Tennant Company - 10-Q quarterly report FY2014 Q3

UNITED STATES OF AMERICA

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



[ü]	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended September 30, 2014
OR
[ ]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from ___________ to __________

Commission File Number 1-16191

______________________________________

TENNANT COMPANY

(Exact name of registrant as specified in its charter)



Minnesota	41-0572550
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

701 North Lilac Drive

P.O. Box 1452

Minneapolis, Minnesota 55440

(Address of principal executive offices)

(Zip Code)

(763) 540-1200

(Registrant’s telephone number, including area code)

______________________________________________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.



Yes	ü	No

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



Yes	ü	No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer	ü		Accelerated filer
Non-accelerated filer		(Do not check if a smaller reporting company)	Smaller reporting company

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).



Yes	No	ü

As of October 15, 2014, there were 18,400,228 shares of Common Stock outstanding.

TABLE OF CONTENTS



PART I - FINANCIAL INFORMATION		Page
Item 1.	Financial Statements (Unaudited)	3
	Condensed Consolidated Statements of Earnings	3
	Condensed Consolidated Statements of Comprehensive Income	4
	Condensed Consolidated Balance Sheets	5
	Condensed Consolidated Statements of Cash Flows	6
	Notes to the Condensed Consolidated Financial Statements	7
	1. Basis of Presentation	7
	2. Newly Adopted Accounting Pronouncements	7
	3. Management Actions	7
	4. Acquisitions and Divestitures	8
	5. Inventories	9
	6. Goodwill and Intangible Assets	9
	7. Debt	10
	8. Warranty	11
	9. Fair Value Measurements	11
	10. Retirement Benefit Plans	12
	11. Commitments and Contingencies	13
	12. Accumulated Other Comprehensive Loss	13
	13. Income Taxes	14
	14. Share-Based Compensation	14
	15. Earnings Per Share	14
	16. Segment Reporting	15
	17. Related Party Transactions	15
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	22
Item 4.	Controls and Procedures	23
PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	23
Item 1A.	Risk Factors	23
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	23
Item 6.	Exhibits	24
Signatures		25

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PART I – FINANCIAL INFORMATION


Item 1.	Financial Statements

TENNANT COMPANY CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited)

	Three Months Ended						Nine Months Ended
(In thousands, except shares and per share data)	September 30						September 30
	2014			2013			2014			2013
Net Sales	$	202,643		$	188,541		$	605,706		$	556,871
Cost of Sales	115,480			106,679			346,363			314,745
Gross Profit	87,163			81,862			259,343			242,126

Operating Expense:
Research and Development Expense	6,844			7,970			21,976			23,309
Selling and Administrative Expense	63,215			57,663			187,885			174,083
Total Operating Expense	70,059			65,633			209,861			197,392
Profit from Operations	17,104			16,229			49,482			44,734

Other Income (Expense):
Interest Income	84			67			254			295
Interest Expense	(396		)	(440		)	(1,301		)	(1,318		)
Net Foreign Currency Transaction Losses	(276		)	(303		)	(156		)	(1,046		)
Other Expense, Net	(162		)	(157		)	(282		)	(238		)
Total Other Expense, Net	(750		)	(833		)	(1,485		)	(2,307		)

Profit Before Income Taxes	16,354			15,396			47,997			42,427
Income Tax Expense	4,562			4,779			14,887			12,497
Net Earnings	$	11,792		$	10,617		$	33,110		$	29,930

Earnings per Share:
Basic	$	0.65		$	0.58		$	1.82		$	1.64
Diluted	$	0.63		$	0.56		$	1.77		$	1.59

Weighted Average Shares Outstanding:
Basic	18,120,729			18,267,828			18,201,291			18,288,083
Diluted	18,635,287			18,811,638			18,727,818			18,823,745

Cash Dividend Declared per Common Share	$	0.20		$	0.18		$	0.58		$	0.54

See accompanying Notes to the Condensed Consolidated Financial Statements.

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TENNANT COMPANY CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

	Three Months Ended						Nine Months Ended
(In thousands)	September 30						September 30
	2014			2013			2014			2013
Net Earnings	$	11,792		$	10,617		$	33,110		$	29,930
Other Comprehensive Income (Loss):
Foreign currency translation adjustments	(6,963		)	2,696			(5,112		)	(1,221		)
Pension and retiree medical benefits	46			4			138			921
Income Taxes:
Foreign currency translation adjustments	(6		)	(1		)	7			(8		)
Pension and retiree medical benefits	(17		)	89			(51		)	86
Total Other Comprehensive Income (Loss), net of tax	(6,940		)	2,788			(5,018		)	(222		)
Comprehensive Income	$	4,852		$	13,405		$	28,092		$	29,708

See accompanying Notes to the Condensed Consolidated Financial Statements.

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TENNANT COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

	September 30,			December 31,
(In thousands, except shares and per share data)	2014			2013
ASSETS
Current Assets:
Cash and Cash Equivalents	$	79,784		$	80,984
Restricted Cash	395			393
Accounts Receivable, less Allowances of $5,008 and $4,526, respectively	141,771			140,182
Inventories	83,964			66,906
Prepaid Expenses	13,473			11,426
Deferred Income Taxes, Current Portion	8,200			13,723
Other Current Assets	1,658			1,682
Total Current Assets	329,245			315,296
Property, Plant and Equipment	311,704			300,906
Accumulated Depreciation	(226,513		)	(217,430		)
Property, Plant and Equipment, Net	85,191			83,476
Deferred Income Taxes, Long-Term Portion	6,072			2,423
Goodwill	18,725			18,929
Intangible Assets, Net	16,680			19,028
Other Assets	15,337			17,154
Total Assets	$	471,250		$	456,306
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Short-Term Borrowings and Current Portion of Long-Term Debt	$	3,717		$	3,803
Accounts Payable	57,896			53,079
Employee Compensation and Benefits	33,549			29,756
Income Taxes Payable	1,140			812
Other Current Liabilities	43,209			44,076
Total Current Liabilities	139,511			131,526
Long-Term Liabilities:
Long-Term Debt	24,450			28,000
Employee-Related Benefits	24,407			25,173
Deferred Income Taxes, Long-Term Portion	4,553			2,870
Other Liabilities	4,961			4,891
Total Long-Term Liabilities	58,371			60,934
Total Liabilities	197,882			192,460
Commitments and Contingencies (Note 11)
Shareholders' Equity:
Preferred Stock, $0.02 par value; 1,000,000 shares authorized; no shares issued or outstanding	—			—
Common Stock, $0.375 par value; 60,000,000 shares authorized; 18,408,026 and 18,491,524 shares issued and outstanding, respectively	6,903			6,934
Additional Paid-In Capital	24,271			31,956
Retained Earnings	272,183			249,927
Accumulated Other Comprehensive Loss	(29,989		)	(24,971		)
Total Shareholders’ Equity	273,368			263,846
Total Liabilities and Shareholders’ Equity	$	471,250		$	456,306

See accompanying Notes to the Condensed Consolidated Financial Statements.

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TENNANT COMPANY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

	Nine Months Ended
(In thousands)	September 30
	2014			2013
OPERATING ACTIVITIES
Net Earnings	$	33,110		$	29,930
Adjustments to reconcile Net Earnings to Net Cash Provided by Operating Activities:
Depreciation	13,186			13,178
Amortization	1,812			1,914
Deferred Income Taxes	3,136			(4		)
Share-Based Compensation Expense	5,261			5,106
Allowance for Doubtful Accounts and Returns	1,248			1,153
Other, Net	(45		)	155
Changes in Operating Assets and Liabilities:
Receivables	(6,077		)	(6,551		)
Inventories	(21,720		)	(11,798		)
Accounts Payable	5,879			2,826
Employee Compensation and Benefits	1,755			(2,620		)
Other Current Liabilities	216			1,716
Income Taxes	137			940
Other Assets and Liabilities	(1,073		)	863
Net Cash Provided by Operating Activities	36,825			36,808
INVESTING ACTIVITIES
Purchases of Property, Plant and Equipment	(13,476		)	(11,380		)
Proceeds from Disposals of Property, Plant and Equipment	235			97
Acquisition of Business, Net of Cash Acquired	—			(750		)
Proceeds from Sale of Business	1,418			3,520
Increase in Restricted Cash	(12		)	(224		)
Net Cash Used for Investing Activities	(11,835		)	(8,737		)
FINANCING ACTIVITIES
Payments of Short-Term Debt	(1,500		)	—
Short-Term Debt Borrowings	—			1,500
Payment of Long-Term Debt	(2,015		)	(938		)
Purchases of Common Stock	(13,609		)	(16,626		)
Proceeds from Issuance of Common Stock	1,650			5,994
Excess Tax Benefit on Stock Plans	1,620			2,944
Dividends Paid	(10,854		)	(9,918		)
Net Cash Used for Financing Activities	(24,708		)	(17,044		)
Effect of Exchange Rate Changes on Cash and Cash Equivalents	(1,482		)	342
Net Increase (Decrease) in Cash and Cash Equivalents	(1,200		)	11,369
Cash and Cash Equivalents at Beginning of Period	80,984			53,940
Cash and Cash Equivalents at End of Period	$	79,784		$	65,309

Supplemental Disclosure of Cash Flow Information:
Cash Paid for Income Taxes	$	8,274		$	8,093
Cash Paid for Interest	$	1,107		$	1,189
Supplemental Non-cash Investing and Financing Activities:
Capital Expenditures in Accounts Payable	$	1,001		$	873

See accompanying Notes to the Condensed Consolidated Financial Statements.

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TENNANT COMPANY

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(In thousands, except shares and per share data)


1.	Basis of Presentation

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with the Securities and Exchange Commission (“SEC”) requirements for interim reporting, which allows certain footnotes and other financial information normally required by accounting principles generally accepted in the United States of America to be condensed or omitted. In our opinion, the Condensed Consolidated Financial Statements contain all adjustments (consisting of only normal recurring adjustments) necessary for the fair presentation of our financial position and results of operations.

These statements should be read in conjunction with the Consolidated Financial Statements and Notes included in our annual report on Form 10-K for the year ended December 31, 2013. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year.


2.	Newly Adopted Accounting Pronouncements

Presentation of Unrecognized Tax Benefits

In July 2013, the Financial Accounting Standards Board (“FASB”) issued amendments to guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss or a tax credit carryforward exists. The amendments require entities to present an unrecognized tax benefit netted against certain deferred tax assets when specific requirements are met. The amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. Adoption of this guidance did not have a material impact on our results of operations or financial position.


3.	Management Actions

Q4 2013 Action - During the fourth quarter of 2013, we implemented a restructuring action to right size the cost structure in our European operations, primarily as a result of the strategic decision to adjust our Direct versus Distribution selling efforts, to enhance our go-to-market approach which is anticipated to improve profitability and increase customer satisfaction. The pre-tax charge of $1,577 recognized in the fourth quarter consisted primarily of severance and was included within Selling and Administrative Expense in the Condensed Consolidated Statements of Earnings. We believe the anticipated savings will offset the pre-tax charge in approximately 1.5 years. The charge impacted our Europe, Middle East, Africa (EMEA) operating segment, which has no goodwill balance. We do not expect additional costs will be incurred related to this restructuring action.

A reconciliation of the beginning and ending liability balances is as follows:



	Severance and Related Costs
Q4 2013 restructuring action	$	1,577
December 31, 2013 balance	$	1,577
2014 utilization:
Cash payments	(1,188		)
Foreign currency adjustments	(47		)
Change in estimate	(25		)
September 30, 2014 balance	$	317

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Q1 2013 Action - During the first quarter of 2013, we implemented a restructuring action to right size the cost structure of our European operations, primarily focused on reducing the size of our sales and service organization, in response to the challenging economic situation. The pre-tax charge of $1,440 recognized in the first quarter consisted primarily of severance and was included within Selling and Administrative Expense in the Condensed Consolidated Statements of Earnings. We believe the anticipated savings will offset the pre-tax charge in approximately one year. The charge impacted our Europe, Middle East, Africa (EMEA) operating segment, which has no goodwill balance. We do not expect additional costs will be incurred related to this restructuring action.

A reconciliation of the beginning and ending liability balances is as follows:



	Severance and Related Costs
Q1 2013 restructuring action	$	1,440
Cash payments	(1,110		)
Foreign currency adjustments	17
December 31, 2013 balance	$	347
2014 utilization:
Cash payments	(120		)
Foreign currency adjustments	(23		)
September 30, 2014 balance	$	204


4.	Acquisitions and Divestitures

Acquisitions

On May 31, 2011, we acquired Water Star, Inc. (“Water Star”), a Newbury, Ohio firm specializing in electrochemistry, for $4,456. The total purchase price of $4,456 was comprised of $2,956 paid at closing and two $750 installment payments which were paid in cash on May 31, 2012 and 2013. This acquisition is consistent with our strategy to expand our intellectual property in support of our long-term vision to deliver sustainable, breakthrough innovations.

Divestitures

On July 31, 2012, we entered into a Share Purchase Agreement (“SPA”) with M&F Management and Financing GmbH (“M&F”) for the sale of ownership of our subsidiary, Tennant CEE GmbH, and our minority interest in a joint venture, OOO Tennant. In exchange for the ownership of these entities, we received €815, or $1,014, in cash, as of the date of sale and financed the remaining €5,351, for a total purchase price of €6,166. A total of €2,126, or $2,826, was received in equal quarterly payments during 2013 and the first anniversary payment of €1,075, or $1,435, was received on July 31, 2013. The second anniversary payment of €1,075, or $1,418, was received on July 31, 2014. The remaining €1,075, or $1,357, as of September 30, 2014, will be received on the third anniversary date of the divestiture, which is July 31, 2015. As a result of this divestiture, we recorded a pre-tax gain of $784 during the third quarter of 2012 in our Profit from Operations in the Condensed Consolidated Statements of Earnings.

M&F is now a master distributor of Tennant products in the Central Eastern Europe, Middle East and Africa markets. In addition, as further discussed in Note 17, at the time of the transaction, M&F was a related party of ours. We have identified M&F as a variable interest entity (“VIE”) and have performed a qualitative assessment that considered M&F's purpose and design, our involvement and the risks and benefits and determined that we are not the primary beneficiary of this VIE. The only financing we have provided to M&F was related to the SPA as noted above and there are no arrangements that would require us to provide significant financial support in the future.

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5.	Inventories

Inventories are valued at the lower of cost or market. Inventories at September 30, 2014 and December 31, 2013 consisted of the following:



	September 30, 2014			December 31, 2013
Inventories carried at LIFO:
Finished goods	$	46,860		$	36,238
Raw materials, production parts and work-in-process	20,624			13,922
LIFO reserve	(27,463		)	(27,463		)
Total LIFO inventories	40,021			22,697
Inventories carried at FIFO:
Finished goods	30,577			31,489
Raw materials, production parts and work-in-process	13,366			12,720
Total FIFO inventories	43,943			44,209
Total inventories	$	83,964		$	66,906

The LIFO reserve approximates the difference between LIFO carrying cost and FIFO.


6.	Goodwill and Intangible Assets

The changes in the carrying value of Goodwill for the nine months ended September 30, 2014 were as follows:



	Goodwill			Accumulated Impairment Losses			Total
Balance as of December 31, 2013	$	68,906		$	(49,977	)	$	18,929
Foreign currency fluctuations	(1,780		)	1,576			(204		)
Balance as of September 30, 2014	$	67,126		$	(48,401	)	$	18,725

The balances of acquired Intangible Assets, excluding Goodwill, as of September 30, 2014 and December 31, 2013, were as follows:



	Customer Lists			Trade Name			Technology			Total
Balance as of September 30, 2014
Original cost	$	22,933		$	4,481		$	7,049		$	34,463
Accumulated amortization	(12,297		)	(2,074		)	(3,412		)	(17,783		)
Carrying value	$	10,636		$	2,407		$	3,637		$	16,680
Weighted-average original life (in years)	15			14			13
Balance as of December 31, 2013
Original cost	$	23,763		$	4,836		$	7,347		$	35,946
Accumulated amortization	(11,609		)	(1,976		)	(3,333		)	(16,918		)
Carrying value	$	12,154		$	2,860		$	4,014		$	19,028
Weighted-average original life (in years)	15			14			13

Amortization expense on Intangible Assets for the three and nine months ended September 30, 2014 was $589 and $1,812, respectively. Amortization expense on Intangible Assets for the three and nine months ended September 30, 2013 was $633 and $1,914, respectively.

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Estimated aggregate amortization expense based on the current carrying value of amortizable Intangible Assets for each of the five succeeding years and thereafter is as follows:



Remaining 2014	$	576
2015	2,111
2016	1,803
2017	1,701
2018	1,694
Thereafter	8,795
Total	$	16,680


7.	Debt

Debt outstanding is summarized as follows:



	September 30, 2014			December 31, 2013
Short-Term Debt:
Credit facility borrowings	$	—		$	1,500
Long-Term Debt:
Bank borrowings	1			9
Credit facility borrowings	28,000			30,000
Collateralized borrowings	10			11
Capital lease obligations	156			283
Total Debt	28,167			31,803
Less: Current Portion	(3,717		)	(3,803		)
Long-Term Portion	$	24,450		$	28,000

As of September 30, 2014, we had committed lines of credit totaling $125,000 and uncommitted lines of credit totaling $87,525. There were $10,000 in outstanding borrowings under our JPMorgan facility (described below) and $18,000 in outstanding borrowings under our Prudential facility (described below) as of September 30, 2014. In addition, we had stand alone letters of credit of $2,460 outstanding and bank guarantees in the amount of $180. Commitment fees on unused lines of credit for the nine months ended September 30, 2014 were $241.

Our most restrictive covenants are part of our 2011 Credit Agreement with JPMorgan (as defined below), which are the same covenants in the Shelf Agreement (as defined below) with Prudential (as defined below), and require us to maintain an indebtedness to EBITDA ratio of not greater than 3.00 to 1 and to maintain an EBITDA to interest expense ratio of no less than 3.50 to 1 as of the end of each quarter. As of September 30, 2014, our indebtedness to EBITDA ratio was 0.35 to 1 and our EBITDA to interest expense ratio was 50.81 to 1.

Credit Facilities

JPMorgan Chase Bank, National Association

Details regarding our Credit Agreement, dated as of May 5, 2011 and amended on April 25, 2013, with JPMorgan Chase Bank, N. A. (“JPMorgan”), as administrative agent and collateral agent, U.S. Bank National Association, as syndication agent, Wells Fargo Bank, National Association, and RBS Citizens, N.A., as co-documentation agents, and the Lenders (including JPMorgan) from time to time party thereto (the “2011 Credit Agreement”) are described in Note 8 of the 2013 annual report on Form 10-K.

As of September 30, 2014, we were in compliance with all covenants under this credit agreement. There were $10,000 in outstanding borrowings under this facility at September 30, 2014, with a weighted average interest rate of 1.46%. This facility, under the current terms of the 2011 Credit Agreement, expires on March 1, 2018.

Prudential Investment Management, Inc.

Details regarding our Private Shelf Agreement, dated as of July 29, 2009, and amended on May 5, 2011 and July 24, 2012 with Prudential Investment Management, Inc. (“Prudential”) and Prudential affiliates from time to time party thereto (the “Shelf Agreement”) are described in Note 8 of the 2013 annual report on Form 10-K.

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As of September 30, 2014, there were $18,000 in outstanding borrowings under this facility, consisting of the $8,000 Series A notes issued in March 2011 with a fixed interest rate of 4.00% and a 7 year term serially maturing from 2014 to 2018 and the $10,000 Series B notes issued in June 2011 with a fixed interest rate of 4.10% and a 10 year term serially maturing from 2015 to 2021. The first payment of $2,000 on Series A notes was made during the first quarter of 2014. We were in compliance with all covenants under this private shelf agreement as of September 30, 2014. The issuance period, under the current terms of the Shelf Agreement, expires on July 24, 2015.

The Royal Bank of Scotland Citizens, N.A.

On September 14, 2010, we entered into an overdraft facility with The Royal Bank of Scotland Citizens, N.A. in the amount of €2,000, or approximately $2,525. There was no balance outstanding on this facility as of September 30, 2014.

HSBC Bank (China) Company Limited, Shanghai Branch

On June 20, 2012, we entered into a banking facility with the HSBC Bank (China) Company Limited, Shanghai Branch in the amount of $5,000. During the first quarter of 2014, we repaid previous borrowings under this facility amounting to $1,500 and, as of September 30, 2014, there were no outstanding borrowings on this facility.


8.	Warranty

We record a liability for warranty claims at the time of sale. The amount of the liability is based on the trend in the historical ratio of claims to sales, the historical length of time between the sale and resulting warranty claim, new product introductions and other factors. Warranty terms on machines generally range from one to four years; however, the majority of our claims are paid out within the first six to nine months following a sale.

The changes in warranty reserves for the nine months ended September 30, 2014 and 2013 were as follows:



	Nine Months Ended
	September 30
	2014			2013
Beginning balance	$	9,663		$	9,357
Additions charged to expense	7,789			8,239
Foreign currency fluctuations	(123		)	(50		)
Claims paid	(7,799		)	(7,704		)
Ending balance	$	9,530		$	9,842


9.	Fair Value Measurements

Estimates of fair value for financial assets and financial liabilities are based on the framework established in the accounting guidance for fair value measurements. The framework defines fair value, provides guidance for measuring fair value and requires certain disclosures. The framework discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow) and the cost approach (cost to replace the service capacity of an asset or replacement cost). The framework utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:


•	Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.


•	Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.


•	Level 3: Unobservable inputs that reflect the reporting entity’s own assumptions.

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Our population of assets and liabilities subject to fair value measurements at September 30, 2014 is as follows:



	Fair Value		Level 1		Level 2		Level 3
Assets:
Foreign currency forward exchange contracts	$	108	$	—	$	108	$	—
Total Assets	$	108	$	—	$	108	$	—
Liabilities:
Foreign currency forward exchange contracts	$	6	$	—	$	6	$	—
Total Liabilities	$	6	$	—	$	6	$	—

Our foreign currency forward exchange contracts are valued based on quoted forward foreign exchange prices at the reporting date.

We use derivative instruments to manage exposures to foreign currency only in an attempt to limit underlying exposures from currency fluctuations and not for trading purposes. Gains or losses on forward foreign exchange contracts that hedge foreign currency-denominated assets and liabilities are recognized in Other Current Assets and Other Current Liabilities within the Condensed Consolidated Balance Sheets and are recognized in Other Income (Expense), Net under Net Foreign Currency Transaction Gains (Losses) within the Condensed Consolidated Statements of Earnings. As of September 30, 2014, the fair value of such contracts outstanding was an asset of $108 and a liability of $6. As of December 31, 2013, the fair value of such contracts outstanding was an asset of $16 and a liability of $109. At September 30, 2014 and December 31, 2013, the notional amounts of foreign currency forward exchange contracts outstanding were $33,518 and $30,280, respectively. We recognized a net gain of $1,073 and $969 on such contracts during the first nine months of 2014 and 2013, respectively.

The carrying amounts reported in the Condensed Consolidated Balance Sheets for Cash and Cash Equivalents, Accounts Receivable, Other Current Assets, Accounts Payable and Other Current Liabilities approximate fair value.

The fair value of our Long-Term Debt approximates cost based on the borrowing rates currently available to us for bank loans with similar terms and remaining maturities.


10.	Retirement Benefit Plans

Our defined benefit pension plans and postretirement medical plan are described in Note 11 of our 2013 annual report on Form 10-K. We have contributed $73 and $239 during the third quarter of 2014 and $325 and $781 during the first nine months of 2014 to our pension plans and to our postretirement medical plan, respectively.

The components of the net periodic benefit cost for the three and nine months ended September 30, 2014 and 2013 were as follows:



	Three Months Ended
	September 30
	Pension Benefits												Postretirement
	U.S. Plans						Non-U.S. Plans						Medical Benefits
	2014			2013			2014			2013			2014			2013
Service cost	$	123		$	85		$	38		$	34		$	32		$	39
Interest cost	491			221			133			122			124			110
Expected return on plan assets	(670		)	(363		)	(131		)	(116		)	—			—
Amortization of net actuarial loss (gain)	37			217			—			—			(2		)	49
Amortization of prior service cost (benefit)	11			9			46			(353		)	—			(25		)
Foreign currency	—			—			98			(56		)	—			—
Net periodic (benefit) cost	$	(8	)	$	169		$	184		$	(369	)	$	154		$	173

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	Nine Months Ended
	September 30
	Pension Benefits												Postretirement
	U.S. Plans						Non-U.S. Plans						Medical Benefits
	2014			2013			2014			2013			2014			2013
Service cost	$	370		$	517		$	114		$	100		$	96		$	115
Interest cost	1,473			1,352			399			365			373			332
Expected return on plan assets	(2,012		)	(2,183		)	(391		)	(347		)	—			—
Amortization of net actuarial loss	111			1,313			—			—			—			150
Amortization of prior service cost (benefit)	32			55			139			(192		)	(5		)	(77		)
Foreign currency	—			—			114			(27		)	—			—
Net periodic (benefit) cost	$	(26	)	$	1,054		$	375		$	(101	)	$	464		$	520


11.	Commitments and Contingencies

Certain operating leases for vehicles contain residual value guarantee provisions, which would become due at the expiration of the operating lease agreement if the fair value of the leased vehicles is less than the guaranteed residual value. As of September 30, 2014, of those leases that contain residual value guarantees, the aggregate residual value at lease expiration was $11,909, of which we have guaranteed $9,668. As of September 30, 2014, we have recorded a liability for the estimated end of term loss related to this residual value guarantee of $261 for certain vehicles within our fleet. Our fleet also contains vehicles we estimate will settle at a gain. Gains on these vehicles will be recognized at the end of the lease term.

During the second quarter of 2014, we entered into a three year software licensing agreement with a total commitment of $1,198.

During the second quarter of 2012, we entered into a three year agreement with a supplier, commencing January 1, 2013, with a total commitment of $2,102 of which $911 is still outstanding as of September 30, 2014.


12.	Accumulated Other Comprehensive Loss

Components of Accumulated Other Comprehensive Loss, net of tax, within the Condensed Consolidated Balance Sheets, are as follows:



	September 30, 2014			December 31, 2013
Foreign currency translation adjustments	$	(27,096	)	$	(21,991	)
Pension and retiree medical benefits	(2,893		)	(2,980		)
Total Accumulated Other Comprehensive Loss	$	(29,989	)	$	(24,971	)

The changes in components of Accumulated Other Comprehensive Loss, net of tax, are as follows:



	Foreign Currency Translation Adjustments			Pension and Post Retirement Benefits			Total
December 31, 2013	$	(21,991	)	$	(2,980	)	$	(24,971	)
Other comprehensive income before reclassifications	(5,105		)	—			(5,105		)
Amounts reclassified from Accumulated Other Comprehensive Loss	—			87			87
Net current period other comprehensive income	(5,105		)	87			(5,018		)
September 30, 2014	$	(27,096	)	$	(2,893	)	$	(29,989	)

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13.	Income Taxes

We and our subsidiaries are subject to U.S. federal income tax as well as income tax of numerous state and foreign jurisdictions. We are generally no longer subject to U.S. federal tax examinations for taxable years before 2011 and, with limited exceptions, state and foreign income tax examinations for taxable years before 2007.

We recognize potential accrued interest and penalties related to unrecognized tax benefits in Income Tax Expense. In addition to the liability of $3,527 for unrecognized tax benefits as of September 30, 2014, there was approximately $615 for accrued interest and penalties. The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate as of September 30, 2014 was $3,224. To the extent interest and penalties are not assessed with respect to uncertain tax positions, amounts accrued will be revised and reflected as an adjustment of the Income Tax Expense.

Unrecognized tax benefits were reduced by $326 during the first nine months of 2014 for expiration of the statute of limitations in various jurisdictions.

We are currently undergoing income tax examinations in various state and foreign jurisdictions covering 2007 to 2011. Although the final outcome of these examinations cannot be currently determined, we believe that we have adequate reserves with respect to these examinations.


14.	Share-Based Compensation

Our share-based compensation plans are described in Note 15 of our 2013 annual report on Form 10-K. During the three months ended September 30, 2014 and 2013 we recognized total Share-Based Compensation Expense of $1,505 and $1,667, respectively. During the nine months ended September 30, 2014 and 2013 we recognized total Share-Based Compensation Expense of $5,261 and $5,106, respectively. The total excess tax benefit recognized for share-based compensation arrangements during the nine months ended September 30, 2014 and 2013 was $1,620 and $2,944, respectively.

During the first nine months of 2014, we granted 20,868 restricted shares. The weighted average grant date fair value of each share awarded was $62.18. Restricted share awards generally have a three year vesting period from the effective date of the grant. The total fair value of shares vested during the nine months ended September 30, 2014 and 2013 was $827 and $643, respectively.


15.	Earnings Per Share

The computations of Basic and Diluted Earnings per Share were as follows:



	Three Months Ended				Nine Months Ended
	September 30				September 30
	2014		2013		2014		2013
Numerator:
Net Earnings	$	11,792	$	10,617	$	33,110	$	29,930
Denominator:
Basic - Weighted Average Shares Outstanding	18,120,729		18,267,828		18,201,291		18,288,083
Effect of dilutive securities:
Share-based compensation plans	514,558		543,810		526,527		535,662
Diluted - Weighted Average Shares Outstanding	18,635,287		18,811,638		18,727,818		18,823,745
Basic Earnings per Share	$	0.65	$	0.58	$	1.82	$	1.64
Diluted Earnings per Share	$	0.63	$	0.56	$	1.77	$	1.59

Excluded from the dilutive securities shown above were options to purchase 81,874 and 147,737 shares of Common Stock during the three months ended September 30, 2014 and 2013, respectively. Excluded from the dilutive securities shown above were options to purchase 85,765 and 251,576 shares of Common Stock during the nine months ended September 30, 2014 and 2013, respectively. These exclusions were made as the effects were anti-dilutive.

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16.	Segment Reporting

We are organized into four operating segments: North America; Latin America; Europe, Middle East and Africa; and Asia Pacific. We combine our North America and Latin America operating segments into the “Americas” for reporting Net Sales by geographic area. In accordance with the objective and basic principles of the applicable accounting guidance, we aggregate our operating segments into one reportable segment that consists of the design, manufacture and sale of products used primarily in the maintenance of nonresidential surfaces.

Net Sales attributed to each geographic area for the three and nine months ended September 30, 2014 and 2013 were as follows:



	Three Months Ended				Nine Months Ended
	September 30				September 30
	2014		2013		2014		2013
Americas	$	142,149	$	130,037	$	418,236	$	382,877
Europe, Middle East and Africa	40,610		37,436		124,946		116,465
Asia Pacific	19,884		21,068		62,524		57,529
Total	$	202,643	$	188,541	$	605,706	$	556,871

Net Sales are attributed to each geographic area based on the country from which the product was shipped and are net of intercompany sales.


17.	Related Party Transactions

On July 31, 2012, we entered into a share purchase agreement with M&F, as further discussed in Note 4. Two of the M&F shareholders are individuals who were employed by Tennant prior to the transaction date and were no longer employed by Tennant as of the transaction date.

Our May 31, 2011 acquisition of Water Star includes installment payments totaling $1,500, all of which have been paid to the former owners of Water Star, as further discussed in Note 4. As of September 30, 2013, the former owners of Water Star were no longer employees of Tennant.

During the first quarter of 2008, we acquired Sociedade Alfa Ltda. and entered into lease agreements for certain properties owned by or partially owned by the former owners of this entity. Some of these individuals are current employees of Tennant. Lease payments made under these lease agreements are not material to our financial position or results of operations.


Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations

Overview

Tennant Company is a world leader in designing, manufacturing and marketing solutions that help create a cleaner, safer, healthier world. Our products include equipment for maintaining surfaces in industrial, commercial and outdoor environments; chemical-free and other sustainable cleaning technologies; and coatings for protecting, repairing and upgrading floors and other surfaces. We sell our products through our direct sales and service organization and a network of authorized distributors worldwide. Geographically, our customers are located in North America, Latin America, Europe, the Middle East, Africa and Asia Pacific. We strive to be an innovator in our industry through our commitment to understanding our customers’ needs and using our expertise to create innovative products and solutions.

Net Earnings for the third quarter of 2014 were $11.8 million, or $0.63 per diluted share, as compared to Net Earnings of $10.6 million, or $0.56 per diluted share, in the third quarter of 2013. Operating Profit for the third quarter of 2014 was $17.1 million, or 8.4% of Net Sales, as compared to Operating Profit of $16.2 million, or 8.6% of Net Sales, in the third quarter of 2013. Operating Profit during the third quarter of 2014 was favorably impacted by higher Net Sales and lower Research and Development (“R&D”) Expense, somewhat offset by higher Selling and Administrative (“S&A”) Expense.

Net Earnings for the first nine months of 2014 were $33.1 million, or $1.77 per diluted share, as compared to Net Earnings of $29.9 million, or $1.59 per diluted share, in the first nine months of 2013. Operating Profit for the first nine months of 2014 was $49.5 million, or 8.2% of Net Sales, as compared to Operating Profit of $44.7 million, or 8.0% of Net Sales, in the first nine months of 2013. Operating Profit during the first nine months of 2014 was favorably impacted by higher Net Sales and lower R&D Expense, somewhat offset by higher S&A Expense and a lower Gross Margin as a percentage of Net Sales. Net Earnings during the first nine months of 2013 were favorably impacted by a tax benefit of $0.6 million related to the 2012 R&D tax credit which was retroactively enacted in January of 2013. Included in the S&A Expense in the first nine months of 2013 was a restructuring charge of $1.4 million, or 30 basis points as a percentage of Net Sales.

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Net Earnings for the third quarter of 2013 were $10.6 million, or $0.56 per diluted share, as compared to Net Earnings of $8.7 million, or $0.46 per diluted share, in the third quarter of 2012. Net Earnings during the third quarter of 2013 were favorably impacted by higher Net Sales somewhat offset by increased R&D Expense. The third quarter of 2012 included a gain on sale of business that did not reoccur in the third quarter of 2013.

Net Earnings for the first nine months of 2013 were $29.9 million, or $1.59 per diluted share, as compared to Net Earnings of $27.7 million, or $1.45 per diluted share, in the first nine months of 2012. Net Earnings during the first nine months of 2013 were favorably impacted by a tax benefit of $0.6 million related to the 2012 R&D tax credit which was retroactively enacted in January of 2013. Included in the lower S&A Expense in the first nine months of 2013 was a restructuring charge of $1.4 million, or 30 basis points as a percentage of Net Sales.

Historical Results

The following table compares the historical results of operations for the three and nine months ended September 30, 2014 and 2013, respectively, and as a percentage of Net Sales (in thousands, except per share data and percentages):



	Three Months Ended										Nine Months Ended
	September 30										September 30
	2014			%		2013			%		2014			%		2013			%
Net Sales	$	202,643		100.0		$	188,541		100.0		$	605,706		100.0		$	556,871		100.0
Cost of Sales	115,480			57.0		106,679			56.6		346,363			57.2		314,745			56.5
Gross Profit	87,163			43.0		81,862			43.4		259,343			42.8		242,126			43.5
Operating Expense:
Research and Development Expense	6,844			3.4		7,970			4.2		21,976			3.6		23,309			4.2
Selling and Administrative Expense	63,215			31.2		57,663			30.6		187,885			31.0		174,083			31.3
Total Operating Expense	70,059			34.6		65,633			34.8		209,861			34.6		197,392			35.4
Profit from Operations	17,104			8.4		16,229			8.6		49,482			8.2		44,734			8.0
Other Income (Expense):
Interest Income	84			—		67			—		254			—		295			0.1
Interest Expense	(396		)	(0.2	)	(440		)	(0.2	)	(1,301		)	(0.2	)	(1,318		)	(0.2	)
Net Foreign Currency Transaction Losses	(276		)	(0.1	)	(303		)	(0.2	)	(156		)	—		(1,046		)	(0.2	)
Other Expense, Net	(162		)	(0.1	)	(157		)	(0.1	)	(282		)	—		(238		)	—
Total Other Expense, Net	(750		)	(0.4	)	(833		)	(0.4	)	(1,485		)	(0.2	)	(2,307		)	(0.4	)
Profit Before Income Taxes	16,354			8.1		15,396			8.2		47,997			7.9		42,427			7.6
Income Tax Expense	4,562			2.3		4,779			2.5		14,887			2.5		12,497			2.2
Net Earnings	$	11,792		5.8		$	10,617		5.6		$	33,110		5.5		$	29,930		5.4
Earnings per Diluted Share	$	0.63				$	0.56				$	1.77				$	1.59

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Net Sales

Consolidated Net Sales for the third quarter of 2014 totaled $202.6 million, a 7.5% increase as compared to consolidated Net Sales of $188.5 million in the third quarter of 2013. Consolidated Net Sales for the first nine months of 2014 totaled $605.7 million, an 8.8% increase as compared to consolidated Net Sales of $556.9 million for the first nine months of 2013.

The components of the consolidated Net Sales change for the three and nine months ended September 30, 2014 as compared to the same period in 2013 were as follows:



	2014 v. 2013
	Three Months Ended	Nine Months Ended
	September 30	September 30
Organic Growth:
Volume	6.5%	7.8%
Price	1.0%	1.0%
Organic Growth	7.5%	8.8%
Foreign Currency	0.0%	0.0%
Total	7.5%	8.8%

The 7.5% increase in consolidated Net Sales in the third quarter of 2014 as compared to the same period in 2013 was driven by:

•

An organic sales increase of approximately 7.5%, which excludes the effects of foreign currency exchange (and acquisitions when applicable), due to an approximate 6.5% volume increase and a 1.0% price increase. The volume increase was primarily due to increased sales to strategic accounts and through distribution, continued demand for new products, such as the T12 and T17 rider scrubbers and walk-behind burnishers, and gains in commercial and outdoor equipment. Sales of new products introduced since the 2012 fourth quarter were 13% of equipment sales in the third quarter of 2014. The price increase was the result of selling list price increases, typically in the range of 2 percent to 4 percent in most geographies, with an effective date of March 1, 2014. We expect the increase in selling prices to increase Net Sales in the range of 1 percent to 2 percent for the 2014 full year. The impact to gross margin is estimated to be minimal as these selling price increases were taken to offset inflation.

The 8.8% increase in consolidated Net Sales in the first nine months of 2014 as compared to the same period in 2013 was driven by:

•

An organic sales increase of approximately 8.8%, which excludes the effects of foreign currency exchange (and acquisitions when applicable), due to an approximate 7.8% volume increase and a 1.0% price increase. The volume increase was primarily due to strong sales through distribution and to strategic accounts, continued demand for new products such as the T12 rider scrubber, and gains in commercial, industrial and outdoor equipment. Sales of new products introduced since the 2012 fourth quarter were 10% of equipment sales in the first nine months of 2014. The price increase was the result of selling list price increases, typically in the range of 2 percent to 4 percent in most geographies, with an effective date of March 1, 2014. We expect the increase in selling prices to increase Net Sales in the range of 1 percent to 2 percent for the 2014 full year. The impact to gross margin is estimated to be minimal as these selling price increases were taken to offset inflation.

The following table sets forth the Net Sales by geographic area for the three and nine months ended September 30, 2014 and 2013 and the percentage change from the prior year (in thousands, except percentages):



	Three Months Ended					Nine Months Ended
	September 30					September 30
	2014		2013		%	2014		2013		%
Americas	$	142,149	$	130,037	9.3	$	418,236	$	382,877	9.2
Europe, Middle East and Africa	40,610		37,436		8.5	124,946		116,465		7.3
Asia Pacific	19,884		21,068		(5.6)	62,524		57,529		8.7
Total	$	202,643	$	188,541	7.5	$	605,706	$	556,871	8.8

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Americas

Net Sales in the Americas were $142.1 million and $418.2 million for the third quarter and first nine months of 2014, an increase of 9.3% and 9.2%, respectively, from the third quarter and first nine months of 2013. Organic sales in the third quarter and first nine months of 2014 were favorably impacted by higher sales of scrubbers in North America, including scrubbers equipped with ec-H2O™ technology and walk-behind burnishers. The direct impact of foreign currency translation exchange effects within the Americas unfavorably impacted Net Sales by approximately 0.5% during the third quarter and 1.0% during the first nine months of 2014. Organic sales increased approximately 9.8% in the third quarter and 10.2% in the first nine months of 2014.

Europe, Middle East and Africa

In our markets within Europe, the Middle East and Africa (“EMEA”), Net Sales increased 8.5% and 7.3% to $40.6 million and $124.9 million, respectively, for the third quarter and first nine months of 2014, compared to the third quarter and first nine months of 2013. Organic sales increased approximately 6.5% in the third quarter driven by higher sales of outdoor equipment and sales to strategic accounts and distributors. Organic sales increased approximately 3.3% in the first nine months of 2014 due primarily to higher sales of outdoor equipment. There was a favorable foreign currency exchange impact on Net Sales during the third quarter and first nine months of 2014 of approximately 2.0% and 4.0%, respectively.

Asia Pacific

Net Sales in the Asia Pacific market for the third quarter and first nine months of 2014 totaled $19.9 million and $62.5 million, respectively, a decrease of 5.6% and an increase of 8.7% from the third quarter and first nine months of 2013, respectively. Organic sales decreased approximately 5.1% in the third quarter of 2014 due primarily to economic uncertainties in the key markets of Australia, Japan and China. These uncertainties lengthened sales cycles, which adversely impacted the timing of orders and shipments. Organic sales increased approximately 11.7% in the first nine months of 2014 due primarily to strong sales performance in China. Direct foreign currency translation exchange effects unfavorably impacted sales by approximately 0.5% and 3.0% in the third quarter and first nine months of 2014, respectively.

Gross Profit

Gross profit in the third quarter of 2014 was $87.2 million, or 43.0% of Net Sales, as compared to $81.9 million, or 43.4% of Net Sales, in the third quarter of 2013. Gross profit dollars increased 6.5% versus the prior year period due to the higher Net Sales in the third quarter of 2014. Gross margin was 40 basis points lower versus the prior year period primarily due to costs related to hiring and training additional manufacturing employees and temporary workers to support the higher levels of production.

Gross profit in the first nine months of 2014 was $259.3 million, or 42.8% of Net Sales, as compared to $242.1 million, or 43.5% of Net Sales, in the first nine months of 2013. Gross profit dollars increased 7.1% versus the prior year period due to the higher Net Sales in the first nine months of 2014. Gross margin was 70 basis points lower versus the prior year period primarily due to strong sales through distribution and sales to strategic accounts that tend to have lower gross margins and costs related to hiring and training additional manufacturing employees to support the higher levels of production.

Operating Expense

Research & Development Expense

R&D Expense in the third quarter of 2014 decreased by 14.1% to $6.8 million as compared with $8.0 million in the third quarter of 2013. R&D Expense as a percentage of Net Sales was 3.4% for the third quarter of 2014, a decrease of 80 basis points as compared to 4.2% in the third quarter of 2013.

R&D Expense for the first nine months of 2014 was $22.0 million, a decrease of 5.7% from $23.3 million in the same period in 2013. R&D Expense as a percentage of Net Sales was 3.6% for the first nine months of 2014, a decrease of 60 basis points as compared to 4.2% for the first nine months of 2013.

We continued to invest in developing innovative new products for our traditional core business, as well as in our Orbio Technologies Group, which is focused on advancing a suite of sustainable cleaning technologies. New products are a key driver of sales growth. Ten new products were launched in the first nine months of 2014, including a line of walk-behind burnishers, a mid-size battery-powered rider scrubber, and a mid-size rider sweeper with optimized dust control. There are plans to introduce an additional six new products in the last quarter of the year.

Selling & Administrative Expense

S&A Expense in the third quarter of 2014 was $63.2 million, as compared to $57.7 million in the third quarter of 2013. S&A Expense as a percentage of Net Sales was 31.2% for the third quarter of 2014, an increase of 60 basis points from 30.6% in the comparable 2013 quarter.

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For the nine months ended September 30, 2014, S&A Expense increased to $187.9 million from $174.1 million in the comparable period last year. S&A Expense as a percentage of Net Sales was 31.0% for the first nine months of 2014 versus 31.3% in the comparable period last year. Included in S&A Expense in the first nine months of 2013 was the first quarter 2013 restructuring charge, described in Note 3, of $1.4 million, or 30 basis points as a percentage of Net Sales.

The increase in S&A Expense in the third quarter and first nine months of 2014 as compared to the same periods in the prior year was primarily due to investments in direct sales, distribution and marketing to build organic sales. This was somewhat offset by continued cost controls and improved operating efficiencies that favorably impacted S&A Expense in the first nine months of 2014.

Other Income (Expense), Net

Interest Income

There was no significant change in Interest Income in the third quarter and first nine months of 2014 as compared to the same periods in 2013.

Interest Expense

There was no significant change in Interest Expense in the third quarter and first nine months of 2014 as compared to the same periods in 2013.

Net Foreign Currency Transaction Losses

Net Foreign Currency Transaction Losses in the third quarter and first nine months of 2014 were $0.3 million and $0.2 million, respectively, as compared to Net Foreign Currency Transaction Losses of $0.3 million and $1.0 million in the same periods in the prior year. The favorable change in the impact from foreign currency transactions in 2014 was due to fluctuations in foreign currency rates and settlement of transactional hedging activity in the normal course of business.

Other Expense, Net

There was no significant change in Other Expense, Net in the third quarter and first nine months of 2014 as compared to the same periods in 2013.

Income Taxes

The effective tax rate in the third quarter of 2014 was 27.9% compared to the effective rate in the third quarter of the prior year of 31.0%.

The year-to-date overall effective rate was 31.0% for 2014 compared to 29.5% for 2013. The tax expense for the first nine months of 2013 included a $0.4 million tax benefit associated with a $1.4 million expense related to a European restructuring reserve. The tax expense for the first nine months of 2013 also included a discrete tax benefit of $0.6 million for the enactment of the Federal R&D tax credit retroactively impacting the tax year ended December 31, 2012. Excluding these benefits, the 2013 year-to-date overall effective tax rate would have been 30.8%.

The increase in the overall year-to-date effective tax rate to 31.0% in 2014 compared to 30.8% in 2013, excluding the 2013 special items, was primarily related to the mix in expected full year taxable earnings by country and changes related to the Federal R&D tax credits. The 2014 third quarter and first nine months year-to-date tax rate did not include any benefit for Federal R&D tax credits as we are not allowed to consider these credits in our tax rate until they are formally reenacted.

We do not have any plans to repatriate the undistributed earnings of non-U.S. subsidiaries. Any repatriation from foreign subsidiaries that would result in incremental U.S. taxation is not being considered. It is management's belief that reinvesting these earnings outside the U.S. is the most efficient use of capital.

Liquidity and Capital Resources

Liquidity

Cash and Cash Equivalents totaled $79.8 million at September 30, 2014, as compared to $81.0 million as of December 31, 2013. Wherever possible, cash management is centralized and intercompany financing is used to provide working capital to subsidiaries as needed. Our current ratio was 2.4 as of September 30, 2014 and 2.4 as of December 31, 2013, and our working capital was $189.7 million and $183.8 million, respectively. Our debt-to-capital ratio was 9.3% and 10.8% at September 30, 2014 and December 31, 2013, respectively.

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Cash Flow Summary

Cash provided by (used for) our operating, investing and financing activities is summarized as follows (in thousands):



	Nine Months Ended
	September 30
	2014			2013
Operating Activities	$	36,825		$	36,808
Investing Activities:
Purchases of Property, Plant and Equipment, Net of Disposals	(13,241		)	(11,283		)
Acquisition of Business, Net of Cash Acquired	—			(750		)
Proceeds from Sale of Business	1,418			3,520
Increase in Restricted Cash	(12		)	(224		)
Financing Activities	(24,708		)	(17,044		)
Effect of Exchange Rate Changes on Cash and Cash Equivalents	(1,482		)	342
Net Increase (Decrease) in Cash and Cash Equivalents	$	(1,200	)	$	11,369

Operating Activities

Operating activities provided $36.8 million of cash for the nine months ended September 30, 2014. Cash provided by operating activities was driven primarily from Net Earnings of $33.1 million and an increase in Accounts Payable and payment of Employee Compensation and Benefits liabilities of $5.9 million and $1.8 million, respectively, partially offset by an increase in Inventories and Accounts Receivable of $21.7 million and $6.1 million, respectively.

Operating activities provided $36.8 million of cash for the nine months ended September 30, 2013. Cash provided by operating activities was driven primarily from Net Earnings of $29.9 million and an increase in Accounts Payable of $2.8 million partially offset by increases in Inventories, increases in Accounts Receivable and payment of Employee Compensation and Benefits liabilities. The increase in Accounts Payable was due to higher production levels and timing of payments.

Management evaluates how effectively we utilize two of our key operating assets, Accounts Receivable and Inventories, using Accounts Receivable “Days Sales Outstanding” (DSO) and “Days Inventory on Hand” (DIOH), on a FIFO basis. The metrics are calculated on a rolling three month basis in order to more readily reflect changing trends in the business. These metrics for the quarters ended were as follows (in days):



	September 30, 2014	December 31, 2013	September 30, 2013
DSO	65	61	65
DIOH	90	81	82

As of September 30, 2014, DSO was the same as compared to September 30, 2013 and increased 4 days as compared to December 31, 2013. The increase is primarily due to the variety of terms offered and mix of business having a larger unfavorable impact than the favorable trend of continued proactive management of our receivables by enforcing tighter credit limits and continuing to successfully collect past due balances.

As of September 30, 2014, DIOH increased 8 days as compared to September 30, 2013 and 9 days as compared to December 31, 2013 primarily due to increased levels of inventory in support of higher sales levels and the launches of many new products somewhat offset by progress from inventory reduction initiatives.

Investing Activities

Investing activities during the nine months ended September 30, 2014 used $11.8 million in cash. Net capital expenditures used $13.2 million. This was partially offset by continued proceeds of $1.4 million from the sale of a business in 2012, as described in Note 4. Capital expenditures included investments in tooling related to new product development, and manufacturing and information technology process improvement projects.

Investing activities during the nine months ended September 30, 2013 used $8.7 million in cash. Net capital expenditures used $11.3 million and the installment payment to the former owners of Water Star used $0.8 million. This was partially offset by proceeds of $3.5 million from the sale of a business as described in Note 4. Capital expenditures included investments in tooling related to new product development and manufacturing and also information technology process improvement projects.

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Financing Activities

Net cash used by financing activities was $24.7 million during the first nine months of 2014. The purchases of our Common Stock per our authorized repurchase program used $13.6 million, dividend payments used $10.9 million, the payment of Long-Term Debt used $2.0 million and the repayment of Short-Term borrowings used $1.5 million, partially offset by proceeds from the issuance of Common Stock of $1.7 million and the excess tax benefit on stock plans of $1.6 million.

Net cash used by financing activities was $17.0 million during the first nine months of 2013. The purchases of our Common Stock per our authorized repurchase program used $16.6 million, dividend payments used $9.9 million and the payment of Long-Term Debt used $0.9 million, partially offset by proceeds from the issuance of Common Stock of $6.0 million, the excess tax benefit on stock plans of $2.9 million and the Short-Term Borrowings of $1.5 million.

Indebtedness

As of September 30, 2014, we had committed lines of credit totaling $125.0 million and uncommitted lines of credit totaling $87.5 million. There were $10.0 million in outstanding borrowings under our JPMorgan facility (described below) and $18.0 million in outstanding borrowings under our Prudential facility (described below) as of September 30, 2014. In addition, we had stand alone letters of credit of $2.5 million outstanding and bank guarantees in the amount of $0.2 million. Commitment fees on unused lines of credit for the nine months ended September 30, 2014 were $0.2 million.

Credit Facilities

JPMorgan Chase Bank, National Association

As of September 30, 2014, we were in compliance with all covenants under this credit agreement. There were $10.0 million in outstanding borrowings under this facility at September 30, 2014, with a weighted average interest rate of 1.46%. This facility, under the current terms of the 2011 Credit Agreement, expires on March 1, 2018.

Prudential Investment Management, Inc.

As of September 30, 2014, there were $18.0 million in outstanding borrowings under this facility, consisting of the $8.0 million Series A notes issued in March 2011 with a fixed interest rate of 4.00% and a 7 year term serially maturing from 2014 to 2018 and the $10.0 million Series B notes issued in June 2011 with a fixed interest rate of 4.10% and a 10 year term serially maturing from 2015 to 2021. The first payment of $2.0 million on Series A notes was made during the first quarter of 2014. We were in compliance with all covenants under this private shelf agreement as of September 30, 2014. The issuance period, under the current terms of the Shelf Agreement, expires on July 24, 2015.

The Royal Bank of Scotland Citizens, N.A.

On September 14, 2010, we entered into an overdraft facility with The Royal Bank of Scotland Citizens, N.A. in the amount of 2.0 million Euros, or approximately $2.5 million. There was no balance outstanding on this facility as of September 30, 2014.

HSBC Bank (China) Company Limited, Shanghai Branch

On June 20, 2012, we entered into a banking facility with the HSBC Bank (China) Company Limited, Shanghai Branch in the amount of $5.0 million. During the first quarter of 2014, we repaid previous borrowings under this facility amounting to $1.5 million and, as of September 30, 2014, there were no outstanding borrowings on this facility.

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Contractual Obligations

During the second quarter of 2014, we entered into a three year software licensing agreement with a total commitment of $1.2 million.

Except as noted above, there have been no material changes with respect to contractual obligations as disclosed in our 2013 annual report on Form 10-K.

Newly Issued Accounting Guidance

Revenue from Contracts with Customers

In May 2014, the FASB issued guidance on revenue from contracts with customers that will replace most of the existing revenue recognition guidance, including industry-specific guidance when it becomes effective. This guidance requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. This guidance provides a five-step analysis of transactions to determine when and how revenue is recognized. Other major provisions include capitalization of certain contract costs, consideration of time value of money in the transaction price, and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances. This guidance also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with customers. This guidance is effective for the interim and annual periods beginning on or after December 15, 2016. Early adoption is not permitted. This guidance permits the use of either a retrospective or cumulative effect transition method. We have not yet selected a transition method and are currently evaluating the impact of the guidance on our results of operations or financial position and related disclosures.

No other new accounting pronouncements issued during 2014 but not yet effective have had, or are expected to have, a material impact on our results of operations or financial position.

Cautionary Statement Relevant to Forward-Looking Information

This Form 10-Q, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 2, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “intend,” “estimate,” “anticipate,” “believe,” “project,” or “continue” or similar words or the negative thereof. These statements do not relate to strictly historical or current facts and provide current expectations of forecasts of future events. Any such expectations or forecasts of future events are subject to a variety of factors. Particular risks and uncertainties presently facing us include: geopolitical and economic uncertainty throughout the world; the competition in our business; our ability to attract and retain key personnel; our ability to successfully upgrade, evolve and protect our information technology systems; our ability to effectively manage organizational changes; our ability to develop and commercialize new innovative products and services; our ability to comply with laws and regulations; fluctuations in the cost or availability of raw materials and purchased components; unforeseen product liability claims or product quality issues; the occurrence of a significant business interruption; and the relative strength of the U.S. dollar, which affects the cost of our materials and products purchased and sold internationally. We caution that forward-looking statements must be considered carefully and that actual results may differ in material ways due to risks and uncertainties both known and unknown. Information about factors that could materially affect our results can be found in Part I, Item 1A. Risk Factors in our annual report on Form 10-K for the year ended December 31, 2013 and Part II, Item 1A of this Form 10-Q. Shareholders, potential investors and other readers are urged to consider these factors in evaluating forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements.

We undertake no obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. Investors are advised to consult any further disclosures by us in our filings with the Securities and Exchange Commission and in other written statements on related subjects. It is not possible to anticipate or foresee all risk factors, and investors should not consider any list of such factors to be an exhaustive or complete list of all risks or uncertainties.


Item 3.	Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes in our market risk since December 31, 2013. For additional information, refer to Item 7A of our 2013 annual report on Form 10-K for the year ended December 31, 2013.

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Item 4.	Controls and Procedures

Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and our Principal Financial and Accounting Officer, have evaluated the effectiveness of our disclosure controls and procedures for the period ended September 30, 2014 (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)). Based on that evaluation, our Chief Executive Officer and our Principal Financial and Accounting Officer have concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our principal executive and our principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Controls

There were no changes in our internal controls over financial reporting during the most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION


Item 1.	Legal Proceedings

There are no material pending legal proceedings other than ordinary routine litigation incidental to the Company’s business.

Item 1A. Risk Factors

We documented our risk factors in Item 1A of Part I of our annual report on Form 10-K for our fiscal year ended December 31, 2013. There have been no material changes to our risk factors since the filing of that report.


Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds

On April 25, 2012, the Board of Directors authorized the repurchase of 1,000,000 shares of our common stock. Share repurchases are made from time to time in the open market or through privately negotiated transactions, primarily to offset the dilutive effect of shares issued through our share-based compensation programs. Our credit agreements and Shelf Agreement restrict the payment of dividends or repurchasing of stock if, after giving effect to such payments, our leverage ratio is greater than 2.00 to 1, in such case limiting such payments to an amount ranging from $50.0 million to $75.0 million during any fiscal year.



For the Quarter Ended September 30, 2014	Total Number of Shares Purchased (1)	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
July 1 - 31, 2014	686	$	75.02	—	413,069
August 1 - 31, 2014	—	—		—	413,069
September 1 - 30, 2014	—	—		—	413,069
Total	686	$	75.02	—	413,069

(1) Includes 686 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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Item 6.	Exhibits



Item #	Description	Method of Filing
3i	Restated Articles of Incorporation	Incorporated by reference to Exhibit 3i to the Company’s report on Form 10-Q for the quarterly period ended June 30, 2006.
3ii	Certificate of Designation	Incorporated by reference to Exhibit 3.1 to the Company’s Form 10-K for the year ended December 31, 2006.
3iii	Amended and Restated By-Laws	Incorporated by reference to Exhibit 3iii to the Company’s Form 8-K dated December 14, 2010.
31.1	Rule 13a-14(a)/15d-14(a) Certification of CEO	Filed herewith electronically.
31.2	Rule 13a-14(a)/15d-14(a) Certification of CFO	Filed herewith electronically.
32.1	Section 1350 Certification of CEO	Filed herewith electronically.
32.2	Section 1350 Certification of CFO	Filed herewith electronically.
101	The following financial information from Tennant Company's Quarterly Report on Form 10-Q for the period ended September 30, 2014, formatted in Extensible Business Reporting Language (XBRL): (i) Condensed Consolidated Statements of Earnings for the three and nine months ended September 30, 2014 and 2013; (ii) Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2014 and 2013; (iii) Condensed Consolidated Balance Sheets as of September 30, 2014 and December 31, 2013; (iv) Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2014 and 2013; and (v) Notes to the Condensed Consolidated Financial Statements.	Filed herewith electronically.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



		TENNANT COMPANY

Date:	October 29, 2014	/s/ H. Chris Killingstad
		H. Chris Killingstad President and Chief Executive Officer

Date:	October 29, 2014	/s/ Thomas Paulson
		Thomas Paulson Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)

Tennant Company - 10-Q quarterly report FY2014 Q3

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