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 third quarter of 2009 were $5.8 million, or $0.31 per diluted share, compared to Net Earnings of $14.0 million, or $0.76 per diluted share, in the third quarter of 2008. Net Earnings during the 2009 third 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, cost cutting, delayed discretionary spending, and savings from our workforce reductions.

Net Loss for the first nine months of 2009 was $33.0 million, or a $1.78 loss per diluted share, compared to Net Earnings of $27.5 million, or $1.48 per diluted share, in the first nine months of 2008. The Net Loss in the first nine months of 2009 was primarily due to the non-cash pretax goodwill impairment charge of $43.4 million, or a $2.29 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 only 80 basis points compared to the same period in 2008 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 $25.6 million lower in the first nine 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 delays 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. During the first nine months of 2009, the severance accrual was revised to reflect actual experience resulting in a benefit of $1.7 million which was included within Selling and Administrative Expense.

Historical Results

The following compares the historical results of operations for the three and
nine month periods ended September 30, 2009 and 2008 in dollars and as a
percentage of Net Sales (dollars in thousands, except per share data):

                                  Three Months Ended                                   Nine Months Ended
                                     September 30                                        September 30
                      2009           %          2008           %          2009           %          2008           %
Net Sales           $ 154,427       100.0     $ 185,935       100.0     $ 431,651       100.0     $ 548,120       100.0
Cost of Sales          89,539        58.0       107,383        57.8       253,939        58.8       317,725        58.0
Gross Profit           64,888        42.0        78,552        42.2       177,712        41.2       230,395        42.0
Operating
Expense:
Research and
Development
Expense                 5,466         3.5         6,033         3.2        16,837         3.9        17,773         3.2
Selling and
Administrative
Expense                51,800        33.5        56,074        30.2       146,271        33.9       171,904        31.4
Goodwill
Impairment Charge           -           -             -           -        43,363        10.0             -           -
Gain on
Divestiture of
Assets                      -           -             -           -             -           -          (246 )         -
Total Operating
Expenses               57,266        37.1        62,107        33.4       206,471        47.8       189,431        34.6
Profit (Loss)
from Operations         7,622         4.9        16,445         8.8       (28,759 )      (6.7 )      40,964         7.5
Other Income
(Expense):
Interest Income            96         0.1           306         0.2           301         0.1           834         0.2
Interest Expense         (726 )      (0.5 )      (1,142 )      (0.6 )      (2,290 )      (0.5 )      (2,827 )      (0.5 )
Net Foreign
Currency
Transaction Gains
(Losses)                  353         0.2         2,538         1.4           145           -         1,925         0.4
ESOP Income               252         0.2           769         0.4           740         0.2         1,783         0.3
Other Income
(Expense), Net             21           -          (844 )      (0.5 )         (27 )         -        (1,588 )      (0.3 )
Total Other
Income (Expense),
Net                        (4 )         -         1,627         0.9        (1,131 )      (0.3 )         127           -

Profit (Loss)
Before Income
Taxes                   7,618         4.9        18,072         9.7       (29,890 )      (6.9 )      41,091         7.5
Income Tax
Expense (Benefit)       1,835         1.2         4,087         2.2         3,066         0.7        13,578         2.5
Net Earnings
(Loss)              $   5,783         3.7     $  13,985         7.5     $ (32,956 )      (7.6 )   $  27,513         5.0
Earnings (Loss)
per Diluted Share   $    0.31                 $    0.76                 $   (1.78 )               $    1.48

Net Sales

Consolidated Net Sales for the third quarter of 2009 totaled $154.4 million, a 16.9% decline compared to consolidated Net Sales of $185.9 million in the third quarter of 2008. Consolidated Net Sales for the nine months ended September 30, 2009 totaled $431.7 million, a 21.2% decline compared to consolidated Net Sales of $548.1 million during the first nine months of 2008.

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

                            % Change from 2008
                  Three Months Ended   Nine Months Ended
                  September 30, 2009   September 30, 2009
Organic Growth:
    Volume              (15%)                (18%)
    Price                 0%                   1%
                        (15%)                (17%)
Foreign Currency         (2%)                 (5%)
Acquisitions              0%                   1%
    Total               (17%)                (21%)

The 16.9% decrease in consolidated Net Sales in the third quarter of 2009 from 2008 was primarily driven by:

· an organic sales decline of 15%, 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 2%.

The 21.2% decrease in consolidated Net Sales in the first nine months of 2009 from 2008 was primarily driven by:

· an organic sales decline of 17% 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 5%.

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

                                 Three Months Ended                       Nine Months Ended
                                    September 30                            September 30
                           2009          2008           %          2009          2008           %
North America            $  90,531     $ 107,193       (15.5 )   $ 251,601     $ 314,008       (19.9 )
Europe, Middle East
and Africa                  45,192        55,300       (18.3 )     131,823       171,698       (23.2 )
Other International         18,704        23,442       (20.2 )      48,227        62,414       (22.7 )
Total                    $ 154,427     $ 185,935       (16.9 )   $ 431,651     $ 548,120       (21.2 )

North America

North America Net Sales were $90.5 million for the third quarter of 2009, a decrease of 15.5% from the third quarter of 2008. We experienced a decline in unit volume across all product lines, but most significantly within our large industrial equipment. We continued to see a longer sales cycle for our products during the third quarter of 2009, with customers delaying their purchases due to the economic downturn and tight credit markets. During the third quarter of 2009, Net Sales benefited by less than 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 less than 1% during the third quarter of 2009.

Net Sales decreased 19.9% to $251.6 million in North America for the nine months ended September 30, 2009 compared to the same period in 2008. Organic growth within North America has been negative during the first nine months 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 of approximately 1% 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 nine months of 2009.

Europe, Middle East and Africa

In our markets within Europe, the Middle East and Africa ("EMEA"), Net Sales decreased 18.3% to $45.2 million for the third quarter of 2009 as compared to the third quarter of 2008. An organic sales decline of approximately 12% in the third quarter of 2009 when compared to the same period last year was primarily due to lower sales of equipment. Unfavorable direct foreign currency exchange fluctuations decreased Net Sales by approximately 6% in the third quarter of 2009.

EMEA Net Sales decreased 23.2% to $131.8 million for the nine months ended September 30, 2009. We experienced a decline in organic growth of approximately 13% for the first nine months of 2009 as compared to the same period in 2008 primarily due to decreased sales of industrial and outdoor equipment, slightly offset by benefits from pricing actions. Unfavorable direct foreign currency exchange fluctuations reduced EMEA Net Sales approximately 12% for the nine months ended September 30, 2009. Acquisitions added approximately 2% during the first nine 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 third quarter of 2009 totaled $18.7 million, a decrease of 20.2% as compared to the first quarter of 2009. An organic decline of approximately 18% 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 2% in the 2009 third quarter.

Net Sales for the first nine months of 2009 in Other International markets decreased 22.7% to $48.2 million compared to the same period last year. Unfavorable direct foreign currency translation exchange effects decreased sales by approximately 5%. Acquisitions added approximately 2% to Net Sales within this market during the first nine months of 2009. Organic sales growth was negative by approximately 20% primarily due to equipment unit volume declines.

Gross Profit

Gross Profit margin was 42.0% for the third quarter of 2009 compared with 42.2% in the third quarter of 2008. Gross margin declined by 20 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.

Gross Profit margin was 41.2% for the first nine months of 2009 compared with 42.0% in the first nine months of 2008. Gross margin declined by 80 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 third quarter of 2009 was $5.5 million as compared with $6.0 million in the third quarter of 2008. R&D Expense as a percentage of Net Sales was 3.5% for the third quarter of 2009 compared to 3.2% in the comparable quarter last year.

R&D Expense for the nine months ended September 30, 2009 was $16.8 million, down 5.3% from $17.8 million in the first nine months of 2008. R&D expense as a percentage of Net Sales was 3.9% for the first nine 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 third quarter of 2009 decreased $4.3 million, or 7.6%, to $51.8 million from $56.1 million in the third quarter of 2008. We achieved a lower overall S&A Expense in the 2009 third quarter as compared to the same period last year as our workforce reductions and cost controls more than offset higher incentives on better than anticipated performance.

For the nine months ended September 30, 2009, S&A Expense decreased 14.9% to $146.3 million from $171.9 million in the comparable period last year. During the first nine months of 2009, we were successful in reducing costs and delaying discretionary spending to better align expenses with our current lower sales level.

S&A Expense as a percentage of Net Sales was 33.5% for the third quarter of 2009, up from 30.2% in the comparable 2008 quarter. S&A Expense as a percentage of Net Sales was 33.9% for the nine months ended September 30, 2009, up from 31.4% in the comparable 2008 period. Although S&A Expense was lower than in the third quarter of 2008 and in the first nine months of 2008 on a dollar basis, the sharp decline in sales experienced in the first nine months of 2009 still resulted in higher S&A Expense as a percentage of Net Sales during the third quarter and the first nine 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 $0.3 million in the third quarter and first nine months of 2009, a decrease of $0.2 million and $0.5 million, respectively, 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 $0.7 million and $2.3 million in the third quarter and first nine months of 2009, a decrease of $0.4 million and $0.5 million, respectively, 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 third quarter and first nine months of 2009 were $0.4 million and $0.1 million, respectively, a decrease of $2.2 million and $1.8 million, respectively, as compared to the same periods in the prior year. The net unfavorable change from the prior year of foreign currency gains in the third quarter and first nine months of 2009 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 and the 2008 third quarter $2.7 million net foreign currency gain from the settlement of forward contracts related to a British Pound denominated loan. No such transactions occurred during 2009.

ESOP Income

ESOP Income was $0.3 million and $0.7 million in the third quarter and first nine months of 2009, respectively, as compared to $0.8 million and $1.8 million in the same periods 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 third quarter and first nine months of 2009 as compared to 2008 are due to a lower average stock price during 2009.

Other Income (Expense), Net

Other Expense, Net was inconsequential in the third quarter and first nine months of 2009 as compared to a net expense of $0.8 million and $1.6 million, respectively, in the same periods in 2008. During the third quarter of 2008 we contributed $1.0 million to Tennant's charitable foundation and during the first nine months of 2008, we incurred $0.7 million of costs related to potential acquisitions. There were no such costs incurred during 2009.

Income Taxes

The effective tax rate in the third quarter of 2009 was 24.1% compared to the effective tax rate in the third quarter of the prior year of 22.6%. Each of these quarters benefited from discrete net favorable tax items, primarily due to adjustments of tax reserves related to federal tax filings, as well as the expiration of the statute of limitations in various jurisdictions. The underlying base tax rate, which excludes discrete tax items, declined from 39.5% to 36.9% for the 2009 first nine months compared to a reduction from 38% to 36% for the first nine months of 2008. The tax rate primarily depends on the mix in taxable earnings by country.

The year-to-date effective rates were a negative 10.3% for 2009 compared to 33.0% 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 30.7%.

Liquidity and Capital Resources

Liquidity

Cash and Cash Equivalents totaled $13.9 million at September 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 19.5% and 31.2% at September 30, 2009 and December 31, 2008, respectively.

On July 29, 2009, we 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.

On July 29, 2009, we entered into a Private Shelf Agreement (the "Shelf Agreement") with Prudential Investment Management, Inc. ("Prudential") and Prudential affiliates from time to time party thereto. The Shelf Agreement provides us and our subsidiaries access to an uncommitted, senior secured, maximum aggregate principal amount of $80.0 million of debt capital.

We have not drawn on the shelf registration statement or the Shelf Agreement as of September 30, 2009, 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):

                                                                  Nine Months Ended
                                                                    September 30
                                                                 2009          2008
Operating Activities                                           $  58,420     $  13,326
Investing Activities:
Purchases of Property, Plant and Equipment, Net of Disposals      (8,543 )     (16,227 )
Acquistions of Businesses, Net of Cash Acquired                   (2,162 )     (82,161 )
Financing Activities                                             (63,063 )      74,855
Effect of Exchange Rate Changes on Cash and Cash Equivalents           1          (111 )
Net Increase (Decrease) in Cash and Cash Equivalents           $ (15,347 )   $ (10,318 )

Operating Activities

Operating activities provided $58.4 million of cash for the nine months ended September 30, 2009. Cash provided by operating activities was driven primarily by reductions in working capital during the first nine 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 provided $13.3 million of cash. Cash provided by operating activities included Net Earnings of $27.5 million, partially offset by payments of 2007 annual performance awards, incentives, profit sharing and rebates as well as lower accruals for these items in 2008 and higher receivables due to net sales growth over the 2007 third quarter, especially in the last month of the quarter. In addition, inventory levels increased due to higher demo and used equipment inventories related to the introduction of new products and increased inventory at our Louisville distribution center and China locations.

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):

       September 30, 2009   December 31, 2008   September 30, 2008
DSO            66                  77                   70
DIOH           94                  101                  89

As of September 30, 2009, DSO of 66 days was 4 days lower than the prior year DSO as of September 30, 2008 and decreased 11 days compared to December 31, 2008 primarily due to the collection of outstanding Accounts Receivable.

As of September 30, 2009, DIOH increased 5 days compared to September 30, 2008 due to a disproportionate decline in sales volume as compared to the related smaller reduction in inventory. As of September 30, 2009, DIOH decreased 7 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 nine months ended September 30, 2009 used $10.7 million in cash. Investing activities included net capital expenditures of $8.5 million and $2.2 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 $2.2 million related to acquisitions was primarily comprised of the 2009 first quarter earn-out payment for our March 28, 2008 acquisition of Alfa and the 2009 third quarter earn-out payment for our August 15, 2008 acquisition of Shanghai ShenTan.

Investing activities during the nine months ended September 30, 2008 used $98.4 million in cash. Investing activities included the acquisitions of Applied Sweepers, Alfa and Shanghai ShenTan for $82.2 million and net capital expenditures of $16.2 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 new product innovation efforts.

Financing Activities

Net cash used by financing activities was $63.1 million during the first nine months of 2009, primarily from net repayments of Long-Term Debt of $53.0 million and $7.2 million in dividends payments.

Net cash provided by financing activities was $74.9 million during the first nine months of 2008, primarily from long-term borrowings totaling $87.5 million from our Credit Agreement with our bank group led by JPMorgan and $8.5 million in net short-term borrowings. Significant uses of cash included $14.3 million for repurchases of common stock under our share repurchase program and $7.2 million in dividend payments.

Indebtedness

. . .