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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, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 1-13215
GARDNER DENVER, INC.
(Exact name of Registrant as Specified in its Charter)
DELAWARE 76-0419383
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1800 GARDNER EXPRESSWAY
QUINCY, ILLINOIS 62301
(Address of Principal Executive Offices and Zip Code)
(217) 222-5400
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirement
for the past 90 days.
Yes X No
-------------- -----------------
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes X No
-------------- ----------------
Number of shares outstanding of the issuer's Common Stock, par
value $.01 per share, as of July 30, 2004: 19,793,166 shares.
===============================================================================
PART I
FINANCIAL INFORMATION
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,
--------------------- --------------------
2004 2003 2004 2003
-------- -------- --------- --------
Revenues $161,297 $109,388 $315,725 $210,879
Costs and Expenses:
Cost of sales (excluding depreciation
and amortization) 108,650 76,151 213,161 146,925
Depreciation and amortization 5,016 3,767 10,149 7,313
Selling and administrative expenses 33,667 20,681 68,570 41,358
Interest expense 1,436 1,136 3,458 2,341
Other income, net (12) (210) (2,088) (97)
-------- -------- -------- --------
Income before income taxes 12,540 7,863 22,475 13,039
Provision for income taxes 4,264 2,517 7,642 4,173
-------- -------- -------- --------
Net income $ 8,276 $ 5,346 $ 14,833 $ 8,866
======== ======== ======== ========
Basic earnings per share $ 0.42 $ 0.33 $ 0.82 $ 0.55
======== ======== ======== ========
Diluted earnings per share $ 0.41 $ 0.33 $ 0.80 $ 0.55
======== ======== ======== ========
The accompanying notes are an integral part of this statement.
- 2 -
GARDNER DENVER, INC.
CONSOLIDATED BALANCE SHEET
(in thousands, except per share amounts)
(UNAUDITED)
JUNE 30, DECEMBER 31,
2004 2003
----------- ------------
ASSETS
Current assets:
Cash and equivalents $ 26,252 $132,803
Receivables, net 119,471 81,345
Inventories, net 95,708 64,327
Deferred income taxes 5,687 3,652
Other 5,442 5,682
-------- --------
Total current assets 252,560 287,809
-------- --------
Property, plant and equipment, net 108,094 75,428
Goodwill 264,418 205,488
Other intangibles, net 44,173 10,341
Deferred income taxes 2,166 5,374
Other assets 5,596 5,293
-------- --------
Total assets $677,007 $589,733
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings and current maturities
of long-term debt $ 47,131 $ 16,875
Accounts payable and accrued liabilities 124,742 84,081
-------- --------
Total current liabilities 171,873 100,956
-------- --------
Long-term debt, less current maturities 61,737 165,756
Postretirement benefits other than pensions 31,451 32,110
Other long-term liabilities 48,922 25,006
-------- --------
Total liabilities 313,983 323,828
-------- --------
Stockholders' equity:
Common stock, $0.01 par value; 50,000 shares
authorized; 19,784 shares issued and
outstanding at June 30, 2004 215 178
Capital in excess of par value 258,015 174,474
Treasury stock at cost, 1,736 shares at
June 30, 2004 (26,304) (25,947)
Retained earnings 117,140 102,307
Accumulated other comprehensive income 13,958 14,893
-------- --------
Total stockholders' equity 363,024 265,905
-------- --------
Total liabilities and stockholders' equity $677,007 $589,733
======== ========
The accompanying notes are an integral part of this statement.
- 3 -
GARDNER DENVER, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(Unaudited)
SIX MONTHS ENDED
JUNE 30,
---------------------------
2004 2003
--------- --------
Cash flows from operating activities:
Net income $ 14,833 $ 8,866
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 10,149 7,313
Foreign currency transaction gain (1,320) --
Net gain on asset dispositions (69) (367)
Stock issued for employee benefit plans 1,205 1,394
Deferred income taxes (1,145) 824
Changes in assets and liabilities:
Receivables (7,497) (1,574)
Inventories (8,614) (4,157)
Accounts payable and accrued liabilities (2,011) (2,940)
Other assets and liabilities, net (118) (511)
--------- --------
Net cash provided by operating activities 5,413 8,848
--------- --------
Cash flows from investing activities:
Business acquisitions, net of cash acquired (82,119) --
Capital expenditures (8,771) (5,546)
Disposals of property, plant and equipment 209 915
Other 57 --
--------- --------
Net cash used in investing activities (90,624) (4,631)
--------- --------
Cash flows from financing activities:
Principal payments on long-term debt (135,779) (29,266)
Proceeds from long-term debt 31,330 20,000
Proceeds from issuance of common stock 79,557 --
Proceeds from stock options 2,816 850
Purchase of treasury stock (357) (28)
Other -- (3)
--------- --------
Net cash used in financing activities (22,433) (8,447)
--------- --------
Effect of exchange rate changes on cash and
equivalents 1,093 1,594
--------- --------
Decrease in cash and equivalents (106,551) (2,636)
--------- --------
Cash and equivalents, beginning of period 132,803 25,667
--------- --------
Cash and equivalents, end of period $ 26,252 $ 23,031
========= ========
The accompanying notes are an integral part of this statement.
- 4 -
NOTES TO CONDENSED FINANCIAL STATEMENTS
(in thousands, except per share amounts)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements include the
accounts of Gardner Denver, Inc. and its subsidiaries ("Gardner Denver" or
the "Company"). All significant intercompany transactions and accounts have
been eliminated.
The financial information presented as of any date other than December 31
has been prepared from the books and records without audit. The accompanying
condensed consolidated financial statements have been prepared in accordance
with the instructions to Form 10-Q and do not include all of the information
and footnotes required by generally accepted accounting principles for
complete statements. In the opinion of management, all adjustments,
consisting only of normal recurring adjustments necessary for a fair
presentation of such financial statements, have been included.
These condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
incorporated by reference in Gardner Denver's Annual Report on Form 10-K for
the year ended December 31, 2003.
The results of operations for the three and six months ended June 30, 2004
are not necessarily indicative of the results to be expected for the full
year.
STOCK-BASED COMPENSATION PLANS
As allowed under Statement of Financial Accounting Standards ("SFAS") No.
123, "Accounting for Stock-Based Compensation," the Company measures its
compensation cost of equity instruments issued under employee compensation
plans using the intrinsic value method in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees,"
and related interpretations. Stock options granted during the three and six
months ended June 30, 2004 and 2003 were exercisable at prices equal to the
fair market value of the Company's common stock on the dates the options
were granted; and accordingly, no compensation expense has been recognized.
If the Company had accounted for stock-based compensation using the fair
value recognition provisions of SFAS No. 123 and related amendments, net
income and basic and diluted earnings per share would have been as follows:
- 5 -
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
----------------------- ----------------------
2004 2003 2004 2003
------ ------ ------- ------
Net income, as reported $8,276 $5,346 $14,833 $8,866
Less: Total stock-based employee compensation
expense determined under fair value method, net of
related tax effects 347 296 652 624
------ ------ ------- ------
Pro forma net income $7,929 $5,050 $14,181 $8,242
====== ====== ======= ======
Basic earnings per share, as reported $ 0.42 $ 0.33 $ 0.82 $ 0.55
====== ====== ======= ======
Basic earnings per share, pro forma $ 0.40 $ 0.31 $ 0.79 $ 0.51
====== ====== ======= ======
Diluted earnings per share, as reported $ 0.41 $ 0.33 $ 0.80 $ 0.55
====== ====== ======= ======
Diluted earnings per share, pro forma $ 0.39 $ 0.31 $ 0.77 $ 0.51
====== ====== ======= ======
Compensation costs charged against income (net of tax) for restricted stock
issued under the Company's Incentive Plan totaled $0.2 million in the six
months ended June 30, 2003. There was no restricted stock issued in the
current year.
NEW ACCOUNTING STANDARDS
In May 2004, the FASB issued Staff Position SFAS No. 106-2, "Accounting and
Disclosure Requirements Related to the Medicare Prescription Drug,
Improvement and Modernization Act of 2003," ("FSP 106-2"). FSP 106-2
supersedes FSP 106-1, "Accounting and Disclosure Requirements Related to the
Medicare Prescription Drug, Improvement and Modernization Act of 2003," and
provides guidance on the accounting, disclosure, effective date and
transition related to the Prescription Drug Act. FSP 106-2 is effective for
the third quarter of 2004. According to an actuarial assessment, the Company
currently provides prescription drug benefits, which are actuarially
equivalent to the Medicare-prescription drug benefit to certain retired and
other employees and will therefore qualify for the subsidy. As a result, the
Company will account for the federal subsidy attributable to past services
as an actuarial gain, which will reduce the accumulated post-retirement
benefit obligation. This actuarial gain will then be amortized in future
periods in accordance with SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions." The federal subsidy
attributable to employee service rendered in current and future periods will
reduce future net periodic postretirement benefit cost as those employees
provide service. The favorable impact to diluted earnings per share from
adopting FSP 106-2 is expected to be approximately $0.01 in 2004 and $0.02
in 2005.
NOTE 2. ACQUISITIONS
On January 2, 2004, the Company effectively acquired the outstanding shares
of Syltone plc ("Syltone"), previously a publicly traded company listed on
the London Stock Exchange. Syltone, headquartered in Bradford, United
Kingdom ("U.K."), is one of the world's largest manufacturers of equipment
used for loading and unloading liquid and dry bulk products on commercial
transportation vehicles. This equipment includes compressors, blowers and
other ancillary products that are complementary to the Company's product
line. Syltone is also one of the world's largest manufacturers of fluid
transfer equipment (including loading arms, swivel joints, couplers and
valves) used to load and unload ships, tank trucks and rail cars. The
- 6 -
purchase price of (pounds)61.1 million including assumed bank debt
(net of cash acquired) was paid in the form of cash ((pounds)44.4
million), new loan notes ((pounds)5.2 million) and the assumption of
Syltone's existing bank debt, net of cash acquired ((pounds)11.5
million). There are no additional contingent payments or commitments related
to this acquisition.
This acquisition has been accounted for by the purchase method and
accordingly, its results are included in the Company's consolidated
financial statements from the date of acquisition. Net of cash acquired,
$81.3 million in cash was used to fund the Syltone acquisition (and related
direct acquisition costs) during the first quarter. The aggregate purchase
price (including direct acquisition costs) has been allocated primarily to
receivables ($30,410); inventory ($22,413); property, plant and equipment
($33,297); intangible assets ($92,316); accounts payable and accrued
liabilities ($41,586); bank debt, net of cash acquired ($20,570); net
deferred income tax liabilities ($2,308) and other long-term liabilities
($21,993), based on their estimated fair values at the date of acquisition.
This allocation reflects the Company's preliminary estimates of the purchase
price allocation and is subject to change upon completion of appraisals in
2004. Further, other assets and liabilities may be identified to which a
portion of the purchase price could be allocated.
The following table summarizes the preliminary fair values of the intangible
assets acquired in the Syltone acquisition:
Amortized intangible assets:
Customer lists and relationships $19,646
Other 5,394
Unamortized intangible assets:
Goodwill 58,346
Trademarks 8,930
-------
Total intangible assets $92,316
=======
The preliminary weighted average amortization period for customer lists and
relationships and other amortized intangible assets is 20 years and 5 years,
respectively.
The total amount of goodwill that is expected to be deductible for tax
purposes is not anticipated to be significant given the stock nature of the
acquisition. The assignment of goodwill has been allocated to the Compressed
Air Products segment ($40,842) and the Fluid Transfer Products segment
($17,504). This allocation is preliminary and subject to change upon
completion of appraisals in 2004. See Note 12 for additional segment
information.
The following table summarizes supplemental pro forma information as if the
Syltone acquisition had been completed on January 1, 2003:
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 2003 JUNE 30, 2003
------------- -------------
Revenues $142,923 $276,944
Net income 5,401 8,906
Diluted earnings per share $ 0.33 $ 0.55
- 7 -
The pro forma net income above for the six months ended June 30, 2003
reflects the negative impact of a one-time adjustment on cost of sales of
approximately $1.1 million stemming from recording Syltone's inventory at
fair value.
NOTE 3. INVENTORIES
JUNE 30, DECEMBER 31,
2004 2003
--------- ------------
Raw materials, including parts and
subassemblies $ 46,912 $33,850
Work-in-process 12,597 7,850
Finished goods 38,629 24,731
Perishable tooling and supplies 2,284 2,429
-------- -------
100,422 68,860
Excess of FIFO costs over LIFO costs (4,714) (4,533)
-------- -------
Inventories, net $ 95,708 $64,327
======== =======
NOTE 4. GOODWILL AND OTHER INTANGIBLE ASSETS
The changes in the carrying amount of goodwill attributable to each business
segment for the six months ended June 30, 2004, are as follows:
FLUID
COMPRESSED TRANSFER
AIR PRODUCTS PRODUCTS
------------ --------
Balance as of December 31, 2003 $179,854 $25,634
Goodwill acquired during the period 40,842 17,504
Foreign currency translation 256 328
-------- -------
Balance as of June 30, 2004 $220,952 $43,466
======== =======
Other intangible assets at June 30, 2004 consisted of the following:
ACCUMULATED
COST AMORTIZATION
------- ------------
Amortized intangible assets:
Acquired technology $21,345 $(11,849)
Customer lists and relationships 22,219 (1,615)
Other 3,815 (1,897)
Unamortized intangible assets:
Trademarks 12,155 --
------- --------
Total other intangible assets $59,534 $(15,361)
======= ========
Amortization of intangible assets for the three and six months ended June
30, 2004, was $1.0 million and $2.0 million, respectively. Amortization of
intangible assets is anticipated to be approximately $3.5 to $4.0 million
per year for 2004 through 2008, exclusive of the impact from the planned
acquisition of nash_elmo Holdings, LLC (See Note 13).
- 8 -
NOTE 5. ACCRUED PRODUCT WARRANTY
The following is a rollforward of the Company's warranty accrual for the
three and six months ended June 30, 2004 and 2003.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
2004 2003 2004 2003
------- ------- ------- -------
Balance at beginning of period $ 8,084 $ 6,883 $ 6,635 $ 7,060
Product warranty accruals 1,879 1,159 3,732 2,051
Settlements (2,230) (1,469) (4,032) (2,582)
Other (acquisitions and foreign
currency translation) 75 122 1,473 166
------- ------- ------- -------
Balance at end of period $ 7,808 $ 6,695 $ 7,808 $ 6,695
======= ======= ======= =======
NOTE 6. PENSION AND OTHER POSTRETIREMENT BENEFITS
The following table provides the components of net periodic benefit expense
(income) for the Company's defined benefit pension plans and other
postretirement benefit plans for the three and six months ended June 30,
2004 and 2003:
THREE MONTHS ENDED JUNE 30,
-----------------------------------------------------------------------
Pension Benefits
------------------------------------------- Other
U.S. Plans Non-U.S. Plans Postretirement Benefits
---------- -------------- -----------------------
2004 2003 2004 2003 2004 2003
----- ---- ------- ---- ----- ----
Service cost $ 482 389 $ 775 385 $ 7 6
Interest cost 809 792 1,294 362 394 343
Expected return on plan assets (901) (780) (1,271) (368) -- --
Amortization of transition liability -- 3 -- -- -- --
Amortization of prior-service cost (17) (18) 5 -- (249) (178)
Amortization of net loss (gain) 61 81 64 57 (8) (329)
----- ---- ------- --- ----- ----
Net periodic benefit expense (income) $ 434 467 $ 867 436 $ 144 (158)
===== ==== ======= === ===== ====
SIX MONTHS ENDED JUNE 30,
----------------------------------------------------------------------
Pension Benefits
------------------------------------------- Other
U.S. Plans Non-U.S. Plans Postretirement Benefits
---------- -------------- -----------------------
2004 2003 2004 2003 2004 2003
------- ------ ------- ---- ----- ----
Service cost $ 1,056 989 $ 1,566 770 $ 7 6
Interest cost 1,662 1,700 2,604 724 819 843
Expected return on plan assets (1,851) (1,635) (2,557) (737) -- --
Amortization of transition liability -- 3 -- -- -- --
Amortization of prior-service cost (41) (43) 10 -- (274) (303)
Amortization of net loss (gain) 114 211 123 115 (73) (479)
------- ------ ------- --- ----- ----
Net periodic benefit expense (income) $ 940 1,225 $ 1,746 872 $ 479 67
======= ====== ======= === ===== ====
- 9 -
NOTE 7. STOCKHOLDERS' EQUITY
Pursuant to its previously filed shelf registration with the Securities and
Exchange Commission, the Company completed an offering of 3.45 million
shares of its common stock for net proceeds of approximately $79.6 million,
during March 2004. These proceeds were used to repay borrowings under its
Revolving Line of Credit Agreement (the "Credit Line").
NOTE 8. 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,
---------------------- ---------------------
2004 2003 2004 2003
------- ------- ------- -------
Basic EPS:
Net income $ 8,276 $ 5,346 $14,833 $ 8,866
======= ======= ======= =======
Shares:
Weighted average number of common shares
outstanding 19,763 16,052 18,058 16,031
======= ======= ======= =======
Basic earnings per common share $ 0.42 $ 0.33 $ 0.82 $ 0.55
======= ======= ======= =======
Diluted EPS:
Net income $ 8,276 $ 5,346 $14,833 $ 8,866
======= ======= ======= =======
Shares:
Weighted average number of common shares
outstanding 19,763 16,052 18,058 16,031
Assuming conversion of dilutive stock options
issued and outstanding 378 208 389 183
------- ------- ------- -------
Weighted average number of common shares
outstanding, as adjusted 20,141 16,260 18,447 16,214
======= ======= ======= =======
Diluted earnings per common share $ 0.41 $ 0.33 $ 0.80 $ 0.55
======= ======= ======= =======
NOTE 9. COMPREHENSIVE INCOME
For the three months ended June 30, 2004 and 2003, comprehensive income was
$7.2 million and $9.5 million, respectively. For the six months ended June
30, 2004 and 2003, comprehensive income was $13.9 million and $14.7 million,
respectively. Items impacting the Company's comprehensive income, but not
included in net income, consist of foreign currency translation adjustments.
NOTE 10. CASH FLOW INFORMATION
In the first six months of 2004 and 2003, the Company paid $5.4 million and
$1.5 million, respectively, to the various taxing authorities for income
taxes. Interest paid for the first six months of 2004 and 2003, was $2.9
million and $2.2 million, respectively.
- 10 -
NOTE 11. CONTINGENCIES
The Company is a party to various legal proceedings, lawsuits and
administrative actions, which are of an ordinary or routine nature. In
addition, due to the bankruptcies of several asbestos manufacturers and
other primary defendants, the Company has been named as a defendant in an
increasing number of asbestos personal injury lawsuits. The Company has also
been named as a defendant in an increasing number of silicosis personal
injury lawsuits. The plaintiffs in these suits allege exposure to asbestos
or silica from multiple sources and typically the Company is one of
approximately 25 or more named defendants. In the Company's experience, the
vast majority of the plaintiffs are not impaired with a disease for which
the Company bears any responsibility.
Predecessors to the Company manufactured, distributed and sold products
allegedly at issue in the pending asbestos and silicosis litigation lawsuits
(the "Products"). The Company has potential responsibility for certain of
these Products, namely: (a) air compressors which used asbestos containing
components manufactured and supplied by third parties; and (b) portable air
compressors used in sandblasting operations as a component of sandblasting
equipment manufactured and sold by others. The sandblasting equipment is
alleged to have caused the silicosis disease plaintiffs claim in these
cases.
Neither the Company nor its predecessors ever mined, manufactured, mixed,
produced or distributed asbestos fiber. The asbestos-containing components
used in the Products were completely encapsulated in a protective
non-asbestos binder and enclosed within the subject Products. Furthermore,
the Company has never manufactured or distributed portable air compressors.
The Company has entered into a series of cost sharing agreements with
multiple insurance companies to secure coverage for asbestos and silicosis
lawsuits. The Company also believes some of the potential liabilities
regarding these lawsuits are covered by indemnity agreements with other
parties. The Company's uninsured settlement payments for past asbestos and
silicosis lawsuits have been immaterial.
The Company believes that the pending and future asbestos and silicosis
lawsuits will not, in the aggregate, have a material adverse effect on its
consolidated financial position, results of operations or liquidity, based
on: the Company's anticipated insurance and indemnification rights to
address the risks of such matters; the limited potential asbestos exposure
from the components described above; the Company's experience that the vast
majority of plaintiffs are not impaired with a disease attributable to
alleged exposure to asbestos or silica from or relating to the Products;
various potential defenses available to the Company with respect to such
matters; and the Company's prior disposition of comparable matters. However,
due to inherent uncertainties of litigation and because future developments
could cause a different outcome, there can be no assurance that the
resolution of pending or future lawsuits, whether by judgment, settlement or
dismissal, will not have a material adverse effect on its consolidated
financial position, results of operations or liquidity.
The Company has also been identified as a potentially responsible party with
respect to several sites designated for environmental cleanup under various
state and federal laws. The Company does not own any of these sites. The
Company does not believe that the future potential costs related to these
sites will have a material adverse effect on its consolidated financial
position, results of operations or liquidity.
- 11 -
NOTE 12. SEGMENT INFORMATION
Subsequent to the acquisition of Syltone, the Company continues to be
organized based upon the products and services it offers but now has four
operating divisions: Compressor, Blower, Pump and Fluid Transfer. These
divisions comprise two reportable segments, Compressed Air Products and
Fluid Transfer Products. The Compressor and Blower (which now includes the
Syltone transportation-related activities) divisions are aggregated into one
reportable segment (Compressed Air Products) since the long-term financial
performance of these businesses are affected by similar economic conditions,
coupled with the similar nature of their products, manufacturing processes
and other business characteristics. The Pump and Fluid Transfer (which
consists of the Syltone fluid transfer-related activities) divisions are
aggregated into one reportable segment (Fluid Transfer Products) primarily
due to the same factors as noted above.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
2004 2003 2004 2003
--------- --------- --------- ---------
Revenues:
Compressed Air Products $ 126,026 $ 92,443 $ 249,022 $ 179,629
Fluid Transfer Products 35,271 16,945 66,703 31,250
--------- --------- --------- ---------
Total $ 161,297 $ 109,388 $ 315,725 $ 210,879
========= ========= ========= =========
Operating Earnings:
Compressed Air Products $ 10,629 $ 7,699 $ 18,903 $ 14,275
Fluid Transfer Products 3,335 1,090 4,942 1,008
--------- --------- --------- ---------
Total 13,964 8,789 23,845 15,283
Interest expense 1,436 1,136 3,458 2,341
Other income, net (12) (210) (2,088) (97)
--------- --------- --------- ---------
Income before income taxes $ 12,540 $ 7,863 $ 22,475 $ 13,039
========= ========= ========= =========
NOTE 13. SUBSEQUENT EVENT
On July 28, 2004, the Company signed a definitive agreement to acquire
nash_elmo Holdings, LLC ("nash_elmo") for a purchase price of $223.5 million
in cash. Nash_elmo is a leading global manufacturer of industrial vacuum
pumps, which are complementary to the Compressed Air Products segment's
existing product portfolio. For the year ended December 31, 2003,
nash_elmo's revenues and earnings before tax were $212.4 million and $7.8
million, respectively. The acquisition is expected to close during the third
quarter of 2004 and is subject to customary closing conditions, including
the receipt of applicable regulatory approvals. There are certain
non-recurring, non-cash adjustments required under accounting principles
generally accepted in the U.S. (primarily the adjustment of inventory to
fair value) that are expected to result in a mildly dilutive impact on the
Company's diluted earnings per share in 2004 (estimated to be approximately
$0.05). The Company expects to finance the acquisition of nash_elmo through
a revised and expanded senior secured bank facility.
- 12 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RECENT DEVELOPMENTS.
On July 28, 2004, the Company signed a definitive agreement to acquire
nash_elmo Holdings, LLC ("nash_elmo") for a purchase price of $223.5 million
in cash. Nash_elmo is a leading global manufacturer of industrial vacuum
pumps complementary to the Compressed Air Products segment's existing
product portfolio. Nash_elmo, headquartered in Trumbull, CT, has primary
manufacturing facilities located in Bad Neustadt and Nuremberg, Germany;
Zibo, China; and Campinas, Brazil. For the year ended December 31, 2003,
nash_elmo's revenues and earnings before tax were $212.4 million and $7.8
million, respectively. The acquisition is expected to close during the third
quarter of 2004 and is subject to customary closing conditions, including
the receipt of applicable regulatory approvals. There are certain
non-recurring, non-cash adjustments required under accounting principles
generally accepted in the U.S. (primarily the adjustment of inventory to
fair value) that are expected to result in a mildly dilutive impact on the
Company's diluted earnings per share in 2004 (estimated to be approximately
$0.05).
On January 2, 2004, the Company effectively acquired the outstanding shares
of Syltone plc ("Syltone"), previously a publicly traded company listed on
the London Stock Exchange. Syltone, headquartered in Bradford, United
Kingdom ("U.K."), is one of the world's largest manufacturers of equipment
used for loading and unloading liquid and dry bulk products on commercial
transportation vehicles. This equipment includes compressors, blowers and
other ancillary products that are complementary to the Company's product
line. Syltone is also one of the world's largest manufacturers of fluid
transfer equipment (including loading arms, swivel joints, couplers and
valves) used to load and unload ships, tank trucks and rail cars. The
purchase price of (pounds)61.1 million including assumed bank debt
(net of cash acquired), was paid in the form of cash ((pounds)44.4
million), new loan notes ((pounds)5.2 million) and the assumption of
Syltone's existing bank debt, net of cash ((pounds)11.5 million).
There are no additional contingent payments or commitments related to this
acquisition.
Syltone generated revenues and operating profit (in accordance with
accounting principles generally accepted in the U.K.) of (pounds)84.4
million and (pounds)6.3 million, respectively (approximately $151.1
million and $11.3 million, respectively as calculated using the December 31,
2003 exchange rate of $1.79/(pound)) for the twelve months ended
September 30, 2003. Syltone's largest markets are Europe and North America,
which represent approximately 67% and 20% of its revenues, respectively.
Approximately 70% of Syltone's revenues are generated through
transportation-related activities while the remaining 30% are derived from
fluid transfer-related activities.
Subsequent to the acquisition of Syltone, the Company continues to be
organized based upon the products and services it offers but now has four
operating divisions: Compressor, Blower, Pump and Fluid Transfer. These
divisions comprise two reportable segments, Compressed Air Products and
Fluid Transfer Products. The Compressor and Blower (which now includes the
Syltone transportation-related activities) divisions are aggregated into one
reportable segment (Compressed Air Products) since the long-term financial
performance of these businesses are affected by similar economic conditions,
coupled with the similar nature of their products, manufacturing processes
and other business characteristics. The Pump and Fluid Transfer (which
consists of the Syltone fluid transfer-related activities) divisions are
aggregated into one reportable segment (Fluid Transfer Products) primarily
due to the same factors as noted above.
- 13 -
RESULTS OF OPERATIONS.
PERFORMANCE IN THE QUARTER ENDED JUNE 30, 2004 COMPARED WITH
THE QUARTER ENDED JUNE 30, 2003
Revenues
Revenues increased $51.9 million (47%) to $161.3 million for the three
months ended June 30, 2004, compared to the same period of 2003. This
increase was primarily due to the acquisition of Syltone ($37.5 million) and
increased shipments of well stimulation pumps, pump parts, rotary screw
compressors and positive displacement blowers. Changes in currency exchange
rates and price increases also contributed to this increase.
For the three months ended June 30, 2004, revenues for the Compressed Air
Products segment increased $33.6 million to $126.0 million, compared to the
same period of 2003. This 36% increase was primarily due to the acquisition
of Syltone (28%); increased volumes of compressor and blower shipments in
the U.S., Europe, South Africa and China (4%); changes in currency exchange
rates (3%) and price increases (1%). Fluid Transfer Products segment
revenues increased $18.3 million to $35.3 million for the three months ended
June 30, 2004, compared to the same period of 2003. This 108% increase was
primarily due to the acquisition of Syltone (69%), increased shipments of
well stimulation pumps, water jetting systems and related aftermarket (37%)
and price increases (2%).
Costs and Expenses
Gross margin (defined as revenues less cost of sales) for the three months
ended June 30, 2004 increased $19.4 million (58%) to $52.6 million compared
to the same period of 2003. Gross margin as a percentage of revenues (gross
margin percentage) increased to 32.6% in the three-month period of 2004 from
30.4% in the same period of 2003. This increase in gross margin percentage
was principally attributable to the increased revenues in both segments and
the related positive impact of increased leverage of fixed and semi-fixed
costs over a higher revenue base. The addition of Syltone also positively
impacted gross margin percentage as Syltone's gross margin percentage was
higher than the Company's previously existing businesses. Finally, favorable
sales mix also contributed to the increased gross margin as the second
quarter of 2004 included a higher percentage of aftermarket sales compared
to the prior year.
Depreciation and amortization for the three months ended June 30, 2004
increased $1.2 million to $5.0 million compared to $3.8 million in the same
period of 2003, primarily due to the Syltone acquisition.
Selling and administrative expenses increased in the three-month period of
2004 by 63% to $33.7 million from $20.7 million in the same period of 2003,
primarily due to the acquisition of Syltone ($10.5 million). Higher
compensation and fringe benefit costs and changes in currency exchange rates
also contributed to this increase.
The Compressed Air Products segment generated operating earnings (defined as
revenues, less cost of sales, depreciation and amortization, and selling and
administrative expenses) as a percentage of revenues of 8.4% in the
three-month period ended June 30, 2004, a slight increase from 8.3% for the
same period of 2003. This increase was primarily attributable to the
positive impact of increased leverage of the segment's fixed and semi-fixed
costs over a higher revenue
- 14 -
base. Cost savings and product rationalization efforts initiated in the
fourth quarter of 2003 and the favorable sales mix also contributed to this
increase. These positive factors were partially offset by higher
compensation and fringe benefit costs and the incremental impact of Syltone,
which had lower operating earnings as a percentage of revenues than the
segment's previously existing businesses. Operating earnings as a percentage
of revenues from Compressed Air Products segment businesses that existed
prior to the Syltone acquisition were 9.6% for the three-month period ended
June 30, 2004.
The Fluid Transfer Products segment generated operating earnings as a
percentage of revenues of 9.5% for the three-month period ended June 30,
2004, compared to 6.4% in the same period of 2003. This improvement in
profitability was primarily attributable to the positive impact of increased
leverage of the segment's fixed and semi-fixed costs over a higher revenue
base and operational improvements. These positive factors were partially
offset by the incremental impact of Syltone, which had lower operating
earnings as a percentage of revenues than the segment's previously existing
businesses. Operating earnings as a percentage of revenues from Fluid
Transfer Products segment businesses that existed prior to the Syltone
acquisition were 15.8% for the three-month period ended June 30, 2004.
Interest expense increased $0.3 million (26%) to $1.4 million for the three
months ended June 30, 2004, compared to the same period of 2003, due to
higher average borrowings stemming from the Syltone acquisition and higher
average rates. The average interest rate for the three-month period ended
June 30, 2004 was 5.2%, compared to 4.2% in the comparable prior year
period.
Other income, net decreased $0.2 million (94%) for the three months ended
June 30, 2004 compared to the same period of 2003. This change was primarily
due to a $0.4 million (pretax) gain on the sale of an idle manufacturing
facility in Syracuse, New York in the second quarter of 2003, partially
offset by lower foreign currency transaction losses generated from U.S.
dollar denominated balances of foreign subsidiaries in 2004.
Income before income taxes increased $4.7 million (59%) to $12.5 million for
the three months ended June 30, 2004. This increase was primarily due to the
same factors that resulted in higher operating earnings as a percentage of
revenues in each segment, partially offset by higher interest expense and
lower other income, net. The contribution to income before income taxes from
Syltone was not significant during the second quarter of 2004.
The provision for income taxes increased by $1.7 million to $4.3 million for
the three-month period of 2004, compared to the prior year period, as a
result of the higher income before taxes and a higher overall effective tax
rate. The Company's effective tax rate for the three months ended June 30,
2004 increased to 34% compared to 32% in the prior year period, principally
due to the acquisition of Syltone.
Net income for the three months ended June 30, 2004 increased $2.9 million
(55%) to $8.3 million ($0.41 diluted earnings per share), compared to $5.4
million ($0.33 diluted earnings per share) in same period of 2003. This
increase in net income was primarily attributable to the same factors that
resulted in increased income before taxes noted above, partially offset by a
higher effective tax rate in 2004. The incremental impact on net income from
Syltone during the second quarter of 2004 was not significant.
- 15 -
PERFORMANCE IN THE SIX MONTHS ENDED JUNE 30, 2004 COMPARED WITH
THE SIX MONTHS ENDED JUNE 30, 2003
Revenues
Revenues increased $104.8 million (50%) to $315.7 million for the six months
ended June 30, 2004, compared to the same period of 2003. This increase was
primarily due to the acquisition of Syltone ($79.8 million) and increased
shipments of well stimulation pumps, pump parts, rotary screw compressors
and positive displacement blowers. Changes in currency exchange rates and
price increases also contributed to this increase.
For the six months ended June 30, 2004, revenues for the Compressed Air
Products segment increased $69.4 million to $249.0 million, compared to the
same period of 2003. This 39% increase was primarily due to the acquisition
of Syltone (31%); changes in currency exchange rates (4%); increased volumes
of compressor and blower shipments in the U.S., Europe, South Africa and
China (3%) and price increases (1%). Fluid Transfer Products segment
revenues increased $35.5 million to $66.7 million for the six months ended
June 30, 2004, compared to the same period of 2003. This 113% increase was
primarily due to the acquisition of Syltone (79%); increased shipments of
well stimulation pumps, water jetting systems and related aftermarket (37%)
and price increases (2%). These positive factors were partially offset by
decreased volume of drilling pump shipments (5%).
Costs and Expenses
Gross margin (defined as revenues less cost of sales) for the six months
ended June 30, 2004 increased $38.6 million (60%) to $102.6 million compared
to the same period of 2003. Gross margin as a percentage of revenues (gross
margin percentage) increased to 32.5% in the six-month period of 2004 from
30.3% in the same period of 2003. This increase in gross margin percentage
was principally attributable to the increased revenues in both segments and
the related positive impact of increased leverage of fixed and semi-fixed
costs over a higher revenue base. The addition of Syltone also positively
impacted gross margin percentage, as Syltone's gross margin percentage was
higher than the Company's previously existing businesses. Finally, favorable
sales mix also contributed to the increased gross margin as the first half
of 2004 included a higher percentage of aftermarket sales compared to the
prior year. These positive factors were partially offset by higher warranty
expense in 2004.
Depreciation and amortization for the six months ended June 30, 2004
increased $2.8 million to $10.1 million compared to $7.3 million in the same
period of 2003, primarily due to the Syltone acquisition.
Selling and administrative expenses increased $27.2 million (66%) in the
six-month period of 2004 to $68.6 million compared to $41.4 million in the
same period of 2003, primarily due to the acquisition of Syltone ($20.6
million). Higher compensation and fringe benefit costs and changes in
currency exchange rates also contributed to this increase.
The Compressed Air Products segment generated operating earnings (defined as
revenues, less cost of sales, depreciation and amortization, and selling and
administrative expenses) as a percentage of revenues of 7.6% in the
six-month period ended June 30, 2004, a slight decrease from 7.9% for the
same period of 2003. This decrease was primarily attributable to the portion
of Syltone's business included in this segment which had lower operating
earnings as a percentage of revenues than the segment's previously existing
businesses. Higher compensation,
- 16 -
fringe benefit and warranty expense also contributed to the decline. These
negative factors were partially offset by the positive impact of increased
leverage of the segment's fixed and semi-fixed costs over a higher revenue
base. Operating earnings as a percentage of revenues from Compressed Air
Products segment businesses that existed prior to the Syltone acquisition
were 7.9% for the six-month period ended June 30, 2004.
The Fluid Transfer Products segment generated operating earnings as a
percentage of revenues of 7.4% for the six-month period ended June 30, 2004,
compared to 3.2% in the same period of 2003. This improvement was primarily
attributable to the positive impact of increased leverage of the segment's
fixed and semi-fixed costs over a higher revenue base and operational
improvements. This positive factor was partially offset by the impact of
Syltone's business included in this segment which had lower operating
earnings as a percentage of revenues than the segment's previously existing
businesses. Operating earnings as a percentage of revenues from Fluid
Transfer Products segment businesses that existed prior to the Syltone
acquisition were 12.0% for the six-month period ended June 30, 2004.
Interest expense increased $1.1 million (48%) to $3.5 million for the six
months ended June 30, 2004, compared to the same period of 2003, due to
higher average borrowings stemming from the Syltone acquisition and higher
average rates. The average interest rate for the six-month period ended June
30, 2004 was 4.5%, compared to 4.1% in the comparable prior year period.
Other income, net was $2.1 million for the six-month period ended June 30,
2004 compared to $0.1 million in the comparable prior year period. This
change was primarily due to foreign currency transaction gains recorded in
2004. These gains included $1.2 million specifically related to a portion of
the proceeds from U.S. dollar borrowings, which were converted to British
pounds and appreciated in U.S. dollars in 2004 prior to being used to
consummate the Syltone acquisition in January 2004. This change was
partially offset by a $0.4 million (pretax) gain on the sale of an idle
manufacturing facility in Syracuse, New York in the second quarter of 2003.
Income before income taxes increased $9.4 million (72%) to $22.5 million for
the six months ended June 30, 2004. This increase was primarily due to the
same factors that resulted in higher operating earnings as a percentage of
revenues in each segment, including the incremental impact from Syltone,
which contributed $2.0 million in the first half of 2004. These positive
factors were partially offset by higher interest expense and lower other
income, net.
The provision for income taxes increased by $3.5 million to $7.6 million for
the six-month period of 2004, compared to the prior year period, as a result
of the higher income before taxes and a higher overall effective tax rate.
The Company's effective tax rate for the six months ended June 30, 2004
increased to 34% compared to 32% in the prior year period, principally due
to the acquisition of Syltone.
Net income for the six months ended June 30, 2004 increased $6.0 million
(67%) to $14.8 million ($0.80 diluted earnings per share), compared to $8.9
million ($0.55 diluted earnings per share) in same period of 2003. This
increase in net income was primarily attributable to the same factors that
resulted in increased income before taxes noted above, partially offset by a
higher effective tax rate in 2004. Syltone contributed approximately $0.06
to diluted earnings per share during the first half of 2004.
- 17 -
Outlook
In general, demand for compressed air products correlates to the rate of
manufacturing capacity utilization and the rate of change of industrial
production because compressed air is often used as a fourth utility in the
manufacturing process. Over longer time periods, demand also follows the
economic growth patterns indicated by the rates of change in the Gross
Domestic Product. In the second quarter of 2004, orders for compressed air
products were $129.6 million, compared to $81.7 million in the same period
of 2003. Backlog for the Compressed Air Products segment was $81.5 million
as of June 30, 2004, compared to $56.9 million as of June 30, 2003. The
increase in orders and backlog compared to the prior year was primarily due
to the addition of Syltone's transportation-related activities, which
contributed $28.1 million and $17.3 million to orders and backlog,
respectively. Favorable changes in foreign currency exchange rates also
added approximately $2.6 million and $2.3 million to orders and backlog,
respectively. Excluding these favorable items, the growth in orders for this
segment was primarily driven by an improvement in the U.S. industrial
economy and increased demand for compressors in Europe.
Demand for fluid transfer products, the majority of which are petroleum
related, has historically corresponded to market conditions and expectations
for oil and natural gas prices. Orders for fluid transfer products were
$41.4 million in the second quarter of 2004 compared to $13.7 million in the
same period of 2003. Backlog for this business segment was $36.7 million as
of June 30, 2004, compared to $10.1 million as of June 30, 2003. The
increase in orders and backlog compared to the prior year was primarily due
to the addition of Syltone's fluid transfer-related activities, which
contributed $18.7 million and $19.1 million to orders and backlog,
respectively. Excluding the impact of Syltone, the increase in orders for
this segment was principally due to increased demand for well stimulation
pumps and petroleum pump parts as a result of continued high prices for oil
and natural gas. Future increases in demand for these products will likely
be dependent upon oil and natural gas prices and rig counts, which the
Company cannot predict.
During the second quarter of 2004, the Company began relocating production
from a facility located in Louisville, Kentucky, which was acquired as part
of the Syltone acquisition. As of July 31, 2004, manufacturing of certain
blower and fluid transfer products at this operation had been relocated to
an existing facility in Sedalia, Missouri and to another Syltone facility in
Houston, Texas, respectively. The complete integration of these product
lines is expected to be completed by year-end and is anticipated to reduce
diluted earnings per share by as much as $0.03 in 2004, the majority of
which will occur in the second half.
LIQUIDITY AND CAPITAL RESOURCES
Operating Working Capital
During the six months ended June 30, 2004, operating working capital
(defined as receivables plus inventories, less accounts payable and accrued
liabilities) increased $28.8 million, primarily due to incremental operating
working capital from the Syltone acquisition and higher inventory and
receivable balances stemming from increased activity levels.
- 18 -
Cash Flows
During the first six months of 2004, the Company generated cash from
operations totaling $5.4 million, compared to $8.8 million in the prior year
period. This change was primarily due to the unfavorable change in operating
working capital (excluding the impact of the Syltone acquisition) due to
increased activity levels, partially offset by higher net income. Net of
cash acquired, $82.1 million in cash was used to fund the Syltone
acquisition (and related direct acquisition costs) during the first half of
2004. This use of cash was partially offset by net proceeds from the sale of
3.45 million shares of common stock in March 2004, which totaled $79.6
million. These proceeds along with other cash reserves were used to reduce
debt (including debt assumed in the Syltone acquisition) by approximately
$104.4 million. The cash flows provided by operating activities and used in
financing and investing activities, combined with the effect of exchange
rate changes, resulted in a net cash decrease of $106.6 million during the
first half of 2004.
Capital Expenditures and Commitments
Capital projects designed to increase operating efficiency and flexibility,
expand production capacity and bring new products to market resulted in
expenditures of $8.8 million in the first half of 2004. This was $3.2
million higher than the level of capital expenditures in the comparable
period in 2003, primarily due to the timing of capital projects and spending
at Syltone operations. Commitments for capital expenditures at June 30, 2004
were approximately $10 million. Capital expenditures related to
environmental projects have not been significant in the past and are not
expected to be significant in the foreseeable future.
In October 1998, Gardner Denver's Board of Directors authorized the
repurchase of up to 1,600,000 shares of the Company's common stock to be
used for general corporate purposes. Approximately 200,000 shares remain
available for repurchase under this program. The Company has also
established a Stock Repurchase Program for its executive officers to provide
a means for them to sell Gardner Denver common stock and obtain sufficient
funds to meet income tax obligations which arise from the exercise or
vesting of incentive stock options, restricted stock or performance shares.
The Gardner Denver Board has authorized up to 400,000 shares for repurchase
under this program and of this amount approximately 200,000 shares remain
available for repurchase. As of June 30, 2004, a total of 1,572,542 shares
have been repurchased at a cost of $22.8 million under both repurchase
programs.
Liquidity
Pursuant to its previously filed shelf registration with the Securities and
Exchange Commission, the Company completed an offering of 3.45 million
shares of its common stock for net proceeds of approximately $79.6 million
during March 2004. These proceeds were used to repay borrowings under its
Revolving Line of Credit Agreement (the "Credit Line").
The Credit Line has a borrowing capacity of $150.0 million and the total
debt balance is due upon final maturity on 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. On June 30, 2004, the Credit Line
had an outstanding principal balance of $13.0 million, leaving $137.0
million available for future use or for letters of credit, subject to the
terms of the Credit Line.
- 19 -
The Company also has a five-year $50.0 million Term Loan with a final
maturity of March 6, 2007. The Term Loan requires principal payments of $2.5
million in years one and two, and $15.0 million in years three through five.
On June 30, 2004, the Term Loan had an outstanding principal balance of
$41.3 million.
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 for at least the next twelve
months. Management expects to finance the acquisition of nash_elmo through a
revised and expanded senior secured bank facility. The interest rate
associated with such a facility is expected to vary with LIBOR and the
Company's debt to EBITDA ratio. The initial rate is expected to be 2% over
current LIBOR rates or 3.6%.
CONTINGENCIES
The Company is a party to various legal proceedings, lawsuits and
administrative actions, which are of an ordinary or routine nature. In
addition, due to the bankruptcies of several asbestos manufacturers and
other primary defendants, the Company has been named as a defendant in an
increasing number of asbestos personal injury lawsuits. The Company has also
been named as a defendant in an increasing number of silicosis personal
injury lawsuits. The plaintiffs in these suits allege exposure to asbestos
or silica from multiple sources and typically the Company is one of
approximately 25 or more named defendants. In the Company's experience, the
vast majority of the plaintiffs are not impaired with a disease for which
the Company bears any responsibility.
Predecessors to the Company manufactured, distributed and sold products
allegedly at issue in the pending asbestos and silicosis litigation lawsuits
(the "Products"). The Company has potential responsibility for certain of
these Products, namely: (a) air compressors which used asbestos containing
components manufactured and supplied by third parties; and (b) portable air
compressors used in sandblasting operations as a component of sandblasting
equipment manufactured and sold by others. The sandblasting equipment is
alleged to have caused the silicosis disease plaintiffs claim in these
cases.
Neither the Company nor its predecessors ever mined, manufactured, mixed,
produced or distributed asbestos fiber. The asbestos-containing components
used in the Products were completely encapsulated in a protective
non-asbestos binder and enclosed within the subject Products. Furthermore,
the Company has never manufactured or distributed portable air compressors.
The Company has entered into a series of cost sharing agreements with
multiple insurance companies to secure coverage for asbestos and silicosis
lawsuits. The Company also believes some of the potential liabilities
regarding these lawsuits are covered by indemnity agreements with other
parties. The Company's uninsured settlement payments for past asbestos and
silicosis lawsuits have been immaterial.
The Company believes that the pending and future asbestos and silicosis
lawsuits will not, in the aggregate, have a material adverse effect on its
consolidated financial position, results of operations or liquidity, based
on: the Company's anticipated insurance and indemnification rights
- 20 -
to address the risks of such matters; the limited potential asbestos
exposure from the components described above; the Company's experience that
the vast majority of plaintiffs are not impaired with a disease attributable
to alleged exposure to asbestos or silica from or relating to the Products;
various potential defenses available to the Company with respect to such
matters; and the Company's prior disposition of comparable matters. However,
due to inherent uncertainties of litigation and because future developments
could cause a different outcome, there can be no assurance that the
resolution of pending or future lawsuits, whether by judgment, settlement or
dismissal, will not have a material adverse effect on its consolidated
financial position, results of operations or liquidity.
The Company has also been identified as a potentially responsible party with
respect to several sites designated for environmental cleanup under various
state and federal laws. The Company does not own any of these sites. The
Company does not believe that the future potential costs related to these
sites will have a material adverse effect on its consolidated financial
position, results of operations or liquidity.
NEW ACCOUNTING STANDARDS
In May 2004, the FASB issued Staff Position SFAS No. 106-2, "Accounting and
Disclosure Requirements Related to the Medicare Prescription Drug,
Improvement and Modernization Act of 2003," ("FSP 106-2"). FSP 106-2
supersedes FSP 106-1, "Accounting and Disclosure Requirements Related to the
Medicare Prescription Drug, Improvement and Modernization Act of 2003," and
provides guidance on the accounting, disclosure, effective date and
transition related to the Prescription Drug Act. FSP 106-2 is effective for
the third quarter of 2004. According to an actuarial assessment, the Company
currently provides prescription drug benefits, which are actuarially
equivalent to the Medicare-prescription drug benefit to certain retired and
other employees and will therefore qualify for the subsidy. As a result, the
Company will account for the federal subsidy attributable to past services
as an actuarial gain, which will reduce the accumulated post-retirement
benefit obligation. This actuarial gain will then be amortized in future
periods in accordance with SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions." The federal subsidy
attributable to employee service rendered in current and future periods will
reduce future net periodic postretirement benefit cost as those employees
provide service. The favorable impact to diluted earnings per share from
adopting FSP 106-2 is expected to be approximately $0.01 in 2004 and $0.02
in 2005.
CRITICAL ACCOUNTING POLICIES
Management has evaluated the accounting policies used in the preparation of
the Company's financial statements and related notes and believes those
policies to be reasonable and appropriate. Certain of these accounting
policies require the application of significant judgment by management in
selecting appropriate assumptions for calculating financial estimates. By
their nature, these judgments are subject to an inherent degree of
uncertainty. These judgments are based on historical experience, trends in
the industry, information provided by customers and information available
from other outside sources, as appropriate. The most significant areas
involving management judgments and estimates may be found in our 2003 Annual
Report on Form 10-K, filed on March 10, 2004, in the Critical Accounting
Policies section of Management's Discussion and Analysis and in Note 1 to
the Consolidated Financial Statements contained in our 2003 Annual Report to
Stockholders filed as Exhibit 13.0 thereto.
- 21 -
CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS
All of the statements in this Management's Discussion and Analysis, other
than historical facts, are forward-looking statements made in reliance upon
the safe harbor of the Private Securities Litigation Reform Act of 1995,
including, without limitation, statements made under the caption "Outlook."
As a general matter, forward-looking statements are those focused upon
anticipated events or trends and expectations and beliefs relating to
matters that are not historical in nature. Such forward-looking statements
are subject to uncertainties and factors relating to the Company's
operations and business environment, all of which are difficult to predict
and many of which are beyond the control of the Company. These uncertainties
and factors could cause actual results to differ materially from those
matters expressed in or implied by such forward-looking statements.
The following uncertainties and factors, among others, could affect future
performance and cause actual results to differ materially from those
expressed in or implied by forward-looking statements: (1) the ability to
complete the nash_elmo acquisition and identify, negotiate and complete
possible future acquisitions; (2) the speed with which the Company is able
to integrate acquisitions and realize the related financial benefits; (3)
the ability to maintain and to enter into key purchasing, supply and
outsourcing relationships; (4) the ability to effectively manage the
transition of iron casting supply to alternate sources and the skill,
commitment and availability of such alternate sources; (5) the successful
implementation of other strategic initiatives, including, without
limitation, restructuring plans, inventory reduction programs and other cost
reduction efforts; (6) 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; (7) changes in domestic and/or
worldwide industrial production and industrial capacity utilization rates,
which affect demand for the Company's compressed air products; (8) pricing
of the Company's products; (9) the degree to which the Company is able to
penetrate niche and international markets; (10) changes in currency exchange
rates (primarily between the U.S. dollar, the euro and the British pound);
(11) changes in interest rates; (12) the ability to attract and retain
quality management personnel; (13) market performance of pension plan assets
and changes in discount rates used for actuarial assumptions in pension and
other postretirement obligation and expense calculations; (14) the continued
ability to effectively manage and defend litigation matters pending, or
asserted in the future, against the Company; (15) the development and
acceptance of the Company's new product offerings; and (16) the continued
successful implementation and utilization of the Company's electronic
services; (17) changes in laws and regulations, including accounting
standards and tax requirements.
The Company does not undertake, and hereby disclaims, any duty to update
these forward-looking statements, even though its situation and
circumstances may change in the future.
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, 2003 and June 30, 2004.
ITEM 4. CONTROLS AND PROCEDURES
As required by Rule 13a-15 of the Exchange Act, the Company has carried out
an evaluation of the effectiveness of the design and operation of the
Company's disclosure controls and procedures as of the end of the period
covered by this report. This evaluation was carried out under the
supervision and with the participation of the Company's management,
including the Chairman, President and Chief Executive Officer and the Vice
President, Finance and Chief
- 22 -
Financial Officer. Based upon that evaluation, the Chairman, President and
Chief Executive Officer and Vice President, Finance and Chief Financial
Officer concluded that the Company's controls and procedures were effective
to provide reasonable assurance that information required to be disclosed in
the Company's periodic SEC reports is recorded, processed, summarized, and
reported as and when required. In addition, they concluded that there were
no changes in the Company's internal control over financial reporting that
occurred during the period covered by this report that have materially
affected, or that are reasonably likely to materially affect, the Company's
internal control over financial reporting.
In designing and evaluating the disclosure controls and procedures, the
Company's management recognized that any controls and procedures, no matter
how well designed, can provide only reasonable assurances of achieving the
desired control objectives and management necessarily was required to apply
its judgment in evaluating the cost-benefit relationship of possible
controls and procedures.
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF
EQUITY SECURITIES
- ---------------------------------------------------------------------------------------------------------------------
TOTAL NUMBER OF
SHARES PURCHASED AS MAXIMUM NUMBER OF
PART OF PUBLICLY SHARES THAT MAY YET
TOTAL NUMBER OF SHARES AVERAGE PRICE ANNOUNCED PLANS OR BE PURCHASED UNDER
PERIOD PURCHASED (1) PAID PER SHARE PROGRAMS (2) THE PLANS OR PROGRAMS
- ---------------------------------------------------------------------------------------------------------------------
April 1, 2004 -
April 30, 2004 -- -- -- 210,300
- ---------------------------------------------------------------------------------------------------------------------
May 1, 2004 -
May 31, 2004 -- -- -- 210,300
- ---------------------------------------------------------------------------------------------------------------------
June 1, 2004 -
June 30, 2004 -- -- -- 210,300
--- ---
- ---------------------------------------------------------------------------------------------------------------------
Total -- -- -- 210,300
=== ===
- ---------------------------------------------------------------------------------------------------------------------
(1) The shares purchased do not include shares acquired by the Company in
connection with the exercise of stock options via a stock swap.
(2) In October 1998, Gardner Denver's Board of Directors authorized the
repurchase of up to 1,600,000 shares of the Company's common stock to
be used for general corporate purposes.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders (the "Annual Meeting") was held
pursuant to notice on May 4, 2004. At the Annual Meeting, Frank J. Hansen,
Thomas M. McKenna and Diane K. Schumacher were elected to serve as directors
for a three-year term expiring in 2007. There were 14,195,139 affirmative
votes cast and 947,543 non-votes concerning Mr. Hansen's election as a
director, 14,399,142 affirmative votes cast and 743,539 non-votes concerning
Mr. McKenna's election as a director and 14,412,981 affirmative votes cast
and 729,700 non-votes concerning Mrs. Schumacher's election as a director.
Stockholders also elected to amend the
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Long-Term Incentive Plan and the Employee Stock Purchase Plan. There were
10,296,053 affirmative votes cast, 2,748,381 votes against and 1,126,706
abstaining votes or non-votes concerning the Long-Term Incentive Plan and
12,222,829 affirmative votes cast, 825,700 votes against and 1,122,610
abstaining votes or non-votes concerning the Employee Stock Purchase Plan.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits:
12 Calculation of Ratio of Earnings to Fixed Charges.
31.1 Certification of Principal Executive Officer Pursuant to
Rule 13a-15(e) or 15d-15(e) of the Exchange Act, as
Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
31.2 Certification of Principal Financial Officer Pursuant to
Rule 13a-15(e) or 15d-15(e) of the Exchange Act, as
Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
32.1 Certification of Chief Executive Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K, dated April 28,
2004, under Item 12 relating to a press release issued on that date
announcing the Company's earnings for the quarter ended March 31,
2004, certain recent activities, and guidance as to results for
2004.
The Company filed a Current Report on Form 8-K, dated April 30,
2004, under Item 12 relating to additional information released
during the Company's April 29, 2004 conference call to discuss the
Company's earnings for the quarter ended March 31, 2004, certain
recent activities, and guidance as to results for 2004.
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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 9, 2004 By: /s/Ross J. Centanni
----------------------------------
Ross J. Centanni
Chairman, President & CEO
Date: August 9, 2004 By: /s/Philip R. Roth
----------------------------------
Philip R. Roth
Vice President, Finance & CFO
Date: August 9, 2004 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
12 Calculation of Ratio of Earnings to Fixed Charges.
31.1 Certification of Principal Executive Officer Pursuant to Rule
13a-15(e) or 15d-15(e) of the Exchange Act, as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Principal Financial Officer Pursuant to Rule
13a-15(e) or 15d-15(e) of the Exchange Act, as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
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