UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K10–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 if the registrant is a well-known seasoned issuer, as defined by Rule 405 of the Securities Act.    Yes [  ]   No [X]   

        Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15 (d) of the Act.    Yes [  ]   No [X]   

        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.    Yes [X]   No [  ]   

        Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

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

        $368,471,858 is the$313,399,936 aggregate market value of common stock held by non-affiliates as of June 30, 2004.2005.

9,006,0529,273,267 shares outstanding at February 25, 200522, 2006

DOCUMENTS INCORPORATED BY REFERENCE

20052006 Proxy – Part III (Partial)

Tennant Company
Form 10-K10–K
Table of Contents

TENNANT COMPANY

20042005

ANNUAL REPORT

Form 10-K10–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 productssolutions 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"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 28page 30 of this Form 10-K.10–K. Nearly all of the Company’s foreign investments in assets reside within theThe Netherlands, the United Kingdom, Japan, Australia, Canada, France, Germany, Spain, Austria and Austria.China.

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 5080 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 onenone 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 onenone 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 2005, 2004 2003 and 2002,2003, respectively, the Company spent $19,351,000, $17,198,000 $16,696,000 and $16,331,000$16,696,000 on research and development activities relating to the development of new products orand 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 persons2,496 people in worldwide operations as of December 31, 2004.2005.

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Access to Information on the Company’s Website

        The Company makes available free of charge, through the Company’s website atwww.tennantco.com, 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 1A – Risk Factors

        The following are significant factors known to us that could materially adversely affect our business, financial condition, or operating results.

We may encounter difficulties obtaining raw materials needed to manufacture our products and the prices of these materials are subject to fluctuation.

        As a manufacturer, our sales and profitability are dependent upon availability and cost of raw materials, which are subject to price fluctuations, and the ability to control or pass on an increase in costs of raw materials to our customers. We purchase raw materials, such as steel, rubber, and petroleum-based resins, for use in our manufacturing operations. The availability of these raw materials is subject to market forces beyond our control. Under normal circumstances, these materials are generally available on the open market from a variety of sources. From time to time, however, the prices and availability of these raw materials fluctuate due to global market demands, which could impair our ability to procure necessary materials, or increase the cost of such materials. Inflationary and other increases in the costs of these raw materials have occurred in the past and may recur from time to time, and our performance depends in part on our ability to incorporate changes in costs in the selling prices for our products.

        Given the worldwide steel market conditions, we have experienced cost increases in our steel-based raw materials and component parts. 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. We do not use derivative commodity instruments to manage our exposure to changes in commodity prices such as steel, oil, and gas. Any fluctuations in the supply or prices for any of these raw materials could have a material adverse affect on our profit margins and financial condition.

We are subject to risks associated with changes in foreign currency exchange rates.

        We are exposed to market risks from changes in foreign currency exchange rates. As a result of our increasing international presence, we have experienced an increase in transactions and balances denominated in currencies other than the U.S. dollar. There is a direct financial impact of foreign currency exchange when translating profits from local currencies to U.S. dollars. Our primary exposure is to transactions denominated in the Euro, Australian and Canadian dollar, Japanese yen and the British pound. In 2006, we will also begin to have a foreign currency exchange impact related to the Chinese yuan. Any significant change in the value of the currencies of the countries in which we do business against the U.S. dollar could affect our ability to sell products competitively and control our cost structure. Because our products are primarily manufactured in the United States, a stronger U.S. dollar generally has a negative impact on results from operations outside the United States while a weaker dollar generally has a positive effect. Unfavorable changes in exchange rates between the U.S. dollar and these currencies impacts the cost of our products sold internationally and could significantly reduce our reported sales and earnings. We periodically enter into 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. However, all foreign currency exposures cannot be fully hedged, and there can be no assurances that our future results of operations will not be adversely affected by currency fluctuation.

If the United States economy or global economies slow down, the demand for our products could decrease and our revenue may be adversely affected.

        The demand for our products and services is dependent upon the overall success and general economic well-being of the U.S. and the foreign economies in which we conduct business. We are primarily susceptible to economic downturns in North America, Europe, the Middle East, Asia, Japan, Latin America, and Australia. The global economy affects overall capital spending by businesses and consumers. An economic slowdown in the U.S. or abroad could result in a decrease in actual and projected spending on capital equipment. If, as a result of general economic uncertainty or otherwise, companies reduce their spending levels, such a decrease in spending could substantially reduce demand for our products and services and negatively impact our operating results.

Our inability to achieve certain planned operational efficiencies may adversely affect our strategic objectives, profit margins, and our earnings growth.

        As a manufacturing and service company operating with facilities, inventories, and workforce, our operations have been, and may continue to be, adversely affected by our ability to control costs and achieve planned operational efficiencies. We continuously endeavor to lower our cost structure through various savings measures, including lower-cost sourcing alternatives and consolidation of higher-cost manufacturing facilities. In support of this strategy, we plan to reallocate production activities among our manufacturing plants to reduce facilities, logistics, labor and other costs. We plan to exit a manufacturing facility in Minnesota in 2007. Our operating results may be adversely affected if we are unable to find lower-cost sources for our materials, shift production from higher-cost facilities, or cost-effectively expand our existing manufacturing facilities.

Our strategic plans include international expansion. Our failure to meet the challenges associated with international expansion could adversely impact our ability to grow our business and our financial condition.

        We plan to continue international expansion of our product sales and manufacturing operations, which will require significant management attention and financial resources. There are certain risks inherent in doing business in international markets. We must ensure compliance with the laws and regulations of foreign governmental and regulatory authorities of each country in which we conduct business. Our international operations could be adversely affected by changes in political and economic conditions, trade protection measures, restrictions on repatriation of earnings, or changes in regulatory requirements that restrict the sales of our products or increase our costs. We may encounter difficulties in collecting receivables, enforcing intellectual property rights, staffing and managing new foreign operations, achieving cost-reduction strategies because of, among other things, competitive conditions overseas, product acceptance in already established domestic markets, or certain cultural barriers. We may experience increased infrastructure costs including costs for legal, tax, accounting and information technology services. Failure of our products to succeed in the global marketplace could reduce our revenues and margins, thereby adversely impacting our financial condition, results of operations, and timing of our planned business expansion.

We are subject to risks associated with developing innovative products and technologies, which could delay the timing and success of new product releases.

        Our products are sold in competitive markets throughout the world. Competition is based on product features and design, brand recognition, reliability, durability, technology, breadth of product offerings, price, customer relationships, and after-sale service. Although we believe that the performance and price characteristics of our products will provide competitive solutions for

our customers’ needs, there can be no assurance that our customers will continue to choose our products over products offered by our competitors.

        The market for our products is characterized by changing technological and industry standards. Our product lines may be threatened by these new technologies or market demands for competitors’ products may reduce the value of our current product lines. Our success is based in part on our ability to develop innovative new products and bring them to market more quickly than our competitors. Our ability to compete successfully will depend on our ability to enhance and improve our existing products, to continue to bring innovative products to market in a timely fashion, to adapt our products to the needs and standards of our customers and potential customers, and to continue to improve operating efficiencies and lower manufacturing costs. Product development requires substantial investment by us. If our products, markets and services are not competitive, we may experience a decline in sales, pricing, and market share, which adversely impacts revenues, margin, and the success of our operations.

If we are unable to smoothly transition management into senior leadership roles and responsibilities, and attract and retain qualified personnel, we may not be able to meet our strategic objectives.

        The Board of Directors has recently appointed a new President and Chief Executive Officer. Our ability to meet strategic objectives will depend on the continued contributions of our existing senior management team and the smooth transition of other newly appointed members into their new roles within the leadership team.

        Our future success will also depend on our ability to identify, attract and retain other highly qualified manufacturing, service, managerial, technical, sales, and customer service personnel. The loss or interruption of services of any of our key personnel could make is difficult for us to manage our business and meet key objectives, which could impede our ability to execute our business plans.

We are subject to product liability claims and product quality issues that could adversely affect our operating results or financial condition.

        Our business exposes us to potential product liability risks that are inherent in the design, manufacturing and distribution of our products. If product liability claims are brought against us for damages that are in excess of our insurance coverage or for uninsured liabilities and it is determined we are liable, our business could be adversely impacted. If products are used incorrectly by our customers, injury may result leading to product liability claims against us. Any losses we suffer from any liability claims, and the effect that any product liability litigation may have upon the reputation and marketability of our products, may have a negative impact on our business and operating results. Some of our products or product improvements may have defects or risks that we have not yet identified that may give rise to product quality issues, liability and warranty claims. We could experience a material design or manufacturing failure in our products, a quality system failure, other safety issues, or heightened regulatory scrutiny that could warrant a recall of some of our products. Any unforseen product quality problems could result in loss of market share, reduced sales, and higher warranty expense.

We may consider acquisition of suitable candidates to accomplish our growth objectives. We may not be able to successfully integrate the businesses we acquire.

        We may consider, as part of our growth strategy, to supplement our internal growth through acquisitions of complementary businesses or products. We have engaged in acquisitions in the past and believe future acquisitions may provide meaningful opportunities to grow our business and improve profitability. Acquisitions allow us to enhance the breadth of our product offerings and expand the market and geographic participation of our products and services. However, our success in growing by acquisition is dependent upon identifying businesses to acquire and integrating the newly acquired businesses with our existing businesses. We may incur difficulties in the realignment and integration of business activities when assimilating the operations and products of an acquired business or in realizing projected efficiencies, cost savings, revenue synergies, and profit margins. Acquired businesses may not achieve the levels of revenue, profit, productivity or otherwise perform as expected. We are also subject to incurring unanticipated liabilities and contingencies associated with the acquired entity that are not identified or fully understood in the due diligence process. Current and/or future acquisitions may not be successful or accretive to earnings if the acquired businesses do not achieve expected financial results.

We may not be able to adequately acquire, retain and protect our proprietary intellectual property rights which could put us at a competitive disadvantage.

        We rely on trade secret, copyright, trademark and patent laws and contractual protections to protect our proprietary technology and other proprietary rights. Our competitors may attempt to copy our products or gain access to our trade secrets. Notwithstanding the precautions we take to protect our intellectual property rights, it is possible that third parties may illegally copy or otherwise obtain and use our proprietary technology without our consent. Any litigation concerning infringement could result in substantial costs to us and diversions of our resources, either of which would adversely affect our business. In some cases, there may be no effective legal recourse against duplication of products or services by competitors. Intellectual property rights in foreign jurisdictions may be limited or unavailable. Patents of third parties also have an important bearing on our ability to offer some of our products and services. Our competitors may obtain patents related to the types of products and services we offer or plan to offer. Any infringement by us on intellectual property rights of others could result in litigation and adversely affect our ability to continue to provide, or could increase the cost of providing, our products and services.

Environmental compliance costs and liabilities could increase our expenses and adversely affect our financial condition.

        Our manufacturing operations and our past and present ownership and operations of real property are subject to extensive and changing federal, state, and local environmental laws and regulations, as well as those of other countries pertaining to the handling or discharge of hazardous materials into the environment. We must conform our operations and properties to these laws and adapt to regulatory requirements in the countries in which we operate as these requirements change. We expect to continue to incur costs to comply with environmental laws and regulations. We may also be identified as a responsible party and be subject to liability relating to any investigation and clean-up of current or former properties that have been used for industrial purposes or the generation of hazardous substances in our operations. These laws and regulations can also result in the imposition of substantial fines and sanctions for violations, and could require the installation of costly pollution control equipment or operational changes to limit pollution emissions or decrease the likelihood of accidental hazardous substance releases. Imposition of new environmental laws and regulations, stricter enforcement of existing laws and regulations, or discovery of previously unknown contamination could require us to incur costs, or become the basis for new or increased liabilities, that could have a material adverse effect on our business, financial condition, or results of operations.

ITEM 1B – Unresolved SEC Staff Comments

        None.

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.Kingdom and Shanghai, China. 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, 2411, 26 and 2527 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 2004.2005.

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, 2004,2005, there were approximately 5,5007,500 shareholders. The common stock price was $39.65$54.20 per share on DecemberJanuary 31, 2004.2006.

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

        DIVIDEND INFORMATION – Cash dividends on Tennant’s common stock have been paid for 6162 consecutive years. Cash dividends increased for the 33rd34th consecutive year to $0.86$0.88 per share in 2004,2005, an increase of $0.02 per share over 2003.2004. Dividends generally are declared each quarter. Following are the remaininganticipated record dates anticipated for 2005:2006: May 31, 2005,2006, August 31, 20052006 and November 30, 2005.2006.

        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 – DuringIn November 2004, an additionalTennant Company’s Board of Directors authorized the repurchase of 400,000 shares were authorizedof our common stock 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 47,420 shares delivered or attested to in satisfaction of the exercise price and/or tax withholding obligations by employees who exercised stock options or restricted stock under employee stock compensation plans.

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-taxafter–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 productssolutions 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.

        Tennant achieved significant improvements in our 2005 results with record net sales of $552.9 million and a 73% increase in diluted earnings per share to $2.52. Current year growth in net sales of 8.9% was complemented by a year-over-year improvement of 64% in operating profit to $34.8 million, driven in part by a 2.6 percentage point increase in gross margin. Sales of new products, launched primarily in 2004, contributed about half of the growth in net sales. Our 2004 resultscontinued efforts to improve operating efficiencies and reduce costs enabled us to leverage this growth in net sales into improved profitability. The improvements in profitability were primarily influenced by three external factors:accomplished despite rising costs for raw materials and other purchased components, as we were able to successfully mitigate the economic growth ratesimpact of cost increases through price increases. A decrease in the countrieseffective tax rate of 2.9 percentage points also contributed to the improved profitability. Partially offsetting the improvement was an increase in whichselling and administrative expenses of 10.2%, primarily due to higher performance-based incentive compensation.

        Tennant’s financial position remains strong, allowing us to continue to reinvest in innovative product development and new systems capabilities. We ended 2005 with a debt-to-capital ratio of 2.0% and $41.3 million in cash and cash equivalents. We generated operating cash flows of $44.2 million during 2005, an increase of 20.6% over 2004.

        We closed the year with H. Chris Killingstad assuming the Chief Executive Officer role after serving as the Vice President of North America since April 2002. In addition, we selllaunched our 2006 corporate priorities that focus on leveraging our global cost structure through expansion in China, global sourcing, creating a lean enterprise, continuous process improvement as well as growth through innovation and expanded market coverage.

        During the fourth quarter of 2005, we launched initiatives to establish a manufacturing facility in China and rationalize our global manufacturing footprint. During 2006, we expect to incur $3.6 million in costs associated with these initiatives. In connection with the manufacturing footprint rationalization, the company anticipates selling its Maple Grove, Minnesota facility. While the company cannot estimate the impact of selling this facility in 2006 because of the uncertainty of the transaction price and timing, the company anticipates a substantial gain on the sale. Through these initiatives and by establishing Asia as a key source for parts and components, we expect to broaden our global sourcing capabilities, reduce product costs and improve operating efficiencies over the next three to five years.

        In addition, we will continue our efforts to transform Tennant into a lean enterprise. Through the adoption of lean manufacturing principles and continuous focus on process improvement, we will strive to become more efficient, better employ automation and lower our operating costs. During 2006, we plan to further invest in our systems capabilities to enhance customer relationship management, global supply chain and financial analysis capabilities.

        Lastly, we believe we can continue to grow our revenue through innovation in both the products foreign currency exchange rates and prices of certain commodities that are used in the manufactureservices we offer and expansion of our products. Eachmarket coverage. In 2006, new product launches are planned for all market segments. We plan to continue our efforts to build a profitable growth platform in Europe and expand our market coverage in our other international markets including China, Eastern Europe, Brazil, India and Mexico.

        These initiatives should also support our efforts to meet the business challenges we face. Current challenges facing Tennant include successful mitigation, primarily through price increases, of these external factorscontinued cost increases for raw materials and their impact onother purchased components due to rising commodity costs. Although management believes that steel prices have stabilized, we expect to see a continued trend of rising oil and gas prices driving increases in our results are described below.cost of fuel and petroleum-based products in 2006.

        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 demandMacro-economic indicators for our products and growthindustry showed general improvement 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 2004,2005; however, the global economy remains unpredictable and we expect that economic recovery will be gradual and somewhat volatile. The relative strength or weakness of the global economies in 2005 will2006 may impact demand for our products.products and services in the markets we serve in 2006.

        Our results in 2004 continuedcontinue to be favorably impacted by weaknesschanges in value of the U.S. dollar primarily against the Euro, the Australian and Canadian dollars, the British pound and the Japanese yen. The direct financial impact ofIn 2006, we will also begin to have a 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 additionrelated 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 includesChinese yuan. To the effect on sales volumes within local economies and the impact of pricing actions taken as a result of foreign exchange rate fluctuations. Ifextent the applicable exchange rates continue to strengthenweaken relative to the U.S. dollar, the related direct foreign currency exchange effect would continue to have a favorablean unfavorable 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.2006 results. If the prices of these commodities continueapplicable exchange rates strengthen relative to increase,the U.S. dollar, our results couldwould 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.favorably impacted.

Historical Results

        The following compares the historical results of operations for the years ended December 31, 2005, 2004 2003 and 20022003 in dollars and as a percentage of net sales (dollars in thousands, except per share amounts):

Consolidated Financial Results

In 2005, net earnings increased 71.4% to $22.9 million or $2.52 per diluted share. Net earnings were impacted by:

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

In 2003,        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 earnings increased 71.3%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 net sales, gross margin, operating expenses and the effective tax rate. The key drivers we focus on to $14.2 million or $1.56 per diluted share. Net earnings were impacted by: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.

Net Sales

        In 2004,2005, consolidated net sales of $552.9 million increased 8.9% from 2004. Consolidated net sales of $507.8 million in 2004 increased 11.9% from 2003. Consolidated net sales of $454.0 million in 20032003. In 2005, growth was driven by increases in all three geographic regions and all product categories. Growth in equipment sales was attributable to volume growth, primarily from new products, as well as price increases in certain geographic regions. 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 7.0% from $424.2 millionnet sales by approximately 1% in 2002.2005 and approximately 3% in 2004. 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 2005, North American net sales increased 8.3% to $370.1 million compared with $341.9 million in 2004. Growth in net sales was driven by increases in all product categories. The growth in equipment sales was primarily driven by volume increases from the continued success of new products launched in the latter part of 2004 and expanded market coverage as well as price increases. Growth in service and parts and consumables also contributed to the increase in North American net sales when compared to 2004.

        In 2004, North American net sales of $341.9 million increased 6.9% to $341.9 million compared with $319.7 million into 2003. Growth in net 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 and 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 20042005 increased 29.5%10.4% to $115.0$126.9 million compared to 2003.2004. This increase was driven by growth in service, parts and

consumables and equipment sales. Increases in service and parts and consumables were primarily due to expanded market coverage, while increases in equipment sales were driven by volume increases resulting from new products, price increases and expanded market coverage. In addition, the shipment of a large order to a new customer in the fourth quarter of 2005 contributed about 3% to Europe’s 2005 net sales similar to the large order which occurred in the first quarter of 2004. Positive direct foreign currency exchange effects increased European net sales by approximately 1% in 2005.

        European net sales in 2004 were $115.0 million, up 29.5% compared to 2003 net sales of $88.8 million. The acquisition of Walter-Broadley in January 2004 added about 14% to Europe’s 2004 net 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.growth.

        Other International – Other international net sales for 20042005 totaled $51.0$55.9 million, up 12.0%9.6% from 2003.2004. Overall growth in net sales was primarily driven by volume growth due to new products as well as stronger sales in certain markets resulting from strengthening economies. Positive direct foreign currency exchange effects increased net sales in other international markets by approximately 1% in 2005.

        Other international net sales in 2004 were $51.0 million, an increase of 12.0% over 2003 net sales of $45.5 million. Positive direct foreign currency exchange effects increased net 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 internationalGross Profit

        Gross profit margin improved 2.6 percentage points to 42.5%. Gross profit margin in 2005 was favorably impacted by operating efficiencies including cost-reduction actions taken in 2004, improved overhead absorption, and decreased net sales in 2003 were $45.5 million, an increase of 17.9% over 2002 sales of $38.6 million. Positive directlogistics costs as well as favorable foreign currency

exchange effects increased exchange. Also contributing to gross margin improvement was a favorable sales by approximately 8%mix of products sold, including a higher percentage of direct sales which have higher gross margins. In addition, price increases implemented in 2003 compared to 2002. The remaining increasethe latter part of 2004 and early in other international sales in 2003 compared with 2002 was primarily due to2005 have neutralized the impact of higher equipment sales due to strengthening economies and success selling new products in several foreign markets including Asia, the Middle East and Australia.

Gross Profitsteel costs that had adversely affected 2004 gross margins.

        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 pricescost of steel, oilraw materials and gas,other product components, 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 tobeen demonstrated through the development and launchsuccess of products including ReadySpace™ReadySpace^® carpet cleaning technology, and the T Series automatic scrubbers, in 2004, and FaST™ and Centurion™ in 2002.FaST^® technology. 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 $2.2 million, or 12.5%, in 2005 compared to 2004 and increased 0.1% to 3.5% as a percentage of net sales in 2005. Research and development expenses increased $0.5 million, or 3.0%, in 2004 compared to 2003, but declined 0.3% as a percentage of net 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 approximately 3-4% percent of net sales annually.

        Selling and Administrative Expenses –S&A expenses increased 15.2%10.2% to $180.7 million from $164.0 million in 2004. The increase in S&A expenses was primarily due to an increase in performance-based incentive compensation expense, including additional expense resulting from $142.3modifications to our management compensation program which discontinued annual employee stock option grants. Our modified program is primarily comprised of performance-based shares that are expensed over the performance period instead of stock option grants, for which there is currently no expense. Previously issued but unvested stock options will be expensed beginning in 2006 as discussed under “New Accounting Pronouncements.”

        S&A expense also increased in 2005 due to expanded sales and service market coverage, primarily in Europe, an increase in bad debt expense reflecting increased collection risk for certain customers, senior management transition costs, higher fuel costs for sales and service fleet vehicles and Sarbanes-Oxley compliance costs.

        S&A expenses increased by $21.7 million, or 15.2%, in 2004 compared to 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 asOther Income (Expense)

        The change in other income (expense) primarily results from a percentage of sales were 32.3% for 2004, up from 31.3% compareddecrease in interest expense due to 2003. This increase is primarily the result of the $2.3 million severance charge as well as the additional marketinga reduction in debt outstanding 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 compensationinterest income, partially offset by an increase in miscellaneous expense anddue to a $0.8 million contribution 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.Tennant Foundation.

Income Taxes

        Our effective income tax rate was 37.4%34.5%, 37.0%37.4% and 44.5%37.0% for the years 2005, 2004 2003 and 2002,2003, respectively. The 2004 effective tax rate was favorably impacted by the resolution of certain outstanding state, federal and federalforeign tax matters and a benefit resulting fromfavorably impacted the release of a valuation allowance on a foreign capital loss carryforward. The 20032005 effective rate was impacted by a favorable settlement of a foreign tax audit and a more favorable mix of the taxable earnings by country.rate. 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%2-4% 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 towhich will phase out the ETI Act tax benefit over the next two years.during 2005 and 2006. 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 bewas substantially offset by the phase-in of the U.S. manufacturing deduction. We expect the impact in 2006 will be similar to 2005. For 20062007 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.

Liquidity and Capital Resources

        During 2004,2005, our financial condition remained strong.continued to strengthen. Our debt-to-total-capital ratio was 2.0% at December 31, 2005, compared with 4.8% at December 31, 2004, compared with 4.2% at December 31, 2003.2004. At December 31, 2004,2005, our capital structure was comprised of $7.7$2.2 million of current debt, $1.0$1.6 million of long-term debt and $174.0$193.1 million of shareholders’ equity.

        As of December 31, 2004,2005, we had available committed and uncommitted lines of credit totaling $52$51 million, with terms generally one year or less, and a $1$0.8 million letter of credit outstanding. At December 31, 2004,2005, we were in compliance with all debt covenants.

        Cash, cash equivalents and short-term investments totaled $22.9$41.3 million at December 31, 2004, down 6.9%2005, up 80.4% from $24.6$22.9 million as of December 31, 2003.2004. 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 2.4 at December 31, 2005, and 2.3 at December 31, 2004, and 3.0 at December 31, 2003, based on working capital of $106.8$122.6 million and $116.9$106.8 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 2005.2006.

        Our contractual cash obligations and commitments at December 31, 2004,2005, are summarized in the following table (in thousands):

        On-balance Sheet Obligations – Our debt obligations totaling $8.7$3.8 million as of December 31, 2004,2005, as described in Note 6 to the Consolidated Financial Statements, are primarily comprised of notes payable due in 2005, capital lease obligations, collateralized borrowings and collateralized borrowings.notes payable. 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$18.1 million as of December 31, 2004,2005, are not included in the table above.contractual cash obligations and commitments table. We expect to contribute approximately $1.1$1.3 million in total to our U.S. Retiree, U.S. Nonqualified, U.K. Pension and the German Pension Plans in 2005.2006. 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$6.3 million as of December 31, 2004.2005. We expect to distribute approximately $4.9$1.1 million of this obligation in 2005.2006. 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 severanceother long-term arrangements totaling $1.6$3.4 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 statementsConsolidated 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,July 2005, we entered into aamended our 2003 purchase commitment with a third-party manufacturer totaling $12 million throughto extend the terms of the agreement from September 2007 with ato September 2008. The remaining purchase commitment of approximately $9under this agreement totaled $5.5 million as of December 31, 2004.2005. This purchase commitment has been included in the contractual cash obligations and commitments table along with 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 $1.6$1.1 million at December 31, 2004,2005, declines on a straight-line basis over the life of the contract, which expires inthrough 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$10.3 million, of which we have guaranteed $6.3$7.8 million. As of December 31, 2004,2005, we have not recorded a liability related tofor the fair value of this residual value guarantee as we estimate our future settlements to be a net gain.of $0.6 million.

Cash Requirements

        Operating Activities – Cash provided by operating activities was $44.2 million in 2005, $36.7 million in 2004, and $30.5 million in 2003, and $19.2 million in 2002.2003. The cash provided by operating activities in 2005 was impacted by strong net earnings and an increase in accounts payable, accrued expenses and deferred revenues. The increase in accounts payable, accrued expenses and deferred revenues was primarily attributable to higher accruals for annual performance-based incentive payments and timing of payments. Partially offsetting these sources of cash was an increase in receivables and a decrease in other current/noncurrent assets and liabilities. The increase in receivables was driven by higher fourth quarter sales volumes while the decrease in other current/noncurrent assets and liabilities was primarily due to a large, lump-sum payment of deferred compensation in 2005.

        In 2004, cash provided from operating activities 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 and deferred revenue increased primarily due to the timing of payments and higher accruals for annual performance-based incentives,incentive payments, 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 115 days in 20042005 reflects a continued focus on inventory reduction initiatives and the implementationintroduction 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.principles. This follows an improvement in DIOH of seven11 days in 2003.2004.

        Investing Activities – Net cash used in investing activities was $11.8 million in 2005, $32.1 million in 2004 and $6.4 million in 20032003. Cash used in investing activities in 2005 was driven by capital expenditures, partially offset by proceeds from disposition of property, plant and $10.4equipment and sales of short-term investments. Capital expenditures were $20.9 million during 2005 compared to $21.1 million in 2002.2004. Capital expenditures in 2005 included investments in new product tooling and expansion of our information system capabilities. Capital expenditures in 2004 were higher than 2003 expenditures of $10.5 million primarily due to the installation of a new powder paint system and the purchase of additional system components to provide a platform to expand the capabilities of our information systems. Proceeds from dispositions of property, plant and equipment in 2005 include $1.5 million in proceeds from the sale of a distribution center in Holland, Michigan.

        In 2006, capital spending is expected to approximate $23 to $28 million. Significant capital projects planned for 2006 include continued expansion of our information systems capabilities and investments in new product tooling as well as China expansion initiatives. Capital expenditures in 2006 are expected to be financed primarily with funds from operations.

        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 $8.1 million in 2005, $12.1 million in 2004 and $15.8 million in 20032003. In 2005, significant uses of cash included a $5.0 million scheduled debt repayment and $16.2$3.5 million in 2002.repurchases of common stock related to our share repurchase program. During 2004, $2.5 million of assumed Walter-Broadley debt was repaid, while 2003 financing activities included a $5.0repaid.

        In 2005, proceeds from issuance of common stock were $7.9 million scheduled debt payment. Other financing activitiesdriven by employee stock option exercises due to an increase in 2004 were comparable to 2003 activities.our stock price and senior management transitions during the year.

        Cash dividends increased for the 33rd34th consecutive year to $0.86$0.88 per share in 2004,2005, an increase of $0.02 per share over 2003.2004.

        DuringIn 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 2005, 2004 and 2003 approximated 92,000, 73,000 and 2002 approximated 73,000, 77,000, and 124,000, respectively. The average repurchase price was $37.66 during 2005, $39.11 during 2004 and $34.54 during 2003 and $37.38 during 2002.2003. At December 31, 2004,2005, approximately 434,000342,000 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 JulyJanuary 1, 2005,2006, as required, and plan to useusing 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$1.4 million to $700,000$1.7 million of stock-based compensation expense in the second half of 20052006 related to non-vested employeestock options, issued prior to the adoption date.including reload grants.

        Beginning in 2005, we modified our management compensation program and have replacedreplacing annual employee stock option awards with performance-based share awards. Prior to the adoption of SFAS No. 123 (R),During 2005, compensation expense under this program will bewas recognized over the performance period, with adjustments to expense for changes in the market price of Tennant stock and for the actual achievement against established targets. Upon adoption of SFAS No. 123 (R)123(R) in July 2005,January 2006, 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.

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.trade receivables. 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 net sales were 0.2% in 2005 and 0.3% in 2004 0.3% in 2003 and 0.4% in 2002.2003. As of December 31, 2004,2005, we had $4.0$3.7 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, 2004,2005, we had $5.5$4.7 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 net 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 net sales was 1.3% in 2005, 1.5% in 2004 and 1.9% in 2003 and 1.6% in 2002.2003. As of December 31, 2004,2005, we had $6.2$6.1 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, 2004,2005, was $11.8$10.9 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

        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’sour other Securities and Exchange Commission filings.filings, including disclosures under “Risk Factors” in this document.

        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.

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 isexposures are with the Euro, the Canadian dollar, the Australian dollar, the British pound and the Japanese yen against the U.S. dollar. In 2006, we will also begin to have a foreign currency exchange impact related to the Chinese yuan. 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$45 million and $48$51 million at the end of 20042005 and 2003,2004, respectively. The potential for material loss in fair value of foreign currency contracts outstanding and the related underlying exposures as of December 31, 2004,2005, 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, weather-related factors 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 2004,2005, our purchased material and other costs were unfavorably impacted by higher oil and gas prices.

        Increases in worldwide demand and other factors caused prices for steel and related products to increase during 2004. We do not maintain an inventory of raw or fabricated steel in excess of near-term production requirements. As a result, we experienced significant cost increases in our steel-based raw materials and component parts during 2004, which we were not able to fully mitigate with price increases. During 2005, the price of steel and related products stabilized.

        We can mitigate the risk of future raw material or other product component increases through product pricing and negotiations with our vendors. The success of these efforts will depend upon our ability to increase our selling prices in a competitive market. If the commodity prices of oil and gas remain at their current levels or continue to increase, our results couldmay be unfavorably impacted in 2005.2006.

Other Matters –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.

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 accounting and financial officer,officers, we conducted an assessment of the effectiveness of our internal control over financial reporting based on the framework inInternal Control – Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our assessment under the framework inInternal Control – Integrated Framework(COSO), our management concluded that our internal control over financial reporting was effective as of December 31, 2004.2005. Our management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 2004,2005, has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their report which is included herein.

REPORTSREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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, 2005 and 2004, 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, 2005. We also have audited management’s assessment, included in the accompanying Management’s Report on Internal Controls and Procedures, that Tennant Company and subsidiaries maintained effective internal control over financial reporting as of December 31, 2004,2005, 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 these consolidated financial statements, 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 these consolidated financial statements, 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.audits.

        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 auditaudits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audit of financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statement, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting 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 providesaudits provide a reasonable basis for our opinion.opinions.

        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, 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, 2005 and 2004, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, management’s assessment that Tennant Company maintained effective internal control over financial reporting as of December 31, 2004,2005, 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,Furthermore, in our opinion, Tennant Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004,2005, 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, 200522, 2006

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

Consolidated Statements of Earnings

TENNANT COMPANY AND SUBSIDIARIES

(In thousands, except per share data)

        See accompanying notes to consolidated financial statements.

Consolidated Balance Sheets

TENNANT COMPANY AND SUBSIDIARIES

(In thousands, except shares and per share data)

        See accompanying notes to consolidated financial statements.

17

Consolidated Statements of Cash Flows

TENNANT COMPANY AND SUBSIDIARIES

(In thousands)

        See accompanying notes to consolidated financial statements.

Consolidated Statements of Cash Flows

TENNANT COMPANY AND SUBSIDIARIES

(In thousands)