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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019
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
tennantcompanylogo.jpg
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
 
Trading Symbol(s)
 
  Name of exchange on which registered
Common Stock, par value $0.375 per share
 
TNC
 
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.
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
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.
Yes
 
No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes
 
No

1


Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See definitions of “large accelerated filer,” "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
Accelerated filer
 
Non-accelerated filer 
 
  Smaller reporting company
 
 
 
 
  Emerging growth company
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
 
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes
No
The aggregate market value of the voting and non-voting common equity held by non-affiliates as of June 28, 2019, was $1,094,534,460.
As of January 31, 2020, there were 18,349,518 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Proxy Statement for its 2020 annual meeting of shareholders (the “2020 Proxy Statement”) are incorporated by reference in Part III.



2


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

3

Table of Contents

TENNANT COMPANY
2019
ANNUAL REPORT
Form 10–K
(Pursuant to Securities Exchange Act of 1934)
PART I
ITEM 1 – Business
General Development of Business
Founded in 1870 by George H. Tennant, Tennant Company, ("the Company, we, us, or our"), a Minnesota corporation incorporated in 1909, began as a one-man woodworking business, evolved into a successful wood flooring and wood products company, and eventually into a manufacturer of floor cleaning equipment. Throughout its history, the Company has remained focused on advancing our industry by aggressively pursuing new technologies and creating a culture that celebrates innovation.
Today, the Company is a recognized leader of the cleaning industry. We are passionate about developing innovative and sustainable solutions that help our customers clean spaces more effectively, addressing various cleaning challenges. The Company operates in three geographic business units including the Americas, Europe, Middle East and Africa (EMEA) and Asia Pacific (APAC).
The Company is committed to empowering our customers to create a cleaner, safer and healthier world with high-performance solutions that minimize waste, reduce costs, improve safety and further sustainability goals.
Principal Products, Markets and Distribution
The Company offers products and solutions consisting of mechanized cleaning equipment, detergent-free and other sustainable cleaning technologies, aftermarket parts and consumables, equipment maintenance and repair service, specialty surface coatings, and business solutions such as financing, rental and leasing programs, and machine-to-machine asset management solutions.
The Company's products are used in many types of environments including: Retail establishments, distribution centers, factories and warehouses, public venues such as arenas and stadiums, office buildings, schools and universities, hospitals and clinics, parking lots and streets, and more. The Company markets its offerings under the following brands: Tennant®, Nobles®, Alfa Uma Empresa Tennant, IRIS®, VLX, IPC brands and private-label brands. The Company's customers include contract cleaners to whom organizations outsource facilities maintenance, as well as businesses that perform facilities maintenance themselves. The Company reaches these customers through the industry's largest direct sales and service organization and through a strong and well-supported network of authorized distributors worldwide.
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 and trade secrets, 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 item or category of intellectual property. We take appropriate measures to protect our intellectual property to the extent such intellectual property can be protected.
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 toward the high end of the range and the third quarter is typically in the middle of the range.

Working Capital
The Company primarily 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 are 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, 2019 and 2018.
Competition
Public industry data concerning global market share is limited; however, through an assessment of validated third-party sources and sponsored third-party market studies, the Company is confident in its position as a world-leading manufacturer of floor maintenance and cleaning equipment. Several global competitors compete with the Company in virtually every geography of the world. However, small regional competitors are also significant competitors who vary by country, vertical market, product category or channel. 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.
Research and Development
The Company has a history of developing innovative technologies to create a cleaner, safer, healthier world. The Company is committed to its innovation leadership position through fulfilling its goal to annually invest approximately 3% of annual sales to research and development. The Company’s innovation efforts are focused on solving our customers’ needs

4

Table of Contents


holistically by addressing a broad array of issues, such as managing labor costs, enhancing productivity, and making cleaning processes more efficient and sustainable.  Through core product development, partnerships and technology enablement, we are creating new growth avenues for the Company. These new avenues for growth go beyond cleaning equipment into business insights and service solutions.
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 approximately 4,400 people in worldwide operations as of December 31, 2019.
Available Information
The Company's internet address is www.tennantco.com. The Company makes available free of charge, through the Investor Relations website at investors.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”). The SEC also maintains an internet site that contains reports, proxy and information statements, and other information, which can be accessed at sec.gov.
Information About Our Executive Officers
The list below identifies those persons designated as executive officers of the Company, including their age, positions held with the Company and their business experience during the past five or more years.
Andrew Cebulla, Vice President of Finance and Corporate Controller; Interim Chief Financial Officer and Interim Principal Accounting Officer
Andrew Cebulla (49) joined the Company in 2017 as Vice President of Finance and Corporate Controller, and is serving as Interim Chief Financial Officer and Interim Principal Accounting Officer as Mr. Woodward is on a short-term medical leave of absence. Prior to joining the Company, Mr. Cebulla served in a variety of accounting and finance leadership roles, including Treasurer and Director of Investor Relations, Corporate Controller, and most recently Vice President of Finance supporting the Test Vehicles and Structures business, of MTS Systems Corporation, a global supplier of test systems and industrial position sensors, since 2007.
David W. Huml, Senior Vice President, EMEA, APAC, Global Marketing and Operations
David W. Huml (51) joined the Company in November 2014 as Senior Vice President, Global Marketing. In January 2016, he also assumed oversight for the Company's APAC business unit. In January 2017, he assumed oversight for the Company's EMEA business and in June 2018 he assumed responsibility for Global Operations. From 2006 to October 2014, he held various positions with Pentair plc, a global manufacturer of water and fluid solutions, valves and controls, equipment protection and thermal management products, most recently as Vice President, Applied Water Platform. From 1992 to 2006, he held various positions with Graco Inc., a designer, manufacturer and marketer of systems and equipment to move, measure, control, dispense and spray fluid and coating materials, including Worldwide Director of Marketing, Contractor Equipment Division.


 
H. Chris Killingstad, President and Chief Executive Officer
H. Chris Killingstad (64) joined the Company in April 2002 as Vice President, North America and was named President and CEO in 2005. From 1990 to 2002, he was employed by The Pillsbury Company, a consumer foods manufacturer. From 1999 to 2002 he served as Senior Vice President and General Manager of Frozen Products for Pillsbury North America; from 1996 to 1999 he served as Regional Vice President and Managing Director of Pillsbury Europe, and from 1990 to 1996 was Regional Vice President of Häagen-Dazs Asia Pacific. He held the position of International Business Development Manager at PepsiCo Inc., from 1982 to 1990 and Financial Manager for General Electric, from 1978 to 1980.
Carol E. McKnight, Senior Vice President, Chief Administrative Officer
Carol E. McKnight (52) joined the Company in June 2014 as Senior Vice President of Global Human Resources. In 2017, she was named SVP and Chief Administrative Officer. Prior to joining the Company, she was Vice President of Human Resources at ATK (Alliant Techsystems) where she held divisional and corporate leadership positions in the areas of compensation, talent management, talent acquisition and general human resource management from 2002 to 2014. Prior to ATK, she was with New Jersey-based NRG Energy, Inc.
Mary E. Talbott, Senior Vice President, General Counsel and Corporate Secretary
Mary E. Talbott (51) joined the Company in January 2019 as Senior Vice President, General Counsel and Corporate Secretary. Prior to joining the Company, from 2017 to 2018, she was Vice President, Assistant General Counsel and Assistant Corporate Secretary for General Cable Corporation, a global manufacturer in the development, design, manufacture, marketing and distribution of copper, aluminum and fiber optic wire and cable products for use in the energy, industrial, construction, automotive, specialty and communications markets. From 2016 to 2017, she was Vice President of Law at Macy’s, Inc., and from 2006 to 2015, she held corporate leadership positions with Scripps Networks Interactive, Inc. (which was spun off from The E.W. Scripps Company in 2008), a developer of lifestyle-oriented content for linear and interactive video platforms including television and the internet, most recently as Senior Vice President, Deputy General Counsel and Corporate Secretary.
Keith A. Woodward, Senior Vice President and Chief Financial Officer
Keith A. Woodward (55) joined the Company in December 2018 as Senior Vice President and Chief Financial Officer. As previously announced, Mr. Woodward is currently taking a short-term medical leave of absence. Prior to joining the Company, he was at General Mills, Inc., a global manufacturer and marketer of branded consumer foods, for over 26 years holding various finance and corporate leadership roles, most recently as Senior Vice President, Global Treasurer. Prior to General Mills, Inc., he was with PriceWaterhouseCoopers.  
Richard H. Zay, Senior Vice President, The Americas and R&D
Richard H. Zay (49) joined the Company in June 2010 as Vice President, Global Marketing and was named Senior Vice President, Global Marketing in October 2013. In 2014, he was named Senior Vice President of the Americas business unit for the Company and in 2018 he assumed responsibility for Tennant Research and Development as well. From 2006 to 2010, he held various positions with Whirlpool Corporation, a manufacturer of major home appliances, most recently as General Manager, KitchenAid Brand. From 1993 to 2006, he held various positions with Maytag Corporation, including Vice President, Jenn-Air Brand, Director of Marketing, Maytag Brand, and Director of Cooking Category Management.


5

Table of Contents

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 not be able to develop or manage strategic planning and growth processes or the related operational plans to deliver on our strategies and establish a broad organization alignment, thereby impairing our ability to achieve future performance expectations.
We are continuing to refine our global company strategy to guide our next phase of performance as our structure has become more complex due to recent acquisitions. We continue to consolidate and reallocate resources as part of our ongoing efforts to optimize our cost structure and to drive synergies and growth. Our operating results may be negatively impacted if we are unable to implement new processes and manage organizational changes, which includes changes to our go-to-market strategy, systems and processes; simultaneous focus on expense control and growth; and introduction of alternative cleaning methods. In addition, if we do not effectively realize and sustain the benefits that these transformations are designed to produce, 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.
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 to support our growth strategy and business operations, which could adversely impact our abilities to accomplish anticipated future cost savings and better serve our customers.
We have many information technology systems that are important to the operation of our business and are in need of upgrading in order to effectively implement our growth strategy. Given our greater emphasis on customer-facing technologies, we may not have adequate resources to upgrade our systems at the pace which the current business environment demands. 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, among other things, could lead to significant expenses, adversely impacting our results of operations and hindering our ability to offer better technology solutions to our customers.
Increases in the cost of, quality, or disruption in the availability of, raw materials and components that we purchase or labor required to manufacture our products could negatively impact our operating results or financial condition.
Our sales growth, expanding geographical footprint and continued use of sole-source vendors, coupled with suppliers’ potential credit issues, could lead to an increased risk of a breakdown in our supply chain. Our use of sole-source vendors creates a concentration risk. There is an increased risk of defects due to the highly configured nature of our purchased component parts that could result in quality issues, returns or production slowdowns. In addition, 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 becoming more reliant on a sole source. There is also a risk that the vendors we choose to supply our parts and equipment fail to comply with our quality expectations, thus damaging our reputation for quality and negatively impacting sales.
We have and may continue to experience higher than normal wage inflation due to skilled labor shortages.  In addition, we have incurred costs associated with tariffs on certain raw materials used on our manufacturing processes. The labor shortages and tariff costs have unfavorably impacted our gross profit margins and could continue to do so if actions we are taking are not effective at offsetting these rising costs.  Changes and uncertainties related to government fiscal and tax policies, including increased duties, tariffs,
 
or other restrictions, could adversely affect demand for our products, the cost of the products we manufacture or our ability to cost-effectively source raw materials, all of which could have a negative impact on our financial results. 
We may encounter financial difficulties if the United States or other global economies experience an additional or continued long-term economic downturn, decreasing the demand for our products and negatively affecting our sales growth.
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 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, such as restructuring actions. In addition, other fixed costs would have to be reduced to a level that is in line with a lower level of sales. A long-term economic downturn that puts downward pressure on sales could also negatively affect investor perception relative to our publicly stated growth targets.
We may consider acquisition of suitable candidates to accomplish our growth objectives. We may not be able to successfully integrate the businesses we acquire to achieve operational efficiencies, including synergistic and other benefits of acquisition.
We may consider, as part of our growth strategy, supplementing our organic growth through acquisitions of complementary businesses or products. We have engaged in acquisitions in the past and we believe future acquisitions may provide meaningful opportunities to grow our business and improve profitability. Acquisitions allow us to enhance the breadth of our product offerings and expand the market and geographic participation of our products and services.
However, our success in growing by acquisition is dependent upon identifying businesses to acquire, integrating the newly acquired businesses with our existing businesses and complying with the terms of our credit facilities. We may incur difficulties in the realignment and integration of business activities when assimilating the operations and products of an acquired business or in realizing projected efficiencies, cost savings, revenue synergies and profit margins. Acquired businesses may not achieve the levels of revenue, profit, productivity or otherwise perform as expected. We are also subject to incurring unanticipated liabilities and contingencies associated with an acquired entity that are not identified or fully understood in the due diligence process. Current or future acquisitions may not be successful or accretive to earnings if the acquired businesses do not achieve expected financial results.
In addition, we may record significant goodwill or other intangible assets in connection with an acquisition. We are required to perform impairment tests at least annually and whenever events indicate that the carrying value may not be recoverable from future cash flows. If we determine that any intangible asset values need to be written down to their fair values, this could result in a charge that may be material to our operating results 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, provide employee development opportunities and create effective succession planning strategies.
Our growth strategy, expanding global footprint, changing workforce demographics and increased improvements in technology and business processes designed to enhance the customer experience are putting increased pressure on human capital strategies designed to recruit, retain and develop top talent.
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 highly qualified managerial, technical, manufacturing, research, sales and marketing personnel also impacts our ability to effectively

6

Table of Contents

operate our business. As 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. We believe the increased loss of key personnel within a concentrated region could adversely affect our sales growth.
In addition, there is a risk that we may not have adequate talent acquisition resources and employee development resources to support our future hiring needs and provide training and development opportunities to all employees. This, in turn, could impede our workforce from embracing change and leveraging the improvements we have made in technology and other business process enhancements.
We may encounter risks to our IT infrastructure, such as access and security, that may not be adequately designed to protect critical data and systems from theft, corruption, unauthorized usage, viruses, sabotage or unintentional misuse.
Global cybersecurity threats and incidents can range from uncoordinated individual attempts to gain unauthorized access to IT systems to sophisticated and targeted measures known as advanced persistent threats, directed at the Company, its products and its customers. We seek to deploy comprehensive measures to deter, prevent, detect, react to and mitigate these threats, including identity and access controls, data protection, vulnerability assessments, continuous monitoring of our IT networks and systems and maintenance of backup and protective systems.
Despite these efforts, cybersecurity incidents, depending on their nature and scope, could potentially result in the misappropriation, destruction, corruption or unavailability of critical data and confidential or proprietary information (our own or that of third parties) and the disruption of business operations. The potential consequences of a material cybersecurity incident include financial loss, reputational damage, litigation with third parties, theft of intellectual property, diminution in the value of our investment in research, development and engineering, and increased cybersecurity protection and remediation costs due to the increasing sophistication and proliferation of threats, which in turn could adversely affect our competitiveness and results of operations.
Inadequate funding or insufficient innovation 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.
We are subject to competitive risks associated with developing innovative products and technologies, including, but not limited to, not expanding as rapidly or aggressively in the global market as our competitors, our customers not continuing to pay for innovation and competitive challenges to our products, 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, our products are generally priced higher than our competitors’ products. This is due to our dedication to innovation and continued investments in research and development. We believe that customers will pay for the innovations and quality in our products. However, it may be difficult for us to compete with lower priced 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 volume, an increase in price discounting and a loss of market share, which adversely impacts revenues, margin and the success of our operations.
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.
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 for any reason, 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.
The spread of contagious diseases, such as the coronavirus outbreak which originated in China at the beginning of 2020, could adversely affect our customers, employees, manufacturing operations, and global supply chain. Also, government actions to prevent further outbreaks could adversely affect our business operations and/or our financial results.
In addition, the increase in customer-facing technology raises the risk of a lapse in business operations. Therefore, significant long-term interruption in our business could cause a decline in sales, an increase in expenses and could adversely impact our financial results.
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, labor and safety 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, there is a risk that we do not have adequate resources or comprehensive processes to stay current on changes in laws or regulations applicable to us worldwide and maintain compliance with those changes. Increased compliance requirements may lead to increased costs and erosion of desired profit margin. As a result, 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.
In addition to the foregoing, the European Union adopted a comprehensive General Data Privacy Regulation (the "GDPR") in May 2016 that has replaced the EU Data Protection Directive and related country-specific legislation. The GDPR became effective in May 2018. GDPR requires companies to satisfy new requirements regarding the handling of personal and sensitive data, including its use, protection and the ability of persons

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whose data is stored to correct or delete such data about themselves. Failure to comply with GDPR requirements could result in penalties of up to 4% of worldwide revenue.
The SEC has adopted rules regarding 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 rules have required and will continue to require due diligence and disclosure efforts.
Actions of activist investors or others could disrupt our business.
Public companies have been the target of activist investors. One investor which owns approximately 5% of our outstanding common stock filed a Schedule 13D with the Securities and Exchange Commission in December 2017 which stated its belief that we should undertake a strategic review process regarding a consolidation transaction with a third party. In the event such investor or another third party, such as an activist investor, continues to pursue such belief or proposes to change our governance policies, board of directors, or other aspects of our operations, our review and consideration of such proposals may create a significant distraction for our management and employees. This could negatively impact our ability to execute our business plans and may require our management to expend significant time and resources. Such proposals may also create uncertainties with respect to our financial position and operations and may adversely affect our ability to attract and retain key employees.
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. Quality issues may also arise due to changes in parts or specifications with suppliers and/or changes in suppliers. 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.
We may not be able to generate sufficient cash to service all of our indebtedness and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.
In April 2017, in connection with the acquisition of IPC Cleaning S.p.A., we entered into a new senior credit facility and indenture, and issued debt totaling approximately $400,000,000 consisting of a $100,000,000 term loan and $300,000,000 of senior notes, which funded the acquisition and replaced our current debt facility. The new senior credit facility also includes a revolving facility in an amount up to $200,000,000. We cannot provide assurance that our business will generate sufficient cash flow from operations to meet all our debt service requirements, to pay dividends, to repurchase shares of our common stock, and to fund our general corporate and capital requirements.
Our ability to satisfy our debt obligations will depend upon our future operating performance. We do not have complete control over our future operating performance because it is subject to prevailing economic conditions,
 
and financial, business and other factors.
Our current and future debt service obligations and covenants could have important consequences. These consequences include, or may include, the following:
our ability to obtain financing for future working capital needs or acquisitions or other purposes may be limited;
our funds available for operations, expansions, dividends or other distributions, or stock repurchases may be reduced because we dedicate a significant portion of our cash flow from operations to the payment of principal and interest on our indebtedness;
our ability to conduct our business could be limited by restrictive covenants; and
our vulnerability to adverse economic conditions may be greater than less leveraged competitors and, thus, our ability to withstand competitive pressures may be limited.
Restrictive covenants in our senior credit facility and in our indenture place limits on our ability to conduct our business. Covenants in our senior credit facility and indenture include those that restrict our ability to make acquisitions, incur debt, encumber or sell assets, pay dividends, engage in mergers and consolidations, enter into transactions with affiliates, make investments and permit our subsidiaries to enter into certain restrictive agreements. The senior credit facility additionally contains certain financial covenants. We cannot provide assurance that we will be able to comply with these covenants in the future.
Foreign currency exchange rate fluctuations, particularly the strengthening of the U.S. dollar against other major currencies, could result in declines in our reported net sales and net earnings.
We earn revenues, pay expenses, own assets and incur liabilities in countries using functional currencies other than the U.S. dollar. Because our consolidated financial statements are presented in U.S. dollars, we translate revenues and expenses into U.S. dollars at the average exchange rate during each reporting period, as well as assets and liabilities into US. dollars at exchange rates in effect at the end of each reporting period. Therefore, increases or decreases in the value of the U.S. dollar against other major currencies will affect our net revenues, net earnings, earnings per share and the value of balance sheet items denominated in foreign currencies as we translate them into the U.S. dollar reporting currency. We use derivative financial instruments to hedge our estimated transactional or translational exposure to certain foreign currency-denominated assets and liabilities as well as our foreign currency-denominated revenue. While we actively manage the exposure of our foreign currency market risk in the normal course of business by utilizing various foreign exchange financial instruments, these instruments involve risk and may not effectively limit our underlying exposure from foreign currency exchange rate fluctuations or minimize the effects on our net earnings and the cash volatility associated with foreign currency exchange rate changes. Fluctuations in foreign currency exchange rates, particularly the strengthening of the U.S. dollar against major currencies, could materially affect our financial 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 located in Minneapolis, Minnesota; Holland, Michigan; Chicago, Illinois; Uden, The Netherlands and the Italian cities of Venice, Cremona and Reggio Emilia and in the Province of Padua are owned by the Company. Manufacturing facilities located in Louisville, Kentucky; São Paulo, Brazil; Shanghai, China; Hefei, China, and another facility in the Province of Padua are leased to the Company. In addition, IPC uses a dedicated, third-party plant

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in Germany that specially manufactures heavy–duty stainless steel scrubbers and sweepers to IPC designs. IPC also owns a minor tools and supplies assembly operation in China to service local customers. The facilities are in good operating condition, suitable for their respective uses and adequate for current needs.
Sales offices, warehouse and storage facilities are leased in various locations in the United States, Canada, Mexico, Portugal, Spain, Italy, Germany, France, The Netherlands, Belgium, Norway, the United Kingdom, Japan, China, India, Australia, New Zealand and Brazil. 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 15 to 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.

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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 February 14, 2020, there were 291 shareholders of record.
DIVIDEND INFORMATION – Cash dividends on Tennant’s common stock have been paid for 75 consecutive years. Tennant’s annual cash dividend payout increased for the 48th consecutive year to $0.88 per share in 2019, an increase of $0.03 per share over 2018. Dividends are generally declared each quarter. On February 19, 2020, the Company announced a quarterly cash dividend of $0.22 per share payable March 16, 2020, to shareholders of record on February 28, 2020.
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:
Equiniti Trust Company
Shareowner Services
P.O. Box 64874
St. Paul, MN 55164-0854
(800) 468-9716

SHARE REPURCHASES – On October 31, 2016, the Board of Directors authorized the repurchase of an additional 1,000,000 shares of our common stock. This is in addition to the 392,892 shares remaining under our prior repurchase program. Share repurchases are made from time to time in the open market or through privately negotiated transactions. As of December 31, 2019, our 2017 Credit Agreement restricts the payment of dividends or repurchasing of stock if, after giving effect to such payments and assuming no default exists or would result from such payment, our leverage ratio is greater than 2.50 to 1, in such case limiting such payments to an amount ranging from $50.0 million to $75.0 million during any fiscal year based on our leverage ratio after giving effect to such payment. Our Senior Notes due 2025 also contain certain restrictions, which are generally less restrictive than those contained in the 2017 Credit Agreement.
For the Quarter Ended
December 31, 2019
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, 2019
18
 
$70.70
 
 
1,392,263
November 1–30, 2019
1,352
 
77.96
 
 
1,392,263
December 1–31, 2019
 
 
 
1,392,263
Total
1,370
 
$77.86
 
 
1,392,263
(1) 
Includes 1,370 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.















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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, 2014, including the reinvestment of all dividends.

5-YEAR CUMULATIVE TOTAL RETURN COMPARISON
zackgraph2019.jpg
 
2014
 
2015
 
2016
 
2017
 
2018
 
2019
Tennant Company
$100
 
$79
 
$101
 
$105
 
$76
 
$115
S&P SmallCap 600
$100
 
$98
 
$96
 
$109
 
$100
 
$122
Morningstar Industrials Sector
$100
 
$97
 
$115
 
$141
 
$124
 
$164

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ITEM 6 – Selected Financial Data
(In millions, except shares, per share, ratio, and employee data)
Years Ended December 31
2019
 
2018
 
2017
 
2016
 
2015
 
Financial Results:
 
 
 
 
 
 
 
 
 
 
Net Sales
$
1,137.6

 
$
1,123.5

(6)
$
1,003.1

 
$
808.6

 
$
811.8

 
Cost of Sales
675.9

(1)
678.5

 
603.3

(3)
457.0

 
462.7

 
Gross Margin - %
40.6
%

39.6
%

39.9
 %

43.5
%

43.0
%
 
Research and Development Expense
32.7

 
30.7

 
32.0

 
34.7

 
32.4

 
% of Net Sales
2.9
%

2.7
%

3.2
 %

4.3
%

4.0
%
 
Selling and Administrative Expense
357.2

(1)
356.3

(2), (5)
334.8

(3),(5)
248.6

(5)
251.7

(4), (5)
% of Net Sales
31.4
%

31.7
%

33.4
 %

30.7
%

31.0
%
 
Profit from Operations
71.8

(1)
58.0

(2), (5)
33.0

(3),(5)
68.3

(5)
52.6

(4), (5)
% of Net Sales
6.3
%

5.2
%

3.3
 %

8.4
%

6.6
%
 
Income Tax Expense
8.1

(1)
2.3

(2)
4.9

(3)
19.9

 
18.3

(4)
Effective Tax Rate - %
15.1


6.4


(380.2
)

29.9


36.4

 
Net Earnings (Loss) Attributable to Tennant Company
45.8

(1)
33.4

(2)
(6.2
)
(3)
46.6

 
32.1

 
% of Net Sales
4.0
%
 
3.0
%
 
(0.6
)%
 
5.8
%
 
4.0
%
 
Per Share Data:
 
 
 
 
 
 
 
 
 
 
Basic Net Earnings (Loss) Attributable to Tennant Company
$
2.53

 
$
1.86

(2)
$
(0.35
)
 
$
2.66

 
$
1.78

(4)
Diluted Net Earnings (Loss) Attributable to Tennant Company
$
2.48

 
$
1.82

(2)
$
(0.35
)
 
$
2.59

 
$
1.74

(4)
Diluted Weighted Average Shares
18,453,145

 
18,338,569

 
17,695,390

 
17,976,183

 
18,493,447

 
Cash Dividends
$
0.88

 
$
0.85

 
$
0.84

 
$
0.81

 
$
0.80

 
Financial Position:
 
 
 
 
 
 
 
 
 
 
Total Assets
$
1,062.9

(7)
$
992.5

(6)
$
994.0

 
$
470.0

 
$
432.3

 
Total Debt
338.8

 
355.1

 
376.8

 
36.2

 
24.7

 
Total Tennant Company Shareholders’ Equity
359.9

 
314.4

 
296.5

 
278.5

 
252.2

 
Current Ratio
1.7

 
1.9

 
1.8

 
2.2

 
2.2

 
Debt-to-Capital Ratio
48.5
%
 
53.0
%
 
56.0
 %
 
11.5
%
 
8.9
%
 
Cash Flows:
 
 
 
 
 
 
 
 
 
 
Net Cash Provided by Operations
$
71.9

 
$
80.0

 
$
54.2

 
$
57.9

 
$
45.2

 
Capital Expenditures, Net of Disposals
(38.3
)
 
(18.7
)
 
(17.9
)
 
(25.9
)
 
(24.4
)
 
Other Data:
 
 
 
 
 
 
 
 
 
 
Depreciation and Amortization
$
54.4

 
$
54.4

 
$
43.3

 
$
18.3

 
$
18.0

 
Number of employees at year-end
4,373

 
4,341

 
4,297

 
3,236

 
3,164

 
The results of operations from our 2017 acquisition of the IPC Group have been included in the Selected Financial Data presented above since its acquisition date on April 6, 2017.
(1 ) 2019 includes pre-tax discontinuation of product lines, a fair value step-up adjustment to acquired inventory, and restructuring charges in cost of sales of $3.3 million, $0.9 million, and $0.3 million, respectively ($2.7 million, $0.7 million, and $0.2 million after-tax, respectively, or $0.15, $0.04, and $0.01 per diluted share, respectively). Additionally, 2019 includes pre-tax acquisition and integration costs, professional services, restructuring charges, a write-down on note receivable, and an adjustment to acquisition contingent consideration in sales and administrative expense of $3.0 million, $0.1 million, $4.5 million, $2.7 million, and $(2.3) million, respectively ($2.4 million, $0.1 million, $3.2 million, $2.7 million, and $(2.3) million after-tax, respectively, or $0.12, $0.00, $0.17, $0.15, and $(0.12) per diluted share, respectively). Furthermore, 2019 includes pre- and post-tax acquisition and integration costs in other income of $(1.8) million, or $(0.10) per diluted share.
(2) 
2018 includes pre-tax acquisition and integration costs, a gain on a sale of business, professional services, restructuring charges, and building design costs in selling and administrative expense of $6.9 million, ($1.0) million, $1.9 million, $1.0 million, and $1.6 million, respectively ($5.5 million, $(0.8) million, $1.4 million, $0.8 million and $1.2 million after-tax, respectively, or $0.29, $(0.04), $0.08, $0.05, and $0.06 per diluted share, respectively). Additionally, 2018 included a pre- and post-tax pension curtailment gain in other expense of $(0.1) million or $(0.01) per diluted share. In addition,

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2018 net earnings attributable to Tennant Company includes an acquisition-related tax adjustment of $0.9 million and a mandatory repatriation tax expense of $0.3 million ($(0.05) and $(0.02) per diluted share, respectively).
(3) 
2017 includes a fair value step-up adjustment to acquired inventory in cost of sales of $7.2 million pre-tax ($5.2 million after-tax, or $0.30 per diluted share), pre-tax acquisition costs, restructuring charges and a pension settlement charge in selling and administrative expense of $10.6 million, $10.5 million and $6.4 million, respectively ($9.7 million, $7.6 million and $4.0 million after-tax, or $0.55, $0.43 and $0.23 per diluted share, respectively). 2017 also includes pre-tax acquisition-related financing costs and acquisition costs in total other expense, net of $7.4 million and $0.8 million, respectively ($4.6 million and $0.7 million after-tax, or $0.26 and $0.04 per diluted share, respectively). In addition, 2017 net loss attributable to Tennant Company includes a $2.4 million net income tax expense ($0.14 per diluted share) as a result of the impacts of the 2017 tax reform legislation.
(4) 
2015 includes restructuring charges of $3.7 million pre-tax ($3.1 million after-tax or $0.17 per diluted share) and a non-cash impairment of long-lived assets of $11.2 million pre-tax ($10.8 million after-tax or $0.58 per diluted share).
(5) 
On January 1, 2018, we adopted Accounting Standards Update (ASU) No. 2017-07, Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The components of net pension and postretirement benefit costs, except for service costs, are required to be presented in the Consolidated Statements of Operations separately from the service cost component in nonoperating expenses.
(6) 
On January 1, 2018, we adopted ASU No. 2014-9, Revenue from Contracts with Customers, (Topic 606) using the modified retrospective adoption approach. Our adoption of this ASU did not have a material impact to Net Sales. However, the adoption did result in an increase in Total Assets of $1.3 million at December 31, 2018. Periods prior to 2018 have not been restated for the adoption of this standards update.
(7) 
On January 1, 2019, we adopted ASU No. 2016-02, Leases (Topic 842), using the modified retrospective adoption approach. Our adoption of this ASU resulted in an increase to Total Assets. The impact at December 31, 2019 is disclosed in Note 15 to the Consolidated Financial Statements. Periods prior to 2019 have not been restated for the adoption of this standards update.


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ITEM 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
The Company is a world leader in designing, manufacturing and marketing solutions that empower customers to achieve quality cleaning performance, reduce environmental impact and help create a cleaner, safer, healthier world. The Company is committed to creating and commercializing breakthrough, sustainable cleaning innovations to enhance its broad suite of products, including floor maintenance and outdoor cleaning equipment, detergent-free and other sustainable cleaning technologies, aftermarket parts and consumables, equipment maintenance and repair service, specialty surface coatings and asset management solutions. Our products are used in many types of environments, including retail establishments, distribution centers, factories and warehouses, public venues such as arenas and stadiums, office buildings, schools and universities, hospitals and clinics, parking lots and streets, and more. Customers include contract cleaners to whom organizations outsource facilities maintenance, as well as businesses that perform facilities maintenance themselves. The Company reaches these customers through the industry's largest direct sales and service organization and through a strong and well-supported network of authorized distributors worldwide.

 
Historical Results
The following table compares the historical results of operations for the years ended December 31, 2019, 2018 and 2017 in dollars and as a percentage of Net Sales (in millions, except per share amounts and percentages):
 
2019
 
%
 
2018
 
%
 
2017
 
%
Net Sales
$
1,137.6

 
100.0

 
$
1,123.5

 
100.0

 
$
1,003.1

 
100.0

Cost of Sales
675.9

 
59.4

 
678.5

 
60.4

 
603.3

 
60.1

Gross Profit
461.7

 
40.6

 
445.0

 
39.6

 
399.8

 
39.9

Operating Expense:
 
 
 
 
 
 
 
 
 
 
 
Research and Development Expense
32.7

 
2.9

 
30.7

 
2.7

 
32.0

 
3.2

Selling and Administrative Expense
357.2

 
31.4

 
356.3

 
31.7

 
334.8

 
33.4

Total Operating Expense
389.9

 
34.3

 
387.0

 
34.5

 
366.8

 
36.6

Profit from Operations
71.8

 
6.3

 
58.0

 
5.2

 
33.0

 
3.3

Other Income (Expense):
 
 
 
 
 
 
 
 
 
 
 
Interest Income
3.3

 
0.3

 
3.0

 
0.3

 
2.4

 
0.2

Interest Expense
(21.1
)
 
(1.9
)
 
(23.3
)
 
(2.1
)
 
(25.4
)
 
(2.5
)
Net Foreign Currency Transaction Losses
(0.7
)
 
(0.1
)
 
(1.1
)
 
(0.1
)
 
(3.4
)
 
(0.3
)
Other Expense, Net
0.7

 
0.1

 
(0.8
)
 
(0.1
)
 
(7.9
)
 
(0.8
)
Total Other Expense, Net
(17.8
)
 
(1.6
)
 
(22.2
)
 
(2.0
)
 
(34.3
)
 
(3.4
)
Profit (Loss) Before Income Taxes
54.0

 
4.7

 
35.8

 
3.2

 
(1.3
)
 
(0.1
)
Income Tax Expense
8.1

 
0.7

 
2.3

 
0.2

 
4.9

 
0.5

Net Earnings (Loss) Including Noncontrolling Interest
45.9

 
4.0

 
33.5

 
3.0

 
(6.2
)
 
(0.6
)
Net Earnings (Loss) Attributable to Noncontrolling Interest
0.1

 

 
0.1

 

 

 

Net Earnings (Loss) Attributable to Tennant Company
$
45.8

 
4.0

 
$
33.4

 
3.0

 
$
(6.2
)
 
(0.6
)
Net Earnings (Loss) Attributable to Tennant Company per Share - Diluted
$
2.48

 
 
 
$
1.82

 
 

 
$
(0.35
)
 
 


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Net Sales
Net Sales in 2019 totaled $1,137.6 million, a 1.3% increase as compared to Net Sales of $1,123.5 million in 2018.
The components of the consolidated Net Sales change for 2019 as compared to 2018, and 2018 as compared to 2017, were as follows:
 
2019 v. 2018
 
2018 v. 2017
Organic Net Sales
2.2%
 
5.5%
Foreign Currency
(2.2%)
 
0.3%
Acquisitions
1.3%
 
6.2%
Total
1.3%
 
12.0%
The 1.3% increase in consolidated Net Sales for 2019 as compared to 2018 was driven by:
Organic sales increased approximately 2.2% which excludes the effects of foreign currency translation exchange and acquisitions. The organic sales increase was primarily driven by growth in the Americas in the strategic account channel, industrial equipment, service and parts and consumables in North America and broad-based growth in Latin America. The organic sales increases were partially offset by a decrease in our EMEA region from general market weakness across the entire region and a decline in the APAC region due to broad-based distribution softness in China.
1.3% from the acquisition of Gaomei.
An unfavorable impact from foreign currency exchange of approximately (2.2%).
The 12.0% increase in consolidated Net Sales for 2018 as compared to 2017 was primarily due to the following:
Organic sales increased approximately 5.5% which excludes the effects of foreign currency translation exchange and acquisitions. The organic sales increase was driven by growth in all geographic regions, with particular strength in the Americas from higher sales of commercial equipment in the strategic account channel. Strong organic sales in Germany and France and strength in China and Australia also contributed to the strong organic sales growth.
6.2% from the full year impact of the April 2017 acquisition of the IPC Group.
A favorable impact from foreign currency exchange of approximately 0.3%.
The following table sets forth annual Net Sales by geographic area and the related percentage change from the prior year (in millions, except percentages):
 
2019
 
%
 
2018
 
%
 
2017
Americas
$
722.4

 
4.5

 
$
691.0

 
7.9

 
$
640.3

Europe, Middle East and Africa
307.6

 
(8.3
)
 
335.6

 
22.6

 
273.7

Asia Pacific
107.6

 
11.0

 
96.9

 
8.8

 
89.1

Total
$
1,137.6

 
1.3

 
$
1,123.5

 
12.0

 
$
1,003.1

Americas – In 2019, Americas Net Sales increased 4.5% to $722.4 million as compared with $691.0 million in 2018. The divestiture of our Waterstar business in the second half of 2018 had an unfavorable impact of 0.3% on Net Sales. In addition, an unfavorable impact of foreign currency translation exchange effects within the Americas impacted Net Sales by approximately 0.8% in 2019. As a result, organic sales growth in the Americas favorably impacted Net Sales by approximately 5.6% due to higher strategic
 
account channel sales from strong demand for our autonomous cleaning machines and sales strength in our industrial equipment sales as well as growth in service and parts and consumables sales in North America. There was also broad-based growth in Latin America, particularly Mexico.
In 2018, Americas Net Sales increased 7.9% to $691.0 million as compared with $640.3 million in 2017. The direct impact of the second quarter 2017 acquisition of the IPC Group favorably impacted Net Sales by approximately 1.1%. In addition, an unfavorable impact of foreign currency translation exchange effects within the Americas impacted Net Sales by approximately 0.7% in 2018. As a result, organic sales growth in the Americas favorably impacted Net Sales by approximately 7.5% due to strong equipment sales in North America resulting from increases in all channels, particularly strategic accounts and the distribution channel. The Americas also experienced increased parts and service sales in 2018 as well as strong sales in Latin America, particularly Brazil.
Europe, Middle East and Africa – EMEA Net Sales in 2019 decreased 8.3% to $307.6 million as compared to 2018 Net Sales of $335.6 million. In 2019, the unfavorable impact of foreign currency translation exchange effects within EMEA impacted Net Sales by approximately 4.5%. As a result, organic sales in EMEA decreased by approximately 3.8% due to general market weakness in the region, primarily driven by sales declines in France, the United Kingdom, Germany and the Central Europe and Middle Eastern markets.
EMEA Net Sales in 2018 increased 22.6% to $335.6 million as compared to 2017 Net Sales of $273.7 million. In 2018, the direct impact of the second quarter 2017 acquisition of the IPC Group favorably impacted Net Sales by approximately 18.2%. In addition, a favorable impact of foreign currency translation exchange effects within EMEA impacted Net Sales by approximately 3.0% in 2018. As a result, organic sales growth in EMEA favorably impacted Net Sales by approximately 1.3% due to strong growth in Germany and France, partially offset by challenging comparable sales performance in Italy.
Asia Pacific – APAC Net Sales in 2019 increased 11.0% to $107.6 million as compared to 2018 Net Sales of $96.9 million. In 2019, the direct impact of the acquisition of Gaomei favorably impacted Net Sales by approximately 16.3%. In addition, an unfavorable direct impact of foreign currency translation exchange effects within APAC impacted Net Sales by approximately 3.5% in 2019. As a result, organic sales in APAC decreased by approximately 1.7% primarily due to sales declines in the China distribution business, partially offset by growth across the other APAC markets.
APAC Net Sales in 2018 increased 8.8% to $96.9 million as compared to 2017 Net Sales of $89.1 million. In 2018, the direct impact of the second quarter 2017 acquisition of the IPC Group favorably impacted Net Sales by approximately 6.3%. In addition, an unfavorable direct impact of foreign currency translation exchange effects within APAC impacted Net Sales by approximately 0.6% in 2018. As a result, organic sales growth in APAC favorably impacted Net Sales by approximately 3.2% primarily due to sales growth in China, India and Australia from strong commercial and industrial product sales through the direct and strategic account channels slightly offset by sales declines in Japan and Korea.
Gross Profit
Gross Profit margin was 40.6%, or 100 basis points higher in 2019 compared to 2018. Gross Profit margin was favorably impacted by pricing actions during the year in addition to cost reduction initiatives and favorable product mix. The favorable impacts were partially offset by higher material and labor costs, including the impact from higher tariffs, as well as an impact of $3.3 million from the discontinuation of the Green Machines, Orbio and outdoor product lines and a $0.9 million fair value inventory step-up related to our acquisition of Gaomei in 2019.
Gross Profit margin was 39.6%, or 30 basis points lower in 2018 compared to 2017. Gross Profit margin was unfavorably impacted by manufacturing productivity issues associated with raw material and labor

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shortages, robust strategic account sales which negatively impacted our mix, higher freight costs and negative impacts from tariffs. The unfavorable Gross Profit margin impacts were partially offset by improved operational performance in both manufacturing and service as well as favorable pricing in North America and EMEA. In addition, Gross Profit margin was favorably impacted by a $7.2 million fair value inventory step-up flow through related to our acquisition of the IPC Group in 2017 that did not repeat in 2018.
Operating Expenses
Research and Development Expense – The Company continues to invest in innovative product development with 2.9% of 2019 Net Sales spent on Research and Development ("R&D"). We continue to invest in developing innovative new products and technologies and the advancement of detergent-free products, fleet management, autonomous vehicles and other sustainable technologies. New products launched in 2019 included the M17 sweeper-scrubber and T17 scrubber.
R&D Expense increased $2.0 million, or 6.4%, in 2019 as compared to 2018. As a percentage of Net Sales, 2019 R&D Expense increased 14 basis points compared to the prior year. The increase in R&D as a percentage of sales reflects the timing of project spend in 2019 and headcount additions to continue to support our initiatives in order to propel our clear technology leadership position.
R&D Expense decreased $1.3 million, or 4.0%, in 2018 as compared to 2017. As a percentage of Net Sales, 2018 R&D Expense decreased 46 basis points compared to the prior year. The decrease in R&D as a percentage of sales reflects the impact of higher revenue in 2018 and the timing of anticipated project spend in 2018, including investment in our strategic relationship with Brain Corp., to accelerate development of our autonomous floor cleaning technology.
 
Selling and Administrative Expense – Selling and Administrative Expense ("S&A Expense") increased by $0.9 million, or 0.3%, in 2019 compared to 2018. As a percentage of Net Sales, 2019 S&A Expense decreased 30 basis points to 31.4% from 31.7% in 2018. The primary drivers of the increase from 2018 were approximately $5.9 million of Gaomei-related S&A Expense, a $3.5 million increase in restructuring costs and a $3.4 million increase in compensation-related expenses. These increases were mostly offset by $3.9 million lower acquisition and integration expenses as well as cost containment efforts, including a $7.0 million decrease in professional services.
S&A Expense increased by $21.5 million, or 6.4%, in 2018 compared to 2017. As a percentage of Net Sales, 2018 S&A Expense decreased 170 basis points to 31.7% from 33.4% in 2017. The primary drivers of the increase in spending were approximately $18.3 million of IPC-related S&A Expense due to an additional quarter in 2018 and $12.6 million in compensation-related expenses. These increases were partially offset by a decrease of $9.5 million in restructuring costs from 2017 to 2018.
Total Other Expense, Net
Interest Income – Interest Income was $3.3 million in 2019, an increase of $0.3 million from 2018. The increase between 2019 and 2018 was primarily due to interest income related to foreign currency swap activities.
Interest Income was $3.0 million in 2018, an increase of $0.6 million from 2017. The increase between 2018 and 2017 was primarily due to an extra quarter of interest income related to foreign currency swap activities.
Interest Expense – Interest Expense was $21.1 million in 2019, as compared to $23.3 million in 2018. The lower Interest Expense in 2019 was primarily due to carrying a lower level of debt on our Consolidated Balance Sheets due to debt paydowns, as further described in the Liquidity and Capital Resources section that follows.
Interest Expense was $23.3 million in 2018, as compared to $25.4 million in 2017. The lower Interest Expense in 2018 was primarily due to carrying a lower level of debt on our Consolidated Balance Sheets due to debt paydowns, as further described in the Liquidity and Capital Resources section that follows.
Net Foreign Currency Transaction Losses Net Foreign Currency Transaction Losses were $0.7 million in 2019 as compared to $1.1 million of losses in 2018. The favorable change in the impact from foreign currency transactions in 2019 was primarily due to fluctuations in foreign currency rates, specifically between the Canadian dollar, Mexican peso and the U.S. dollar, and settlements of transactional hedging activity in the normal course of business.
Net Foreign Currency Transaction Losses were $1.1 million in 2018 as compared to losses of $3.4 million in 2017. The favorable change in the impact from foreign currency transactions in 2018 was primarily due to fluctuations in foreign currency rates, specifically between the euro, Brazilian real and the U.S. dollar, and settlements of transactional hedging activity in the normal course of business. Additionally an unfavorable $1.1 million mark-to-market adjustment of a foreign exchange call option was recorded in 2017 that did not recur in 2018. This instrument was held in connection with our acquisition of the IPC Group in April 2017.
Other Income (Expense), Net – Other Income (Expense), Net was $0.7 million income in 2019 as compared to $0.8 million expense in 2018. The favorable change in Other Income (Expense), Net was due primarily to a $1.8 million acquisition-related indemnification settlement that occurred in 2019.
Other Income (Expense), Net was $0.8 million expense in 2018 as compared to $7.9 million expense in 2017. The unfavorable change in Other Income (Expense), Net was due primarily to a pension settlement loss of $6.4 million in 2017 that did not recur in 2018.

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Income Taxes
The overall effective income tax rate was 15.1%, 6.4% and (380.2)% in 2019, 2018 and 2017, respectively.
The expense for 2019 included $2.8 million tax benefit associated with $10.7 million of non-recurring expenses, which impacted the effective tax rate by (2.1)%.
Our effective tax rate fluctuates from year to year due to the global nature of our operations. The effective tax rate increased to 15.1% in 2019 from 6.4% in 2018 primarily due to the mix in full year taxable earnings by country, a favorable tax ruling from Italian tax authorities related to the deductibility of interest expense in Italy received in 2018, and fewer tax benefits related to the exercise of soon-to-expire stock options, partially offset by income tax benefits related to a change in valuation allowances in The Netherlands and the U.S.
The tax expense for 2018 included a $3.5 million tax benefit associated with $10.3 million non-recurring expenses, which impacted the effective tax rate by (6.2)%.
Other Comprehensive Income (Loss)
Foreign Currency Translation Adjustments – For the years ended December 31, 2019 and 2018, we recorded a pre-tax foreign currency translation loss of $4.5 million and a loss of $16.2 million, respectively. These adjustments resulted from translating the financial statements of our non-U.S. dollar functional currency subsidiaries into our reporting currency, which is the U.S. dollar, as well as other adjustments permitted by foreign currency accounting rules.
During 2019, we recorded a pre-tax currency translation loss of $4.5 million. These adjustments were caused primarily by the strengthening of the U.S. dollar to most currencies. In 2019, the U.S. dollar strengthened by approximately 2% to the euro, 1% to the Chinese renminbi, and approximately 3% to the Brazilian real.
During 2018, we recorded a pre-tax currency translation loss of $16.2 million. These adjustments were caused primarily by the strengthening of the U.S. dollar to most currencies. In 2018, the U.S. dollar strengthened by approximately 5% to the euro and approximately 15% to the Brazilian real.
Pension and Postretirement Medical Benefits The summarized changes in Accumulated Other Comprehensive Loss for the three years ended December 31 were as follows:
 
Pension and Postretirement Medical Benefits
 
2019
2018
2017
Prior Service Costs
$

$
0.1

$

Net actuarial (gain) loss
0.4

(1.7
)
0.6

Amortization of net actuarial loss
0.1

(0.1
)
(0.1
)
Settlement Charge


(6.4
)
Total recognized in other comprehensive (income) loss
$
0.5

$
(1.7
)
$
(5.9
)
The $0.5 million loss in 2019 was primarily due to a $0.4 million actuarial loss relating to an annual actuarial analysis resulting from a 94 basis point decrease in the U.S. pension discount rate, a 69 basis point decrease in the non-U.S. discount rate and an 89 basis point increase in the postretirement discount rate.
The $1.7 million gain in 2018 was due to an actuarial gain relating to an annual actuarial analysis resulting from a 67 basis point increase in the U.S. pension discount rate, a 27 basis point increase in the non-U.S. discount rate and a 69 basis point increase in the postretirement discount rate.
 
Cash Flow Hedging – For the years ended December 31, 2019 and 2018, we recorded pre-tax adjustments on cash flow hedge financial instruments of a gain of $4.6 million and a gain of $1.3 million, respectively, in Other Comprehensive Income (Loss) as further disclosed in Note 11 to the Company's Consolidated Financial Statements.
The $4.6 million gain in 2019 was primarily due to the strengthening of the U.S. dollar relative to the euro, partially offset by a weakening of the U.S. dollar relative to the Canadian dollar. During 2019, the U.S. dollar strengthened approximately 2% to the euro and weakened approximately 5% to the Canadian dollar.
The $1.3 million gain in 2018 was primarily due to the strengthening of the U.S. dollar relative to the Canadian dollar and Euro. During 2018, the U.S. dollar strengthened approximately 8% to the Canadian dollar and approximately 5% to the euro.
Liquidity and Capital Resources
Liquidity – Cash, Cash Equivalents and Restricted Cash totaled $74.6 million at December 31, 2019, as compared to $86.1 million as of December 31, 2018. Cash, Cash Equivalents and Restricted Cash held by our foreign subsidiaries totaled $45.7 million as of December 31, 2019, as compared to $59.2 million as of December 31, 2018. Wherever possible, cash management is centralized and intercompany financing is used to provide working capital to subsidiaries as needed. Our current ratio was 1.7 as of December 31, 2019, and 1.9 as of December 31, 2018, and our working capital was $206.1 million and $219.8 million, respectively.
Our Debt-to-Capital ratio was 48.5% as of December 31, 2019, compared with 53.0% as of December 31, 2018. Our capital structure was comprised of $338.8 million of Debt and $359.9 million of Tennant Company Shareholders’ Equity as of December 31, 2019.
Operating Activities – Cash provided by operating activities was $71.9 million in 2019, $80.0 million in 2018 and $54.2 million in 2017. In 2019, cash provided by operating activities was driven primarily by net earnings, after adding back non-cash items, and a $4.5 million increase in Employee Compensation and Benefits liabilities. These cash inflows were partially offset by cash outflows from a $21.1 million increase in Inventories to support future sales growth, an increase in Accounts Receivable of $8.5 million resulting from higher sales levels, the variety of payment terms offered and mix of business as well as a decrease in Accounts Payable of $7.5 million due to timing of payments.
In 2018, cash provided by operating activities was driven primarily by net earnings, after adding back non-cash items, a $12.6 million increase in Employee Compensation and Benefits liabilities and an increase in Accounts Payable of $4.6 million due to timing of payments. These inflows were partially offset by an increase in Accounts Receivable of $7.6 million resulting from higher sales levels, the variety of payment terms offered and mix of business as well as a $16.6 million increase in Inventories to support future sales growth.
Investing Activities – Net cash used in investing activities was $55.6 million in 2019, $16.1 million in 2018 and $375.3 million in 2017. In 2019, we used $38.3 million for net capital expenditures. Net capital expenditures included investments in a new administrative building, information technology process improvement projects, tooling related to new product development and manufacturing equipment. In addition, we used $19.7 million for the acquisition of the Gaomei, net of cash acquired.
In 2018, we used $18.7 million for net capital expenditures. Net capital expenditures included investments in information technology process improvement projects, tooling related to new product development and manufacturing equipment. We also used $2.8 million for the purchase of a technology license and other intangibles. In addition, we received $4.0 million in proceeds from the sale of assets of our Waterstar business.
Financing Activities – Net cash used in financing activities was $27.4 million in 2019. Net cash used in financing activities was $32.8 million in 2018.

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Net cash provided by financing activities was $319.4 million in 2017. In 2019, we made $41.8 million of Debt payments and dividend payments of $16.0 million. Our annual cash dividend payout increased for the 48th consecutive year to $0.88 per share in 2019, an increase of $0.03 per share over 2018. These cash outflows were partially offset by proceeds from credit facility borrowings of $25.0 million and proceeds from the issuance of Common Stock of $6.1 million.
In 2018, cash outflows resulted from $38.3 million of Long-Term Debt payments and dividend payments of $15.3 million. Our annual cash dividend payout increased to $0.85 per share in 2018, an increase of $0.01 per share over 2017. These cash outflows were partially offset by proceeds from the incurrence of Long-Term Debt associated with the Gaomei acquisition, and the issuance of Common Stock of $11.0 million and $5.9 million, respectively.
At December 31, 2019, there were 1,392,263 remaining shares authorized for repurchase.
There were no shares repurchased in 2019, 2018 or 2017. Our 2017 Credit Agreement, as defined below, restricts the payment of dividends or repurchasing of stock if, after giving effect to such payments and assuming no default exists or would result from such payment, our leverage ratio is greater than 2.50 to 1, in such case limiting such payments to an amount ranging from $50.0 million to $75.0 million during any fiscal year based on our leverage ratio after giving effect to such payment. Our Senior Notes due 2025 (the "Notes") also contain certain restrictions, which are generally less restrictive than those contained in the 2017 Credit Agreement.
Indebtedness – During 2017, the Company and certain of our foreign subsidiaries entered into a Credit Agreement (the “2017 Credit Agreement”) with JPMorgan, as administrative agent, Goldman Sachs Bank USA, as syndication agent, Wells Fargo, National Association, U.S. Bank National Association, and HSBC Bank USA, National Association, as co-documentation agents, and the lenders (including JPMorgan) from time to time party thereto.
Borrowings denominated in U.S. dollars under the 2017 Credit Agreement bear interest at a rate per annum equal to the adjusted London interbank offered rate ("LIBOR") for a one month period and do not have fallback language for when LIBOR is no longer available. Uncertainty related to the LIBOR phase out at the end of 2021 may adversely impact the value of, and our obligations under, the 2017 Credit Agreement. We may need to renegotiate our financial obligations that utilize LIBOR. The Company continues to assess and monitor regulatory developments during the transition period.
For further details regarding our indebtedness, see Note 9 to the Consolidated Financial Statements.
Contractual Obligations – Our contractual obligations as of December 31, 2019, are summarized by period due in the following table (in millions):
 
 
Total
 
Less Than 1 Year
 
1 - 3 Years
 
3 - 5 Years
 
More Than 5 Years
Long-term debt(1)
$
342.6

 
$
31.3

 
$
11.1

 
$
0.2

 
$
300.0

Interest payments on long-term
debt(1)
92.9

 
18.1

 
35.4

 
33.8

 
5.6

Finance leases
0.2

 
0.2

 

 

 

Secured borrowings payment
2.6

 
1.1

 
1.3

 
0.2

 

Interest payments on secured borrowings
0.2

 
0.1

 
0.1

 

 

Retirement benefit plans(2)
1.2

 
1.2

 

 

 

Deferred compensation arrangements(3)
2.8

 
1.1

 
1.0

 
0.5

 
0.2

Operating
leases(4)
50.7

 
18.2

 
21.6

 
8.7

 
2.2

Purchase obligations(5)
52.0

 
52.0

 

 

 

Total contractual obligations
$
545.2

 
$
123.3

 
$
70.5

 
$
43.4

 
$
308.0

(1) 
Long-term debt represents borrowings through the Notes and the 2017 Credit Agreement with JPMorgan. Interest on the Notes accrues at the rate of 5.625% per annum and is payable semiannually in cash on each May 1 and November 1. Repayment of the principal amount of the Senior Notes is due upon expiration of the agreement in 2025. Interest payments on our 2017 Credit Agreement with JPMorgan were calculated using the December 31, 2019 30-day LIBOR rate plus a spread.
(2) 
Our retirement benefit plans, as described in Note 13 to the Consolidated Financial Statements, require us to make contributions to the plans from time to time. 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 2020 expected contribution in the contractual obligations table.
(3) 
The unfunded deferred compensation arrangements covering certain current and retired management employees totaled $2.8 million as of December 31, 2019. Our estimated distributions in the contractual obligations table are based upon a number of assumptions including termination dates and participant distribution elections.
(4) 
Operating lease commitments consist primarily of office and warehouse facilities, vehicles and office equipment as well as the estimated liability for residual value guarantee as discussed in Note 15 to the Consolidated Financial Statements.
(5) 
Purchase obligations include all known open purchase orders, contractual purchase commitments and contractual obligations as of December 31, 2019.

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Total contractual obligations exclude our gross unrecognized tax benefits of $7.5 million and accrued interest and penalties of $0.6 million as of December 31, 2019. 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 17 to the Consolidated Financial Statements.
Newly Issued Accounting Guidance
See Note 1 to the Consolidated Financial Statements for information on new accounting pronouncements.
No other new accounting pronouncements issued but not yet effective have had, or are expected to have, a material impact on our results of operations or financial position.
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 to 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.
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 a reporting unit below its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's 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 quantitative goodwill impairment test. The qualitative test is used as an indicator to identify if there is potential goodwill impairment. If the qualitative test indicates there may be an impairment, we perform the quantitative test, which measures the amount of the goodwill impairment, if any. We perform our goodwill impairment analysis as of year-end or when an event occurs or circumstances change that may reduce the fair value of a reporting unit below its carrying amount, 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. Based on our analysis of qualitative factors, we determined that it was not more likely than not that the fair value of our reporting units was less than its respective carrying amount as of December 31, 2019. We had goodwill of $195.1 million as of December 31, 2019.
 
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 Operations.
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 Operations. 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, 2019, a valuation allowance of $6.2 million was recorded against foreign tax loss carryforwards, foreign tax credit carryforwards and state credit carryforwards.
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 7, contains 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:
Ability to effectively manage strategic plans or growth processes.
Ability to successfully upgrade and evolve our information technology systems.
Fluctuations in the cost, quality or availability of raw materials and purchased components.
Geopolitical and economic uncertainty throughout the world.
Ability to integrate acquisitions.
Ability to attract, retain and develop key personnel and create effective succession planning strategies.
Ability to successfully protect our information technology systems from cybersecurity risks.
Ability to develop and commercialize new innovative products and services.

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Competition in our business.
Occurrence of a significant business interruption.
Ability to comply with global laws and regulations.
Potential disruption of our business from actions of activist investors or others.
Unforeseen product liability claims or product quality issues.
Ability to generate sufficient cash to satisfy our debt obligations.
Foreign currency fluctuations.
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, except as required by law. 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.
Fluctuations 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.
We continue to focus on mitigating the risk of future raw material or other product component cost increases through supplier negotiations, ongoing optimization of our supply chain, the continuation of cost reduction actions and product pricing. The success of these efforts will depend upon our ability to leverage our commodity spend in the current global economic environment. 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 2020.
Foreign Currency Exchange Rate 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 renminbi, Brazilian real and Mexican peso 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 our international operations 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.
In the normal course of business, we actively manage the exposure of our foreign currency exchange rate market risk by entering into various hedging instruments with counterparties that are highly rated financial institutions. We may use foreign exchange purchased options or forward contracts to hedge our foreign currency denominated forecasted revenues or forecasted sales to wholly-owned foreign subsidiaries. Additionally, we hedge our net recognized foreign currency assets and liabilities with foreign exchange forward contracts. We hedge these exposures to reduce the risk that our net earnings and cash flows will be adversely affected by changes in foreign exchange rates. We do not enter into any of these instruments for speculative or trading purposes to generate revenue.
These contracts are carried at fair value and have maturities between one and 12 months. The gains and losses on these contracts generally approximate changes in the value of the related assets, liabilities or forecasted transactions. Some of the derivative instruments we enter into do not meet the criteria for cash flow hedge accounting treatment; therefore, changes in fair value are recorded in Foreign Currency Transaction Losses on our Consolidated Statements of Operations.
We use foreign currency exchange rate derivatives to hedge our exposure to fluctuations in exchange rates for anticipated intercompany cash transactions between the Company and its subsidiaries. During 2017, we entered into euro to U.S. dollar foreign exchange cross currency swaps for all of the anticipated cash flows associated with an intercompany loan from a wholly-owned European subsidiary. We entered into these foreign exchange cross currency swaps to hedge the foreign currency-denominated cash flows associated with this intercompany loan, and accordingly, they are not speculative in nature. We designated these cross currency swaps as cash flow hedges. The hedged cash flows as of December 31, 2019 included €166.8 million of total notional value. As of December 31, 2019, the aggregate scheduled interest payments over the course of the loan and related swaps amounted to €16.8 million. The scheduled maturity and principal payment of the loan and related swaps of €150.0 million are due in April 2022. There were no new cross currency swaps designated as cash flow hedges as of December 31, 2019.
For further information regarding our foreign currency derivatives and hedging programs, see Note 11 to the Consolidated Financial Statements.
For details of the estimated effects of currency translation on the operations of our operating segments, see Item 7 – Management's Discussion and Analysis of Financial Condition and Results of Operations.
Other Matters Management regularly reviews our business operations with the objective of improving financial performance and maximizing our return on investment. 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.

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ITEM 8 – Financial Statements and Supplementary Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors
Tennant Company:
Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting
We have audited the accompanying consolidated balance sheets of Tennant Company and subsidiaries (the Company) as of December 31, 2019 and 2018, the related consolidated statements of operations, comprehensive income, equity, and cash flows for each of the years in the three-year period ended December 31, 2019, and the related notes and financial statement Schedule II - Valuation and Qualifying Accounts (collectively, the consolidated financial statements). We also have audited the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2019, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019 based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
The Company acquired Gaomei during 2019, and management excluded from its assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2019, Gaomei’s internal control over financial reporting associated with total assets of $41.3 million and total revenues of $15.8 million included in the consolidated financial statements of the Company as of and for the year ended December 31, 2019. Our audit of internal control over financial reporting of the Company also excluded an evaluation of the internal control over financial reporting of Gaomei.
Change in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, the Company has changed its method of accounting for leases as of January 1, 2019 due to the adoption of Accounting Standards Update 2016-02, Leases (Topic 842), and related amendments, and as discussed in Note 1 to the consolidated financial statements, the Company has changed its method of accounting for revenues as of January 1, 2018 due to the adoption of Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606), and related amendments.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

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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.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Evaluation of the acquisition-date fair value of contingent consideration
As discussed in Note 5 to the consolidated financial statements, on January 4, 2019, the Company acquired Gaomei for a total purchase price of $27.1 million, including $4.7 million representing the estimated fair value of contingent consideration at the acquisition date. The acquisition-date fair value was based on probability-weighted scenario analyses of achieving certain levels of gross profit growth over a three-year period. Consideration ranging from zero to $42.4 million will be paid in March 2021 if the gross profit growth targets are met.
We identified the evaluation of the acquisition-date fair value of contingent consideration as a critical audit matter. A high degree of auditor judgment was required in assessing the valuation method, forecasted annual gross profit growth rates, gross profit volatility rate, and discount rate, as the fair value determination is sensitive to minor changes in these assumptions.
The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over the Company’s fair value determination process, including controls over the development of the forecasted annual gross profit growth rates, gross profit volatility rate, and discount rate. We analyzed the forecasted gross profit growth rates by comparing the Gaomei forecasted gross profit growth rates to historical results to assess the Company’s ability to accurately forecast. We performed sensitivity analyses to assess the impact of changes in these assumptions on the Company’s fair value determination of the contingent consideration. We involved valuation professionals with specialized skills and knowledge who assisted in:
evaluating the valuation method used by the Company to determine the acquisition-date fair value of contingent consideration,
evaluating the Company’s gross profit volatility rate by comparing the Company’s inputs to amounts calculated from publicly available data for comparable entities and assessing the resulting rates,
evaluating the Company’s discount rate by comparing the Company’s inputs to publicly available data for comparable entities and assessing the resulting rates, and
performing independent simulation analyses to assess the accuracy of the Company’s resulting fair value of contingent consideration.


/s/ KPMG LLP
We have served as the Company's auditor since 1954.

Minneapolis, Minnesota
February 27, 2020

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Consolidated Statements of Operations
TENNANT COMPANY AND SUBSIDIARIES
(In millions, except shares and per share data)
Years ended December 31
2019
 
2018
 
2017
Net Sales
$
1,137.6

 
$
1,123.5

 
$
1,003.1

Cost of Sales
675.9

 
678.5

 
603.3

Gross Profit
461.7

 
445.0

 
399.8

Operating Expense:
 

 
 

 
 

Research and Development Expense
32.7

 
30.7

 
32.0

Selling and Administrative Expense
357.2

 
356.3

 
334.8

Total Operating Expense
389.9

 
387.0

 
366.8

Profit from Operations
71.8

 
58.0

 
33.0

Other Income (Expense):
 

 
 

 
 

Interest Income
3.3

 
3.0

 
2.4

Interest Expense
(21.1
)
 
(23.3
)
 
(25.4
)
Net Foreign Currency Transaction Losses
(0.7
)
 
(1.1
)
 
(3.4
)
Other Income (Expense), Net
0.7

 
(0.8
)
 
(7.9
)
Total Other Expense, Net
(17.8
)
 
(22.2
)
 
(34.3
)
Profit (Loss) Before Income Taxes
54.0

 
35.8

 
(1.3
)
Income Tax Expense
8.1

 
2.3

 
4.9

Net Earnings (Loss) Including Noncontrolling Interest
45.9

 
33.5

 
(6.2
)
Net Earnings (Loss) Attributable to Noncontrolling Interest
0.1

 
0.1

 

Net Earnings (Loss) Attributable to Tennant Company
$
45.8

 
$
33.4

 
$
(6.2
)
 
 
 
 
 
 
Net Earnings (Loss) Attributable to Tennant Company per Share:
 

 
 

 
 

Basic
$
2.53

 
$
1.86

 
$
(0.35
)
Diluted
$
2.48

 
$
1.82

 
$
(0.35
)
 
 
 
 
 
 
Weighted Average Shares Outstanding:
 
 
 

 
 

Basic
18,118,486

 
17,940,438

 
17,695,390

Diluted
18,453,145

 
18,338,569

 
17,695,390

See accompanying Notes to Consolidated Financial Statements.

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Consolidated Statements of Comprehensive Income
TENNANT COMPANY AND SUBSIDIARIES
(In millions)
Years ended December 31
2019
 
2018
 
2017
Net Earnings (Loss) Including Noncontrolling Interest
$
45.9

 
$
33.5

 
$
(6.2
)
Other Comprehensive (Loss) Income:
 

 
 

 
 

Foreign currency translation adjustments
(4.5
)
 
(16.2
)
 
28.3

Pension and retiree medical benefits
(0.5
)
 
1.7

 
5.9

Cash flow hedge
4.6

 
1.3

 
(7.7
)
Income Taxes:
 
 
 
 
 
Foreign currency translation adjustments
0.1

 
0.2

 
0.3

Pension and retiree medical benefits
0.1

 
(0.5
)
 
(2.1
)
Cash flow hedge
(1.1
)
 
(1.4
)
 
2.9

Total Other Comprehensive (Loss) Income, net of tax
(1.3
)
 
(14.9
)
 
27.6

Total Comprehensive Income Including Noncontrolling Interest
44.6

 
18.6

 
21.4

Comprehensive Income Attributable to Noncontrolling Interest
0.1

 
0.1

 

Comprehensive Income Attributable to Tennant Company
$
44.5

 
$
18.5

 
$
21.4

See accompanying Notes to Consolidated Financial Statements.

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Consolidated Balance Sheets
TENNANT COMPANY AND SUBSIDIARIES
(In millions, except shares and per share data)
December 31
2019
 
2018
ASSETS
 
 
 
Current Assets:
 
 
 
Cash, Cash Equivalents, and Restricted Cash
$
74.6

 
$
86.1

Receivables:
 

 
 

Trade, less Allowances of $3.6 and $2.5, respectively
216.5

 
208.0

Other
6.8

 
8.2

Net Receivables
223.3

 
216.2

Inventories
150.1

 
135.1

Prepaid and Other Current Assets
33.0

 
31.2

Total Current Assets
481.0

 
468.6

Property, Plant and Equipment
412.5

 
386.6

Accumulated Depreciation
(239.2