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 Earnings for the second quarter of 2009 were $3.0 million, or $0.16 per diluted share compared to Net Earnings of $8.3 million, or $0.44 per diluted share, in the second quarter of 2008. Net Earnings during the second quarter were unfavorably impacted by the ongoing global recession that resulted in lower net sales volume across all geographies and unfavorable direct foreign currency exchange impacts, somewhat offset by lower commodity prices, deferred discretionary spending, and savings from our workforce reductions.

Net Loss for the first six months of 2009 was $38.7 million, or a $2.10 loss per diluted share compared to Net Earnings of $13.5 million, or $0.72 per diluted share, in the first six months of 2008. The Net Loss in the first six months of 2009 was primarily due to the non-cash pretax goodwill impairment charge of $43.4 million, or a $2.32 loss per diluted share, taken during the first quarter of 2009 as well as a significant decline in Net Sales due to ongoing unfavorable global economic conditions. Gross margins declined by 120 basis points which was better than expected as a result of benefits from commodity price deflation, cost reductions, flexible production management and workforce reductions. These benefits were not enough to offset the unfavorable impact of lower production volume through our manufacturing facilities. Selling and Administrative Expense was $21.4 million lower in the first six months of 2009 as compared to the same period last year as a result of benefits from our workforce reduction program, reductions in volume-related expenses, and a decrease in discretionary spending 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 and
six month periods ended June 30, 2009 and 2008 in dollars and as a percentage of
Net Sales (dollars in thousands, except per share data):

                                            Three Months Ended                                   Six Months Ended
                                                  June 30                                             June 30
                                2009           %          2008           %          2009           %          2008           %
Net Sales                     $ 148,578       100.0     $ 193,584       100.0     $ 277,225       100.0     $ 362,184       100.0
Cost of Sales                    88,479        59.6       111,381        57.5       164,401        59.3       210,341        58.1
Gross Profit                     60,099        40.4        82,203        42.5       112,824        40.7       151,843        41.9
Operating Expense:
Research and Development
Expense                           5,679         3.8         5,702         2.9        11,371         4.1        11,740         3.2
Selling and Administrative
Expense                          49,012        33.0        60,751        31.4        94,471        34.1       115,830        32.0
Goodwill Impairment Charge            -           -             -           -        43,363        15.6             -           -
Gain on Divestiture of
Assets                                -           -          (246 )      (0.1 )           -           -          (246 )      (0.1 )
Total Operating Expenses         54,691        36.8        66,207        34.2       149,205        53.8       127,324        35.2
Profit (Loss) from
Operations                        5,408         3.6        15,996         8.3       (36,381 )     (13.1 )      24,519         6.8
Other Income (Expense):
Interest Income                      95         0.1           216         0.1           205         0.1           528         0.1
Interest Expense                   (912 )      (0.6 )      (1,197 )      (0.6 )      (1,564 )      (0.6 )      (1,685 )      (0.5 )
Net Foreign Currency
Transaction Gains (Losses)          153         0.1           146         0.1          (208 )      (0.1 )        (614 )      (0.2 )
ESOP Income                         245         0.2           311         0.2           488         0.2         1,014         0.3
Other Income (Expense), Net         (68 )         -          (750 )      (0.4 )         (48 )         -          (744 )      (0.2 )
Total Other Income
(Expense), Net                     (487 )      (0.3 )      (1,274 )      (0.7 )      (1,127 )      (0.4 )      (1,501 )      (0.4 )
Profit (Loss) Before Income
Taxes                             4,921         3.3        14,722         7.6       (37,508 )     (13.5 )      23,018         6.4
Income Tax Expense
(Benefit)                         1,914         1.3         6,430         3.3         1,231         0.4         9,490         2.6
Net Earnings (Loss)           $   3,007         2.0     $   8,292         4.3     $ (38,739 )     (14.0 )   $  13,528         3.7
Earnings (Loss) per Diluted
Share                         $    0.16                 $    0.44                 $   (2.10 )               $    0.72

Net Sales

Consolidated Net Sales for the second quarter of 2009 totaled $148.6 million, a 23.2% decline compared to consolidated Net Sales of $193.6 million in the second quarter of 2008. Consolidated Net Sales for the six months ended June 30, 2009 totaled $277.2 million, a 23.5% decline compared to consolidated Net Sales of $362.2 million during the first six months of 2008.

The components of the change in consolidated Net Sales in the second quarter and first six months of 2009 as compared to the same periods in 2008 were as follows:

                                 % Change from 2008
                    Three Months Ended           Six Months Ended
                         June 30                     June 30
Organic Growth:
Volume                              (18 %)                     (20 %)
Price                                 1 %                        1 %
                                    (17 %)                     (19 %)
Foreign Currency                     (6 %)                      (6 %)
Acquisitions                          -                          1 %
Total                               (23 %)                     (24 %)

The 23.2% decrease in consolidated Net Sales in the second quarter of 2009 from 2008 was primarily driven by:

· an organic sales decline of 17%, excluding the effects of acquisitions and foreign currency exchange, primarily due to the ongoing global recession that resulted in lower sales volume across all geographies; and

· an unfavorable direct foreign currency exchange impact of 6%.

The 23.5% decrease in consolidated Net Sales in the first six months of 2009 from 2008 was primarily driven by:

· an organic sales decline of 19% primarily due to the ongoing global recession that resulted in lower sales volume across all geographies; and

· an unfavorable direct foreign currency exchange impact of 6%.

The following table sets forth the Net Sales by geographic area for the three and six month periods ended June 30, 2009 and 2008 and the percentage change from the prior year (dollars in thousands):

                                 Three Months Ended                         Six Months Ended
                                       June 30                                   June 30
                          2009          2008            %           2009          2008            %
North America           $  87,703     $ 108,572         (19.2 )   $ 161,070     $ 206,815         (22.1 )
Europe, Middle East
and Africa                 45,544        63,676         (28.5 )      86,631       116,397         (25.6 )
Other International        15,331        21,336         (28.1 )      29,524        38,972         (24.2 )
Total                   $ 148,578     $ 193,584         (23.2 )   $ 277,225     $ 362,184         (23.5 )

North America

North America Net Sales were $87.7 million for the second quarter of 2009, a decrease of 19.2% from the second 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 second quarter of 2009, with customers delaying or cancelling their purchases due to broader economic factors. During the second quarter of 2009, Net Sales benefited approximately 1% from slightly higher prices across most product lines. The direct impact of foreign currency translation exchange effects within North America unfavorably impacted Net Sales by approximately 1% during the second quarter of 2009.

Net Sales decreased 22.1% to $161.1 million in North America for the six months ended June 30, 2009 compared to the same period in 2008. Organic growth within North America has been negative during the first half of 2009 due to lower demand, especially for industrial and outdoor equipment, as a result of the ongoing recession in the U.S. economy. Benefits from pricing actions across most product lines helped offset the decline in unit volume. The direct impact of foreign currency translation exchange effects within North America unfavorably impacted Net Sales by approximately 1% during the first six months of 2009.

Europe, Middle East and Africa

In our markets within Europe, the Middle East and Africa ("EMEA"), Net Sales decreased 28.5% to $45.5 million for the second quarter of 2009 as compared to the second quarter of 2008. An organic sales decline of approximately 14% in the second quarter of 2009 when compared to the same period last year was due to lower unit volume offset somewhat by higher prices. Unfavorable direct foreign currency exchange fluctuations decreased Net Sales by approximately 14% in the second quarter of 2009.

EMEA Net Sales decreased 25.6% to $86.6 million for the six months ended June 30, 2009. We experienced a decline in organic growth of approximately 14% for the first six months of 2009 as compared to the same period in 2008 primarily due to decreased volume in industrial and outdoor products, slightly offset by benefits from pricing actions. Unfavorable direct foreign currency exchange fluctuations reduced EMEA Net Sales approximately 14% for the six months ended June 30, 2009. Acquisitions added approximately 3% during the first six months 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 second quarter of 2009 totaled $15.3 million, a decrease of 28.1% as compared to the first quarter of 2009. An organic decline of approximately 20% in Net Sales was driven by unit volume decreases primarily within our equipment business. Unfavorable direct foreign currency translation exchange effects decreased sales in Other International markets by approximately 8% in the 2009 second quarter.

Net Sales for the first six months of 2009 in Other International markets decreased 24.2% to $29.5 million compared to the same period last year. Unfavorable direct foreign currency translation exchange effects decreased sales by approximately 8%. Acquisitions added approximately 4% to Net Sales within this market during the first six months of 2009. Organic sales growth was negative by approximately 20% primarily due to equipment unit volume declines.

Gross Profit

Gross Profit margin was 40.4% for the second quarter of 2009 compared with 42.5% in the second quarter of 2008. Gross margin declined by 210 basis points due to the unfavorable impacts of: lower production volume through our manufacturing facilities, mix of products sold, and foreign currency exchange effects somewhat offset by benefits from lower commodity prices, flexible production management and workforce reductions. During the second quarter of 2009 our sales were comprised of a higher percentage of small commercial equipment products, which generally carry a lower margin than our large industrial equipment.

Gross Profit margin was 40.7% for the first six months of 2009 compared with 41.9% in 2008. Gross margins declined by 120 basis points due to the unfavorable impact of lower production volume through our manufacturing facilities and unfavorable foreign currency exchange effects, somewhat offset by benefits from lower commodity prices, flexible production management and workforce reductions.

Operating Expense

Research & Development Expense

Research and Development ("R&D") Expense in the second quarter of 2009, as well as the second quarter of 2008, was $5.7 million. R&D Expense as a percentage of Net Sales was 3.8% for the second quarter of 2009 compared to 2.9% 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 for the six months ended June 30, 2009 was $11.4 million, down 3.1% from $11.7 million in 2008. R&D expense as a percentage of Net Sales was 4.1% for the first six months of 2009 compared to 3.2% in the same period last year. R&D Expense was slightly down on a dollar basis due in part to timing of projects and initiatives between years.

Selling & Administrative Expense

Selling and Administrative ("S&A") Expense in the second quarter of 2009 decreased $11.7 million, or 19.3%, to $49.0 million from $60.8 million in the second quarter of 2008. In spite of unfavorable direct foreign currency exchange effects which increased S&A Expense by approximately $3.0 million in the second quarter of 2009, we achieved lower S&A Expense through our workforce reduction and strict cost controls in the 2009 second quarter as compared to the same period last year.

For the six months ended June 30, 2009, S&A Expense decreased 18.4% to $94.5 million from $115.8 million in the comparable period last year. Although unfavorable direct foreign currency exchange added approximately $5.5 million to S&A expense for the six months ended June 30, 2009, we were successful in reducing our discretionary spending to a level that better aligned expenses with our current sales level.

S&A Expense as a percentage of Net Sales was 33.0% for the second quarter of 2009, up from 31.4% in the comparable 2008 quarter. S&A Expense as a percentage of Net Sales was 34.1% for the six months ended June 30, 2009, up from 32.0% in the comparable 2008 period. Although S&A Expense was lower than in the second quarter of 2008 and in the first half of 2008 on a dollar basis, the sharp decline in sales experienced in the first half of 2009 still resulted in higher S&A Expense as a percentage of Net Sales during the second quarter and the first six months of 2009.

Goodwill Impairment Charge

During the first quarter of 2009, we recorded a non-cash pretax 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.

Gain on Divestiture of Assets

During the second quarter of 2008, we realized a pretax gain of $0.2 million from the divestiture of assets related to our Centurion chassis-mounted street sweeper product.

Other Income (Expense), Net

Interest Income

Interest Income was $0.1 million and $0.2 in the second quarter and first six months of 2009, a decrease of $0.1 million and $0.3 million as compared to the same periods in 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 $0.9 million and $1.6 million in the second quarter and first six months of 2009, a decrease of $0.3 million and $0.1 million from 2008. 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. The decline in interest expense between periods was primarily due to lower debt levels as a result of our increased focus on cash optimization.

Net Foreign Currency Transaction Gains (Losses)

Net foreign currency gains in the second quarter of 2009 were relatively consistent with the second quarter of 2008.

The net favorable change from the prior year of foreign currency gains in the first six months of 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 U.S. dollars for the Alfa acquisition.

ESOP Income

ESOP Income was $0.2 million and $0.5 million in the second quarter and first six months of 2009 as compared to $0.3 million and $1.0 million in the same period in 2008. 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. Lower levels of ESOP Income during both the second quarter and first half of 2009 as compared to 2008 are due to a lower average stock price during 2009.

Other Income (Expense), Net

Other Expense, Net was $0.1 million and $0.1 million in the second quarter and first six months of 2009 as compared to $0.7 million and $0.7 million in the same periods in 2008. During the second quarter of 2008, we incurred $0.7 million of costs related to potential acquisitions.

Income Taxes

The effective tax rate in the second quarter of 2009 was 38.9% compared to the effective rate in the second quarter of the prior year of 43.7%. The year-to-date effective rates were a negative 3.3% for 2009 compared to 41.2% for 2008. The year-to-date tax expense includes only a $1.1 million tax benefit associated with the $43.4 million impairment of goodwill recorded in the first quarter, materially impacting the overall effective rate. Excluding the first quarter goodwill impairment, the year-to-date effective tax rate would have been 39.4%.

The decrease in the effective rate between quarters was primarily related to the mix in expected full year taxable earnings by country and reinstatement of the research and development tax credit in the fourth quarter of 2008. The effective tax rate in 2008 was also negatively impacted by the correction of an immaterial error related to reserves for uncertain tax positions covering tax years 2004 to 2006.

Liquidity and Capital Resources

Liquidity

Cash and Cash Equivalents totaled $16.1 million at June 30, 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 24.5% and 31.2% at June 30, 2009 and December 31, 2008, respectively.

On July 29, 2009, we put a shelf loan agreement in place to potentially obtain fixed rate, long-term debt and filed a shelf registration statement with the SEC to facilitate any future issuances of debt securities, preferred stock, depository shares and common stock. No securities can be offered under the shelf registration statement until it has been declared effective by the SEC. We have no current plans to draw on the shelf loan agreement or issue securities, but have taken these steps for greater long-term flexibility to access capital, as opportunities arise.

Cash Flow Summary

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

                                                                  Six Months Ended
                                                                       June 30
                                                                 2009          2008
Operating Activities                                           $  42,578     $  (4,672 )
Investing Activities:
Purchases of Property, Plant and Equipment, Net of Disposals      (6,411 )     (10,410 )
Acquistions of Businesses, Net of Cash Acquired                   (2,117 )     (81,600 )
Financing Activities                                             (47,551 )      81,559
Effect of Exchange Rate Changes on Cash and Cash Equivalents         308           540
Net Increase (Decrease) in Cash and Cash Equivalents           $ (13,193 )   $ (14,583 )

Operating Activities

Operating activities provided $42.6 million of cash for the six months ended June 30, 2009. Cash provided by operating activities was driven primarily by reductions in Accounts Receivable during the first six months of 2009, partially offset by lower Employee Compensation and Benefit liabilities due to payments of severance associated with the workforce reduction announced in the fourth quarter of 2008.

In the comparable 2008 period, operating activities used $4.7 million of cash for the six months ended June 30, 2008. Primary uses of cash included payments of 2007 annual performance awards, incentives, profit sharing and rebates as well as decreased accruals for these items in 2008. In addition, we have increased inventory levels due to higher demo and used inventories related to the introduction of new products and increased inventory at our Louisville distribution center and China locations. Partially offsetting these uses of cash was cash provided by net earnings of $13.5 million.

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):

       June 30, 2009   December 31, 2008   June 30, 2008
DSO         66                77                66
DIOH        98                101               90

As of June 30, 2009, DSO of 66 days was consistent with the prior year DSO as of June 30, 2008 and decreased 11 days compared to December 31, 2008 primarily due to the collection of outstanding Accounts Receivable.

As of June 30, 2009, DIOH increased 8 days compared to June 30, 2008 due to a disproportionate decline in sales volume as compared to the related smaller reduction in inventory. As of June 30, 2009, DIOH decreased 3 days compared to December 31, 2008 primarily due to lower levels of inventory as a result of inventory reduction initiatives.

Investing Activities

Investing activities during the six months ended June 30, 2009 used $8.5 million in cash. Investing activities included net capital expenditures of $6.4 million and $2.1 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 $2.1 million related to acquisitions was primarily comprised of the first quarter earn-out payment for our March 28, 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 six months ended June 30, 2008 used $92.0 million in cash. Investing activities included the acquisitions of Applied Sweepers and Alfa for $81.6 million and net capital expenditures of $10.4 million. Investments in capital expenditures included technology upgrades, tooling related to new product development and investments in our Minnesota facilities to create a global R&D center of excellence to support product innovation efforts.

Financing Activities

Net cash used by financing activities was $47.6 million during the first six months of 2009, primarily from net repayments of Long-Term Debt of $40.0 million and $4.8 million in dividends paid.

Net cash provided by financing activities was $81.6 million during the first six months of 2008, primarily from long-term borrowings totaling $87.5 million from our Credit Agreement with our bank group led by JPMorgan and $7.4 million in net short-term borrowings. Significant uses of cash included $8.3 million for repurchases of common stock under our share repurchase program and $4.8 million in dividend payments.

Indebtedness

As of June 30, 2009, we had lines of credit totaling approximately $134.7 million. There were $47.5 million in outstanding borrowings under these facilities as of June 30, 2009. In addition, we had stand alone letters of credit of approximately $2.5 million outstanding and bank guarantees in the amount of approximately $1.0 million. The weighted average interest rate on . . .