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 March 31, 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 April 25, 2003: 16,045,709 shares.
===============================================================================
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
GARDNER DENVER, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(Unaudited)
THREE MONTHS ENDED
MARCH 31,
----------------------------
2003 2002
-------- --------
Revenues $101,491 $106,609
Costs and Expenses:
Cost of sales (excluding depreciation
and amortization) 70,774 74,602
Depreciation and amortization 3,546 3,548
Selling and administrative expenses 20,677 19,972
Interest expense 1,205 1,682
Other expense (income), net 113 (132)
-------- --------
Income before income taxes 5,176 6,937
Provision for income taxes 1,656 2,359
-------- --------
Net income $ 3,520 $ 4,578
======== ========
Basic earnings per share $ 0.22 $ 0.29
======== ========
Diluted earnings per share $ 0.22 $ 0.29
======== ========
The accompanying notes are an integral part of this statement.
- 2 -
GARDNER DENVER, INC.
CONSOLIDATED BALANCE SHEET
(in thousands, except per share amounts)
(UNAUDITED)
MARCH 31, DECEMBER 31,
2003 2002
----------- ------------
ASSETS
Current assets:
Cash and equivalents $ 21,065 $ 25,667
Receivables, net 69,091 74,490
Inventories, net 71,102 67,448
Deferred income taxes 5,378 5,902
Other 3,603 4,268
-------- --------
Total current assets 170,239 177,775
-------- --------
Property, plant and equipment, net 75,370 76,162
Goodwill 202,441 201,761
Other intangibles, net 9,668 9,418
Deferred income taxes 2,787 3,611
Other assets 3,643 3,454
-------- --------
Total assets $464,148 $472,181
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings and current maturities
of long-term debt $ 7,500 $ 7,500
Accounts payable and accrued liabilities 63,543 70,160
-------- --------
Total current liabilities 71,043 77,660
-------- --------
Long-term debt, less current maturities 104,030 112,663
Postretirement benefits other than pensions 34,149 34,539
Other long-term liabilities 25,082 24,396
-------- --------
Total liabilities 234,304 249,258
-------- --------
Stockholders' equity:
Common stock, $0.01 par value; 50,000 shares
authorized; 16,040 shares issued and
outstanding at March 31, 2003 178 177
Capital in excess of par value 172,763 171,047
Treasury stock at cost, 1,717 shares at
March 31, 2003 (25,833) (25,819)
Retained earnings 85,183 81,664
Accumulated other comprehensive loss (2,447) (4,146)
-------- --------
Total stockholders' equity 229,844 222,923
-------- --------
Total liabilities and stockholders' equity $464,148 $472,181
======== ========
The accompanying notes are an integral part of this statement.
- 3 -
GARDNER DENVER, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(Unaudited)
THREE MONTHS ENDED
MARCH 31,
------------------------------
2003 2002
-------- --------
Cash flows from operating activities:
Net income $ 3,520 $ 4,578
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 3,546 3,548
Net loss (gain) on asset dispositions 3 (20)
Stock issued for employee benefit plans 889 603
Deferred income taxes 1,339 (164)
Changes in assets and liabilities:
Receivables 5,982 4,293
Inventories (3,433) 1,694
Accounts payable and accrued liabilities (7,100) (9,078)
Other assets and liabilities, net 606 (1,534)
-------- --------
Net cash provided by operating activities 5,352 3,920
-------- --------
Cash flows from investing activities:
Capital expenditures (2,765) (1,982)
Disposals of plant and equipment 23 41
-------- --------
Net cash used in investing activities (2,742) (1,941)
-------- --------
Cash flows from financing activities:
Principal payments on long-term debt (12,633) (12,518)
Proceeds from long-term debt 4,000 5,000
Proceeds from stock options 828 1,468
Purchase of treasury stock (14) --
Other (3) (639)
-------- --------
Net cash used in financing activities (7,822) (6,689)
-------- --------
Effect of exchange rate changes on cash and
equivalents 610 (499)
-------- --------
Decrease in cash and equivalents (4,602) (5,209)
-------- --------
Cash and equivalents, beginning of period 25,667 29,980
-------- --------
Cash and equivalents, end of period $ 21,065 $ 24,771
======== ========
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 months ended March 31, 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.
MARCH 31, DECEMBER 31,
2003 2002
--------- ------------
Raw materials, including parts and
subassemblies $35,386 $35,675
Work-in-process 11,203 9,077
Finished goods 27,024 25,355
Perishable tooling and supplies 2,457 2,456
------- -------
76,070 72,563
Excess of current standard costs
over LIFO costs (4,968) (5,115)
------- -------
Inventories, net $71,102 $67,448
======= =======
NOTE 3. GOODWILL AND OTHER INTANGIBLE ASSETS.
The changes in the carrying amount of goodwill attributable to each business
segment for the three months ended March 31, 2003, are as follows:
COMPRESSED PUMP
AIR PRODUCTS PRODUCTS
------------ --------
Balance as of December 31, 2002 $176,230 $25,531
Foreign currency translation 680 ---
-------- -------
Balance as of March 31, 2003 $176,910 $25,531
======== =======
- 5 -
Other intangible assets at March 31, 2003 consisted of the following:
GROSS CARRYING ACCUMULATED
AMOUNT AMORTIZATION
-------------- ------------
Amortized intangible assets:
Acquired technology $11,756 $(7,292)
Other 4,232 (1,985)
Unamortized intangible assets:
Trademarks 2,957 --
------- -------
Total other intangible assets $18,945 $(9,277)
======= =======
Amortization of intangible assets for the three months ended March 31, 2003,
was $0.3 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 change in the Company's accrued product warranty liability from December
31, 2002 to March 31, 2003 was as follows:
Balance as of December 31, 2002 $ 7,060
Product warranty accruals 892
Settlements (1,113)
Other (primarily foreign currency translation) 44
-------
Balance as of March 31, 2003 $ 6,883
=======
NOTE 5. EARNINGS PER SHARE.
The following table details the calculation of basic and diluted earnings
per share:
THREE MONTHS ENDED
MARCH 31,
--------------------------
2003 2002
------- -------
Basic EPS:
Net income $ 3,520 $ 4,578
======= =======
Shares:
Weighted average number of common
shares outstanding 16,010 15,757
======= =======
Basic earnings per common share $ 0.22 $ 0.29
======= =======
- 6 -
THREE MONTHS ENDED
MARCH 31,
--------------------------
2003 2002
------- -------
Diluted EPS:
Net income $ 3,520 $ 4,578
======= =======
Shares:
Weighted average number of common
shares outstanding 16,010 15,757
Assuming conversion of dilutive stock options
issued and outstanding 161 240
------- -------
Weighted average number of common
shares outstanding, as adjusted 16,171 15,997
======= =======
Diluted earnings per common share $ 0.22 $ 0.29
======= =======
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 months
ended March 31, 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
MARCH 31,
------------------
2003 2002
------- -------
Net income, as reported $ 3,520 $ 4,578
Less: Total stock-based employee compensation
expense determined under fair value method for all
awards, net of related tax effects 328 312
------- -------
Pro forma net income $ 3,192 $ 4,266
======= =======
Basic earnings per common share, as reported $ 0.22 $ 0.29
======= =======
Basic earnings per common share, pro forma $ 0.20 $ 0.27
======= =======
Diluted earnings per common share, as reported $ 0.22 $ 0.29
======= =======
Diluted earnings per common share, pro forma $ 0.20 $ 0.27
======= =======
- 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 three
months ended March 31, 2003. There was no restricted stock issued in the
prior year period.
NOTE 7. COMPREHENSIVE INCOME.
For the three months ended March 31, 2003 and 2002, comprehensive income was
$5.2 million and $2.9 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 three months of 2003 and 2002, the Company paid $0.8 million
and $0.5 million, respectively, to the various taxing authorities for income
taxes. Interest paid for the first three months of 2003 and 2002, was $1.5
million and $1.4 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 begun to be named as a defendant in an
increasing number of asbestos personal injury lawsuits. In addition, the
Company has also been named as a defendant in a number of silicosis personal
injury lawsuits. Predecessors to the Company manufactured and sold the
products allegedly at issue in these asbestos and silicosis lawsuits,
namely: (a) asbestos-containing components supplied by third parties; and
(b) portable compressors that were used as components for sandblasting
equipment manufactured and sold by other parties. Since its formation in
1993, the Company has not manufactured or sold asbestos containing products
or portable compressors. Nonetheless, these lawsuits represent potential
contingent liabilities to the Company as a result of its predecessors'
historical sales of these products.
The Company believes that these pending legal proceedings, lawsuits and
administrative actions will not, in the aggregate, have a material adverse
effect on its consolidated financial position, results of operations or
liquidity, based on: (1) the Company's anticipated insurance and
indemnification rights to address the risks of such matters; (2) the limited
risk of potential asbestos exposure from the components described above, due
to the complete enclosure of the components within the subject products and
the additional protective non-asbestos binder which encapsulated the
components; (3) the fact that neither the Company, nor its predecessors,
ever manufactured, marketed or sold sandblasting equipment; (4) various
other potential defenses available to the Company with respect to such
matters; and (5) the Company's prior disposition of comparable matters.
The Company has also been identified as a potentially responsible party with
respect to various sites designated for cleanup under various state and
federal laws. The Company does not own any of these sites. The Company does
not believe that the future potential costs related to these sites will have
a material adverse effect on its consolidated financial position, results of
operations or liquidity.
- 8 -
NOTE 10. SEGMENT INFORMATION.
THREE MONTHS ENDED
MARCH 31,
------------------------
2003 2002
---------- ---------
Revenues:
Compressed Air Products $ 87,186 $ 88,511
Pump Products 14,305 18,098
---------- ---------
Total $ 101,491 $ 106,609
========== =========
Operating Earnings:
Compressed Air Products $ 6,576 $ 7,340
Pump Products (82) 1,147
---------- ---------
Total 6,494 8,487
Interest expense 1,205 1,682
Other expense (income), net 113 (132)
---------- ---------
Income before income taxes $ 5,176 $ 6,937
========== =========
- 9 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS.
PERFORMANCE IN THE QUARTER ENDED MARCH 31, 2003 COMPARED WITH
THE QUARTER ENDED MARCH 31, 2002
Revenues
Revenues decreased $5.1 million to $101.5 million for the three months ended
March 31, 2003, compared to $106.6 million in the same period of 2002
primarily due to lower revenues in the Pump Products segment.
For the three months ended March 31, 2003, revenues for the Compressed Air
Products segment decreased $1.3 million (1%) to $87.2 million, compared to
the same period of 2002. Excluding the favorable impact of changes in
foreign currency exchange rates, revenues in this segment decreased $5.6
million (6%) due to a softer U.S. industrial economy, which weakened demand
for domestic compressors and blowers. Pump Products segment revenues
declined $3.8 million (21%) to $14.3 million for the three months ended
March 31, 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
Gross margin (defined as sales less cost of sales excluding depreciation and
amortization) for the three months ended March 31, 2003 decreased $1.3
million (4%) to $30.7 million compared to the same period of 2002. Gross
margin as a percentage of revenues (gross margin percentage) increased to
30.3% in the three-month period of 2003 from 30.0% in the same period of
2002. This increase in the gross margin percentage was principally
attributable to an overall favorable sales mix change (in part relating to
decreased pump product sales) and ongoing cost reduction projects, including
acquisition integration efforts. These positive factors were partially
offset by incremental costs to expedite castings from new suppliers as a
result of the closure of the Company's largest supplier of iron castings
(see further discussion in the "Outlook" section below).
Selling and administrative expenses increased in the three-month period of
2003 by 4% to $20.7 million from $20.0 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 1% due to cost reduction
efforts, including acquisition integration efforts. These cost reductions
were partially offset by higher compensation and fringe benefit costs.
Selling and administrative expenses as a percentage of revenues increased to
20.4% for the three-month period of 2003 compared to 18.7% in 2002 primarily
as a result of the decline in revenues and higher compensation and fringe
benefit costs.
Other expense (income), net decreased $0.2 million compared to the prior
year period primarily due to foreign currency translation losses generated
from U.S. dollar denominated balances of
- 10 -
foreign subsidiaries in 2003. Transaction gains were recorded on these
balances in 2002 due to favorable changes in foreign currency exchange
rates.
The Compressed Air Products segment generated operating margins (defined as
revenues, less cost of sales, depreciation and amortization, and selling and
administrative expenses) of 7.5% for the three-month period ended March 31,
2003, a decrease from 8.3% for the same period of 2002. This decrease was
primarily attributable to higher compensation and fringe benefit costs,
shipment of lower margin engineered packages and incremental costs to
expedite castings from new suppliers. These negative factors were partially
offset by cost reduction efforts, including the integration of an acquired
facility into the Company's existing operations in Peachtree City, GA.
The Pump Products segment generated an operating loss of 0.6% of revenues
for the three-month period ended March 31, 2003, compared to an operating
margin of 6.3% 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 operating loss were higher compensation and fringe benefit costs and an
unfavorable sales mix stemming from a lower percentage of sales from
drilling pumps which carry higher margins than other pump products.
Interest expense decreased $0.5 million (28%) to $1.2 million for the three
months ended March 31, 2003, compared to $1.7 million for the same period of
2002 due to lower average borrowings. The average interest rate for both
three-month periods was 4.1%.
Income before income taxes decreased $1.8 million (25%) to $5.2 million for
the three months ended March 31, 2003, compared to the same period of 2002.
This decrease is primarily the result of decreased leverage of fixed costs
over a lower revenue base for both segments and higher compensation and
fringe benefit costs. These negative factors were partially offset by cost
reduction efforts, including acquisition integration and favorable changes
in foreign currency rates.
The provision for income taxes decreased by $0.7 million to $1.7 million for
the three-month period of 2003, compared to $2.4 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 March 31,
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 March 31, 2003 decreased $1.1 million
(23%) to $3.5 million ($0.22 diluted earnings per share), compared to $4.6
million ($0.29 diluted earnings per share) for the same period of 2002. This
decrease in net income is 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
- 11 -
first quarter of 2003, orders for compressed air products were $93.1
million, compared to $88.5 million in the same period of 2002. Order backlog
for the Compressed Air Products segment was $65.4 million as of March 31,
2003, compared to $56.2 million as of March 31, 2002. The increase in orders
and backlog compared to the prior year is primarily due to favorable changes
in foreign currency exchange rates. Order backlog for this segment was up
$6.8 million (12%) from the December 31, 2002 level, primarily due to
increased demand in wastewater treatment and additional penetration of the
European and Asian markets.
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 $20.7 million in the first
quarter of 2003, an increase of $7.3 million compared to the same period of
2002. This increase can primarily be attributed to increasing international
drilling pump activity. Compared to March 31, 2002, backlog for this
business segment decreased $2.7 million to $13.1 million on March 31, 2003,
primarily due to the significant backlog in the first quarter of 2002, which
was carried over from 2001 orders. Compared to December 31, 2002, backlog
for pump products increased $6.5 million (98%) due to the increased
international activity noted above. 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.
The Company's largest supplier of iron castings, Atchison Casting
Corporation ("Atchison") announced in August 2002 that it would downsize its
LaGrange, Missouri foundry ("LaGrange Foundry"), ceasing production and
focusing the facility on pattern repair, maintenance and storage. Atchison
later decided to completely close this facility. As a result of the
announced downsizing, the Company began to implement its previously
developed contingency plan to secure alternate supply sources. The Company
does not anticipate that the downsizing 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. The most
significant aspects of this change have been completed and the Company
expects to benefit going forward from reduced material costs from alternate
suppliers, although the Company expects it will have to address lingering
problems over the balance of the year.
LIQUIDITY AND CAPITAL RESOURCES
Operating Working Capital
During the three months ended March 31, 2003, operating working capital
(defined as receivables plus inventories, less accounts payable and accrued
liabilities) increased $4.9 million due to lower accounts payable and
accrued liabilities and higher inventories partially offset by lower
receivables. The lower accounts payable and accrued liabilities and
receivables are primarily due to reduced activity levels. Improved
collections and more favorable terms also contributed significantly to the
decrease in receivables. Additions to inventory resulted from positioning
long lead-time orders in backlog and increases related to iron casting
supply disruptions.
Cash Flows
During the first three months of 2003, the Company generated cash from
operations totaling $5.4 million, compared to $3.9 million in the prior year
period. This change is primarily due to a more favorable change in
receivables, accounts payable and accrued liabilities and other assets
- 12 -
and liabilities, which was partially offset by an unfavorable change in
inventories and lower net income. Net payments on long-term debt totaled
$8.6 million during the three months ended March 31, 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 $4.6 million for the three months
ended March 31, 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 $2.8 million in the first three months of 2003. This was
$0.8 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 March 31, 2003 totaled $7.6 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 March 31, 2003, a total of 1,572,542 shares have been
repurchased at a cost of $22.8 million under both repurchase programs.
Liquidity
On March 6, 2002, the Company amended and restated its Revolving Line of
Credit Agreement (the "Credit Line"), increasing the borrowing capacity to
$150 million and extending the maturity date to March 6, 2005. Subject to
approval by lenders holding more than 75% of the debt, the Company may
request up to two, one-year extensions. The total debt balance will be due
upon final maturity. On March 31, 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 the 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 March 31, 2003, the Term Loan had an outstanding principal balance of
$47.5 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.
- 13 -
CONTINGENCIES
The Company is a party to various legal proceedings, lawsuits and
administrative actions, which are of an ordinary or routine nature. Due to
the bankruptcies of several asbestos manufacturers and other primary
defendants, the Company has begun to be named as a defendant in an
increasing number of asbestos personal injury lawsuits. In addition, the
Company has also been named as a defendant in a number of silicosis personal
injury lawsuits. Predecessors to the Company manufactured and sold the
products allegedly at issue in these asbestos and silicosis lawsuits,
namely: (a) asbestos-containing components supplied by third parties; and
(b) portable compressors that were used as components for sandblasting
equipment manufactured and sold by other parties. Since its formation in
1993, the Company has not manufactured or sold asbestos containing products
or portable compressors. Nonetheless, these lawsuits represent potential
contingent liabilities to the Company as a result of its predecessors'
historical sales of these products.
The Company believes that these pending legal proceedings, lawsuits and
administrative actions will not, in the aggregate, have a material adverse
effect on its consolidated financial position, results of operations or
liquidity, based on: (1) the Company's anticipated insurance and
indemnification rights to address the risks of such matters; (2) the limited
risk of potential asbestos exposure from the components described above, due
to the complete enclosure of the components within the subject products and
the additional protective non-asbestos binder which encapsulated the
components; (3) the fact that neither the Company, nor its predecessors,
ever manufactured, marketed or sold sandblasting equipment; (4) various
other potential defenses available to the Company with respect to such
matters; and (5) the Company's prior disposition of comparable matters.
The Company has also been identified as a potentially responsible party with
respect to various sites designated for cleanup under various state and
federal laws. The Company does not own any of these sites. The Company does
not believe that the future potential costs related to these sites will have
a material adverse effect on its consolidated financial position, results of
operations or liquidity.
NEW ACCOUNTING STANDARDS
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations," which requires entities to record the fair value of a
liability associated with an asset retirement in the period in which it is
incurred. The adoption of this standard on January 1, 2003, did not have a
material impact to the Company's financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an Amendment of FASB Statement
No. 123." SFAS No. 148 provides alternative methods of transition for a
voluntary change to the fair value based method of accounting for
stock-based employee compensation. In addition, the statement amends the
disclosure requirements of SFAS 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on
reported results. The Company has adopted SFAS No. 148 and included the
required interim disclosures in Note 6 to the condensed consolidated
financial statements.
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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 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 due to the LaGrange Foundry closure 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 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 continued 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.
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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 March 31, 2003.
ITEM 4. CONTROLS AND PROCEDURES
During the 90-day period prior to the filing date of this report,
management, including the Company's Chairman, President and Chief Executive
Officer and Vice President, Finance and Chief Financial Officer, evaluated
the effectiveness of the design and operation of the Company's disclosure
controls and procedures. Based upon, and as of the date of that evaluation,
the Chairman, President and Chief Executive Officer and Vice President,
Finance and Chief Financial Officer concluded that the disclosure controls
and procedures were effective to provide reasonable assurance that
information required to be disclosed in the reports the Company files and
submits under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported as and when required.
There have been no significant changes in the Company's internal controls or
in other factors which could significantly affect internal controls
subsequent to the date the Company carried out its evaluation. There were no
significant deficiencies or material weaknesses identified in the evaluation
and therefore, no corrective actions were taken.
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits:
10.7 Gardner Denver, Inc. Executive Stock Repurchase Program,
as amended May 6, 2003.
99.1 Certification of Chief Executive Officer pursuant to
section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer pursuant to
section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
On April 23, 2003, Gardner Denver, Inc. filed an 8-K to furnish its
press release announcing the Company's earnings for the three
months ended March 31, 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: May 8, 2003 By: /s/Ross J. Centanni
---------------------------------------
Ross J. Centanni
Chairman, President & CEO
Date: May 8, 2003 By: /s/Philip R. Roth
---------------------------------------
Philip R. Roth
Vice President, Finance & CFO
Date: May 8, 2003 By: /s/Daniel C. Rizzo, Jr.
---------------------------------------
Daniel C. Rizzo, Jr.
Vice President and Corporate
Controller (Chief Accounting Officer)
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CERTIFICATIONS
CERTIFICATIONS OF PRINCIPAL EXECUTIVE OFFICER
I, Ross J. Centanni, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Gardner
Denver, Inc.;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statement made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
any significant changes in internal controls or in other
factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
By: /s/ Ross J. Centanni
--------------------
Ross J. Centanni
Chairman, President & CEO
May 8, 2003
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CERTIFICATIONS OF PRINCIPAL FINANCIAL OFFICER
I, Philip R. Roth, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Gardner
Denver, Inc.;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statement made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
any significant changes in internal controls or in other
factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
By: /s/ Philip R. Roth
------------------
Philip R. Roth
Vice President, Finance & CFO
May 8, 2003
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GARDNER DENVER, INC.
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
10.7 Gardner Denver, Inc. Executive Stock Repurchase Program, as amended May 6, 2003.
99.1 Certification of Chief Executive Officer pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
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