UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 1-13215
GARDNER DENVER, INC.
(Exact name of Registrant as Specified in its Charter)
DELAWARE 76-0419383
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1800 GARDNER EXPRESSWAY
QUINCY, ILLINOIS 62301
(Address of Principal Executive Offices and Zip Code)
(217) 222-5400
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirement
for the past 90 days.
Yes X No
--- ---
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Exchange Act). Yes X No
--- ---
Number of shares outstanding of the issuer's Common Stock, par
value $.01 per share, as of July 25, 2003: 16,071,498 shares.
==============================================================================
PART I
FINANCIAL INFORMATION
GARDNER DENVER, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(dollars in thousands, except per share amounts)
(Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ -----------------------
2003 2002 2003 2002
-------- -------- -------- --------
Revenues $109,388 $104,854 $210,879 $211,463
Costs and Expenses:
Cost of sales (excluding depreciation
and amortization) 76,151 71,289 146,925 145,891
Depreciation and amortization 3,767 3,593 7,313 7,141
Selling and administrative expenses 20,681 20,308 41,358 40,280
Interest expense 1,136 1,730 2,341 3,412
Other income, net (210) (435) (97) (567)
-------- -------- -------- --------
Income before income taxes 7,863 8,369 13,039 15,306
Provision for income taxes 2,517 2,845 4,173 5,204
-------- -------- -------- --------
Net income $ 5,346 $ 5,524 $ 8,866 $ 10,102
======== ======== ======== ========
Basic earnings per share $ 0.33 $ 0.35 $ 0.55 $ 0.64
======== ======== ======== ========
Diluted earnings per share $ 0.33 $ 0.34 $ 0.55 $ 0.63
======== ======== ======== ========
The accompanying notes are an integral part of this statement.
-2-
GARDNER DENVER, INC.
CONSOLIDATED BALANCE SHEET
(in thousands, except per share amounts)
(UNAUDITED)
JUNE 30, DECEMBER 31,
2003 2002
-------- ------------
ASSETS
Current assets:
Cash and equivalents $ 23,031 $ 25,667
Receivables, net 75,986 74,490
Inventories, net 73,042 67,448
Deferred income taxes 6,178 5,902
Other 5,104 4,268
-------- --------
Total current assets 183,341 177,775
-------- --------
Property, plant and equipment, net 74,973 76,162
Goodwill 203,571 201,761
Other intangibles, net 9,354 9,418
Deferred income taxes 2,486 3,611
Other assets 4,001 3,454
-------- --------
Total assets $477,726 $472,181
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings and current maturities
of long-term debt $ 10,625 $ 7,500
Accounts payable and accrued liabilities 66,831 70,160
-------- --------
Total current liabilities 77,456 77,660
-------- --------
Long-term debt, less current maturities 100,272 112,663
Postretirement benefits other than pensions 33,316 34,539
Other long-term liabilities 26,863 24,396
-------- --------
Total liabilities 237,907 249,258
-------- --------
Stockholders' equity:
Common stock, $0.01 par value; 50,000 shares
authorized; 16,067 shares issued and
outstanding at June 30, 2003 178 177
Capital in excess of par value 173,289 171,047
Treasury stock at cost, 1,718 shares at
June 30, 2003 (25,847) (25,819)
Retained earnings 90,530 81,664
Accumulated other comprehensive loss 1,669 (4,146)
-------- --------
Total stockholders' equity 239,819 222,923
-------- --------
Total liabilities and stockholders' equity $477,726 $472,181
======== ========
The accompanying notes are an integral part of this statement.
-3-
GARDNER DENVER, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(Unaudited)
SIX MONTHS ENDED
JUNE 30,
-------------------------------
2003 2002
-------- --------
Cash flows from operating activities:
Net income $ 8,866 $ 10,102
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 7,313 7,141
Net (gain) loss on asset dispositions (367) 26
Stock issued for employee benefit plans 1,394 1,132
Deferred income taxes 824 (251)
Changes in assets and liabilities:
Receivables (1,574) 3,983
Inventories (4,157) 1,597
Accounts payable and accrued liabilities (2,940) (11,312)
Other assets and liabilities, net (511) (658)
-------- --------
Net cash provided by operating activities 8,848 11,760
-------- --------
Cash flows from investing activities:
Capital expenditures (5,546) (4,842)
Disposals of plant and equipment 915 72
Other -- (5)
-------- --------
Net cash used in investing activities (4,631) (4,775)
-------- --------
Cash flows from financing activities:
Principal payments on long-term debt (29,266) (31,162)
Proceeds from long-term debt 20,000 8,000
Proceeds from stock options 850 2,289
Purchase of treasury stock (28) (201)
Other (3) (665)
-------- --------
Net cash used in financing activities (8,447) (21,739)
-------- --------
Effect of exchange rate changes on cash and
equivalents 1,594 1,540
-------- --------
Decrease in cash and equivalents (2,636) (13,214)
-------- --------
Cash and equivalents, beginning of period 25,667 29,980
-------- --------
Cash and equivalents, end of period $ 23,031 $ 16,766
======== ========
The accompanying notes are an integral part of this statement.
-4-
NOTES TO CONDENSED FINANCIAL STATEMENTS
(in thousands, except per share amounts)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
Basis of Presentation. The accompanying condensed consolidated financial
statements include the accounts of Gardner Denver, Inc. ("Gardner Denver" or
the "Company") and its subsidiaries. All significant intercompany
transactions and accounts have been eliminated.
The financial information presented as of any date other than December 31
has been prepared from the books and records without audit. The accompanying
condensed consolidated financial statements have been prepared in accordance
with the instructions to Form 10-Q and do not include all of the information
and footnotes required by generally accepted accounting principles for
complete statements. In the opinion of management, all adjustments,
consisting only of normal recurring adjustments necessary for a fair
presentation of such financial statements, have been included.
These condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
incorporated by reference in Gardner Denver's Annual Report on Form 10-K for
the year ended December 31, 2002.
The results of operations for the three and six months ended June 30, 2003
are not necessarily indicative of the results to be expected for the full
year.
Certain prior year amounts have been reclassified to conform with current
year presentation.
NOTE 2. INVENTORIES.
JUNE 30, DECEMBER 31,
2003 2002
-------- ------------
Raw materials, including parts and
subassemblies $33,752 $35,675
Work-in-process 11,252 9,077
Finished goods 30,553 25,355
Perishable tooling and supplies 2,457 2,456
------- -------
78,014 72,563
Excess of current standard costs
over LIFO costs (4,972) (5,115)
------- -------
Inventories, net $73,042 $67,448
======= =======
NOTE 3. GOODWILL AND OTHER INTANGIBLE ASSETS.
The changes in the carrying amount of goodwill attributable to each business
segment for the six months ended June 30, 2003, are as follows:
COMPRESSED PUMP
AIR PRODUCTS PRODUCTS
------------ --------
Balance as of December 31, 2002 $176,230 $25,531
Foreign currency translation 1,810 ---
-------- -------
Balance as of June 30, 2003 $178,040 $25,531
======== =======
-5-
Other intangible assets at June 30, 2003 consisted of the following:
GROSS CARRYING ACCUMULATED
AMOUNT AMORTIZATION
-------------- ------------
Amortized intangible assets:
Acquired technology $11,826 $(7,583)
Other 4,234 (2,080)
Unamortized intangible assets:
Trademarks 2,957 --
------- -------
Total other intangible assets $19,017 $(9,663)
======= =======
Amortization of intangible assets for the six months ended June 30, 2003,
was $0.7 million. Amortization of intangible assets is anticipated to be
approximately $1.5 to $2.0 million per year for 2003 through 2007.
NOTE 4. ACCRUED PRODUCT WARRANTY.
The following is a rollforward of the Company's warranty accrual for the
three and six months ended June 30, 2003.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2003 JUNE 30, 2003
------------- -------------
Balance at beginning of period $ 6,883 $ 7,060
Product warranty accruals 1,159 2,051
Settlements (1,469) (2,582)
Other (primarily foreign currency translation) 122 166
------- -------
Balance at end of period $ 6,695 $ 6,695
======= =======
NOTE 5. EARNINGS PER SHARE.
The following table details the calculation of basic and diluted earnings
per share:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2003 2002 2003 2002
------- ------- ------- -------
Basic EPS:
Net income $ 5,346 $ 5,524 $ 8,866 $10,102
======= ======= ======= =======
Shares:
Weighted average number of common
shares outstanding 16,052 15,856 16,031 15,806
======= ======= ======= =======
Basic earnings per common share $ 0.33 $ 0.35 $ 0.55 $ 0.64
======= ======= ======= =======
-6-
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2003 2002 2003 2002
------- ------- ------- -------
Diluted EPS:
Net income $ 5,346 $ 5,524 $ 8,866 $10,102
======= ======= ======= =======
Shares:
Weighted average number of common
shares outstanding 16,052 15,856 16,031 15,806
Assuming conversion of dilutive stock
options issued and outstanding 208 283 183 263
------- ------- ------- -------
Weighted average number of common
shares outstanding, as adjusted 16,260 16,139 16,214 16,069
======= ======= ======= =======
Diluted earnings per common share $ 0.33 $ 0.34 $ 0.55 $ 0.63
======= ======= ======= =======
NOTE 6. STOCK-BASED COMPENSATION PLANS.
As allowed under Statement of Financial Accounting Standards ("SFAS") No.
123, "Accounting for Stock-Based Compensation," the Company measures its
compensation cost of equity instruments issued under employee compensation
plans using the intrinsic value method in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees,"
and related interpretations. Stock options granted during the three and six
months ended June 30, 2003 and 2002 were exercisable at prices equal to the
fair market value of the Company's common stock on the dates the options
were granted; 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:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2003 2002 2003 2002
------- ------- ------- -------
Net income, as reported $ 5,346 $ 5,524 $ 8,866 $10,102
======= ======= ======= =======
Less: Total stock-based employee
compensation expense determined under fair
value method, net of related tax effects 296 324 624 636
------- ------- ------- -------
Pro forma net income $ 5,050 $ 5,200 $ 8,242 $ 9,466
======= ======= ======= =======
Basic earnings per share, as reported $ 0.33 $ 0.35 $ 0.55 $ 0.64
======= ======= ======= =======
Basic earnings per share, pro forma $ 0.31 $ 0.33 $ 0.51 $ 0.60
======= ======= ======= =======
Diluted earnings per share, as reported $ 0.33 $ 0.34 $ 0.55 $ 0.63
======= ======= ======= =======
Diluted earnings per share, pro forma $ 0.31 $ 0.32 $ 0.51 $ 0.59
======= ======= ======= =======
-7-
Compensation costs charged against income (net of tax) for restricted stock
issued under the Company's Incentive Plan totaled $0.2 million in the six
months ended June 30, 2003.
NOTE 7. COMPREHENSIVE INCOME.
For the three months ended June 30, 2003 and 2002, comprehensive income was
$9.5 million and $12.5 million, respectively. For the six months ended June
30, 2003 and 2002, comprehensive income was $14.7 million and $15.3 million,
respectively. Items impacting the Company's comprehensive income, but not
included in net income, consist of foreign currency translation adjustments.
NOTE 8. CASH FLOW INFORMATION.
In the first six months of 2003 and 2002, the Company paid $1.5 million and
$3.3 million, respectively, to the various taxing authorities for income
taxes. Interest paid for the first six months of 2003 and 2002, was $2.2
million and $3.3 million, respectively.
NOTE 9. CONTINGENCIES.
The Company is a party to various legal proceedings, lawsuits and
administrative actions, which are of an ordinary or routine nature. Due to
the bankruptcies of several asbestos manufacturers and other primary
defendants, the Company has been named as a defendant in an increasing
number of asbestos personal injury lawsuits. In addition, the Company has
also been named as a defendant in a number of silicosis personal injury
lawsuits. Predecessors to the Company manufactured and sold the products
allegedly at issue in these asbestos and silicosis lawsuits, namely: (a)
asbestos-containing components supplied by third parties; and (b) portable
compressors that were used as components for sandblasting equipment
manufactured and sold by other parties. These lawsuits represent potential
contingent liabilities to the Company as a result of its predecessors'
historical sales of these products.
The Company believes that these pending legal proceedings, lawsuits and
administrative actions will not, in the aggregate, have a material adverse
effect on its consolidated financial position, results of operations or
liquidity, based on: (1) the Company's anticipated insurance and
indemnification rights to address the risks of such matters; (2) the limited
risk of potential asbestos exposure from the components described above, due
to the complete enclosure of the components within the subject products and
the additional protective non-asbestos binder which encapsulated the
components; (3) the fact that the substantial majority of claimants in the
pending asbestos and silicosis lawsuits against the Company are not impaired
with disease; (4) the fact that neither the Company, nor its predecessors,
ever manufactured, marketed or sold sandblasting equipment; (5) various
other potential defenses available to the Company with respect to such
matters; and (6) the Company's prior disposition of comparable matters.
The Company has also been identified as a potentially responsible party with
respect to various sites designated for cleanup under various state and
federal laws. The Company does not own any of these sites. The Company does
not believe that the future potential costs related to these sites will have
a material adverse effect on its consolidated financial position, results of
operations or liquidity.
-8-
NOTE 10. SEGMENT INFORMATION.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ----------------------
2003 2002 2003 2002
-------- -------- -------- --------
Revenues:
Compressed Air Products $ 92,443 $ 89,240 $179,629 $177,751
Pump Products 16,945 15,614 31,250 33,712
-------- -------- -------- --------
Total $109,388 $104,854 $210,879 $211,463
======== ======== ======== ========
Operating Earnings:
Compressed Air Products $ 7,699 $ 8,800 $ 14,275 $ 16,140
Pump Products 1,090 864 1,008 2,011
-------- -------- -------- --------
Total 8,789 9,664 15,283 18,151
Interest expense 1,136 1,730 2,341 3,412
Other income, net (210) (435) (97) (567)
-------- -------- -------- --------
Income before income taxes $ 7,863 $ 8,369 $ 13,039 $ 15,306
======== ======== ======== ========
-9-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS.
PERFORMANCE IN THE QUARTER ENDED JUNE 30, 2003 COMPARED WITH
THE QUARTER ENDED JUNE 30, 2002
Revenues
Revenues increased $4.5 million to $109.4 million for the three months ended
June 30, 2003, compared to $104.9 million in the same period of 2002
primarily due to favorable changes in foreign currency exchange rates.
For the three months ended June 30, 2003, revenues for the Compressed Air
Products segment increased $3.2 million (4%) to $92.4 million, compared to
the same period of 2002. This increase is primarily due to favorable changes
in foreign currency exchange rates combined with unit growth of compressor
packages used in PET bottle blowing applications. Excluding the favorable
impact of changes in foreign currency exchange rates, revenues in this
segment decreased $1.4 million (2%) due to softer U.S. and European
industrial economies, which weakened demand for compressors and blowers.
Pump Products segment revenues increased $1.3 million (9%) to $16.9 million
for the three months ended June 30, 2003, compared to the same period of
2002, primarily as a result of increased international shipments of
petroleum pump parts from backlog.
Costs and Expenses
Gross margin (defined as sales less cost of sales excluding depreciation and
amortization) for the three months ended June 30, 2003 decreased $0.3
million (1%) to $33.2 million compared to the same period of 2002. Gross
margin as a percentage of revenues (gross margin percentage) decreased to
30.4% in the three-month period of 2003 from 32.0% in the same period of
2002. This decrease in the gross margin percentage was principally
attributable to unfavorable sales mix including lower compressor aftermarket
sales and higher compressor package sales, higher warranty expense (due to
unusually low warranty expense in the second quarter of 2002, as a result of
favorable claims experience) and higher fringe benefit costs. These negative
factors were partially offset by cost reduction efforts, including
acquisition integration efforts.
Depreciation and amortization expense increased in the three-month period of
2003 by 5% to $3.8 million from $3.6 million in the same period of 2002
primarily due to a $0.2 million (pre-tax) depreciation charge in 2003 to
write-off pattern modification charges from casting suppliers no longer
servicing the Company.
Selling and administrative expenses increased in the three-month period of
2003 by 2% to $20.7 million from $20.3 million in the same period of 2002
primarily due to unfavorable changes in foreign currency exchange rates.
Excluding the impact of foreign currency exchange rate changes, selling and
administrative expenses decreased approximately 3% due to cost reductions,
including acquisition integration efforts. These cost reductions were
partially offset by higher sales commissions and fringe benefit costs.
Selling and administrative expenses as a percentage of revenues decreased to
18.9% for the three-month period of 2003 compared to 19.4% in 2002 primarily
as a result of the increase in revenues and the aforementioned cost
reductions.
-10-
The Compressed Air Products segment generated operating margins (defined as
revenues, less cost of sales, depreciation and amortization, and selling and
administrative expenses) of 8.3% for the three-month period ended June 30,
2003, a decrease from 9.9% for the same period of 2002. This decrease was
primarily attributable to lower gross margins as a percentage of revenues
due to unfavorable sales mix and higher warranty expense combined with
higher sales commissions and fringe benefit costs. These negative factors
were partially offset by cost reductions, including acquisition integration,
combined with revenue and operating margin improvement from compressor
packages used in PET bottle blowing applications. On a sequential basis,
operating margins for the Compressed Air Products segment improved to 8.3%
from 7.5% for the three-month period ended March 31, 2003 as the Company
leveraged its selling and administrative costs over a higher revenue base.
The Pump Products segment generated operating margins of 6.4% of revenues
for the three-month period ended June 30, 2003, compared to an operating
margin of 5.5% for the same period in 2002. This increase was primarily
attributable to the positive impact of increased leverage of the segment's
fixed and semi-fixed costs over a higher revenue base. Also contributing to
the higher percentage was a more favorable sales mix, which included a
higher proportion of petroleum pump parts that carry higher margins than
other pump products.
Other income, net decreased $0.2 million compared to the prior year period
primarily due to lower interest income and higher foreign currency
transaction losses generated from U.S. dollar denominated balances of
foreign subsidiaries in 2003. These negative factors were partially offset
by a $0.4 million (pretax) gain on the sale of an idle manufacturing
facility in Syracuse, New York in the second quarter of 2003.
Interest expense decreased $0.6 million (34%) to $1.1 million for the three
months ended June 30, 2003, compared to $1.7 million for the same period of
2002 due to lower average borrowings and interest rates. The average
interest rate for the three-month period of 2003 was 4.2% compared to 4.5%
in the prior year period.
Income before income taxes decreased $0.5 million (6%) to $7.9 million for
the three months ended June 30, 2003, compared to the same period of 2002.
This decrease was primarily the result of the factors driving the decrease in
the Compressed Air Products segment operating margins and other income noted
above. These negative factors were partially offset by cost reduction
efforts, including acquisition integration, favorable changes in foreign
currency exchange rates and lower interest expense.
The provision for income taxes decreased by $0.3 million to $2.5 million for
the three-month period of 2003, compared to $2.8 million in 2002, as a
result of the lower income before taxes and a lower overall effective tax
rate. The Company's effective tax rate for the three months ended June 30,
2003 decreased to 32.0%, compared to 34.0% in the prior year period,
principally as a result of a higher proportion of Extraterritorial Income
Exclusion (EIE) benefit from U.S. export sales relative to pretax income.
Net income for the three months ended June 30, 2003 decreased $0.2 million
(3%) to $5.3 million ($0.33 diluted earnings per share), compared to $5.5
million ($0.34 diluted earnings per share) for the same period of 2002. This
decrease in net income was primarily attributable to the same factors that
resulted in decreased income before taxes noted above partially offset by a
lower effective tax rate in 2003.
-11-
PERFORMANCE IN THE SIX MONTHS ENDED JUNE 30, 2003 COMPARED WITH
THE SIX MONTHS ENDED JUNE 30, 2002
Revenues
Revenues decreased $0.6 million to $210.9 million for the six months ended
June 30, 2003, compared to $211.5 million in the same period of 2002
primarily due to lower revenues in the Pump Products segment which were
partially offset by an increase in the Compressed Air Products segment.
For the six months ended June 30, 2003, revenues for the Compressed Air
Products segment increased $1.9 million (1%) to $179.6 million, compared to
the same period of 2002. This increase is primarily due to favorable foreign
currency exchange rates combined with revenue growth of compressor packages
used in PET bottle blowing applications. Excluding the favorable impact of
changes in foreign currency exchange rates, revenues in this segment
decreased $7.1 million (4%) due to softer U.S. and European industrial
economies, which weakened demand for compressors and blowers. Pump Products
segment revenues decreased $2.5 million (7%) to $31.3 million for the six
months ended June 30, 2003, compared to the same period of 2002. The
depressed demand for petroleum pump products resulted from previously low
levels of rig count, which began negatively impacting order rates in the
second half of 2001. In 2002, Pump Products segment revenues were primarily
supported by drilling pump backlog carried over from 2001 orders.
Costs and Expenses
Atchison Casting Corporation, the Company's largest supplier of iron
castings in 2002, downsized and subsequently closed its LaGrange, Missouri
foundry ("LaGrange Foundry"), in the second half of 2002. As a result, the
Company implemented its previously developed contingency plan to secure
alternate supply sources. The Company does not anticipate that the closure
of the LaGrange Foundry will materially impact its long-term financial
performance. However, there was a negative impact (estimated at $0.02-$0.03
diluted earnings per share) on the Company's financial performance in the
first quarter of 2003, as additional costs were incurred to expedite
castings from new suppliers. In addition, the Company recorded a $0.2
million (pre-tax) depreciation charge in the second quarter of 2003 to
write-off pattern modification charges from alternate casting suppliers who
are no longer servicing the Company.
The most significant aspects of the changes related to the LaGrange Foundry
closure have been completed and the Company expects to benefit going forward
from reduced material costs from alternate suppliers. At the same time, the
Company anticipates that it will need to address some lingering problems
over the balance of the year as it re-balances its casting supply chain
while dealing with suppliers that are experiencing lower volumes, high fixed
cost structures and increased competitive pressures.
Gross margin (defined as sales less cost of sales excluding depreciation and
amortization) for the six months ended June 30, 2003 decreased $1.6 million
(2%) to $64.0 million compared to the same period of 2002. Gross margin as a
percentage of revenues (gross margin percentage) decreased to 30.3% in the
six-month period of 2003 from 31.0% in the same period of 2002. This
decrease in the gross margin percentage was principally attributable to
unfavorable sales mix including lower drilling pump sales and higher
compressor package sales and higher fringe
-12-
benefit costs. These negative factors were partially offset by cost
reduction efforts, including acquisition integration efforts.
Depreciation and amortization expense increased in the six-month period of
2003 by 2% to $7.3 million from $7.1 million in the same period of 2002
primarily due to a $0.2 million (pre-tax) depreciation charge in 2003 to
write-off pattern modification charges from casting suppliers no longer
servicing the Company.
Selling and administrative expenses increased in the six-month period of
2003 by 3% to $41.4 million from $40.3 million in the same period of 2002
primarily due to unfavorable changes in foreign currency exchange rates.
Excluding the impact of foreign currency exchange rate changes, selling and
administrative expenses decreased approximately 2% due to cost reductions,
including acquisition integration efforts. These cost reductions were
partially offset by higher compensation, sales commissions and fringe
benefit costs. Selling and administrative expenses as a percentage of
revenues increased to 19.6% for the six-month period of 2003 compared to
19.0% in 2002 primarily as a result of the increase in sales commissions and
fringe benefit costs combined with lower revenues.
The Compressed Air Products segment generated operating margins (defined as
revenues, less cost of sales, depreciation and amortization, and selling and
administrative expenses) of 7.9% for the six-month period ended June 30,
2003, a decrease from 9.1% for the same period of 2002. This decrease was
primarily attributable to lower gross margins as a percentage of revenues
due to unfavorable sales mix combined with higher compensation, fringe
benefit and sales commissions. These negative factors were partially offset
by cost reductions, including acquisition integration, combined with revenue
and operating margin improvement from compressors packages used in PET
bottle blowing applications.
The Pump Products segment generated operating margins of 3.2% of revenues
for the six-month period ended June 30, 2003, compared to an operating
margin of 6.0% for the same period in 2002. This decrease was primarily
attributable to the negative impact of decreased leverage of the segment's
fixed and semi-fixed costs over a lower revenue base. Also contributing to
the lower percentage was a less favorable sales mix, which included a lower
percentage of revenues from drilling pumps, which carry higher margins than
other pump products.
Other income, net decreased $0.5 million compared to the prior year period
primarily due to lower interest income and higher foreign currency
transaction losses generated from U.S. dollar denominated balances of
foreign subsidiaries in 2003. These negative factors were partially offset
by a $0.4 million (pretax) gain on the sale of an idle manufacturing
facility in Syracuse, New York in the second quarter of 2003.
Interest expense decreased $1.1 million (31%) to $2.3 million for the six
months ended June 30, 2003, compared to $3.4 million for the same period of
2002 due to lower average borrowings and interest rates. The average
interest rate for the six-month period of 2003 was 4.1% compared to 4.3% in
the prior year period.
Income before income taxes decreased $2.3 million (15%) to $13.0 million for
the six months ended June 30, 2003, compared to the same period of 2002.
This decrease was primarily the result of the factors driving the decrease in
segment operating margins and other income noted above. These negative
factors were partially offset by cost reduction efforts, including
acquisition integration, favorable changes in foreign currency exchange
rates and lower interest expense.
-13-
The provision for income taxes decreased by $1.0 million (20%) to $4.2
million for the six-month period of 2003, compared to $5.2 million in 2002,
as a result of the lower income before taxes and a lower overall effective
tax rate. The Company's effective tax rate for the six months ended June 30,
2003 decreased to 32.0%, compared to 34.0% in the prior year period,
principally as a result of a higher proportion of Extraterritorial Income
Exclusion (EIE) benefit from U.S. export sales relative to pretax income.
Net income for the six months ended June 30, 2003 decreased $1.2 million
(12%) to $8.9 million ($0.55 diluted earnings per share), compared to $10.1
million ($0.63 diluted earnings per share) for the same period of 2002. This
decrease in net income was primarily attributable to the same factors that
resulted in decreased income before taxes noted above partially offset by a
lower effective tax rate in 2003.
Outlook
In general, demand for compressed air products correlates to the rate of
manufacturing capacity utilization and the rate of change of industrial
production because compressed air is often used as a fourth utility in the
manufacturing process. Over longer time periods, demand also follows the
economic growth patterns indicated by the rates of change in the Gross
Domestic Product. In the second quarter of 2003, orders for compressed air
products were $81.7 million, compared to $93.6 million in the same period of
2002. For the first six months of 2003, orders for compressed air products
were $174.9 million compared to $179.2 million in the same period of 2002.
Order backlog for the Compressed Air Products segment was $56.9 million as
of June 30, 2003, compared to $61.2 million as of June 30, 2002. The
favorable impact of changes in foreign currency exchange rates was
approximately $1.3 million and $8.6 million for compressed air products
backog and orders, respectively, as of and for the six months ended June 30,
2003. The decrease in orders and backlog compared to the prior year is
primarily due to softer U.S. and European industrial economies.
Demand for pump products, which are primarily petroleum related, has
historically corresponded to market conditions and expectations for oil and
natural gas prices. Orders for pump products were $13.7 million in the
second quarter of 2003 compared $12.9 million in the same period of 2002.
For the first six months of 2003, pump product orders were $34.4 million
compared to $26.2 in the same period of 2002. The increase in orders can
primarily be attributed to increasing international drilling pump activity.
Compared to June 30, 2002, backlog for this business segment decreased $3.0
million to $10.1 million on June 30, 2003, primarily due to the significant
backlog in the second quarter of 2002, which was carried over from 2001
orders.
The Company's postretirement expenses have not increased in 2003 as
significantly as originally anticipated due to lower staffing levels and
less dramatic increases in medical costs than initially assumed. However,
consistent with the experience of many other companies in the U.S., these
expenses will be higher in 2003 than in previous years. The Company now
expects diluted earnings per share deterioration as a result of increased
fringe benefits of approximately $0.08 to $0.10 compared to 2002, rather
than previous expectations of $0.15 to $0.18 per share. The Company expects
that material cost reductions, process improvements to operations and
further capital investment will offset most of the volume reductions and
unfavorable mix in our Pump Products segment (due to decreased drilling pump
sales). Based upon the above and the current economic environment and
activity levels in both reporting segments, the Company anticipates that
diluted earnings per share will be approximately $0.30 to $0.34 for the
third quarter of 2003.
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Diluted earnings per share is expected to be approximately $1.17 to $1.27
for the year, which is within in the range of our previous guidance,
assuming that a modest recovery in demand for compressed air products occurs
in the fourth quarter.
LIQUIDITY AND CAPITAL RESOURCES
Operating Working Capital
During the six months ended June 30, 2003, operating working capital
(defined as receivables plus inventories, less accounts payable and accrued
liabilities) increased $10.4 million due to higher inventories and
receivables and lower accounts payable and accrued liabilities. Additions to
inventory resulted from positioning long lead-time orders in backlog,
unfavorable changes in foreign currency exchange rates and increases related
to iron casting supply disruptions. The increase in receivables is primarily
due to unfavorable changes in foreign currency exchange rates. The lower
accounts payable and accrued liabilities are primarily due to reduced
activity levels partially offset by favorable changes in foreign currency
exchange rates.
Cash Flows
During the first six months of 2003, the Company generated cash from
operations totaling $8.8 million, compared to $11.8 million in the prior
year period. This change is primarily due the unfavorable change in
operating working capital and lower net income in 2003 as noted above. Net
payments on total debt were $9.3 million during the first six months 2003.
The cash flows provided by operating activities and used in investing and
financing activities, combined with the effect of changes in foreign
currency exchange rates, resulted in a net cash decrease of $2.6 million for
the first six months of 2003.
Capital Expenditures and Commitments
Capital projects designed to increase operating efficiency and flexibility,
expand production capacity and increase product quality resulted in
expenditures of $5.5 million in the first six months of 2003. This was $0.7
million higher than the level of capital expenditures in the comparable
period in 2002, primarily due to the timing of capital projects. Commitments
for capital expenditures at June 30, 2003 totaled $8.1 million. Capital
expenditures related to environmental projects have not been significant in
the past and are not expected to be significant in the foreseeable future.
In October 1998, Gardner Denver's Board of Directors authorized the
repurchase of up to 1,600,000 shares of the Company's common stock to be
used for general corporate purposes. Approximately 200,000 shares remain
available for repurchase under this program. The Company has also
established a Stock Repurchase Program for its executive officers to provide
a means for them to sell Gardner Denver common stock and obtain sufficient
funds to meet tax obligations which arise from the exercise or vesting of
incentive stock options, restricted stock or performance shares. The Gardner
Denver Board has authorized up to 400,000 shares for repurchase under this
program and, of this amount, approximately 200,000 shares remain available
for repurchase. As of June 30, 2003, a total of 1,572,542 shares have been
repurchased at a cost of $22.8 million under both repurchase programs.
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Liquidity
The Company's amended and restated Revolving Line of Credit Agreement (the
"Credit Line") has a borrowing capacity to $150 million and matures on March
6, 2005. Subject to approval by lenders holding more than 75% of the debt,
the Company may request up to two, one-year extensions. The total debt
balance will be due upon final maturity. On June 30, 2003, the Credit Line
had an outstanding principal balance of $36.0 million, leaving $114.0
million available for future use or for letters of credit, subject to the
terms of the Credit Line.
The Credit Line also provided for an additional $50.0 million Term Loan
which was used to retire debt outstanding under a previous interim credit
agreement. The five-year Term Loan requires principal payments of $2.5
million in years one and two, and $15.0 million in years three through five.
On June 30, 2003, the Term Loan had an outstanding principal balance of
$46.9 million.
The Company's borrowing arrangements are generally unsecured and permit
certain investments and dividend payments. There are no material
restrictions on the Company as a result of its credit agreements, other than
customary covenants regarding certain earnings, liquidity and capital
ratios.
Management currently expects the Company's future cash flows to be
sufficient to fund its scheduled debt service and provide required resources
for working capital and capital investments.
CONTINGENCIES
The Company is a party to various legal proceedings, lawsuits and
administrative actions, which are of an ordinary or routine nature. Due to
the bankruptcies of several asbestos manufacturers and other primary
defendants, the Company has been named as a defendant in an increasing
number of asbestos personal injury lawsuits. In addition, the Company has
also been named as a defendant in a number of silicosis personal injury
lawsuits. Predecessors to the Company manufactured and sold the products
allegedly at issue in these asbestos and silicosis lawsuits, namely: (a)
asbestos-containing components supplied by third parties; and (b) portable
compressors that were used as components for sandblasting equipment
manufactured and sold by other parties. These lawsuits represent potential
contingent liabilities to the Company as a result of its predecessors'
historical sales of these products.
The Company believes that these pending legal proceedings, lawsuits and
administrative actions will not, in the aggregate, have a material adverse
effect on its consolidated financial position, results of operations or
liquidity, based on: (1) the Company's anticipated insurance and
indemnification rights to address the risks of such matters; (2) the limited
risk of potential asbestos exposure from the components described above, due
to the complete enclosure of the components within the subject products and
the additional protective non-asbestos binder which encapsulated the
components; (3) the fact that the substantial majority of claimants in the
pending asbestos and silicosis lawsuits against the Company are not impaired
with disease; (4) the fact that neither the Company, nor its predecessors,
ever manufactured, marketed or sold sandblasting equipment; (5) various
other potential defenses available to the Company with respect to such
matters; and (6) the Company's prior disposition of comparable matters.
The Company has also been identified as a potentially responsible party with
respect to various sites designated for cleanup under various state and
federal laws. The Company does not own any of these sites. The Company does
not believe that the future potential costs related to these
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sites will have a material adverse effect on its consolidated financial
position, results of operations or liquidity.
NEW ACCOUNTING STANDARDS
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." This
statement establishes standards for classifying and measuring certain
financial instruments with both liabilities and equity and is effective for
financial instruments entered into or modified after May 31, 2003. Adoption
of SFAS No. 150 did not have a material impact on the Company's consolidated
financial statements.
CRITICAL ACCOUNTING POLICIES
Management has evaluated the accounting policies used in the preparation of
the Company's financial statements and related notes and believes those
policies to be reasonable and appropriate. Certain of these accounting
policies require the application of significant judgment by management in
selecting appropriate assumptions for calculation of financial estimates. By
their nature, these judgments are subject to an inherent degree of
uncertainty. These judgments are based on historical experience, trends in
the industry, information provided by customers and information available
from other outside sources, as appropriate. The most significant areas
involving management judgments and estimates may be found in our 2002 Annual
Report on Form 10-K, filed on March 26, 2003, in the Critical Accounting
Policies Section of Management's Discussion and Analysis and in Note 1 to
the Consolidated Financial Statements contained in our 2002 Annual Report to
Stockholders filed as Exhibit 13.0 thereto.
CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS
All of the statements in this Management's Discussion and Analysis, other
than historical facts, are forward-looking statements made in reliance upon
the safe harbor of the Private Securities Litigation Reform Act of 1995,
including, without limitation, statements made under the caption "Outlook."
As a general matter, forward-looking statements are those focused upon
anticipated events or trends and expectations and beliefs relating to
matters that are not historical in nature. Such forward-looking statements
are subject to uncertainties and factors relating to Gardner Denver's
operations and business environment, all of which are difficult to predict
and many of which are beyond the control of the Company. These uncertainties
and factors could cause actual results to differ materially from those
matters expressed in or implied by such forward-looking statements. The
following uncertainties and factors, among others, could affect future
performance and cause actual results to differ materially from those
expressed in or implied by forward-looking statements: (1) the ability to
maintain and to enter into key purchasing, supply and outsourcing
relationships; (2) the ability to effectively manage the transition of iron
casting supply to alternate sources and the skill, commitment and
availability of such alternate sources; (3) the ability to identify,
negotiate and complete future acquisitions; (4) the speed with which the
Company is able to integrate acquisitions and realize the related financial
benefits; (5) the domestic and/or worldwide level of oil and natural gas
prices and oil and gas drilling and production, which affect demand for the
Company's petroleum products; (6) changes in domestic and/or worldwide
industrial production and industrial capacity utilization rates, which
affect demand for the Company's compressed air products; (7) pricing of
Gardner Denver products; (8) the degree to which the Company is able to
penetrate niche and international markets; (9) the ability to attract and
retain quality management personnel; (10) market performance of pension
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plan assets and changes in discount rates used for actuarial assumptions in
pension and other post-employment obligation and expense calculations; (11)
the continued successful implementation of cost reduction efforts; (12) the
ability to manage and defend litigation matters pending, or asserted in the
future, against the Company: (13) the successful implementation of the
Company's strategic initiatives and partnering relationships; (14) the
acceptance of the Company's new product offerings; and (15) the continued
successful implementation and utilization of the Company's electronic
services.
The Company does not undertake, and hereby disclaims, any duty to update
these forward-looking statements, even though its situation and
circumstances may change in the future.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There were no material changes in the Company's exposure to market risk
between December 31, 2002 and June 30, 2003.
ITEM 4. CONTROLS AND PROCEDURES
As required by Rule 13a-15 of the Exchange Act, the Company has carried out
an evaluation of the effectiveness of the design and operation of the
Company's disclosure controls and procedures as of the end of the period
covered by this report. This evaluation was carried out under the
supervision and with the participation of the Company's management,
including our Chairman, President and Chief Executive Officer and our 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 our controls and
procedures were effective to provide reasonable assurance that information
required to be disclosed in the Company's periodic SEC reports is recorded,
processed, summarized, and reported as and when required. In addition, they
concluded that there were no significant changes in the Company's internal
control over financial reporting that occurred during the period covered by
this report that have materially affected, or that are reasonably likely to
materially affect, our ability to record, process, summarize and report
financial information.
In designing and evaluating the disclosure controls and procedures, the
Company's management recognized that any controls and procedures, no matter
how well designed, can provide only reasonable assurances of achieving the
desired control objectives and management necessarily was required to apply
its judgment in evaluating the cost-benefit relationship of possible
controls and procedures.
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders (the "Annual Meeting") was held
pursuant to notice on May 6, 2003. At the Annual Meeting, Ross J. Centanni
and Richard L. Thompson were elected to serve as directors for a three-year
term expiring in 2006. There were 15,549,087 affirmative votes cast and
191,324 non-votes concerning Mr. Centanni's election as a director and
14,591,312 affirmative votes cast and 149,099 non-votes concerning Mr.
Thompson's election as a director.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits:
10.1 Gardner Denver, Inc. Long-Term Incentive Plan, as amended
May 6, 2003.
10.15 Gardner Denver, Inc. Executive Retirement Planning Program
Services, dated May 5, 2003.
31.1 Certification of Chief Executive Officer pursuant to
Exchange Act Rule 13a-14(a).
31.2 Certification of Chief Financial Officer pursuant to
Exchange Act Rule 13a-14(a).
32 Certification pursuant to 18 U.S.C. Section 1350 and
Exchange Act Rule 13a-14(b).
(b) Reports on Form 8-K
On July 23, 2003, Gardner Denver, Inc. filed an 8-K to furnish its
press release announcing the Company's earnings for the second
quarter and six months ended June 30, 2003.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
GARDNER DENVER, INC.
Date: August 8, 2003 By: /s/Ross J. Centanni
---------------------------------------
Ross J. Centanni
Chairman, President & CEO
Date: August 8, 2003 By: /s/Philip R. Roth
---------------------------------------
Philip R. Roth
Vice President, Finance & CFO
Date: August 8, 2003 By: /s/ Daniel C. Rizzo, Jr.
---------------------------------------
Daniel C. Rizzo, Jr.
Vice President and Corporate
Controller (Chief Accounting Officer)
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GARDNER DENVER, INC.
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
10.1 Gardner Denver, Inc. Long-Term Incentive Plan, as amended May 6, 2003.
10.15 Gardner Denver, Inc. Executive Retirement Planning Program Services,
dated May 5, 2003.
31.1 Certification of Chief Executive Officer pursuant to Exchange Act
Rule 13a-14(a).
31.2 Certification of Chief Financial Officer pursuant to Exchange Act
Rule 13a-14(a).
32 Certification pursuant to 18 U.S.C. Section 1350 and Exchange Act
Rule 13a-14(b).
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