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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 June 30, 2002
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
--------- ---------
Number of shares outstanding of the issuer's Common Stock, par
value $.01 per share, as of July 26, 2002: 15,880,666 shares.
============================================================================
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
GARDNER DENVER, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(dollars in thousands, except per share amounts)
(Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ -----------------------
2002 2001 2002 2001
-------- -------- -------- --------
Revenues $104,854 $104,554 $211,463 $205,450
Costs and Expenses:
Cost of sales (excluding depreciation
and amortization) 71,289 73,307 145,891 144,761
Depreciation and amortization 3,593 4,197 7,141 8,472
Selling and administrative expenses 20,308 16,625 40,280 33,274
Interest expense 1,730 1,547 3,412 3,389
Other income, net (435) (1,350) (567) (2,291)
-------- -------- -------- --------
Income before income taxes 8,369 10,228 15,306 17,845
Provision for income taxes 2,845 3,784 5,204 6,602
-------- -------- -------- --------
Net income $ 5,524 $ 6,444 $ 10,102 $ 11,243
======== ======== ======== ========
Basic earnings per share $ 0.35 $ 0.41 $ 0.64 $ 0.73
======== ======== ======== ========
Diluted earnings per share $ 0.34 $ 0.41 $ 0.63 $ 0.72
======== ======== ======== ========
The accompanying notes are an integral part of this statement.
- 2 -
GARDNER DENVER, INC.
CONSOLIDATED BALANCE SHEET
(dollars in thousands, except per share amounts)
(UNAUDITED)
JUNE 30, DECEMBER 31,
2002 2001
----------- ------------
ASSETS
Current assets:
Cash and equivalents $ 16,766 $ 29,980
Receivables, net 83,291 85,538
Inventories, net 75,779 76,650
Deferred income taxes 6,750 4,956
Other 4,112 4,011
-------- --------
Total current assets 186,698 201,135
-------- --------
Property, plant and equipment, net 73,574 74,097
Goodwill 184,612 183,145
Other intangibles, net 24,957 25,692
Deferred income taxes 515 2,093
Other assets 3,769 2,526
-------- --------
Total assets $474,125 $488,688
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings and current maturities
of long-term debt $ 7,500 $ 7,375
Accounts payable and accrued liabilities 67,083 77,202
-------- --------
Total current liabilities 74,583 84,577
-------- --------
Long-term debt, less current maturities 136,943 160,230
Postretirement benefits other than pensions 36,211 36,890
Other long-term liabilities 9,125 8,263
-------- --------
Total liabilities 256,862 289,960
-------- --------
Stockholders' equity:
Common stock, $.01 par value; 50,000,000 shares
authorized; 15,875,985 shares issued and
outstanding at June 30, 2002 176 174
Capital in excess of par value 169,681 166,262
Treasury stock at cost, 1,715,520 shares at
June 30, 2002 (25,803) (25,602)
Retained earnings 72,164 62,062
Accumulated other comprehensive income (loss) 1,045 (4,168)
-------- --------
Total stockholders' equity 217,263 198,728
-------- --------
Total liabilities and stockholders' equity $474,125 $488,688
======== ========
The accompanying notes are an integral part of this statement.
- 3 -
GARDNER DENVER, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(dollars in thousands)
(Unaudited)
SIX MONTHS ENDED
JUNE 30,
---------------------------
2002 2001
-------- --------
Cash flows from operating activities:
Net income $ 10,102 $ 11,243
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 7,141 8,472
Net loss on asset dispositions 26 63
Stock issued for employee benefit plans 1,132 1,114
Deferred income taxes (251) (847)
Changes in assets and liabilities:
Receivables 3,983 1,137
Inventories 1,597 (160)
Accounts payable and accrued liabilities (11,312) (4,237)
Other assets and liabilities, net (49) (928)
-------- --------
Net cash provided by operating activities 12,369 15,857
-------- --------
Cash flows from investing activities:
Capital expenditures (4,842) (5,354)
Disposals of plant and equipment 72 50
Other (5) (32)
-------- --------
Net cash used in investing activities (4,775) (5,336)
-------- --------
Cash flows from financing activities:
Principal payments on long-term debt (31,162) (26,221)
Proceeds from long-term borrowings 8,000 6,000
Proceeds from stock options 2,289 1,499
Purchase of treasury stock (201) (108)
Debt issuance costs (664) --
Other (610) (739)
-------- --------
Net cash used in financing activities (22,348) (19,569)
-------- --------
Effect of exchange rate changes on cash and
equivalents 1,540 (1,518)
-------- --------
Decrease in cash and equivalents (13,214) (10,566)
-------- --------
Cash and equivalents, beginning of period 29,980 30,239
-------- --------
Cash and equivalents, end of period $ 16,766 $ 19,673
======== ========
The accompanying notes are an integral part of this statement.
- 4 -
NOTES TO CONDENSED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
Basis of Presentation. The accompanying condensed consolidated financial
statements include the accounts of Gardner Denver, Inc. ("Gardner Denver" or
the "Company") and its subsidiaries. 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, 2001.
The results of operations for the three months and six months ended June 30,
2002 are not necessarily indicative of the results to be expected for the
full year.
Certain prior year amounts have been reclassified to conform with current
year presentation.
NOTE 2. RECENT ACQUISITIONS.
During 2001, the Company's Compressed Air Products segment completed two
acquisitions. Effective September 10, 2001, the Company acquired certain
assets and stock of Hoffman Air and Filtration Systems ("Hoffman"). Hoffman,
headquartered in Syracuse, New York, manufactures and distributes multistage
centrifugal blowers and vacuum systems, primarily for wastewater treatment
and industrial applications. Effective September 1, 2001, the Company also
acquired certain assets and stock of the Hamworthy Belliss & Morcom
compressor business ("Belliss & Morcom"). Belliss & Morcom is headquartered
in Gloucester, England and manufactures and distributes lubricated and
oil-free reciprocating air compressors for a variety of applications.
All acquisitions have been accounted for by the purchase method, and
accordingly, their results are included in the Company's consolidated
financial statements from the respective dates of acquisition. Under the
purchase method, the purchase price is allocated based on the fair value of
assets received and liabilities assumed as of the acquisition date. The
purchase price allocation for Hoffman and Bellis & Morcom, used in
preparation of the June 30, 2002 consolidated balance sheet, is preliminary
and subject to adjustment when the valuation of certain intangible assets
is finalized.
In accordance with Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets" ("SFAS 142"), the cost in excess of
net assets acquired ("goodwill") for each acquisition has not been
amortized.
- 5 -
NOTE 3. EARNINGS PER SHARE.
The following table details the calculation of basic and diluted earnings
per share:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
2002 2001 2002 2001
-------- -------- -------- --------
Basic EPS:
Net income $ 5,524 $ 6,444 $ 10,102 $ 11,243
======== ======== ======== ========
Shares
Weighted average number of common
shares outstanding 15,856 15,545 15,806 15,499
======== ======== ======== ========
Basic earnings per common share $ 0.35 $ 0.41 $ 0.64 $ 0.73
======== ======== ======== ========
Diluted EPS:
Net income $ 5,524 $ 6,444 $ 10,102 $ 11,243
======== ======== ======== ========
Shares
Weighted average number of common
shares outstanding 15,856 15,545 15,806 15,499
Assuming conversion of dilutive stock
options issued and outstanding 283 196 263 196
-------- -------- -------- --------
Weighted average number of common
shares outstanding, as adjusted 16,139 15,741 16,069 15,695
======== ======== ======== ========
Diluted earnings per common share $ 0.34 $ 0.41 $ 0.63 $ 0.72
======== ======== ======== ========
NOTE 4. INVENTORIES.
JUNE 30, DECEMBER 31,
2002 2001
-------- ------------
Raw materials, including parts and
subassemblies $ 34,368 $ 33,156
Work-in-process 11,357 15,908
Finished goods 33,287 30,942
Perishable tooling and supplies 2,328 2,328
-------- --------
81,340 82,334
Excess of current standard costs
over LIFO costs (5,561) (5,684)
-------- --------
Inventories, net $ 75,779 $ 76,650
======== ========
NOTE 5. COMPREHENSIVE INCOME.
For the three months ended June 30, 2002 and 2001, comprehensive income was
$12.5 million and $6.2 million, respectively. For the six months ended June
30, 2002 and 2001,
- 6 -
comprehensive income was $15.3 million and $10.4 million, respectively.
Items impacting the Company's comprehensive income, but not included in net
income, consist of foreign currency translation adjustments.
NOTE 6. CASH FLOW INFORMATION.
In the first six months of 2002 and 2001, the Company paid $3.3 million and
$7.9 million, respectively, to the various taxing authorities for income
taxes. Interest paid for the first six months of 2002 and 2001, was $3.3
million and $3.2 million, respectively.
NOTE 7. SEGMENT INFORMATION.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
2002 2001* 2002 2001*
--------- --------- --------- ---------
Revenues:
Compressed Air Products $ 89,240 $ 73,972 $ 177,751 $ 148,251
Pump Products 15,614 30,582 33,712 57,199
--------- --------- --------- ---------
Total $ 104,854 $ 104,554 $ 211,463 $ 205,450
========= ========= ========= =========
Operating Earnings:
Compressed Air Products $ 8,800 $ 5,481 $ 16,140 $ 10,888
Pump Products 864 4,944 2,011 8,055
--------- --------- --------- ---------
Total 9,664 10,425 18,151 18,943
Interest expense 1,730 1,547 3,412 3,389
Other income, net (435) (1,350) (567) (2,291)
--------- --------- --------- ---------
Income before income taxes $ 8,369 $ 10,228 $ 15,306 $ 17,845
========= ========= ========= =========
* As a result of adopting SFAS 142, periodic goodwill amortization
ceased effective January 1, 2002. Operating earnings for the quarter
ended June 30, 2001, excluding goodwill amortization expense, would
have been $6,386 and $5,134 for the Compressed Air Products and Pump
Products segments, respectively. Operating earnings for the six
months ended June 30, 2001, excluding goodwill amortization expense,
would have been $12,698 and $8,435 for the Compressed Air Products
and Pump Products segments, respectively.
NOTE 8. GOODWILL AND OTHER INTANGIBLE ASSETS.
Effective July 1, 2001, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 142 "Goodwill and Other Intangible
Assets" ("SFAS 142") applicable to business combinations completed after
June 30, 2001. Effective January 1, 2002, additional provisions of SFAS 142,
relating to business combinations completed prior to July 1, 2001 became
effective and were adopted by the Company. Under the provisions of this
standard, intangible assets deemed to have indefinite lives and goodwill are
not subject to amortization. All other intangible assets are amortized over
their estimated useful lives. Intangible assets and goodwill are subject to
annual impairment testing using the guidance and criteria described in this
standard. This testing requires comparison of carrying values to fair
values, and when appropriate, the carrying value of impaired assets is
reduced to fair value. During the second quarter of 2002, the Company
completed its transitional impairment test and determined that no impairment
of goodwill existed.
Net income, basic and diluted earnings per share for the three and six
months ended June 30, 2001, adjusted to exclude goodwill amortization, are as
follows:
- 7 -
Three Months Six Months
Ended Ended
June 30, 2001 June 30, 2001
------------- -------------
Reported net income $6,444 $11,243
Adjustments: goodwill amortization 940 1,880
------ -------
Adjusted net income $7,384 $13,123
====== =======
Basic earnings per share:
Reported $ 0.41 $ 0.73
Adjusted $ 0.48 $ 0.85
Diluted earnings per share:
Reported $ 0.41 $ 0.72
Adjusted $ 0.47 $ 0.84
The changes in the carrying amount of goodwill attributable to each business
segment for the six months ended June 30, 2002, are as follows:
COMPRESSED PUMP
AIR PRODUCTS PRODUCTS
------------ --------
Balance as of December 31, 2001 $157,614 $25,531
Foreign currency translation 1,467 ---
-------- -------
Balance as of June 30, 2002 $159,081 $25,531
======== =======
Other intangible assets at June 30, 2002 consisted of the following:
GROSS CARRYING ACCUMULATED
AMOUNT AMORTIZATION
-------------- ------------
Amortized intangible assets:
Acquired technology $ 9,187 $(6,082)
Customer lists and relationships 5,000 (365)
Other 2,661 (1,439)
------- -------
Total $16,848 $(7,886)
======= =======
Unamortized intangible assets
Trademarks $11,850
Other 4,145
-------
Total $15,995
=======
Amortization of intangible assets for the three months and six months ended
June 30, 2002, was $0.5 million and $1.1 million, respectively. Amortization
of intangible assets is anticipated to be approximately $2 million per year
for 2002 through 2006.
NOTE 9. CONTINGENCIES.
The Company is a party to various legal proceedings, lawsuits and
administrative actions, which are of an ordinary or routine nature. Due to
the bankruptcies of several asbestos manufacturers and other primary
defendants, the Company has begun to be named as a defendant in an
- 8 -
increasing number of asbestos personal injury lawsuits. In addition, the
Company has also been named as a defendant in a number of silicosis personal
injury lawsuits. Predecessors to the Company manufactured and sold the
products allegedly at issue in these asbestos and silicosis lawsuits,
namely: (a) asbestos-containing components supplied by third parties; and
(b) portable compressors that were used as components for sandblasting
equipment manufactured and sold by other parties. Since its formation in
1993, the Company has not manufactured or sold asbestos containing products
or portable compressors. Nonetheless, these lawsuits represent potential
contingent liabilities to the Company as a result of its predecessors'
historical sales of these products.
The Company believes that these pending legal proceedings, lawsuits and
administrative actions will not, in the aggregate, have a material adverse
effect on its consolidated financial position, results of operations or
liquidity, based on: (1) the Company's anticipated insurance and
indemnification rights to address the risks of such matters; (2) the limited
risk of potential asbestos exposure from the components described above, due
to the complete enclosure of the components within the subject products and
the additional protective non-asbestos binder which encapsulated the
components; (3) the fact that neither the Company, nor its predecessors,
ever manufactured, marketed or sold sandblasting equipment; (4) various
other potential defenses available to the Company with respect to such
matters; and (5) the Company's prior disposition of comparable matters.
The Company has also been identified as a potentially responsible party with
respect to various sites designated for 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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS.
PERFORMANCE IN THE QUARTER ENDED JUNE 30, 2002 COMPARED WITH
THE QUARTER ENDED JUNE 30, 2001
Revenues
Revenues increased slightly to $104.9 million for the three months ended
June 30, 2002, compared to $104.6 million in the same period of 2001.
Excluding incremental revenue from acquisitions, revenues declined $16.7
million (16%) over the same period of 2001. See Note 2 to the Financial
Statements for further information on the Company's recent acquisitions.
For the three months ended June 30, 2002, revenues for the Compressed Air
Products segment, including $17.0 million from acquisitions, increased $15.3
million (21%) to $89.2 million, compared to the same period of 2001.
Excluding acquisitions, the decline in revenues was primarily attributable
to softness in the U.S. and European industrial markets, which weakened
demand for compressors and blowers. Favorable foreign currency exchange
rates partially offset this negative factor. Pump Products segment revenues
declined $15.0 million (49%) to $15.6 million for the three months ended
June 30, 2002, compared to the same period of 2001. This decline resulted
from depressed demand for petroleum pump products due to lower natural gas
prices and rig counts, which began negatively impacting order rates in the
second half of 2001.
- 9 -
Costs and Expenses
Gross margin (defined as sales less cost of sales excluding depreciation and
amortization) for the three months ended June 30, 2002 increased $2.3
million (7%) to $33.6 million compared to the same period of 2001. Gross
margin as a percentage of revenues (gross margin percentage) increased to
32.0% in the three-month period of 2002 from 29.9% in the same period of
2001. This increase in the gross margin percentage was principally
attributable to an overall favorable sales mix (in part relating to
decreased pump product sales), lower warranty expense in the Compressed Air
Products segment, the incremental impact of acquisitions and ongoing cost
reduction efforts.
Depreciation and amortization decreased 14% to $3.6 million in the
three-month period of 2002, compared with $4.2 million for the same period
of 2001. The decrease in depreciation and amortization expense was due to
the adoption of SFAS 142 effective January 1, 2002, which eliminated
goodwill amortization. For the three-month periods, depreciation and
amortization expense as a percentage of revenues decreased to 3.4% in 2002
from 4.0% in 2001. This percentage decrease is due to the cessation of
goodwill amortization in 2002, as noted above.
Selling and administrative expenses increased in the three-month period of
2002 by 22% to $20.3 million from $16.6 million in the same period of 2001
due to acquisitions. Excluding acquisitions, selling and administrative
expenses decreased slightly in 2002 compared to the prior year period.
Selling and administrative expenses as a percentage of revenues increased to
19.4% in the second quarter of 2002 compared to 15.9% in 2001 primarily as a
result of the decline in revenues excluding acquisitions. Acquisitions also
contributed to this increase as they currently have higher selling and
administrative expenses relative to revenues than the Company's previously
existing operations.
Other income for the three months ended June 30, 2001, included
approximately $0.7 million from non-recurring litigation settlement proceeds
and $0.5 million of interest income related to the finalization of an income
tax settlement with the Internal Revenue Service.
The Compressed Air Products segment generated operating margins (defined as
revenues, less cost of sales, depreciation and amortization, and selling and
administrative expenses) of 9.9% for the three-month period ended June 30,
2002, an increase from 7.4% for the same period of 2001. This increase is
primarily due to reduced warranty expense, the cessation of goodwill
amortization, the incremental impact of acquisitions and ongoing cost
reduction efforts.
The Pump Products segment generated operating margins of 5.5% for the
three-month period ended June 30, 2002, compared to 16.2% for the same
period in 2001. This decrease is primarily attributable to the negative
impact of decreased leverage of the segment's fixed and semi-fixed costs
over a lower revenue base.
Interest expense increased $0.2 million (12%) to $1.7 million for the three
months ended June 30, 2002, compared to the same period of 2001. This
increase is a result of higher average borrowings (due to businesses
acquired in 2001) partially offset by lower average interest rates. The
average interest rate for the three-month period of 2002 was 4.5%, compared
to 6.0% for the same period of 2001.
Income before income taxes decreased $1.9 million (18%) to $8.4 million for
the three months ended June 30, 2002, compared to the same period of 2001.
This decrease is primarily the result of decreased leverage of fixed costs
over a lower revenue base (excluding acquisitions) for both
- 10 -
segments and the non-recurring gains included in 2001 other income mentioned
above. These negative factors were partially offset by the cessation of
goodwill amortization.
The provision for income taxes decreased by $0.9 million to $2.8 million for
the three month period of 2002, compared to $3.8 million in 2001, as a
result of the lower income before taxes and a lower overall effective tax
rate. The Company's effective tax rate for the three months ended June 30,
2002 decreased to 34.0%, compared to 37.0% in the prior year period,
principally as a result of the cessation of non-deductible goodwill
amortization.
Net income for the three months ended June 30, 2002 decreased $0.9 million
(14%) to $5.5 million ($0.34 diluted earnings per share), compared to $6.4
million ($0.41 diluted earnings per share) for the same period of 2001. This
decrease in net income is attributable to the same factors that resulted in
decreased income before taxes noted above.
PERFORMANCE IN THE SIX MONTHS ENDED JUNE 30, 2002 COMPARED WITH
THE SIX MONTHS ENDED JUNE 30, 2001
Revenues
Revenues increased $6.0 million, or 3% to $211.5 million for the six months
ended June 30, 2002, compared to $205.5 million in the same period of 2001.
Excluding incremental revenue from acquisitions, revenues declined $35.2
million (17%) over the same period of 2001. See Note 2 to the Financial
Statements for further information on the Company's recent acquisitions.
For the six months ended June 30, 2002, revenues for the Compressed Air
Products segment, including $41.3 million from acquisitions, increased $29.5
million (20%) to $177.8 million, compared to the same period of 2001.
Excluding acquisitions, the decline in revenues was primarily attributable
to softness in the U.S. and European industrial markets, which weakened
demand for compressors and blowers. Pump Products segment revenues declined
$23.5 million (41%) to $33.7 million for the six months ended June 30, 2002,
compared to the same period of 2001. This decline resulted from depressed
demand for petroleum pump products due to lower natural gas prices and rig
counts, which began negatively impacting order rates in the second half of
2001.
Costs and Expenses
Gross margin (defined as sales less cost of sales excluding depreciation and
amortization) for the six months ended June 30, 2002 increased $4.9 million
(8%) to $65.6 million compared to the same period of 2001. Gross margin as a
percentage of revenues (gross margin percentage) increased to 31.0% in the
six-month period of 2002 from 29.5% in the same period of 2001. This
increase in the gross margin percentage was principally attributable to an
overall favorable sales mix (in part relating to decreased pump product
sales), lower warranty expense in the Compressed Air Products segment, the
incremental impact of acquisitions and ongoing cost reduction efforts.
Depreciation and amortization decreased 16% to $7.1 million in the six-month
period of 2002, compared with $8.5 million for the same period of 2001. The
decrease in depreciation and amortization expense was due to the adoption of
SFAS 142 effective January 1, 2002, which eliminated goodwill amortization.
For the six-month periods, depreciation and amortization
- 11 -
expense as a percentage of revenues decreased to 3.4% in 2002 from 4.1% in
2001. This percentage decrease is due to the cessation of goodwill
amortization in 2002, as noted above.
Selling and administrative expenses increased in the six-month period of
2002 by 21% to $40.3 million from $33.3 million in the same period of 2001
due to acquisitions. Excluding acquisitions, selling and administrative
expenses decreased slightly in 2002 compared to the prior year period.
Selling and administrative expenses as a percentage of revenues increased to
19.0% in the second quarter of 2002 compared to 16.2% in 2001 primarily as a
result of the decline in revenues excluding acquisitions. Acquisitions also
contributed to this increase as they currently have higher selling and
administrative expenses relative to revenues than the Company's previously
existing operations.
Other income for the six months ended June 30, 2001 included approximately
$1.4 million from non-recurring litigation settlement proceeds and $0.5
million of interest income related to the finalization of an income tax
settlement with the Internal Revenue Service.
The Compressed Air Products segment generated operating margins (defined as
revenues, less cost of sales, depreciation and amortization, and selling and
administrative expenses) of 9.1% for the six-month period ended June 30,
2002, an increase from 7.3% for the same period of 2001. This increase is
primarily due to reduced warranty expense, the cessation of goodwill
amortization, the incremental impact of acquisitions and ongoing cost
reduction efforts. These positive factors were partially offset by the
negative impact of decreased leverage of the segment's fixed and semi-fixed
costs over a lower revenue base (excluding acquisitions) and higher fringe
benefit costs.
The Pump Products segment generated operating margins of 6.0% for the
six-month period ended June 30, 2002, compared to 14.1% for the same period
in 2001. This decrease is primarily attributable to the negative impact of
decreased leverage of the segment's fixed and semi-fixed costs over a lower
revenue base.
Interest expense was $3.4 million for the six months ended June 30, 2002 and
2001, as higher average borrowings (due to businesses acquired in 2001) were
offset by lower average interest rates. The average interest rate for the
six-month period of 2002 was 4.3%, compared to 6.2% for the same period of
2001.
Income before income taxes decreased $2.5 million (14%) to $15.3 million for
the six months ended June 30, 2002, compared to the same period of 2001.
This decrease is primarily the result of decreased leverage of fixed costs
over a lower revenue base (excluding acquisitions) for both segments and the
non-recurring gains included in 2001 other income mentioned above. These
negative factors were partially offset by the cessation of goodwill
amortization.
The provision for income taxes decreased by $1.4 million to $5.2 million for
the six month period of 2002, compared to $6.6 million in 2001, as a result
of the lower income before taxes and a lower overall effective tax rate. The
Company's effective tax rate for the six months ended June 30, 2002
decreased to 34.0%, compared to 37.0% in the prior year period, principally
as a result of the cessation of non-deductible goodwill amortization.
Net income for the six months ended June 30, 2002 decreased $1.1 million
(10%) to $10.1 million ($0.63 diluted earnings per share), compared to $11.2
million ($0.72 diluted earnings per
- 12 -
share) for the same period of 2001. This decrease in net income is
attributable to the same factors that resulted in decreased income before
taxes noted above.
Outlook
Demand for pump products has historically been related to market conditions
and expectations for oil and natural gas prices. Orders for pump products
were $12.9 million in the second quarter of 2002, a decrease of $29.5
million compared to the same period of 2001. For the first six months of
2002, pump product orders were $26.2 million, a decrease of $49.0 million
compared to the same period of 2001. Compared to June 30, 2001, backlog for
this business segment decreased $19.6 million to $13.1 million on June 30,
2002. These decreases can primarily be attributed to lower natural gas
prices and rig counts which began negatively impacting order rates in the
second half of 2001. 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.
In general, demand for compressed air products follows 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 second quarter of 2002, orders for compressed air
products were $93.6 million, compared to $70.7 million in the same period of
2001. For the first six months of 2002, orders for compressed air products
were $179.2 million, compared to $147.8 million in the same period of 2001.
Order backlog for the Compressed Air Products segment was $61.2 million as
of June 30, 2002, compared to $46.3 million as of June 30, 2001. These
increases are solely due to acquisitions. Excluding the businesses acquired
in 2001, orders and backlog were down 8% and 20%, respectively, in the first
six months of 2002, compared to the prior year period, due to softness in the
U.S. and European industrial markets, as noted above.
The Company's largest supplier of iron castings, Atchison Casting
Corporation ("Atchison") recently announced that it intends to sell its
LaGrange, Missouri foundry ("LaGrange Foundry"). The LaGrange Foundry is
utilized by Atchison to meet its iron casting supply commitments to the
Company. The LaGrange Foundry was previously owned by the Company and was
sold to Atchison in 1995. As part of the sale agreement, the Company entered
into a five-year agreement for the supply of certain cast iron products from
Atchison/LaGrange Foundry. Since the expiration of the supply agreement in
2000, the Company has entered into more favorable arrangements for some of
these iron castings from other suppliers, as part of its ongoing material
cost reduction initiatives. In the process, the Company has achieved
significant cost reductions and diminished its reliance on the LaGrange
Foundry. Nonetheless, Atchison remains the Company's largest supplier of
iron castings.
Atchison recently informed the Company that if a sale of the LaGrange
Foundry is not consummated, it may be necessary to close the foundry. The
Company does not anticipate that a potential closure of the LaGrange Foundry
would have a material adverse impact on its long-term financial performance.
In the event of a closure, the Company would be required to secure
alternative supply sources over a short-term transition period. During such
short-term period, there would be a negative impact on the Company's
financial performance as alternative iron casting supply sources are fully
integrated into the Company's supply and manufacturing processes. With this
in mind,
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Company management is continuously monitoring this situation, and has
developed a contingency plan to mitigate the severity of the impact during
such a transition period. This contingency plan is designed to minimize the
disruption to the Company's manufacturing operations that currently utilize
iron castings from the LaGrange Foundry as new supply sources are
integrated. The ultimate success, however, of this plan would be predicated
in large measure on the skill, commitment and availability of the alternate
suppliers and the Company's ability to effectively manage the transition.
LIQUIDITY AND CAPITAL RESOURCES
Operating Working Capital
During the six months ended June 30, 2002, operating working capital
(defined as receivables plus inventories, less accounts payable and accrued
liabilities) increased $7.0 million due to lower accounts payable and
accrued liabilities partially offset by lower receivables and inventories.
These changes were primarily the result of changes in foreign currency
exchange rates combined with reduced activity levels.
Cash Flows
During the six months of 2002, the Company generated cash from operations
totaling $12.4 million, compared to $15.9 million in the prior year period.
This change is primarily due to a less favorable change in operating working
capital compared to the prior year period. Net payments on long-term debt
totaled $23.2 million during the six months ended June 30, 2002. The cash
flows provided by operating activities and used in investing and financing
activities, combined with the effect of changes in foreign currency exchange
rates, resulted in a net cash decrease of $13.2 million for the six months
ended June 30, 2002.
Capital Expenditures and Commitments
Capital projects to increase operating efficiency and flexibility, expand
production capacity and product quality resulted in expenditures of $4.8
million in the first six months of 2002. This was $0.5 million lower than
the level of capital expenditures in the comparable period in 2001 due to
the timing of capital projects. Commitments for capital expenditures at June
30, 2002 totaled $8.9 million. Management expects additional capital
authorizations to be committed during the remainder of the year and that
capital expenditures for 2002 will approximate $12-15 million, primarily due
to expenditures for cost reductions and additional machining capacity at
certain operations. 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 alternative minimum tax obligations which arise from the
exercise of incentive stock options. 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 June 30,
2002, a total of 1,572,542 shares have been repurchased at a cost of $22.8
million under both repurchase
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programs. During the first half of 2002, the Company accepted shares of its
common stock, valued at $0.2 million, which were tendered for the exercise
of stock options.
Liquidity
On March 6, 2002, the Company amended and restated its Revolving Line of
Credit Agreement (the "Credit Line"), increasing the borrowing capacity to
$150 million and extending the maturity date to March 6, 2005. Subject to
approval by lenders holding more than 75% of the debt, the Company may
request up to two, one-year extensions. The total debt balance will be due
upon final maturity. On June 30, 2002, the Credit Line had an outstanding
principal balance of approximately $62.0 million, leaving $88.0 million
available for future use, subject to the terms of the Credit Line.
The amended and restated agreement also provided for an additional $50.0
million Term Loan which was used to retire debt outstanding under the
Interim Credit Agreement. The five-year loan requires principal payments of
$2.5 million in years one and two, and $15.0 million in years three through
five.
The Company's borrowing arrangements are generally unsecured and permit
certain investments and dividend payments. 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.
CONTINGENCIES
The Company is a party to various legal proceedings, lawsuits and
administrative actions, which are of an ordinary or routine nature. Due to
the bankruptcies of several asbestos manufacturers and other primary
defendants, the Company has begun to be named as a defendant in an
increasing number of asbestos personal injury lawsuits. In addition, the
Company has also been named as a defendant in a number of silicosis personal
injury lawsuits. Predecessors to the Company manufactured and sold the
products allegedly at issue in these asbestos and silicosis lawsuits,
namely: (a) asbestos-containing components supplied by third parties; and
(b) portable compressors that were used as components for sandblasting
equipment manufactured and sold by other parties. Since its formation in
1993, the Company has not manufactured or sold asbestos containing products
or portable compressors. Nonetheless, these lawsuits represent potential
contingent liabilities to the Company as a result of its predecessors'
historical sales of these products.
The Company believes that these pending legal proceedings, lawsuits and
administrative actions will not, in the aggregate, have a material adverse
effect on its consolidated financial position, results of operations or
liquidity, based on: (1) the Company's anticipated insurance and
indemnification rights to address the risks of such matters; (2) the limited
risk of potential asbestos exposure from the components described above, due
to the complete enclosure of the components within the subject products and
the additional protective non-asbestos binder which encapsulated the
components; (3) the fact that neither the Company, nor its predecessors,
ever manufactured, marketed or sold sandblasting equipment; (4) various
other potential defenses available to the Company with respect to such
matters; and (5) the Company's prior disposition of comparable matters.
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The Company has also been identified as a potentially responsible party with
respect to various sites designated for 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
Effective July 1, 2001, the Company adopted the provisions of the Financial
Accounting Standards Board ("FASB"), Statement of Financial Accounting
Standards No. 142 "Goodwill and Other Intangible Assets" ("SFAS 142")
applicable to business combinations completed after June 30, 2001. Effective
January 1, 2002, additional provisions of SFAS 142, relating to business
combinations completed prior to July 1, 2001 became effective and were
adopted by the Company. Under the provisions of this standard, intangible
assets deemed to have indefinite lives and goodwill are not subject to
amortization. All other intangible assets are amortized over their estimated
useful lives. Intangible assets and goodwill are subject to annual
impairment testing using the guidance and criteria described in this
standard. This testing requires comparison of carrying values to fair
values, and when appropriate, the carrying value of impaired assets is
reduced to fair value. During the second quarter of 2002, the Company
completed its transitional impairment test and determined that no impairment
of goodwill existed.
In June 2001, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 143, "Accounting for Asset Retirement Obligations." This
standard requires that legal obligations associated with the retirement of
long-lived intangible assets be recorded at fair value when incurred. The
Company will adopt this standard on January 1, 2003 and management believes
it will not have a material impact on the Company's future consolidated
financial statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145 provides for the rescission of several previously
issued accounting standards, new accounting guidance for the accounting for
certain lease modifications and various technical corrections that are not
substantive in nature to existing pronouncements. SFAS No. 145 will be
adopted by the Company beginning January 1, 2003, except for the provisions
relating to the amendment of SFAS No. 13, which will be adopted for
transactions occurring subsequent to May 15, 2002. Adoption of SFAS No. 145
will not have a material impact on the Company's future consolidated
financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 nullifies Emerging Issues
Task Force Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)," and requires that a liability for costs
associated with an exit or disposal activity be recognized when the
liability is incurred rather than when a company commits to such an
activity. SFAS No. 146 also establishes that fair value be the objective for
initial measurement of the liability. SFAS No. 146 will be adopted by the
Company for exit or disposal activities that are initiated after December
31, 2002. Adoption of SFAS No. 146 will not have a material impact on the
Company's future consolidated financial statements.
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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, certain 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 Gardner Denver'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: the ability to
maintain and to enter into key purchasing and supply relationships; the
ability to identify, negotiate and complete future acquisitions; the speed
with which the Company is able to integrate its recent acquisitions and
realize the related financial benefit; 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; changes in domestic
and/or worldwide industrial production and industrial capacity utilization
rates, which affect demand for the Company's compressed air products;
pricing of Gardner Denver products; the degree to which the Company is able
to penetrate niche markets; the ability to attract and retain quality
management personnel; and the continued successful implementation of cost
reduction efforts.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There were no material changes in the Company's exposure to market risk
between December 31, 2001 and June 30, 2002.
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders (the "Annual Meeting") was held
pursuant to notice on May 7, 2002. At the Annual Meeting, Donald G. Barger,
Jr. and Raymond R. Hipp were elected to serve as directors for a three-year
term expiring in 2005. There were 14,427,489 affirmative votes cast and
75,185 votes withheld concerning Mr. Barger's election as a director and
14,425,430 affirmative votes cast and 77,244 votes withheld concerning Mr.
Hipp's election as a director. Stockholders also elected to amend the
Long-Term Incentive Plan with 11,480,995 affirmative votes cast, 2,636,012
votes against and 385,667 abstaining votes or non-votes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits:
10.1 Gardner Denver, Inc. Long-Term Incentive Plan, as amended
July 30, 2002.
10.13 Change in Control Agreement dated August 1, 2002, entered
into between Gardner Denver, Inc. and its Chief Executive
Officer.
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10.14 Form of Change in Control Agreement dated August 1, 2002,
entered into between Gardner Denver, Inc. and its
executive officers.
99.1 Certification of Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
During the quarter ended June 30, 2002, the Company filed a Current
Report on Form 8-K, dated June 26, 2002, related to its dismissal
of Arthur Andersen LLP as the Company's independent public
accountants. The Company has engaged KPMG LLP to serve as its
independent public accountants for the fiscal year 2002.
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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.
GARDNER DENVER, INC.
Date: August 13, 2002 By: /s/Ross J. Centanni
--------------------------------------
Ross J. Centanni
Chairman, President & CEO
Date: August 13, 2002 By: /s/Philip R. Roth
--------------------------------------
Philip R. Roth
Vice President, Finance & CFO
Date: August 13, 2002 By: /s/Daniel C. Rizzo, Jr.
--------------------------------------
Daniel C. Rizzo, Jr.
Vice President and Corporate
Controller (Chief Accounting Officer)
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GARDNER DENVER, INC.
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
10.1 Gardner Denver, Inc. Long-Term Incentive Plan, as amended July 30,
2002.
10.13 Change in Control Agreement dated August 1, 2002, entered into
between Gardner Denver, Inc. and its Chief Executive Officer.
10.14 Form of Change in Control Agreement dated August 1, 2002, entered
into between Gardner Denver, Inc. and its executive officers.
99.1 Certification of Chief Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
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