UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 1-13215
GARDNER DENVER, INC.
(Exact name of Registrant as Specified in its Charter)
DELAWARE 76-0419383
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1800 GARDNER EXPRESSWAY
QUINCY, ILLINOIS 62301
(Address of Principal Executive Offices and Zip Code)
(217) 222-5400
(Registrant's Telephone Number, Including Area Code)
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 requirement
for the past 90 days.
Yes X No
--- ---
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes X No
--- ---
Number of shares outstanding of the issuer's Common Stock, par
value $0.01 per share, as of October 31, 2004: 19,858,503 shares.
==============================================================================
PART I
FINANCIAL INFORMATION
GARDNER DENVER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share amounts)
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ -----------------------
2004 2003 2004 2003
-------- -------- -------- --------
Revenues $182,616 $112,061 $498,341 $322,940
Costs and Expenses:
Cost of sales (excluding depreciation
and amortization) 123,296 78,198 336,457 225,123
Depreciation and amortization 5,925 3,740 16,074 11,053
Selling and administrative expenses 37,461 21,063 106,031 62,421
Interest expense 2,491 1,070 5,949 3,411
Other expense (income), net 332 230 (1,756) 133
-------- -------- -------- --------
Income before income taxes 13,111 7,760 35,586 20,799
Provision for income taxes 4,457 2,483 12,099 6,656
-------- -------- -------- --------
Net income $ 8,654 $ 5,277 $ 23,487 $ 14,143
======== ======== ======== ========
Basic earnings per share $ 0.44 $ 0.33 $ 1.26 $ 0.88
======== ======== ======== ========
Diluted earnings per share $ 0.43 $ 0.32 $ 1.23 $ 0.87
======== ======== ======== ========
The accompanying notes are an integral part of this statement.
- 2 -
GARDNER DENVER, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
2004 2003
------------- ------------
ASSETS
Current assets:
Cash and equivalents $ 48,055 $132,803
Receivables, net 152,459 81,345
Inventories, net 141,977 64,327
Deferred income taxes 8,144 3,652
Other 10,339 5,682
-------- --------
Total current assets 360,974 287,809
-------- --------
Property, plant and equipment, net 142,029 75,428
Goodwill 359,153 205,488
Other intangibles, net 127,319 10,341
Deferred income taxes -- 5,374
Other assets 10,495 5,293
-------- --------
Total assets $999,970 $589,733
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings and current maturities
of long-term debt $ 28,964 $ 16,875
Accounts payable and accrued liabilities 171,609 84,081
-------- --------
Total current liabilities 200,573 100,956
-------- --------
Long-term debt, less current maturities 309,564 165,756
Postretirement benefits other than pensions 30,936 32,110
Deferred income taxes 30,783 --
Other long-term liabilities 52,003 25,006
-------- --------
Total liabilities 623,859 323,828
-------- --------
Stockholders' equity:
Common stock, $0.01 par value; 50,000 shares
authorized; 19,850 shares issued and
outstanding at September 30, 2004 216 178
Capital in excess of par value 259,236 174,474
Treasury stock at cost, 1,736 shares at
September 30, 2004 (26,345) (25,947)
Retained earnings 125,794 102,307
Accumulated other comprehensive income 17,210 14,893
-------- --------
Total stockholders' equity 376,111 265,905
-------- --------
Total liabilities and stockholders' equity $999,970 $589,733
======== ========
The accompanying notes are an integral part of this statement.
- 3 -
GARDNER DENVER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------------
2004 2003
--------- --------
Cash flows from operating activities:
Net income $ 23,487 $ 14,143
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 16,074 11,053
Foreign currency transaction gain (1,235) --
Net gain on asset dispositions (11) (359)
Stock issued for employee benefit plans 1,768 1,904
Deferred income taxes 1,291 4,189
Changes in assets and liabilities:
Receivables (638) (2,518)
Inventories (8,324) (543)
Accounts payable and accrued liabilities (8,746) (5,568)
Other assets and liabilities, net (1,413) 1,432
--------- --------
Net cash provided by operating activities 22,253 23,733
--------- --------
Cash flows from investing activities:
Business acquisitions, net of cash acquired (292,108) (2,402)
Capital expenditures (12,301) (8,194)
Disposals of property, plant and equipment 315 940
Other (126) --
--------- --------
Net cash used in investing activities (304,220) (9,656)
--------- --------
Cash flows from financing activities:
Principal payments on long-term debt (200,998) (44,899)
Proceeds from long-term debt 315,959 27,000
Proceeds from issuance of common stock 79,557 --
Proceeds from stock options 3,475 956
Purchase of treasury stock (399) (90)
Other (1,846) (2)
--------- --------
Net cash provided by (used in)
financing activities 195,748 (17,035)
--------- --------
Effect of exchange rate changes on cash and
equivalents 1,471 1,914
--------- --------
Decrease in cash and equivalents (84,748) (1,044)
--------- --------
Cash and equivalents, beginning of period 132,803 25,667
--------- --------
Cash and equivalents, end of period $ 48,055 $ 24,623
========= ========
The accompanying notes are an integral part of this statement.
- 4 -
NOTES TO CONDENSED FINANCIAL STATEMENTS
(in thousands, except per share amounts)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements include the
accounts of Gardner Denver, Inc. and its subsidiaries ("Gardner Denver" or
the "Company"). All significant intercompany transactions and accounts have
been eliminated.
The financial information presented as of any date other than December 31
has been prepared from the books and records without audit. The accompanying
condensed consolidated financial statements have been prepared in accordance
with the instructions to Form 10-Q and do not include all of the information
and footnotes required by generally accepted accounting principles for
complete statements. In the opinion of management, all adjustments,
consisting only of normal recurring adjustments necessary for a fair
presentation of such financial statements, have been included.
These condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
incorporated by reference in Gardner Denver's Annual Report on Form 10-K for
the year ended December 31, 2003.
The results of operations for the three and nine months ended September 30,
2004 are not necessarily indicative of the results to be expected for the
full year.
STOCK-BASED COMPENSATION PLANS
As allowed under Statement of Financial Accounting Standards ("SFAS") No.
123, "Accounting for Stock-Based Compensation," the Company measures its
compensation cost of equity instruments issued under employee compensation
plans using the intrinsic value method in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees,"
and related interpretations. Stock options granted during the three and nine
months ended September 30, 2004 and 2003 were exercisable at prices equal to
the fair market value of the Company's common stock on the dates the options
were granted; and accordingly, no compensation expense has been recognized.
If the Company had accounted for stock-based compensation using the fair
value recognition provisions of SFAS No. 123 and related amendments, net
income and basic and diluted earnings per share would have been as follows:
- 5 -
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------ ----------------------
2004 2003 2004 2003
------- ------- ------- -------
Net income, as reported $ 8,654 $ 5,277 $23,487 $14,143
Less: Total stock-based employee compensation
expense determined under fair value method,
net of related tax effects (363) (292) (1,014) (916)
------ ------ ------- -------
Pro forma net income $8,291 $4,985 $22,473 $13,227
====== ====== ======= =======
Basic earnings per share, as reported $ 0.44 $ 0.33 $ 1.26 $ 0.88
====== ====== ======= =======
Basic earnings per share, pro forma $ 0.42 $ 0.31 $ 1.20 $ 0.82
====== ====== ======= =======
Diluted earnings per share, as reported $ 0.43 $ 0.32 $ 1.23 $ 0.87
====== ====== ======= =======
Diluted earnings per share, pro forma $ 0.41 $ 0.30 $ 1.18 $ 0.81
====== ====== ======= =======
Compensation costs charged against income (net of tax) for restricted stock
issued under the Company's Incentive Plan totaled $0.2 million in the nine
months ended September 30, 2003. There was no restricted stock issued in the
current year.
NEW ACCOUNTING STANDARDS
In May 2004, the FASB issued Staff Position SFAS No. 106-2, "Accounting and
Disclosure Requirements Related to the Medicare Prescription Drug,
Improvement and Modernization Act of 2003," ("FSP 106-2"). FSP 106-2
supersedes FSP 106-1, "Accounting and Disclosure Requirements Related to the
Medicare Prescription Drug, Improvement and Modernization Act of 2003," and
provides guidance on the accounting, disclosure, effective date and
transition related to the Prescription Drug Act. FSP 106-2 was effective for
the third quarter of 2004. According to an actuarial assessment, the Company
currently provides prescription drug benefits, which are actuarially
equivalent to the Medicare-prescription drug benefit, to certain retired and
other employees and will therefore qualify for the subsidy. As a result, the
Company accounted for the federal subsidy attributable to past services as
an actuarial gain, which reduced the accumulated post-retirement benefit
obligation. This actuarial gain will then be amortized in future periods in
accordance with SFAS No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions." The federal subsidy attributable to employee
service rendered in current and future periods will reduce future net
periodic postretirement benefit cost as those employees provide service. The
favorable impact to diluted earnings per share from adopting FSP 106-2 is
expected to be $0.01 in 2004 and $0.02 in 2005.
NOTE 2. ACQUISITIONS
On September 1, 2004, the Company acquired nash_elmo Holdings, LLC ("Nash
Elmo"). Nash Elmo is a leading global manufacturer of industrial vacuum
pumps. Prior to the acquisition, Nash Elmo was primarily split between two
businesses, liquid ring pumps and side channel blowers. Both businesses'
products are complementary to the Compressor and Vacuum Products segment's
existing product portfolio. The purchase price of $221.6 million including
assumed bank debt (net of cash acquired) was paid in the form of cash
($208.5 million), the assumption of certain of Nash Elmo's debt ($10.4
million) and the assumption of other liabilities stemming
- 6 -
from the transaction ($2.7 million), which will be paid in the fourth
quarter of 2004. There are no additional contingent payments or commitments
related to this acquisition.
This acquisition has been accounted for by the purchase method and
accordingly, its results are included in the Company's consolidated
financial statements from the date of acquisition. Net of cash acquired,
$210.0 million in cash was used to fund the Nash Elmo acquisition (and
related direct acquisition costs) during the third quarter. The aggregate
purchase price (including direct acquisition costs) has been allocated
primarily to receivables ($35,719); inventory ($45,749); property, plant and
equipment ($34,461); intangible assets ($178,835); other assets ($7,205);
accounts payable and accrued liabilities ($45,975); net deferred income tax
liabilities ($28,031) and other long-term liabilities ($3,398), based on
their estimated fair values at the date of acquisition. This allocation
reflects the Company's preliminary estimates of the purchase price
allocation and is subject to change upon completion of appraisals in 2005.
Further, other assets and liabilities may be identified to which a portion
of the purchase price could be allocated.
The following table summarizes the preliminary fair values of the intangible
assets acquired in the Nash Elmo acquisition:
Amortized intangible assets:
Customer lists and relationships $ 44,000
Other 12,245
Unamortized intangible assets:
Goodwill 94,590
Trademarks 28,000
--------
Total intangible assets $178,835
========
The preliminary weighted average amortization period for customer lists and
relationships and other amortized intangible assets is 20 years and 5 years,
respectively.
The total amount of goodwill that is expected to be deductible for tax
purposes is not anticipated to be significant given the stock nature of the
acquisition. The assignment of goodwill has been allocated to the Compressor
and Vacuum Products segment. This allocation is preliminary and subject to
change upon completion of appraisals. See Note 13 for additional segment
information.
On January 2, 2004, the Company effectively acquired the outstanding shares
of Syltone plc ("Syltone"), previously a publicly traded company listed on
the London Stock Exchange. Syltone, headquartered in Bradford, United
Kingdom ("U.K."), is one of the world's largest manufacturers of equipment
used for loading and unloading liquid and dry bulk products on commercial
transportation vehicles. This equipment includes compressors, blowers and
other ancillary products that are complementary to the Company's product
line. Syltone is also one of the world's largest manufacturers of fluid
transfer equipment (including loading arms, swivel joints, couplers and
valves) used to load and unload ships, tank trucks and rail cars. The
purchase price of (pounds)61.1 million including assumed bank debt (net of
cash acquired) was paid in the form of cash ((pounds)44.4 million), new loan
notes ((pounds)5.2 million) and the assumption of Syltone's existing bank
debt, net of cash acquired ((pounds)11.5 million). There are no additional
contingent payments or commitments related to this acquisition.
This acquisition has been accounted for by the purchase method and
accordingly, its results are included in the Company's consolidated
financial statements from the date of acquisition. Net of
- 7 -
cash acquired, $81.3 million in cash was used to fund the Syltone
acquisition (and related direct acquisition costs) during the first quarter.
The aggregate purchase price (including direct acquisition costs) has been
allocated primarily to receivables ($30,410); inventory ($22,413); property,
plant and equipment ($33,297); intangible assets ($92,316); accounts payable
and accrued liabilities ($41,586); bank debt, net of cash acquired
($20,570); net deferred income tax liabilities ($2,308) and other long-term
liabilities ($21,993), based on their estimated fair values at the date of
acquisition. This allocation reflects the Company's preliminary estimates of
the purchase price allocation and is subject to change upon completion of
appraisals in 2004. Further, other assets and liabilities may be identified
to which a portion of the purchase price could be allocated.
The following table summarizes the preliminary fair values of the intangible
assets acquired in the Syltone acquisition:
Amortized intangible assets:
Customer lists and relationships $19,646
Other 5,394
Unamortized intangible assets:
Goodwill 58,346
Trademarks 8,930
-------
Total intangible assets $92,316
=======
The preliminary weighted average amortization period for customer lists and
relationships and other amortized intangible assets is 20 years and 5 years,
respectively.
The total amount of goodwill that is expected to be deductible for tax
purposes is not anticipated to be significant given the stock nature of the
acquisition. The assignment of goodwill has been allocated to the Compressor
and Vacuum Products segment ($40,842) and the Fluid Transfer Products
segment ($17,504). This allocation is preliminary and subject to change upon
completion of appraisals in 2004. See Note 13 for additional segment
information.
The following table summarizes supplemental pro forma information as if the
Nash Elmo and Syltone acquisition had been completed on January 1, 2003:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- -----------------------------
2004 2003 2004 2003
-------- -------- -------- --------
Revenues $228,607 $202,445 $654,658 $579,927
Net Income 10,912 4,480 28,087 10,997
Diluted earnings per share $ 0.54 $ 0.27 $ 1.48 $ 0.68
The pro forma net income above for the three months ended September 30, 2003
reflects the negative impact of a one-time adjustment on cost of sales of
approximately $0.6 million stemming from recording Nash Elmo's inventory at
fair value. The pro forma net income above for the nine months ended
September 30, 2003 reflects the negative impact of a one-time adjustment on
cost of sales of approximately $3.6 million stemming from recording
Syltone's and Nash Elmo's inventory at fair value.
- 8 -
NOTE 3. INVENTORIES
SEPTEMBER 30, DECEMBER 31,
2004 2003
------------- ------------
Raw materials, including parts and
subassemblies $ 63,094 $33,850
Work-in-process 23,252 7,850
Finished goods 58,104 24,731
Perishable tooling and supplies 2,274 2,429
-------- -------
146,724 68,860
Excess of FIFO costs over LIFO costs (4,747) (4,533)
-------- -------
Inventories, net $141,977 $64,327
======== =======
NOTE 4. GOODWILL AND OTHER INTANGIBLE ASSETS
The changes in the carrying amount of goodwill attributable to each business
segment for the nine months ended September 30, 2004, are as follows:
COMPRESSOR & FLUID TRANSFER
VACUUM PRODUCTS PRODUCTS
--------------- --------------
Balance as of December 31, 2003 $179,854 $25,634
Goodwill acquired during the period 135,432 17,504
Foreign currency translation 472 257
-------- -------
Balance as of September 30, 2004 $315,758 $43,395
======== =======
Other intangible assets at September 30, 2004 consisted of the following:
ACCUMULATED
COST AMORTIZATION
-------- ------------
Amortized intangible assets:
Acquired technology $ 23,687 $(12,328)
Customer lists and relationships 66,136 (2,137)
Other 14,080 (2,237)
Unamortized intangible assets:
Trademarks 40,118 --
-------- --------
Total other intangible assets $144,021 $(16,702)
======== ========
Amortization of intangible assets for the three and nine months ended
September 30, 2004, was $1.3 million and $3.3 million, respectively.
Amortization of intangible assets is anticipated to be approximately $5.5
million in 2004 and $8.0 to $9.0 million per year for 2005 through 2008.
NOTE 5. ACCRUED PRODUCT WARRANTY
The following is a rollforward of the Company's warranty accrual for the
three and nine months ended September 30, 2004 and 2003.
- 9 -
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ---------------------------
2004 2003 2004 2003
------- ------- ------- -------
Balance at beginning of period $ 7,808 $ 6,695 $ 6,635 $ 7,060
Product warranty accruals 2,284 1,589 6,012 3,640
Settlements (1,948) (1,812) (5,978) (4,394)
Other (acquisitions and foreign
currency translation) 3,059 41 4,534 207
------- ------- ------- -------
Balance at end of period $11,203 $ 6,513 $11,203 $ 6,513
======= ======= ======= =======
NOTE 6. DEBT
On September 1, 2004, the Company entered into a $375.0 million amended and
restated credit agreement (the "Credit Agreement"). The Credit Agreement
provided the Company with access to senior secured credit facilities
including a $150.0 million five-year Term Loan and a $225.0 million
five-year Revolving Line of Credit (the "Credit Line"). Proceeds from the
Credit Agreement were used to fund the Nash Elmo acquisition and retire debt
outstanding under its previously existing Credit Line and Term Loan.
The Credit Line has a borrowing capacity of $225.0 million and the total
debt balance is due upon final maturity on September 1, 2009. Loans under
this facility may be denominated in U.S. Dollars or several foreign
currencies. The interest rate varies with prime, federal funds and/or LIBOR
for the applicable currency and was 3.8% as of September 30, 2004. On
September 30, 2004, the Credit Line had an outstanding principal balance of
$127.0 million, leaving $98.0 million available for letters of credit or
future use, subject to the terms of the Credit Line.
The $150.0 million Term Loan has a final maturity of September 1, 2009. The
Term Loan requires quarterly principal payments totaling $7.5 million, $15.0
million, $22.5 million, $37.5 million and $67.5 million in years one through
five, respectively. The interest rate varies with prime, federal funds
and/or LIBOR and was 3.8% as of September 30, 2004. On September 30, 2004,
the Term Loan had an outstanding principal balance of $150.0 million.
NOTE 7. PENSION AND OTHER POSTRETIREMENT BENEFITS
The following table provides the components of net periodic expense for the
Company's defined benefit pension plans and other postretirement benefit
plans for the three and nine months ended September 30, 2004 and 2003:
- 10 -
THREE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------------------------------
Pension Benefits
---------------------------------------- Other
U.S. Plans Non-U.S. Plans Postretirement Benefits
---------- -------------- -----------------------
2004 2003 2004 2003 2004 2003
---- ---- ---- ---- ---- ----
Service cost $ 528 $ 494 $ 858 $ 385 $ 4 $ 3
Interest cost 831 850 1,453 362 410 421
Expected return on plan assets (925) (817) (1,328) (369) -- --
Amortization of transition liability -- 1 -- -- -- --
Amortization of prior-service cost (20) (22) 5 -- (37) (152)
Amortization of net loss (gain) 57 105 61 57 (137) (240)
----- ----- ------- ----- ----- -----
Net periodic expense $ 471 $ 611 $ 1,049 $ 435 $ 240 $ 32
===== ==== ======= ==== ===== =====
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------------------------------
Pension Benefits
---------------------------------------- Other
U.S. Plans Non-U.S. Plans Postretirement Benefits
---------- -------------- -----------------------
2004 2003 2004 2003 2004 2003
---- ---- ---- ---- ---- ----
Service cost $ 1,583 $ 1,483 $ 2,424 $ 1,154 $ 11 $ 9
Interest cost 2,493 2,550 4,057 1,085 1,229 1,264
Expected return on plan assets (2,776) (2,452) (3,885) (1,106) -- --
Amortization of transition liability -- 4 -- -- -- --
Amortization of prior-service cost (61) (65) 15 -- (110) (455)
Amortization of net loss (gain) 170 316 183 172 (411) (719)
------- ------- ------- ------- ------ ------
Net periodic expense $ 1,409 $ 1,836 $ 2,794 $ 1,305 $ 719 $ 99
======= ======= ======= ======= ====== ======
NOTE 8. STOCKHOLDERS' EQUITY
Pursuant to its previously filed shelf registration with the Securities and
Exchange Commission, the Company completed an offering of 3.45 million
shares of its common stock for net proceeds of approximately $79.6 million
during March 2004. These proceeds were used to repay borrowings under the
Company's previously existing Credit Line. See Note 6 for additional
information regarding the Company's debt.
- 11 -
NOTE 9. EARNINGS PER SHARE
The following table details the calculation of basic and diluted earnings
per share:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- ------------------------
2004 2003 2004 2003
------- ------- ------- -------
Basic EPS:
Net income $ 8,654 $ 5,277 $23,487 $14,143
======= ======= ======= =======
Shares:
Weighted average number of common shares
outstanding 19,806 16,079 18,645 16,047
======= ======= ======= =======
Basic earnings per common share $ 0.44 $ 0.33 $ 1.26 $ 0.88
======= ======= ======= =======
Diluted EPS:
Net income $ 8,654 $ 5,277 $23,487 $14,143
======= ======= ======= =======
Shares:
Weighted average number of common shares
outstanding 19,806 16,079 18,645 16,047
Assuming conversion of dilutive stock options
issued and outstanding 382 314 387 222
------- ------- ------- -------
Weighted average number of common shares
outstanding, as adjusted 20,188 16,393 19,032 16,269
======= ======= ======= =======
Diluted earnings per common share $ 0.43 $ 0.32 $ 1.23 $ 0.87
======= ======= ======= =======
NOTE 10. COMPREHENSIVE INCOME
For the three months ended September 30, 2004 and 2003, comprehensive income
was $11.9 million and $6.3 million, respectively. For the nine months ended
September 30, 2004 and 2003, comprehensive income was $25.8 million and
$20.9 million, respectively. Items impacting the Company's comprehensive
income, but not included in net income, consist of foreign currency
translation adjustments.
NOTE 11. CASH FLOW INFORMATION
In the first nine months of 2004 and 2003, the Company paid $11.5 million
and $2.8 million, respectively, to the various taxing authorities for income
taxes. Interest paid for the first nine months of 2004 and 2003 was $5.4
million and $3.6 million, respectively.
NOTE 12. CONTINGENCIES
The Company is a party to various legal proceedings, lawsuits and
administrative actions, which are of an ordinary or routine nature. In
addition, due to the bankruptcies of several asbestos manufacturers and
other primary defendants, the Company has been named as a defendant in an
increasing number of asbestos personal injury lawsuits. The Company has also
been named as a defendant in an increasing number of silicosis personal
injury lawsuits. The plaintiffs in these
- 12 -
suits allege exposure to asbestos or silica from multiple sources and
typically the Company is one of approximately 25 or more named defendants.
In the Company's experience, the vast majority of the plaintiffs are not
impaired with a disease for which the Company bears any responsibility.
Predecessors to the Company manufactured, distributed and sold products
allegedly at issue in the pending asbestos and silicosis litigation lawsuits
(the "Products"). The Company has potential responsibility for certain of
these Products, namely: (a) air compressors which used asbestos containing
components manufactured and supplied by third parties; and (b) portable air
compressors used in sandblasting operations as a component of sandblasting
equipment manufactured and sold by others. The sandblasting equipment is
alleged to have caused the silicosis disease plaintiffs claim in these
cases.
Neither the Company nor its predecessors ever mined, manufactured, mixed,
produced or distributed asbestos fiber. The asbestos-containing components
used in the Products were completely encapsulated in a protective
non-asbestos binder and enclosed within the subject Products. Furthermore,
the Company has never manufactured or distributed portable air compressors.
The Company has entered into a series of cost sharing agreements with
multiple insurance companies to secure coverage for asbestos and silicosis
lawsuits. The Company also believes some of the potential liabilities
regarding these lawsuits are covered by indemnity agreements with other
parties. The Company's uninsured settlement payments for past asbestos and
silicosis lawsuits have been immaterial.
The Company believes that the pending and future asbestos and silicosis
lawsuits will not, in the aggregate, have a material adverse effect on its
consolidated financial position, results of operations or liquidity, based
on: the Company's anticipated insurance and indemnification rights to
address the risks of such matters; the limited potential asbestos exposure
from the components described above; the Company's experience that the vast
majority of plaintiffs are not impaired with a disease attributable to
alleged exposure to asbestos or silica from or relating to the Products;
various potential defenses available to the Company with respect to such
matters; and the Company's prior disposition of comparable matters. However,
due to inherent uncertainties of litigation and because future developments
could cause a different outcome, there can be no assurance that the
resolution of pending or future lawsuits, whether by judgment, settlement or
dismissal, will not have a material adverse effect on its consolidated
financial position, results of operations or liquidity.
The Company has also been identified as a potentially responsible party with
respect to several sites designated for environmental cleanup under various
state and federal laws. The Company does not own any of these sites. The
Company does not believe that the future potential costs related to these
sites will have a material adverse effect on its consolidated financial
position, results of operations or liquidity.
NOTE 13. SEGMENT INFORMATION
Subsequent to the acquisition of Nash Elmo and Syltone, the Company
continues to be organized based upon the products and services it offers and
has four operating divisions: Compressor, Blower, Liquid Ring Pump and Fluid
Transfer. These divisions comprise two reportable segments, Compressor and
Vacuum Products (formerly Compressed Air Products) and Fluid Transfer
Products. The Compressor, Blower (which now includes the Syltone
transportation-
- 13 -
related activities and Nash Elmo's side channel blower business) and Liquid
Ring Pump (consisting of Nash Elmo's liquid ring pump business) Divisions
are aggregated into one reportable segment (Compressor and Vacuum Products)
since the long-term financial performance of these businesses are affected
by similar economic conditions, coupled with the similar nature of their
products, manufacturing processes and other business characteristics. During
the third quarter, the Company's former Pump and Fluid Transfer (which
consisted of the Syltone fluid transfer-related activities) Divisions were
combined into one division, Fluid Transfer. These two divisions were
previously aggregated into one reportable segment (Fluid Transfer Products)
primarily due to the same factors as noted above, and thus, there has been
no change to the Fluid Transfer Products segment.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
2004 2003 2004 2003
-------- -------- -------- --------
Revenues:
Compressor and Vacuum
Products $147,148 $ 91,554 $396,170 $271,183
Fluid Transfer Products 35,468 20,507 102,171 51,757
-------- -------- -------- --------
Total $182,616 $112,061 $498,341 $322,940
======== ======== ======== ========
Operating Earnings:
Compressor and Vacuum
Products $ 13,519 $ 7,089 $ 32,422 $ 21,364
Fluid Transfer Products 2,415 1,971 7,357 2,979
-------- -------- -------- --------
Total 15,934 9,060 39,779 24,343
Interest expense 2,491 1,070 5,949 3,411
Other expense (income), net 332 230 (1,756) 133
-------- -------- -------- --------
Income before income taxes $ 13,111 $ 7,760 $ 35,586 $ 20,799
======== ======== ======== ========
- 14 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RECENT DEVELOPMENTS.
On September 1, 2004, the Company acquired the outstanding shares of
nash_elmo Holdings, LLC ("Nash Elmo"). Nash Elmo is a leading global
manufacturer of industrial vacuum pumps. Prior to the acquisition, Nash Elmo
was primarily split between two businesses, liquid ring pumps and side
channel blowers. Both businesses' products are complementary to the
Compressor and Vacuum Products segment's existing product portfolio. Nash
Elmo, headquartered in Trumbull, CT, has primary manufacturing facilities
located in Bad Neustadt and Nuremberg, Germany; Zibo, China; and Campinas,
Brazil. The purchase price of $221.6 million, including assumed bank debt
(net of cash acquired), was paid in the form of cash ($208.5 million), the
assumption of certain of Nash Elmo's debt ($10.4 million) and the assumption
of other liabilities stemming from the transaction ($2.7 million), which
will be paid in the fourth quarter of 2004. There are no additional
contingent payments or commitments related to this acquisition.
For the year ended December 31, 2003, Nash Elmo's revenues and earnings
before income taxes were $212.4 million and $7.8 million, respectively. Nash
Elmo's largest markets are in Europe, North America, South America and Asia.
Approximately 70% of Nash Elmo's revenues are generated from liquid ring
pump products (including related engineered systems and aftermarket
services), while the remaining 30% are derived from side channel blower
products (including aftermarket services).
On January 2, 2004, the Company effectively acquired the outstanding shares
of Syltone plc ("Syltone"), previously a publicly traded company listed on
the London Stock Exchange. Syltone, headquartered in Bradford, United
Kingdom ("U.K."), is one of the world's largest manufacturers of equipment
used for loading and unloading liquid and dry bulk products on commercial
transportation vehicles. This equipment includes compressors, blowers and
other ancillary products that are complementary to the Company's product
lines. Syltone is also one of the world's largest manufacturers of fluid
transfer equipment (including loading arms, swivel joints, couplers and
valves) used to load and unload ships, tank trucks and rail cars. The
purchase price of (pounds)61.1 million, including assumed bank debt (net of
cash acquired), was paid in the form of cash ((pounds)44.4 million), new
loan notes ((pounds)5.2 million) and the assumption of Syltone's existing
bank debt, net of cash ((pounds)11.5 million). There are no additional
contingent payments or commitments related to this acquisition.
Syltone generated revenues and operating profit (in accordance with
accounting principles generally accepted in the U.K.) of (pounds)84.4
million and (pounds)6.3 million, respectively (approximately $151.1 million
and $11.3 million, respectively as calculated using the December 31, 2003
exchange rate of $1.79/(pounds)) for the twelve months ended September 30,
2003. Syltone's largest markets are Europe and North America, which
represent approximately 67% and 20% of its revenues, respectively.
Approximately 70% of Syltone's revenues are generated through
transportation-related activities while the remaining 30% are derived from
fluid transfer-related activities.
Subsequent to the acquisition of Nash Elmo and Syltone, the Company
continues to be organized based upon the products and services it offers and
has four operating divisions: Compressor, Blower, Liquid Ring Pump and Fluid
Transfer. These divisions comprise two reportable
- 15 -
segments, Compressor and Vacuum Products (formerly Compressed Air Products)
and Fluid Transfer Products. The Compressor, Blower (which now includes the
Syltone transportation-related activities and Nash Elmo's side channel
blower business) and Liquid Ring Pump (consisting of Nash Elmo's liquid ring
pump business) Divisions are aggregated into one reportable segment
(Compressor and Vacuum Products) since the long-term financial performance
of these businesses are affected by similar economic conditions, coupled
with the similar nature of their products, manufacturing processes and other
business characteristics. During the third quarter, the Company's former
Pump and Fluid Transfer (which consisted of the Syltone fluid
transfer-related activities) Divisions were combined into one division,
Fluid Transfer. These two divisions were previously aggregated into one
reportable segment (Fluid Transfer Products) primarily due to the same
factors as noted above, and thus, there has been no change to the Fluid
Transfer Products segment.
RESULTS OF OPERATIONS.
PERFORMANCE IN THE QUARTER ENDED SEPTEMBER 30, 2004 COMPARED WITH
THE QUARTER ENDED SEPTEMBER 30, 2003
Revenues
Revenues increased $70.6 million (63%) to $182.6 million for the three
months ended September 30, 2004, compared to the same period of 2003. This
increase was primarily due to acquisitions, which contributed $58.8 million
in revenues. Increased shipments of well stimulation pumps, compressors and
blowers, combined with changes in currency exchange rates and price
increases, also contributed to this increase.
For the three months ended September 30, 2004, revenues for the Compressor
and Vacuum Products segment increased $55.6 million to $147.1 million,
compared to the same period of 2003. This 61% increase is primarily due to
the acquisition of Syltone and Nash Elmo (52%), increased volume of
compressor and blower shipments in the U.S., Europe, South Africa and China
(4%), changes in currency exchange rates (3%) and price increases (2%).
Fluid Transfer Products segment revenues increased $15.0 million to $35.5
million for the three months ended September 30, 2004, compared to the same
period of 2003. This 73% increase is primarily due to the acquisition of
Syltone (53%), and increased shipments of well stimulation pumps, water
jetting systems and related aftermarket (34%) and price increases (4%).
These positive factors were partially offset by lower drilling pump
shipments (18%).
Costs and Expenses
Gross margin (defined as revenues less cost of sales) for the three months
ended September 30, 2004 increased $25.5 million (75%) to $59.3 million
compared to the same period of 2003, primarily due to the increase in
revenues. Gross margin as a percentage of revenues (gross margin percentage)
increased to 32.5% in the three-month period of 2004 from 30.2% in the same
period of 2003. This increase in gross margin percentage was principally
attributable to increased volume in both segments and the related positive
impact of increased leverage of fixed and semi-fixed costs over a higher
revenue base. Acquisitions also positively impacted gross margin percentage
as their gross margin percentage (35.4%) is higher than the Company's
previously existing businesses. Favorable sales mix also contributed to the
increased gross margin as the third quarter of 2004 included a higher
percentage of aftermarket sales compared to the prior year.
- 16 -
Depreciation and amortization for the three months ended September 30, 2004
increased $2.2 million to $5.9 million, compared to $3.7 million in the same
period of 2003, primarily due to the Syltone and Nash Elmo acquisitions.
Selling and administrative expenses increased in the three-month period of
2004 by 78% to $37.5 million from $21.1 million in the same period of 2003,
primarily due to the acquisition of Syltone and Nash Elmo ($15.1 million).
Changes in currency exchange rates also contributed to this increase.
The Compressor and Vacuum Products segment generated operating earnings
(defined as revenues, less cost of sales, depreciation and amortization, and
selling and administrative expenses) as a percentage of revenues of 9.2% in
the three-month period ended September 30, 2004, an increase from 7.7% for
the same period of 2003. This increase was primarily attributable to the
positive impact of increased leverage of the segment's fixed and semi-fixed
costs over a higher revenue base. Favorable sales mix also contributed to
this increase. These favorable factors were partially offset by
acquisitions, as their operating margins were lower than the segment's
previously existing businesses. Operating earnings as a percentage of
revenues from Compressor and Vacuum Products segment businesses that existed
prior to the Nash Elmo and Syltone acquisitions were 9.5% for the
three-month period ended September 30, 2004.
The Fluid Transfer Products segment generated operating earnings as a
percentage of revenues of 6.8% for the three-month period ended September
30, 2004, compared to 9.6% in the same period of 2003. This decrease was
primarily attributable to the Syltone business included in this segment
which generated an operating loss of $0.5 million during the third quarter
primarily due to a $3.0 million shipment scheduled for the third quarter
which was delayed due to a customer logistics issue. This order subsequently
shipped in October 2004. This negative factor was partially offset by the
positive impact of increased leverage of the segment's fixed and semi-fixed
costs over a higher revenue base and operational improvements. Operating
earnings as a percentage of revenues from Fluid Transfer Products segment
businesses that existed prior to the Syltone acquisition were 13.0% for the
three-month period ended September 30, 2004.
Interest expense increased $1.4 million (133%) to $2.5 million for the three
months ended September 30, 2004, compared to the same period of 2003, due to
higher average borrowings stemming from the Nash Elmo and Syltone
acquisitions and higher average rates. The average interest rate for the
three-month period ended September 30, 2004 was 5.6% compared to 4.0% in the
comparable prior year period.
Income before income taxes increased $5.4 million (69%) to $13.1 million for
the three months ended September 30, 2004. This increase is primarily due to
the increased volume in both segments and the related positive impact of
increased leverage of fixed and semi-fixed costs over a higher revenue base.
Acquisitions also contributed $1.5 million to this increase. These positive
factors were partially offset by higher interest expense.
The provision for income taxes increased by $2.0 million to $4.5 million for
the three-month period of 2004, compared to the prior year period, as a
result of the incremental income before taxes and a higher overall effective
tax rate. The Company's effective tax rate for the three months ended
September 30, 2004 increased to 34.0% compared to 32.0% in the prior year
period, principally due to the acquisition of Syltone.
- 17 -
Net income for the three months ended September 30, 2004 increased $3.4
million (64%) to $8.7 million ($0.43 diluted earnings per share), compared
to $5.3 million ($0.32 diluted earnings per share) in same period of 2003.
This increase was primarily attributable to the same factors that resulted
in increased income before taxes noted above, partially offset by a higher
effective tax rate in 2004. The incremental impact on diluted earnings per
share from acquisitions was $0.04.
PERFORMANCE IN THE NINE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED WITH
THE NINE MONTHS ENDED SEPTEMBER 30, 2003
Revenues
Revenues increased $175.4 million (54%) to $498.3 million for the nine
months ended September 30, 2004, compared to the same period of 2003. This
increase was primarily due to acquisitions, which contributed $138.6 million
in revenues. Increased shipments of well stimulation pumps, pump parts,
compressors and blowers combined with changes in currency exchange rates and
price increases also contributed to this increase.
For the nine months ended September 30, 2004, revenues for the Compressor
and Vacuum Products segment increased $125.0 million (46%) to $396.2
million, compared to the same period of 2003. This increase is primarily due
to acquisitions (38%), changes in currency exchange rates (4%), increased
volume of compressor and blower shipments in the U.S., Europe, South Africa
and China (3%) and price increases (1%). Fluid Transfer Products segment
revenues increased $50.4 million to $102.2 million for the nine months ended
September 30, 2003, compared to the same period of 2003. This 97% increase
is primarily due to the acquisition of Syltone (69%), increased shipments of
well stimulation pumps, water jetting systems and related aftermarket (36%)
and price increases (3%). These positive factors were partially offset by a
decreased volume of drilling pump shipments (11%).
Costs and Expenses
Gross margin for the nine months ended September 30, 2004 increased $64.1
million (66%) to $161.9 million compared to the same period of 2003. Gross
margin percentage increased to 32.5% in the nine-month period of 2004 from
30.3% in the same period of 2003. This increase in gross margin percentage
was principally attributable to the increased volume in both segments and
the related positive impact of increased leverage of fixed and semi-fixed
costs over a higher revenue base. Acquisitions also positively impacted
gross margin percentage, as their gross margin percentage (34.6%) is higher
than the Company's previously existing businesses. Finally, favorable sales
mix also contributed to the increased gross margin as the first nine months
of 2004 included a higher percentage of aftermarket sales compared to the
prior year. These positive factors were partially offset by higher warranty
expense in 2004.
Depreciation and amortization for the nine months ended September 30, 2004
increased $5.0 million to $16.1 million compared to $11.1 million in the
same period of 2003, primarily due to the Syltone and Nash Elmo
acquisitions.
Selling and administrative expenses increased $43.6 million (70%) in the
nine-month period of 2004 to $106.0 million compared to $62.4 million in the
same period of 2003, primarily due to acquisitions ($35.8 million). Higher
compensation and fringe benefit costs and changes in currency exchange rates
also contributed to this increase.
- 18 -
Other income, net was $1.8 million for the nine-month period ended September
30, 2004, compared to expense of $0.1 million in the comparable prior year
period. This change was primarily due to foreign currency transaction gains
recorded in 2004. These gains included $1.2 million in the first quarter
specifically related to a portion of the proceeds from U.S. dollar
borrowings, which were converted to British pounds and appreciated in U.S.
dollars in 2004 prior to being used to consummate the Syltone acquisition.
This change was partially offset by a $0.4 million pretax gain on the sale
of an idle manufacturing facility in Syracuse, New York in the second
quarter of 2003.
The Compressor and Vacuum Products segment generated operating earnings as a
percentage of revenues of 8.2% in the nine-month period ended September 30,
2004, an increase from 7.9% for the same period of 2003. This increase was
primarily attributable to the positive impact of increased leverage of the
segment's fixed and semi-fixed costs over a higher revenue base and
favorable sales mix. These positive factors were partially offset by higher
compensation, fringe benefit and warranty expense and acquisitions, which
had lower operating earnings as a percentage of revenues than the segment's
previously existing businesses. Operating earnings as a percentage of
revenues from Compressor and Vacuum Products segment businesses that existed
prior to the Nash Elmo and Syltone acquisitions were 8.4% for the nine-month
period ended September 30, 2004.
The Fluid Transfer Products segment generated operating earnings as a
percentage of revenues of 7.2% for the nine-month period ended September 30,
2004, compared to 5.8% in the same period of 2003. This improvement was
primarily attributable to the positive impact of increased leverage of the
segment's fixed and semi-fixed costs over a higher revenue base and
operational improvements. This positive factor was partially offset by the
impact of the Syltone business included in this segment which had lower
operating earnings as a percentage of revenues than the segment's previously
existing businesses. Operating earnings as a percentage of revenues from
Fluid Transfer Products segment businesses that existed prior to the Syltone
acquisition were 12.4% for the nine-month period ended September 30, 2004.
Interest expense increased $2.5 million (74%) to $5.9 million for the nine
months ended September 30, 2004, compared to the same period of 2003, due to
higher average borrowings stemming from the Syltone and Nash Elmo
acquisitions and higher average rates. The average interest rate for the
nine-month period ended September 30, 2004 was 4.9% compared to 4.1% in the
comparable prior year period.
Income before income taxes increased $14.8 million (71%) to $35.6 million
for the nine months ended September 30, 2004. This increase is primarily due
to the increased volume in both segments and the related positive impact of
increased leverage of fixed and semi-fixed costs over a higher revenue base.
Acquisitions also contributed $3.4 million to this increase. These positive
factors were partially offset by higher interest expense.
The provision for income taxes increased by $5.4 million to $12.1 million
for the nine-month period of 2004, compared to the prior year period, as a
result of the incremental income before taxes and a higher overall effective
tax rate. The Company's effective tax rate for the nine months ended
September 30, 2004 increased to 34.0% compared to 32.0% in the prior year
period, principally due to the acquisition of Syltone.
Net income for the nine months ended September 30, 2004 increased $9.3
million (66%) to $23.5 million ($1.23 diluted earnings per share), compared
to $14.1 million ($0.87 diluted
- 19 -
earnings per share) in same period of 2003. This increase in net income is
primarily attributable to the same factors that resulted in increased income
before taxes noted above, partially offset by a higher effective tax rate in
2004. The incremental impact on diluted earnings per share from acquisitions
was $0.10.
Outlook
In general, demand for compressor and vacuum products correlates to the rate
of manufacturing capacity utilization and the rate of change of industrial
production because compressed air is often used as a fourth utility in the
manufacturing process. Over longer time periods, demand also follows the
economic growth patterns indicated by the rates of change in the Gross
Domestic Product. In the third quarter of 2004, orders for compressor and
vacuum products were $146.5 million, compared to $90.3 million in the same
period of 2003. Backlog for the Compressor and Vacuum Products segment was
$161.2 million as of September 30, 2004, compared to $56.5 million as of
September 30, 2003. The increase in orders and backlog compared to the prior
year was primarily due to the addition of Syltone's transportation-related
activities and Nash Elmo, which contributed $44.0 million and $93.4 million
to orders and backlog, respectively. Favorable changes in foreign currency
exchange rates also added approximately $2.9 million and $2.2 million to
orders and backlog, respectively. Excluding these favorable items, the
growth in orders in the three-month period for this segment was primarily
driven by an improvement in industrial demand in the U.S. and Europe,
combined with incremental market share gains in Europe, South Africa and
China. The Company also experienced an increase in demand for positive
displacement blowers and locomotive compressors due to an improved
transportation market in the U.S.
Demand for fluid transfer products, the majority of which are petroleum
related, has historically corresponded to market conditions and expectations
for oil and natural gas prices. Orders for fluid transfer products were
$50.4 million in the third quarter of 2004, compared to $18.9 million in the
same period of 2003. Backlog for this business segment was $51.6 million as
of September 30, 2004, compared to $8.7 million as of September 30, 2003.
The increase in orders and backlog compared to the prior year was primarily
due to the addition of Syltone's fluid transfer-related activities, which
contributed $15.5 million and $23.7 million to orders and backlog,
respectively. Excluding the impact of Syltone, the increase in orders for
this segment was principally due to increased demand for well stimulation
pumps, drilling pumps and petroleum pump parts, as a result of continued
high prices for oil and natural gas. Future increases in demand for these
products will likely be dependent upon oil and natural gas prices and rig
counts, which the Company cannot predict.
On October 22, 2004, the President of the United States signed into law the
"American Jobs Creation Act of 2004." The Company is currently analyzing
this tax legislation to determine its impact, if any, on the Company's
future income tax accounting and consolidated financial statements.
LIQUIDITY AND CAPITAL RESOURCES
Operating Working Capital
During the nine months ended September 30, 2004, operating working capital
(defined as receivables plus inventories, less accounts payable and accrued
liabilities) increased $61.2 million, primarily due to incremental operating
working capital from the Nash Elmo and Syltone
- 20 -
acquisitions and higher inventory and receivable balances stemming from
increased activity levels.
Cash Flows
During the first nine months of 2004, the Company generated cash from
operations totaling $22.3 million, compared to $23.7 million in the prior
year period. This change was primarily due to the unfavorable change in
operating working capital due to increased activity levels, partially offset
by higher net income and cash from operations provided by acquisitions. Net
of cash acquired, $292.1 million in cash was used to fund the Nash Elmo and
Syltone acquisitions (and related direct acquisition costs) during the first
nine months of 2004. This use of cash was primarily funded by net borrowings
($115.0 million), the sale of 3.45 million shares of common stock in March
2004 ($79.6 million) and excess cash reserves. The cash flows provided by
operating and financing activities and used in investing activities,
combined with the effect of exchange rate changes, resulted in a net cash
decrease of $84.7 million during the first nine months of 2004.
Capital Expenditures and Commitments
Capital projects designed to increase operating efficiency and flexibility,
expand production capacity and bring new products to market resulted in
expenditures of $12.3 million in the first nine months 2004. This was $4.1
million higher than the level of capital expenditures in the comparable
period in 2003, primarily due to the timing of capital projects and spending
at acquisitions. Commitments for capital expenditures at September 30, 2004
were approximately $10 million. Capital expenditures related to
environmental projects have not been significant in the past and are not
expected to be significant in the foreseeable future.
In October 1998, Gardner Denver's Board of Directors authorized the
repurchase of up to 1,600,000 shares of the Company's common stock to be
used for general corporate purposes. Approximately 200,000 shares remain
available for repurchase under this program. The Company has also
established a Stock Repurchase Program for its executive officers to provide
a means for them to sell Gardner Denver common stock and obtain sufficient
funds to meet income tax obligations which arise from the exercise or
vesting of incentive stock options, restricted stock or performance shares.
The Gardner Denver Board has authorized up to 400,000 shares for repurchase
under this program and of this amount approximately 200,000 shares remain
available for repurchase. As of September 30, 2004, a total of 1,572,542
shares have been repurchased at a cost of $22.8 million under both
repurchase programs.
Liquidity
On September 1, 2004, the Company entered into a $375.0 million amended and
restated credit agreement (the "Credit Agreement"). The Credit Agreement
provided the Company with access to senior secured credit facilities
including a $150.0 million five-year Term Loan and a $225.0 million
five-year Revolving Line of Credit (the "Credit Line"). Proceeds from the
Credit Agreement were used to fund the Nash Elmo acquisition and retire debt
outstanding under its previously existing Credit Line and Term Loan.
The Credit Line has a borrowing capacity of $225.0 million and the total
debt balance is due upon final maturity on September 1, 2009. Loans under
this facility may be denominated in U.S. Dollars or several foreign
currencies. The interest rate varies with prime, federal funds and/or
- 21 -
LIBOR for the applicable currency and was 3.8% as of September 30, 2004. On
September 30, 2004, the Credit Line had an outstanding principal balance of
$127.0 million, leaving $98.0 million available for letters of credit or for
future use, subject to the terms of the Credit Line.
The $150.0 million Term Loan has a final maturity of September 1, 2009. The
Term Loan requires quarterly principal payments totaling $7.5 million, $15.0
million, $22.5 million, $37.5 million and $67.5 million in years one through
five, respectively The interest rate varies with prime, federal funds and/or
LIBOR and was 3.8% as of September 30, 2004. On September 30, 2004, the Term
Loan had an outstanding principal balance of $150.0 million.
Pursuant to its previously filed shelf registration with the Securities and
Exchange Commission, the Company completed an offering of 3.45 million
shares of its common stock for net proceeds of approximately $79.6 million
during March 2004. These proceeds were used to repay borrowings under its
previously existing Credit Line.
The Company's borrowing arrangements permit certain investments and dividend
payments and are generally unsecured with the exception of the Credit
Agreement, which requires the pledge of certain subsidiaries' stock. There
are no material restrictions on the Company as a result of its credit
agreements, other than customary covenants regarding certain earnings,
liquidity and capital ratios.
Management currently expects the Company's future cash flows to be
sufficient to fund its scheduled debt service and provide required resources
for working capital and capital investments for at least the next twelve
months.
CONTINGENCIES
The Company is a party to various legal proceedings, lawsuits and
administrative actions, which are of an ordinary or routine nature. In
addition, due to the bankruptcies of several asbestos manufacturers and
other primary defendants, the Company has been named as a defendant in an
increasing number of asbestos personal injury lawsuits. The Company has also
been named as a defendant in an increasing number of silicosis personal
injury lawsuits. The plaintiffs in these suits allege exposure to asbestos
or silica from multiple sources and typically the Company is one of
approximately 25 or more named defendants. In the Company's experience, the
vast majority of the plaintiffs are not impaired with a disease for which
the Company bears any responsibility.
Predecessors to the Company manufactured, distributed and sold products
allegedly at issue in the pending asbestos and silicosis litigation lawsuits
(the "Products"). The Company has potential responsibility for certain of
these Products, namely: (a) air compressors which used asbestos containing
components manufactured and supplied by third parties; and (b) portable air
compressors used in sandblasting operations as a component of sandblasting
equipment manufactured and sold by others. The sandblasting equipment is
alleged to have caused the silicosis disease plaintiffs claim in these
cases.
Neither the Company nor its predecessors ever mined, manufactured, mixed,
produced or distributed asbestos fiber. The asbestos-containing components
used in the Products were completely encapsulated in a protective
non-asbestos binder and enclosed within the subject Products. Furthermore,
the Company has never manufactured or distributed portable air compressors.
- 22 -
The Company has entered into a series of cost sharing agreements with
multiple insurance companies to secure coverage for asbestos and silicosis
lawsuits. The Company also believes some of the potential liabilities
regarding these lawsuits are covered by indemnity agreements with other
parties. The Company's uninsured settlement payments for past asbestos and
silicosis lawsuits have been immaterial.
The Company believes that the pending and future asbestos and silicosis
lawsuits will not, in the aggregate, have a material adverse effect on its
consolidated financial position, results of operations or liquidity, based
on: the Company's anticipated insurance and indemnification rights to
address the risks of such matters; the limited potential asbestos exposure
from the components described above; the Company's experience that the vast
majority of plaintiffs are not impaired with a disease attributable to
alleged exposure to asbestos or silica from or relating to the Products;
various potential defenses available to the Company with respect to such
matters; and the Company's prior disposition of comparable matters. However,
due to inherent uncertainties of litigation and because future developments
could cause a different outcome, there can be no assurance that the
resolution of pending or future lawsuits, whether by judgment, settlement or
dismissal, will not have a material adverse effect on its consolidated
financial position, results of operations or liquidity.
The Company has also been identified as a potentially responsible party with
respect to several sites designated for environmental cleanup under various
state and federal laws. The Company does not own any of these sites. The
Company does not believe that the future potential costs related to these
sites will have a material adverse effect on its consolidated financial
position, results of operations or liquidity.
NEW ACCOUNTING STANDARDS
In May 2004, the FASB issued Staff Position SFAS No. 106-2, "Accounting and
Disclosure Requirements Related to the Medicare Prescription Drug,
Improvement and Modernization Act of 2003," ("FSP 106-2"). FSP 106-2
supersedes FSP 106-1, "Accounting and Disclosure Requirements Related to the
Medicare Prescription Drug, Improvement and Modernization Act of 2003," and
provides guidance on the accounting, disclosure, effective date and
transition related to the Prescription Drug Act. FSP 106-2 was effective for
the third quarter of 2004. According to an actuarial assessment, the Company
currently provides prescription drug benefits, which are actuarially
equivalent to the Medicare-prescription drug benefit to certain retired and
other employees and will therefore qualify for the subsidy. As a result, the
Company accounted for the federal subsidy attributable to past services as
an actuarial gain, which reduced the accumulated post-retirement benefit
obligation. This actuarial gain will then be amortized in future periods in
accordance with SFAS No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions." The federal subsidy attributable to employee
service rendered in current and future periods will reduce future net
periodic postretirement benefit cost as those employees provide service. The
favorable impact to diluted earnings per share from adopting FSP 106-2 is
expected to be $0.01 in 2004 and $0.02 in 2005.
CRITICAL ACCOUNTING POLICIES
Management has evaluated the accounting policies used in the preparation of
the Company's financial statements and related notes and believes those
policies to be reasonable and appropriate. Certain of these accounting
policies require the application of significant judgment by management in
selecting appropriate assumptions for calculating financial estimates. By
their
- 23 -
nature, these judgments are subject to an inherent degree of uncertainty.
These judgments are based on historical experience, trends in the industry,
information provided by customers and information available from other
outside sources, as appropriate. The most significant areas involving
management judgments and estimates may be found in our 2003 Annual Report on
Form 10-K, filed on March 10, 2004, in the Critical Accounting Policies
section of Management's Discussion and Analysis and in Note 1 to the
Consolidated Financial Statements contained in our 2003 Annual Report to
Stockholders filed as Exhibit 13.0 thereto.
CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS
All of the statements in this Management's Discussion and Analysis, other
than historical facts, are forward-looking statements made in reliance upon
the safe harbor of the Private Securities Litigation Reform Act of 1995,
including, without limitation, statements made under the caption "Outlook."
As a general matter, forward-looking statements are those focused upon
anticipated events or trends and expectations and beliefs relating to
matters that are not historical in nature. Such forward-looking statements
are subject to uncertainties and factors relating to the Company's
operations and business environment, all of which are difficult to predict
and many of which are beyond the control of the Company. These uncertainties
and factors could cause actual results to differ materially from those
matters expressed in or implied by such forward-looking statements.
The following uncertainties and factors, among others, could affect future
performance and cause actual results to differ materially from those
expressed in or implied by forward-looking statements: (1) the ability to
identify, negotiate and complete possible future acquisitions; (2) the speed
with which the Company is able to integrate acquisitions and realize the
related financial benefits; (3) the ability to maintain and to enter into
key purchasing, supply and outsourcing relationships; (4) purchased material
cost changes, including metal surcharges; (5) the ability to effectively
manage the transition of iron casting supply to alternate sources and the
skill, commitment and availability of such alternate sources; (6) the
successful implementation of other strategic initiatives, including, without
limitation, restructuring plans, inventory reduction programs and other cost
reduction efforts; (7) the domestic and/or worldwide level of oil and
natural gas prices and oil and gas drilling and production, which affect
demand for the Company's petroleum products; (8) changes in domestic and/or
worldwide industrial production and industrial capacity utilization rates,
which affect demand for the Company's compressor and vacuum products; (9)
pricing of the Company's products; (10) the degree to which the Company is
able to penetrate niche and international markets; (11) changes in currency
exchange rates (primarily between the U.S. dollar, the euro and the British
pound); (12) changes in interest rates; (13) the ability to attract and
retain quality management personnel; (14) market performance of pension plan
assets and changes in discount rates used for actuarial assumptions in
pension and other postretirement obligation and expense calculations; (15)
the continued ability to effectively manage and defend litigation matters
pending, or asserted in the future, against the Company; (16) the
development and acceptance of the Company's new product offerings; (17) the
continued successful implementation and utilization of the Company's
electronic services; and (18) changes in laws and regulations, including
accounting standards and tax requirements.
The Company does not undertake, and hereby disclaims, any duty to update
these forward-looking statements, even though its situation and
circumstances may change in the future.
- 24 -
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk related to changes in interest rates
as well as European and other foreign currency exchange rates, and
selectively uses derivative financial instruments, including forwards and
swaps, to manage these risks. The Company does not hold derivatives for
trading purposes. The value of market-risk sensitive derivatives and other
financial instruments is subject to change as a result of movements in
market rates and prices. Sensitivity analysis is one technique used to
evaluate these impacts. Based on a hypothetical ten percent change in
interest rates or ten percent change in the U.S. dollar across relevant
foreign currencies, principally the euro and British pound, the potential
changes in future earnings, fair value and cash flows are not material to the
Company.
ITEM 4. CONTROLS AND PROCEDURES
As required by Rule 13a-15 of the Exchange Act, the Company has carried out
an evaluation of the effectiveness of the design and operation of the
Company's disclosure controls and procedures as of the end of the period
covered by this report. This evaluation was carried out under the
supervision and with the participation of the Company's management,
including the Chairman, President and Chief Executive Officer and the Vice
President, Finance and Chief Financial Officer. Based upon that evaluation,
the Chairman, President and Chief Executive Officer and Vice President,
Finance and Chief Financial Officer concluded that the Company's disclosure
controls and procedures were effective to provide reasonable assurance that
information required to be disclosed in the Company's periodic SEC reports
is recorded, processed, summarized, and reported as and when required. In
addition, they concluded that there were no changes in the Company's
internal control over financial reporting that occurred during the period
covered by this report that have materially affected, or that are reasonably
likely to materially affect, the Company's internal control over financial
reporting.
In designing and evaluating the disclosure controls and procedures, the
Company's management recognized that any controls and procedures, no matter
how well designed, can provide only reasonable assurances of achieving the
desired control objectives and management necessarily was required to apply
its judgment in evaluating the cost-benefit relationship of possible
controls and procedures.
The Company completed the acquisition of Nash Elmo on September 1, 2004. For
the year ended December 31, 2003, Nash Elmo's revenues were $212.4 million.
Total assets for this business were $323.0 million as of September 30, 2004.
This business is a separate control environment. The evaluation of
disclosure controls and procedures referred to in the paragraph above
included Nash Elmo. However, the Company will exclude this business from
management's report on internal control over financial reporting, as
permitted by SEC guidance, to be included in our Form 10-K for the year
ended December 31, 2004.
- 25 -
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES
----------------------------------------------------------------------------------------------------------------------
TOTAL NUMBER OF
SHARES PURCHASED AS MAXIMUM NUMBER OF
PART OF PUBLICLY SHARES THAT MAY YET
TOTAL NUMBER OF AVERAGE PRICE ANNOUNCED PLANS OR BE PURCHASED UNDER
PERIOD SHARES PURCHASED (1) PAID PER SHARE PROGRAMS (2) THE PLANS OR PROGRAMS
----------------------------------------------------------------------------------------------------------------------
July 1, 2004 -
July 31, 2004 -- -- -- 210,300
----------------------------------------------------------------------------------------------------------------------
August 1, 2004 -
August 31, 2004 -- -- -- 210,300
----------------------------------------------------------------------------------------------------------------------
September 1, 2004 -
September 30, 2004 -- -- -- 210,300
----------------------------------------------------------------------------------------------------------------------
Total -- -- -- 210,300
----------------------------------------------------------------------------------------------------------------------
(1) The shares purchased do not include shares acquired by the Company in
connection with the exercise of stock options via a stock swap.
(2) In October 1998, Gardner Denver's Board of Directors authorized the
repurchase of up to 1,600,000 shares of the Company's common stock to
be used for general corporate purposes.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 6. EXHIBITS
(a) List of Exhibits:
10.1 Salary Continuation Agreement dated August 16, 2004 between
Gardner Denver, Inc. and Philip R. Roth.
12 Calculation of Ratio of Earnings to Fixed Charges.
31.1 Certification of Principal Executive Officer Pursuant to
Rule 13a-15(e) or 15d-15(e) of the Exchange Act, as
Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
31.2 Certification of Principal Financial Officer Pursuant to
Rule 13a-15(e) or 15d-15(e) of the Exchange Act, as
Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
32.1 Certification of Chief Executive Officer Pursuant to
18 U.S.C. Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer Pursuant to
18 U.S.C. Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
- 26 -
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.
GARDNER DENVER, INC.
Date: November 9, 2004 By: /s/Ross J. Centanni
---------------------------------
Ross J. Centanni
Chairman, President & CEO
Date: November 9, 2004 By: /s/Helen W. Cornell
---------------------------------
Helen W. Cornell
Vice President, Finance & CFO
Date: November 9, 2004 By: /s/Daniel C. Rizzo, Jr.
---------------------------------
Daniel C. Rizzo, Jr.
Vice President and Corporate
Controller (Chief Accounting Officer)
- 27 -
GARDNER DENVER, INC.
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
10.1 Salary Continuation Agreement dated August 16, 2004 between Gardner
Denver, Inc. and Philip R. Roth.
12 Calculation of Ratio of Earnings to Fixed Charges.
31.1 Certification of Principal Executive Officer Pursuant to Rule
13a-15(e) or 15d-15(e) of the Exchange Act, as Adopted Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Principal Financial Officer Pursuant to Rule
13a-15(e) or 15d-15(e) of the Exchange Act, as Adopted Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
- 28 -