Tennant Company Annual Report 2006

FY2006 Annual Report · Tennant Company

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T E N N A N T C O M P A N Y 2 0 0 6 A N N U A L R E P O R T

W E A R E T E N N A N T C O M P A N Y

w e a r e t h e f u t u r e

TENNANT COMPANY
701 North Lilac Drive
P.O. Box 1452
Minneapolis, MN 55440
www.tennantco.com

©2007 Tennant and Nobles are registered trademarks of Tennant Company, whose products are sold and
serviced through Tennant Sales and Service Company, as well as through distributors. #1750-10

Company’s Investor Relations Department at 763-540-1204.
Individual stockholders may direct any questions to Tennant
INVESTOR INQUIRIES

New York Stock Exchange (TNC)
STOCK LISTING

E-mail: investors@tennantco.com
Minneapolis, MN 55440
P.O. Box 1452
Tennant Company
Investor Relations

website at www.tennantco.com, or contact:
financial reports on Form 10-Q, visit the Investor portion of our
copies of our Form 10-K or to obtain a copy of the quarterly
tutethe company’s annual report to shareholders. For additional
Commission accompanies this profile and together they consti-
The Form10-K filed with the Securities and Exchange
FORM 10-K AND 10-Q

Club, 7001Golden Valley Road, Golden Valley, MN 55427.
Thursday, May 3, 2007, at 10:30 a.m. at the Golden Valley Country
The annual meeting of Tennant Company will take place
ANNUAL MEETING

Information
Investor

Financial Highlights

2006

2005

% Change

For the year
Net sales
Profit from operations
% of net sales
Net earnings
% of net earnings
Basic earning per share
Diluted earnings per share
Dividends per share
Average shares outstanding – diluted

$ 598,981
$ 39,964
6.7%
$ 29,809
5.0%
1.61
1.57
0.46
18,989

$
$
$

At year-end

Total assets
Total debt
Shareholders’ equity
Ratio of total debt to total capital
Shareholders’ equity per share (ending) $

$ 354,250
$
3,719
$ 229,664
1.6%
12.25

$ 552,908
$ 34,837
6.3%
$ 22,936
4.2%
1.27
1.26
0.44
18,210

$
$
$

$ 311,472
$ 3,840
$ 193,102
2.0%
$ 10.50

8.3%
14.7%
–
30.0%
–
26.8%
24.6%
4.5%
4.3%

13.7%
(3.2)%
18.9%
–
16.7%

NET SALES (millions of dollars)

PROFIT FROM OPERATIONS (millions of dollars)

100

200

300

400

500

600

DILUTED EARNINGS PER SHARE (dollars)

CASH FLOW FROM OPERATIONS (millions of dollars)

0.25

0.50

0.75

1.00

1.25

1.50

ABOUT THE COVER:
The five individuals photographed on the cover are five of the 2,600 Tennant Company employees worldwide
who are at the heart of Tennant Company’s success.

A. James Weston, manufacturing supervisor, 2-year employee B. Connie Mitlyng, benefits administrator, 7-year
employee C. Tom Villebrun, material handler, 34-year employee D. Bruce Weiss, human resources, 2-year
employee E. Abby Liubakka, new product engineer, 1-year employee F. The sunflower image was introduced in
our 2005 annual report cover as a symbol of delivering “visible results” in connection with our long-term strategy
to lead the industry as an environmental cleaning solutions company. The sunflower has long been an image
positively associated with energy derived from the sun. Some have referred to it as a “trumpet of life.” For
Tennant Company, it has come to symbolize the radiance of a clean, safe environment and our organizational
commitment to sustain it.

Corporate Information

BOARD OF DIRECTORS

OFFICERS

William F. Austen
Vice President,
Operations,
Bemis Company

David Mathieson
Vice President and Chief
Financial Officer,
Brady Corporation

Jeffrey A. Balagna
Executive Vice President,
Chief Information &
Customer Technology
Officer,
Carlson Companies

James T. Hale
Retired Executive
Vice President,
General Counsel and
Corporate Secretary,
Target Corporation

H. Chris Killingstad
President and Chief
Executive Officer,
Tennant Company

Pamela K. Knous
Executive Vice President
and Chief Financial
Officer,
SUPERVALU INC.

Edwin L. Russell
Chairman and
Chief Executive,
Horizon Investments

Stephen G. Shank
Chairman and Chief
Executive Officer,
Capella Education
Company

Frank L. Sims
Corporate Vice President
Transportation and
Product Assurance,
Cargill Incorporated

Steven A. Sonnenberg
President,
Rosemount, Inc.,
a division of Emerson
Electric Co.

H. Chris Killingstad
President and
Chief Executive Officer

Steven M. Coopersmith
Vice President,
Global Marketing

Thomas J. Dybsky
Vice President,
Administration

Andrew J. Eckert
Vice President,
North America Sales

Mark J. Fleigle
Vice President,
Research and
Development

Heidi M. Hoard
Vice President,
General Counsel and
Secretary

Karel Huijser
Vice President,
International

Thomas Paulson
Vice President and
Chief Financial Officer

Patrick J. O’Neill
Treasurer

Steven K. Weeks
Vice President,
North America
Strategic Planning

Don B. Westman
Vice President,
Global Operations

Gregory M. Siedschlag
Corporate Controller

Steven G. Ulvi
Vice President,
Global Sourcing

Investor
Information

ANNUAL MEETING
The annual meeting of Tennant Company will take place
Thursday, May 3, 2007, at 10:30 a.m. at the Golden Valley Country
Club, 7001 Golden Valley Road, Golden Valley, MN 55427.

FORM 10-K AND 10-Q
The Form 10-K filed with the Securities and Exchange
Commission accompanies this profile and together they consti-
tute the company’s annual report to shareholders. For additional
copies of our Form 10-K or to obtain a copy of the quarterly
financial reports on Form 10-Q, visit the Investor portion of our
website at www.tennantco.com, or contact:

Investor Relations
Tennant Company
P.O. Box 1452
Minneapolis, MN 55440
E-mail: investors@tennantco.com

STOCK LISTING
New York Stock Exchange (TNC)

INVESTOR INQUIRIES
Individual stockholders may direct any questions to Tennant
Company’s Investor Relations Department at 763-540-1204.

Tennant Company At-A-Glance

Year Founded:

1870

Employees:

2,600

NYSE Trading Symbol:

TNC

Headquarters:

Minneapolis, Minnesota

Manufacturing:

Minneapolis, Minnesota
Holland, Michigan
Northampton, United Kingdom

Maple Grove, Minnesota
Uden, The Netherlands
Shanghai, China

Solutions:

Tennant Company offers comprehensive cleaning solutions that include a broad array of
machines and equipment, parts and consumables, and service and repair programs. Under
the brand names of Tennant and Nobles, our suite of products – sweepers and scrubbers,
carpet extractors, floor polishers, vacuums and more – help our customers achieve peak
performance, productivity and uptime for their cleaning equipment. Our Tennant ECO line
of coatings and resurfacers is used to seal and protect concrete floors, improving appearance
and making them easier to clean.

Customers:

Tennant Company products are geared to the maintenance professionals who are responsible
for keeping indoor and outdoor environments clean and safe. These professionals include
employees of corporations and property managers who maintain their own facilities and
premises themselves and building service contractors whose business is to clean and maintain
facilities for others. Tennant and Nobles products are found just about everywhere – schools,
retail complexes, airports, factories, healthcare facilities, government buildings, sports
stadiums, warehouses, office facilities and more.

Channels:

Tennant Company reaches customers through four primary channels: a strong direct
sales organization in major industrialized countries complemented by a worldwide net-
work of distributors. In addition, Tennant Company offers the industry’s most extensive
field service network and maximizes its customer support through centralized customer
service and support.

To Our Shareholders

CHRIS KILLINGS TAD
President and Chief Executive Officer

I am very pleased to report on Tennant Company’s outstanding per-
formance in 2006, which topped last year’s record results. Our strategic
plans are on track and generating increased sales and profitability. We
believe even greater growth and efficiency lie ahead, as we build on the
strength of our people, strategies and growing culture of excellence.
I’m excited about our progress and our future prospects.

GENERATING RESULTS
Tennant Company’s 2006 net sales grew to $599.0 million, up 8.3 percent
from last year’s record net sales of $552.9 million. Net earnings rose
30 percent to $29.8 million, or $1.57 per diluted share, versus 2005
net earnings of $22.9 million, or $1.26 per diluted share. The 2006
earnings include $0.03 per diluted share for the non-cash expense
of stock options in accordance with SFAS 123(R).

Fueled by new product sales, we saw sales gains in all of the company’s
geographies, as well as continuous improvement in our operating
efficiency in 2006. The company has now posted nine consecutive
quarters of double-digit earnings gains. During the year, Tennant also
increased its cash dividend for the 35th consecutive year and declared
a two-for-one stock split.

ADDING NEW TALENT
Leading Tennant Company is a senior management team with many
new faces. Two-thirds of the senior management team is either new to
Tennant Company or filling new roles. Among those who joined are:
• Karel Huijser, vice president of international, is leading our interna-
tional market growth and expansion. Karel was formerly with GE,
serving as president and CEO of Asia Pacific for GE Infrastructure.
• Tom Paulson, vice president and chief financial officer, who came
from Innovex, a publicly held technology company, where he was
CFO and responsible for legal and IT.

• Steve Ulvi, vice president of global procurement, is championing
our low-cost sourcing platform. He has an extensive background
in worldwide supply chain management with IMI Cornelius and
Caterpillar Paving Products.

• Don Westman, vice president of global operations, with responsibility
for leveraging our lean manufacturing and supply chain opportunities
and driving operational excellence. Don formerly headed Pentair’s
manufacturing and distribution operations in the U.S., China, Mexico
and Canada.

Tennant Company has also welcomed two new members to its board
of directors, bringing the total to 10. David Mathieson is a seasoned
international executive currently serving as chief financial officer for
Brady Corporation. William Austen is vice president of operations at
Bemis Company and brings extensive experience in global expansion
and best practices in operations.

GROWING MARKETS
We succeeded in increasing our top-line revenues through new
products and services, and continued international market expansion.
Sales in all of the company’s geographic regions grew, as did new
product sales for both large and small equipment. Notably, sales of
new products introduced in the past three years generated almost
30 percent of our revenue growth during 2006.

SALES BY GEOGRAPHIC AREAS

North America-65%

Europe-25% International-10%

EUROPE SALES (millions of dollars)

100

110

120

130

140

150

Our international focus is beginning to produce results. Europe
generated particularly strong sales, up 16.3 percent, led by demand
for the Tennant T-series scrubbers. The July acquisition of Hofmans
Machinefabriek also was a strong contributor, adding approximately
3 percent to the sales increase. Hofmans offers a line of compact,
outdoor street cleaning products that complement our current suite
of products in Europe and may have other market applications.

In Tennant Company’s other
international markets, sales
rose 7.5 percent versus 2005.
Significant opportunities
exist in Europe and in our
other international markets,
where our market share has
tremendous room to grow.
Under-penetrated markets
include Eastern Europe,
China, Japan, Brazil and
India.

Tennant Company’s acquisition of Hofmans
Machinefabriek complements the current suite
of Tennant equipment in Europe and potentially
in other markets.

Sales in North America, our largest market, rose 5.7 percent. Again,
new products were a big factor in our success, led by the Tennant
M20, T20 and T5 products, as well as the Nobles Speed Scrub®.

SETTING 2007 PRIORITIES
We remain focused on leveraging our efficiency and growing Tennant
Company through our 2007 corporate priorities: process improve-
ment, operational excellence, new products, integrated solutions and
market expansion.

Process Improvement
In this area, we are working to become better at sharing and accessing
information companywide. Our global sales and operations planning
process is an example of how we are aligning the business’s financial
plans with sales, production and inventory plans. The benefits include
manufacturing efficiencies, improved inventory management and
faster delivery of goods and services.

Operational Excellence
Important priorities within operational excellence include continued
attention to our manufacturing base in China, building a low-cost global
sourcing platform and implementing lean manufacturing initiatives.

Within one year, we succeeded in getting our China facility up and
running. Our first walk-behind machines manufactured in China rolled
off the production line during the 2006 third quarter, on schedule.
Additionally, we’ve expanded our market coverage and added
distributors to our China organization.

China is also a focus area for low-cost global sourcing. Currently,
70 percent of our cost of goods comes from parts and components,
but less than 8 percent of our parts and components are now sourced
from low-cost regions. Our goal: drive that percentage higher. We’ve
begun implementing a worldwide material sourcing strategy to deliver
substantial savings in 2007 and beyond.

Establishing a lean enterprise, which includes consolidating our
manufacturing footprint, is another key initiative. Our plans are on
track to complete the consolidation of certain production lines and
facilities by the end of 2007. As a result, we expect to see increasing
benefits to our operations over the next year or two.

New Products
We launched several exciting, new Tennant and Nobles branded products
in the second half of 2006, and sales are on the rise. The introductions
included new walk-behind scrubbers: the Tennant T5 and the Nobles

A Commitment
to “Green”

Tennant Company is becoming a leader in offering

“green” cleaning technologies with products that

conserve resources and protect the environment.

We create environmentally preferable solutions that

may reduce water use by 70 percent and detergents

by 90 percent with technologies like FaST® and

ReadySpace®; recycle natural resources and packaging;

and employ environmentally friendly cleaning

agents. Engine emissions on Tennant Company-

engineered machines have dropped more than 90

percent since 2000 by implementing state-of-the-art

technology that meets the most stringent emissions

requirements in the United States and Europe.

Further proof of Tennant Company’s

environmental stewardship commitment

is the growing number of third-party

“green” certifications that many of our

machines, detergents and floor coatings

have earned. Through ongoing research

and development, we continue to develop

more environmentally friendly products –

including proprietary technologies that

make more efficient use of clean water and

consequently reduce effluents released into

the waste stream.

We are proud of our initial steps to become better environmental

stewards. We intend to offer more green products and solutions

in the future, in keeping with our commitment to deliver superior

cleaning results in environmentally responsible ways.

A booth fashioned after Lurie
Garden, a 2.5 acre ecological
and natural garden in
Chicago, Illinois’ Millennium
Park, attracts customers to
Tennant Company’s demon-
stration of its commitment to
“green” at ISSA/INTERCLEAN®,
the industry’s largest annual
tradeshow. The native
plantings were replanted in
Lurie Garden, representing the
largest corporate donation
made to the garden.

Tennant Company President and CEO Chris Killingstad formally opens the company’s
first China factory in Shanghai, China, during a traditional Chinese ceremony.

SALES BY PRODUCT GROUPS

EQUIPMENT, SERVICE, PARTS & CONSUMABLES (thousands of dollars)

Equipment-60%
Service, parts & consumables-36%
Coatings-4%

Service

Parts &
Consumables

Equipment

Historically, every $1 of equipment sales drives approximately $0.60
in service, parts and consumables sales.

100

150

200

250

300

350

Speed Scrub. These products are whisper-quiet and feature Hygenic®
tanks to meet the needs of a wide range of applications and environ-
ments, such as retail, hospitality and light industrial. In addition, both
products extend the use of our successful FaST® floor-cleaning technology.

We also extended our ReadySpace® carpet-cleaning line onto our popular
micro-rider platform, launching two new rider machines: the Tennant
R14 and the Nobles Strive® machine. These machines are dual technology
carpet cleaners that offer two distinct cleaning functions – ReadySpace,
which leaves carpets clean and dry in less than 30 minutes, and deep
extraction – in a single machine.

Our other major 2006 new product launches include the M20, the
cleaning industry’s first integrated, single-system scrubber-sweeper,
which we introduced in the second quarter in North America. Sharing
the same design platform is the new T20 Rider Scrubber. Both have
been received very positively.

We have a robust new product pipeline for 2007 and beyond. We
introduced six major new products during 2006 and plan to launch
about a dozen before the end of 2008.

Integrated Solutions
As I mentioned in last year’s report, we plan to move Tennant Company
from a machine-centric business to a flexible-solutions business over
time. While machines will remain the core of our business, we plan to
expand our services to further fuel growth. These integrated solutions
will wrap a variety of services and customer solutions around our
equipment offerings. We have several exciting, integrated solutions in
the development pipeline.

Market Expansion
The new products we’ve launched and the organizational changes
we’ve made have a common goal – to expand our domestic and
international market share. We operate in a highly fragmented industry
that offers us great potential to grow Tennant Company’s business
worldwide. We will continue to pursue growth organically and
through targeted acquisitions.

Our acquisition of Hofmans Machinefabriek and its integration into our
business have proceeded smoothly, and we believe the Hofmans line
offers global growth potential. The opening of our Brazil sales office in
2006 and the acquisition of Floorep Limited, a cleaning equipment
distributor based in Scotland, in February 2007, demonstrate Tennant
Company’s strategy to expand sales and service coverage in key
International markets. The Floorep acquisition is anticipated to increase
our customer base in the United Kingdom by about 25 percent.

INSTILLING A CULTURE OF EXCELLENCE
I firmly believe that a company’s success depends on a combination of
its people, its strategy and its corporate culture. Companies that have
the best people working to achieve a compelling strategy with a shared
sense of purpose will have a higher degree of success. One of the reasons
why I am confident about our future is that I am surrounded by great
Tennant Company employees. Tennant employees around the world
are linked through a shared value of stewardship, a commitment to
excellence and a belief that we must share accountability for our
customers, our community and our investors. It’s exciting to see a
powerful culture taking shape at Tennant Company.

LOOKING AHEAD
We have high expectations and great momentum heading into 2007.
We plan to drive continued revenue growth by offering innovative
new products, services and solutions, growing our presence in current
markets and expanding international market coverage. We are confident
in our ability to grow and to leverage operating efficiencies.

Our objective is to achieve the following long-term financial metrics:
• 5 percent to 9 percent annual revenue growth;
• double-digit earnings growth;
• continuous improvement in economic profit and return on invested

capital; and

• reaching our goal of 9.5 percent operating margin by the end of 2008.

I remain excited and motivated by our opportunities to transform
Tennant Company from a non-residential floor maintenance company
into a global leader of environmental cleaning solutions. We have
begun this evolution and I look forward to updating you on our
progress.

Sincerely,

H. Chris Killingstad
President and Chief Executive Officer
March 12, 2007