Note 10 - Derivatives

9 Months Ended

Sep. 30, 2021

Notes to Financial Statements

Derivative Instruments and Hedging Activities Disclosure [Text Block]

10. Derivatives

Hedge Accounting and Hedging Programs

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

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

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

Balance Sheet Hedging

Hedges of Foreign Currency Assets and Liabilities

We hedge our net recognized foreign currency denominated assets and liabilities with foreign exchange forward contracts to reduce the risk that the value of these assets and liabilities will be adversely affected by changes in exchange rates. These contracts hedge assets and liabilities that are denominated in foreign currencies and are carried at fair value as either assets or liabilities on the consolidated balance sheets with changes in the fair value recorded to net foreign currency transaction loss in our consolidated statements of income. These contracts do not subject us to material balance sheet risk due to exchange rate movements because gains and losses on these derivatives are intended to offset gains and losses on the assets and liabilities being hedged. At September 30, 2021 and December 31, 2020, the notional amounts of foreign currency forward exchange contracts outstanding not designated as hedging instruments were $46.7 million and $57.3 million, respectively.

Cash Flow Hedging

Hedges of Forecasted Foreign Currency Transactions

In countries outside the U.S., we transact business in U.S. dollars and in various other currencies. We may use foreign exchange option contracts or forward contracts to hedge certain cash flow exposures resulting from changes in these foreign currency exchange rates. These foreign exchange contracts, carried at fair value, have maturities of up to one year. We enter into these foreign exchange contracts to hedge a portion of our forecasted foreign currency denominated revenue in the normal course of business, and accordingly, they are not speculative in nature. The notional amounts of outstanding foreign currency forward contracts designated as cash flow hedges were $3.3 million as of September 30, 2021 and $2.7 million as of December 31, 2020. The notional amounts of outstanding foreign currency option contracts designated as cash flow hedges were $3.0 million and $8.2 million as of September 30, 2021 and December 31, 2020, respectively.

Foreign Currency Derivatives

We use foreign currency exchange rate derivatives to hedge our exposure to fluctuations in exchange rates for anticipated intercompany cash transactions between Tennant Company and its subsidiaries. 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 enter into these foreign exchange cross-currency swaps to hedge the foreign currency denominated cash flows associated with this intercompany loan, and accordingly, they are not speculative in nature. These cross-currency swaps are designated as cash flow hedges. The hedged cash flows as of September 30, 2021 and December 31, 2020 included €154.2 million and €159.6 million of total notional values, respectively. As of September 30, 2021, the aggregate scheduled interest payments over the course of the loan and related swaps amounted to €4.2 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 September 30, 2021.

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

	Derivative Assets					Derivative Liabilities
	Balance Sheet Location	September 30, 2021		December 31, 2020		Balance Sheet Location	September 30, 2021		December 31, 2020
Derivatives designated as hedging instruments:
Foreign currency forward contracts	Other current assets	$	—	$	1.9	Other current liabilities	$	13.2	$	—
Foreign currency forward contracts	Other assets		—		—	Other liabilities		—		24.1
Derivatives not designated as hedging instruments:
Foreign currency forward contracts	Other current assets		1.1		0.4	Other current liabilities		—		0.7

As of September 30, 2021, we anticipate reclassifying approximately $0.6 million of gains from accumulated other comprehensive loss to net income during the next 12 months.

The following tables include the amounts in the consolidated statements of income in which the effects of cash flow hedges are recorded and the effects of cash flow hedge activity on these line items:

	Three Months Ended											Nine Months Ended
	September 30,											September 30,
	2021					2020						2021						2020
	Total			Amount of Gain (Loss) on Cash Flow Hedge Activity		Total			Amount of Gain (Loss) on Cash Flow Hedge Activity			Total			Amount of Gain (Loss) on Cash Flow Hedge Activity			Total			Amount of Gain (Loss) on Cash Flow Hedge Activity
Net sales	$	272.0		$	—	$	261.9		$	(0.1	)	$	814.4		$	(0.3	)	$	728.0		$	(0.1	)
Interest expense, net		(0.6	)		0.6		(4.4	)		0.6			(6.6	)		1.7			(13.4	)		2.1
Net foreign currency transaction loss		(0.7	)		4.1		(0.9	)		(7.3	)		(0.2	)		9.5			(5.0	)		(7.6	)

The effect of foreign currency derivative instruments designated as hedges and of foreign currency derivative instruments not designated as hedges in our consolidated statements of income was as follows:

	Three Months Ended				Nine Months Ended
	September 30, 2021				September 30, 2021
	Foreign Currency Option Contracts		Foreign Currency Forward Contracts		Foreign Currency Option Contracts		Foreign Currency Forward Contracts
Derivatives in cash flow hedging relationships:
Net gain recognized in other comprehensive (loss) income, net of tax(a)	$	—	$	3.4	$	—	$	8.1
Net loss reclassified from accumulated other comprehensive loss into income, net of tax, effective portion to net sales		—		—				(0.2	)
Net gain reclassified from accumulated other comprehensive loss into income, net of tax, effective portion to interest expense, net		—		0.4		—		1.3
Net gain reclassified from accumulated other comprehensive loss into income, net of tax, effective portion to net foreign currency transaction loss		—		3.2		—		7.3
Derivatives not designated as hedging instruments:
Net gain recognized in income(b)		—		0.8		—		2.2

	Three Months Ended						Nine Months Ended
	September 30, 2020						September 30, 2020
	Foreign Currency Option Contracts			Foreign Currency Forward Contracts			Foreign Currency Option Contracts			Foreign Currency Forward Contracts
Derivatives in cash flow hedging relationships:
Net loss recognized in other comprehensive (loss) income, net of tax(a)	$	(0.1	)	$	(5.8	)	$	(0.1	)	$	(1.6	)
Net loss reclassified from accumulated other comprehensive loss into income, net of tax, effective portion to net sales		—			(0.1	)		—			(0.1	)
Net gain reclassified from accumulated other comprehensive loss into income, net of tax, effective portion to interest expense, net		—			0.5			—			1.6
Net loss reclassified from accumulated other comprehensive loss into income, net of tax, effective portion to net foreign currency transaction loss		—			(5.7	)		—			(5.9	)
Derivatives not designated as hedging instruments:
Net loss recognized in income(b)		—			(1.7	)		—			(1.1	)

^(a) Net change in the fair value of the effective portion classified in other comprehensive loss.

^(b) Classified in net foreign currency transaction gain (loss).