Overview

Tennant Company is a world leader in designing, manufacturing and marketing solutions that help create a cleaner, safer world. We provide equipment, parts and consumables and specialty surface coatings to contract cleaners, end-user businesses, healthcare facilities, schools and local, state and federal governments. We sell our products through our direct sales and service organization and a network of authorized distributors worldwide. Geographically, our customers are primarily located in North America, Europe, the Middle East, Africa, Asia-Pacific and Latin America. 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. The Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") should be read in conjunction with the MD&A included in our Annual Report on Form 10-K for the year ended December 31, 2008.

Net Loss for the first quarter of 2009 was $41.7 million, or a $2.29 loss per diluted share compared to Net Earnings of $5.2 million, or $0.28 per diluted share, in the first quarter of 2008. The Net Loss in the first quarter of 2009 was primarily due to the $43.4 million Goodwill Impairment Charge, or a $2.32 loss per diluted share, as well as a significant decline in Net Sales of 23.7% due to the continued credit crisis and the global economic conditions. Gross margins declined by 30 basis points which was better than expected as a result of benefits from commodity price deflation and cost reductions, including benefits from the fourth quarter 2008 workforce reduction, were not enough to offset the unfavorable impact of lower production volume through our manufacturing facilities. Selling and Administrative Expense was lower in the first quarter of 2009 as compared to same quarter last year as a result of benefits from the fourth quarter 2008 workforce reduction program, reductions in volume-related expenses, and a decrease in discretionary expenses to align expenses with the lower sales volume.

The workforce reduction program was announced during the fourth quarter of 2008 to resize our worldwide employee base by approximately 8%, or about 240 people. A pretax workforce reduction charge totaling $14.6 million, or $0.65 per diluted share, was recognized in the fourth quarter of 2008 as a result of this program. The workforce reduction was accomplished primarily through the elimination of salaried positions across the organization. This measure is estimated to achieve savings of at least $15 million in 2009 and approximately $20 million in 2010. Additionally, early retirements, elimination of contracted positions and attrition accounted for some of the eliminated positions and contributed to these savings. The pretax charge consisted primarily of severance and outplacement services and was included within Selling and Administrative Expense in the 2008 Consolidated Statement of Earnings. In the first quarter of 2009, the severance accrual was revised to reflect actual experience resulting in a benefit of $1.3 million which was included within Selling and Administrative Expense in the 2009 first quarter results of operations.

Historical Results

The following compares the historical results of operations for the three month
periods ended March 31, 2009 and 2008 in dollars and as a percentage of Net
Sales (dollars in thousands, except per share data):
                                                           Three Months Ended
                                                                March 31
                                             2009            %           2008            %
Net Sales                                  $ 128,647         100.0     $ 168,600         100.0
Cost of Sales                                 75,922          59.0        98,960          58.7
Gross Profit                                  52,725          41.0        69,640          41.3
Operating Expense:
Research and Development Expense               5,692           4.4         6,038           3.6
Selling and Administrative Expense            45,460          35.3        55,079          32.7
Goodwill Impairment Charge                    43,363          33.7             -             -
Total Operating Expenses                      94,515          73.5        61,117          36.2
Profit (Loss) from Operations                (41,790 )       (32.5 )       8,523           5.1
Other Income (Expense):
Interest Income                                  111           0.1           313           0.2
Interest Expense                                (652 )        (0.5 )        (488 )        (0.3 )
Net Foreign Currency Transaction Gains
(Losses)                                        (361 )        (0.3 )        (759 )        (0.5 )
ESOP Income                                      243           0.2           702           0.4
Other Income (Expense), Net                       20             -             5             -
Total Other Income (Expense), Net               (639 )        (0.5 )        (227 )        (0.1 )
Profit (Loss) Before Income Taxes            (42,429 )       (33.0 )       8,296           4.9
Income Tax Expense (Benefit)                    (683 )        (0.5 )       3,061           1.8
Net Earnings (Loss)                        $ (41,746 )       (32.5 )   $   5,235           3.1
Earnings (Loss) per Diluted Share          $   (2.29 )                 $    0.28

Net Sales

Consolidated Net Sales for the first quarter of 2009 totaled $128.6 million, a
23.7% decline compared to Net Sales of $168.6 million in the first quarter of
2008. The components of the change in consolidated Net Sales in the first
quarter of 2009 as compared to the first quarter of 2008 were as follows:

                  % Change from 2008
Organic Growth:
    Volume              (22%)
    Price                 1%
                        (21%)
Foreign Currency         (6%)
Acquisitions              3%
    Total               (24%)

The 23.7% decrease in consolidated Net Sales in the first quarter of 2009 from 2008 was primarily driven by:

· an organic decline of 21%, driven almost entirely by a decline in our base business volume due to the global economic downturn;

· an unfavorable direct foreign currency exchange impact of 6%; and

· an increase of 3% in sales due to our March 28, 2008 acquisition of Alfa and our February 29, 2008 acquisition of Applied Sweepers.

The following table sets forth the Net Sales by geographic area for the three month periods ended March 31, 2009 and 2008 and the percentage change from the prior year (dollars in thousands):

                                         Three Months Ended
                                              March 31
                                   2009          2008           %
North America                    $  73,367     $  98,243       (25.3 )
Europe, Middle East and Africa      41,087        52,721       (22.1 )
Other International                 14,193        17,636       (19.5 )
Total                            $ 128,647     $ 168,600       (23.7 )

North America

North America Net Sales were $73.4 million for the first quarter of 2009, a decrease of 25.3% from the first quarter of 2008. We experienced a decline in unit volume across all product lines, but most significantly within our equipment business. We continued to see a longer sales cycle for our products during the first quarter of 2009, with customers delaying or cancelling their purchases due to broader economic factors. During the first quarter of 2009, Net Sales benefited approximately 1% from price increases taken across all product lines. The direct impact of foreign currency within North America unfavorably impacted Net Sales by approximately 1% during the first quarter of 2009.

Europe, Middle East and Africa

In our markets within Europe, the Middle East and Africa ("EMEA"), Net Sales decreased 22.1% to $41.1 million for the first quarter of 2009 as compared to the first quarter of 2008. An organic decline of approximately 14% accounted for the decrease in the first quarter of 2009 when compared to the same period last year due to lower unit volume more than offsetting benefits from pricing actions. Unfavorable direct foreign currency exchange fluctuations decreased Net Sales by approximately 14% in the first quarter of 2009. Acquisitions added approximately 6% to Net Sales within this market in the first quarter of 2009.

Other International

Our Other International markets are comprised of the following key geographic regions: China and other Asia Pacific markets, Japan, Australia and Latin America. Net Sales in these markets for the first quarter of 2009 totaled $14.2 million, a decrease of 19.5% as compared to the first quarter of 2008. An organic decline of approximately 19% in Net Sales was driven by unit volume decreases primarily in our Latin America markets. Unfavorable direct foreign currency translation exchange effects decreased sales in Other International markets by approximately 8% in the 2009 first quarter. Acquisitions added approximately 8% to Net Sales within this market during the first quarter of 2009.

Gross Profit

Gross margin was 41.0% for the first quarter of 2009 compared with 41.3% reported in the first quarter of 2008. Gross margins declined by 30 basis points which was better than expected as a result of benefits from commodity price deflation and cost reductions, including benefits from the fourth quarter 2008 workforce reduction, were not enough to offset the unfavorable impact of lower production volume through our manufacturing facilities. Additionally, gross margin was impacted by unfavorable foreign currency exchange effects.

Operating Expense

Research & Development Expense

Research and Development ("R&D") Expense in the first quarter of 2009 was $5.7 million and $6.0 million in the first quarter of 2008. R&D Expense as a percentage of Net Sales was 4.4% for the first quarter of 2009 compared to 3.6% in the comparable quarter last year. We are committed to spending between 3% to 4% of Net Sales on our R&D efforts annually. R&D Expense was slightly down on a dollar basis due in part to timing of projects and initiatives between years, but was higher than 4% of Net Sales due to the low level of Net Sales in the first quarter of 2009.

Selling & Administrative Expense

Selling and Administrative ("S&A") Expense in the first quarter of 2009 decreased $9.6 million, or 17.5%, to $45.5 million from $55.1 million in the first quarter of 2008. Favorable direct foreign currency exchange effects decreased S&A Expense by approximately $2.4 million in the first quarter of 2009. S&A Expense in the 2009 first quarter also included a $1.3 million benefit from the revision to the reserve for the severance and related costs associated with the workforce reduction announced in the fourth quarter of 2008.

The remaining $5.9 million, or approximately 10.7%, decrease in S&A Expense during the 2009 first quarter was due to savings from the workforce reduction along with cost controls and reductions in discretionary spending to better align expenses with sales. Partially offsetting these benefits is the inclusion of expenses related to the February 29, 2008 acquisition of Applied Sweepers and the March 28, 2008 acquisition of Alfa.

S&A Expense as a percentage of Net Sales was 35.3% for the first quarter of 2009, up from 32.7% in the comparable 2008 quarter. Although S&A Expense was lower than in the 2008 first quarter on a dollar basis, the rapid decline in sales still resulted in higher S&A Expense as a percentage of Net Sales during the quarter.

Goodwill Impairment Charge

During the first quarter of 2009, we recorded a Goodwill Impairment Charge of $43.4 million related to our EMEA reporting unit. All but $3.8 million of this charge is not tax deductible.

Other Income (Expense), Net

Interest Income

Interest Income was $0.1 million in the first quarter of 2009, a decrease of $0.2 million from 2008. The decrease between 2009 and 2008 reflects the impact of a decline in interest rates between periods on lower average levels of cash and cash equivalents.

Interest Expense

Interest Expense was $0.7 million in the first quarter of 2009, an increase of $0.2 million from 2008 as we became a net debtor during the latter part of the first quarter of 2008 borrowing against our revolving credit facility, primarily to fund the two acquisitions that closed during the first quarter of 2008.

Net Foreign Currency Transaction Gains (Losses)

The net favorable change from the prior year of foreign currency losses for the three month period ended March 31, 2009 of $0.4 million was primarily due to a $0.9 million unfavorable movement in the foreign currency exchange rates in the first quarter of 2008 related to a deal contingent non-speculative forward contract that we entered into which fixed the cash outlay in US dollars for the Alfa acquisition.

ESOP Income

ESOP Income was $0.2 million in the first quarter of 2009 as compared to $0.7 million in the same period in 2008 due to a lower average stock price during the first quarter of 2009. We benefit from ESOP Income when the shares held by Tennant's ESOP Plan are utilized and the basis of those shares is lower than the current average stock price. This benefit is offset in periods when the number of shares needed exceeds the number of shares available from the ESOP as the shortfall must be issued at the current market rate, which is generally higher than the basis of the ESOP shares.

Other Income (Expense), Net

Other Expense, Net was essentially unchanged between the first quarters of 2009 and 2008.

Income Taxes

The effective tax rate in the first quarter of 2009 was negative 1.6% compared to the effective rate in the first quarter of the prior year of 36.9%. The tax expense for the first quarter includes only a $1.1 million tax benefit associated with the $43.4 million impairment of goodwill, materially impacting the overall effective rate.

Excluding the tax benefit associated with the goodwill impairment, the first quarter effective tax rate would have been 41.9%. The increase in the effective rate as compared to the first quarter of the prior year was primarily related to the mix in expected full year taxable earnings by country.

Liquidity and Capital Resources

Liquidity

Cash and cash equivalents totaled $26.7 million at March 31, 2009, compared to $29.3 million at December 31, 2008. We believe that the combination of internally generated funds and present capital resources are more than sufficient to meet our cash requirements for the next twelve months. Our debt-to-capital ratio was 35.7% and 31.2% at March 31, 2009 and December 31, 2008, respectively.

Cash Flow Summary

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

                                                                  Three Months Ended
                                                                       March 31
                                                                  2009          2008
Operating Activities                                           $   11,173     $  (5,887 )
Investing Activities:
Purchases of Property, Plant and Equipment, Net of Disposals       (3,561 )      (7,408 )
Acquistions of Businesses, Net of Cash Acquired                    (2,295 )     (81,365 )
Financing Activities                                               (7,627 )      86,547
Effect of Exchange Rate Changes on Cash and Cash Equivalents         (276 )         312
Net Increase (Decrease) in Cash and Cash Equivalents           $   (2,586 )   $  (7,801 )

Operating Activities

Operating activities provided $11.2 million of cash for the three months ended March 31, 2009. Cash provided by operating activities was driven primarily by reductions in receivables during the quarter, partially offset by lower Employee Compensation and Benefit liabilities due to severance payments associated with the workforce reduction announced in the fourth quarter of 2008.

In the comparable 2008 period, cash used by operating activities was $5.9 million. Cash used by operating activities was driven by a decrease in cash income taxes paid, a decrease in Employee Compensation and Benefits and Other Accrued Expenses and Accounts Payable. The decrease in Employee Compensation and Benefits and Other Accrued Expenses was primarily a result of payments of prior fiscal year performance awards, annual rebates, incentives and profit sharing. Timing of payments was the primary reason for the decrease in Accounts Payable.

Management evaluates how effectively we utilize two of our key operating assets, receivables 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):

       March 31, 2009   December 31, 2008   March 31, 2008
DSO          75                77                 67
DIOH        121                101                95

At March 31, 2009, DSO increased eight days compared to March 31, 2008 primarily due to decreased sales volume experienced during the first quarter of 2009 and a slowing of payments due to current economic conditions and the decreased availability of credit to our customers. At March 31, 2009, DSO decreased two days compared to December 31, 2008 primarily due to the lower level of sales and the collection of outstanding Accounts Receivable.

At March 31, 2009, DIOH increased twenty-six days compared to March 31, 2008 and increased twenty days compared to December 31, 2008 primarily due to the decline in sales volume experienced during the first quarter of 2009 as well as higher inventory levels due to higher demo and used inventories related to the introduction of new products and higher inventories at our Louisville distribution center and China locations due to longer lead times for products sourced from low-cost regions.

Investing Activities

Investing activities during the three months ended March 31, 2009 used $5.9 million in cash. Investing activities included net capital expenditures of $3.6 million and $2.3 million related to acquisition of businesses. Investments in capital expenditures included technology upgrades, tooling related to new product development and investments in our Minnesota facilities to complete the new global R&D center of excellence to support new product innovation efforts. The $2.3 million related to acquisitions was primarily comprised of the first quarter earn-out payment for our February 29, 2008 acquisition of Alfa.

Full-year capital spending is anticipated to approximate $15 million or less, including capital spending related to our recent acquisitions.

Investing activities during the three months ended March 31, 2008 used $88.8 million in cash. Investing activities included the acquisitions of Applied Sweepers and Alfa for $81.4 million and capital expenditures of $7.4 million during the three months ended March 31, 2008. Investments in capital expenditures included technology upgrades and new product development.

Financing Activities

Net cash used by financing activities was $7.6 million during the first three months of 2009, primarily from repayment of debt of $4.0 million and $2.4 million in dividends paid.

Net cash provided by financing activities was $86.5 million during the first three months of 2008, primarily from borrowings totaling $92.5 million from our Credit Agreement with our bank group led by JP Morgan. Significant uses of cash included $3.6 million for repurchases of common stock under our share repurchase program and $2.4 million in dividend payments.

Indebtedness

As of March 31, 2009, we had available lines of credit totaling $134.3 million and stand alone letters of credit of approximately $2.7 million. There were $83.5 million in outstanding borrowings under these facilities and we were in compliance with all debt covenants as of March 31, 2009.

On March 4, 2009, we entered into a second amendment to the Credit Agreement with JPMorgan. This amendment principally provides: (i) an exclusion from our EBITDA calculation for: all non-cash losses and charges up to $15.0 million cash restructuring charges during the 2008 fiscal year and up to $3.0 million cash restructuring charges during the 2009 fiscal year, (ii) an amendment of the indebtedness to EBITDA financial ratio required for the second and third quarters of 2009 to not greater than 4.0 to 1 and 5.5 to 1, respectively, (iii) an amendment to the EBITDA to interest expense financial ratio for the third quarter of 2009 to not less than 3.25 to 1, and (iv) the ability for us to incur up to an additional $80.0 million of indebtedness pari passu with the lenders under the Credit Agreement. The revolving credit facility available under the Credit Agreement remains at $125.0 million, but the amendment reduced the expansion feature under the Credit Agreement from $100.0 million to $50.0 million. The amendment put a cap on permitted new acquisitions of $2.0 million for the 2009 fiscal year and the amount of permitted new acquisitions in fiscal years after 2009 will be limited according to our then current leverage ratio. The amendment prohibits us from conducting share repurchases during the 2009 fiscal year and limits the payment of dividends and repurchases of stock in fiscal years after 2009 to an amount ranging from $12.0 million to $40.0 million based on our leverage ratio after giving effect to such payments. Finally, if we obtain additional indebtedness as permitted under the amendment, to the extent that any revolving loans under the credit agreement are then outstanding we are required to prepay the revolving loans in an amount equal to 100% of the proceeds from the additional indebtedness. Additionally, proceeds over $25.0 million and under $35.0 million will reduce the revolver commitment on a 50% dollar for dollar basis and proceeds over $35.0 million will reduce the revolver commitment on a 100% dollar for dollar basis.

In conjunction with the amendment to the Credit Agreement, we gave the lenders a security interest on most of our personal property and pledged 65% of the stock of all domestic and first tier foreign subsidiaries. The obligations under the Credit Agreement are also guaranteed by our domestic subsidiaries and those subsidiaries also provide a security interest in their similar personal property.

Included in the amendment were increased interest spreads and increased facility fees. The fee for committed funds under the Credit Agreement now ranges from an annual rate of 0.30% to 0.50%, depending on our leverage ratio. Borrowings under the Credit Agreement bear interest at an annual rate of, at our option, either
(i) between LIBOR plus 2.2% to LIBOR plus 3.0%, depending on our leverage ratio; or (ii) the highest of (A) the prime rate, (B) the federal funds rate plus 0.50%, and (C) the adjusted LIBOR rate for a one month period plus 1.0%; plus, in any such case under this clause (ii), an additional spread of 1.2% to 2.0%, depending on our leverage ratio.

We were in compliance with all covenants under the Credit Agreement as of March 31, 2009. There was $83.5 million in outstanding borrowings under this facility at March 31, 2009, with a weighted average interest rate of 3.5%.

Contractual Obligations

There have been no material changes with respect to contractual obligations as disclosed in our 2008 Annual Report on Form 10-K.

New Accounting Pronouncements

In December 2008, the FASB issued FSP FAS 132(R)-1, "Employers' Disclosures about Postretirement Benefit Plan Assets" ("FSP FAS 132(R)-1"). FSP FAS 132(R)-1 provides guidance on an employer's disclosures about plan assets of a defined benefit pension or other postretirement plan. The requirements are effective for fiscal years beginning after December 15, 2009. This staff position pertains only to the disclosures and does not affect the accounting for defined benefit pensions or other postretirement plans; therefore, we do not anticipate that the adoption of FSP FAS 132(R)-1 will have an impact on our Consolidated Financial Statements.

In May 2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted Accounting Principles" ("SFAS No. 162"). SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles. SFAS No. 162 directs the hierarchy to the entity, rather than the independent auditors, as the entity is responsible for selecting accounting principles for financial statements that are presented in conformity with generally accepted accounting principles. The Standard is effective 60 days following SEC's approval of the Public Company Accounting Oversight Board amendments to remove the hierarchy of generally accepted accounting principles from the auditing standards. We do not expect that SFAS No. 162 will have an impact on our Consolidated Financial Statements.

In April 2009, the FASB issued FSP 157-4, "Interim Disclosures about Fair Value Financial Instruments" ("FSP FAS 157-4") that provides guidance on how to determine the fair value of assets and liabilities under SFAS No. 157 in the current economic environment and reemphasizes that the objective of fair-value measurement remains an exit price. The requirements are effective for interim and annual periods ending after June 15, 2009. We do not anticipate that the adoption of FSP FAS 157-4 will have an impact on our Consolidated Financial Statements.

In April 2009, the FASB issued FSP FASB 107-1 and APB 28-1, "Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly" ("FSP FASB 107-1 and APB 28-1") which requires publicly traded companies, as defined in Opinion 28, to disclose the fair value of financial instruments within the scope of Statement 107 in interim financial statements, adding to the current requirement to make those disclosures in annual financial statements. The requirements are effective for interim periods ending after June 15, 2009. We do not anticipate that the adoption of FSP FASB 107-1 and APB 28-1 will have an impact on our Consolidated Financial Statements.

Cautionary Statement Relevant to Forward-Looking Information

Certain statements contained in this document as well as other written and oral statements made by us from time to time are considered "forward-looking . . .