Note 10 - Derivatives

6 Months Ended

Jun. 30, 2022

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 Hedges

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

Cash Flow Hedges

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

Fair Value Hedges

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

Net Investment Hedges

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

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

	Derivative Assets					Derivative Liabilities
	Balance Sheet Location	June 30, 2022		December 31, 2021		Balance Sheet Location	June 30, 2022		December 31, 2021
Derivatives designated as cash flow hedges:
Foreign currency forward contracts	Other current assets	$	—	$	—	Other current liabilities	$	—	$	10.4
Derivatives designated as fair value hedges:
Cross-currency swaps	Other current assets		1.3		—	Other current liabilities		—		—
Cross-currency swaps	Other assets		1.2		—	Other liabilities		—		—
Derivatives designated as net investment hedges:
Cross-currency swaps	Other current assets		1.1		—	Other current liabilities		—		—
Cross-currency swaps	Other assets		0.7		—	Other liabilities		—		—
Derivatives not designated as hedging instruments:
Foreign currency forward contracts	Other current assets		0.5		0.3	Other current liabilities		0.2		0.4

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

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

	Three Months Ended											Six Months Ended
	June 30,											June 30,
	2022					2021						2022					2021
	Total			Amount of Gain (Loss) on Hedging Activity		Total			Amount of Gain (Loss) on Hedging Activity			Total			Amount of Gain (Loss) on Hedging Activity		Total			Amount of Gain (Loss) on Hedging Activity
Derivatives designated as cash flow hedges:
Net sales	$	280.2		$	—	$	279.1		$	(0.2	)	$	538.3		$	—	$	542.4		$	(0.3	)
Interest expense, net		(1.2	)		—		(2.1	)		0.5			(1.5	)		0.7		(6.0	)		1.1
Net foreign currency transaction (loss) gain		(1.0	)		0.2		—			(1.9	)		(0.4	)		4.7		0.5			5.4
Derivatives designated as fair value hedges:
Interest expense, net		(1.2	)		0.4		(2.1	)		—			(1.5	)		0.4		(6.0	)		—
Net foreign currency transaction (loss) gain		(1.0	)		4.3		—			—			(0.4	)		4.3		0.5			—
Derivatives designated as net investment hedges:
Interest expense, net		(1.2	)		0.3		(2.1	)		—			(1.5	)		0.3		(6.0	)		—

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

	Three Months Ended					Six Months Ended
	June, 30					June, 30
	2022		2021			2022		2021
Derivatives designated as cash flow hedges:
Net (loss) gain recognized in other comprehensive loss, net of tax(a)	$	—	$	(1.3	)	$	3.8	$	4.7
Net loss reclassified from accumulated other comprehensive loss into income, net of tax, effective portion to net sales		—		(0.2	)		—	$	(0.2	)
Net gain reclassified from accumulated other comprehensive loss into income, net of tax, effective portion to interest expense, net		—		0.5			0.5		0.9
Net (loss) gain reclassified from accumulated other comprehensive loss into income, net of tax, effective portion to net foreign currency transaction gain		0.1		(1.5	)		3.6		4.1
Derivatives designated as fair value hedges:
Net gain recognized in other comprehensive loss, net of tax(a)		4.7		—			4.7		—
Net gain reclassified from accumulated other comprehensive loss into income, net of tax, effective portion to interest expense, net		0.3		—			0.3		—
Net gain reclassified from accumulated other comprehensive loss into income, net of tax, effective portion to net foreign currency transaction gain		3.3		—			3.3		—
Derivatives designated as net investment hedges:
Net gain reclassified from accumulated other comprehensive loss into income, net of tax, effective portion to interest expense, net		0.2		—			0.2		—
Derivatives not designated as hedging instruments:
Net gain (loss) recognized in income(b)		4.2		(0.7	)		2.6		1.4

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

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