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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 September 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
--- ---
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 $.01 per share, as of October 28, 2002: 15,907,821 shares.
==============================================================================
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
GARDNER DENVER, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share amounts)
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ -----------------------
2002 2001 2002 2001
-------- -------- -------- --------
Revenues $102,791 $103,426 $314,254 $308,876
Costs and Expenses:
Cost of sales (excluding depreciation
and amortization) 70,261 72,544 216,152 217,305
Depreciation and amortization 3,718 4,252 10,859 12,724
Selling and administrative expenses 19,897 17,007 60,177 50,281
Interest expense 1,566 1,548 4,978 4,937
Other expense (income), net 32 (739) (535) (3,030)
-------- -------- -------- --------
Income before income taxes 7,317 8,814 22,623 26,659
Provision for income taxes 2,488 3,262 7,692 9,864
-------- -------- -------- --------
Net income $ 4,829 $ 5,552 $ 14,931 $ 16,795
======== ======== ======== ========
Basic earnings per share $ 0.30 $ 0.36 $ 0.94 $ 1.08
======== ======== ======== ========
Diluted earnings per share $ 0.30 $ 0.35 $ 0.93 $ 1.07
======== ======== ======== ========
The accompanying notes are an integral part of this statement.
- 2 -
GARDNER DENVER, INC.
CONSOLIDATED BALANCE SHEET
(in thousands, except per share amounts)
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- ------------
ASSETS
Current assets:
Cash and equivalents $ 16,185 $ 29,980
Receivables, net 78,362 85,538
Inventories, net 73,607 76,650
Deferred income taxes 6,613 4,956
Other 3,905 4,011
-------- --------
Total current assets 178,672 201,135
-------- --------
Property, plant and equipment, net 72,997 74,097
Goodwill 200,755 183,145
Other intangibles, net 8,879 25,692
Deferred income taxes 158 2,093
Other assets 3,371 2,526
-------- --------
Total assets $464,832 $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 65,951 77,202
-------- --------
Total current liabilities 73,451 84,577
-------- --------
Long-term debt, less current maturities 123,297 160,230
Postretirement benefits other than pensions 35,172 36,890
Other long-term liabilities 10,345 8,263
-------- --------
Total liabilities 242,265 289,960
-------- --------
Stockholders' equity:
Common stock, $.01 par value; 50,000 shares
authorized; 15,903 shares issued and
outstanding at September 30, 2002 176 174
Capital in excess of par value 170,196 166,262
Treasury stock at cost, 1,716 shares at
September 30, 2002 (25,803) (25,602)
Retained earnings 76,993 62,062
Accumulated other comprehensive income (loss) 1,005 (4,168)
-------- --------
Total stockholders' equity 222,567 198,728
-------- --------
Total liabilities and stockholders' equity $464,832 $488,688
======== ========
The accompanying notes are an integral part of this statement.
- 3 -
GARDNER DENVER, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(Unaudited)
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
2002 2001
-------- --------
Cash flows from operating activities:
Net income $ 14,931 $ 16,795
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 10,859 12,724
Net (gain) loss on asset dispositions (17) 40
Stock issued for employee benefit plans 1,647 1,622
Deferred income taxes 244 70
Changes in assets and liabilities:
Receivables 9,099 2,366
Inventories 3,932 (495)
Accounts payable and accrued liabilities (13,269) (853)
Other assets and liabilities, net 557 (572)
-------- --------
Net cash provided by operating activities 27,983 31,697
-------- --------
Cash flows from investing activities:
Capital expenditures (7,476) (8,090)
Business acquisitions, net of cash acquired -- (82,236)
Disposals of plant and equipment 135 86
Other (5) (31)
-------- --------
Net cash used in investing activities (7,346) (90,271)
-------- --------
Cash flows from financing activities:
Principal payments on long-term debt (48,808) (81,075)
Proceeds from long-term debt 62,000 87,000
Principal payments on short-term borrowings (50,000) --
Proceeds from short-term borrowings -- 50,000
Proceeds from stock options 2,289 1,549
Purchase of treasury stock (201) (108)
Debt issuance costs (745) --
Other (609) (1,115)
-------- --------
Net cash (used in) provided by
financing activities (36,074) 56,251
-------- --------
Effect of exchange rate changes on cash and
equivalents 1,642 (471)
-------- --------
Decrease in cash and equivalents (13,795) (2,794)
-------- --------
Cash and equivalents, beginning of period 29,980 30,239
-------- --------
Cash and equivalents, end of period $ 16,185 $ 27,445
======== ========
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. ("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 nine months ended
September 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,
previously 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 their 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. In
accordance with Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets" ("SFAS 142"), goodwill acquired in
each acquisition has not been amortized. The purchase price allocations for
Hoffman and Belliss & Morcom were finalized during the quarter ended
September 30, 2002, upon receipt of independent third party valuations of
the acquired, separately identifiable intangible assets (other than
goodwill). Pursuant to the valuations, the fair value of the separately
identifiable intangible assets was reduced from the Company's previous
internal fair value estimate with a corresponding increase in the purchase
price allocated to
- 5 -
goodwill. The impact on amortization expense as a result of the finalization
of the purchase price allocations was insignificant.
NOTE 3. 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,
----------------------- -----------------------
2002 2001 2002 2001
------- ------- ------- -------
Basic EPS:
Net income $ 4,829 $ 5,552 $14,931 $16,795
======= ======= ======= =======
Shares
Weighted average number of common
shares outstanding 15,887 15,581 15,833 15,526
======= ======= ======= =======
Basic earnings per common share $ 0.30 $ 0.36 $ 0.94 $ 1.08
======= ======= ======= =======
Diluted EPS:
Net income $ 4,829 $ 5,552 $14,931 $16,795
======= ======= ======= =======
Shares
Weighted average number of common
shares outstanding 15,887 15,581 15,833 15,526
Assuming conversion of dilutive stock
options issued and outstanding 151 281 225 223
------- ------- ------- -------
Weighted average number of common
shares outstanding, as adjusted 16,038 15,862 16,058 15,749
======= ======= ======= =======
Diluted earnings per common share $ 0.30 $ 0.35 $ 0.93 $ 1.07
======= ======= ======= =======
NOTE 4. INVENTORIES.
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- ------------
Raw materials, including parts and
subassemblies $33,175 $33,156
Work-in-process 11,010 15,908
Finished goods 32,651 30,942
Perishable tooling and supplies 2,328 2,328
------- -------
79,164 82,334
Excess of current standard costs
over LIFO costs (5,557) (5,684)
------- -------
Inventories, net $73,607 $76,650
======= =======
- 6 -
NOTE 5. COMPREHENSIVE INCOME.
For the three months ended September 30, 2002 and 2001, comprehensive income
was $5.5 million and $8.5 million, respectively. For the nine months ended
September 30, 2002 and 2001, comprehensive income was $20.1 million and
$19.0 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 nine months of 2002 and 2001, the Company paid $5.3 million and
$8.6 million, respectively, to the various taxing authorities for income
taxes. Interest paid for the first nine months of 2002 and 2001, was $5.4
million and $4.9 million, respectively.
NOTE 7. SEGMENT INFORMATION.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
2002 2001* 2002 2001*
-------- -------- -------- --------
Revenues:
Compressed Air Products $ 85,496 $ 74,986 $263,247 $223,237
Pump Products 17,295 28,440 51,007 85,639
-------- -------- -------- --------
Total $102,791 $103,426 $314,254 $308,876
======== ======== ======== ========
Operating Earnings:
Compressed Air Products $ 7,375 $ 5,424 $ 23,515 $ 16,312
Pump Products 1,540 4,199 3,551 12,254
-------- -------- -------- --------
Total 8,915 9,623 27,066 28,566
Interest expense 1,566 1,548 4,978 4,937
Other, net 32 (739) (535) (3,030)
-------- -------- -------- --------
Income before income taxes $ 7,317 $ 8,814 $ 22,623 $ 26,659
======== ======== ======== ========
* As a result of adopting SFAS 142, periodic goodwill amortization
ceased effective January 1, 2002. Operating earnings for the quarter
ended September 30, 2001, excluding goodwill amortization expense,
would have been $6,329 and $4,389 for the Compressed Air Products and
Pump Products segments, respectively. Operating earnings for the nine
months ended September 30, 2001, excluding goodwill amortization
expense, would have been $19,027 and $12,824 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
- 7 -
quarter of 2002, the Company completed its transitional impairment test and
determined that no impairment of goodwill existed.
Net income and basic and diluted earnings per share for the three and nine
months ended September 30, 2001, adjusted to exclude goodwill amortization,
are as follows:
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, 2001 SEPTEMBER 30, 2001
------------------ ------------------
Reported net income $5,552 $16,795
Adjustments: goodwill amortization 940 2,820
------ -------
Adjusted net income $6,492 $19,615
====== =======
Basic earnings per share:
Reported $ 0.36 $ 1.08
Adjusted $ 0.42 $ 1.26
Diluted earnings per share:
Reported $ 0.35 $ 1.07
Adjusted $ 0.41 $ 1.25
The changes in the carrying amount of goodwill attributable to each business
segment for the nine months ended September 30, 2002, are as follows:
COMPRESSED PUMP
AIR PRODUCTS PRODUCTS
------------ --------
Balance as of December 31, 2001 $157,614 $25,531
Adjustment due to finalization of purchase
price allocations for businesses acquired
in 2001 (See Note 2) 16,213 --
Foreign currency translation 1,397 --
-------- -------
Balance as of September 30, 2002 $175,224 $25,531
======== =======
Other intangible assets at September 30, 2002 consisted of the following:
GROSS CARRYING ACCUMULATED
AMOUNT AMORTIZATION
-------------- ------------
Amortized intangible assets:
Acquired technology $10,024 $(6,495)
Other 4,496 (2,103)
Unamortized intangible assets:
Trademarks $ 2,957 --
------- -------
Total other intangible assets $17,477 $(8,598)
======= =======
- 8 -
Amortization of intangible assets for the three months and nine months ended
September 30, 2002, was $0.7 million and $1.8 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
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 SEPTEMBER 30, 2002 COMPARED WITH
THE QUARTER ENDED SEPTEMBER 30, 2001
Revenues
Revenues decreased slightly to $102.8 million for the three months ended
September 30, 2002, compared to $103.4 million in the same period of 2001.
Excluding incremental revenue from
- 9 -
acquisitions, revenues declined $13.1 million (13%) 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 September 30, 2002, revenues for the Compressed
Air Products segment, including $12.4 million from acquisitions, increased
$10.5 million (14%) to $85.5 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 $11.1 million (39%) to $17.3 million for the three months ended
September 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 three months ended September 30, 2002 increased $1.6
million (5%) to $32.5 million compared to the same period of 2001. Gross
margin as a percentage of revenues (gross margin percentage) increased to
31.6% 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 change (in part relating to
decreased pump product sales), the incremental impact of acquisitions, lower
warranty expense in the Compressed Air Products segment and ongoing cost
reduction projects, including acquisition integration efforts.
Depreciation and amortization decreased 13% to $3.7 million in the
three-month period of 2002, compared with $4.3 million for the same period
of 2001. The decrease in depreciation and amortization expense was primarily
due to the adoption of SFAS 142 effective January 1, 2002, which eliminated
goodwill amortization. This decrease was partially offset by the
amortization of intangible assets (other than goodwill) related to the 2001
acquisitions.
Selling and administrative expenses increased in the three-month period of
2002 by 17% to $19.9 million from $17.0 million in the same period of 2001.
This increase was attributable to the incremental impact of acquisitions and
changes in foreign currency exchange rates. Selling and administrative
expenses as a percentage of revenues increased to 19.4% in the third quarter
of 2002 compared to 16.4% 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
as a percentage of revenues than the Company's previously existing
operations.
Other income for the three months ended September 30, 2001, included
approximately $0.6 million from a non-recurring litigation settlement.
The Compressed Air Products segment generated operating margins (defined as
revenues, less cost of sales, depreciation and amortization, and selling and
administrative expenses) of 8.6% for the three-month period ended September
30, 2002, an increase from 7.2% for the same period of 2001. This increase
is primarily attributable to the incremental impact of acquisitions, the
cessation of goodwill amortization, reduced warranty expense and ongoing
cost reduction efforts.
- 10 -
The Pump Products segment generated operating margins of 8.9% for the
three-month period ended September 30, 2002, compared to 14.8% 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 slightly to $1.6 million for the three months
ended September 30, 2002, compared to $1.5 million for 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
4.6%, compared to 5.4% for the same period of 2001.
Income before income taxes decreased $1.5 million (17%) to $7.3 million for
the three months ended September 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 gain included in 2001 other income mentioned above.
These negative factors were partially offset by the cessation of goodwill
amortization and lower warranty expense in the Compressed Air Products
segment.
The provision for income taxes decreased by $0.8 million to $2.5 million for
the three-month period of 2002, compared to $3.3 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 September
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 September 30, 2002 decreased $0.7
million (13%) to $4.8 million ($0.30 diluted earnings per share), compared
to $5.6 million ($0.35 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 NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED WITH
THE NINE MONTHS ENDED SEPTEMBER 30, 2001
Revenues
Revenues increased $5.4 million, or 2% to $314.3 million for the nine months
ended September 30, 2002, compared to $308.9 million in the same period of
2001. Excluding incremental revenue from acquisitions, revenues declined
$48.7 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 nine months ended September 30, 2002, revenues for the Compressed
Air Products segment, including $54.1 million from acquisitions, increased
$40.0 million (18%) to $263.2 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. Pump Products segment revenues declined
$34.6 million (40%) to $51.0 million for the nine months ended September 30,
2002, compared to the same period of 2001. This decline resulted from
depressed demand for petroleum pump
- 11 -
products due to lower natural gas prices and rig counts, which began to
negatively impact 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 nine months ended September 30, 2002 increased $6.5
million (7%) to $98.1 million compared to the same period of 2001. Gross
margin as a percentage of revenues (gross margin percentage) increased to
31.2% in the nine-month period of 2002 from 29.6% in the same period of
2001. This increase in the gross margin percentage was principally
attributable to an overall favorable sales mix change (in part relating to
decreased pump product sales), the incremental impact of acquisitions, lower
warranty expense in the Compressed Air Products segment and ongoing cost
reduction projects, including acquisition integration efforts.
Depreciation and amortization decreased 15% to $10.9 million in the
nine-month period of 2002, compared with $12.7 million for the same period
of 2001. The decrease in depreciation and amortization expense was primarily
due to the adoption of SFAS 142 effective January 1, 2002, which eliminated
goodwill amortization. This decrease was partially offset by the
amortization of intangible assets (other than goodwill) related to the 2001
acquisitions.
Selling and administrative expenses increased in the nine-month period of
2002 by 20% to $60.2 million from $50.3 million in the same period of 2001
due to acquisitions. Excluding acquisitions, selling and administrative
expenses decreased slightly in 2002 due to cost reduction efforts, which
were partially offset by higher fringe benefit costs (medical, other
post-employment benefits and pension). Selling and administrative expenses
as a percentage of revenues increased to 19.1% for the nine-month period of
2002 compared to 16.3% 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
as a percentage of revenues than the Company's previously existing
operations.
Other income for the nine months ended September 30, 2001 included
approximately $2.0 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 8.9% for the nine-month period ended September
30, 2002, an increase from 7.3% for the same period of 2001. This increase
is primarily due to the incremental impact of acquisitions, the cessation of
goodwill amortization, reduced warranty expense 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 7.0% for the
nine-month period ended September 30, 2002, compared to 14.3% 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.
- 12 -
Interest expense was $5.0 million for the nine months ended September 30,
2002, compared to $4.9 million in 2001, as higher average borrowings (due to
businesses acquired in 2001) were partially offset by lower average interest
rates. The average interest rate for the nine-month period of 2002 was 4.4%,
compared to 5.8% for the same period of 2001.
Income before income taxes decreased $4.0 million (15%) to $22.6 million for
the nine months ended September 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 $2.2 million to $7.7 million for
the nine month period of 2002, compared to $9.9 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 nine months ended September 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 nine months ended September 30, 2002 decreased $1.9
million (11%) to $14.9 million ($0.93 diluted earnings per share), compared
to $16.8 million ($1.07 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.
Outlook
Demand for pump products, which are primarily petroleum related, has
historically been related to market conditions and expectations for oil and
natural gas prices. Orders for pump products were $14.5 million in the third
quarter of 2002, a decrease of $9.9 million compared to the same period of
2001. For the first nine months of 2002, pump product orders were $40.7
million, a decrease of $58.9 million compared to the same period of 2001.
Compared to the prior year, backlog for this business segment decreased
$18.4 million to $10.3 million on September 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 third quarter of 2002, orders for compressed air
products were $80.7 million, compared to $71.3 million in the same period of
2001. For the first nine months of 2002, orders for compressed air products
were $259.9 million, compared to $219.1 million in the same period of 2001.
Order backlog for the Compressed Air Products segment was $56.9 million as
of September 30, 2002, compared to $66.0 million as of September 30, 2001.
The increase in orders is solely due to acquisitions. Excluding the
businesses acquired in 2001, orders were down 7% in the first nine months of
2002, compared to the prior year period, due to softness in the U.S. and
European industrial markets, as noted above.
- 13 -
The Company's largest supplier of iron castings, Atchison Casting
Corporation ("Atchison") announced in August 2002 that it would downsize its
LaGrange, Missouri foundry ("LaGrange Foundry"), ceasing production and
focusing the facility on pattern repair, maintenance and storage. This
downsizing is expected to be completed by the end of the fourth quarter of
2002. 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 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, as of September 30, 2002, it
was the Company's largest supplier of iron castings.
The Company does not anticipate that the downsizing of the LaGrange Foundry
will materially impact its long-term financial performance. However, there
will be a negative impact on the Company's financial performance during a
short-term transition period as alternative iron castings supply sources are
fully integrated into the Company's supply and manufacturing processes. The
Company has implemented its previously developed contingency plan to secure
alternative supply sources. However, the ultimate success of this plan and
the near-term impact on the Company's financial results will depend in large
part on the skill, commitment and availability of alternate suppliers and
the Company's ability to effectively manage the transition. Management has
assessed the impact on the Company's future financial performance due to the
projected disruption of supply and incremental costs associated with
expediting new castings from alternative supply sources. Management
currently believes that the magnitude of this negative impact will be
approximately $0.03 to $0.06 diluted earnings per share in the fourth
quarter of 2002 and $0.02 to $0.04 diluted earnings per share in the first
quarter of 2003.
Due to the significant declines in the financial markets, management
currently anticipates that the fair value of the plan assets of its primary
funded defined benefit pension plans will fall short of their accumulated
benefit obligation at December 31, 2002. If this occurs, the Company will
record a non-cash charge to stockholders' equity (accumulated other
comprehensive loss), currently estimated at $10 to 12 million after-tax.
This non-cash reduction in stockholders' equity will not impact reported net
income or the Company's compliance with any debt covenants. This reduction
could reverse in future periods if a combination of factors, including
interest rate increases, improved investment results, and contributions
cause the pension plans to return to a fully funded status. Due to poor
asset performance and lower interest rates, management also expects that
rising pension and other post-employment benefit expenses will reduce
diluted earnings per share $0.15 to $0.18 in 2003, as compared to the level
of expense incurred in 2002. The potential reduction in stockholders' equity
and future increase in post-retirement benefit expenses are highly variable
and dependent upon actual investment returns, interest rates and changes in
actuarial assumptions.
- 14 -
LIQUIDITY AND CAPITAL RESOURCES
Operating Working Capital
During the nine months ended September 30, 2002, operating working capital
(defined as receivables plus inventories, less accounts payable and accrued
liabilities) increased $1.0 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 nine months of 2002, the Company generated cash from operations
totaling $28.0 million, compared to $31.7 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 $36.8 million during the nine months ended September 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 $13.8 million
for the nine months ended September 30, 2002.
Capital Expenditures and Commitments
Capital projects designed to increase operating efficiency and flexibility,
expand production capacity and increase product quality resulted in
expenditures of $7.5 million in the first nine months of 2002. This was $0.6
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 September 30, 2002 totaled $9.0 million. Management
expects additional capital authorizations to be committed during the
remainder of the year and that capital expenditures for 2002 will
approximate $12-14 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
September 30, 2002, a total of 1,572,542 shares have been repurchased at a
cost of $22.8 million under both repurchase programs. During the first nine
months 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
- 15 -
Company may request up to two, one-year extensions. The total debt balance
will be due upon final maturity. On September 30, 2002, the Credit Line had
an outstanding principal balance of approximately $54.0 million, leaving
$96.0 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.
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.
- 16 -
NEW ACCOUNTING STANDARDS
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 is expected to impact the timing of
recognition of costs associated with future exit and disposal activities, to
the extent they occur.
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
- 17 -
future performance and cause actual results to differ materially from those
expressed in or implied by forward-looking statements:
o the ability to maintain and to enter into key purchasing and supply
relationships;
o the ability to effectively manage the transition of iron casting supply
to alternate sources due to the LaGrange Foundry downsizing and the
skill, commitment and availability of such alternate sources;
o the ability to identify, negotiate and complete future acquisitions;
o the speed with which the Company is able to integrate its acquisitions
and realize the related financial benefit;
o 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;
o changes in domestic and/or worldwide industrial production and
industrial capacity utilization rates, which affect demand for the
Company's compressed air products;
o pricing of Gardner Denver products;
o the degree to which the Company is able to penetrate niche markets;
o the ability to attract and retain quality management personnel;
o market performance of pension plan assets and changes in discount rates
used for actuarial assumptions in pension and other post-employment
obligation and expense calculations; and
o the continued successful implementation of cost reduction projects.
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.
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 September 30, 2002.
ITEM 4. CONTROLS AND PROCEDURES
During the 90-day period prior to the filing date of this report,
management, including the Company's Chairman, President and Chief Executive
Officer and Vice President, Finance and Chief Financial Officer, evaluated
the effectiveness of the design and operation of the Company's disclosure
controls and procedures. Based upon, and as of the date of that evaluation,
the Chairman, President and Chief Executive Officer and Vice President,
Finance and Chief Financial Officer concluded that the disclosure controls
and procedures were effective in all material respects, to ensure that
information to be disclosed in the reports the Company files and submits
under the Securities Exchange Act of 1934 is recorded, processed, summarized
and reported as and when required.
There have been no significant changes in the Company's internal controls or
in other factors which could significantly affect internal controls
subsequent to the date the Company carried out its evaluation. There were no
significant deficiencies or material weaknesses identified in the evaluation
and therefore, no corrective actions were taken.
- 18 -
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits:
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 September 30, 2002, the Company filed a
Current Report on Form 8-K, dated September 17, 2002, related to
the announced downsizing of the LaGrange Foundry by Atchison
Casting Corporation, the Company's largest supplier of iron
castings. In this Form 8-K, the Company also separately provided
updated earnings guidance for the quarter ended September 30, 2002,
as a result of lower demand than previously anticipated.
Additionally, on July 1, 2002, the Company filed a Current Report
on Form 8-K, dated June 26, 2002, related to the change in its
certifying accountant.
- 19 -
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 13, 2002 By: /s/ Ross J. Centanni
---------------------------------
Ross J. Centanni
Chairman, President & CEO
Date: November 13, 2002 By: /s/ Philip R. Roth
---------------------------------
Philip R. Roth
Vice President, Finance & CFO
Date: November 13, 2002 By: /s/ Daniel C. Rizzo, Jr.
---------------------------------
Daniel C. Rizzo, Jr.
Vice President and Corporate
Controller (Chief Accounting Officer)
- 20 -
CERTIFICATIONS
CERTIFICATIONS OF PRINCIPAL EXECUTIVE OFFICER
I, Ross J. Centanni, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Gardner
Denver, Inc.;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statement made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within
90 days prior to the filing date of this quarterly
report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
any significant changes in internal controls or in other
factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
By: /s/ Ross J. Centanni
--------------------
Ross J. Centanni
Chairman, President & CEO
November 13, 2002
- 21 -
CERTIFICATIONS OF PRINCIPAL FINANCIAL OFFICER
I, Philip R. Roth, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Gardner Denver,
Inc.;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statement made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
d) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this quarterly
report is being prepared;
e) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within
90 days prior to the filing date of this quarterly
report (the "Evaluation Date"); and
f) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
function):
c) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and
d) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
any significant changes in internal controls or in other
factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
By: /s/ Philip R. Roth
------------------
Philip R. Roth
Vice President, Finance & CFO
November 13, 2002
- 22 -
GARDNER DENVER, INC.
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
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.
- 23 -