Washington, D.C.   20549

 

FORM 10-K

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2003. Commission File Number 0-4804

 

TENNANT COMPANY

 

Incorporated in the State of Minnesota                               Employer Identification Number 41-0572550

 

701 North Lilac Drive, P.O. Box 1452, Minneapolis, Minnesota  55440

 

Telephone Number 763-540-1553

 

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  ý  No  o

 

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.

 

[     ]

 

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

 

$325,814,328 is aggregate market value of common stock held by non-affiliates as of June 30, 2003.

 

                9,008,588 shares outstanding at February 27, 2004

 

DOCUMENTS INCORPORATED BY REFERENCE

 

2004 Proxy – Part III (Partial)

 

 

TENNANT COMPANY
2003

 

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 user corporations, health care 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 business segment. The Company sells its products domestically and internationally. Financial information on the Company’s geographic areas is provided on pages 34 and 35. Nearly all of the Company’s foreign investment in assets resided within the Netherlands, the United Kingdom, Japan, Australia, Canada, France, Germany, Spain and Austria. While subject to increases or decreases in value over time due to foreign exchange rate movements, we believe that these investments are a low business risk.

 

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 11 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 or 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.

 

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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.

 

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 the leading competitor in many 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

 

We strive to be the industry leader in innovation and are 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 2003, 2002 and 2001, respectively, the Company spent $16,696,000, $16,331,000 and $16,578,000 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 is not expected to have, a material effect upon the Company’s capital expenditures, earnings or competitive position.

 

Employment

 

The Company employed 2,351 persons in worldwide operations as of December 31, 2003.

 

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, 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 10, 30 and 31 of this Form 10-K.

 

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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 2003.

 

 

PART II

 

ITEM 5 – Market for Registrant’s Common Stock and Related Shareholder Matters

 

STOCK MARKET INFORMATION — Tennant common stock is traded on the New York Stock Exchange, under the ticker symbol TNC. As of December 31, 2003, there were approximately 2,900 shareholders.  The common stock price was $43.30 per share on December 31, 2003.

 

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

 

		First			Second			Third			Fourth
1999		$	31.44-45.00		$	32.00-38.50		$	32.63-37.25		$	32.00-35.63
2000		$	28.25-34.50		$	30.50-38.00		$	33.75-44.25		$	39.00-53.38
2001		$	39.95-49.56		$	39.85-45.60		$	33.32-40.25		$	32.80-38.40
2002		$	34.60-41.99		$	38.54-44.00		$	31.23-39.67		$	26.35-36.10
2003		$	29.00-35.70		$	31.10-37.74		$	34.90-41.10		$	36.12-45.80

 

DIVIDEND INFORMATION — Cash dividends on Tennant’s common stock have been paid for 60 consecutive years. Cash dividends increased for the 32nd consecutive year to $0.84 per share in 2003, an increase of $0.02 per share over 2002. Dividends generally are declared each quarter. Following are the remaining record dates anticipated for 2004: May 28, 2004, August 31, 2004 and November 30, 2004.

 

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.

 

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ITEM 6 – Selected Financial Data

 

(In thousands, except shares and per share data)

 

Years Ended December 31		2003			2002		2001		2000		1999
Year-end Financial Results
Net sales		$	453,962	(1)	424,183		422,425		452,176		429,739
Cost of sales		$	272,285	(1)	254,360		251,922		254,191		240,667
Gross margin – %		40.0			40.0		40.4		43.8		44.0
Research and development expenses		$	16,696		16,331		16,578		15,466		14,861
% of net sales		3.7			3.9		3.9		3.4		3.5
Selling and administrative expenses		$	142,306		133,914		136,440		139,665		136,076
% of net sales		31.3			31.6		32.3		30.9		31.7
Profit from operations		$	22,675	(1)	15,576	(2)	13,451	(3)	42,853		31,464	(5)
% of net sales		5.0			3.7		3.2		9.5		7.3
Other income (expense)		$	(192	)	(678	)	(5	)	359		(770	)
Income tax expense		$	8,328		6,633		8,838		15,470		10,939
% of earnings before income taxes		37.0			44.5		65.7		35.8		35.6
Net earnings		$	14,155	(1)	8,265	(2)	4,608	(3)(4)	27,742		19,755	(5)
% of net sales		3.1			1.9		1.1		6.1		4.6
Return on beginning shareholders’ equity – %		9.2			5.4		3.0		20.7		15.2
Per Share Data
Basic net earnings		$	1.58	(1)	0.92	(2)	0.51	(3)(4)	3.05		2.17	(5)
Diluted net earnings		$	1.56	(1)	0.91	(2)	0.50	(3)(4)	3.04		2.16	(5)
Cash dividends		$	0.84		0.82		0.80		0.78		0.76
Shareholders’ equity (ending)		$	18.41		17.16		16.82		16.88		14.94
Year-End Financial Position
Cash and cash equivalents		$	24,587		16,356		23,783		21,512		14,928
Total current assets		$	176,370		162,901		153,595		173,220		166,745
Property, plant and equipment, net		$	61,121		69,153		73,096		69,054		67,388
Total assets		$	258,873		256,237		252,559		268,472		261,269
Current liabilities excluding current debt		$	58,477		55,401		48,031		57,594		65,362
Current ratio excluding current debt		3.0			2.9		3.2		3.0		2.6
Long-term liabilities excluding long-term debt		$	27,455		26,743		26,643		31,081		30,616
Debt:
Current		$	1,030		14,948		13,418		15,274		14,191
Long-term		$	6,295		5,000		12,496		11,736		16,839
Total debt as % of total capital		4.2			11.5		14.6		15.0		18.8
Shareholders’ equity		$	165,616		154,145		151,971		152,787		134,261

 

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Years Ended December 31		2003			2002		2001		2000		1999
Cash Flow Increase (Decrease)
Related to operating activities		$	30,470		19,219		34,141		38,866		37,603
Related to investing activities		$	(6,391	)	(10,423	)	(20,544	)	(19,251	)	(25,343	)
Related to financing activities		$	(15,780	)	(16,214	)	(11,633	)	(12,680	)	(14,665	)
Other Data
Interest income		$	1,441		1,891		2,133		2,532		2,847
Interest expense		$	833		1,381		2,131		1,886		2,665
Depreciation and amortization expense		$	13,879		16,947		19,282		18,766		19,028
Net expenditures for property, plant and equipment		$	6,391		10,423		20,544		18,251		16,362
Number of employees at year-end		2,351			2,380		2,416		2,471		2,266
Diluted average shares outstanding		9,064			9,048		9,203		9,135		9,140
Closing share price at year-end		$	43.30		32.60		37.10		48.00		32.75
Common stock price range during year		$	29.00-45.80		26.35-44.00		32.80-49.56		28.25-53.38		31.44-45.00
Closing price/earnings ratio		27.8			35.8		74.2		15.8		15.2

 

(1) 2003 results 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 pre-tax charges of $1,960 ($1,215 net of taxes or $0.14 per diluted share) related to the dissolution of a joint venture.  (2) 2002 includes unusual charges of $5,002 pre-tax ($3,619 net of taxes or $0.40 per diluted share).  (3) 2001 includes net unusual charges of $5,041 pre-tax ($3,141 net of taxes or $0.34 per diluted share).   (4) Includes a charge of $4,267 after-tax (or $0.47 per diluted share) to record a deferred tax asset valuation allowance.   (5) 1999 includes pre-tax restructuring charges of $6,671 ($4,308 net of taxes or $0.47 per diluted share).

 

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

 

Business Overview

 

Tennant Company is a world leader in designing, manufacturing and marketing products that help create a cleaner, safer world. We provide equipment, aftermarket parts and floor coatings to contract cleaners, corporations, 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.

 

Financial Overview

 

During 2002 and 2001, and to a lesser extent during 2003, the global industrial sector recession and lower capital spending negatively impacted our performance, and that of the industry as a whole.  While there have been some indications of an improving global economy toward the end of 2003, the economic environment remains challenging and difficult to predict.  If the global economic conditions are weak in 2004, it could have an unfavorable impact on the demand for our products.

 

North America, which generates approximately 70% of our consolidated sales, has been impacted significantly by the industrial sector economic recession. During 2003, sales of equipment to the North American industrial sector stabilized; however, we saw a decline in demand in sales of equipment to the commercial sector, particularly to federal, state and local governments where the effects of the economic recession have impacted capital spending budgets.

 

During 2003, our results were favorably impacted by weakness of the U.S. dollar against the Euro, the Australian and Canadian dollars, the British pound and the Japanese yen. We can estimate the direct financial impact of foreign currency exchange on net sales and earnings; however, it is difficult to estimate the indirect financial impact.  The indirect financial impact would include such factors as the effect on sales volumes within local economies and the impact of pricing actions taken as a result of foreign exchange rate fluctuations. For 2003, the favorable foreign currency exchange effect on sales was approximately $20 million.  The total direct favorable effect on earnings, which included net foreign currency transaction losses of $0.9 million pre-tax, was approximately $2.6 million or $0.29 per diluted share.  We expect that our sales and earnings will continue to be impacted by the effects of foreign currency exchange rate fluctuations in 2004.   If the applicable

 

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exchange rates continue to strengthen relative to the U.S. dollar, the related effect on our results would continue to be favorable in 2004.

 

In January 2004, we acquired Walter-Broadley Machines Limited, a cleaning equipment company based in the United Kingdom, with annual sales of approximately $13 million. The acquisition significantly increases our customer base and service coverage in the United Kingdom. The acquisition is expected to have approximately an $0.08 dilutive impact to earnings per share in 2004, resulting primarily from certain restructuring costs, one-time tax costs and a short-term impact on gross profit margins related to purchase accounting. We expect the acquisition to begin contributing to earnings in 2005. Future contributions to earnings will be dependent upon our ability to successfully integrate the Walter-Broadley business in an efficient and effective manner.

 

We use Economic Profit as a key indicator of financial performance.  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 to improve economic profit 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 “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.

 

Historical Results

 

The following compares the historical results of operations for the years ended December 31, 2003, 2002 and 2001 in dollars and as a percentage of net sales (dollars in thousands except per share amounts):

 

		2003			%		2002			%		2001			%
Net sales		$	453,962		100.0		$	424,183		100.0		$	422,425		100.0
Cost of sales		272,285			60.0		254,360			60.0		251,922			59.6
Gross profit		181,677			40.0		169,823			40.0		170,503			40.4
Research and development expenses		16,696			3.7		16,331			3.9		16,578			3.9
Selling and administrative expenses		142,306			31.3		133,914			31.6		136,440			32.3
Restructuring charges		—			—		4,002			0.9		9,962			2.4
Pension settlement gain		—			—		—			—		(5,928		)	1.4
Profit from operations		22,675			5.0		15,576			3.7		13,451			3.2
Other income (expense)		(192		)	—		(678		)	0.2		(5		)	—
Profit before income taxes		22,483			5.0		14,898			3.5		13,446			3.2
Income tax expense		8,328			1.8		6,633			1.6		8,838			2.1
Net earnings		$	14,155		3.1		$	8,265		1.9		$	4,608		1.1
Earnings per diluted share		$	1.56		—		$	0.91		—		$	0.50		—

 

Consolidated Financial Results

 

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

 

•                       A favorable foreign currency exchange impact on net earnings of approximately $2.6 million or $0.29 per diluted share.

 

•             Growth in net sales of 7.0% to $454.0 million.  Foreign currency exchange increased sales by approximately 5%. The remaining increase was due to sales growth in Europe and other international markets.

 

•             Recognition of previously deferred revenue totaling $6.4 million as a result of the retroactive amendment to the agreement with our U.S. third-party lessor. This increased net earnings by $1.8 million or $0.20 per diluted share.

 

•             The decision to dissolve our joint venture with an unrelated third party and discontinue manufacturing of the product that was the basis for the formation of the joint venture. This resulted in a charge of $1.2 million or $0.14 diluted share.

 

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•             A decrease in our effective tax rate to 37.0% in 2003 from 44.5% in 2002 primarily due to a decrease in the deferred tax charge required to establish a valuation allowance for foreign tax loss carryforwards, a more favorable mix of taxable earnings by country and a favorable settlement of a foreign tax audit.

 

In 2002, net earnings increased 79.4% to $8.3 million or $0.91 per diluted share.  Net earnings were impacted by:

 

•             A decrease in the effective tax rate to 44.5% from 65.7% primarily due to a decrease in the deferred tax charge required to establish a valuation allowance for foreign tax loss carryforwards.

 

•             A decrease in selling and administrative expenses of $2.5 million attributable to cost containment and reduction initiatives as well as the elimination of goodwill amortization expense related to the adoption of SFAS No. 142.  Goodwill amortization in 2001 was $0.8 million.

 

•             Recognition of restructuring charges of $4.0 million related to a workforce reduction and consolidation of our North American distribution operations, centralization of our customer service operations in Europe and actions to streamline other operations in North America.

 

•             Unfavorable foreign currency exchange impact on net earnings of $0.5 million or  $0.05 per diluted share.

 

Our financial position remained strong in 2003.  Our debt-to-total-capital ratio was 4.2% at December 31, 2003, compared with 11.5% at December 31, 2002.  Cash provided by operating activities was $30.5 million in 2003, up 58.5% from 2002, while working capital increased 26.3% to $116.9 million.

 

Net Sales

 

In 2003, consolidated net sales of $454.0 million increased 7.0% from 2002.  Foreign currency exchange effects increased net sales by approximately 5% during 2003. Consolidated net sales of $424.2 million in 2002 increased from $422.4 million in 2001. Foreign currency exchange effects, resulting primarily from the weakness of the U.S. dollar compared to the Euro, had a favorable impact of approximately 1% on revenues in 2002. In addition, net sales for 2001 included an additional month of sales from our European operations, as discussed below.

 

Consolidated order backlog totaled $8 million at December 31, 2003 and 2002 and $5 million at the end of 2001. Our backlog represents approximately two weeks of sales.

 

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):

 

		2003			%		2002			%		2001
North America		$	319,660		2.5		$	311,862		3.4		$	301,529
Europe		88,786			20.5		73,703			(8.6	)	80,605
Other International		45,516			17.9		38,618			(4.2	)	40,291
Total Sales		$	453,962		7.0		$	424,183		0.4		$	422,425

 

North America - In 2003, North American sales of $319.7 million increased 2.5% compared to 2002. The 2003 sales increase is 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 aftermarket parts and service 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.  Foreign currency exchange effects increased North American net sales approximately 1%.

 

Sales in North America increased 3.4% in 2002 to $311.9 million compared with $301.5 million in 2001. Sales growth in equipment of 4.6% was driven by contributions from Centurion™, our new street sweeper product that began shipping in 2002, and an increase in sales of equipment for commercial cleaning applications.  These contributions were partially offset by a decline in sales of equipment for industrial cleaning applications due to the continued industrial sector recession. An increase of 3.0% in aftermarket and service revenues was partially offset by a 7.1% decrease in the sales of coating products.

 

Europe - European sales in 2003 were $88.8 million, up 20.5% compared to 2002 sales of $73.7 million. 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.

 

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European sales of $73.7 million in 2002 decreased 8.6% compared to 2001 sales. During 2001, our European operation changed its fiscal year-end from November to December because of the conversion of the European information system to the U.S. platform. This resulted in an additional month of sales in 2001 totaling $5.6 million. In addition, sales decreased 7% as a result of weakness in economic conditions during 2002. Foreign currency exchange effects increased European revenues approximately 5% in 2002.

 

Other International - Other international sales in 2003 were $45.5 million, an increase of 17.9% over 2002 sales of $38.6 million. Favorable foreign currency 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.

 

Other international sales in 2002 were $38.6 million, a decrease of 4.2% compared to 2001 sales of $40.3 million. Other international sales volume decreased 5% primarily reflecting the deterioration in global economic conditions, particularly in Japan and Latin America, partially offset by favorable foreign currency exchange effects of approximately 1%.

 

Gross Profit

 

Gross profit as a percentage of sales in 2003 remained consistent with 2002.  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 were offset by favorable foreign currency exchange effects.

 

Gross profit as a percentage of sales decreased by 0.4% in 2002 compared with 2001. The primary factor contributing to the decrease in the gross profit margin was an unfavorable sales mix resulting from the shift in sales toward lower margin equipment for commercial cleaning applications, as well as lower margins on Centurion™. Centurion™ generates lower margins because there is no mark-up on the value of the chassis manufactured by our supplier. Other factors contributing to the percentage decrease in gross profit margin were a $0.5 million inventory write-down related to the consolidation of distribution operations, as well as unfavorable foreign exchange effects.

 

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

 

Operating 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 such as the Centurion™ and FaST™.  However, a focus on innovation also carries certain risks that new technology will be slow to be accepted by the marketplace.  Management mitigates this risk through our focus on and commitment to understanding our customers’ needs and requirements.

 

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.  Research and development decreased by $0.2 million, or 1.5%, but remained flat as a percentage of sales in 2002 compared with 2001.

 

We expect to continue to increase our spending on research and development at a rate that approximates our sales growth before the impact of foreign currency.

 

Selling and administrative expenses increased by $8.4 million, or 6.3% in 2003.  The impact of foreign currency exchange contributed approximately 5% of the increase.  The remaining increase is primarily related to an increase in profit-related employee incentives and to the dissolution of a joint venture as described in Note 2 to the consolidated financial statements. Selling and administrative expenses as a percentage of sales declined 0.3% compared with 2002.

 

In 2002, selling and administrative expenses declined $2.5 million, or 1.9%. This decrease was attributable to the favorable impact of cost-reduction measures as well as general cost-containment initiatives throughout the entire organization, partially offset by the effect of a settlement of a royalty obligation. In 2002, selling and administrative expenses as a percentage of sales decreased 0.7 percentage points compared with 2001.   On January 1, 2002, the Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets.” Under this standard, purchased goodwill is no longer amortized over its useful life. Rather, goodwill is subject to a periodic impairment test based on its fair value. Therefore, we did not recognize any goodwill amortization expense in 2003 and 2002 compared to $0.8 million in 2001.

 

Restructuring Charges

 

As discussed in Note 2 to the consolidated financial statements, we recorded pre-tax 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 will be 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

 

8

 

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.

 

As discussed in Note 2 to the consolidated financial statements, we recorded pre-tax restructuring charges of $10.0 million in 2001 related to a workforce reduction, the closure of our Germany facility and the transfer of production to a contract manufacturer in the Czech Republic. These initiatives were completed in 2001 and 2002. The actions improved the efficiency and productivity of our European organization and reduced global infrastructure.

 

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.

 

Pension Settlement Gain

 

During 2001, we recorded a $5.9 million non-recurring, pre-tax pension settlement gain as described in Note 9 to the consolidated financial statements.

 

Income Taxes

 

Our effective income tax rate was 37.0%, 44.5% and 65.7% for the years 2003, 2002 and 2001, respectively. The decrease in the effective rate in 2003 compared to 2002 was due to a decrease in the non-cash income tax charge required to establish a valuation allowance for our future benefits from foreign tax losses of $2.5 million in 2003 compared to $2.9 million in 2002, a more favorable mix of taxable earnings by country and a favorable settlement of a foreign tax audit.  The decrease in the effective rate in 2002 was the result of a decrease in the non-cash income tax charge required to establish a valuation allowance for our future benefits from foreign tax losses of $2.9 million in 2002 compared to $4.3 million in 2001. The European tax losses resulted largely from restructuring actions taken in 2001 and 2002 for which no loss carryback is available. In the future, we may experience changes in our effective tax rate based on our ability to utilize the 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.  The World Trade Organization has ruled the ETI Act is an illegal export subsidy and, as a result, the U.S. Congress may repeal the ETI Act in 2004.  If this U.S. law is repealed and no phase out of the tax benefit is allowed, it could result in a 3-4% increase in our effective rate in 2004.

 

Liquidity and Capital Resources

 

Despite a continued difficult economic environment, we maintained a favorable financial position in 2003. Our debt-to-total-capital ratio was 4.2% at December 31, 2003, compared with 11.5% at December 31, 2002. At December 31, 2003, our capital structure was comprised of $1.0 million of current debt, $6.3 million of long-term debt and $165.6 million of shareholders’ equity.

 

As of December 31, 2003, we had available committed and uncommitted lines of credit totaling $41 million, with terms generally one year or less, and $0.2 million of related debt was outstanding. At December 31, 2003, we were in compliance with all debt covenants.

 

Cash and cash equivalents totaled $24.6 million at December 31, 2003, up 50.3% from $16.4 million as of December 31, 2002. Approximately $11 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 3.0 at December 31, 2003 and 2.3 at December 31, 2002, based on working capital of $116.9 million and $92.6 million, respectively.

 

If the global economy remains weak during 2004, it could have an unfavorable impact on the demand for our products and, as a result, 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 2004.

 

9

 

Our contractual cash obligations and commitments at December 31, 2003, are summarized in the following table (in thousands):

 

		Total			2004			2005-2006			2007-2008			After 2008
On-balance sheet obligations:
Short-term bank borrowings		$	354		$	354		$	—		$	—		$	—
Long-term bank borrowings		5,000			—			5,000			—			—
Capital leases		215			91			124			—			—
Collateralized borrowings		1,756			585			1,160			11			—
Total on-balance sheet obligations		$	7,325		$	1,030		$	6,284		$	11		$	—
Off-balance sheet arrangements:
Operating leases		$	16,037		$	6,168		$	6,032		$	3,362		$	475
Purchase obligations		57,419			48,448			7,242			1,729			—
Total off-balance sheet obligations		$	73,456		$	54,616		$	13,274		$	5,091		$	475
Total contractual obligations		$	80,781		$	55,646		$	19,558		$	5,102		$	475

 

On-balance Sheet Obligations - Our long-term obligations are composed primarily of a 7.84% note payable due in 2005 and collateralized borrowing related to deferred sales proceeds on certain European leasing transactions.

 

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 2003, we entered into a purchase commitment with a third-party manufacturer totaling $12 million through September 2007. We began a capital improvement project in 2003 to install a new powder paint system in our main manufacturing plant in Minnesota.  We are committed to spend $3 million with certain vendors for system components and installation costs over the course of the project through February 2005. Our remaining purchase obligations consist of purchase orders entered into in the ordinary course of business.

 

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 $2.1 million at December 31, 2003, 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 13.  As a result, we have included the future minimum lease payments related to the underlying building lease in our operating lease commitments above.

 

We sponsor defined benefit retirement plans that may require us to make contributions to the plans from time to time. Contributions are dependent upon a number of factors including the market performance of plan assets and future changes in interest rates, which impact the actuarial measurement of plan obligations.  We expect to contribute approximately $0.8 million to our postretirement medical benefit plan in 2004.  We do not expect that a contribution to our Pension Plan will be required in 2004.

 

Cash Requirements

 

Operating Activities - Cash provided by operating activities was $30.5 million in 2003, $19.2 million in 2002 and $34.1 million in 2001. The $11.3 million increase in operating cash flows from 2002 to 2003 is primarily due to a $5.9 million increase in net earnings and and $8.1 million decrease in inventory levels.  Inventories decreased in 2003 as a result of initiatives to reduce inventory levels companywide following the buildup that occurred in 2002 as we were transitioning inventories to locations managed by our third-party logistics provider.

 

As discussed previously, we evaluate how effectively we utilize our net assets and monitor our operating cash flows using the DIOH (on a FIFO basis) and DSO ratios.  DIOH decreased by seven days to 98 days in 2003 from 105 days in 2002.  DIOH in 2001 was 101 days.   DSO decreased by one day to 62 days in 2003 and decreased four days to 63 days in 2002.

 

The $14.9 million decrease in operating cash flows from 2001 to 2002 is primarily attributable to a $7.5 million increase in accounts receivable and a $7.8 million increase in inventories. The increase in accounts receivable is due to increased sales

 

10

 

in the fourth quarter of 2002 compared to the same period in 2001. The increase in inventory levels is primarily due to three factors: 1) our decision to maintain duplicate parts inventories during the transition of our distribution function to a third-party logistics provider, 2) our decision to carry higher inventories in Europe to respond more quickly to shorter lead-time demands from customers and 3) higher inventory levels associated with new products such as Centurion™.

 

Investing Activities - Net cash used in investing activities was $6.4 million in 2003, $10.4 million in 2002 and $20.5 million in 2001.  Net cash used in investing activities in 2003 was mainly due to capital expenditures, partially offset by proceeds from the disposal of property, plant and equipment. Capital expenditures for property, plant and equipment totaled  $10.5 million in 2003.  Capital expenditures in 2003 were lower as a result of our transition to leasing versus buying for fleet vehicles.  Proceeds of $4.1 million in 2003 included $1.4 million from the sale of an office property in the U.K.

 

Capital expenditures totaling $13.1 million in 2002 were significantly decreased compared to the prior year as 2001 capital projects included significant investments in design systems software, new product tooling and the purchase of a previously leased production facility.

 

In 2004, capital spending is expected to increase to approximately $18 to $23 million, subject to economic conditions. Significant capital projects planned for 2004 include investments in a powder paint system that offers cost, quality and environmental compliance benefits and an automation project in our North American service business.  Expenditures for capital in 2004 are expected to be financed primarily with cash equivalents and funds from operations.

 

As previously discussed, we acquired all of the stock of Walter-Broadley in January 2004 for approximately $6.5 million in cash, subject to certain post-closing adjustments as well as assuming approximately $2.5 million in outstanding debt, which was immediately retired.  The cost of acquisition was paid for through funds provided by operations.

 

Financing Activities - Net cash used by financing activities was $15.8 million in 2003, $16.2 million in 2002 and $11.6 million in 2001.  Significant uses of cash in 2003 included a $5.0 million scheduled debt repayment, $3.2 million net repayments of short-term borrowing, $7.5 million in dividend payments, and $2.7 million for net purchases of Tennant common stock.

 

Cash dividends increased for the 32nd consecutive year to $0.84 per share in 2003, an increase of $0.02 per share over 2002.

 

During May 2001, our Board of Directors authorized a share repurchase program to repurchase up to 400,000 shares of common stock. Shares repurchased during 2003, 2002 and 2001 approximated 77,000, 124,000 and 130,000, respectively. The average repurchase price was $34.54 during 2003, $37.38 during 2002 and $38.69 during 2001. At December 31, 2003, approximately 107,000 shares were still available for repurchase under this program.

 

Critical Accounting Estimates

 

Our consolidated financial statements are based on the selection and application of accounting principles generally accepted in the United States of America, 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. 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

 

11

 

were 0.3% in 2003 and 0.4% in 2002 and 2001. As of December 31, 2003, we had $5.5 million reserved against our accounts receivable.

 

Inventory Reserves – We record reserves for inventory shrinkage and for potentially excess, obsolete and slow-moving inventory. The amounts of these reserves are based upon historical loss trends, inventory levels, historical physical inventory and cycle-count adjustments, 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 current or committed inventory levels. Reserve requirements are managed according to our projected demand requirements based on market conditions, technological and product life cycle changes, as well as longer than previously expected usage periods. It is possible that increases in inventory reserves may be required in the future if there is a significant decline in demand for certain products. Alternatively, if market conditions improve, we may find it necessary to reverse a portion of these reserves. As of December 31, 2003, we had $4.9 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, anticipated releases of new products and other factors. Claims experience could be materially different from actual 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.  Warranty expense as a percentage of sales has increased from 1.6% in 2001 and 2002 to 1.9% in 2003. Warranty expense could continue to be adversely impacted if the increased claims experience continues in 2004. As of December 31, 2003, we had $6.0 million reserved related to 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 uncertain. The deferred tax asset valuation allowance could be materially different from actual results because of changes in management’s expectations regarding our 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, 2003, was $9.7 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; geo-political and economic uncertainty throughout the world; changes in tax laws and regulations including the repeal of the foreign export benefit; 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; the success of new products; projections of future financial and operating results; successful integration of acquisitions; the ability to achieve operational efficiencies, including synergistic and other benefits of acquisitions; 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.  For additional information about factors that could materially affect Tennant’s results, please see the company’s other Securities and Exchange Commission filings.  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.

 

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 that any list of such factors to be an exhaustive or complete list of all risks or uncertainties.

 

12

 

ITEM 7A – Quantitative and Qualitative Disclosures About Market 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. 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 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. 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 $48 million and $35 million at the end of 2003 and 2002, respectively. The potential loss in fair value of foreign currency contracts outstanding and the related underlying exposures as of December 31, 2003, from a 10% adverse change are not material. Our policy prohibits us from entering into transactions for speculative purposes.

 

We are subject to exposures resulting from potential price increases of certain commodities in the purchase of raw materials or other product components.  Recently, increased worldwide demand and other factors have caused prices for steel and related products to increase. Given the worldwide steel market conditions, we anticipate significant price increases in our steel-based raw materials and component parts in 2004. We purchase approximately $11 million of raw or fabricated steel annually and do not maintain an inventory of steel in excess of our near-term production requirements. We also purchase component parts that contain steel.  We will attempt to mitigate the impact of the anticipated steel price increases through product pricing and negotiations with our vendors. Successful mitigation of the impact will depend upon our ability to increase prices in a competitive market.

 

ITEM 8 – Financial Statements and Supplementary Data

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES

 

INDEPENDENT AUDITORS’ REPORT
CONSOLIDATED STATEMENTS OF EARNINGS For the Three Years Ended December 31, 2003, 2002 and 2001
CONSOLIDATED BALANCE SHEETS At December 31, 2003 and 2002
CONSOLIDATED STATEMENTS OF CASH FLOWS For the Three Years Ended December 31, 2003, 2002 and 2001
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME For the Three Years Ended December 31, 2003, 2002 and 2001
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

13

---

 

INDEPENDENT AUDITORS’ REPORT

 

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, 2003 and 2002, 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, 2003. 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 auditing standards generally accepted in the United States of America. 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, 2003 and 2002, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America.

 

As discussed in Note 1 to the consolidated financial statements, the Company adopted the provisions of Financial Accounting Standard No. 142, Goodwill and Other Intangible Assets, on January 1, 2002.

 

 

Minneapolis, Minnesota
February 2, 2004

 

14

 

Consolidated Statements of Earnings

TENNANT COMPANY AND SUBSIDIARIES

 

(In thousands, except per share data)

 

Years ended December 31		2003			2002			2001
Net sales		$	453,962		$	424,183		$	422,425
Cost of sales		272,285			254,360			251,922
Gross profit		181,677			169,823			170,503
Operating expense (income):
Research and development expenses		16,696			16,331			16,578
Selling and administrative expenses		142,306			133,914			136,440
Restructuring charges		—			4,002			9,962
Pension settlement gain		—			—			(5,928		)
Total operating expenses		159,002			154,247			157,052
Profit from operations		22,675			15,576			13,451
Other income (expense):
Interest income		1,441			1,891			2,133
Interest expense		(833		)	(1,381		)	(2,131		)
Net foreign currency transaction gains (losses)		(889		)	(752		)	241
Miscellaneous income (expense), net		89			(436		)	(248		)
Total other income (expense)		(192		)	(678		)	(5		)
Profit before income taxes		22,483			14,898			13,446
Income tax expense		8,328			6,633			8,838
Net earnings		$	14,155		$	8,265		$	4,608
Basic earnings per share		$	1.58		$	0.92		$	0.51
Diluted earnings per share		$	1.56		$	0.91		$	0.50

 

See accompanying notes to consolidated financial statements.

 

15

 

Consolidated Balance Sheets

TENNANT COMPANY AND SUBSIDIARIES

 

(In thousands, except shares and per share data)

 

December 31		2003			2002
Assets
CURRENT ASSETS
Cash and cash equivalents		$	24,587		$	16,356
Receivables:
Trade, less allowance for doubtful accounts ($5,545 in 2003 and $5,137 in 2002)		82,411			77,002
Other, net		3,229			769
Net receivables		85,640			77,771
Inventories		54,682			58,941
Prepaid expenses		2,494			2,416
Deferred income taxes, current portion		8,967			7,417
Total current assets		176,370			162,901
Property, plant and equipment, net		61,121			69,153
Deferred income taxes, long-term portion		1,609			3,688
Goodwill		17,812			16,995
Intangible assets, net		—			725
Other assets		1,961			2,775
Total assets		$	258,873		$	256,237
Liabilities and Shareholders’ Equity
CURRENT LIABILITIES
Current debt and collateralized borrowings		$	1,030		$	14,948
Accounts payable, accrued expenses and deferred revenues		58,477			55,401
Total current liabilities		59,507			70,349
LONG-TERM DEBT		6,295			5,000
LONG-TERM EMPLOYEE-RELATED BENEFITS		27,455			26,743
Total liabilities		93,257			102,092
COMMITMENTS AND CONTINGENCIES (Notes 9 and 11)
SHAREHOLDERS’ EQUITY
Preferred stock of $0.02 par value per share, authorized 1,000,000; none issued		—			—
Common stock of $0.375 par value per share, authorized 30,000,000; issued and outstanding 8,994,745 shares in 2003 and 8,981,417 shares in 2002		3,385			3,380
Additional paid-in capital		355			—
Unearned restricted shares		(551		)	(612		)
Retained earnings		168,180			161,281
Accumulated other comprehensive loss		(338		)	(3,586		)
Receivable from ESOP		(5,415		)	(6,318		)
Total shareholders’ equity		165,616			154,145
Total liabilities and shareholders’ equity		$	258,873		$	256,237

 

See accompanying notes to consolidated financial statements.

 

16

 

Consolidated Statements of Cash Flows

TENNANT COMPANY AND SUBSIDIARIES

 

(In thousands)

 

Years ended December 31		2003			2002			2001
CASH FLOWS RELATED TO OPERATING ACTIVITIES
Net earnings		$	14,155		$	8,265		$	4,608
Adjustments to net earnings to arrive at operating cash flow:
Depreciation and amortization		13,879			16,947			19,282
Deferred tax expense		801			1,626			1,715
Tax benefit on ESOP and stock plans		(272		)	(356		)	(468		)
Provision for bad debts and returns		1,561			2,116			2,016
Changes in operating assets and liabilities:
Accounts receivable		(10,286		)	(7,482		)	14,103
Inventories		8,068			(7,776		)	5,622
Accounts payable, accrued expenses and deferred revenues		2,057			6,378			(8,746		)
Other current/noncurrent assets and liabilities		1,874			31			(4,931		)
Other, net		(1,367		)	(530		)	940
Net cash flows related to operating activities		30,470			19,219			34,141
CASH FLOWS RELATED TO INVESTING ACTIVITIES
Acquisition of property, plant and equipment		(10,483		)	(13,072		)	(23,364		)
Proceeds from disposals of property, plant and equipment		4,092			2,649			2,820
Net cash flows related to investing activities		(6,391		)	(10,423		)	(20,544		)
CASH FLOWS RELATED TO FINANCING ACTIVITIES
Net changes in short-term borrowings		(3,229		)	(6,690		)	2,094
Payments of long-term debt		(5,000		)	—			(5,000		)
Proceeds from issuance of common stock		1,588			1,509			1,874
Purchase of common stock		(2,676		)	(4,628		)	(5,035		)
Dividends paid		(7,528		)	(7,373		)	(7,244		)
Principal payment from ESOP		1,065			968			1,678
Net cash flows related to financing activities		(15,780		)	(16,214		)	(11,633		)
Effect of exchange rate changes on cash and cash equivalents		(68		)	(9		)	307
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		8,231			(7,427		)	2,271
Cash and cash equivalents at beginning of year		16,356			23,783			21,512
CASH AND CASH EQUIVALENTS AT END OF YEAR		$	24,587		$	16,356		$	23,783
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Collateralized borrowings incurred for operating lease equipment		$	1,756		$	1,761		$	1,979
Capital expenditures funded through capital leases		$	215		—			—

 

See accompanying notes to consolidated financial statements.

 

17

 

Consolidated Statements of Shareholders’ Equity and Comprehensive Income

TENNANT COMPANY AND SUBSIDIARIES

 

(In thousands, except shares and per share data)

 

		2003					2002					2001
Years ended December 31		Shares		Amount			Shares		Amount			Shares		Amount
COMMON STOCK
Beginning balance		8,981,417		$	3,380		9,036,095		$	3,389		9,052,789		$	3,395
Issue stock for employee benefit plans and directors		90,810		34			69,116		37			113,449		43
Purchase of common stock		(77,482	)	(29		)	(123,794	)	(46		)	(130,143	)	(49		)
Ending balance		8,994,745		$	3,385		8,981,417		$	3,380		9,036,095		$	3,389
ADDITIONAL PAID-IN CAPITAL
Beginning balance				$	—				$	383				$	1,544
Issue stock for employee benefit plans and directors				1,604					2,287					3,825
Purchase of common stock				(1,249		)			(2,670		)			(4,986		)
Ending balance				$	355				$	—				$	383
COMMON STOCK SUBSCRIBED
Beginning balance		—		$	—		—		$	—		9,575		$	459
Issue stock for employee benefit plans		—		—			—		—			(9,575	)	(459		)
Ending balance		—		$	—		—		$	—		—		$	—
UNEARNED RESTRICTED SHARES
Beginning balance				$	(612	)			$	(278	)			$	(905	)
Restricted share activity, net				61					(334		)			627
Ending balance				$	(551	)			$	(612	)			$	(278	)
RETAINED EARNINGS
Beginning balance				$	161,281				$	161,945				$	164,113
Net earnings				14,155					8,265					4,608
Dividends paid, $0.84, $0.82 and $0.80, respectively, per common share				(7,528		)			(7,373		)			(7,244		)
Issue stock for employee benefit plans and directors				1,398					—					—
Purchase of common stock				(1,398		)			(1,912		)			—
Tax benefit on ESOP and stock plans				272					356					468
Ending balance				$	168,180				$	161,281				$	161,945
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)(1)
Beginning balance				$	(3,586	)			$	(6,247	)			$	(6,886	)
Foreign currency translation adjustments				3,248					2,661					639
Ending balance				$	(338	)			$	(3,586	)			$	(6,247	)
RECEIVABLE FROM ESOP
Beginning balance				$	(6,318	)			$	(7,221	)			$	(8,933	)
Principal payments				1,065					968					1,678
Shares allocated				(162		)			(65		)			34
Ending balance				$	(5,415	)			$	(6,318	)			$	(7,221	)
Total shareholders’ equity				$	165,616				$	154,145				$	151,971

 

(1) Reconciliations of net earnings to comprehensive income are as follows:

 

Net earnings				$	14,155				$	8,265				$	4,608
Foreign currency translation adjustments				3,248					2,661					639
Comprehensive income				$	17,403				$	10,926				$	5,247

 

The company had 30,000,000 authorized shares of common stock as of December 31, 2003, 2002 and 2001.

 

See accompanying notes to consolidated financial statements.

 

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