See Notes to Consolidated Condensed Financial Statements

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ROBBINS & MYERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
November 30, 2004
(Unaudited)

NOTE 1—Preparation of Financial Statements

In the opinion of management, the accompanying unaudited consolidated condensed financial statements of Robbins & Myers, Inc. and subsidiaries (“we” “our”) contain all adjustments, consisting of normally recurring items, necessary to present fairly our financial condition as of November 30, 2004 and August 31, 2004, and the results of our operations and cash flows for the three month periods ended November 30, 2004 and 2003. All intercompany transactions have been eliminated. Certain amounts in the prior period financial statements have been reclassified to conform to the current year presentation.

While we believe that the disclosures are adequately presented, it is suggested that these consolidated condensed financial statements be read in conjunction with the financial statements and notes included in our most recent Annual Report on Form 10-K for the fiscal year ended August 31, 2004. A summary of our significant accounting policies is presented therein on page 29. There have been no material changes in the accounting policies followed by us during fiscal year 2005.

NOTE 2 — Income Statement Information

Unless otherwise noted, all of the recorded costs mentioned in this note were included on the “other” expense line of our Consolidated Condensed Income Statement in the period indicated.

In the second quarter of fiscal 2004, we recorded $1,378,000 of costs, $603,000 of which were for retirement payments, associated with the retirement of our former President and CEO. As of August 31, 2004 all costs except for a portion of the retirement payments were paid. Following is a progression of the liability for the remaining retirement payments:

In the fourth quarter of fiscal 2004 we recorded $761,000 of severance cost for approximately 20 people related to the closure of one of the Reactor Systems facilities in Italy. The severance liability at August 31, 2004 was $667,000. The remaining liability was paid during the first quarter of fiscal 2005 and no changes in estimates were made.

We announced a restructuring plan of our Pharmaceutical segment. The restructuring plan was initiated to improve the profitability of the Pharmaceutical segment in light of the current worldwide economic conditions that are affecting this segment. The restructuring plan included the following:

	•	Plant closures (one of two Reactor Systems facilities in Italy, a Reactor Systems facility in Mexico and the Unipac facility of Romaco in Italy).
	•	Headcount reductions to support the Reactor Systems business reorganization and to bring the personnel costs in line with the current level of business.
	•	Headcount reductions at Romaco with the Unipac integration into the Macofar facility and removal of duplicate administrative costs at other locations.

     As a result of the restructuring activities, we expect to record costs totaling approximately $7,700,000. We recorded expenses of $4,963,000 in the first quarter of fiscal 2005 and expect to record the balance of the

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restructuring costs in the second quarter of fiscal 2005. The recorded expenses in the first quarter were comprised of the following:

	•	$3,727,000 of termination benefits related to the aforementioned headcount reductions.
	•	$738,000 to write-down inventory and $175,000 to write-off intangibles related to a discontinued product line. The inventory charge is included in cost of sales.
	•	$323,000 to write-down to estimated net realizable value the Reactor Systems facility in Italy that we exited.

Following is a progression of the liability for termination benefits:

The Reactor Systems facility in Italy and the Unipac facility in Italy have been closed and are presented as “Assets Held for Sale” at estimated net realizable value on our Consolidated Condensed Balance Sheet as of November 30, 2004. The impact of this restructuring plan has been considered in our testing of goodwill for impairment, and no adjustments to the recorded value of goodwill were deemed necessary.

NOTE 3—Goodwill and Other Intangible Assets

Changes in the carrying amount of goodwill for the three month period ended November 30, 2004, by operating segment, are as follows:

Information regarding our other intangible assets is as follows:

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NOTE 4—Net Income per Share

NOTE 5—Product Warranties

Warranty obligations are contingent upon product failure rates, material required for the repairs and service delivery costs. We estimate the warranty accrual based on specific product failures that are known to us plus an additional amount based on the historical relationship of warranty claims to sales.

Changes in our product warranty liability during the period are as follows:

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NOTE 6—Long-Term Debt

Our Bank Credit Agreement (“Agreement”) provides that we may borrow on a revolving credit basis up to a maximum of $100,000,000. All outstanding amounts under the Agreement are due and payable on October 7, 2006. Interest is variable based upon formulas tied to LIBOR or prime, at our option, and is payable at least quarterly. At November 30, 2004 the weighted average interest rate for all amounts outstanding was 5.13%. Indebtedness under the Agreement is unsecured, except for guarantees by our U.S. subsidiaries, the pledge of the stock of our U.S. subsidiaries and the pledge of the stock of certain non-U.S. subsidiaries.

We have $100,000,000 of Senior Notes (“Senior Notes”) issued in two series. Series A in the principal amount of $70,000,000 has an interest rate of 6.76% and is due May 1, 2008, and Series B in the principal amount of $30,000,000 has an interest rate of 6.84% and is due May 1, 2010. Interest is payable semi-annually on May 1 and November 1.

The above agreements have certain restrictive covenants including limitations on cash dividends, treasury stock purchases and capital expenditures, and minimum requirements for interest coverage and leverage ratios. The amount of cash dividends and treasury stock purchases, other than in relation to stock option exercises, we may incur in each fiscal year is restricted to the greater of $3,500,000 or 50% of our consolidated net income for the immediately preceding fiscal year, plus a portion of any unused amounts from the preceding fiscal year. Under this Agreement and other lines of credit, we could incur additional indebtedness of approximately $6,000,000 at November 30, 2004 based on our covenant position.

Our other debt primarily consists of unsecured non-U.S. bank lines of credit with interest rates ranging from 4.00% to 8.00%.

We have $27,248,000 of 10.00% Subordinated Notes (“Subordinated Notes”) denominated in euro with the former owner of Romaco. The Subordinated Notes are due in 2006 and interest is payable quarterly.

We have $40,000,000 of 8.00% Convertible Subordinated Notes Due 2008 (“8.00% Convertible Subordinated Notes”). The 8.00% Convertible Subordinated Notes are due on January 31, 2008, bear interest at 8.00%, payable semi-annually on March 1 and September 1 and are convertible into common stock at a rate of $22.50 per share. Holders may convert at any time until maturity. The 8.00% Convertible Subordinated Notes are redeemable at our option at any time on or after March 1, 2004 at a redemption price (a) prior to or on March 1, 2005 equal to 102% of the principal amount, and (b) after March 1, 2005 equal to 100% of the principal amount.

The 8.00% Convertible Subordinated Notes and the Subordinated Notes are subordinated to all of our other indebtedness.

We have entered into an interest rate swap agreement. The interest rate swap agreement utilized by us effectively modifies our exposure to interest rate risk by converting our fixed rate debt to floating rate debt.

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This agreement involves the receipt of fixed rate amounts in exchange for floating rate interest payments over the life of the agreement without an exchange of underlying principal amounts. The mark-to-market values of both the fair value hedging instrument and the underlying debt obligation were equal and recorded as offsetting gains and losses in current period earnings. The fair value hedge qualifies for treatment under the short-cut method of measuring effectiveness. As a result, there is no impact on earnings due to hedge ineffectiveness. The interest rate swap agreement totals $30,000,000, expires in 2008 and allows us to receive an interest rate of 6.76% and pay an interest rate based on LIBOR.

NOTE 7 — Retirement Benefits

Retirement and other postretirement plan costs are as follows:

We estimate that the required employer contributions to our plans in fiscal 2005 will be approximately $10,500,000.

NOTE 8—Income Taxes

The estimated annual effective tax rate was 37.0% for the three month period of fiscal 2005 and 35.0% for the three month period of fiscal 2004. The effective tax rate has increased in fiscal 2005 because a higher proportion of our income is being earned in countries with tax rates higher than the U.S.

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NOTE 9—Stock-Based Compensation

We apply Accounting Principles Board Opinion No. 25 as the method used to account for stock-based employee compensation arrangements. The following table illustrates the effect on net income and earnings per share as if the fair value based method had been applied to all outstanding and unvested awards in each period.

NOTE 10—Comprehensive Income

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NOTE 11—New Accounting Pronouncement

In December 2004, the FASB issued SFAS No. 123 (revised), “Share-Based Payment” (“SFAS 123(R)”). This standard replaces SFAS No. 123, “Accounting for Stock-Based Compensation,” and supercedes APB Opinion No. 25, “Accounting for Stock Issued to Employees”. SFAS 123(R) requires all companies to recognize compensation expense for all share-based payments, including stock options, at fair value. Robbins & Myers, Inc. will be required to adopt SFAS 123(R) beginning in the first quarter of fiscal year 2006. We are currently evaluating the effect that SFAS 123(R) will have on our consolidated balance sheets and our consolidated statements of shareholders’ equity and cash flows. See Note 9 for the pro forma impact on net (loss) income and (loss) income per share form calculating stock-related compensation costs under the fair value alternative of SFAS No. 123. However, the calculation of compensation cost for share-based payment transactions after the effective date of SFAS No. 123(R) may be different from the calculation of compensation cost under SFAS No. 123, but such differences have not yet been quantified.

NOTE 12—Business Segments

Sales and Income before Interest and Taxes (“EBIT”) by operating segment are presented in the following table.

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Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations

Results of Operations

Overview

We are a leading designer, manufacturer and marketer of highly engineered, application-critical equipment and systems for the pharmaceutical, energy and industrial markets worldwide. We operate with three market focused business segments: Pharmaceutical, Energy and Industrial.

Pharmaceutical. Our Pharmaceutical business segment includes our Reactor Systems and Romaco businesses and is focused primarily on the pharmaceutical and healthcare industries. Our Reactor Systems business designs, manufacturers and markets primary processing equipment and engineered systems and we believe has the leading worldwide position in glass-lined reactors and storage vessels. Our Romaco business designs, manufacturers and markets secondary processing, dosing, filling, printing and security equipment.

Energy. Our Energy business segment designs, manufactures and markets equipment and systems used in oil and gas exploration and recovery. Our equipment and systems include hydraulic drilling power sections, down-hole pumps and a broad line of ancillary equipment, such as rod guides, rod and tubing rotators, wellhead systems, pipeline closure products and valves. These products and systems are used at the wellhead and in subsurface drilling and production.

Industrial. Our Industrial business segment is comprised of our Moyno, Tarby, Chemineer and Edlon businesses, which design, manufacture and market products that are used in specialty chemical, wastewater treatment and a variety of other industrial applications. Our Moyno and Tarby businesses manufacture pumps that utilize progressing cavity technology to provide fluids-handling solutions for a wide range of applications involving the flow of viscous, abrasive and solid-laden slurries and sludges. Our Chemineer business manufactures high-quality standard and customized fluid-agitation equipment and systems. Our Edlon business manufactures customized fluoropolymer-lined pipe, fittings, vessels and accessories.

We have manufacturing facilities in 15 countries and approximately 63% of our sales are international sales.

For our first quarter of fiscal 2005, ended November 30, 2004, our consolidated net sales were $132.5 million which was consistent with the first quarter of fiscal 2004. Foreign currency exchange rates, principally the euro, favorably impacted first quarter sales. For the fiscal 2005 first quarter, we recorded a net loss of $2.5 million versus net income of $2.0 million in the comparable prior year quarter. Restructuring expenses of $5.0 million in the recent quarter and reduced sales volume on a constant dollar basis were the principal reasons for the profit decline. Our Energy business performed at record levels in the first quarter of fiscal 2005 and the outlook for our Energy segment remains solid. We also ended the first quarter with improved backlog and expect our restructuring actions to lead to profit improvement in the remainder of fiscal 2005.

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The following tables present the components of our consolidated income statement and segment information for the three month periods of fiscal 2005 and 2004.

Impact of Restructuring Program

We announced a restructuring plan of our Pharmaceutical segment. The restructuring plan was initiated to improve the profitability of the Pharmaceutical segment in light of the current worldwide economic conditions that are affecting this segment. The restructuring plan included the following:

	•	Plant closures (one of two Reactor Systems facilities in Italy, a Reactor Systems facility in Mexico and the Unipac facility of Romaco in Italy).
	•	Headcount reductions to support the Reactor Systems business reorganization and to bring the personnel costs in line with the current level of business.
	•	Headcount reductions at Romaco with the Unipac integration into the Macofar facility and removal of duplicate administrative costs at other locations.

The status of the restructuring activities is as follows:

	•	The Reactor Systems facility in Italy and the Unipac facility in Italy have been closed and are presented as “Assets Held for Sale” at estimated net realizable value on our Consolidated Condensed Balance Sheet as of November 30, 2004.
	•	The Reactor Systems headcount has been reduced by 84.

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•

The Romaco headcount has been reduced by 58.

As a result of the restructuring activities, we expect to record costs totaling approximately $7.7 million. We recorded expenses of $5.0 million in the first quarter of fiscal 2005 and expect to record the balance of the restructuring costs in the second quarter of fiscal 2005. The recorded expenses in the first quarter were comprised of the following:

	•	$3.8 million termination benefits related to the aforementioned headcount reductions.
	•	$0.7 million to write-down inventory and $0.2 million to write-off intangibles related to a discontinued product line. The inventory charge is included in cost of sales.
	•	$0.3 million to write-down to estimated net realizable value the Reactor Systems facility in Italy that we exited.

The approximately $2.7 million of restructuring costs that we expect to incur in the second quarter of fiscal 2005 primarily relate to termination benefits as we further reduce our workforce by approximately 75 people. The total cash outlays in connection with the restructuring plan are estimated to be between $6.0 and $6.5 million. We estimate that the restructuring plan will be substantially completed by the second quarter of fiscal 2005.

The facilities that have been closed and the Mexico facility that will be closed later in fiscal 2005 are owned by us and will be sold. We expect the facility sales to generate approximately $8.0 to $10.0 million of cash proceeds, which exceeds the recorded book value of these facilities by approximately $3.0 to $5.0 million. The facilities are in excellent condition and are believed to be readily marketable, but we are unable to predict the specific timing of the sale of any one or all of the facilities.

Net Sales

Consolidated net sales for the first quarter of fiscal 2005 were $132.5 million which were consistent with net sales for the first quarter of fiscal 2004.

The Pharmaceutical segment had sales of $71.3 million in the first quarter of fiscal 2005 compared with $77.9 million in the first quarter of fiscal 2004. The change in exchange rates, primarily the strengthening of the euro, increased the first quarter of fiscal 2005 sales by $4.1 million compared with the first quarter of fiscal 2004. Excluding the impact of exchange rates, the first quarter of fiscal 2004 sales decreased by $10.7 million, or 13.7%. Consolidation within the Pharmaceutical industry and weak economic conditions in Europe continue to negatively impact sales. Orders for this segment increased from $85.8 million in the first quarter of fiscal 2004 to $92.4 million in the first quarter of fiscal 2005. The increase in orders relative to the first quarter of fiscal 2004 is primarily due to the change in the euro exchange rate. Excluding the favorable impact from changes in exchange rates, orders are 1.6% higher in the first quarter of fiscal 2005 compared with the first quarter of fiscal 2004. Backlog in this segment increased to $106.9 million at the end of the first quarter of fiscal 2005 from $85.7 million at August 31, 2004.

The Industrial segment had sales of $31.3 million in the first quarter of fiscal 2005 compared with $29.9 million in the first quarter of fiscal 2004. Most of the increase in sales ($1.0 million) is due to the completion of a large project in Asia. The remaining small increase in sales is a result of increased revenues from domestic customers. Incoming orders in this segment were $29.9 million in the first quarter of fiscal 2005 compared with $30.6 million in the first quarter of fiscal 2004.

The Energy segment had sales of $29.8 million in the first quarter of fiscal 2005 compared with $24.7 million in the first quarter of fiscal 2004. On a constant currency basis, sales increased by $4.6 million, or 18.6% The overall level of crude oil and natural gas exploration and production activities has increased compared with the first quarter of fiscal 2004. Incoming orders in this segment increased to $33.7 million in the first quarter of fiscal 2005 compared with $26.3 million in the first quarter of fiscal 2004. Backlog increased to $9.2 million at the end of the first quarter of fiscal 2005 from $5.3 million at August 31, 2004 as a result of international orders that have longer lead times.

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Earnings Before Interest and Income Taxes (EBIT)

The Company’s operating performance is evaluated using several measures. One of those measures, EBIT is income before interest and income taxes and is reconciled to net income on our Consolidated Condensed Income Statement. We evaluate performance of our business segments and allocate resources based on EBIT. EBIT is not; however, a measure of performance calculated in accordance with accounting principles generally accepted in the United States and should not be considered as an alternative to net income as a measure of our operating results. EBIT is not a measure of cash available for use by management.

Consolidated EBIT for the first quarter of fiscal 2005 was negative $0.1 million compared with positive $7.2 million in the first quarter of fiscal 2004. Included in the current quarter’s EBIT are the aforementioned $5.0 million of costs related to the restructuring of our Pharmaceutical segment. The remaining decline in EBIT is attributable to the lower constant dollar sales in fiscal 2005.

The Pharmaceutical segment had EBIT of negative $5.8 million in the first quarter of fiscal 2005 compared with positive $2.2 million in the first quarter of fiscal 2004. The change in exchange rates decreased the first quarter of fiscal 2005 EBIT by $0.4 million compared with the first quarter of fiscal 2004. Excluding the change in exchange rates, EBIT declined by $7.6 million. This decline in EBIT is due to the aforementioned $10.7 million decrease in sales on a constant dollar basis, and the restructuring costs of $5.0 million. Offsetting these two items are realized cost savings of $0.9 million as a result of the restructuring programs.

The Industrial segment had EBIT of $2.0 million in the first quarter of fiscal 2005 compared with $2.2 million in the first quarter of fiscal 2004. The decrease in EBIT even though there was a slight increase in sales is because aftermarket sales are a lower proportion of sales and health care costs are approximately $0.3 million higher in the first quarter of fiscal 2005.

The Energy segment had EBIT of $7.3 million in the first quarter of fiscal 2005 compared with $5.8 million in the first quarter of fiscal 2004, an increase of $1.5 million or 25.9%. The Energy segment EBIT increase was due to the sales volume increase mentioned above.

Interest Expense

Interest expense decreased from $3.7 million in the first quarter of fiscal 2004 to $3.5 million in the first quarter of fiscal 2005. This was due to lower average debt levels.

Income Taxes

The effective tax rate is 37.0% in fiscal 2005 and 35.0% in fiscal 2004. The effective tax rate has increased in fiscal 2005 because a higher proportion of our income is being earned in countries with tax rates higher than the U.S.

Liquidity and Capital Resources

Operating Activities

In the first quarter of fiscal 2005, our cash flow used by operations was $5.3 million compared cash flow provided by operations of $0.4 million in the first quarter of fiscal 2004. The lower cash flow from operations is a result of the aforementioned restructuring charges and higher inventory levels because of higher first quarter orders and backlog.

We expect our fiscal 2005 operating cash flow to be adequate to fund the fiscal year 2005 operating needs, scheduled debt service, shareholder dividend requirements and planned capital expenditures of approximately $20.0 million. Our planned capital expenditures are related to additional production capacity in China, cost reductions and replacement items.

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Investing Activities

Our capital expenditures were $2.8 million in the first quarter of fiscal 2005, up from $2.3 million in the first quarter of fiscal 2004. The majority of our capital expenditures were for replacement of equipment.

Financing Activities

We paid $0.3 million to amend our credit agreement in November 2004. The amendment modified certain financial covenants which allowed us to proceed with the aforementioned restructuring of our Pharmaceutical segment.

Credit Agreement

Our Bank Credit Agreement (“Agreement”) provides that we may borrow on a revolving credit basis up to a maximum of $100.0 million. All outstanding amounts under the Agreement are due and payable on October 7, 2006. Interest is variable based upon formulas tied to LIBOR or prime, at our option, and is payable at least quarterly. At November 30, 2004, the weighted average interest rate for all amounts outstanding was 5.13%. Indebtedness under the Agreement is unsecured, except for guarantees by our U.S. subsidiaries, the pledge of the stock of our U.S. subsidiaries and the pledge of the stock of certain non-U.S. subsidiaries. Under this Agreement and other lines of credit, we have $90.1 million of unused borrowing capacity. However, due to our financial covenants and outstanding standby letters of credit, we could only incur additional indebtedness of $6.0 million at November 30, 2004. We have $26.7 million of standby letters of credit outstanding at November 30, 2004. These standby letters of credit are used as security for advance payments received from customers and future payments to our vendors.

Following is information regarding our long-term contractual obligations and other commitments outstanding as of November 30, 2004:

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Critical Accounting Policies

In preparing our consolidated financial statements, we follow accounting principles generally accepted in the United States of America, which in many cases require us to make assumptions, estimates and judgments that affect the amounts reported. Many of these policies are straightforward. There are, however, some policies that are critical because they are important in determining the financial condition and results of operations and some may involve management judgments due to the sensitivity of the methods, assumptions and estimates necessary in determining the related income statement, asset and/or liability amounts. These policies are described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Report on Form 10-K for the year ended August 31, 2004. There have been no material changes in the accounting policies followed by us during fiscal 2005.

Safe Harbor Statement

In addition to historical information, this Form 10-Q contains forward-looking statements, identified by use of words such as “expects,” “anticipates,” “estimates,” and similar expressions. These statements reflect the Company’s expectations at the time this Form 10-Q was filed. Actual events and results may differ materially from those described in the forward-looking statements. Among the factors that could cause material differences are a significant decline in capital expenditures in specialty chemical and pharmaceutical industries, a major decline in oil and natural gas prices, foreign exchange rate fluctuations, the impact of Sarbanes-Oxley section 404 procedures, work stoppages related to union negotiations, customer order cancellations, the ability of the Company to comply with the financial covenants and other provisions of its financing arrangements, the ability of the Company to realize the benefits of its restructuring program in its Pharmaceutical Segment and general economic conditions that can affect demand in the process industries. The Company undertakes no obligation to update or revise any forward-looking statement.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

In our normal operations we have market risk exposure to foreign currency exchange rates and interest rates. There has been no significant change in our market risk exposure with respect to these items during the quarter ended November 30, 2004. For additional information see “Qualitative and Quantitative Disclosures About Market Risk” at Item 7A of our Annual Report on Form 10-K for the year ended August, 31, 2004.

Item 4. Controls and Procedures

Based on a recent evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q, the Company’s Chief Executive Officer and the Chief Financial Officer have concluded that the Company’s disclosure controls and procedures (as defined in the Exchange Act Rules 13a-15(e) and 15d-15(e)) are effective in timely alerting them to information relating to the Company (including its consolidated subsidiaries) required to be disclosed by the Company in the reports that it files or submits under the Exchange Act. There have been no changes in the Company’s internal control over financial reporting that occurred during the quarter ended November 30, 2004 that have materially affected, or are reasonably likely to affect, our internal control over financial reporting.

Part II—Other Information

Item 6. Exhibits

a)	Exhibits — see INDEX TO EXHIBITS

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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.

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INDEX TO EXHIBITS

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