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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

Commission File Number 001-16191

TENNANT COMPANY

Securities registered pursuant to Section 12 (b) of the Act:

Common Stock, par value $0.375 per share
and
Preferred Share Purchase Rights

Securities registered pursuant to Section 12 (g) of the Act: NONE

        Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes [X]   No [  ]   

        Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    [X]

        Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).    Yes [X]   No [  ]   

        $368,471,858 is the aggregate market value of common stock held by non-affiliates as of June 30, 2004.

9,006,052 shares outstanding at February 25, 2005

DOCUMENTS INCORPORATED BY REFERENCE

2005 Proxy – Part III (Partial)

Tennant Company
Form 10-K
Table of Contents

TENNANT COMPANY

2004

ANNUAL REPORT

Form 10-K

(Pursuant to Securities Exchange Act of 1934)

PART I

ITEM 1 – Business

General Development of Business

        Tennant Company, a Minnesota corporation incorporated in 1909, is a world leader in designing, manufacturing and marketing products that help create a cleaner, safer world. The Company’s floor maintenance equipment, outdoor cleaning equipment, coatings and related products are used to clean factories, office buildings, parking lots and streets, airports, hospitals, schools, warehouses, shopping centers and more. Customers include the building service contract cleaners to whom organizations now outsource facilities maintenance, as well as end-user businesses, healthcare facilities, schools and federal, state and local governments who handle facilities maintenance themselves. We reach these customers through the industry’s largest direct sales and service organization and through a strong and well-supported network of authorized distributors worldwide.

        Tennant’s shares are traded on the New York Stock Exchange (NYSE) under the symbol TNC.

Industry Segments, Foreign and Domestic Operations and Export Sales

        The Company, as described under “General Development of Business,” has one reportable business segment. The Company sells its products domestically and internationally. Financial information on the Company’s geographic areas is provided on pages 27 and 28 of this Form 10-K. Nearly all of the Company’s foreign investments in assets reside within the Netherlands, the United Kingdom, Japan, Australia, Canada, France, Germany, Spain and Austria.

Principal Products, Markets and Distribution

        Products consisting mainly of motorized cleaning equipment and related products, including floor coating and preservation products, are sold through a direct sales organization and independent distributors in North America, primarily through a direct sales organization in Australia, Japan and 15 countries principally in Western Europe, and through independent distributors in more than 50 foreign countries.

Raw Materials and Purchased Components

        The Company has not experienced any significant or unusual problems in the purchase of raw materials or other product components and is not disproportionately dependent upon any single source of supply. The Company has some sole-source vendors for certain components, primarily for automotive and plastic parts. A disruption in supply from such vendors may cause a short-term disruption in the Company’s operations. However, the Company believes that it can find alternate sources in the event there is a disruption in supply from such vendors.

Patents and Trademarks

        The Company applies for and is granted United States and foreign patents and trademarks in the ordinary course of business, no one of which is of material importance in relation to the business as a whole.

Seasonality

        Although the Company’s business is not seasonal in the traditional sense, historically revenues and earnings have been more concentrated in the fourth quarter of each year reflecting the tendency of customers to increase capital spending during such quarter and the Company’s efforts to close orders and reduce order backlogs. In addition, we offer annual distributor rebates and sales commissions which tend to drive sales in the fourth quarter.

Major Customers

        The Company sells its products to a wide variety of customers, no one of which is of material importance in relation to the business as a whole.

Backlog

        The Company routinely fills orders within two weeks on average. Consequently, order backlogs are generally not indicative of future sales levels.

Competition

        While there is no industry association or industry data, the Company believes, through its own market research, that it is a world-leading manufacturer of floor maintenance equipment. Active competition exists in most geographic areas; however, it tends to originate from different sources in each area, and the Company believes its market share exceeds that of several competitors in certain areas. The Company competes primarily on the basis of offering a broad line of high-quality, innovative products supported by an extensive sales and service network in major markets.

Product Research and Development

        The Company strives to be the industry leader in innovation and it is committed to investing in research and development. The Company believes that it regularly commits an above-average amount of resources to product research and development. In 2004, 2003 and 2002, respectively, the Company spent $17,198,000, $16,696,000 and $16,331,000 on research and development activities relating to the development of new products or improvements of existing products or manufacturing processes.

Environmental Protection

        Compliance with federal, state and local provisions regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, has not had, and the Company does not expect it to have, a material effect upon the Company’s capital expenditures, earnings or competitive position.

Employment

        The Company employed 2,474 persons in worldwide operations as of December 31, 2004.

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Access to Information on the Company’s Website

        The Company makes available free of charge, through the Company’s website, its annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or Section 15(d) of the Exchange Act as soon as reasonably practicable after such reports are filed with, or furnished to, the SEC.

ITEM 2 – Properties

        The Company’s corporate offices are owned by the Company and are located in the Minneapolis, Minnesota, metropolitan area. Manufacturing facilities are located in Minnesota, Michigan, Uden, The Netherlands and Northampton, United Kingdom. Sales offices, warehouse and storage facilities are leased in various locations in North America, Europe, Japan, Asia, and Australia. The Company’s facilities are in good operating condition, suitable for their respective uses and adequate for current needs. Further information regarding the Company’s property and lease commitments is included on pages 9, 24 and 25 of this Form 10-K.

ITEM 3 – Legal Proceedings

        There are no material pending legal proceedings other than ordinary routine litigation incidental to the Company’s business.

ITEM 4 – Submission of Matters to a Vote of Security Holders

        No matters were submitted to a vote of security holders during the fourth quarter of 2004.

PART II

ITEM 5 – Market for Registrant’s Common Stock, Related Shareholder Matters and Issuer Purchases of Equity Securities

        STOCK MARKET INFORMATION – Tennant common stock is traded on the New York Stock Exchange, under the ticker symbol TNC. As of December 31, 2004, there were approximately 5,500 shareholders. The common stock price was $39.65 per share on December 31, 2004.

        QUARTERLY PRICE RANGE – The accompanying chart shows the quarterly price range of the Company’s shares over the past five years:

        DIVIDEND INFORMATION – Cash dividends on Tennant’s common stock have been paid for 61 consecutive years. Cash dividends increased for the 33rd consecutive year to $0.86 per share in 2004, an increase of $0.02 per share over 2003. Dividends generally are declared each quarter. Following are the remaining record dates anticipated for 2005: May 31, 2005, August 31, 2005 and November 30, 2005.

        DIVIDEND REINVESTMENT OR DIRECT DEPOSIT OPTIONS – Shareholders have the option of reinvesting quarterly dividends in additional shares of Company stock or having dividends deposited directly to a bank account. The Transfer Agent should be contacted for additional information.

        TRANSFER AGENT AND REGISTRAR – Shareholders with a change of address or questions about their account may contact:

        SHARE REPURCHASES – During November 2004, an additional 400,000 shares were authorized under the share repurchase program approved by the Board of Directors in May 2001. These share repurchases are made from time to time in the open market or through privately negotiated transactions, primarily to offset the dilutive effects of shares issued through our stock-based compensation programs.

        ⁽¹⁾ Includes shares delivered or attested to in satisfaction of the exercise price and/or tax withholding obligations by employees who exercised stock options under employee stock compensation plans.

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ITEM 6 – Selected Financial Data

(In thousands, except shares and per share data)

(1) 2004 includes workforce reduction expenses of $2,301 pretax ($1,458 after-tax or $0.16 per diluted share). (2) 2003 includes sales of $6,430, gross profit of $2,917 and after-tax earnings of $1,796 ($0.20 per diluted share) related to the recognition of previously deferred revenue resulting from the amendment of a contract and pretax charges of $1,960 ($1,215 net of taxes or $0.14 per diluted share) related to the dissolution of a joint venture. (3) 2002 includes unusual charges of $5,002 pretax ($3,619 net of taxes or $0.40 per diluted share) primarily related to restructuring charges. (4) 2001 includes net unusual charges of $5,041 pretax ($3,141 net of taxes or $0.34 per diluted share) related to restructuring charges, net of a pension settlement gain. (5) Includes a charge of $4,267 after-tax (or $0.47 per diluted share) to record a deferred tax asset valuation allowance.

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ITEM 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

        Tennant Company is a world leader in designing, manufacturing and marketing products that help create a cleaner, safer world. We provide equipment, parts and consumables and floor 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 and other international markets including the Middle East, Asia, Japan, Latin America and Australia. We strive to be an innovator in our industry through our commitment to understanding our customers’ needs and using our expertise to create innovative solutions.

        Our 2004 results were primarily influenced by three external factors: the economic growth rates in the countries in which we sell our products, foreign currency exchange rates and prices of certain commodities that are used in the manufacture of our products. Each of these external factors and their impact on our results are described below.

        The pace of economic growth in the countries in which we sell our products affects the growth of our sales volumes in each of our three geographic areas. North America, which generates approximately two-thirds of our consolidated net sales, experienced improvements in its economy during 2004, which stimulated demand for our products and growth in sales volumes. The growth in the local economies within our international markets other than Europe generated increased demand for our products in these markets during 2004. Despite the improvements in 2004, the global economy remains unpredictable and we expect that economic recovery will be gradual and somewhat volatile. The strength or weakness of the global economies in 2005 will impact demand for our products.

        Our results in 2004 continued to be favorably impacted by weakness of the U.S. dollar against the Euro, the Australian and Canadian dollars, the British pound and the Japanese yen. The direct financial impact of foreign currency exchange includes the effect of translating profits from local currencies to U.S. dollars, the impact of currency fluctuations on the transfer of goods between Tennant operations in the United States and abroad and transaction gains and losses. The direct financial impact of foreign currency exchange can be estimated and, where significant, is included in the discussion of our results of operations below. In addition to the direct financial impact, fluctuations in foreign currency exchange rates have an indirect financial impact which is very difficult to estimate. The indirect financial impact on our results includes the effect on sales volumes within local economies and the impact of pricing actions taken as a result of foreign exchange rate fluctuations. If the applicable exchange rates continue to strengthen relative to the U.S. dollar, the related direct foreign currency effect would continue to have a favorable impact on our results in 2005.

        We are subject to exposures resulting from fluctuations in the price of certain commodities which influence the price of raw materials and product components as well as other operating costs. We purchase raw steel and steel- and petroleum-based components for use in our manufacturing operations. In addition, freight costs associated with shipping and receiving product and sales and service vehicle fuel costs are impacted by fluctuations in the cost of oil and gas. During 2004, purchased materials and other costs were impacted by the higher prices of these commodities which put downward pressure on margins as well as resulting in higher selling and administrative expense. Selling price surcharges on certain products in North America were implemented during 2004, which partially mitigated the impact of the increased cost of steel and petroleum-related materials on gross profit margins. If the prices of these commodities continue to increase, our results could be unfavorably impacted in 2005.

        In addition to these external factors, our results were impacted by two significant management actions during 2004: the acquisition of Walter-Broadley Machines Limited (“Walter-Broadley”) in January 2004 and a workforce reduction action in September 2004.

        The acquisition of Walter-Broadley, a cleaning equipment company based in the United Kingdom, significantly increased our customer base and service coverage in the United Kingdom. The acquisition is discussed further in Note 18 to the Consolidated Financial Statements. With annual sales of approximately $13 million, the acquisition had a dilutive impact of approximately $0.08 per diluted share through the first six months of 2004, resulting from certain integration costs, and a short-term impact on gross profit margins related to purchase accounting. Beginning with our third quarter of 2004, operations of Walter-Broadley were fully integrated into our European operations.

        In September 2004, management approved actions to reduce selling and administrative costs as a part of a continuing effort to improve profitability. These actions included the elimination of a net 64 management and administrative positions companywide and are expected to be substantially complete by the first quarter of 2005. These actions are expected to produce net annualized savings totalling $2 million to $3 million pretax in 2005, increasing to $4 million to $5 million pretax in 2006. The workforce reductions resulted in the recognition of a net pretax charge of $2,301 ($1,458 after-tax, or $0.16 per diluted share) in our 2004 results. The charge consists primarily of severance and outplacement benefits and is included within Selling and Administrative (S&A) Expenses in the Consolidated Statements of Earnings.

        We use Economic Profit as a key indicator of financial performance and the primary metric for performance-based incentives. Economic Profit is based on our net operating profit after taxes less a charge for the net assets used in the business. The key drivers of net operating profit we focus on include sales, gross margin, operating expenses and the effective tax rate. The key drivers we focus on to measure how effectively we utilize net assets in the business include “Accounts Receivable Days Sales Outstanding” (DSO), “Days Inventory on Hand” (DIOH) and capital expenditures. These key drivers are discussed in greater depth throughout Management’s Discussion and Analysis.

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Historical Results

        The following compares the historical results of operations for the years ended December 31, 2004, 2003 and 2002 in dollars and as a percentage of net sales (dollars in thousands, except per share amounts):

Consolidated Financial Results

In 2004, net earnings decreased 5.5% to $13.4 million or $1.46 per diluted share. Net earnings were impacted by:

In 2003, net earnings increased 71.3% to $14.2 million or $1.56 per diluted share. Net earnings were impacted by:

Net Sales

        In 2004, consolidated net sales of $507.8 million increased 11.9% from 2003. Consolidated net sales of $454.0 million in 2003 increased 7.0% from $424.2 million in 2002. In 2004, the acquisition of Walter-Broadley in January increased net sales approximately $13 million, or 3% for the year. Positive direct foreign currency exchange fluctuations, resulting primarily from a weakened U.S. dollar compared to the Euro, Japanese Yen, British pound sterling and Canadian and Australian dollars, increased net sales by approximately 3% in 2004 and approximately 5% in 2003.

        The following table sets forth for the years indicated net sales by geography and the related percent change from the prior year (dollars in thousands):

        North America – In 2004, North American net sales increased 6.9% to $341.9 million compared with $319.7 million in 2003. Growth in sales was driven by volume increases in equipment sales resulting from a stronger North American economy, new product introductions as well as price increases including surcharges on certain products to help offset the higher cost of steel and other materials. Growth in service, parts and consumables also contributed to the increase in North American net sales when compared to the same period last year.

        In 2003, North American net sales of $319.7 million increased 2.5% compared to 2002. The 2003 sales increase was primarily due to recognition of $6.4 million of previously deferred revenue, as discussed in Note 2 to the Consolidated Financial Statements. In addition, sales growth in service, parts and consumables contributed to the increase. Offsetting these increases were declines in equipment sales due to continued weak economic conditions in the industrial sector in North America during 2003.

        Europe – European net sales in 2004 increased 29.5% to $115.0 million compared to 2003. The acquisition of Walter-Broadley in January 2004 added about 14% to Europe’s 2004 sales growth. Positive direct foreign currency exchange effects increased European net sales by approximately 12% in 2004. The shipment of a large order to a new European customer, primarily in the first quarter of 2004, contributed approximately 4% to Europe’s 2004 sales growth. European economies remained relatively weak in 2004.

        European net sales in 2003 were $88.8 million, up 20.5% compared to 2002 sales of $73.7 million. Positive direct foreign currency exchange effects had a favorable impact on sales of approximately 19% in 2003 compared to 2002. The remaining increase was primarily due to our expanded sales and service coverage in Europe.

        Other International – Other international net sales for 2004 totaled $51.0 million, up 12.0% from 2003. Positive direct foreign currency exchange effects increased sales in other international markets by approximately 6% in 2004. The remaining increase resulted from stronger sales in several international markets including Latin America, Japan, Asia and Australia, primarily driven by stronger local economies in these markets as well as new product introductions.

        Other international net sales in 2003 were $45.5 million, an increase of 17.9% over 2002 sales of $38.6 million. Positive direct foreign currency

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exchange effects increased sales by approximately 8% in 2003 compared to 2002. The remaining increase in other international sales in 2003 compared with 2002 was primarily due to higher equipment sales due to strengthening economies and success selling new products in several foreign markets including Asia, the Middle East and Australia.

Gross Profit

        Gross profit margin in 2004 was 39.9% compared to 40.0% in 2003. Gross profit margin in 2004 was unfavorably impacted by the increases in material costs including steel and petroleum-based materials and purchased components. Selling price surcharges on certain products in North America were implemented in 2004, which partially mitigated the impact of the increasing material costs on gross profit margins. The net unfavorable impact was offset by favorable direct foreign currency exchange effects.

        Gross profit margin in 2003 remained consistent with 2002. Gross profit margin in 2003 was unfavorably impacted by the write-off of inventory related to the decision to dissolve a joint venture described in Note 2 to the Consolidated Financial Statements along with unfavorable effects of sales mix, offset by favorable direct foreign currency exchange effects.

        Future gross profit margins could continue to be impacted by fluctuations in the prices of steel, oil and gas, competitive market conditions, the mix of products both within and among product lines and geographies, and foreign currency exchange effects.

Operating Expenses

        Research and Development Expenses – We strive to be the industry leader in innovation and are committed to investing in research and development. This has led to the development and launch of products including ReadySpace™ carpet cleaning technology and the T Series automatic scrubbers in 2004, and FaST™ and Centurion™ in 2002. However, a focus on innovation also carries certain risks that new technology will be slow to be accepted by the marketplace. Management seeks to mitigate this risk through our focus on and commitment to understanding our customers’ needs and requirements.

        Research and development expenses increased $0.5 million, or 3.0%, in 2004 compared to 2003, but declined 0.3% as a percentage of sales in 2004 compared to 2003. Research and development expenses increased $0.4 million, or 2.2%, in 2003 compared to 2002, but declined 0.2% as a percentage of sales in 2003 compared to 2002. We expect to maintain our spending on research and development at 3-4% percent of net sales annually.

        Selling and Administrative Expenses – S&A expenses increased 15.2% to $164.0 million from $142.3 million in 2003. S&A expenses increased partly due to the pretax workforce reduction charge of $2.3 million discussed previously and in Note 2 to the Consolidated Financial Statements. The remaining increase in S&A expenses primarily reflects an increase in performance-based incentive compensation expense, an increase in marketing expenses to support product launches in the latter half of 2004, Sarbanes-Oxley compliance costs, increased expenses associated with our expanded market coverage in Europe and the inclusion of expenses associated with the acquired operations of Walter-Broadley. Partially offsetting these increases was a decrease in warranty expense primarily due to improved claims experience and a decrease in expense for specific warranty claims in 2004, as well as benefits from prior restructuring actions. Approximately $4 million of the increase in S&A expenses is due to direct foreign currency exchange effects.

        S&A expenses as a percentage of sales were 32.3% for 2004, up from 31.3% compared to 2003. This increase is primarily the result of the $2.3 million severance charge as well as the additional marketing and Sarbanes-Oxley compliance costs. In addition, the 2003 percentage benefited from the $6.4 million of deferred revenue that was recognized as a result of the amendment of the agreement with our third-party lessor, for which there was no related S&A expense.

        S&A expenses increased by $8.4 million, or 6.3%, in 2003 compared to 2002. The impact of positive direct foreign currency exchange contributed approximately 5% of the increase. The remaining increase is primarily related to an increase in performance-based incentive compensation expense and to the dissolution of a joint venture as described in Note 2 to the Consolidated Financial Statements. S&A expenses as a percentage of sales declined 0.3% compared with 2002.

Restructuring Charges

        As discussed in Note 2 to the Consolidated Financial Statements, we recorded pretax restructuring charges totaling $4.4 million in 2002 related to a workforce reduction and consolidation of our North American distribution operations from a network of seven distribution centers into two new facilities that are leased and managed by a third-party logistics services provider and actions to consolidate and centralize customer service operations in Europe and to streamline other operations in North America. The majority of these actions were completed during 2002 and 2003. These actions improved the efficiency and productivity of our North American organization and reduced global infrastructure. In addition, a change in estimate of $0.4 million was recorded in 2002 to reduce the 2001 and 1999 restructuring charges.

        Management regularly reviews our business operations with the objective of improving financial performance and maximizing our return on investment. As a result of this ongoing process to improve financial performance, we may incur additional restructuring charges in the future which, if taken, could be material to our financial results.

Income Taxes

        Our effective income tax rate was 37.4%, 37.0% and 44.5% for the years 2004, 2003 and 2002, respectively. The 2004 effective tax rate was favorably impacted by the resolution of certain outstanding state and federal tax matters and a benefit resulting from the release of a valuation allowance on a foreign capital loss carryforward. The 2003 effective rate was impacted by a favorable settlement of a foreign tax audit and a more favorable mix of the taxable earnings by country. In the future, we may experience changes in our effective tax rate based on our ability to utilize the available foreign net operating loss carryforwards and changes in mix of taxable earnings by country.

        During each of the past three years, we had a favorable impact from the Extraterritorial Income Exclusion Act (ETI Act), a U.S. tax law, of approximately 4-5% on our effective tax rate. On October 22, 2004, the American Jobs Creation Act of 2004 was signed into law. The new law included a provision to phase out the ETI Act tax benefit over the next two years. In addition, the new law established a manufacturing deduction for profits on U.S. manufactured product to be phased in over six years. For 2005, we expect the phase-out of the ETI Act tax benefit to be substantially offset by the phase-in of the U.S. manufacturing deduction. For 2006 to 2009, we expect that the change in the U.S. tax law will have a negative impact on our effective tax rate since the ETI Act is phased out more quickly than the phase-in of the U.S. manufacturing deduction.

        The American Jobs Creation Act of 2004 also had a provision to allow companies to repatriate earnings from their foreign subsidiaries at a favorable tax rate. We do not plan to repatriate earnings from our foreign subsidiaries in the foreseeable future.

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Liquidity and Capital Resources

        During 2004, our financial condition remained strong. Our debt-to-total-capital ratio was 4.8% at December 31, 2004, compared with 4.2% at December 31, 2003. At December 31, 2004, our capital structure was comprised of $7.7 million of current debt, $1.0 million of long-term debt and $174.0 million of shareholders’ equity.

        As of December 31, 2004, we had available committed and uncommitted lines of credit totaling $52 million, with terms generally one year or less, and a $1 million letter of credit outstanding. At December 31, 2004, we were in compliance with all debt covenants.

        Cash, cash equivalents and short-term investments totaled $22.9 million at December 31, 2004, down 6.9% from $24.6 million as of December 31, 2003. Approximately $5 million of cash and cash equivalents were held by our foreign subsidiaries. Wherever possible, cash management is centralized and intercompany financing is used to provide working capital to subsidiaries as needed. Our current ratio was 2.3 at December 31, 2004, and 3.0 at December 31, 2003, based on working capital of $106.8 million and $116.9 million, respectively.

        If the global economy deteriorates, it could have an unfavorable impact on the demand for our products and, as a result, our operating cash flow. We believe that the combination of internally generated funds, present capital resources and available financing sources are more than sufficient to meet cash requirements for 2005.

        Our contractual cash obligations and commitments at December 31, 2004, are summarized in the following table (in thousands):

        On-balance Sheet Obligations – Our debt obligations totaling $8.7 million as of December 31, 2004, as described in Note 6 to the Consolidated Financial Statements, are primarily comprised of notes payable due in 2005, capital lease obligations and collateralized borrowings. Cash obligations in the table above do not include obligations associated with our collateralized borrowings as these transactions represent deferred sales proceeds on certain leasing transactions in Europe accounted for as borrowings under SFAS No. 13, “Accounting for Leases” (“SFAS No. 13”). We do not expect to have to fund these obligations.

        In addition, we have other long-term liabilities on the balance sheet which represent our obligations associated with long-term employee benefit arrangements, primarily retirement benefit plans and unfunded deferred compensation arrangements.

        Our retirement benefit plans, as described in Note 9 to the Consolidated Financial Statements, require us to make contributions to the plans from time to time. Contributions to the various plans are dependent upon a number of factors including the market performance of plan assets, if any, and future changes in interest rates, which impact the actuarial measurement of plan obligations. As a result, these obligations, which totaled $16.4 million as of December 31, 2004, are not included in the table above. We expect to contribute approximately $1.1 million in total to our U.S. Retiree, U.S. Nonqualified, U.K. Pension and the German Pension Plans in 2005. We do not expect that a contribution will be required to our U.S. Pension Plan for the foreseeable future.

        The unfunded deferred compensation arrangements covering certain current and retired management employees totaled $10.4 million as of December 31, 2004. We expect to distribute approximately $4.9 million of this obligation in 2005. We cannot predict the timing or amounts of the remaining obligation as it is dependent upon a number of assumptions including termination dates and participant distribution elections. Our remaining long-term employee benefit arrangements are comprised of long-term incentive compensation arrangements with certain key management, foreign defined contribution plans and severance arrangements totaling $1.6 million. We cannot predict the timing or amount of our future payments associated with these arrangements; as a result, these obligations are not included in the contractual cash obligations and commitments table.

        Off-balance Sheet Arrangements – Off-balance sheet arrangements consist primarily of operating lease commitments for office and warehouse facilities, vehicles and office equipment as discussed in Note 11 to the consolidated financial statements as well as unconditional purchase commitments. In accordance with U.S. generally accepted accounting principles, these obligations are not reflected in the Consolidated Balance Sheets.

        Unconditional purchase obligations include purchase orders entered into in the ordinary course of business and contractual purchase commitments. During 2003, we entered into a purchase commitment with a third-party manufacturer totaling $12 million through September 2007, with a remaining purchase commitment of approximately $9 million as of December 31, 2004.

        We have a cancellation clause with our third-party logistics provider which would require payment of a cancellation fee in the event we elect to cancel the agreement prior to the contract expiration date. This fee, which approximated $1.6 million at December 31, 2004, declines on a straight-line basis over the life of the contract, which expires in 2007. In addition, in the event that we elect to cancel the agreement, we would be required to assume the underlying building lease for the remainder of its term. We have applied the provisions of EITF 01-8, “Determining Whether an Arrangement Contains a Lease,” and have determined that our agreement with our third-party logistics provider contains an operating lease under SFAS No. 13. As a result, we have included the future minimum lease payments related to the underlying building lease in our operating lease commitments in the contractual cash obligations and commitments table.

        Certain operating leases for vehicles contain residual value guarantee provisions, which would become due at the expiration of the operating lease agreement if the fair value of the leased vehicles is less than the guaranteed residual value. Of those leases that contain residual value guarantees, the aggregate residual value at lease expiration is $8.3 million, of which we have guaranteed $6.3 million. As of December 31, 2004, we have not recorded a liability related to this residual value guarantee as we estimate our future settlements to be a net gain.

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Cash Requirements

        Operating Activities – Cash provided by operating activities was $36.7 million in 2004, $30.5 million in 2003, and $19.2 million in 2002. The cash provided by operating activities in 2004 was impacted by a decrease in inventory levels, an increase in accounts payable and accrued expenses offset by an increase in receivables. The decrease in inventories is primarily attributable to actions associated with inventory reduction initiatives. Accounts payable and accrued expenses increased primarily due to the timing payments and higher accruals for performance-based incentives, rebates and the workforce reduction charge. The increase in receivables was a result of higher fourth quarter sales volumes.

        In 2003, cash provided from operating activities was impacted by a decrease in inventory levels due to companywide reduction initiatives following the buildup that occurred in 2002 as we were transitioning inventories to locations managed by our third-party logistics provider and an increase in receivables due to higher sales volumes during the fourth quarter of 2003.

        As discussed previously, two metrics used by management to evaluate how effectively we utilize our net assets are “Accounts Receivable Days Sales Outstanding” (DSO) and “Days Inventory on Hand” (DIOH), on a FIFO basis. These metrics for the years indicated were as follows (in days):

        The improvement in DIOH of 11 days in 2004 reflects a continued focus on inventory reduction initiatives and the implementation of lean manufacturing principles, including a move closer to a true build-to-order approach for larger equipment, revisions to the order quantity formulas for parts and adjustments to purchased part lot sizes. This follows an improvement in DIOH of seven days in 2003.

        Investing Activities – Net cash used in investing activities was $32.1 million in 2004, $6.4 million in 2003 and $10.4 million in 2002. In January 2004, we acquired all of the stock of Walter-Broadley for $6.5 million in the form of cash and debt as well as assuming $2.6 million in outstanding debt, of which $2.5 million was immediately retired. The cost of the acquisition was paid for in cash with funds provided by operations.

        Capital expenditures were $21.1 million during 2004 compared to $10.5 million in 2003. The increase is primarily attributable to the installation of a new powder paint system and the purchase of additional system components to further expand the capabilities of our information systems. Capital expenditures in 2003 were lower than 2002 due to our transition to leasing versus purchasing fleet vehicles. Proceeds of $4.1 million in 2003 included $1.4 million from the sale of an office property in the U.K.

        In 2005, capital spending is expected to be approximately $15 to $20 million. Significant capital projects planned for 2005 include continued expansion of the capabilities of our information systems and investments in new product tooling. Capital expenditures in 2005 are expected to be financed primarily with funds from operations.

        Financing Activities – Net cash used by financing activities was $12.1 million in 2004, $15.8 million in 2003 and $16.2 million in 2002. During 2004, $2.5 million of assumed Walter-Broadley debt was repaid, while 2003 financing activities included a $5.0 million scheduled debt payment. Other financing activities in 2004 were comparable to 2003 activities.

        Cash dividends increased for the 33rd consecutive year to $0.86 per share in 2004, an increase of $0.02 per share over 2003.

        During November 2004, an additional 400,000 shares were authorized under the share repurchase program approved by the Board of Directors in May 2001. Shares repurchased during 2004, 2003 and 2002 approximated 73,000, 77,000 and 124,000, respectively. The average repurchase price was $39.11 during 2004, $34.54 during 2003 and $37.38 during 2002. At December 31, 2004, approximately 434,000 shares were authorized for repurchase.

New Accounting Pronouncements

        In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement (“SFAS”) No. 123 (Revised 2004), “Share-Based Payment” (“SFAS No. 123(R)”). SFAS No. 123(R) requires that the compensation cost relating to share-based payment transactions, including grants of employee stock options, be recognized in financial statements. That cost will be measured based on the fair value of the equity or liability instruments at the time of issuance. SFAS No. 123(R) covers a wide range of share-based compensation arrangements including stock options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. The effect of the standard will be to require entities to measure the cost of employee services received in exchange for stock awards based on its grant-date fair value and to recognize the cost over the period the employee is required to provide services for the award.

        We plan to adopt the provisions of SFAS No. 123(R) effective July 1, 2005, as required, and plan to use the modified prospective transition method for our existing stock-based compensation plans. Under the modified prospective transition method, the fair value-based accounting method will be used for all employee awards granted, modified, or settled after the adoption date. Compensation cost related to the nonvested portion of awards outstanding as of that date will be based on the grant-date fair value of those awards as calculated under the original provisions of SFAS No. 123. Under this method, we estimate that the adoption of SFAS No. 123(R) will result in approximately $650,000 to $700,000 of stock-based compensation expense in the second half of 2005 related to non-vested employee options issued prior to the adoption date.

        Beginning in 2005, we modified our management compensation program and have replaced stock option awards with performance-based share awards. Prior to the adoption of SFAS No. 123 (R), compensation expense under this program will be recognized over the performance period, with adjustments to expense for changes in the market price of Tennant stock and for actual achievement against established targets. Upon adoption of SFAS No. 123 (R) in July 2005, compensation expense associated with these performance-based share awards will be fixed at the grant-date fair value of the award and recognized over the remaining performance period based on actual achievement against established performance targets. We estimate our 2005 full year expense associated with this program will be approximately $1.4 million to $1.5 million based on achievement of targeted performance.

        In November 2004, the FASB released revised SFAS No. 151, “Inventory Costs - an amendment of ARB No. 43” (“SFAS No. 151”). The new standard requires abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage) to be recognized as current-period charges. It also requires that allocation of fixed production overhead to the costs of conversion be based on the normal capacity of the production facilities. The requirements of the standard will be effective for inventory costs incurred during fiscal years beginning after June 15, 2005. Although we are still evaluating the impact that the adoption of SFAS No. 151 will have on our Consolidated Financial Statements, we do not believe it will have a material impact as we have not historically had any abnormally low levels of production, unplanned downtime, labor or material shortages.

Critical Accounting Estimates

        Our consolidated financial statements are based on the selection and application of U.S. generally accepted accounting principles, which require us to make estimates and assumptions about future events that affect the amounts reported in our financial statements and the accompanying notes. Future events and their effects cannot be determined with absolute certainty.

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Therefore, the determination of estimates requires the exercise of judgment. Actual results could differ from those estimates, and any such differences may be material to the financial statements. We believe that the following policies may involve a higher degree of judgment and complexity in their application and represent the critical accounting policies used in the preparation of our financial statements. If different assumptions or conditions were to prevail, the results could be materially different from our reported results.

        Allowance for Doubtful Accounts – We record a reserve for accounts receivable that are potentially uncollectible. A considerable amount of judgment is required in assessing the realization of these receivables including the current creditworthiness of each customer and related aging of the past-due balances. In order to assess the collectibility of these receivables, we perform ongoing credit evaluations of our customers’ financial condition. Through these evaluations, we may become aware of a situation where a customer may not be able to meet its financial obligations due to deterioration of its financial viability, credit ratings or bankruptcy. The reserve requirements are based on the best facts available to us and are reevaluated and adjusted as additional information is received. Our reserves are also based on amounts determined by using percentages applied to certain aged receivable categories. These percentages are determined by a variety of factors including, but not limited to, current economic trends, historical payment and bad debt write-off experience. We are not able to predict changes in the financial condition of our customers and if circumstances related to these customers deteriorate, our estimates of the recoverability of accounts receivable could be materially affected and we may be required to record additional allowances. Alternatively, if more allowances are provided than are ultimately required, we may reverse a portion of such provisions in future periods based on the actual collection experience. Bad debt write-offs as a percentage of sales were 0.3% in 2004, 0.3% in 2003 and 0.4% in 2002. As of December 31, 2004, we had $4.0 million reserved against our accounts receivable for doubtful accounts.

        Inventory Reserves – We value our inventory at the lower of the cost of inventory or fair market value through the establishment of a reserve for excess, slow moving and obsolete inventory. Our reserve for excess, slow moving and obsolete inventory is based on inventory levels, expected product lives and forecasted sales demand. In assessing the ultimate realization of inventories, we are required to make judgments as to future demand requirements compared with inventory levels. Reserve requirements are developed according to our projected demand requirements based on historical demand, market conditions and technological and product life cycle changes. It is possible that an increase in our reserve may be required in the future if there is a significant decline in demand for certain products. This reserve creates a new cost basis for these products and is considered permanent.

        We also record a reserve for inventory shrinkage. Our inventory shrinkage reserve represents anticipated physical inventory losses that are recorded and adjusted as a part of our cycle counting and physical inventory procedures. The reserve amount is based on historical loss trends, historical physical and cycle-count adjustments as well as inventory levels. Changes in the reserve result from the completed cycle counts and physical inventories.

        As of December 31, 2004, we had $5.5 million reserved against inventories.

        Warranty Reserves – We record a liability for warranty claims at the time of sale. The amount of the liability is based on the trend in the historical ratio of claims to sales, the historical length of time between the sale and resulting warranty claim, new product introductions and other factors. Future claims experience could be materially different from prior results because of the introduction of new, more complex products, a change in our warranty policy in response to industry trends, competition or other external forces, or manufacturing changes that could impact product quality. In the event we determine that our current or future product repair and replacement costs exceed our estimates, an adjustment to these reserves would be charged to earnings in the period such determination is made. During 2003, we recognized a change in estimate of $0.9 million related to an increase in warranty claims on certain products. During 2004, our claims experience improved, resulting in a decrease in our warranty expense as a percent of sales and a decrease in expense for specific claims. Warranty expense as a percentage of sales was 1.5% in 2004, 1.9% in 2003 and 1.6% in 2002. As of December 31, 2004, we had $6.2 million reserved for future estimated warranty costs.

        Deferred Tax Assets – We recognize deferred tax assets for the expected future tax impact of temporary differences between book and taxable income. Deferred tax assets are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. A valuation allowance and income tax charge are recorded when, in management’s judgment, realization of a specific deferred tax asset is less likely than not. The deferred tax asset valuation allowance could be materially different from actual results because of changes in the mix of future taxable income, the relationship between book and taxable income and our tax planning strategies. The valuation allowance for foreign tax loss carryforwards at December 31, 2004, was $11.8 million.

Cautionary Factors Relevant to Forward-Looking Information

        Certain statements contained in this document as well as other written and oral statements made by us from time to time are considered “forward-looking 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: the potential for soft markets in certain regions, including North America, Asia, Latin America and Europe; geopolitical and economic uncertainty throughout the world; changes in tax laws and regulations, including changes in accounting standards and taxation changes, such as the effects of the American Jobs Creation Act of 2004; inflationary pressures; the potential for increased competition in our business; the relative strength of the U.S. dollar, which affects the cost of our products sold internationally; fluctuations in the cost or availability of raw materials; our ability to achieve projections of future financial and operating results; successful integration of acquisitions; the ability to achieve operational efficiencies, including synergistic and other benefits of acquisitions; unforeseen product quality problems; the effects of litigation, including threatened or pending litigation; and our plans for growth. 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 the Company’s other Securities and Exchange Commission filings.

        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.

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ITEM 7A – Quantitative and Qualitative Disclosures About Market Risk

        Foreign Currency Exchange Risk – Due to the global nature of our operations, we are subject to exposures resulting from foreign currency exchange fluctuations in the normal course of business. Our primary exchange rate exposure is with the Euro, the Canadian dollar, the Australian dollar, the British pound and the Japanese yen against the U.S. dollar. The direct financial impact of foreign currency exchange includes the effect of translating profits from local currencies to U.S. dollars, the impact of currency fluctuations on the transfer of goods between Tennant operations in the United States and abroad and transaction gains and losses. In addition to the direct financial impact, foreign currency exchange has an indirect financial impact on our results, including the effect on sales volumes within local economies and the impact of pricing actions taken as a result of foreign exchange rate fluctuations.

        Because our products are manufactured or sourced primarily from the United States, a stronger dollar generally has a negative impact on results from operations outside the United States while a weaker dollar generally has a positive effect. Our objective in managing the exposure to foreign currency fluctuations is to minimize the earnings effects associated with foreign exchange rate changes on certain of our foreign currency-denominated assets and liabilities. We periodically enter into various contracts, principally forward exchange contracts, to protect the value of certain of our foreign currency-denominated assets and liabilities. The gains and losses on these contracts generally approximate changes in the value of the related assets and liabilities. We had forward exchange contracts outstanding in the notional amounts of approximately $51 million and $48 million at the end of 2004 and 2003, respectively. The potential for material loss in fair value of foreign currency contracts outstanding and the related underlying exposures as of December 31, 2004, from a 10% adverse change is unlikely due to the short-term nature of our forward contracts. Our policy prohibits us from entering into transactions for speculative purposes.

        Commodity Risk – We are subject to exposures resulting from potential cost increases related to our purchase of raw materials or other product components. We do not use derivative commodity instruments to manage our exposures to changes in commodity prices such as steel or oil and gas.

        The recent increase in worldwide demand and other factors have caused prices for steel and related products to increase. Given the worldwide steel market conditions, we have experienced significant cost increases in our steel-based raw materials and component parts in 2004. We purchase approximately $55–$60 million of raw and fabricated steel and steel-based component parts annually. We do not maintain an inventory of raw or fabricated steel in excess of near-term production requirements. We continue to focus on mitigating the impact of the anticipated steel cost increases through product pricing and negotiations with our vendors. Successful mitigation of the impact will depend upon our ability to increase our selling prices in a competitive market.

        Various factors beyond our control affect the price of oil and gas, including but not limited to worldwide and domestic supplies of oil and gas, political instability or armed conflict in oil-producing regions, the price and level of foreign imports, the level of consumer demand, the price and availability of alternative fuels, domestic and foreign governmental regulation and the overall economic environment. We purchase petroleum-related component parts for use in our manufacturing operations. In addition, our freight costs associated with shipping and receiving product and sales and service vehicle fuel costs are impacted by fluctuations in the cost of oil and gas. During 2004, our purchased material and other costs were impacted by higher oil and gas prices. If the prices of oil and gas remain at their current levels or continue to increase, our results could be unfavorably impacted in 2005.

ITEM 8 – Financial Statements and Supplementary Data

MANAGEMENT’S REPORT ON INTERNAL CONTROLS AND PROCEDURES

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an assessment of the effectiveness of our internal control over financial reporting based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our assessment under the framework in Internal Control – Integrated Framework (COSO), our management concluded that our internal control over financial reporting was effective as of December 31, 2004. Our management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 2004, has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their report which is included herein.

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REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders

Tennant Company:

        We have audited management’s assessment, included in the accompanying Management’s Report on Internal Controls and Procedures, that Tennant Company maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Tennant Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

        We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

        A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

        Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

        In our opinion, management’s assessment that Tennant Company maintained effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, Tennant Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

        We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Tennant Company and subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of earnings, cashflows, and shareholders’ equity and comprehensive income, for each of the years in the three-year period ended December 31, 2004, and our report dated February 28, 2005 expressed an unqualified opinion on those consolidated financial statements.

        /s/ KPMG LLP

        Minneapolis, MN

        February 28, 2005

The Board of Directors and Shareholders

Tennant Company:

        We have audited the accompanying consolidated balance sheets of Tennant Company and subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of earnings, cash flows, and shareholders’ equity and comprehensive income for each of the years in the three-year period ended December 31, 2004. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

        We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

        In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Tennant Company and subsidiaries as of December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles.

        We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Tennant Company’s internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 28, 2005 expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal control over financial reporting.

        /s/ KPMG LLP

        Minneapolis, MN

        February 28, 2005

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Consolidated Statements of Earnings

TENNANT COMPANY AND SUBSIDIARIES

(In thousands, except per share data)

        See accompanying notes to consolidated financial statements.

14

Consolidated Balance Sheets

TENNANT COMPANY AND SUBSIDIARIES

(In thousands, except shares and per share data)

        See accompanying notes to consolidated financial statements.

15

Consolidated Statements of Cash Flows

TENNANT COMPANY AND SUBSIDIARIES

(In thousands)

        See accompanying notes to consolidated financial statements.

16

Consolidated Statements of Shareholders’ Equity and Comprehensive Income

TENNANT COMPANY AND SUBSIDIARIES

(In thousands, except shares and per share data)

        The company had 30,000,000 authorized shares of common stock as of December 31, 2004, 2003 and 2002.

        See accompanying notes to consolidated financial statements.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except shares and per share data)

        CONSOLIDATION – The consolidated financial statements include the accounts of Tennant Company and its subsidiaries. All material intercompany transactions and balances have been eliminated. In these Notes to the Consolidated Financial Statements, Tennant Company is referred to as “Tennant,” “we,” “us,” or “our.”

        FISCAL YEAR-END – Our fiscal year-end is December 31.

        TRANSLATION OF NON-U.S. CURRENCY – Foreign currency-denominated assets and liabilities have been translated to U.S. dollars at year-end exchange rates, while income and expense items are translated at exchange rates prevailing during the year. Gains or losses resulting from translation are included as a separate component of shareholders’ equity. Transaction gains or losses are included in other income (expense).

        USE OF ESTIMATES – The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

        RECLASSIFICATIONS – Certain prior years’ amounts have been reclassified to conform to the current year presentation.

        CASH EQUIVALENTS – We consider all highly liquid investments with maturities of three months or less from the date of purchase to be cash equivalents.

        SHORT-TERM INVESTMENTS – Short-term investments with average maturities of less than one year are classified and accounted for as available-for-sale and carried at fair value. Unrealized gains and losses on these securities, if any, would be reported as accumulated other comprehensive income (loss).

        As of December 31, 2004, our available-for-sale securities consisted of auction rate securities totaling $6,050. There were no realized gains or losses during the year ended December 31, 2004. At December 31, 2004 the estimated fair value of these securities approximated cost due to their short maturities.

        RECEIVABLES – Credit is granted to our customers in the normal course of business. Management performs ongoing credit evaluations of customers and maintains allowances for potential credit losses. Receivables are recorded at original carrying value less reserves for estimated uncollectible accounts.

        INVENTORIES – Inventories are valued at the lower of cost or market. For inventories in Europe, cost is determined on a first-in, first-out basis. Cost is determined on a last-in, first-out basis for substantially all other locations.

        PROPERTY, PLANT AND EQUIPMENT – Property, plant and equipment is carried at cost. We generally depreciate buildings and improvements by the straight-line method over a 30-year life. Other property, plant and equipment is generally depreciated using the straight-line method based on lives of three to 15 years.

        GOODWILL – Goodwill represents the excess of cost over the fair value of net assets of businesses acquired. Goodwill is reviewed annually or at the time of a triggering event for impairment. In assessing the recoverability of goodwill, we compare the carrying value of our goodwill to our market value. During the fourth quarter of 2004, we completed our annual impairment test and concluded that our goodwill is not impaired.

        IMPAIRMENT OF OTHER LONG-LIVED ASSETS – Our intangible assets, consisting of the acquired trade name and customer lists as described further in Notes 5 and 18, are reviewed annually or at the time of a triggering event for impairment. During the fourth quarter of 2004, we completed our annual impairment test and concluded our intangible assets are not impaired.

        We periodically review our other long-lived assets for impairment and assess whether events or circumstances indicate that the carrying amount of the asset may not be recoverable. We generally deem an asset to be impaired if an estimate of undiscounted future operating cash flows is less than its carrying amount.

        PENSION AND PROFIT SHARING PLANS – We have pension and/or profit sharing plans covering substantially all of our employees. Pension plan costs are accrued based on actuarial estimates with the pension cost funded annually.

        POSTRETIREMENT BENEFITS – We recognize the cost of retiree health benefits over the employees’ period of service.

        WARRANTY – We record a liability for warranty claims at the time of sale. The amount of the liability is based on the trend in the historical ratio of claims to sales, the historical length of time between the sale and resulting warranty claim, new product introductions and other factors. In the event we determine that our current or future product repair and replacement costs exceed our estimates, an adjustment to these reserves would be charged to earnings in the period such determination is made. Warranty terms on machines range from one to four years.

        RESEARCH AND DEVELOPMENT – Research and development costs are expensed as incurred.

        INCOME TAXES – Deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the book and tax bases of existing assets and liabilities. A valuation allowance is provided when, in management’s judgment, it is more likely than not that some portion or all of the deferred tax asset will not be realized.

        STOCK-BASED COMPENSATION – We account for stock-based compensation for employees under Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees.” APB No. 25 requires compensation cost to be recorded on the date of the grant only if the current market price of the underlying stock exceeds the exercise price. Accordingly, no compensation cost has been recognized for stock option plans. At December 31, 2004, we have six stock-based compensation plans, which are described more fully in Note 13.

        We have adopted the disclosure-only provisions of SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure” (“SFAS No. 148”). SFAS No. 148 amends the disclosure requirements of SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”). In accordance with SFAS No. 123, the fair value of options at the date of grant is estimated using the Black-Scholes option pricing model. The following weighted-average assumptions were used for the 2004, 2003 and 2002 grants, respectively: dividend yield of 2.3%, 2.3% and 2.3%; expected volatility of 32%, 25% and 21%; risk-free interest rates of 3.6%, 3.6% and 3.8%. The expected life of our options was seven years in 2004 and 2003, and five years in 2002. The weighted-average fair value of each option granted was $12.80, $8.03 and $6.56 in 2004, 2003 and 2002, respectively.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except shares and per share data)

        Had stock-based compensation cost been determined consistent with the provisions of SFAS No. 123, net earnings would have been reduced to the pro forma amounts indicated below:

        REVENUE RECOGNITION – We recognize revenue when persuasive evidence of an arrangement exists, title and risk of ownership have passed, the sales price is fixed or determinable and collectibility is probable. Generally, these criteria are met at the time the product is shipped. Provisions for estimated returns, rebates and discounts are provided for at the time the related revenue is recognized. Freight revenue billed to customers is included in net sales and the related shipping expense is included in cost of sales. Service revenue is recognized in the period the service is performed, or ratably over the period of the related service contract.

        Customers may obtain financing through third-party leasing companies to assist in their acquisition of our equipment products. In Europe, certain lease transactions classified as operating leases contain retained ownership provisions or guarantees, which results in recognition of revenue over the lease term. In the U.S., for short-term rental transactions, revenue is recognized at the time customers convert the short-term rental to an outright purchase or long-term lease of the equipment. As a result, we defer the sale on both of these transactions and record the sales proceeds as collateralized borrowings or deferred revenue. The underlying equipment relating to operating leases is depreciated on a straight-line basis over the lease term, which does not exceed the equipment’s estimated useful life.

        In 2003, we adopted Emerging Issues Task Force Issue No. 00-21 (“EITF 00-21”), “Revenue Arrangements with Multiple Deliverables”. EITF 00-21 addresses certain aspects of accounting by a vendor for arrangements under which multiple revenue-generating activities are performed as well as how to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting. Under EITF 00-21, revenues from contracts with multiple element arrangements are recognized as each element is earned. We offer service contracts in conjunction with equipment sales in addition to selling equipment and service contracts separately. When equipment and service contracts are sold at the same time, we first apply FASB Technical Bulletin 90-1 and deduct from the sales proceeds the separately priced service contract. The balance of the consideration is allocated to the equipment and recognized when the equipment is shipped. Sales proceeds allocated to service contracts are deferred if the proceeds are received in advance of the service and recognized ratably over the contract period.

        DERIVATIVE FINANCIAL INSTRUMENTS – We use derivative instruments to manage exposures to foreign currency only in an attempt to limit underlying exposures from currency fluctuations and not for trading purposes. We periodically enter into various contracts, principally forward exchange contracts, to protect the value of certain of our foreign currency-denominated assets and liabilities (principally the Euro, British pound, Australian dollar, Canadian dollar and Japanese yen). We have elected not to apply hedge accounting treatment to these contracts as our contracts are for a short duration. These contracts are marked-to-market with the related asset or liability recorded in prepaid or accrued expenses, as applicable. The gains and losses on these contracts generally approximate changes in the value of the related assets and liabilities. Gains or losses on forward foreign exchange contracts to hedge foreign currency-denominated net assets and liabilities are recognized in net foreign currency transaction gains (losses) within the Consolidated Statements of Earnings on a current basis over the term of the contracts.

        EARNINGS PER SHARE – Basic earnings per share is computed by dividing net earnings by the weighted average number of common shares outstanding during the period. Diluted earnings per share assumes conversion of potentially dilutive stock options and performance-related shares.

        2004 ACTIONS – Management approved actions to reduce costs as a part of a continuing effort to improve profitability during 2004. These actions included the elimination of a net 64 management and administrative positions companywide and are expected to be substantially complete by the first quarter of 2005. The workforce reductions resulted in the recognition of a net pretax charge of $2,301 ($1,458 after-tax, or $0.16 per diluted share) in our 2004 results. The charge consists primarily of severance and outplacement benefits and is included within Selling and Administrative (S&A) Expenses in the Consolidated Statements of Earnings. The severance and outplacement benefits were accounted for under SFAS No. 112, “Employers’ Accounting for Postretirement Benefits.”

        The components of the 2004 workforce reduction charges and cash and non-cash applications against these charges were as follows:

        2003 ACTIONS – We amended the agreement with our U.S. third-party lessor during 2003. Prior to this amendment, the agreement contained a retained ownership risk provision that precluded revenue recognition at the time of shipment for equipment sales to the third-party lessor that were considered operating leases. The amendment eliminated the retained ownership risk provision and was retroactive to the beginning of the agreement. This resulted in the recognition of previously deferred revenue of $6,430 in 2003, increasing net earnings by $1,796 or $0.20 per diluted share and resulted in revenue recognition at the time of shipment for future U.S. equipment sales under this agreement.

        During 2003, Tennant and our joint-venture partner agreed to dissolve the joint venture previously established to develop and market a new product. We decided to permanently discontinue manufacturing the product and to abandon the plan to utilize the related purchased technology. As a result of the joint-venture dissolution, we recorded after-tax charges totaling $1,215 or $0.14 per diluted share related to the write-off of accounts receivable, inventory, intangible assets and the establishment of accruals for certain contractual obligations.

        2002 ACTIONS – We recorded pretax charges of $4,396 for restructuring, $500 in certain severance payments and $500 for a write-down of inventory during 2002. In addition, we recorded a change in estimate of $(394) related to our 2001 and 1999 restructuring activities. The restructuring charges

19

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except shares and per share data)

related to a workforce reduction, consolidation of our North American distribution operations from a network of seven distribution centers into two new facilities that are now leased and managed by a third-party logistics services provider, and actions to consolidate and centralize customer service operations in Europe, as well as streamline other operations in North America. Approximately 140 employees were terminated as a result of these actions. The restructuring charges primarily consisted of severance payments, building lease costs and write-downs of certain fixed assets. The inventory write-down related to the consolidation of distribution operations and has been classified in cost of sales. The $500 in certain severance payments has been classified as selling and administrative expense. These actions were substantially completed during 2002 and 2003.

        The components of the 2002 restructuring charges and cash and non-cash applications against these charges were as follows:

        We recorded a change in estimate of $226 related to 2001 restructuring charges during 2003. As of December 31, 2003, there was a remaining balance of $105 related to 2001 restructuring charges. During 2004 we had cash utilization of $(9), non-cash utilization of $4 and we recorded a change in estimate of $(79) related to the 2001 restructuring charge. As of December 31, 2004, there is a remaining balance for noncancelable contractual obligation of $21, which will be settled in 2005.

        During 2002, we completed restructuring initiatives originally accrued in 1999. This resulted in cash usage of $(312), non-cash usage of $48 and a change in estimate of $(201) in 2002.

        The composition of inventories at December 31 was as follows:

        The LIFO reserve approximates the difference between LIFO carrying cost and replacement cost.

        As of December 31, 2004 and 2003, FIFO-based inventories in Europe totaled $25,456 and $22,846, respectively.

        Property, plant and equipment and related accumulated depreciation, including equipment under capital leases, at December 31 consisted of the following:

        The components of goodwill and other intangible assets on the consolidated balance sheet as of December 31 are as follows:

        The additions to goodwill and other intangible assets during 2004 were based on the purchase price allocation of the Walter-Broadley acquisition in January 2004, as discussed in Note 18. These other intangible assets, consisting of the acquired trade name and customer lists, are amortized over useful lives of four and 20 years, respectively, based on the provisions of SFAS No. 142.

        As of December 31, 2004, future amortization expense related to our intangible assets is estimated to be $137 in 2005 to 2007 and $63 in 2008 and 2009.

20

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except shares and per share data)

        During 2003, as a result of the joint-venture dissolution described in Note 2, we wrote off the remaining unamortized balance of intangible assets associated with the joint venture.

        The components of our outstanding debt as of December 31 consisted of the following:

        The aggregate maturities of our outstanding debt including capital lease obligations as of December 31, 2004 are as follows: