FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

Quarterly Report Under Section 13 or 15 (d)

of the Securities Exchange Act of 1934

For Quarter Ended June 30, 2002

Commission File No. 04804

TENNANT COMPANY

701 North Lilac Drive

P.O. Box 1452

Minneapolis, Minnesota  55440

Telephone No. 763-540-1200

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

The number of shares outstanding of Registrant’s common stock, par value $.375, on June 30, 2002, was 8,971,164.

TENNANT COMPANY

Quarterly Report - Form 10-Q

CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited)

(in thousands, except per share amounts)

See accompanying notes to consolidated financial statements.

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TENNANT COMPANY

Quarterly Report - Form 10-Q

CONSOLIDATED BALANCE SHEETS

(In thousands)

See accompanying notes to consolidated financial statements.

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TENNANT COMPANY

Quarterly Report - Form 10-Q

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(In thousands)

See accompanying notes to consolidated financial statements.

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TENNANT COMPANY

Quarterly Report - Form 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

(1)                      In the Company’s opinion, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments, except as noted elsewhere in the notes to the consolidated financial statements) necessary to present fairly its financial position as of June 30, 2002 and the results of its operations for the three and six-months ended June 30, 2002 and 2001, and cash flows for the six-months ended June 30, 2002 and 2001.  These statements are condensed and, therefore, do not include all of the information and note disclosures required by accounting principles generally accepted in the United States of America for complete financial statements.  The statements should be read in conjunction with the consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2001.  The results of operations for the three and six-months ended June 30, 2002 are not necessarily indicative of the results to be expected for the full year.

(2)                      Inventories

Inventories are valued at the lower of cost (principally on a last-in, first-out basis) or market.  Inventories at June 30, 2002, and December 31, 2001, consist of the following:

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

(3)                      Supplemental Cash Flow Information

Income taxes paid during the six-months ended June 30, 2002 and 2001 were $966 and $6,556 respectively.  Interest costs paid during the six-months ended June 30, 2002 and 2001 were $528 and $734, respectively.

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TENNANT COMPANY

Quarterly Report - Form 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

(4)                      Comprehensive Income

The Company reports accumulated other comprehensive income (loss) as a separate item in the shareholders’ equity section of the balance sheet.  Comprehensive income (loss) is comprised of net earnings and other comprehensive income (loss).  Other comprehensive income (loss) consists solely of foreign currency translation adjustments.  The reconciliations of net earnings to comprehensive income (loss) are as follows:

(5)       Earnings Per Share Computation

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TENNANT COMPANY

Quarterly Report - Form 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

(6)       Segment Reporting

The Company operates in one industry segment which consists of the design, manufacture and sale of products used primarily in the maintenance of nonresidential floors.  The following sets forth net sales by geographic area:

(7)       Restructuring and Other Unusual Charges

During the first quarter of 2002, the Company announced its plan to consolidate its North American distribution operations from a current network of seven distribution centers into two new facilities that will be under the ownership and management of a third-party logistics services provider.  The Company also announced plans to consolidate its European customer service function and take other streamlining actions in Europe and North America.  The Company recorded a restructuring charge of $4,004 and an inventory write-down of $500 related to these actions.  The restructuring charge consists primarily of severance, building lease costs and write-down of certain fixed assets.  The inventory write-down is classified in cost of sales.

In connection with these activities, the Company will terminate a total of approximately 140 employees.  These restructuring actions are expected to be substantially completed by March 31, 2003.

During the second quarter of 2002, the Company recorded an unusual charge of $500 for severance pertaining to the departure from the Company of its Chief Operating Officer.  This amount has been classified in selling and administrative expenses.

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TENNANT COMPANY

Quarterly Report - Form 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

During the first six-months of 2001, the Company recorded pre-tax charges of $9,962 for restructuring and $1,007 for a write-down of inventory. The restructuring charges related to a workforce reduction and the closure of a leased plant in Germany and the transfer of its production to a contract manufacturer in the Czech Republic.  Approximately 150 employees were terminated as a result of these actions.  The restructuring charges primarily consisted of severance payments, building lease costs and write-downs of certain fixed assets.  The inventory write-down related to the closing of the leased plant in Germany and has been classified in cost of sales.  The majority of these actions were completed during 2001.

The components of the 2002 and 2001 unusual charges and the cash and noncash utilizations against the charges during the six-month period ended June 30, 2002 were as follows:

The above liabilities are included in accrued expenses.

(8)       Goodwill and Intangible Assets

In July 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) SFAS 142, Goodwill and Other Intangible Assets. SFAS 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually.  SFAS 142 also requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives.

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TENNANT COMPANY

Quarterly Report - Form 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

The Company adopted SFAS 142 effective January 1, 2002.  Had this statement been effective January 1, 2001, net earnings and diluted earnings per share for the three month period ended June 30, 2001 would have approximated $1,466 and $0.15 and $1,749 and $0.19 for the first six-months of 2001.  During the first quarter, the Company completed its initial impairment test of goodwill.  As of January 1, 2002, there was no impairment.

Intangible assets consist entirely of purchased technology and are included in other assets on the consolidated balance sheet.  The balances at June 30, 2002 and December 31, 2001 were as follows:

Amortization expense will approximate $100 per year for each of the five succeeding years.

(9)                      New Accounting Pronouncements

SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, was issued in October 2001.  SFAS 144 provides new guidance on the recognition of impairment losses on long-lived assets to be held and used or to be disposed of and also broadens the definition of what constitutes a discontinued operation and how the results of a discontinued operation are to be measured and presented.  The Company adopted the provisions of this statement on January 1, 2002.  The adoption of SFAS 144 did not have an impact on the consolidated results of operations or financial position.

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TENNANT COMPANY

Quarterly Report - Form 10-Q

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Results of Operations

Net earnings for the second quarter ended June 30, 2002, were $2.9 million or $0.32 per diluted share, on net sales of $105.8 million.  In the comparable 2001 period, the Company reported net earnings of $1.3 million or $0.14 per diluted share, on net sales of $110.8 million.  For the six-months ended June 30, 2002, net earnings were $1.6 million or $0.17 per diluted share, on net sales of $202.4 million.  In the comparable 2001 period, the Company reported net earnings of $1.5 million, or $0.16 per diluted share, on net sales of $214.4 million. Foreign currency translation effects reduced diluted earnings per share in 2002 by approximately $0.02 and $0.07 for the three and six-month periods, respectively.  This unfavorable translation effect resulted primarily from the strength of the U. S. dollar compared to the Euro, Japanese yen, Australian and Canadian dollars, although the effect decreased during the second quarter as the U.S. dollar weakened.

The Company adopted Statement of Financial Accounting Standard 142, “Goodwill and Other Intangible Assets”, effective January 1, 2002.  Had this statement been effective January 1, 2001, net earnings and diluted earnings per share for the 2001 second quarter would have approximated $1.5 million and $0.15 and $1.7 million and $0.19 for the six-month period ended June 30, 2001.

As discussed in note 7 to the consolidated financial statements, restructuring and other unusual charges of $3.3 million after tax ($4.5 million pretax) or $0.37 per diluted share were recorded during the first quarter of 2002.  Restructuring charges of $4.0 million pretax consisted primarily of severance costs, including severance related to a decision to close several North American distribution centers and transfer these distribution operations to a third-party logistics provider. In addition, management approved plans in the first quarter to consolidate and centralize customer service operations in Europe and to streamline other operations in North America. Inventory write-downs related to the consolidation of the distribution operations account for the remaining $.5 million of the unusual charges and are classified as cost of sales in the consolidated statement of earnings. These 2002 restructuring actions are expected to provide an annualized pre-tax benefit of up to $3 million beginning late in 2002.

During the second quarter of 2002, the Company recorded an unusual charge of $.3 million after tax ($.5 million pretax) or $0.03 per diluted share for severance pertaining to the departure from the Company of its Chief Operating Officer.  This amount has been classified in selling and administrative expenses.

Restructuring and unusual charges of $6.9 million after tax ($11.0 million pretax) or $0.75 per diluted share were recorded during the six-month period ended June 30, 2001.  The restructuring charges of $10 million pretax related to a workforce reduction and the closure of a leased plant in Germany and the transfer of its production to a contract manufacturer in the Czech Republic.  Approximately 150 employees were terminated as a result of these actions.  The charges primarily consisted of severance payments, building lease costs and write-downs of certain fixed assets and are classified as restructuring charges.  The inventory write-down of $1 million pretax related to the closing of the leased plant in Germany and has been classified in cost of sales.

Excluding the effects of the restructuring and other unusual charges, net earnings for the 2002 second quarter were $3.2 million or $0.35 per diluted share compared to $4.9 million or $0.53 per diluted share for the 2001 second quarter.  For the first six-months of 2002, results excluding the effects of restructuring and other unusual charges were $5.2 million or $0.57 per diluted share and $8.4 million or $0.91 per diluted share for the comparable 2001 period.

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TENNANT COMPANY

Quarterly Report - Form 10-Q

Consolidated net sales of $105.8 million for the 2002 second quarter decreased 4.5% compared to 2001 second quarter sales of $110.8 million.  Price increases benefited consolidated net sales in the 2002 second quarter by approximately 2.5%.  For the six-month period, 2002 consolidated net sales declined 5.6% to $202.4 million versus 2001.  The impact of foreign currency translation effects on sales during the second quarter and the first six-months of 2002 were not significant. The year-over-year declines in consolidated net sales for the three and six-month periods ended June 30, 2002 resulted primarily from lower sales in North America and Europe.

North American sales for the 2002 second quarter decreased 0.9% to $78.6 million compared with the second quarter of 2001.  For the first six-months of 2002, sales of $149.3 million were down 2.8% versus the comparable 2001 period.  The decrease for both the second quarter and six-month periods was primarily due to lower sales of industrial floor maintenance equipment.  Sales of industrial floor maintenance equipment are down because of weak economic conditions in North America compared to a year ago.  Sales declines also occurred in commercial products and floor coatings, offset by increased service revenues.

In Europe, net sales for the 2002 second quarter decreased 20.1% to $16.7 million versus the comparable 2001 period.  For the first six-months, sales were $34.3 million, down 12.3% versus the first six-months of 2001.  Beginning in 2002, Europe’s fiscal year and quarterly sales correspond with the calendar year as a result of a change in fiscal year-end from November to December that was effective December 31, 2001.  Had Europe’s 2001 second quarter ended June 30 2001, sales for the 2002 second quarter would have decreased 13.0% versus the comparable 2001 quarter.  The 13.0% decline resulted primarily from weakness in European industrial markets, where recovery appears to be lagging the North American recovery.  In addition, the Company encountered aggressive price competition, primarily in Germany, which Tennant chose not to match.

In Other International, 2002 second quarter sales of $10.5 million were flat with 2001.  The 2002 second quarter benefited from the shipment of several orders that were received late in the preceding quarter that were reflected in the 2002 first quarter-end backlog.  For the six-months ended June 30, 2002, sales to other international markets totaled $18.8 million, down 13.5% from $21.7 million in the comparable 2001 period.  Weak economic conditions in the global economy, particularly in Latin America and Japan, contributed to the 13.5% decline.

Order backlog at June 30, 2002, totaled $12 million compared with $10 million at March 31, 2002, and $9 million at June 30, 2001.

Gross profit margin was 36.7% for the 2002 second quarter and 36.4% for the 2001 second quarter.  For the six-month periods ended June 30, gross profit margins were 36.5% in 2002 and 37.3% in 2001.  Adjusted to exclude unfavorable foreign currency translation effects and the impact of unusual charges, gross profit margin for the 2002 second quarter was 37.0% and 37.4% for the 2001 second quarter.  For the six-month periods ended June 30, gross profit margins excluding foreign currency translation effects and unusual charges were 36.9% in 2002 and 37.8% in 2001.  The declines in adjusted 2002 second quarter and year-to-date gross profit margins resulted primarily from the lower sales volumes, including the related sales mix effects.  Sales of North American industrial equipment products, which have a higher gross margin than both North American commercial products and service revenues, decreased on a relative percentage basis in 2002.  Sales volume declines in Europe also contributed to the decrease in second quarter and year-to-date gross margins.  These effects were partially offset by the impact of selling price increases.

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TENNANT COMPANY

Quarterly Report - Form 10-Q

Second quarter selling and administrative (S&A) expenses including unusual charges decreased from $33.9 million in 2001 to $33.8 million in 2002.  For the first six months of 2002, S&A expenses including unusual charges were $66.2 million, down 3.6% versus the first six months of 2001.  Excluding the impact of unusual charges, S&A expenses decreased due to the decline in 2002 sales, savings from various cost reduction measures initiated during 2001, offset by higher incentive compensation expenses.  For the second quarter, S&A expense as a percentage of sales increased from 30.6% in 2001 to 31.9% in 2002.  For the six-month period, S&A expenses represented 32.0% of sales in 2001 compared to 32.7% in 2002.

Net interest income for the three and six-month periods ended June 30, 2002 decreased $.1 million and $.2 million, respectively, primarily because of lower interest rates in 2002.  Other income (expense) was flat for the second quarter of 2002 compared to the second quarter of 2001, but decreased $.3 million on a year-to-date basis.  The year-to-date decrease was primarily because of currency translation losses during 2002.

Income tax expense for both the three and six-month periods ended June 30, 2002 was $2.1 million, versus $.4 million and $.5 million for the comparable periods in 2001.  Income tax expense in 2001 was lower in both the three and six-month periods primarily as a result of the tax effects of the restructuring and other unusual charges described in note 7 to the consolidated financial statements.  The first quarter expenses from European restructuring initiatives were not tax benefited.  Excluding restructuring and other unusual charges, the effective tax rate for the six-month periods ended June 30, 2002 and 2001 were 40% and 35.5%, respectively.  The increase in the effective rate is primarily because of a change in the mix of U.S. and foreign earnings.

Liquidity and Capital Resources

Cash and cash equivalents totaled $11.0 million at June 30, 2002, compared with $15.4 million at June 30, 2001.  The Company generated $6.5 million of operating cash flows during the first six-months of 2002 compared with $7.4 million in the comparable 2001 period.  Net cash outflows from capital expenditures decreased to $6.9 million in 2002 from $11.1 million in 2001.  Capital expenditures in 2001 were greater because of spending on projects intended to improve financial performance through new business systems or cost savings, including investments in design systems software.  Cash outflows from financing activities increased to $12.5 million in 2002 from $2.4 million during 2001 primarily because of the paydown of short-term debt at foreign subsidiaries in 2002.  The debt-to-total-capitalization ratio was 8.3% at June 30, 2002 versus 13.3% at June 30, 2001.  The Company believes that the combination of internally generated funds and available financing sources are more than sufficient to meet the Company’s cash requirements for the next year.

Management regularly reviews the Company’s business operations with the objective of improving financial performance and maximizing its return on investment.  In this regard, the Company continues to consider actions to improve financial performance which, if taken, could result in material nonrecurring charges.

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TENNANT COMPANY

Quarterly Report - Form 10-Q

Market Risk

The Company’s market risk includes the risk of adverse changes in foreign currency exchange rates.  Foreign currency translation effects reduced diluted earnings per share by approximately $0.02 for the second quarter of 2002 and $0.07 for the year to date versus the comparable 2001 periods.  If foreign exchange rates at the end of the second quarter prevailed for the balance of 2002, the foreign exchange effects would be favorable for the remainder of 2002 compared with prior year results.  The Company uses forward exchange contracts to hedge net exposed assets in Australia, Canada, Japan and Europe.  Additional information on market risk is included in the Management Discussion and Analysis section of the Company’s Form 10-K filing for the year ended December 31, 2001.

Cautionary Statement Relevant to Forward-Looking Information

Certain statements contained in this document as well as other written and oral statements made from time to time by the Company 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.  These include factors that affect all businesses operating in a global market as well as matters specific to the Company and the markets it serves.  Particular risks and uncertainties presently facing the Company include: the ability to implement its plan to increase worldwide operational efficiencies; the success of new products; political and economic uncertainty throughout the world; inflationary pressures; the potential for increased competition in the Company’s businesses from competitors that have substantial financial resources; the potential for soft markets in certain regions including North America, Asia, Latin America and Europe; the relative strength of the U.S. dollar, which affects the cost of the Company’s products sold internationally; and the Company’s plan for growth.  The Company cautions 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.

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

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TENNANT COMPANY

Quarterly Report - Form 10-Q

PART II - OTHER INFORMATION

Item 6 - Exhibits and Reports on Form 8-K

(a)       Exhibits

(b)                     Reports on Form 8-K

Form 8-K, dated June 28, 2002, regarding an announcement that James Moar, Chief Operating Officer, left the Company effective June 30, 2002.

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TENNANT COMPANY

Quarterly Report - Form 10-Q

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

TENNANT COMPANY

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