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, 2003
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 27, 2003: 16,098,426 shares.
===============================================================================
PART I
FINANCIAL INFORMATION
GARDNER DENVER, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share amounts)
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ -----------------------
2003 2002 2003 2002
-------- -------- -------- --------
Revenues $112,061 $102,791 $322,940 $314,254
Costs and Expenses:
Cost of sales (excluding depreciation
and amortization) 78,198 70,261 225,123 216,152
Depreciation and amortization 3,740 3,718 11,053 10,859
Selling and administrative expenses 21,063 19,897 62,421 60,177
Interest expense 1,070 1,566 3,411 4,978
Other expense (income), net 230 32 133 (535)
-------- -------- -------- --------
Income before income taxes 7,760 7,317 20,799 22,623
Provision for income taxes 2,483 2,488 6,656 7,692
-------- -------- -------- --------
Net income $ 5,277 $ 4,829 $ 14,143 $ 14,931
======== ======== ======== ========
Basic earnings per share $ 0.33 $ 0.30 $ 0.88 $ 0.94
======== ======== ======== ========
Diluted earnings per share $ 0.32 $ 0.30 $ 0.87 $ 0.93
======== ======== ======== ========
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,
2003 2002
------------- ------------
ASSETS
Current assets:
Cash and equivalents $ 24,623 $ 25,667
Receivables, net 78,257 74,490
Inventories, net 70,351 67,448
Deferred income taxes 5,812 5,902
Other 3,493 4,268
-------- --------
Total current assets 182,536 177,775
-------- --------
Property, plant and equipment, net 75,750 76,162
Goodwill 203,927 201,761
Other intangibles, net 9,461 9,418
Deferred income taxes -- 3,611
Other assets 4,282 3,454
-------- --------
Total assets $475,956 $472,181
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings and current maturities
of long-term debt $ 13,750 $ 7,500
Accounts payable and accrued liabilities 65,747 70,160
-------- --------
Total current liabilities 79,497 77,660
-------- --------
Long-term debt, less current maturities 88,514 112,663
Postretirement benefits other than pensions 32,750 34,539
Deferred income taxes 518 --
Other long-term liabilities 28,050 24,396
-------- --------
Total liabilities 229,329 249,258
-------- --------
Stockholders' equity:
Common stock, $0.01 par value; 50,000 shares
authorized; 16,094 shares issued and
outstanding at September 30, 2003 178 177
Capital in excess of par value 173,906 171,047
Treasury stock at cost, 1,720 shares at
September 30, 2003 (25,909) (25,819)
Retained earnings 95,807 81,664
Accumulated other comprehensive income (loss) 2,645 (4,146)
-------- --------
Total stockholders' equity 246,627 222,923
-------- --------
Total liabilities and stockholders' equity $475,956 $472,181
======== ========
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,
------------------------------
2003 2002
-------- --------
Cash flows from operating activities:
Net income $ 14,143 $ 14,931
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 11,053 10,859
Net gain on asset dispositions (359) (17)
Stock issued for employee benefit plans 1,904 1,647
Deferred income taxes 4,189 244
Changes in assets and liabilities:
Receivables (2,518) 9,099
Inventories (543) 3,932
Accounts payable and accrued liabilities (5,568) (13,269)
Other assets and liabilities, net 1,432 (52)
-------- --------
Net cash provided by operating activities 23,733 27,374
-------- --------
Cash flows from investing activities:
Capital expenditures (8,194) (7,476)
Business acquisitions, net of cash acquired (2,402) --
Disposals of property, plant and equipment 940 135
Other -- (5)
-------- --------
Net cash used in investing activities (9,656) (7,346)
-------- --------
Cash flows from financing activities:
Principal payments on long-term debt (44,899) (48,808)
Proceeds from long-term debt 27,000 12,000
Proceeds from stock options 956 2,289
Purchase of treasury stock (90) (201)
Other (2) (745)
-------- --------
Net cash used in financing activities (17,035) (35,465)
-------- --------
Effect of exchange rate changes on cash and
equivalents 1,914 1,642
-------- --------
Decrease in cash and equivalents (1,044) (13,795)
-------- --------
Cash and equivalents, beginning of period 25,667 29,980
-------- --------
Cash and equivalents, end of period $ 24,623 $ 16,185
======== ========
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, 2002.
The results of operations for the three and nine months ended September 30,
2003 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. STOCK-BASED COMPENSATION PLANS.
As allowed under Statement of Financial Accounting Standards ("SFAS") No.
123, "Accounting for Stock-Based Compensation," the Company measures its
compensation cost of equity instruments issued under employee compensation
plans using the intrinsic value method in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees,"
and related interpretations. Stock options granted during the three and nine
months ended September 30, 2003 and 2002 were exercisable at prices equal to
the fair market value of the Company's common stock on the dates the options
were granted; accordingly, no compensation expense has been recognized. If
the Company had accounted for stock-based compensation using the fair value
recognition provisions of SFAS No. 123 and related amendments, net income
and basic and diluted earnings per share would have been as follows:
- 5 -
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- -----------------------
2003 2002 2003 2002
------- ------- ------- -------
Net income, as reported $ 5,277 $ 4,829 $14,143 $14,931
Less: Total stock-based employee compensation
expense determined under fair value method, net of
related tax effects 292 332 916 968
------- ------- ------- -------
Pro forma net income $ 4,985 $ 4,497 $13,227 $13,963
======= ======= ======= =======
Basic earnings per share, as reported $ 0.33 $ 0.30 $ 0.88 $ 0.94
======= ======= ======= =======
Basic earnings per share, pro forma $ 0.31 $ 0.28 $ 0.82 $ 0.88
======= ======= ======= =======
Diluted earnings per share, as reported $ 0.32 $ 0.30 $ 0.87 $ 0.93
======= ======= ======= =======
Diluted earnings per share, pro forma $ 0.30 $ 0.28 $ 0.81 $ 0.87
======= ======= ======= =======
Compensation costs charged against income (net of tax) for restricted stock
issued under the Company's Incentive Plan totaled $0.2 million in the nine
months ended September 30, 2003.
NOTE 3. INVENTORIES.
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------- ------------
Raw materials, including parts and
subassemblies $ 35,522 $ 35,675
Work-in-process 10,593 9,077
Finished goods 26,750 25,355
Perishable tooling and supplies 2,456 2,456
-------- --------
75,321 72,563
Excess of current costs
over LIFO costs (4,970) (5,115)
-------- --------
Inventories, net $ 70,351 $ 67,448
======== ========
NOTE 4. GOODWILL AND OTHER INTANGIBLE ASSETS.
The changes in the carrying amount of goodwill attributable to each business
segment for the nine months ended September 30, 2003, are as follows:
COMPRESSED PUMP
AIR PRODUCTS PRODUCTS
------------ --------
Balance as of December 31, 2002 $176,230 $25,531
Goodwill acquired during year -- 113
Foreign currency translation 2,053 --
-------- -------
Balance as of September 30, 2003 $178,283 $25,644
======== =======
- 6 -
Other intangible assets at September 30, 2003 consisted of the following:
GROSS CARRYING ACCUMULATED
AMOUNT AMORTIZATION
-------------- ------------
Amortized intangible assets:
Acquired technology $12,209 $ (7,870)
Other 4,234 (2,169)
Unamortized intangible assets:
Trademarks 3,057 --
------- --------
Total other intangible assets $19,500 $(10,039)
======= ========
Amortization of intangible assets for the nine months ended September 30,
2003, was $1.1 million. Amortization of intangible assets is anticipated to
be approximately $1.5 to $2.0 million per year for 2003 through 2007.
NOTE 5. ACCRUED PRODUCT WARRANTY.
The following is a rollforward of the Company's warranty accrual for the
three and nine months ended September 30, 2003.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2003 SEPTEMBER 30, 2003
------------------ ------------------
Balance at beginning of period $ 6,695 $ 7,060
Product warranty accruals 1,589 3,640
Settlements (1,812) (4,394)
Other 41 207
-------- --------
Balance at end of period $ 6,513 $ 6,513
======== ========
NOTE 6. 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,
-------------------------- ---------------------------
2003 2002 2003 2002
---------- --------- ---------- -----------
Basic EPS:
Net income $ 5,277 $ 4,829 $ 14,143 $ 14,931
========== ========= ========== ===========
Shares:
Weighted average number of common
shares outstanding 16,079 15,887 16,047 15,833
========== ========= ========== ===========
Basic earnings per common share $ 0.33 $ 0.30 $ 0.88 $ 0.94
========== ========= ========== ===========
- 7 -
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- ---------------------------
2003 2002 2003 2002
---------- --------- ----------- -----------
Diluted EPS:
Net income $ 5,277 $ 4,829 $ 14,143 $ 14,931
========== ========= =========== ===========
Shares:
Weighted average number of common
shares outstanding 16,079 15,887 16,047 15,833
Assuming conversion of dilutive stock
options issued and outstanding 314 151 222 225
---------- --------- ----------- -----------
Weighted average number of common
shares outstanding, as adjusted 16,393 16,038 16,269 16,058
========== ========= =========== ===========
Diluted earnings per common share $ 0.32 $ 0.30 $ 0.87 $ 0.93
========== ========= =========== ===========
NOTE 7. COMPREHENSIVE INCOME.
For the three months ended September 30, 2003 and 2002, comprehensive income
was $6.3 million and $5.5 million, respectively. For the nine months ended
September 30, 2003 and 2002, comprehensive income was $20.9 million and
$20.1 million, respectively. Items impacting the Company's comprehensive
income, but not included in net income, consist of foreign currency
translation adjustments.
NOTE 8. CASH FLOW INFORMATION.
In the first nine months of 2003 and 2002, the Company paid $2.8 million and
$5.3 million, respectively, to the various taxing authorities for income
taxes. Interest paid for the first nine months of 2003 and 2002, was $3.6
million and $5.4 million, respectively.
NOTE 9. CONTINGENCIES.
The Company is a party to various other 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 been named as a defendant in an increasing
number of asbestos personal injury lawsuits. We have 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 our experience, the substantial majority of the
plaintiffs have not been physically impaired by the alleged exposure.
Predecessors to the Company manufactured, distributed and sold the products
allegedly at issue in the pending asbestos and silicosis litigation
lawsuits. The Company has potential responsibility for certain contingent
liabilities with respect to 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.
- 8 -
Neither the Company, nor its predecessors, ever mined, manufactured, mixed,
produced or distributed asbestos fiber. The asbestos containing components
used in the products at issue 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 fact that the substantial majority of plaintiffs are
not impaired with a disease; various potential defenses available to the
Company with respect to such matters; and the Company's prior disposition of
comparable matters.
However, 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 our consolidated financial position, results of operation
or liquidity.
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.
- 9 -
NOTE 10. SEGMENT INFORMATION.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- -------------------------------
2003 2002 2003 2002
------------- ------------- ------------- ------------
Revenues:
Compressed Air Products $ 91,554 $ 85,496 $ 271,183 $ 263,247
Pump Products 20,507 17,295 51,757 51,007
------------- ------------- ------------- ------------
Total $ 112,061 $ 102,791 $ 322,940 $ 314,254
============= ============= ============= ============
Operating Earnings:
Compressed Air Products $ 7,089 $ 7,375 $ 21,364 $ 23,515
Pump Products 1,971 1,540 2,979 3,551
------------- ------------- ------------- ------------
Total 9,060 8,915 24,343 27,066
Interest expense 1,070 1,566 3,411 4,978
Other expense (income), net 230 32 133 (535)
------------- ------------- ------------- ------------
Income before income taxes $ 7,760 $ 7,317 $ 20,799 $ 22,623
============= ============= ============= ============
- 10 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS.
PERFORMANCE IN THE QUARTER ENDED SEPTEMBER 30, 2003 COMPARED WITH
THE QUARTER ENDED SEPTEMBER 30, 2002
Revenues
Revenues increased $9.3 million to $112.1 million for the three months ended
September 30, 2003, compared to $102.8 million in the same period of 2002
due to increased order activity in both reportable segments and changes in
currency exchange rates.
For the three months ended September 30, 2003, revenues for the Compressed
Air Products segment increased $6.1 million (7%) to $91.6 million, compared
to the same period of 2002. Revenues in this segment increased $3.1 million
(4%) primarily due to improved orders for industrial products, particularly
from Europe and Asia and $3.0 million (3%) from changes in currency exchange
rates. Pump Products segment revenues increased $3.2 million (19%) to $20.5
million for the three months ended September 30, 2003, compared to the same
period of 2002, primarily as a result of increased demand for well
stimulation pumps and petroleum pump parts.
Costs and Expenses
Gross margin (defined as sales less cost of sales excluding depreciation and
amortization) for the three months ended September 30, 2003 increased $1.3
million (4%) to $33.9 million compared to the same period of 2002. Gross
margin as a percentage of revenues (gross margin percentage) decreased to
30.2% in the three-month period of 2003 from 31.6% in the same period of
2002. The decrease in gross margin percentage was principally attributable
to unfavorable sales mix (including lower centrifugal blower and drilling
pump sales and higher compressor package sales) combined with higher
warranty expense (due to unusually low warranty expense in the third quarter
of 2002, as a result of favorable claims experience). These negative factors
were partially offset by cost reduction efforts, including continued
acquisition integration.
Selling and administrative expenses increased in the three-month period of
2003 by 6% to $21.1 million from $19.9 million in the same period of 2002.
Selling and administrative expenses increased 3% primarily due to higher
compensation and fringe benefit expense and 3% due to changes in currency
exchange rates. Selling and administrative expenses as a percentage of
revenues decreased to 18.8% for the three-month period of 2003 compared to
19.4% in 2002 primarily as a result of the increase in revenues.
The Compressed Air Products segment generated operating margins (defined as
revenues, less cost of sales, depreciation and amortization, and selling and
administrative expenses) of 7.7% for the three-month period ended September
30, 2003, a decrease from 8.6% for the same period of 2002. This decrease
was primarily attributable to the higher warranty, compensation and fringe
benefit expense discussed above. These negative factors were partially
offset by cost reductions, including continued acquisition integration,
combined with revenue and operating margin improvement on compressor
packages.
- 11 -
The Pump Products segment generated operating margins of 9.6% of revenues
for the three-month period ended September 30, 2003, compared to an
operating margin of 8.9% for the same period in 2002. This increase was
primarily attributable to the positive impact of increased leverage of the
segment's fixed and semi-fixed costs over a higher revenue base.
Interest expense decreased $0.5 million (32%) to $1.1 million for the three
months ended September 30, 2003, compared to $1.6 million for the same
period of 2002 due to lower average borrowings and interest rates. The
average interest rate for the three-month period of 2003 was 4.0% compared
to 4.6% in the prior year period.
Other expense, net increased $0.2 million compared to the prior year period
primarily due to lower interest income and higher foreign currency
transaction losses generated from U.S. dollar denominated balances of
foreign subsidiaries in 2003.
Income before income taxes increased $0.4 million (6%) to $7.8 million for
the three months ended September 30, 2003, compared to the same period of
2002. This increase was primarily the result of the positive impact of
increased leverage of the Pump Products segment's fixed and semi-fixed costs
over a higher revenue base, cost reduction efforts (including continued
acquisition integration), lower interest expense and changes in currency
exchange rates. These positive factors were partially offset by the negative
factors driving the changes in the Compressed Air Products segment operating
margins and other expense as discussed above.
The provision for income taxes was $2.5 million in both three-month periods,
as higher income before taxes was offset by a lower overall effective tax
rate. The Company's effective tax rate for the three months ended September
30, 2003 decreased to 32.0%, compared to 34.0% in the prior year period,
principally as a result of a higher proportion of Extraterritorial Income
Exclusion (EIE) benefit from U.S. export sales relative to pretax income.
Net income for the three months ended September 30, 2003 increased $0.4
million (9%) to $5.3 million ($0.32 diluted earnings per share), compared to
$4.8 million ($0.30 diluted earnings per share) for the same period of 2002.
This increase in net income was primarily attributable to the same factors
that resulted in increased income before taxes noted above combined with a
lower effective tax rate in 2003. Changes in currency exchange rates
increased net income by approximately $0.2 million in the three months ended
September 30, 2003 compared to the prior year period.
PERFORMANCE IN THE NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED WITH
THE NINE MONTHS ENDED SEPTEMBER 30, 2002
Revenues
Revenues increased $8.7 million to $322.9 million for the nine months ended
September 30, 2003, compared to the same period of 2002 primarily due to
changes in currency exchange rates.
For the nine months ended September 30, 2003, revenues for the Compressed
Air Products segment increased $7.9 million (3%) to $271.2 million, compared
to the same period of 2002. Revenues in this segment increased approximately
5% due to changes in currency exchange rates. Excluding the impact of
changes in currency exchange rates, revenues in this segment decreased
approximately 2% due to softer industrial economic conditions in the U.S.
and Europe, which was partially offset by incremental demand of compressor
packages used in PET bottle
- 12 -
blowing applications. Pump Products segment revenues increased $0.8 million
(1%) to $51.8 million for the nine months ended September 30, 2003, compared
to the same period of 2002. This increase is primarily attributable to
higher shipments of well stimulation pumps and petroleum pump parts and was
partially offset by lower drilling pump sales. In 2002, Pump Products
segment revenues were primarily supported by drilling pump backlog carried
over from 2001 orders.
Costs and Expenses
Atchison Casting Corporation, the Company's largest supplier of iron
castings in 2002, downsized and subsequently closed its LaGrange, Missouri
foundry ("LaGrange Foundry") in the second half of 2002. As a result, the
Company implemented its previously developed contingency plan to secure
alternate supply sources. The Company does not anticipate that the closure
of the LaGrange Foundry will materially impact its long-term financial
performance. However, there was a negative impact (estimated at $0.04-$0.05
diluted earnings per share) on the Company's financial performance during
the first nine months of 2003, as additional costs were incurred to expedite
castings from new suppliers and accelerate depreciation expense of pattern
modification charges from alternate casting suppliers who are no longer
servicing the Company.
The most significant aspects of the changes related to the LaGrange Foundry
closure have been completed and the Company expects to benefit going forward
from reduced material costs from alternate suppliers. At the same time, the
Company anticipates that it will need to address some lingering problems
over the balance of the year as it re-balances its casting supply chain
while dealing with suppliers that are experiencing lower volumes, high fixed
cost structures and increased competitive pressures.
Gross margin for the nine months ended September 30, 2003 decreased $0.3
million to $97.8 million compared to the same period of 2002. The gross
margin percentage decreased to 30.3% in the nine-month period of 2003 from
31.2% in the same period of 2002. This decrease in the gross margin
percentage was principally attributable to unfavorable sales mix (including
lower drilling pump and centrifugal blower sales and higher compressor
package sales) and costs associated with the disruption in the Company's
casting supply chain. These negative factors were partially offset by cost
reduction efforts, including continued acquisition integration efforts.
Selling and administrative expenses increased in the nine-month period of
2003 by 4% to $62.4 million from $60.2 million in the same period of 2002
primarily due to changes in foreign currency exchange rates. Excluding the
impact of foreign currency exchange rate changes, selling and administrative
expenses decreased approximately $0.2 million due to cost reductions,
including continued acquisition integration efforts. These cost reductions
were partially offset by higher compensation expense, sales commissions,
fringe benefit and legal costs. Selling and administrative expenses as a
percentage of revenues increased to 19.3% for the nine-month period of 2003
compared to 19.1% in 2002 primarily as a result of the factors discussed
above which were partially offset by the impact of higher revenues.
The Compressed Air Products segment generated operating margins of 7.9% for
the nine-month period ended September 30, 2003, a decrease from 8.9% for the
same period of 2002. This decrease was primarily attributable to higher
warranty, compensation and fringe benefit expense combined with costs
associated with the disruption within the Company's casting supply chain.
These negative factors were partially offset by cost reductions, including
continued acquisition
- 13 -
integration efforts, combined with revenue and operating margin improvement
from compressor packages used in PET bottle blowing applications.
The Pump Products segment generated operating margins of 5.8% of revenues
for the nine-month period ended September 30, 2003, compared to an operating
margin of 7.0% for the same period in 2002. This decrease was primarily
attributable to a less favorable sales mix, which included a lower
percentage of revenues from drilling pumps, which carry higher margins than
other pump products. This negative factor was partially offset by lower
warranty expense.
Interest expense decreased $1.6 million (31%) to $3.4 million for the nine
months ended September 30, 2003, compared to $5.0 million for the same
period of 2002 due to lower average borrowings and interest rates. The
average interest rate for the nine-month period of 2003 was 4.1% compared to
4.4% in the prior year period.
Other expense, net increased $0.7 million compared to the prior year period
primarily due to lower interest income and higher foreign currency
transaction losses generated from U.S. dollar denominated balances of
foreign subsidiaries in 2003. These negative factors were 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 decreased $1.8 million (8%) to $20.8 million for
the nine months ended September 30, 2003, compared to the same period of
2002. This decrease was primarily the result of the factors driving the
changes in segment operating margins and other expense noted above. These
negative factors were partially offset by cost reductions, including
continued acquisition integration efforts, changes in currency exchange
rates and lower interest expense.
The provision for income taxes decreased by $1.0 million (13%) to $6.7
million for the nine-month period of 2003, compared to $7.7 million in 2002,
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, 2003 decreased to 32.0%, compared to 34.0% in the prior year
period, principally as a result of a higher proportion of Extraterritorial
Income Exclusion (EIE) benefit from U.S. export sales relative to pretax
income.
Net income for the nine months ended September 30, 2003 decreased $0.8
million (5%) to $14.1 million ($0.87 diluted earnings per share), compared
to $14.9 million ($0.93 diluted earnings per share) for the same period of
2002. This decrease in net income was primarily attributable to the same
factors that resulted in decreased income before taxes discussed above
partially offset by a lower effective tax rate in 2003. Changes in currency
exchange rates increased net income by approximately $0.7 million in the
nine months ended September 30, 2003 compared to the prior year period.
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 third quarter of 2003, orders for compressed air
products were $90.3 million, compared to $80.7 million in the same period of
2002. For the first nine months of 2003, orders for compressed air products
were $265.1 million compared to $259.9 million in the same period of 2002.
Order
- 14 -
backlog for the Compressed Air Products segment was $56.5 million as of
September 30, 2003, compared to $56.9 million as of September 30, 2002. The
favorable impact of changes in currency exchange rates was approximately
$12.1 million and $1.7 million and for compressed air products orders and
backlog, respectively, as of and for the nine months ended September 30,
2003. Excluding this impact, the decrease in orders and backlog compared to
the prior year is primarily due to softer U.S. and European industrial
economies.
Demand for pump products, which are primarily petroleum related, has
historically corresponded to market conditions and expectations for oil and
natural gas prices. Orders for pump products were $18.9 million in the third
quarter of 2003 compared to $14.5 million in the same period of 2002. For
the first nine months of 2003, pump product orders were $53.4 million
compared to $40.7 million in the same period of 2002. The increase in orders
can primarily be attributed to increasing demand for well stimulation pumps
and petroleum pump parts. Compared to September 30, 2002, backlog for this
business segment decreased $1.6 million to $8.7 million on September 30,
2003, primarily due to the significant drilling pump backlog in the third
quarter of 2002, which was carried over from 2001 orders.
During the fourth quarter of 2003, the Company announced and initiated
restructuring plans to eliminate redundant manufacturing capacity,
streamline operations and reduce costs. These activities represent further
integration of previously completed acquisitions, which the Company expects
will better leverage existing manufacturing facilities. As a result of the
restructuring, the Company expects to realize a net reduction in headcount
of approximately 80 personnel (approximately 4% of its current workforce) by
2005. The Company also announced a detailed inventory reduction plan and its
intent to establish a compressor packaging and assembly operation in China.
The Company estimates the aggregate financial impact of these programs
(restructuring plans, inventory reduction plan and China operations
establishment) will be a reduction in diluted earnings per share of
approximately $0.10 to $0.12 in the fourth quarter of 2003. Based upon the
above and the current economic environment and activity levels in both
reporting segments, the Company anticipates that diluted earnings per share
will be approximately $0.22 to $0.26 for the fourth quarter of 2003. Diluted
earnings per share is expected to be approximately $1.09 to $1.13 for the
year, which is within the range of the Company's previous guidance after
adjustment for the programs discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Operating Working Capital
During the nine months ended September 30, 2003, operating working capital
(defined as receivables plus inventories, less accounts payable and accrued
liabilities) increased $11.1 million due to higher receivables and
inventories and lower accounts payable and accrued liabilities. Additions to
inventory resulted primarily from positioning long lead-time orders in
backlog and changes in currency exchange rates. The increase in receivables
is primarily due to timing of shipments and changes in currency exchange
rates. The lower accounts payable and accrued liabilities are primarily due
to timing of payments and were partially offset by changes in currency
exchange rates.
- 15 -
Cash Flows
During the first nine months of 2003, the Company generated cash flows from
operating activities totaling $23.7 million, compared to $27.4 million in
the prior year period. This unfavorable comparison is primarily due to an
increase in operating working capital and lower net income in 2003, as
discussed above. During the first nine months of 2003, cash from operating
activities supported the Company's ability to invest in capital expenditures
($8.2 million), reduce total debt ($17.9 million) and acquire a small
machine shop in Odessa, Texas ($2.4 million). The cash flows provided by
operating activities and used in investing and financing activities,
combined with the effect of changes in currency exchange rates, resulted in
a net cash decrease of $1.0 million for the first nine months of 2003.
Capital Expenditures and Commitments
Capital projects designed to increase operating efficiency and flexibility,
expand production capacity and increase product quality resulted in
expenditures of $8.2 million in the first nine months of 2003. This was $0.7
million higher than the level of capital expenditures in the comparable
period in 2002, primarily due to the timing of capital projects. Commitments
for capital expenditures at September 30, 2003 approximated $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, the Company'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 tax
obligations which arise from the exercise or vesting of incentive stock
options, restricted stock or performance shares. The 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. No shares were
repurchased under these repurchase programs during 2002 or 2003. As of
September 30, 2003, a total of 1,572,542 shares have been repurchased at a
cost of $22.8 million under both repurchase programs. During the nine months
ended September 30, 2003, the Company also acquired 3,983 shares of its
common stock, valued at $0.1 million, which were tendered for the exercise
of stock options.
Liquidity
The Company's amended and restated Revolving Line of Credit Agreement (the
"Credit Line") has a borrowing capacity of $150.0 million and matures 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. The total debt
balance will be due upon final maturity. On September 30, 2003, the Credit
Line had an outstanding principal balance of $33.0 million, leaving $117.0
million available for future use or for letters of credit, subject to the
terms of the Credit Line.
The Credit Line also provided for an additional $50 million Term Loan which
was used to retire debt outstanding under a previous interim credit
agreement. The five-year Term Loan requires principal payments of $2.5
million in years one and two, and $15.0 million in years three through five.
On September 30, 2003, the Term Loan had an outstanding principal balance of
$46.3 million.
- 16 -
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.
On September 24, 2003, the Company filed with the Securities and Exchange
Commission ("SEC") a shelf registration statement regarding $150 million of
its securities. The registration statement has since been declared effective
by the SEC and allows the Company to complete one or more offerings of its
common stock, preferred stock, debt securities or warrants. The Company
intends to use the net proceeds from any offering for acquisitions, capital
expenditures, repayment of borrowings, working capital and other general
corporate purposes.
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 ongoing capital investments.
CONTINGENCIES
The Company is a party to various other 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 been named as a defendant in an increasing
number of asbestos personal injury lawsuits. We have 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 our experience, the substantial majority of the
plaintiffs have not been physically impaired by the alleged exposure.
Predecessors to the Company manufactured, distributed and sold the products
allegedly at issue in the pending asbestos and silicosis litigation
lawsuits. The Company has potential responsibility for certain contingent
liabilities with respect to 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 at issue 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
- 17 -
to address the risks of such matters; the limited potential asbestos
exposure from the components described above; the fact that the substantial
majority of plaintiffs are not impaired with a disease; various potential
defenses available to the Company with respect to such matters; and the
Company's prior disposition of comparable matters.
However, 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 our consolidated financial position, results of operation
or liquidity.
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.
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 calculation of 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 2002 Annual
Report on Form 10-K, filed on March 26, 2003, in the Critical Accounting
Policies Section of Management's Discussion and Analysis and in Note 1 to
the Consolidated Financial Statements contained in our 2002 Annual Report to
Stockholders filed as Exhibit 13.0 thereto.
CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS
All of the statements in this Management's Discussion and Analysis, other
than historical facts, are forward-looking statements made in reliance upon
the safe harbor of the Private Securities Litigation Reform Act of 1995,
including, without limitation, statements made under the caption "Outlook."
As a general matter, forward-looking statements are those focused upon
anticipated events or trends and expectations and beliefs relating to
matters that are not historical in nature. Such forward-looking statements
are subject to uncertainties and factors relating to Gardner Denver's
operations and business environment, all of which are difficult to predict
and many of which are beyond the control of the Company. These uncertainties
and factors could cause actual results to differ materially from those
matters expressed in or implied by such forward-looking statements. The
following uncertainties and factors, among others, could affect future
performance and cause actual results to differ materially from those
expressed in or implied by forward-looking statements: (1) the ability to
maintain and to enter into key purchasing, supply and outsourcing
relationships; (2) the ability to effectively manage the transition of iron
casting supply to alternate sources and the skill, commitment and
availability of such alternate sources; (3) the ability to identify,
negotiate and complete future acquisitions; (4) the speed with which the
Company is able to integrate acquisitions and realize the related financial
benefits; (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
- 18 -
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 Gardner Denver products; (9) the degree to
which the Company is able to penetrate niche and international markets; (10)
the ability to attract and retain quality management personnel; (11) 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; (12) the continued ability to effectively manage and
defend litigation matters pending, or asserted in the future, against the
Company; (13) the development and acceptance of the Company's new product
offerings; and (14) the continued successful implementation and utilization
of the Company's electronic services.
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, 2002 and September 30, 2003.
ITEM 4. CONTROLS AND PROCEDURES
As required by Rule 13a-15 of the Exchange Act, the Company has carried out
an evaluation of the effectiveness of the design and operation of the
Company's disclosure controls and procedures as of the end of the period
covered by this report. This evaluation was carried out under the
supervision and with the participation of the Company's management,
including the Chairman, President and Chief Executive Officer and the Vice
President, Finance and Chief Financial Officer. Based upon that evaluation,
the Chairman, President and Chief Executive Officer and Vice President,
Finance and Chief Financial Officer concluded that the Company's 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 significant 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.
- 19 -
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:
10.10 Form of Gardner Denver, Inc. Nonemployee Director Stock
Option Agreement, as amended July 29, 2003.
12 Calculation of Ratio of Earnings to Fixed Charges.
31.1 Certification of Chief Executive Officer pursuant to
Exchange Act Rule 13a-14(a).
31.2 Certification of Chief Financial Officer pursuant to
Exchange Act Rule 13a-14(a).
32 Certification pursuant to 18 U.S.C. Section 1350 and
Exchange Act Rule 13a-14(b).
(b) Reports on Form 8-K
On October 20, 2003, Gardner Denver, Inc. filed a Current Report on
Form 8-K to furnish its press release announcing the Company's
earnings for the third quarter and nine months ended September 30,
2003, certain recent activities, and guidance as to certain future
results.
On September 17, 2003, Gardner Denver, Inc. filed a Current Report
on Form 8-K to report a temporary suspension of trading under its
employee benefits plans.
- 20 -
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 12, 2003 By: /s/Ross J. Centanni
---------------------------------
Ross J. Centanni
Chairman, President & CEO
Date: November 12, 2003 By: /s/Philip R. Roth
---------------------------------
Philip R. Roth
Vice President, Finance & CFO
Date: November 12, 2003 By: /s/Daniel C. Rizzo, Jr.
---------------------------------
Daniel C. Rizzo, Jr.
Vice President and Corporate
Controller (Chief Accounting Officer)
- 21 -
GARDNER DENVER, INC.
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
10.10 Form of Gardner Denver, Inc. Nonemployee Stock Option Agreement, as
amended July 29, 2003.
12 Calculation of Ratio of Earnings to Fixed Charges.
31.1 Certification of Chief Executive Officer pursuant to Exchange Act
Rule 13a-14(a).
31.2 Certification of Chief Financial Officer pursuant to Exchange Act
Rule 13a-14(a).
32 Certification pursuant to 18 U.S.C. Section 1350 and Exchange Act
Rule 13a-14(b).
- 22 -