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, 2005
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 62305
(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
requirements 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 [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Number of shares outstanding of the registrant's Common Stock, par value $0.01
per share, as of November 1, 2005: 25,965,813 shares.
================================================================================
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GARDNER DENVER, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
2005 2004 2005 2004
--------- --------- --------- ---------
REVENUES $ 356,095 $ 182,616 $ 845,265 $ 498,341
COSTS AND EXPENSES:
Cost of sales 240,535 123,296 569,449 336,457
Depreciation and amortization 11,335 5,925 25,816 16,074
Selling and administrative 71,082 37,461 175,245 106,031
Interest expense 10,358 2,491 19,642 5,949
Other expense (income), net (1,016) 332 (4,338) (1,756)
--------- --------- --------- ---------
TOTAL COSTS AND EXPENSES 332,294 169,505 785,814 462,755
--------- --------- --------- ---------
INCOME BEFORE INCOME TAXES 23,801 13,111 59,451 35,586
PROVISION FOR INCOME TAXES 7,140 4,457 17,835 12,099
--------- --------- --------- ---------
NET INCOME $ 16,661 $ 8,654 $ 41,616 $ 23,487
========= ========= ========= =========
BASIC EARNINGS PER SHARE $ 0.64 $ 0.44 $ 1.79 $ 1.26
========= ========= ========= =========
DILUTED EARNINGS PER SHARE $ 0.63 $ 0.43 $ 1.75 $ 1.23
========= ========= ========= =========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
-2-
GARDNER DENVER, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
(UNAUDITED) DECEMBER 31,
ASSETS SEPTEMBER 30, 2005 2004
------------------ -------------
Current assets
Cash and equivalents $ 114,556 $ 64,601
Receivables (net of allowances of $11,939 at
September 30, 2005 and $7,543 at December 31, 2004) 228,578 163,927
Inventories, net 214,033 138,386
Deferred income taxes 25,653 9,465
Other current assets 12,029 9,143
----------- -----------
Total current assets 594,849 385,522
----------- -----------
Property, plant and equipment, net 286,001 148,819
Goodwill 622,839 374,159
Other intangibles, net 205,614 110,173
Other assets 24,452 9,936
----------- -----------
Total assets $ 1,733,755 $ 1,028,609
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short term borrowings and current maturities
of long-term debt $ 31,332 $ 32,949
Accounts payable 96,643 93,577
Accrued liabilities 188,498 112,492
----------- -----------
Total current liabilities 316,473 239,018
----------- -----------
Long-term debt, less current maturities 596,581 280,256
Postretirement benefits other than pensions 30,662 30,503
Deferred income taxes 76,198 21,324
Other long-term liabilities 75,878 52,032
----------- -----------
Total liabilities 1,095,792 623,133
----------- -----------
Stockholders' equity
Common stock, $0.01 par value; 50,000,000 shares authorized; 25,956,654
shares issued and outstanding at September 30, 2005, and 19,947,570
issued and outstanding at December 31, 2004 277 217
Capital in excess of par value 469,343 262,091
Treasury stock at cost, 1,807,776 shares at September 30,
2005, and 1,739,661 at December 31, 2004 (29,257) (26,447)
Retained earnings 181,046 139,430
Accumulated other comprehensive income 16,554 30,185
----------- -----------
Total stockholders' equity 637,963 405,476
----------- -----------
Total liabilities and stockholders' equity $ 1,733,755 $ 1,028,609
=========== ===========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
-3-
GARDNER DENVER, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
NINE MONTHS ENDED
SEPTEMBER 30, 2005
------------------------
2005 2004
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 41,616 $ 23,487
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 25,816 16,074
Unrealized foreign currency transaction gain, net (108) (1,235)
Net loss (gain) on asset dispositions 146 (11)
Stock issued for employee benefit plans 2,496 1,768
Deferred income taxes (1,874) 1,291
Changes in assets and liabilities:
Receivables (7,638) (638)
Inventories (4,316) (8,324)
Accounts payable and accrued liabilities (8,609) (8,746)
Other assets and liabilities, net 5,298 (1,413)
--------- ---------
Net cash provided by operating activities 52,827 22,253
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Business acquisitions, net of cash acquired (480,421) (292,108)
Capital expenditures (22,650) (12,301)
Disposals of property, plant and equipment 536 315
Other (2,148) (126)
--------- ---------
Net cash used in investing activities (504,683) (304,220)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on short-term debt (23,380) -
Proceeds from short-term debt 16,663 -
Principal payments on long-term debt (467,328) (200,998)
Proceeds from issuance of long-term debt 786,150 315,959
Proceeds from issuance of common stock 199,318 79,557
Proceeds from stock options 5,498 3,475
Purchase of treasury stock (2,810) (399)
Debt issuance costs (7,789) (1,846)
--------- ---------
Net cash provided by financing activities 506,322 195,748
Effect of exchange rate changes on cash and equivalents (4,511) 1,471
--------- ---------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS 49,955 (84,748)
--------- ---------
CASH AND EQUIVALENTS, BEGINNING OF PERIOD 64,601 132,803
--------- ---------
CASH AND EQUIVALENTS, END OF PERIOD $ 114,556 $ 48,055
========= =========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
-4-
GARDNER DENVER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts
or amounts described in millions)
(Unaudited)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying condensed consolidated financial statements include the
accounts of Gardner Denver, Inc. and those subsidiaries that are majority-owned
or over which Gardner Denver, Inc. exercises control (referred to herein as
"Gardner Denver" or the "Company"). In consolidation, 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 accounting principles generally accepted in the United
States of America 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, 2004.
The results of operations for the three and nine months ended September
30, 2005 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 stock-based
compensation plans using the intrinsic value method in accordance with
Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock
Issued to Employees," and related interpretations. Stock options granted during
the three and nine months ended September 30, 2005 and 2004 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 NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
--------------------------------- ---------------------------------
2005 2004 2005 2004
-------------- -------------- -------------- --------------
Net income, as reported $ 16,661 $ 8,654 $ 41,616 $ 23,487
Less: Total stock-based employee compensation
expense determined under fair value method,
net of related tax effects $ 439 $ 363 $ 1,218 $ 1,014
-------------- -------------- -------------- --------------
Pro forma net income $ 16,222 $ 8,291 $ 40,398 $ 22,473
============== ============== ============== ==============
Basic earnings per share, as reported $ 0.64 $ 0.44 $ 1.79 $ 1.26
============== ============== ============== ==============
Basic earnings per share, pro forma $ 0.63 $ 0.42 $ 1.74 $ 1.20
============== ============== ============== ==============
Diluted earnings per share, as reported $ 0.63 $ 0.43 $ 1.75 $ 1.23
============== ============== ============== ==============
Diluted earnings per share, pro forma $ 0.62 $ 0.41 $ 1.70 $ 1.18
============== ============== ============== ==============
Changes in Accounting Principles and Effects of New Accounting Pronouncements
In November 2004, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 151, "Inventory Costs - an amendment to ARB No. 43, Chapter 4."
This Statement amends previous guidance and requires expensing for abnormal
amounts of idle facility expense, freight, handling costs, and wasted material
(spoilage). In addition, the Statement requires that allocation of fixed
production overheads to inventory be based on the normal capacity of production
facilities. SFAS No. 151 is effective for inventory costs incurred during annual
periods beginning after June 15, 2005. The Company is currently evaluating the
impact of SFAS No. 151 on its future consolidated financial statements.
In December 2004, the FASB issued SFAS No. 123 (revised 2004),
"Share-Based Payment" ("SFAS No. 123(R)"), which is a revision of SFAS No. 123.
SFAS No. 123(R) supersedes APB 25 and amends SFAS No. 95, "Statement of Cash
Flows." Generally, the approach in SFAS No. 123(R) is similar to the approach
described in SFAS No. 123. However, SFAS No. 123(R) requires all share-based
payments to employees, including grants of employee stock options, to be
expensed based on their fair values.
On April 14, 2005, the Securities and Exchange Commission ("SEC") adopted
a rule that delayed the effective date of SFAS No. 123(R), which required
adoption no later than July 1, 2005. The SEC rule allows companies to implement
SFAS No. 123(R) at the beginning of their next fiscal year that begins after
June 15, 2005. The new SEC rule does not change the accounting required by SFAS
No. 123(R). Gardner Denver plans to adopt SFAS No. 123(R) on January 1, 2006,
using the modified-prospective method, which requires the recognition of
compensation costs beginning with the effective date (a) based on the
requirements of SFAS No. 123(R) for all share-based payments granted after the
effective date and (b) based on the requirements of SFAS No. 123 for all awards
granted to employees prior to the effective date of SFAS No. 123(R) that remain
unvested on the effective date.
As permitted by SFAS No. 123, Gardner Denver currently accounts for
share-based payments to employees using the intrinsic value method prescribed by
APB 25 and, as such, generally recognizes no compensation cost for employee
stock options. Accordingly, the adoption of the fair value method in
-6-
SFAS No. 123(R) will have an impact on Gardner Denver's result of operations,
although it will have no impact on Gardner Denver's overall financial position.
Management currently expects that the adoption of SFAS No. 123(R) will result in
approximately $0.12 to $0.14 reduction in diluted earnings per share for 2006.
This estimate is based on the Company's historical stock-based compensation
practices and may change based on the actual level of stock-based compensation
granted in the future. Additionally, Gardner Denver's stock option grants
contain a provision that accelerates vesting of options for holders that retire
and have met retirement eligibility requirements. Currently, as part of the pro
forma disclosures required by SFAS No. 123, Gardner Denver records a pro forma
expense for the unrecognized compensation cost in the period that the
accelerated vesting occurs. However, upon adoption of SFAS No. 123(R), Gardner
Denver will recognize compensation expense based on retirement eligibility dates
for all options which contain an accelerated vesting provision. SFAS No. 123(R)
also requires the benefits of tax deductions in excess of recognized
compensation cost to be reported as a financing cash flow, rather than as an
operating cash flow as required under current literature. This requirement will
reduce net operating cash flows and increase net financing cash flows in periods
after adoption.
In March 2005, the SEC staff issued Staff Accounting Bulletin No. 107
("SAB 107") to assist preparers with the implementation of SFAS No. 123(R). SAB
107 recognizes that considerable judgment will be required by preparers to
successfully implement SFAS No. 123(R), (specifically when valuing employee
stock options); and that reasonable individuals, acting in good faith, may
conclude differently on the fair value of employee stock options. Gardner Denver
will apply the principles of SAB 107 in conjunction with its adoption of SFAS
No. 123(R).
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections," ("SFAS No. 154"), which requires retrospective application for
reporting a voluntary change in accounting principle, unless it is impracticable
to do so. SFAS No. 154 provides guidance for determining whether retrospective
application of a change in accounting principle is impracticable and also
addresses the reporting of a correction of error by restating previously issued
financial statements. SFAS No. 154 is effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15, 2005.
The Company will adopt SFAS No. 154 as required, and management does not believe
the adoption will have a material effect on the Company's results of operations
or financial position.
NOTE 2. BUSINESS COMBINATIONS
Consummated Acquisitions
On July 1, 2005, the Company acquired Thomas Industries Inc. ("Thomas"),
previously a New York Stock Exchange listed company trading under the ticker
symbol "TII." Thomas is a worldwide leader in the design, manufacture and
marketing of precision engineered pumps, compressors and blowers. Thomas'
products are complementary to the Compressor and Vacuum Products segment's
existing product portfolio. The agreed-upon purchase price of $40.00 per share
for all outstanding shares and share equivalents (approximately $734.2 million)
was paid in the form of cash and the assumption of $7.6 million of long-term
capitalized lease obligations. As of June 30, 2005, Thomas had $265.3 million in
cash and equivalents. The net transaction value, including assumed debt of $7.6
million (net of cash acquired) and direct acquisition costs, was approximately
$483.5 million.
-7-
The balance sheet accounts and results of operations of Thomas were
included in Gardner Denver's Consolidated Financial Statements beginning on
July 1, 2005. The estimated fair values of the significant asset balances
acquired and significant liabilities assumed in connection with the acquisition
of Thomas are as follows: receivables ($59,834); inventory ($76,277); property,
plant and equipment ($126,539); intangible assets ($354,612); other assets
($9,381); accounts payable and accrued liabilities ($90,738); net deferred
income tax liabilities ($28,495) and other liabilities ($23,911), based on their
estimated fair values on 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 2006. Further, other assets and
liabilities may be identified to which a portion of the purchase price could be
allocated.
The following unaudited pro forma financial information for the three and
nine months ended September 30, 2005 and 2004 assumes that the Thomas
acquisition occurred as of January 1, 2004. This unaudited pro forma financial
information is subject to change upon finalization of the purchase price
allocation of Thomas. The pro forma results have been prepared for comparative
purposes only and are not necessarily indicative of the results of operations
which may occur in the future or that would have occurred had the Thomas
acquisition been consummated on the date indicated.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
2005 2004 2005 2004
---------- ---------- ---------- ----------
Revenues $ 356,095 $ 326,304 $1,066,184 $ 964,529
========== ========== ========== ==========
Net income (1) $ 16,661 $ 97,283 $ 46,764 $ 125,111
========== ========== ========== ==========
Diluted earnings per share (1) $ 0.63 $ 3.76 $ 1.78 $ 5.07
========== ========== ========== ==========
(1) Net income and diluted earnings per share for the three-month and
nine-month periods ended September 30, 2004, include a one-time gain of
$160.4 million, pre-tax, related to Thomas' sale of its equity interest in
the Genlyte Thomas Group LLC. Excluding the effect of the gain, diluted pro
forma earnings per share for the three-month and nine-month periods ended
September 30, 2004, would have been $0.45 and $1.29, respectively.
In June 2005, the Company acquired the outstanding shares of Bottarini
S.p.A. ("Bottarini"), a packager of industrial air compressors located near
Milan, Italy. Bottarini's products are complementary to the Compressor and
Vacuum Products segment's existing product portfolio. The purchase price of
$10.1 million, including assumed bank debt (net of cash acquired) and direct
acquisition costs, was paid in cash and the assumption of Bottarini's
outstanding debt ($1.2 million). The size of this acquisition was not material
in relation to Gardner Denver.
On September 1, 2004, the Company acquired nash_elmo Holdings, LLC ("Nash
Elmo"), a leading global manufacturer of industrial vacuum pumps. Nash Elmo is
primarily split between two businesses, liquid ring pumps and side channel
blowers. Both businesses' products are complementary to the Compressor and
Vacuum Products segment's existing product portfolio. Nash Elmo, previously
headquartered in Trumbull, CT, has primary manufacturing facilities located in
Bad Neustadt and Nuremberg, Germany; Zibo, China; and Campinas, Brazil. The
purchase price of $224.6 million, including assumed bank debt (net of cash
acquired) and direct acquisition costs, was paid in the form of cash and the
assumption of certain of Nash Elmo's existing debt ($10.4 million). There are no
additional contingent payments or commitments related to this acquisition.
During the third quarter of 2005, the Company finalized the allocation of the
Nash Elmo purchase price.
-8-
On January 2, 2004, the Company acquired the outstanding shares of
Syltone plc ("Syltone"), previously a publicly traded company listed on the
London Stock Exchange. Syltone, previously 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 lines.
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 British
pound 63.0 million (or approximately $112.5 million), including assumed bank
debt (net of cash acquired) and direct acquisition costs, was paid in the form
of cash (British pound 46.3 million), new loan notes (British pound 5.2 million)
and the assumption of Syltone's existing bank debt, net of cash acquired
(British pound 11.5 million). There are no additional contingent payments or
commitments related to this acquisition.
All acquisitions have been accounted for by the purchase method and,
accordingly, their results are included in the Company's consolidated financial
statements from the respective dates of acquisition. Under the purchase method,
the purchase price is allocated based on the fair value of assets received and
liabilities assumed as of the acquisition date.
Exit Costs for Thomas Headquarters Office
In connection with the consummation of the Thomas acquisition, Gardner
Denver decided to close Thomas' Headquarters office located in Louisville,
Kentucky. The Company recorded a liability primarily related to estimated
severance costs and other personnel-related costs. In accordance with Emerging
Issues Task Force ("EITF") No. 95-3, "Recognition of Liabilities in Connection
with a Purchase Business Combination," the amount of the liability was included
in the allocation of Thomas' acquisition cost. The Company expects to complete
all exit activities by the end of the second quarter of 2006. The following
table summarizes activity with respect to the exit liability.
OPENING BALANCE AT ENDING BALANCE AT
JULY 1, 2005 AMOUNT PAID SEPTEMBER 30, 2005
------------------ ----------- ------------------
Exit Liability $ 8,500 $ (8,091) $ 409
NOTE 3. INVENTORIES
SEPTEMBER 30, 2005 DECEMBER 31, 2004
------------------ -----------------
Raw materials, including parts and subassemblies $ 97,268 $ 62,477
Work-in-process 37,787 23,405
Finished goods 85,513 57,321
--------- ---------
220,568 143,203
Excess of FIFO costs over LIFO costs (6,535) (4,817)
--------- ---------
Inventories, net $ 214,033 $ 138,386
========= =========
-9-
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, 2005, and the year
ended December 31, 2004, are as follows:
COMPRESSOR & FLUID
VACUUM TRANSFER
PRODUCTS PRODUCTS TOTAL
------------ --------- ----------
BALANCE AS OF DECEMBER 31, 2003 $ 179,854 $ 25,634 $ 205,488
Acquisitions 148,842 11,609 160,451
Foreign currency translation 7,379 841 8,220
--------- --------- ---------
BALANCE AS OF DECEMBER 31, 2004 336,075 38,084 374,159
Acquisitions 258,127 - 258,127
Foreign currency translation (6,173) (3,274) (9,447)
--------- --------- ---------
BALANCE AS OF SEPTEMBER 30, 2005 $ 588,029 $ 34,810 $ 622,839
========= ========= =========
The following table presents the gross carrying amounts and accumulated
amortization for Gardner Denver's identifiable intangible assets subject to
amortization at the dates presented:
SEPTEMBER 30, 2005 DECEMBER 31, 2004
--------------------------- -------------------------
GROSS GROSS
CARRYING ACCUMULATED CARRYING ACCUMULATED
AMOUNT AMORTIZATION AMOUNT AMORTIZATION
---------- ------------ --------- --------------
Amortized intangible assets:
Customer lists and relationships $105,070 $ (4,853) $ 53,855 $ (2,153)
Acquired technology 30,338 (12,160) 19,218 (9,732)
Other 13,418 (3,244) 11,352 (2,508)
Unamortized intangible assets:
Trademarks 77,045 - 40,141 -
-------- -------- -------- --------
Total other intangible assets $225,871 $(20,257) $124,566 $(14,393)
======== ======== ======== ========
Amortization of intangible assets for the three and nine months ended
September 30, 2005, was $2.9 million and $6.6 million, respectively.
Amortization of intangible assets for the three and nine months ended
September 30, 2004, was $1.3 million and $3.3 million, respectively.
Amortization of intangible assets is anticipated to be approximately $11 million
to $12 million per year for 2005 through 2009, based upon existing intangible
assets with finite useful lives as of September 30, 2005. This estimate is
subject to change based upon the finalization of the allocation of the Thomas
purchase price.
-10-
NOTE 5. ACCRUED PRODUCT WARRANTY
The following is a roll forward of the Company's product warranty accrual
for the three and nine months ended September 30, 2005 and 2004.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
2005 2004 2005 2004
--------- --------- ------- ---------
Balance at beginning of period $ 10,861 $ 7,808 $ 10,671 $ 6,635
Product warranty expense 3,464 2,284 7,374 6,012
Settlements (3,235) (1,948) (6,700) (5,978)
Other (acquisitions and foreign
currency translation) 5,872 3,059 5,617 4,534
-------- -------- -------- --------
Balance at end of period $ 16,962 $ 11,203 $ 16,962 $ 11,203
-------- -------- -------- --------
NOTE 6. PENSION AND OTHER POSTRETIREMENT BENEFITS
The following table summarizes the components of net periodic benefit
expense for the Company's defined benefit pension plans and other postretirement
benefit plans recognized for the three-month and nine-month periods ended
September 30, 2005 and 2004, respectively:
THREE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------------------------------------
PENSION BENEFITS OTHER
---------------------------------------------------------------------------
U.S. PLANS NON-U.S. PLANS POSTRETIREMENT BENEFITS
---------------------------------------------------------------------------
2005 2004 2005 2004 2005 2004
------- -------- -------- ------- ------- -----------
Service cost $ 1,346 $ 528 $ 1,342 $ 858 $ 28 $ 4
Interest cost 1,025 831 2,008 1,453 409 410
Expected return on plan assets (1,150) (925) (1,901) (1,328) - -
Amortization of transition liability 1 - - - 3 -
Amortization of prior-service cost (2) (20) - 5 11 (37)
Amortization of net loss (gain) 136 57 56 61 (139) (137)
------- ------- ------- ------- ------- -------
Net periodic benefit expense $ 1,356 $ 471 $ 1,505 $ 1,049 $ 312 $ 240
======= ======= ======= ======= ======= =======
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------------------------------------
PENSION BENEFITS OTHER
--------------------------------------------------------------------------
U.S. PLANS NON-U.S. PLANS POSTRETIREMENT BENEFITS
--------------------------------------------------------------------------
2005 2004 2005 2004 2005 2004
------- ------- ------- ------- ------- ---------
Service cost $ 2,552 $ 1,583 $ 3,815 $ 2,424 $ 28 $ 11
Interest cost 2,801 2,493 5,948 4,057 1,169 1,229
Expected return on plan assets (3,100) (2,776) (5,935) (3,885) - -
Amortization of transition liability 1 - - - 3 -
Amortization of prior-service cost (52) (61) - 15 (39) (110)
Amortization of net loss (gain) 356 170 135 183 (439) (411)
------- ------- ------- ------- ------- -------
Net periodic benefit expense $ 2,558 $ 1,409 $ 3,963 $ 2,794 $ 722 $ 719
======= ======= ======= ======= ======= =======
-11-
NOTE 7. DEBT
SEPTEMBER 30, 2005 DECEMBER 31, 2004
-------------------- ------------------
SHORT-TERM DEBT:
Revolving Loans, due 2005 (1) $ - $ 10,898
Other short-term debt 2,105 1,729
-------- --------
Total short-term debt $ 2,105 $ 12,627
======== ========
LONG-TERM DEBT:
Credit Line, due 2009 (2) $ 95,560 $113,635
Term Loan, due 2010 (3,6) 375,250 148,125
Senior Subordinated Notes at 8%, due 2013 125,000 -
Secured Mortgages, due 2022 (4) 9,127 10,362
Unsecured Senior Note at 7.3%, due 2006 (1) - 10,000
Variable Rate Industrial Revenue Bonds, due 2018 (5) 8,000 8,000
Term Loan, due 2007 (1) - 6,001
Capitalized Leases and Other Long-term debt 12,871 4,455
-------- --------
Total long-term debt, including current maturities 625,808 300,578
Current maturities of long-term-debt 29,227 20,322
-------- --------
Total long-term debt, less current maturities $596,581 $280,256
======== ========
(1) The outstanding balance was paid during 2005.
(2) The loans under this facility may be denominated in U.S. dollars or several
foreign currencies. At September 30, 2005, the outstanding balance
consisted of U.S. dollar borrowings of $59,500 and euro borrowings of
euro dollar 30,000. The interest rates under the facility are based on
prime, federal funds and/or LIBOR for the applicable currency and were 5.5%
and 3.8% as of September 30, 2005 for the U.S. dollar and Euro loans,
respectively. The rates averaged 4.6% and 3.6% during the first nine months
of 2005 for the U.S. dollar and Euro loans, respectively.
(3) The interest rate varies with prime, federal funds, and/or LIBOR. At
September 30, 2005, this rate was 5.6% and averaged 5.0% for the first nine
months of 2005.
(4) This amount consists of two commercial loans assumed in the 2004
acquisition of Nash Elmo with an outstanding balance of euro dollar 7,593
at September 30, 2005. The loans are secured by the Company's facility in
Bad Neustadt, Germany and are net of unamortized discount of euro dollar
245. The interest rate of 4.6% is fixed until maturity.
(5) The interest rate varies with market rates for tax-exempt industrial
revenue bonds. At December 31, 2004, this rate was 2.8% and averaged 2.4%
during the first nine months of 2005.
(6) The term loan outstanding at December 31, 2004 was replaced with a new term
loan on July 1, 2005 under the new 2005 Credit Agreement.
On July 1, 2005, the Company's $605.0 million amended and restated credit
agreement (the "2005 Credit Agreement") became effective with the Thomas
acquisition. The 2005 Credit Agreement provided the Company with access to
senior secured credit facilities including a $380.0 million Term Loan and
restated its $225.0 million Revolving Line of Credit, in addition to superceding
the Company's previously existing credit agreement. Proceeds from the 2005
Credit Agreement were used to fund the Thomas acquisition and retire $144.4
million of debt outstanding under the previously existing Term Loan.
-12-
The new Term Loan has a final maturity of July 1, 2010. The Term Loan
requires quarterly principal payments aggregating $19 million, $38 million, $57
million, $95 million and $171 million in years one through five, respectively.
The Revolving Line of Credit matures on September 1, 2009. Loans under
this facility may be denominated in U.S. Dollars or several foreign currencies.
On September 30, 2005, the Revolving Line of Credit had an outstanding principal
balance of $95.6 million, leaving $129.4 million available for letters of credit
or for future use, subject to the terms of the Revolving Line of Credit.
The interest rates applicable to loans under the 2005 Credit Agreement
are variable and will be, at the Company's option, either the prime rate plus an
applicable margin or LIBOR plus an applicable margin. The applicable margin
percentages are adjustable quarterly, based upon financial ratio guidelines
defined in 2005 Credit Agreement.
The Company's obligations under the 2005 Credit Agreement are guaranteed
by the Company's existing and future domestic subsidiaries, and are secured by a
pledge of certain subsidiaries' capital stock. The Company is subject to
customary covenants regarding certain earnings, liquidity and capital ratios.
During May 2005, the Company repaid the outstanding balance on its
revolving lines of credit ($144.2 million) from proceeds received from its
offering of common stock (see Note 8). The Company also received proceeds of
$125.0 million from an offering of its 8% Senior Subordinated Notes (the
"Notes") in May 2005. The Company used the proceeds from the Notes, plus funds
available under its 2005 Credit Agreement, to finance its acquisition of Thomas
on July 1, 2005.
The Notes have a fixed annual interest rate of 8% and are guaranteed by
certain of the Company's domestic subsidiaries. At any time prior to May 1,
2009, the Company may redeem all or part of the Notes issued under the Indenture
at a redemption price equal to 100% of the principal amount of the Notes
redeemed plus an applicable premium in the range of 1% to 4% of the principal
amount, and accrued and unpaid interest and liquidated damages, if any. In
addition, at any time prior to May 1, 2008, the Company may, on one or more
occasions, redeem up to 35% of the aggregate principal amount of the Notes at a
redemption price of 108% of the principal amount, plus accrued and unpaid
interest and liquidated damages, if any, with the net cash proceeds of one or
more equity offerings, subject to certain conditions. On or after May 1, 2009,
the Company may redeem all or a part of the Notes at varying redemption prices,
plus accrued and unpaid interest and liquidated damages, if any. Upon a change
of control, as defined in the Indenture, the Company is required to offer to
purchase all of the Notes then outstanding for cash at 101% of the principal
amount thereof plus accrued and unpaid interest and liquidated damages, if any.
The Indenture contains events of default and affirmative, negative and financial
covenants customary for such financings, including, among other things, limits
on incurring additional debt and restricted payments.
-13-
NOTE 8. STOCKHOLDERS' EQUITY
During May 2005, the Company completed an offering of 5,658,000 million
shares of its common stock (including shares purchased by underwriters to cover
over-allotments) for net proceeds of approximately $199.3 million. A portion of
the proceeds was used to repay certain indebtedness (see Note 7). The remaining
proceeds were invested in short-term securities prior to being used to finance
the Company's acquisition of Thomas on July 1, 2005 (see Note 2).
NOTE 9. 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,
------------------- -------------------
2005 2004 2005 2004
------- ------- ------- -------
BASIC EARNINGS PER SHARE
Net income $16,661 $ 8,654 $41,616 $23,487
======= ======= ======= =======
Shares
Weighted average number of
common shares outstanding 25,871 19,806 23,219 18,645
======= ======= ======= =======
Basic earnings per common share $ 0.64 $ 0.44 $ 1.79 $ 1.26
======= ======= ======= =======
DILUTED EARNINGS PER SHARE
Net income $16,661 $ 8,654 $41,616 $23,487
======= ======= ======= =======
Shares
Weighted average number of
common shares outstanding 25,871 19,806 23,219 18,645
Assuming conversion of dilutive
stock options issued and outstanding 500 382 541 387
------- ------- ------- -------
Weighted average number of common
shares outstanding, as adjusted 26,371 20,188 23,760 19,032
======= ======= ======= =======
Diluted earnings per common share $ 0.63 $ 0.43 $ 1.75 $ 1.23
======= ======= ======= =======
There were no outstanding antidilutive options to purchase shares of
common stock in either the three-month or nine-month periods ended September 30,
2005.
NOTE 10. COMPREHENSIVE INCOME
For the three months ended September 30, 2005 and 2004, comprehensive
income was $18.1 million and $11.9 million, respectively. For the nine months
ended September 30, 2005 and 2004, comprehensive income was $28.0 million and
$25.8 million, respectively. Items impacting the Company's comprehensive income,
but not included in net income, consist of foreign currency translation
adjustments, including realized and unrealized gains and losses (net of income
taxes) on the foreign currency hedge of the Company's investment in foreign
subsidiaries, fair market value adjustments of interest rate swaps and
additional minimum pensions liability (net of income taxes).
-14-
NOTE 11. SUPPLEMENTAL CASH FLOW INFORMATION
In the first nine months of 2005 and 2004, the Company paid $11.7 million
and $11.5 million, respectively, to various taxing authorities for income taxes.
Interest paid for the first nine months of 2005 and 2004, was $14.1 million and
$5.4 million, respectively.
NOTE 12. 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 sometimes manufactured, distributed and/or
sold products allegedly at issue in the pending asbestos and silicosis
litigation lawsuits (the "Products"). However, neither the Company nor its
predecessors ever mined, manufactured, mixed, produced or distributed asbestos
fiber or silica sand, the materials that allegedly cause the injury underlying
the lawsuits. Moreover, the asbestos-containing components used in the Products
were enclosed within the subject Products.
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 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.
-15-
NOTE 13. SEGMENT RESULTS
As a result of the July 1, 2005 acquisition of Thomas, certain changes
were made to Gardner Denver's organizational structure. The Company's new
organizational structure is still fundamentally based on the products and
services it offers. Thomas' business consisted of the original Thomas business
(prior to Thomas Industries' 2002 acquisition of Werner Rietschle Holding GmbH,
a privately held company based in Germany) and the Rietschle business. The
original Thomas business is a leader in the production of oil-free compressors,
vacuum pumps and liquid pumps for original equipment manufacturers. The
Rietschle products primarily include dry running and oil-lubricated vacuum
pumps, compressors and pressure/vacuum pumps. These products utilize similar
technologies and serve similar markets as those in the Blower Division. Due to
these distinct similarities, the Rietschle business was combined with the
Company's Blower Division. The original Thomas business will be operated and
managed as a new Thomas Products operating division.
Subsequent to the acquisition of Thomas, Gardner Denver now has five
operating divisions: Compressor, Blower, Liquid Ring Pump, Fluid Transfer and
Thomas Products. These divisions comprise two reportable segments: Compressor
and Vacuum Products (formerly Compressed Air Products) and Fluid Transfer
Products. The Compressor, Blower, Liquid Ring Pump and Thomas Products Divisions
are aggregated into one reportable segment (Compressor and Vacuum 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. During the third
quarter of 2004, the Company's former Pump and Fluid Transfer Divisions were
combined into one division, Fluid Transfer. These two divisions were previously
aggregated into one reportable segment (Fluid Transfer Products) primarily due
to the same factors noted above, and thus, there has been no change to the Fluid
Transfer Products segment.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
2005 2004 2005 2004
--------- --------- --------- ---------
COMPRESSOR AND VACUUM PRODUCTS
Revenues $ 299,834 $ 147,148 $ 693,504 $ 396,170
Segment operating earnings 24,027 13,519 54,150 32,422
Segment operating earnings as
a percentage of segment revenues 8.0% 9.2% 7.8% 8.2%
FLUID TRANSFER PRODUCTS
Revenues $ 56,261 $ 35,468 $ 151,761 $ 102,171
Segment operating earnings 9,116 2,415 20,605 7,357
Segment operating earnings as
a percentage of segment revenues 16.2% 6.8% 13.6% 7.2%
RECONCILIATION OF SEGMENT RESULTS
TO CONSOLIDATED RESULTS
Total segment operating earnings $ 33,143 $ 15,934 $ 74,755 $ 39,779
Interest expense 10,358 2,491 19,642 5,949
Other expense (income), net (1,016) 332 (4,338) (1,756)
--------- --------- --------- ---------
Consolidated income before income taxes $ 23,801 $ 13,111 $ 59,451 $ 35,586
========= ========= ========= =========
-16-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Thomas Industries, Inc. Acquisition
On July 1, 2005, the Company acquired Thomas Industries Inc. ("Thomas"),
previously a New York Stock Exchange listed company trading under the ticker
symbol "TII." Thomas is a worldwide leader in the design, manufacture and
marketing of precision engineered pumps, compressors and blowers. The
agreed-upon purchase price of $40.00 per share for all outstanding shares and
share equivalents (approximately $734.2 million) was paid in the form of cash
and the assumption of $7.6 million of long-term capitalized lease obligations.
As of June 30, 2005, Thomas had $265.3 million in cash and equivalents. The net
transaction value, including assumed debt of $7.6 million (net of cash acquired)
and direct acquisition costs, was approximately $483.5 million.
Thomas is a leading supplier of pumps, compressors and blowers to the
original equipment manufacturer (OEM) market in such applications as medical
equipment, gasoline vapor and refrigerant recovery, automotive and
transportation applications, printing, packaging, tape drives and laboratory
equipment. Thomas designs, manufactures, markets, sells and services these
products through worldwide operations.
Thomas has wholly-owned operations in 21 countries on five continents.
Its primary manufacturing facilities are located in Sheboygan, Wisconsin;
Monroe, Louisiana; Skokie, Illinois; and Syracuse, New York; Schopfheim,
Fahrnau, Puchheim and Memmingen, Germany; and Wuxi, China. The manufacturing
operations in the United States produce rotary vane, linear, piston and
diaphragm pumps and compressors, and various liquid pump products. These
products are directly sold worldwide to OEM's, as well as through fluid power
and industrial distributors. The German operations manufacture a complementary
line of rotary vane, linear, diaphragm, gear, side channel, radial, claw, screw
and rotary lobe pumps, compressors and blowers, as well as various liquid pump
products, and packaged systems. These products are also distributed worldwide.
The manufacturing facility in China was constructed during late 2004 and began
production in 2005.
Thomas' largest markets are Europe and the United States, which
represented approximately 52% and 38% of its revenues in 2004, respectively. Of
the total sales to Europe, approximately 61% were to Germany and 39% to other
European countries. Approximately 10% of Thomas' 2004 revenues were generated in
Asia Pacific. At July 1, 2005, Thomas employed approximately 2,300 people.
Syltone, Nash Elmo and Bottarini Acquisitions
On January 2, 2004, the Company acquired the outstanding shares of
Syltone plc ("Syltone"), previously a publicly traded company listed on the
London Stock Exchange. Syltone, previously 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 lines.
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 British
pound 63.0 million (or approximately $112.5 million), including assumed bank
debt (net of cash acquired) and direct acquisition costs, was paid in the
-17-
form of cash (British pound 46.3 million), new loan notes (British pound 5.2
million) and the assumption of Syltone's existing bank debt, net of cash
acquired (British pound 11.5 million). There are no additional contingent
payments or commitments related to this acquisition.
On September 1, 2004, the Company acquired nash_elmo Holdings, LLC ("Nash
Elmo"), a leading global manufacturer of industrial vacuum pumps. Nash Elmo is
primarily split between two businesses, liquid ring pumps and side channel
blowers. Both businesses' products are complementary to the Compressor and
Vacuum Products segment's existing product portfolio. Nash Elmo, previously
headquartered in Trumbull, CT, has primary manufacturing facilities located in
Bad Neustadt and Nuremberg, Germany; Zibo, China; and Campinas, Brazil. The
purchase price of $224.6 million, including assumed bank debt (net of cash
acquired) and direct acquisition costs, was paid in the form of cash and the
assumption of certain of Nash Elmo's existing debt ($10.4 million). There are no
additional contingent payments or commitments related to this acquisition.
In June 2005, the Company acquired the outstanding shares of Bottarini
S.p.A. ("Bottarini"), a packager of industrial air compressors located near
Milan, Italy. The purchase prices of $10.1 million, including assumed bank debt
(net of cash acquired) and direct acquisition costs, was paid in cash and the
assumption of Bottarini's outstanding debt ($1.2 million).
Operating Segments
As a result of the July 1, 2005 acquisition of Thomas, certain changes
were made to Gardner Denver's organizational structure. The Company's new
organizational structure is still fundamentally based on the products and
services it offers. Thomas' business consisted of the original Thomas business
(prior to Thomas' 2002 acquisition of Werner Rietschle Holding GmbH, a privately
held company based in Germany) and the Rietschle business. The original Thomas
business is a leader in the production of oil-free compressors and vacuum pumps
for original equipment manufacturers. The Rietschle products primarily include
dry running and oil-lubricated vacuum pumps, compressors and pressure/vacuum
pumps. Due to the distinct similarity in products and markets served, the
Rietschle business was combined with the Company's Blower Division. The original
Thomas business will be operated and managed as a new Thomas Products operating
division.
Subsequent to the acquisition of Thomas, the Company now has five
operating divisions: Compressor, Blower, Liquid Ring Pump, Fluid Transfer and
Thomas Products. These divisions comprise two reportable segments: Compressor
and Vacuum Products (formerly Compressed Air Products) and Fluid Transfer
Products. The Compressor, Blower, Liquid Ring Pump and Thomas Products Divisions
are aggregated into one reportable segment (Compressor and Vacuum 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. During the third
quarter of 2004, the Company's former Pump and Fluid Transfer Divisions were
combined into one division, Fluid Transfer. These two divisions were previously
aggregated into one reportable segment (Fluid Transfer Products) primarily due
to the same factors noted above, and thus, there has been no change to the Fluid
Transfer Products segment.
-18-
RESULTS OF OPERATIONS
PERFORMANCE IN THE QUARTER ENDED SEPTEMBER 30, 2005 COMPARED WITH
THE QUARTER ENDED SEPTEMBER 30, 2004
Revenues
Revenues increased $173.5 million (95%) to $356.1 million for the three
months ended September 30, 2005, compared to the same period of 2004. This
increase was primarily due to the acquisitions of Thomas, Nash Elmo and
Bottarini, which contributed approximately $143.0 million of additional
revenues, compared to 2004. Increased shipments of drilling and well stimulation
pumps, compressors and blowers, combined with price increases, also contributed
to the growth in revenues.
For the three months ended September 30, 2005, revenues for the
Compressor and Vacuum Products segment increased $152.7 million (104%) to $299.8
million, compared to the same period of 2004. This increase was primarily due to
the acquisitions of Thomas, Nash Elmo and Bottarini, and higher volumes of
compressor and blower shipments in the U.S., Europe and China (100%), and
improved pricing (4%).
Fluid Transfer Products segment revenues increased $20.8 million (59%)
to $56.3 million for the three months ended September 30, 2005, compared to the
same period of 2004. This improvement was primarily due to increased volume of
shipments of drilling and well stimulation pumps, water jetting systems and
related aftermarket parts (53%), and price increases (6%).
Costs and Expenses
Gross margin (defined as revenues less cost of sales) for the three
months ended September 30, 2005 increased $56.2 million (95%) to $115.6 million
compared to the same period of 2004, primarily due to the increase in revenues.
Gross margin as a percentage of revenues (gross margin percentage) was 32.5% in
the three-month periods of 2005 and 2004. Increased volume and pricing in both
segments and the related positive impact of increased leverage of fixed and
semi-fixed costs over a higher revenue base contributed favorably. These
positive factors were offset by the impact of recording the Thomas inventory at
fair value on the acquisition date ($3.9 million) and by higher material costs
due to surcharges stemming from increases in scrap iron and other metal prices.
Depreciation and amortization for the three months ended September 30,
2005 increased $5.4 million (91%) to $11.3 million, compared to the same period
of 2004, primarily due to the Thomas and Nash Elmo acquisitions. The current
quarter results include an amortization reduction of approximately $0.7 million
as a result of the finalization of the allocation of the Nash Elmo purchase
price.
Selling and administrative expenses increased $33.6 million (90%) in the
third quarter of 2005 to $71.1 million, compared to the same period of 2004.
This increase was primarily attributable to the acquisitions of Thomas, Nash
Elmo and Bottarini, which contributed approximately $31.0 million of additional
selling and administrative expenses compared to 2004. Higher compensation and
fringe benefit costs, and expenses associated with a new compressor packaging
facility in China also contributed to this increase. However, as a percentage of
revenues, selling and administrative expenses decreased from 20.5% in the third
quarter of 2004 to 20.0% in the third quarter of 2005 as acquisitions are
integrated.
-19-
The Compressor and Vacuum 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 (operating
margin) of 8.0% in the three-month period ended September 30, 2005, compared to
operating margin of 9.2% for the same period of 2004 (see Note 13 to the
Condensed Consolidated Financial Statements). The decline in operating margin
was primarily attributable to higher material and selling and administrative
costs as noted above, and the impact of recording the Thomas Industries
inventory at fair value on the acquisition date, partially offset by the
positive impact of increased leverage of the segment's fixed and semi-fixed
costs over a higher revenue base. Operating margin from Compressor and Vacuum
Products segment businesses that existed prior to the incremental effect of the
acquisitions of Thomas Industries, Nash Elmo and Bottarini was approximately
9.5% and 9.0% for the three-month periods ended September 30, 2005 and 2004,
respectively.
The Fluid Transfer Products segment generated operating margin of 16.2%
for the three-month period ended September 30, 2005, compared to 6.8% for the
same period of 2004 (see Note 13 to the Condensed Consolidated Financial
Statements). This increase is primarily due to the positive impact of increased
leverage of the segment's fixed and semi-fixed costs over a higher revenue base,
and price increases. Improved productivity, benefits from capital investments
and favorable mix associated with a higher proportion of drilling pump shipments
also contributed to the increase.
Interest expense increased $7.9 million to $10.4 million in the third
quarter of 2005, compared to the third quarter of 2004. This increase was
primarily due to additional funds borrowed to finance the acquisition of Thomas
Industries and higher interest rates. The weighted average interest rate,
including the amortization of debt issuance costs, for the three-month period
ended September 30, 2005 was 7.1%, compared to 5.6% in the comparable prior year
period. The higher weighted average interest rate for the current quarter was
primarily attributable to increases in market rates on floating rate debt and
the issuance of $125.0 million of 8% Senior Subordinated Notes (the "Notes") in
the second quarter of 2005.
Income before income taxes increased $10.7 million (82%) to $23.8 million
for the three months ended September 30, 2005, compared to the same period of
2004. This increase is primarily due to increased volume in both segments as a
result of recent acquisitions and internal growth, and the related positive
impact of increased leverage of fixed and semi-fixed costs over a higher revenue
base. These positive factors were partially offset by higher interest expense.
The provision for income taxes increased by $2.7 million to $7.1 million
for the current quarter, compared to the prior year period, as a result of
higher pretax income, partially offset by a lower effective tax rate. The
Company's effective tax rate for the three months ended September 30, 2005
decreased to 30% compared to 34% in the prior year period, principally due to a
higher proportion of earnings being derived from lower-taxed non-U.S.
jurisdictions and tax planning initiatives.
Net income for the three months ended September 30, 2005 increased $8.0
million (93%) to $16.7 million, compared to $8.7 million for same period of
2004. This improvement in net income resulted primarily from the combination of
higher income before taxes and the lower effective tax rate in 2005, compared to
2004. On a diluted per share basis, earnings for the three months ended
September 30, 2005 were $0.63, compared to $0.43 for the same period of 2004.
Diluted earning per share for the current quarter reflect the impact of the
issuance of 5,658,000 shares of Gardner Denver's common stock during the second
quarter of 2005.
-20-
PERFORMANCE IN THE NINE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED WITH
THE NINE MONTHS ENDED SEPTEMBER 30, 2004
Revenues
Revenues increased $346.9 million (70%) to $845.3 million for the nine
months ended September 30, 2005, compared to the same period of 2004. This
increase was primarily due to the acquisitions of Thomas, Nash Elmo and
Bottarini, which contributed approximately $272.3 million of additional revenues
compared to 2004. Increased shipments of drilling and well stimulation pumps,
replacement parts, compressors and blowers, combined with price increases and
favorable changes in currency exchange rates, also contributed to the growth in
revenues.
For the nine months ended September 30, 2005, revenues for the Compressor
and Vacuum Products segment increased $297.3 million (75%) to $693.5 million,
compared to the same period of 2004. This increase was primarily due to the
acquisitions of Thomas, Nash Elmo and Bottarini and, higher volumes of
compressor and blower shipments in the U.S., Europe and China (71%), price
increase (3%) and favorable changes in currency exchange rates (1%).
Fluid Transfer Products segment revenues increased $49.6 million (49%) to
$151.8 million for the nine months ended September 30, 2005, compared to the
same period of 2004. This improvement was primarily attributable to increased
volume of shipments of drilling and well stimulation pumps, water jetting
systems and related aftermarket parts (44%), and price increases (5%).
Costs and Expenses
Gross margin for the nine months ended September 30, 2005 increased
$113.9 million (70%) to $275.8 million, compared to the same period of 2004,
primarily due to the increase in revenues. Gross margin percentage improved
slightly to 32.6% in the nine-month period of 2005 from 32.5% in the same period
of 2004, despite the inclusion of $3.9 million in non-recurring inventory
step-up adjustment in the current year relating to recording Thomas inventory at
fair value on the acquisition date. This improvement was primarily attributable
to the acquisition of Nash Elmo, which had a higher gross margin percentage than
the Company's previously existing businesses, and to increased volume and price
increases in both segments. These positive factors were partially offset by
higher material costs due to surcharges stemming from increases in scrap iron
and other metal prices and inefficiencies stemming from delays in material
availability and increasing levels of production.
Depreciation and amortization for the nine months ended September 30,
2005 increased $9.7 million (61%) to $25.8 million, compared to the same period
of 2004, primarily due to the Thomas and Nash Elmo acquisitions. The
year-to-date results include an amortization reduction of approximately $0.7
million as a result of the finalization of the allocation of the Nash Elmo
purchase price.
Selling and administrative expenses increased $69.2 million (65%) in the
first nine months of 2005 to $175.2 million, compared to the same period of
2004. This increase was primarily attributable to the acquisitions of Thomas,
Nash Elmo and Bottarini, which contributed approximately $62.8 million of
additional selling and administrative expenses compared to 2004. Higher
compensation and fringe benefit costs, unfavorable changes in currency exchange
rates and expenses associated with a new compressor packaging facility in China
also contributed to this increase. However, as a percentage of
-21-
revenues, selling and administrative expenses decreased from 21.3% for the first
nine months of 2004 to 20.7% for the first nine months of 2005, as acquisitions
are integrated and revenue volume increases are leveraged.
The Compressor and Vacuum Products segment generated operating margin of
7.8% in the nine-month period ended September 30, 2005, a decrease from 8.2% for
the same period of 2004 (see Note 13 to the Condensed Consolidated Financial
Statements). The decline in operating margin was primarily attributable to
higher material and selling and administrative costs as noted above, and the
impact of recording the Thomas Industries inventory at fair value on the
acquisition date, which 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 margin from Compressor and Vacuum Products segment
businesses that existed prior to the incremental effect of the acquisitions of
Thomas Industries, Nash Elmo and Bottarini was approximately 7.6% and 8.1% for
the nine-month periods ended September 30, 2005 and 2004, respectively.
The Fluid Transfer Products segment generated operating margin of 13.6%
for the nine-month period ended September 30, 2005, compared to 7.2% for the
same period of 2004 (see Note 13 to the Condensed Consolidated Financial
Statements). This increase is primarily due to the positive impact of increased
leverage of the segment's fixed and semi-fixed costs over a higher revenue base,
and pricing increases. Improved productivity, benefits from capital investments
and favorable mix associated with a higher proportion of drilling pump shipments
also contributed to the improvement.
Interest expense increased $13.7 million (230%) to $19.6 million for the
nine months ended September 30, 2005, compared to the same period of 2004. The
increase was primarily due to higher average borrowings stemming from
acquisition-related financing and higher average interest rates. The weighted
average interest rate, including the amortization of debt issuance costs, for
the nine-month period ended September 30, 2005 was 6.5%, compared to 4.9% in the
comparable prior year period. The higher weighted average interest rate for the
first nine months of 2005 was primarily attributable to increases in market
rates on floating rate debt and the issuance of the Notes in the second quarter
of 2005.
Other income, net increased $2.6 million to $4.3 million for the nine
months ended September 30, 2005, compared to the same period of 2004. This
increase was primarily due to $1.7 million in litigation-related settlements
received in 2005 and $0.7 million of interest income earned on the proceeds from
the Notes, prior to their use to complete the Thomas acquisition. This increase
was partially offset by a non-recurring $1.2 million foreign currency
transaction gain recorded in the prior year, which related to the appreciation
of U.S. dollar borrowings that were converted to British pounds prior to being
used to consummate the Syltone acquisition.
Income before income taxes increased $23.9 million (67%) to $59.5 million
for the nine months ended September 30, 2005, compared to the same period of
2004. This increase was primarily due to increased volume in both segments as a
result of recent acquisitions and internal growth, and the related positive
impact of increased leverage of fixed and semi-fixed costs over a higher revenue
base. These positive factors were partially offset by higher interest expense
and the non-recurring foreign currency gain recorded in the prior year.
The provision for income taxes increased by $5.7 million to $17.8 million
for the nine-month period ended September 30, 2005, compared to the same period
last year, as a result of incremental income before taxes, partially offset by a
lower effective tax rate. The Company's effective tax rate for the nine months
ended September 30, 2005 decreased to 30%, compared to 34% in the prior year
period,
-22-
principally due to a higher proportion of earnings being derived from
lower-taxed non-U.S. jurisdictions and tax planning initiatives.
Net income for the nine months ended September 30, 2005 increased $18.1
million (77%) to $41.6 million, compared to $23.5 million for same period of
2004. Recent acquisitions contributed approximately $7 million of the increase.
In addition, the increase in net income was caused by higher revenue volume,
price increases, litigation-related settlements and the lower effective tax rate
in 2005. On a diluted per share basis, earnings for the nine months ended
September 30, 2005 were $1.75, compared to $1.23 for the same period of 2004.
Diluted earning per share reflect the impact of the issuance of 5,658,000 shares
of Gardner Denver's common stock during the second quarter of 2005.
Outlook
In general, demand for compressor and vacuum 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 global
economic growth patterns indicated by the rates of change in the Gross Domestic
Product around the world. In the third quarter of 2005, orders for compressor
and vacuum products were $300.5 million, compared to $146.5 million in the same
period of 2004. Backlog for the Compressor and Vacuum Products segment was
$294.1 million as of September 30, 2005, compared to $161.2 million as of
September 30, 2004. The increase in orders and backlog for the Compressor and
Vacuum Products segment compared to the prior year was primarily due to the
Thomas and Bottarini acquisitions, which collectively contributed approximately
$101.1 million and $89.8 million to orders and backlog, respectively. Excluding
this impact, the growth in orders and backlog compared to the prior year for
this segment was primarily due to modest improvement in industrial demand in the
U.S. and Eastern Europe, combined with incremental market share gains in Europe
and China, which were partially offset by unfavorable changes in currency
exchange rates during the third quarter of 2005. The Company also experienced an
increase in demand for positive displacement blowers used in transportation
applications in the U.S.
Demand for petroleum-related fluid transfer products has historically
corresponded to market conditions and expectations for oil and natural gas
prices. Orders for fluid transfer products were $110.8 million in the third
quarter of 2005, an increase of 120% compared to $50.4 million in the same
period of 2004. Backlog for the Fluid Transfer segment was $149.0 million as of
September 30, 2005, an increase of 189% compared to $51.6 million as of
September 30, 2004. The significant increases in orders and backlog compared to
the prior year were primarily due to higher demand for drilling pumps, 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.
-23-
LIQUIDITY AND CAPITAL RESOURCES
Operating Working Capital
During the nine months ended September 30, 2005, operating working
capital (defined as receivables plus inventories, less accounts payable and
accrued liabilities) increased $61.2 million to $157.5 million. This increase
primarily stems from the Thomas and Bottarini acquisitions.
Cash Flows
During the first nine months of 2005, cash provided by operating
activities was $52.8 million, compared to $22.3 million in the prior year
period. This increase was primarily due to higher net income. Improvements in
days sales outstanding and inventory turnover also contributed to the increase.
Net cash used in investing activities was $504.7 million during the first nine
months of 2005, primarily due to the Thomas and Bottarini acquisitions, as well
as higher capital expenditures. Net cash provided by financing activities was
$506.3 million during the first nine months of 2005, primarily due to $199.3
million in net proceeds related to the Company's issuance of approximately 5.7
million shares of common stock and additional borrowings used to fund the Thomas
acquisition. The cash flows provided by operating and financing activities and
used in investing activities, combined with the effect of exchange rate changes,
resulted in a net cash increase of $50.0 million during the first nine months of
2005.
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 $22.6 million in the first nine months of 2005. This
was $10.3 million higher than the level of capital expenditures in the
comparable period in 2004, primarily due to the timing of capital projects and
spending related to recent acquisitions. Commitments for capital expenditures at
September 30, 2005 were approximately $18.3 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 of which 210,300 shares remain available for
repurchase under this program as of September 30, 2005. 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 208,258 shares remain available for repurchase as of
September 30, 2005. As of September 30, 2005, a total of 1,581,442 shares have
been repurchased at a cost of approximately $23.2 million under both repurchase
programs.
Liquidity
On July 1, 2005, the Company's $605.0 million amended and restated credit
agreement (the "2005 Credit Agreement") became effective in connection with the
Thomas acquisition. The 2005 Credit Agreement provided the Company with access
to senior secured credit facilities including a $380.0
-24-
million Term Loan and restated its $225.0 million Revolving Line of Credit, in
addition to superceding the Company's previously existing credit agreement.
Proceeds from the 2005 Credit Agreement were used to fund the Thomas acquisition
and retire $144.4 million of debt outstanding under the previously existing Term
Loan.
The new Term Loan has a final maturity of July 1, 2010. The Term Loan
requires quarterly principal payments aggregating $19 million, $38 million, $57
million, $95 million and $171 million in years one through five, respectively.
The Revolving Line of Credit matures on September 1, 2009. Loans under
this facility may be denominated in U.S. Dollars or several foreign currencies.
On September 30, 2005, the Revolving Line of Credit had an outstanding principal
balance of $95.6 million, leaving $129.4 million available for letters of credit
or for future use, subject to the terms of the Revolving Line of Credit.
The interest rates applicable to loans under the 2005 Credit Agreement
are variable and will be, at the Company's option, either the prime rate plus an
applicable margin or LIBOR plus an applicable margin. The applicable margin
percentages are adjustable at the end of each quarter, based upon financial
ratio guidelines defined in 2005 Credit Agreement.
The Company's obligations under the 2005 Credit Agreement are guaranteed
by the Company's existing and future domestic subsidiaries, and are secured by a
pledge of certain subsidiaries' capital stock. The Company is subject to
customary covenants regarding certain earnings, liquidity and capital ratios.
Pursuant to its previously filed shelf registration with the Securities
and Exchange Commission, the Company completed an offering of 5,658,000 shares
of its common stock (including shares purchased by underwriters to cover
over-allotments) for proceeds of approximately $199.3 million (net of direct
costs associated with the offering) during May 2005. The Company also completed
an offering of $125.0 million of its Notes in a private placement on May 4,
2005. The Company used the proceeds from the shares and Notes, plus funds
available under the 2005 Credit Agreement, to finance its acquisition of Thomas
and to repay certain indebtedness.
The Notes have a fixed annual interest rate of 8% and are guaranteed by
certain of the Company's domestic subsidiaries. At any time prior to May 1,
2009, the Company may redeem all or part of the Notes issued under the Indenture
at a redemption price equal to 100% of the principal amount of the Notes
redeemed plus an applicable "make-whole" premium, and accrued and unpaid
interest and liquidated damages, if any. In addition, at any time prior to May
1, 2008, the Company may, on one or more occasions, redeem up to 35% of the
aggregate principal amount of the Notes at a redemption price of 108% of the
principal amount, plus accrued and unpaid interest and liquidated damages, if
any, with the net cash proceeds of one or more equity offerings, subject to
certain conditions. On or after May 1, 2009, the Company may redeem all or a
part of the Notes at varying redemption prices, plus accrued and unpaid interest
and liquidated damages, if any. Upon a change of control, as defined in the
Indenture, the Company is required to offer to purchase all of the Notes then
outstanding for cash at 101% of the principal amount thereof plus accrued and
unpaid interest and liquidated damages, if any. The Indenture contains events of
default and affirmative, negative and financial covenants customary for such
financings, including, among other things, limits on incurring additional debt
and restricted payments.
-25-
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.
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 sometimes manufactured, distributed and/or
sold products allegedly at issue in the pending asbestos and silicosis
litigation lawsuits (the "Products"). However, neither the Company nor its
predecessors ever mined, manufactured, mixed, produced or distributed asbestos
fiber or silica sand, the materials that allegedly cause the injury underlying
the lawsuits. Moreover, the asbestos-containing components used in the Products
were enclosed within the subject Products.
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 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.
-26-
Changes in Accounting Principles and Effects of New Accounting Pronouncements
In November 2004, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 151, "Inventory
Costs - an amendment to ARB No. 43, Chapter 4." This statement amends previous
guidance and requires expensing for abnormal amounts of idle facility expense,
freight, handling costs, and wasted material (spoilage). In addition, the
statement requires that allocation of fixed production overheads to inventory be
based on the normal capacity of production facilities. SFAS No. 151 is effective
for inventory costs incurred during annual periods beginning after June 15,
2005. The Company is currently evaluating the impact of SFAS No. 151 on its
future consolidated financial statements.
In December 2004, the FASB issued SFAS No. 123 (revised 2004),
"Share-Based Payment" ("SFAS No. 123(R)"), which is a revision of SFAS No. 123.
SFAS No. 123(R) supersedes APB 25 and amends SFAS No. 95, "Statement of Cash
Flows." Generally, the approach in SFAS No. 123(R) is similar to the approach
described in SFAS No. 123. However, SFAS No. 123(R) requires all share-based
payments to employees, including grants of employee stock options, to be
expensed based on their fair values.
On April 14, 2005, the Securities and Exchange Commission ("SEC") adopted
a rule that delayed the effective date of SFAS No. 123(R), which required
adoption no later than July 1, 2005. The SEC rule allows companies to implement
SFAS No. 123(R) at the beginning of their next fiscal year that begins after
June 15, 2005. The new SEC rule does not change the accounting required by SFAS
No. 123(R). Gardner Denver plans to adopt SFAS No. 123(R) on January 1, 2006,
using the modified-prospective method, which requires the recognition of
compensation costs beginning with the effective date (a) based on the
requirements of SFAS No. 123(R) for all share-based payments granted after the
effective date and (b) based on the requirements of SFAS No. 123 for all awards
granted to employees prior to the effective date of SFAS No. 123(R) that remain
unvested on the effective date.
As permitted by SFAS No. 123, Gardner Denver currently accounts for
share-based payments to employees using the intrinsic value method prescribed by
APB 25 and, as such, generally recognizes no compensation cost for employee
stock options. Accordingly, the adoption of the fair value method in SFAS No.
123(R) will have an impact on Gardner Denver's result of operations, although it
will have no impact on Gardner Denver's overall financial position. Management
currently expects that the adoption of SFAS No. 123(R) will result in
approximately $0.12 to $0.14 reduction in diluted earnings per share for 2006.
This estimate is based on the Company's historical stock-based compensation
practices and may change based on the actual level of stock-based compensation
granted in the future. Additionally, Gardner Denver's stock option grants
contain a provision that accelerates vesting of options for holders that retire
and have met retirement eligibility requirements. Currently, as part of the pro
forma disclosures required by SFAS No. 123, Gardner Denver records a pro forma
expense for the unrecognized compensation cost in the period that the
accelerated vesting occurs. However, upon adoption of SFAS No. 123(R), Gardner
Denver will recognize compensation expense based on retirement eligibility dates
for all options which contain an accelerated vesting provision. SFAS No. 123(R)
also requires the benefits of tax deductions in excess of recognized
compensation cost to be reported as a financing cash flow, rather than as an
operating cash flow as required under current literature. This requirement will
reduce net operating cash flows and increase net financing cash flows in periods
after adoption.
-27-
In March 2005, the SEC staff issued Staff Accounting Bulletin No. 107
("SAB 107") to assist preparers with the implementation of SFAS No. 123(R). SAB
107 recognizes that considerable judgment will be required by preparers to
successfully implement SFAS No. 123(R), (specifically when valuing employee
stock options); and that reasonable individuals, acting in good faith, may
conclude differently on the fair value of employee stock options. Gardner Denver
will apply the principles of SAB 107 in conjunction with its adoption of SFAS
No. 123(R).
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections," ("SFAS No. 154"), which requires retrospective application for
reporting a voluntary change in accounting principle, unless it is impracticable
to do so. SFAS No. 154 provides guidance for determining whether retrospective
application of a change in accounting principle is impracticable and also
addresses the reporting of a correction of error by restating previously issued
financial statements. SFAS No. 154 is effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15, 2005.
The Company will adopt SFAS No. 154 as required, and management does not believe
the adoption will have a material effect on the Company's results of operations
or financial position.
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 the Company's 2004 Annual Report on Form
10-K, filed on March 15, 2005, in the Critical Accounting Policies section of
Management's Discussion and Analysis and in Note 1 to the Consolidated Financial
Statements.
CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS
All of the statements in the "Management's Discussion and Analysis of
Financial Condition and Results of Operations" section, 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,
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.
-28-
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
effectively integrate the Thomas, Nash Elmo and Bottarini acquisitions and
realize anticipated cost savings, synergies and revenue enhancements; (2) the
risk that the Company may incur significant cash integration costs to achieve
any such cost savings; (3) the risks associated with the reduced liquidity
generated by the substantial additional indebtedness incurred to complete the
Thomas acquisition, including reduced liquidity for working capital and other
purposes, increased vulnerability to general economic conditions and floating
interest rates, and reduced financial and operating flexibility due to increased
covenant and other restrictions in the Company's credit facilities and
indentures; (4) the Company's exposure to economic downturns and market cycles,
particularly the level of oil and natural gas prices and oil and gas drilling
and production, which affect demand for the Company's petroleum products, and
industrial production and industrial capacity utilization rates, which affect
demand for the Company's compressor and vacuum products; (5) the risks
associated with intense competition in the Company's markets, particularly the
pricing of the Company's products; (6) the risks of large or rapid increases in
raw material costs or substantial decreases in their availability, and the
Company's dependence on particular suppliers, particularly iron casting and
other metal suppliers; (7) the Company's ability to continue to identify and
complete other strategic acquisitions and effectively integrate such
acquisitions to achieve desired financial benefits; (8) economic, political and
other risks associated with the Company's international sales and operations,
including changes in currency exchange rates (primarily between the U.S. dollar,
the Euro, the British pound and the Chinese yuan); (9) the risks associated with
pending asbestos and silicosis personal injury lawsuits, as well as other
potential product liability and warranty claims due to the nature of the
Company's products; (10) the risks associated with environmental compliance
costs and liabilities; (11) the ability to attract and retain quality management
personnel; (12) the ability to avoid employee work stoppages and other labor
difficulties; (13) the risks associated with defending against potential
intellectual property claims and enforcing intellectual property rights; (14)
market performance of pension plan assets and changes in discount rates used for
actuarial assumptions in pension and other postretirement obligation and expense
calculations; (15) the risk of possible future charges if the Company determines
that the value of goodwill or other intangible assets has been impaired; and
(16) changes in laws and regulations, including accounting standards, tax
requirements and interpretations or guidance related to the American Jobs
Creation Act of 2004. The Company does not undertake, and hereby disclaims, any
duty to update these forward-looking statements, although its situation and
circumstances may change in the future.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk related to changes in interest
rates, as well as European and other foreign currency exchange rates, and
selectively uses derivative financial instruments, including forwards and swaps,
to manage these risks. The Company does not hold derivatives for trading
purposes. The value of market-risk sensitive derivatives and other financial
instruments is subject to change as a result of movements in market rates and
prices. Sensitivity analysis is one technique used to evaluate these impacts.
As a result of recent acquisitions, a significant amount of the Company's net
income is earned in foreign currencies. Therefore, a strengthening in the U.S.
dollar across relevant foreign currencies, principally the Euro, British pound
and Chinese yuan, would have a corresponding negative impact on the Company's
future earnings.
All derivative instruments are reported on the balance sheet at fair
value. For each derivative instrument designated as a cash flow hedge, the gain
or loss on the derivative is deferred in accumulated
-29-
other comprehensive income until recognized in earnings with the underlying
hedged item. For each derivative instrument designated as a fair value hedge,
the gain or loss on the derivative instrument and the offsetting gain or loss on
the hedged item are recognized immediately in earnings. Currency fluctuations on
non-U.S. dollar borrowings that have been designated as hedges on the Company's
investment in foreign subsidiaries are included in other comprehensive income.
To effectively manage interest costs, the Company uses interest rate
swaps as cash flow hedges of variable rate debt. Including the impact of
interest rate swaps outstanding, the interest rates on approximately 49% of the
Company's total borrowings were effectively fixed as of September 30, 2005. Also
as part of its hedging strategy, the Company periodically uses purchased option
and forward exchange contracts as cash flow hedges to minimize the impact of
currency fluctuations on transactions, future cash flows and firm commitments.
These contracts for the sale or purchase of currencies generally mature within
one year.
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 disclosure 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.
The Company completed the acquisition of Thomas on July 1, 2005. For the
year ended December 31, 2004, Thomas' revenues were $410.1 million. This
significant business is a separate control environment. The evaluation of
disclosure controls and procedures referred to in the paragraph above included
Thomas. However, the Company will exclude this business from management's report
on internal controls over financial reporting, as permitted by SEC guidance, to
be included in our Form 10-K for the year ended December 31, 2005.
-30-
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is a party to various legal proceedings and administrative
actions. The information regarding these proceedings and actions is included
under "Contingencies" contained in "Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations" section herein.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
----------------------------------------------------------------------------------------------------------------------
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
----------------------------------------------------------------------------------------------------------------------
JULY 1, 2005-
JULY 31, 2005 8,631 $ 41.16 4,500 422,958
----------------------------------------------------------------------------------------------------------------------
AUGUST 1, 2005 -
AUGUST 31, 2005 32,847 $ 41.36 -- 422,958
----------------------------------------------------------------------------------------------------------------------
SEPTEMBER 1, 2005 -
SEPTEMBER 30, 2005 6,225 $ 42.03 4,400 418,558
----------------------------------------------------------------------------------------------------------------------
TOTAL 47,703 $ 41.41 8,900 418,558
----------------------------------------------------------------------------------------------------------------------
(1) Includes shares exchanged or surrendered in connection with the exercise of
options under Gardner Denver's stock option plans.
(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 and the repurchase of up to 400,000
shares of the Company's common stock under a Stock Repurchase Program for
Gardner Denver's executive officers. Both authorizations remain in effect
until all the authorized shares are repurchased unless modified by the
Board of Directors.
Item 6. Exhibits
2.1 Agreement and Plan of Merger, dated March 8, 2005, among Gardner
Denver, Inc., PT Acquisition Corporation and Thomas Industries
Inc., filed as Exhibit 2.1 to Gardner Denver, Inc.'s Current
Report on Form 8-K, dated March 8, 2005, and incorporated herein
by reference.
10.1 Third Amended and Restated Credit Agreement dated as of May 13,
2005 among Gardner Denver, Inc. (the "Borrower"), the financial
institutions from time to time party thereto (the "Lenders"),
JPMorgan Chase Bank, N.A., successor by merger to Bank One, NA, as
a Lender, an LC Issuer, the Swing Line Lender and as agent for
itself and the other Lenders, Wachovia Bank, National Association,
as a Lender and as Syndication Agent for the Revolving Loan
-31-
Facility, Harris Trust and Savings Bank, National City Bank of the
Midwest and KeyBank National Association, as Lenders and as
Co-Documentation Agents for the Revolving Credit Facility, and
Bear Stearns Corporate Lending Inc., as a Lender and as
Syndication Agent for the Term Loan Facility, filed as Exhibit
10.1 to Gardner Denver, Inc.'s Current Report on Form 8-K, dated
May 16, 2005, and incorporated herein by reference.
11 Statement re: Computation of Earnings Per Share, filed herewith as
Note 9.
12 Statements re: Computation 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.
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.
(Registrant)
Date: November 9, 2005 By: /s/ Ross J. Centanni
--------------------------------
Ross J. Centanni
Chairman, President & CEO
Date: November 9, 2005 By: /s/ Helen W. Cornell
--------------------------------
Helen W. Cornell
Vice President, Finance & CFO
Date: November 9, 2005 By: /s/ David J. Antoniuk
--------------------------------
David J. Antoniuk
Vice President and Corporate
Controller (Principal Accounting
Officer)
-32-
GARDNER DENVER, INC.
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
2.1 Agreement and Plan of Merger, dated March 8, 2005, among Gardner
Denver, Inc., PT Acquisition Corporation and Thomas Industries Inc.,
filed as Exhibit 2.1 to Gardner Denver, Inc.'s Current Report on
Form 8-K, dated March 8, 2005, and incorporated herein by reference.
10.1 Third Amended and Restated Credit Agreement dated as of May 13, 2005
among Gardner Denver, Inc. (the "Borrower"), the financial
institutions from time to time party thereto (the "Lenders"),
JPMorgan Chase Bank, N.A., successor by merger to Bank One, NA, as a
Lender, an LC Issuer, the Swing Line Lender and as agent for itself
and the other Lenders, Wachovia Bank, National Association, as a
Lender and as Syndication Agent for the Revolving Loan Facility,
Harris Trust and Savings Bank, National City Bank of the Midwest and
KeyBank National Association, as Lenders and as Co-Documentation
Agents for the Revolving Credit Facility, and Bear Stearns Corporate
Lending Inc., as a Lender and as Syndication Agent for the Term Loan
Facility, filed as Exhibit 10.1 to Gardner Denver, Inc.'s Current
Report on Form 8-K, dated May 16, 2005, and incorporated herein by
reference.
11 Statement re: Computation of Earnings Per Share, filed herewith as
Note 9.
12 Statements re: Computation 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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