the two-step quantitative goodwill impairment test. The first step of the two-step model is used as an indicator to identify if there is potential goodwill impairment. If the first step indicates there may be an impairment, the second step is performed which measures the amount of the goodwill impairment, if any. We perform our goodwill impairment analysis as of year end and use our judgment to develop assumptions for the discounted cash flow model that we use, if necessary. Management assumptions include forecasting revenues and margins, estimating capital expenditures, depreciation, amortization and discount rates.
If our goodwill impairment testing resulted in one or more of our reporting units’ carrying amount exceeding its fair value, we would write down our reporting units’ carrying amount to its fair value and would record an impairment charge in our results of operations in the period such determination is made. Subsequent reversal of goodwill impairment charges is not permitted. Each of our reporting units were analyzed for impairment as of December 31, 2013 and based upon our analysis, the estimated fair values of our reporting units substantially exceeded their carrying amounts. We had Goodwill of $18.9 million as of December 31, 2013.
Warranty Reserves – 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 net sales, the historical length of time between the sale and resulting warranty claim, new product introductions and other factors. Future claims experience could be materially different from prior results because of the introduction of new, more complex products, a change in our warranty policy in response to industry trends, competition or other external forces, or manufacturing changes that could impact product quality. In the event we determine that our current or future product repair and replacement costs exceed our estimates, an adjustment to these reserves would be charged to earnings in the period such determination is made. Warranty expense as a percentage of Net Sales was 1.4% in 2013, 1.7% in 2012 and 1.7% in 2011. As of December 31, 2013, we had $9.7 million reserved for future estimated warranty costs.
Income Taxes – We are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating our actual current tax obligations based on expected income, statutory tax rates and tax planning opportunities in the various jurisdictions. We also establish reserves for uncertain tax matters that are complex in nature and uncertain as to the ultimate outcome. Although we believe that our tax return positions are fully supportable, we consider our ability to ultimately prevail in defending these matters when establishing these reserves. We adjust our reserves in light of changing facts and circumstances, such as the closing of a tax audit. We believe that our current reserves are adequate. However, the ultimate outcome may differ from our estimates and assumptions and could impact the income tax expense reflected in our Consolidated Statements of Earnings.
Tax law requires certain items to be included in our tax return at different times than the items are reflected in our results of operations. Some of these differences are permanent, such as expenses that are not deductible in our tax returns, and some differences will reverse over time, such as depreciation expense on property, plant and equipment. These temporary differences result in deferred tax assets and liabilities, which are included within our Consolidated Balance Sheets. Deferred tax assets generally represent items that can be used as a tax deduction or credit in our tax returns in future years but have already been recorded as an expense in our Consolidated Statements of Earnings. We assess the likelihood that our deferred tax assets will be recovered from future taxable income, and, based on management’s judgment, to the extent we believe that recovery is not more likely than not, we establish a valuation reserve against those deferred tax assets. The deferred tax asset valuation allowance could be materially different from actual results because of changes in the mix of future taxable income, the relationship between book and taxable income and our tax planning strategies. As of December 31, 2013, a valuation allowance of $7.2 million was recorded against foreign tax loss carry-forwards and state credit carry-forwards.


16


Cautionary Factors Relevant to Forward-Looking Information
This annual report on Form 10-K, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 2, contain certain statements that are considered “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 of 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.
Competition in our business.
Ability to attract and retain key personnel.
Ability to successfully upgrade, evolve and protect our information technology systems.
Ability to effectively manage organizational changes.
Ability to develop and commercialize new innovative products and services.
Ability to comply with laws and regulations.
Fluctuations in the cost or availability of raw materials and purchased components.
Unforeseen product liability claims or product quality issues.
Occurrence of a significant business interruption.
Relative strength of the U.S. dollar, which affects the cost of our materials and products purchased and sold internationally.
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. Information about factors that could materially affect our results can be found in Part I, Item 1A - Risk Factors. 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.
We undertake no obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. Investors are advised to consult any further disclosures by us in our filings with the Securities and Exchange Commission and in other written statements on related subjects. It is not possible to anticipate or foresee all risk factors, and investors should not consider any list of such factors to be an exhaustive or complete list of all risks or uncertainties.

 
ITEM 7A – Quantitative and Qualitative Disclosures About Market Risk
Commodity Risk We are subject to exposures resulting from potential cost increases related to our purchase of raw materials or other product components. We do not use derivative commodity instruments to manage our exposures to changes in commodity prices such as steel, oil, gas, lead and other commodities.
Various factors beyond our control affect the price of oil and gas, including but not limited to worldwide and domestic supplies of oil and gas, political instability or armed conflict in oil-producing regions, the price and level of foreign imports, the level of consumer demand, the price and availability of alternative fuels, domestic and foreign governmental regulation, weather-related factors and the overall economic environment. We purchase petroleum-related component parts for use in our manufacturing operations. In addition, our freight costs associated with shipping and receiving product and sales and service vehicle fuel costs are impacted by fluctuations in the cost of oil and gas.
Increases in worldwide demand and other factors affect the price for lead, steel and related products. We do not maintain an inventory of raw or fabricated steel or batteries in excess of near-term production requirements. As a result, increases in the price of lead or steel can significantly increase the cost of our lead- and steel-based raw materials and component parts.
During the first part of 2013, our raw materials and other purchased component costs were unfavorably impacted by commodity prices although we were able to somewhat mitigate these higher costs with pricing actions and cost reduction activities. We continue to focus on mitigating the risk of continued future raw material or other product component cost increases through product pricing, negotiations with our vendors and cost reduction actions. The success of these efforts will depend upon our ability to increase our selling prices in a competitive market and our ability to achieve cost savings. If the commodity prices increase significantly and we are not able to offset the increases with higher selling prices, our results may be unfavorably impacted in 2014.
Foreign Currency Exchange Risk Due to the global nature of our operations, we are subject to exposures resulting from foreign currency exchange fluctuations in the normal course of business. Our primary exchange rate exposures are with the Euro, Australian and Canadian dollars, British pound, Japanese yen, Chinese yuan and Brazilian real against the U.S. dollar. The direct financial impact of foreign currency exchange includes the effect of translating profits from local currencies to U.S. dollars, the impact of currency fluctuations on the transfer of goods between our operations in the United States and abroad and transaction gains and losses. In addition to the direct financial impact, foreign currency exchange has an indirect financial impact on our results, including the effect on sales volume within local economies and the impact of pricing actions taken as a result of foreign exchange rate fluctuations.
It is not possible to determine the exact impact of foreign currency translation changes. However, the direct effect on reported net sales can be estimated. For the year ended December 31, 2013, the impact of foreign currency translation resulted in an overall approximate 1% decrease in reported Net Sales. For details of the effects of currency translation on Net Sales of Tennant Company's operating segments, see Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations.


17


Our objective in managing the exposure to foreign currency fluctuations is to minimize the earnings effects associated with foreign exchange rate changes on certain of our foreign currency-denominated assets and liabilities. We periodically enter into various contracts, principally forward exchange contracts, to protect the value of certain of our foreign currency-denominated assets and liabilities. The gains and losses on these contracts generally approximate changes in the value of the related assets and liabilities. We had forward exchange contracts outstanding in the notional amounts of $30.3 million and $42.5 million at the end of 2013 and 2012, respectively. For further information regarding our foreign currency forward exchange contracts, see Note 10 of the Consolidated Financial Statements. The potential for material loss in fair value of foreign currency contracts outstanding and the related underlying exposures as of December 31, 2013, from a 10% adverse change is unlikely due to the short-term nature of our forward contracts. Our policy prohibits us from entering into transactions for speculative purposes.
Other Matters Management regularly reviews our business operations with the objective of improving financial performance and maximizing our return on investment. As a result of this ongoing process to improve financial performance, we may incur additional restructuring charges in the future which, if taken, could be material to our financial results.


18


ITEM 8 – Financial Statements and Supplementary Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Tennant Company:

We have audited the accompanying consolidated balance sheets of Tennant Company and subsidiaries (the Company) as of December 31, 2013 and 2012, and the related consolidated statements of earnings, comprehensive income, cash flows, and shareholders’ equity for each of the years in the three-year period ended December 31, 2013. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule as included in Item 15.A.2. We also have audited the Company’s internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule, and an opinion on the Company’s internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Tennant Company and subsidiaries as of December 31, 2013 and 2012, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2013, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the accompanying financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. Furthermore, in our opinion, Tennant Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
/s/ KPMG LLP
Minneapolis, Minnesota
February 28, 2014

19


Consolidated Statements of Earnings
TENNANT COMPANY AND SUBSIDIARIES
(In thousands, except shares and per share data)
Years ended December 31
2013
 
2012
 
2011
Net Sales
$
752,011

 
$
738,980

 
$
753,998

Cost of Sales
426,103

 
413,684

 
434,817

Gross Profit
325,908

 
325,296

 
319,181

Operating Expense:
 

 
 

 
 

Research and Development Expense
30,529

 
29,263

 
27,911

Selling and Administrative Expense
232,976

 
234,114

 
241,625

Gain on Sale of Business

 
(784
)
 

Total Operating Expense
263,505

 
262,593

 
269,536

Profit from Operations
62,403

 
62,703

 
49,645

Other Income (Expense):
 

 
 

 
 

Interest Income
390

 
1,069

 
752

Interest Expense
(1,761
)
 
(2,517
)
 
(2,238
)
Net Foreign Currency Transaction (Losses) Gains
(671
)
 
(1,403
)
 
559

Other (Expense) Income, Net
(483
)
 
38

 
12

Total Other Expense, Net
(2,525
)
 
(2,813
)
 
(915
)
Profit Before Income Taxes
59,878

 
59,890

 
48,730

Income Tax Expense
19,647

 
18,306

 
16,017

Net Earnings
$
40,231

 
$
41,584

 
$
32,713

 
 
 
 
 
 
Net Earnings per Share:
 

 
 

 
 

Basic
$
2.20

 
$
2.24

 
$
1.74

Diluted
$
2.14

 
$
2.18

 
$
1.69

 
 
 
 
 
 
Weighted Average Shares Outstanding:
 
 
 

 
 

Basic
18,297,371

 
18,544,896

 
18,832,693

Diluted
18,833,453

 
19,102,016

 
19,360,428

 
 
 
 
 
 
Cash Dividends Declared per Common Share
$
0.72

 
$
0.69

 
$
0.68

See accompanying Notes to Consolidated Financial Statements.
Consolidated Statements of Comprehensive Income
TENNANT COMPANY AND SUBSIDIARIES
(In thousands)
Years ended December 31
2013
 
2012
 
2011
Net Earnings
$
40,231

 
$
41,584

 
$
32,713

Other Comprehensive (Loss) Income:
 

 
 

 
 

Foreign currency translation adjustments
(2,242
)
 
574

 
(3,125
)
Pension and retiree medical benefits
12,282

 
(2,534
)
 
(6,192
)
Income Taxes:
 
 
 
 
 
Foreign currency translation adjustments
(15
)
 
(25
)
 

Pension and retiree medical benefits
(4,663
)
 
889

 
2,354

Total Other Comprehensive Income (Loss), net of tax
5,362

 
(1,096
)
 
(6,963
)
Comprehensive Income
$
45,593

 
$
40,488

 
$
25,750

See accompanying Notes to Consolidated Financial Statements.

20


Consolidated Balance Sheets
TENNANT COMPANY AND SUBSIDIARIES
(In thousands, except shares and per share data)
December 31
2013
 
2012
ASSETS
 
 
 
Current Assets:
 
 
 
Cash and Cash Equivalents
$
80,984

 
$
53,940

Restricted Cash
393

 
187

Receivables:
 

 
 

Trade, less Allowances of $4,526 and $4,399, respectively
135,492

 
131,470

Other
4,690

 
6,677

Net Receivables
140,182

 
138,147

Inventories
66,906

 
58,136

Prepaid Expenses
11,426

 
11,309

Deferred Income Taxes, Current Portion
13,723

 
11,339

Other Current Assets
1,682

 
388

Total Current Assets
315,296

 
273,446

Property, Plant and Equipment
300,906

 
294,910

Accumulated Depreciation
(217,430
)
 
(208,717
)
Property, Plant and Equipment, Net
83,476

 
86,193

Deferred Income Taxes, Long-Term Portion
2,423

 
10,989

Goodwill
18,929

 
19,717

Intangible Assets, Net
19,028

 
21,393

Other Assets
17,154

 
9,022

Total Assets
$
456,306

 
$
420,760

LIABILITIES AND SHAREHOLDERS' EQUITY
 

 
 

Current Liabilities:
 

 
 

Short-Term Debt and Current Portion of Long-Term Debt
$
3,803

 
$
2,042

Accounts Payable
53,079

 
47,002

Employee Compensation and Benefits
29,756

 
33,021

Income Taxes Payable
812

 
785

Other Current Liabilities
44,076

 
38,844

Total Current Liabilities
131,526

 
121,694

Long-Term Liabilities:
 

 
 

Long-Term Debt
28,000

 
30,281

Employee-Related Benefits
25,173

 
25,873

Deferred Income Taxes, Long-Term Portion
2,870

 
3,325

Other Liabilities
4,891

 
4,533

Total Long-Term Liabilities
60,934

 
64,012

Total Liabilities
192,460

 
185,706

Commitments and Contingencies (Note 13)


 


Shareholders' Equity:
 

 
 

Preferred Stock of $0.02 par value per share, 1,000,000 shares authorized; no shares issued or outstanding

 

Common Stock, $0.375 par value per share, 60,000,000 shares authorized; 18,491,524 and 18,464,450 issued and outstanding, respectively
6,934

 
6,924

Additional Paid-In Capital
31,956

 
22,398

Retained Earnings
249,927

 
236,065

Accumulated Other Comprehensive Loss
(24,971
)
 
(30,333
)
Total Shareholders’ Equity
263,846

 
235,054

Total Liabilities and Shareholders’ Equity
$
456,306

 
$
420,760

See accompanying Notes to Consolidated Financial Statements.


21


Consolidated Statements of Cash Flows
TENNANT COMPANY AND SUBSIDIARIES
(In thousands)
Years ended December 31
2013
 
2012
 
2011
OPERATING ACTIVITIES
 
 
 
 
 
Net Earnings
$
40,231

 
$
41,584

 
$
32,713

Adjustments to reconcile Net Earnings to Net Cash Provided by Operating Activities:
 

 
 

 
 

Depreciation
17,686

 
18,072

 
18,088

Amortization
2,560

 
2,800

 
3,330

Impairment of Intangible Assets

 

 
2,058

Deferred Income Taxes
5,622

 
3,166

 
(1,352
)
Share-Based Compensation Expense
6,116

 
9,092

 
5,407

Allowance for Doubtful Accounts and Returns
1,279

 
1,427

 
1,879

Gain on Sale of Business

 
(784
)
 

Other, Net
219

 
(126
)
 
508

Changes in Operating Assets and Liabilities, Excluding the Impact of Acquisitions:
 

 
 

 
 

Receivables, Net
(7,618
)
 
(11,811
)
 
(4,451
)
Inventories
(11,967
)
 
(149
)
 
(7,665
)
Accounts Payable
6,120

 
970

 
4,612

Employee Compensation and Benefits
(4,178
)
 
(3,005
)
 
1,177

Other Current Liabilities
5,552

 
1,549

 
1,711

Income Taxes
(248
)
 
797

 
1,668

U.S. Pension Plan Contributions

 
(16,731
)
 

Other Assets and Liabilities
(1,560
)
 
715

 
(2,774
)
Net Cash Provided by Operating Activities
59,814

 
47,566

 
56,909

INVESTING ACTIVITIES
 

 
 

 
 

Purchases of Property, Plant and Equipment
(14,775
)
 
(15,623
)
 
(13,902
)
Proceeds from Disposals of Property, Plant and Equipment
120

 
1,028

 
601

Acquisition of Businesses, Net of Cash Acquired
(750
)
 
(750
)
 
(2,917
)
Proceeds from Sale of Business
4,261

 
1,014

 

(Increase) Decrease in Restricted Cash
(253
)
 
3,089

 
(3,279
)
Net Cash Used for Investing Activities
(11,397
)
 
(11,242
)
 
(19,497
)
FINANCING ACTIVITIES
 

 
 

 
 

Change in Short-Term Borrowings, Net
1,500

 

 

Payments of Long-Term Debt
(1,096
)
 
(2,986
)
 
(19,272
)
Issuance of Long-Term Debt

 

 
20,000

Purchases of Common Stock
(22,157
)
 
(25,343
)
 
(17,603
)
Proceeds from Issuances of Common Stock
8,313

 
4,167

 
4,214

Excess Tax Benefit on Stock Plans
5,178

 
2,047

 
1,266

Dividends Paid
(13,233
)
 
(12,817
)
 
(12,852
)
Net Cash Used for Financing Activities
(21,495
)
 
(34,932
)
 
(24,247
)
Effect of Exchange Rate Changes on Cash and Cash Equivalents
122

 
209

 
(355
)
NET INCREASE IN CASH AND CASH EQUIVALENTS
27,044

 
1,601

 
12,810

Cash and Cash Equivalents at Beginning of Year
53,940

 
52,339

 
39,529

CASH AND CASH EQUIVALENTS AT END OF YEAR
$
80,984

 
$
53,940

 
$
52,339

SUPPLEMENTAL CASH FLOW INFORMATION
 

 
 

 
 

Cash Paid During the Year for:
 

 
 

 
 

Income Taxes
$
13,458

 
$
11,563

 
$
13,158

Interest
$
1,602

 
$
2,375

 
$
2,059

Supplemental Non-Cash Investing and Financing Activities:
 

 
 

 
 

Capital Expenditures Funded Through Capital Leases
$
601

 
$
1,526

 
$
2,893

Capital Expenditures in Accounts Payable
$
1,090

 
$
1,582

 
$
2,669

Notes Payable Related to Water Star, Inc. Acquisition
$

 
$

 
$
1,500

See accompanying Notes to Consolidated Financial Statements.

22


Consolidated Statements of Shareholders’ Equity
TENNANT COMPANY AND SUBSIDIARIES
(In thousands, except shares and per share data)
 
Common Shares
Common Stock
Additional Paid-in Capital
Retained Earnings
Accumulated Other Comprehensive Loss
Total Shareholders' Equity
Balance, December 31, 2010
19,038,843

$
7,140

$
10,876

$
220,391

$
(22,274
)
$
216,133

Net Earnings



32,713


32,713

Other Comprehensive Loss




(6,963
)
(6,963
)
Issue Stock for Directors, Employee Benefit and Stock Plans
265,401

99

4,019



4,118

Share-Based Compensation


4,041



4,041

Dividends paid $0.68 per Common Share



(12,852
)

(12,852
)
Tax Benefit on Stock Plans


1,265



1,265

Purchases of Common Stock
(469,304
)
(176
)
(5,119
)
(12,308
)

(17,603
)
Balance, December 31, 2011
18,834,940

$
7,063

$
15,082

$
227,944

$
(29,237
)
$
220,852

Net Earnings



41,584


41,584

Other Comprehensive Loss




(1,096
)
(1,096
)
Issue Stock for Directors, Employee Benefit and Stock Plans
250,850

94

2,423



2,517

Share-Based Compensation


7,310



7,310

Dividends paid $0.69 per Common Share



(12,817
)

(12,817
)
Tax Benefit on Stock Plans


2,047



2,047

Purchases of Common Stock
(621,340
)
(233
)
(4,464
)
(20,646
)

(25,343
)
Balance, December 31, 2012
18,464,450

$
6,924

$
22,398

$
236,065

$
(30,333
)
$
235,054

Net Earnings



40,231


40,231

Other Comprehensive Income




5,362

5,362

Issue Stock for Directors, Employee Benefit and Stock Plans
461,192

173

6,549



6,722

Share-Based Compensation


6,689



6,689

Dividends paid $0.72 per Common Share



(13,233
)

(13,233
)