Tennant Company Annual Report 2009

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FY2009 Annual Report · Tennant Company

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Financial Highlights

In thousands, except shares and per share data

Reported
2008

Adjusted
2009

Adjusted
2008

Adjusted
% change

Reported
2009

FOR THE YEAR
Net sales
Profit (loss) from operations
% of net sales
Net earnings (loss)
% of net sales
-4.4%
Basic earnings (loss) per share
(1.42 ) (1) $
Diluted earnings (loss) per share
(1.42 ) (1) $
Dividends per common share
$
0.53
Average shares outstanding – diluted 18,507,772

$
$
$

-3.8%

$ 595,875
$ (22,493 ) (1) $ 18,569 (2)

$ 701,405

$ 595,875
$ 19,542 (4)

$ 701,405
$ 39,816 (4)

2.6%

3.3%

5.7%

(26,241 ) (1) $ 10,624 (2)

1.5%
0.58 (2)
0.57 (2)
0.52
18,581,840

$ 12,321 (4)

$ 25,230 (4)

2.1%
0.67 (4)
$
0.67 (4)
$
$
0.53
18,507,772

3.6%
1.37 (4)
$
1.36 (4)
$
$
0.52
18,581,840

AT YEAR-END
Total assets
Total debt
Shareholders’ equity
Debt-to-capital ratio
Shareholders’ equity per share (ending) $

$ 377,726
$ 34,211
$ 184,279
15.7%
9.83

$ 456,604
$ 95,339
$ 209,904
31.2%
11.48

$ 377,726
$ 34,211
$ 184,279
15.7%
9.83

$ 456,604
$ 95,339
$ 209,904
31.2%
11.48

-15.0%
-50.9%
–
-51.2%
–
-51.1%
-50.7%
1.9%
-0.4%

-17.3%
-64.1%
-12.2%
–
-14.4%

Company Profile

Minneapolis-based Tennant Company (NYSE: TNC) is a world leader in designing,

manufacturing and marketing solutions that help create a cleaner, healthier world. Its

products include equipment for maintaining surfaces in industrial, commercial and

outdoor environments; chemical-free cleaning technologies; and specialty surface

coatings for protecting, repairing and upgrading floors. Tennant's global field service

network is the most extensive in the industry. Tennant has manufacturing operations in

Minneapolis, Minn.; Holland, Mich.; Uden, The Netherlands; the United Kingdom; São

Paulo, Brazil; and Shanghai, China; and sells products directly in 15 countries and

through distributors in more than 80 countries.

cleaner

NET SALES
(millions of dollars)

ADJUSTED PROFIT FROM
OPERATIONS
(millions of dollars) (4)

ADJUSTED DILUTED EARNINGS
PER SHARE
(dollars) (4)

800

700

600

500

400

300

200

100

2.0

1.5

1.0

0.5

0.0

CASH FLOW FROM OPERATIONS
(millions of dollars)

SALES OF EQUIPMENT, SERVICE &
PARTS/CONSUMABLES, AND
SPECIALTY SURFACE COATINGS
(millions of dollars)

SALES BY GEOGRAPHIC REGION
(millions of dollars)

500

400

300

200

100

08 09

Equip.

Service
& P/C

Coatings

500

400

300

200

100

08 09

North
America

EMEA

Other
Int’l.

(1) 2009 includes a non-cash goodwill impairment charge of $43,363 pretax ($42,289 aftertax or $2.29 per diluted share), a benefit from

a revision in 2009 to the 2008 workforce reduction charge of $1,328 pretax ($1,249 aftertax or $0.07 per diluted share), a net benefit from a United
Kingdom business reorganization of $1,864 aftertax (or $0.10 per diluted share), and discrete net favorable tax items of $614 aftertax (or $0.03 per
diluted share).

(2) 2008 includes a restructuring charge and associated expenses of $19,755 pretax ($16,287 aftertax or $0.88 per diluted share), special legal expenses of
$1,721 pretax ($1,072 aftertax or $0.06 per diluted share), a gain on sale of Centurion assets of $229 pretax ($142 aftertax or $0.01 per diluted share),
an unusual net foreign currency gain of $1,709 aftertax (or $0.09 per diluted share), curtailed acquisitions expenses of $451 aftertax (or $0.02 per
diluted share), and discrete net favorable tax items of $1,353 aftertax (or $0.07 per diluted share).

(3) 2007 includes a restructuring charge and associated expenses of $2,507 pretax ($1,656 aftertax or $0.09 per diluted share), a gain on the sale of the
Maple Grove, Minnesota, facility of $5,972 pretax ($3,720 aftertax or $0.19 per diluted share), and a one-time tax benefit related to a reduction in
valuation reserves, net of the impact of tax rate changes in foreign jurisdictions on deferred taxes of $3,644 aftertax (or $0.19 per diluted share). Tennant
reported 2007 profit from operations of $54,845 and diluted earnings per share of $2.08.
(4) 2009, 2008 and 2007 adjusted amounts exclude items (1), (2) and (3) above, respectively.

Forward-Looking Statements
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 statements" within the meaning of the Private Securities Litigation Reform Act. These statements do
not relate to strictly historical or current facts and provide current expectations or forecasts of future events. Any such expectations
or forecasts of future events are subject to a variety of factors. These include factors that affect all businesses operating in a global
market as well as matters specific to us and the markets we serve. Particular risks and uncertainties presently facing us include:
geopolitical and economic uncertainty throughout the world; our ability to effectively manage organizational changes; our ability
to optimize the allocation of resources to our strategic objectives; the competition in our business; our ability to acquire, retain and
protect proprietary intellectual property rights; our ability to maintain and manage our computer systems and data; the occurrence
of a significant business interruption; unforeseen product liability claims or product quality issues; fluctuations in the cost or
availability of raw materials and purchased components; our ability to comply with laws and regulations; and the relative strength
of the U.S. dollar, which affects the cost of our materials and products purchased and sold internationally.

We caution that forward-looking statements must be considered carefully and that actual results may differ in material ways due to
risks and uncertainties both known and unknown. Shareholders, potential investors and other readers are urged to consider these
factors in evaluating forward-looking statements and are cautioned not to place undue reliance on such forward-looking
statements. For additional information about factors that could materially affect Tennant's results, please see our other Securities
and Exchange Commission filings, including disclosures under "Risk Factors."

We do not undertake to update any forward-looking statement, and investors are advised to consult any further disclosures by us
on this matter in our filings with the Securities and Exchange Commission and in other written statements we make from time to
time. It is not possible to anticipate or foresee all risk factors, and investors should not consider any list of such factors to be an
exhaustive or complete list of all risks or uncertainties.

10%

healthier

better

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

2009 ANNUAL REPOR T

Setting the standard for
Sustainable Cleaning

To our shareholders:
Reflecting on 2009, Tennant Company executed well in a
challenging global sales environment. We also made
investments in expanding our portfolio of innovative
products that we believe will drive Tennant’s future revenue
growth. I’d like to thank our employees worldwide for their
tireless efforts during a tough year.

The global recession caused lower demand for our cleaning
equipment and service through the first three quarters of
the year, compared with 2008. However, sales improved
throughout the year and we are encouraged that the
company achieved year-over-year growth in the fourth
quarter for the first time since the third quarter, 2008. We
ended the year with consolidated net sales of $595.9
million versus $701.4 million in 2008 and 2009 adjusted
earnings per share of $0.67, excluding several special items.

Investing in Innovation to Fuel Growth
Throughout 2009, we maintained our commitment to drive
innovation through new products, keeping R&D invest-
ment within our historical targeted range of between 3
percent and 4 percent of net sales.

We believe our proprietary ec-H2O™ platform will prove to
be one of Tennant’s most successful R&D efforts ever! This
technology is the environmentally friendly process that
converts plain tap water into a powerful cleaning agent
without any added chemicals.

In 2009, sales of machines equipped with ec-H2O technol-
ogy exceeded our expectations, demonstrating that this
technology is gaining momentum in the marketplace.
Tennant first launched scrubbers equipped with ec-H2O
technology in the 2008 second quarter and, despite
economic headwinds, we achieved $17 million of sales in
2008. Our sales of ec-H2O-equipped scrubbers tripled to
$50 million in 2009. ec-H2O was the major contributor to
41 percent of Tennant’s 2009 equipment sales coming from
products introduced in the past three years, exceeding our
ongoing goal of 30 percent.

This technology is so differentiated from the competition that
it is helping Tennant gain market share. For customers with
large fleets of cleaning machines, the costs to switch suppliers
can be high but the benefits of ec-H2O have been compel-
ling enough to motivate a shift to our equipment. In fact,
approximately 50 percent of the customers buying ec-H2O
equipment are new customers for Tennant. We believe this

CHRIS KILLINGSTAD
President and Chief Executive Officer

technology will continue to provide a significant market share
advantage, especially when the economy recovers.

Today, Tennant offers 11 scrubbers with the award-winning
ec-H2O technology, including six walk-behind scrubbers
introduced in 2008 and five rider scrubbers that we
launched in 2009. We plan to add three more riders with
ec-H2O in 2010, which will round out our portfolio of
scrubbers for our commercial and light industrial customer
base. Specific applications are in retail, education, food and
beverage, healthcare, hospitality, logistics and aviation
environments.

Expanding Our Markets Through Partnerships
We announced three exciting new partnerships in 2009.
These demonstrate our commitment to pursuing long-term
growth opportunities through alliances that help us expand
beyond our traditional markets.

We announced an exclusive licensing agreement with
Activeion Cleaning Solutions, LLC, to commercialize
ec-H2O technology for hand-held spray devices, adding
complementary products to the growing suite of ec-H2O
equipped products. Activeion has introduced two commer-
cial and one consumer product under the license. The latest
products, the ionatorHom and ionatorEXP, are portable,
easy-to-use hand-held sprayers that effectively clean and
sanitize a range of surfaces from glass and stainless, to
wood and carpet. The partnership between Tennant and
Activeion has the ability to expand ec-H2O technology
beyond floor-cleaning applications in such markets as
education, retail, hospitality and healthcare.

With Ecolab Inc., we have launched the Scrub-N-Go™ Floor
Scrubber Vac System in North America. This product was
selected to receive a National Restaurant Association
Product Innovation Award for 2010. The Scrub-N-Go is a
lithium-ion battery-powered cordless cleaning machine that
our two companies jointly developed, initially for the
quick-serve restaurant market segment. There are approxi-
mately 250,000 quick-serve restaurants in the United States.
The product cleans floors up to 63 percent faster and more
thoroughly than using a traditional mop and bucket, and it
represents a huge labor savings for restaurant operators. In
addition, floors cleaned with Scrub-N-Go dry faster, which
greatly reduces the risk of slip-and-fall accidents. Tennant is
manufacturing and servicing the Scrub-N-Go equipment,
which is currently sold through Ecolab’s sales and distribu-

tion channel. McDonald’s recently approved the Scrub-N-
Go for its corporate and franchisee stores, as did Yum!
Brands for its franchisee stores, which include Taco Bell,
KFC, Pizza Hut and Long John Silver’s. We are now begin-
ning to pilot the Scrub-N-Go in international markets.

Lastly, we teamed up with Kaivac, Inc., to jointly develop a
spray-and-vac, or No-Touch Cleaning, system for restrooms
that incorporates ec-H2O technology. When developed, we
expect the system will enable customers to deep clean even
heavily soiled restrooms, without the use of chemicals,
making cleaning more effective, productive, safe and
environmentally friendly.

Envisioning a “Greener” Future
Tennant’s growth has been an evolution. Our business
evolved from providing non-residential floor maintenance
products in the 1990s to delivering what we called “clean,
lean and green” solutions in 2002. This was the first time
we used environmental benefits as a strategic and new
product development filter. We began investing more
aggressively in advanced product development efforts.
Innovative cleaning technologies like FaST® and
ReadySpace® stemmed from this strategic shift. Then in
2006, we began talking about becoming an environmental
cleaning solutions company. We defined this as cleaning
more of our customers’ environments in more environmen-
tally responsible ways – and this led directly to the success-
ful introduction of ec-H2O technology.

Since 2007, we have learned a great deal about the capa-
bilities of water cleaning technologies and, through this
research, realized that ec-H2O could potentially transform
our future. Late last year, we decided to enhance our vision
and take the next step in Tennant’s continuing evolution.

Today, our vision is to become a global
leader in chemical-free cleaning and
other technologies to help our custom-
ers create a cleaner, healthier world.

Leveraging ec-H2O into New
Market Applications
Underlying our confidence in the new
vision is the fact that we see ec-H2O as
a technology platform that is poten-
tially relevant in a broad array of

markets and applications. This platform has two equally
important benefits. First, is scalability. We have created an
electrolyzed water cell that is large enough to be used on
our scrubbers, and we have figured out how to miniaturize
it so it fits into the head of a spray bottle.

The second benefit is performance. We know that ec-H2O
on our scrubbers delivers great cleaning results. And, the
ec-H2O technology on the Activeion spray bottle has been

enhanced to the point that the EPA has approved it as a
sanitizer. It kills 99.9 percent of common household
bacteria, including e-coli, listeria and salmonella, and
inactivates the H1N1 virus. We are now exploring the
possibility that electrically activated technologies can be
further developed to act as a disinfectant.

This could allow us the opportunity to offer an entire
spectrum of cleaning devices that deliver basic cleaning, up
to hospital-grade disinfecting – and everything in between.
We think that is an exciting and potentially transformative
prospect for Tennant. While we don’t have all of the answers
yet, we are committed to figuring out what is possible.

To help achieve our vision of becoming a global leader in
chemical-free cleaning, we have created a new Tennant brand
called ORBIO™ Technologies. This will be the overarching
brand for our growing stable of chemical-free cleaning
products and applications. Our goal is to establish ORBIO as
the recognized standard for sustainable cleaning around the
world. We have also formed a dedicated ORBIO team that is
charged with determining how best to leverage our ec-H2O
technology, and create a large and robust chemical-free
cleaning business in both existing and new markets.

Meeting the Need for Environmental
Stewardship
Tennant’s customers are increasingly seeking eco-friendly
cleaning solutions and using sustainability as a strategic
decision-making filter. Companies understand that being
good environmental stewards is important to their key
constituencies – and to their long-term business success.
We are able to show our customers the tangible environ-
mental benefits they can derive from cleaning with ec-H2O
compared to traditional chemicals.

Ecoform, an independent environmental performance
analysis firm, has published a report showing that ec-H2O
typically achieves environmental footprint reductions across
seven categories ranging from 77 percent to 98 percent
compared to traditional cleaning with chemicals.

With many ec-H2O opportunities in front of us, our focus is
on leveraging this technology platform in three phases:
1) First, we are in the process of extending ec-H2O to all

relevant existing products. The objective is to accelerate
sales and market share growth in our current traditional
markets.

2) The second phase involves cleaning more of our custom-
ers’ spaces, in more environmentally friendly ways. We
have research studies underway with key customers in
North America and Europe to see how they clean their
facilities so we can determine how best to leverage
ec-H2O in most, if not all, of their cleaning applications.
We are also figuring out what cleaning devices we need
to develop, in order to deliver the required chemical-free

cleaning performance in key segments such as retail,
healthcare and education.

3) The third phase of leveraging the ec-H2O technology is
to develop new markets and new applications. We
believe there are significant opportunities in various
market segments, including consumer products, food
processing and healthare.

Finally, our aspiration is to become a global leader in
chemical-free cleaning and other technologies. Our new
Green Machines™ 500ze City Cleaning Sweeper is a good
example of the other kinds of sustainable cleaning innova-
tions Tennant plans to develop. The lithium-ion, battery-
powered 500ze sweeper provides unmatched environmen-
tal benefits, including zero CO2 emissions and reduced
noise levels, in addition to powerful cleaning. We intro-
duced the 500ze in conjunction with the United Nations’
COP15 Climate Change Conference, which was held in
Copenhagen in December 2009. We will officially launch
the 500ze in Europe in 2010.

Looking Ahead to Profitable Growth
Tennant reported 2009 consolidated net sales of $595.9
million versus $701.4 million in 2008. The company had a
2009 reported net loss of $26.2 million, or a loss of $1.42
per diluted share. This included a non-cash aftertax good-
will impairment charge of $42.3 million, or a loss of $2.29

$95.3 million at the end of 2008. In addition, the company
raised the 2009 fourth quarter dividend by 8 percent to
$0.14 per share, marking the 38th consecutive year that
Tennant has increased its annual cash dividend payout to
shareholders.

Going forward, we are committed to continuing to drive
profitable growth in Tennant’s traditional business, while
simultaneously developing a chemical-free cleaning
business around ORBIO Technologies. We are known as a
technology innovator, with a growing reputation for
environmentally sustainable cleaning solutions. Our
planned R&D spending levels for 2010 will be at the higher
end of our targeted 3 percent to 4 percent of sales range
because we believe it is critically important to invest in
ORBIO Technologies now.

As we expand into new areas, a strong board of directors is
more important than ever. I am pleased that in 2009 David
Wichmann, an executive vice president at UnitedHealth
Group Incorporated, and Don Mulligan, executive vice
president and chief financial officer of General Mills, Inc.,
joined Tennant’s board, which now stands at 10 members.

As we look to 2010, we have limited visibility into the future
and order patterns remain unpredictable. Therefore, we will
continue to manage the business conservatively, and if the

Tennant’s Strategic Evolution

CLEAN
Performance

LEAN
Productivity

‘02

‘06

GREEN
Safe & Healthy

NOW

Non-Residential
Floor Maintenance

Deliver
“Clean, Lean and Green”
Solutions

Environmental
Cleaning Solutions
Company

Chemical-Free Cleaning

EVOLVED VISION
We aspire to be a global leader in
chemical-free cleaning and other
technologies to help our customers
create a cleaner, healthier world.

economy falters, we will move
swiftly to adjust our business plans
accordingly, as we have done in the
past. However, we believe Tennant
is well positioned to benefit globally
in our traditional business segments
and with ec-H2O once the
economy regains strength.

per diluted share. The 2009 adjusted earnings per share,
which excludes several special items, totaled $0.67,
compared to 2008 adjusted diluted earnings per share of
$1.36, which also excludes special items. Despite decreased
revenues, Tennant’s full-year gross profit margin rose to
41.3 percent, compared to 40.8 percent in the prior year,
and reached our 2009 stated objective of 41 percent. Our
emphasis on operating efficiency, including lean manufac-
turing and global low-cost sourcing, continued. We sourced
25 percent of our parts from low-cost regions in 2009, up
from only 7 percent in 2006. We also saved more than $15
million, primarily in selling and administrative areas, from
our 2008 actions to rescale the business.

Our reduced cost structure and improved working capital
management helped the company generate $75.2 million
in cash from operations in 2009 – more than double the
amount of cash produced in 2008. Our stronger cash flow
enabled us to significantly pay down debt. We ended 2009
with total debt of just $34.2 million compared to

We’re optimistic we have a winning formula to accelerate
profitable growth: an exciting vision, a compelling strategy,
improved operating efficiencies and an incredible team of
dedicated, capable employees.

Future, here we come.

Sincerely,

Chris Killingstad
President and Chief Executive Officer
March 12, 2010