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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
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.
(FORMERLY KNOWN AS GARDNER DENVER MACHINERY 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
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Number of shares outstanding of the issuer's Common Stock, par value
$.01 per share, as of November 10, 1998: 16,081,988 shares.
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
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GARDNER DENVER, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(dollars in thousands, except per share amounts)
(Unaudited)
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
1998 1997
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<S> <C> <C>
Revenues $96,605 $76,451
Costs and Expenses:
Cost of sales (excluding depreciation
and amortization) 64,024 50,709
Depreciation and amortization 3,458 2,614
Selling and administrative expenses 13,407 10,099
Interest expense 1,287 1,235
Other expense 188 130
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Income before income taxes 14,241 11,664
Provision for income taxes 5,493 4,699
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Net income $ 8,748 $ 6,965
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Basic earnings per share $ 0.54 $ 0.46
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Diluted earnings per share $ 0.52 $ 0.44
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The accompanying notes are an integral part of this statement.
</TABLE>
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<TABLE>
GARDNER DENVER, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(dollars in thousands, except per share amounts)
(Unaudited)
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1998 1997
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<S> <C> <C>
Revenues $289,906 $211,973
Costs and Expenses:
Cost of sales (excluding depreciation
and amortization) 193,553 140,905
Depreciation and amortization 9,574 7,064
Selling and administrative expenses 40,099 28,752
Interest expense 3,852 3,147
Other expense 466 130
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Income before income taxes 42,362 31,975
Provision for income taxes 16,333 12,873
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Net income $ 26,029 $ 19,102
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Basic earnings per share $ 1.62 $ 1.27
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Diluted earnings per share $ 1.56 $ 1.21
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The accompanying notes are an integral part of this statement.
</TABLE>
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<TABLE>
GARDNER DENVER, INC.
CONSOLIDATED BALANCE SHEET
(dollars in thousands, except per share amounts)
(Unaudited)
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
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<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 19,274 $ 8,831
Receivables, net 77,740 62,307
Inventories, net 60,247 48,324
Deferred income taxes 5,348 2,784
Other 3,146 2,637
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Total current assets 165,755 124,883
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Property, plant and equipment, net 54,846 37,530
Intangibles, net 112,242 85,524
Deferred income taxes 12,607 15,845
Other assets 4,439 5,356
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Total assets $349,889 $269,138
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 303 $ 459
Accounts payable and accrued liabilities 69,206 58,471
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Total current liabilities 69,509 58,930
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Long-term debt, less current maturities 83,053 51,227
Postretirement benefits other than pensions 50,004 52,977
Other long-term liabilities 5,253 2,393
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Total liabilities 207,819 165,527
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Stockholders' equity:
Common stock, $.01 par value; 50,000,000 shares
authorized; 16,204,808 shares issued and
outstanding at September 30, 1998 162 154
Capital in excess of par value 152,562 139,524
Treasury stock at cost, 44,793 shares at
September 30, 1998 (1,033) (333)
Retained deficit (7,470) (33,432)
Cumulative translation adjustments (2,151) (2,302)
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Total stockholders' equity 142,070 103,611
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Total liabilities and stockholders' equity $349,889 $269,138
======== ========
The accompanying notes are an integral part of this statement.
</TABLE>
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<TABLE>
GARDNER DENVER, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(dollars in thousands)
(Unaudited)
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1998 1997
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<S> <C> <C>
Cash flows from operating activities:
Net income $ 26,029 $ 19,102
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 9,574 7,064
Stock issued for employee benefit plans 1,408 1,075
Deferred income taxes 1,038 (1,736)
Changes in assets and liabilities:
Receivables (5,260) (8,920)
Inventories 641 4,834
Accounts payable and accrued liabilities (3,023) 8,251
Other assets and liabilities, net (2,666) (2,697)
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Net cash provided by operating activities 27,741 26,973
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Cash flows from investing activities:
Business acquisitions, net of cash acquired (37,578) (27,369)
Foreign currency hedging transactions 960 --
Capital expenditures (11,911) (4,561)
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Net cash used for investing activities (48,529) (31,930)
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Cash flows from financing activities:
Principal payments on long-term debt (36,877) (17,541)
Proceeds from long-term borrowings 67,450 23,000
Debt issuance costs (67) --
Proceeds from stock options 438 792
Other (67) --
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Net cash provided by financing activities 30,877 6,251
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Effect of exchange rate changes 354 61
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Increase in cash and equivalents 10,443 1,355
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Cash and equivalents, beginning of period 8,831 8,610
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Cash and equivalents, end of period $ 19,274 $ 9,965
======== ========
The accompanying notes are an integral part of this statement.
</TABLE>
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NOTES TO FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
Basis of Presentation. The accompanying 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. Investments in
entities in which the Company has twenty to fifty percent ownership are
accounted for by the equity method.
All shares of common stock and per share amounts have been adjusted to
give retroactive effect to a three-for-two stock split distributed on
December 29, 1997 to stockholders of record at the close of business on
December 8, 1997, effected in the form of a stock dividend.
The financial information presented as of any date other than December
31 has been prepared from the books and records without audit. The
accompanying consolidated financial statements have been prepared in
accordance with the instructions to Form 10-Q and do not include all of
the information and the 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.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of asset and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
These 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, 1997.
The results of operations for the nine months ended September 30, 1998
are not necessarily indicative of the results to be expected for the
full year.
Financial Instruments. Off balance sheet derivative financial
instruments as of September 30, 1998 consist of an interest rate swap
agreement used to fix interest rates on floating rate debt. Included
on the balance sheet is a foreign currency forward contract in Finnish
Marka to hedge foreign currency translation risk associated with the
Company's investment in its Finnish subsidiary, Oy Tamrotor Ab
("Tamrotor"). The contract is marked to market and both unrealized and
realized gains and losses are included in the cumulative translation
adjustments component of stockholders' equity.
NOTE 2. ACQUISITIONS.
On June 30, 1997, the Company purchased 100% of the issued and
outstanding stock of Tamrotor, a subsidiary of Tamrock Corporation
located in Tampere, Finland, for approximately $26.2 million. The
purchase price was allocated to assets and liabilities based on their
respective
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fair values at the date of acquisition, and resulted in cost in excess
of net assets acquired of $15.4 million.
On January 5, 1998, the Company purchased substantially all of the
assets and assumed certain agreed upon liabilities of Geological
Equipment Corporation ("Geoquip"), located in Fort Worth, Texas for
approximately $12.0 million. The purchase price was paid in cash
($1.5 million) and 430,695 shares of Gardner Denver common stock.
The Company also paid approximately $2 million to acquire patents,
previously owned by Geoquip shareholders, for products manufactured by
Geoquip. The purchase price was allocated to assets and liabilities
based on their respective fair values at the date of acquisition and
resulted in cost in excess of net assets acquired of $8.4 million.
On January 29, 1998, the Company purchased substantially all of the
assets and assumed certain agreed upon liabilities of Champion
Pneumatic Machinery Company, Inc. ("Champion"), a subsidiary of CRL
Industries, Inc., for approximately $23.5 million. Champion is located
in Princeton, Illinois. The purchase price was allocated to assets and
liabilities based on their respective fair values at the date of
acquisition and resulted in cost in excess of net assets acquired of
$16.8 million.
On March 9, 1998, the Company purchased substantially all of the assets
and assumed certain agreed upon liabilities of the Wittig Division of
Mannesmann Demag A.G. ("Wittig") for approximately $10.5 million.
Wittig is located in Schophfeim, Germany. The purchase price was
allocated to assets and liabilities based on their respective fair
values at the date of acquisition and resulted in cost in excess of net
assets acquired of $1.3 million.
As a result of the stability of the product technology, markets and
customers associated with these four acquisitions, the cost in excess
of net assets acquired for each acquisition is being amortized over
40 years using the straight-line method.
All acquisitions have been accounted for by the purchase method, and
accordingly, the results of operations of Tamrotor, Geoquip, Champion
and Wittig are included in the Company's Consolidated Statement of
Operations from the dates of acquisition. Certain estimates of fair
market value of assets received and liabilities assumed were made with
adjustments to each separate company's historical financial statements.
The estimates and adjustments for the acquisitions of Geoquip,
Champion and Wittig have not been finalized.
NOTE 3. INCOME TAXES.
In the first nine months of 1998 and 1997, the Company paid
$16.4 million and $11.2 million, respectively, to the various taxing
authorities and recognized $16.3 million and $12.9 million,
respectively, in income tax expense.
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NOTE 4. INVENTORIES.
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<CAPTION>
September 30, December 31,
1998 1997
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<S> <C> <C>
Raw materials, including parts and
subassemblies $ 57,504 $ 47,992
Work-in-process 13,435 9,667
Finished goods 15,932 11,003
Perishable tooling and supplies 2,571 2,571
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89,442 71,233
Excess of current standard costs
over LIFO costs (12,045) (10,964)
Allowance for obsolete and slow-
moving inventory (17,150) (11,945)
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Inventories, net $ 60,247 $ 48,324
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</TABLE>
NOTE 5. LONG-TERM DEBT AND OTHER BORROWING ARRANGEMENTS.
Long-term debt at September 30, 1998 consisted of certain notes and
credit facilities due between 2000 and 2018. In September 1996, the
Company entered into an unsecured senior note agreement for $35
million. This debt has a ten-year final, seven-year average maturity
with principal payments beginning in 2000. In January 1998, the
Company refinanced its existing bank debt with an unsecured five-year
revolving loan. The total credit line available on the revolving loan
is $125 million, of which $87 million remained available for additional
borrowings or to issue as letters of credit at September 30, 1998. The
revolving loan will mature on January 20, 2003. On April 23, 1998, the
Fayette County Development Authority issued $9.5 million in Industrial
Revenue Bonds, on behalf of the Company, to finance the cost of
constructing and equipping the Company's new manufacturing facility in
Peachtree City, Georgia. These variable rate bonds mature on March 1,
2018. Maturities of long-term debt for the five years subsequent to
September 30, 1998 are $0.3 million for 1999; $5.3 million for 2000;
$5.3 million for 2001; $5.1 million for 2002; and $42.9 million for
2003.
Total interest expense during the first nine months of 1998 and 1997
totaled $3.9 and $3.1 million, respectively. Interest paid for the
first nine months of 1998 totaled $3.2 million, while the interest paid
for the first nine months of 1997 was $2.6 million.
NOTE 6. EARNINGS PER SHARE.
The 1998 and 1997 basic earnings per share for the three month period
ended September 30 were calculated based on 16,184,252 and 15,084,546
weighted average shares outstanding, respectively. The 1998 and 1997
basic earnings per share for the nine month period ended September 30
were calculated based on 16,079,777 and 14,984,660 weighted average
shares outstanding, respectively. The 1998 and 1997 diluted earnings
per share for the three month period ended September 30 were calculated
based on 16,675,874 and 15,882,348 weighted average shares outstanding.
The 1998 and 1997 diluted earnings per share for the nine month
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period ended September 30 were calculated based on 16,673,249 and
15,786,560 weighted average shares outstanding.
Basic and diluted weighted average shares outstanding were adjusted for
the stock split effected on December 29, 1997. The basic and diluted
earnings per share were calculated in accordance with Statement of
Financial Accounting Standards 128 ("SFAS 128").
NOTE 7. INTEREST RATE SWAP AGREEMENTS.
At September 30, 1998, the Company had an interest rate swap agreement
with a commercial bank (the "Counter Party") outstanding, having a
notional principal amount of $15 million. The swap provides a fixed
interest rate of 6%. The interest rate swap terminates in November
1998. The Company is exposed to credit loss in the event of
nonperformance by the Counter Party to the interest rate swap
agreement. However, the Company does not anticipate such
nonperformance.
NOTE 8. COMPREHENSIVE INCOME.
In June 1997, the Financial Accounting Standards Board (FASB) adopted
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income," which establishes standards for reporting and
disclosure of comprehensive income and its components. Effective
January 1, 1998, the Company adopted SFAS No. 130. For the nine months
ended September 30, 1998 and 1997, comprehensive income was $26.2
million and $16.8 million, respectively. For the three months ended
September 30, 1998 and 1997, comprehensive income was $8.8 million and
$4.6 million, respectively. Items impacting the Company's
comprehensive income, but not included in net income, consist of
changes in cumulative translation adjustments and the realized and
unrealized gains and losses on the foreign currency hedge of the
Company's investment in a foreign subsidiary.
NOTE 9. NEW ACCOUNTING STANDARDS.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The Statement establishes
accounting and reporting standards requiring that every derivative
instrument be recorded in the balance sheet as either an asset or
liability, measured at its fair value. The Statement requires that
changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses
to offset related results on the hedged item in the income statement,
and requires that a company must formally document, designate, and
assess the effectiveness of transactions that receive hedge accounting.
SFAS No. 133 is effective for fiscal years beginning after June 15,
1999 and will be adopted at that time. The Company has reviewed its
current derivative instruments and hedging activities and has
determined that the adoption of SFAS No. 133 would not have a material
impact on its financial statements as of September 30, 1998.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS.
Revenues
Revenues increased $77.9 million (37%) to $289.9 million for the nine
months ended September 30, 1998, compared to the same period of 1997.
Incremental revenues from acquisitions completed since June 1997
contributed $61.0 million of this increase. Excluding acquisitions,
revenues increased $16.9 million (8%) over the same period of 1997. See
Note 2 to the Financial Statements for further information on the
Company's recent acquisitions.
For the nine months ended September 30, 1998, revenues for the
Compressed Air Products segment increased $57.6 million (35%) to $223.4
million compared to the same period of 1997. Excluding acquisitions,
which contributed $53.4 million, compressed air product revenues
increased $4.2 million (3%), primarily related to growth in the U.S.
economy and penetration of niche markets such as field gas gathering.
Petroleum Products segment revenues increased $20.3 million (44%) in the
nine months ended September 30, 1998, compared to the same period of
1997. An acquisition contributed $7.6 million of this increase.
Excluding this acquisition, petroleum products revenues increased $12.7
million (28%), primarily as a result of shipping drilling pumps from the
order backlog that existed at the end of the previous year.
For the three months ended September 30, 1998, revenues were $96.6
million, compared to $76.5 million in the same period of 1997.
Approximately $18.5 million of this increase is attributable to
incremental revenues from acquisitions which the Company completed in
1998. Excluding incremental revenues from acquisitions, revenues
increased approximately $1.6 million (2%) for the quarter, compared to
the same period of 1997.
Revenues for the Compressed Air Products segment increased $16.0 million
(27%) to $75.3 million for the quarter ended September 30, 1998,
compared to $59.3 million for the same period of 1997, primarily as a
result of incremental revenues from acquisitions. Excluding incremental
acquisition revenues, which generated $15.7 million of the increase,
compressed air product revenues increased $0.3 million (1%) in the three
month period compared to the previous year. Petroleum Products segment
revenues increased 24% to $21.3 million for the quarter ended September
30, 1998, compared to the same period of 1997. Incremental revenues
from an acquisition generated $2.8 million of the $4.1 million increase
in petroleum products revenues. The remaining increase resulted
primarily from shipping products from the order backlog that existed at
the end of the previous quarter.
Costs and Expenses
Gross margin (defined as sales less cost of sales excluding depreciation
and amortization) for the nine month period ended September 30, 1998
increased $25.3 million (36%) to $96.4 million from $71.1 million in the
same period of 1997. Gross margin as a percentage of revenues (gross
margin percentage) decreased to 33.2% in the nine month period of 1998
from 33.5% in the same period of 1997. Excluding the effect of the
acquisitions, the gross margin percentage increased
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to 34.1%. For the third quarter of 1998, gross margin increased $6.9
million (27%) to $32.6 million from $25.7 million in the same period of
1997. The gross margin percentage remained flat at 33.7% in the third
quarter of 1998 compared to the same period of 1997. Excluding the
effect of the acquisitions, the gross margin percentage increased to
34.7% in the third quarter of 1998. Increases in gross margin, for both
the three and nine month periods ended September 30, 1998, are primarily
attributable to increased volume, with some improvement resulting from
cost reduction efforts such as manufacturing process improvements,
increased leverage of production overhead costs and price increases for
petroleum products which were implemented in 1997. These positive
factors were partially offset by incremental expenses related to a plant
relocation, which is expected to be completed in the fourth quarter of
1998, and the negative effects of inflation.
Depreciation and amortization increased 36% to $9.6 million in the
first nine months of 1998, compared with $7.1 million for the same
period of 1997. For the third quarter, depreciation and amortization
increased 32% to $3.5 million, compared with $2.6 million for the same
period of 1997. The increases in depreciation and amortization expense
in both the three and nine month periods, compared to the previous year,
were due to the acquisitions and ongoing capital expenditures.
Depreciation and amortization as a percentage of revenues was 3.6% and
3.3% for the respective three and nine month periods of 1998, which was
relatively unchanged from the comparable periods of 1997.
Selling and administrative expenses increased in the first nine months
of 1998 by 40% to $40.1 million from $28.8 million for the same period
of 1997. Approximately $9.9 million of the $11.3 million increase is
attributable to newly acquired operations. For the third quarter of
1998, selling and administrative expenses increased 33% to $13.4 million
from $10.1 million in the same period of 1997, primarily due to newly
acquired operations. As a percentage of revenues, selling and
administrative expenses were 13.9% and 13.8% for the respective three
and nine month periods of 1998, which were somewhat higher than the
comparable periods of 1997. The increases are due primarily to expenses
related to a plant and division headquarters relocation, which is
planned to be completed in the fourth quarter of 1998, and to recently
acquired operations.
The Petroleum Products segment generated operating margins (defined as
revenues, less cost of sales, depreciation and amortization, and selling
and administrative expenses excluding unallocated corporate
administrative expenses) of 23.9% and 23.7% for the three and nine month
periods ended September 30, 1998, respectively, as compared to 23.5% and
20.3% for the comparable three and nine month periods of 1997. These
improved operating margins were primarily the result of significant
volume increases in petroleum product revenues, as this segment has
improved the leverage of its manufacturing operations and administrative
expenses, and price increases implemented in the second half of 1997.
The Compressed Air Products segment generated operating margins of 14.7%
and 14.5% for the three and nine month periods ended September 30, 1998,
respectively, as compared to 15.8% and 16.2% for the comparable three
and nine month periods of 1997. The deterioration in operating margins
(as a percentage of revenues) for the three and nine month periods as
compared to the prior year is primarily due to newly acquired operations
which currently generate a lower operating margin (after amortization of
goodwill associated with the acquisitions) than that of the Company's
previously existing
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operations, combined with the incurrence by the Company of expenses
associated with a plant and division headquarters relocation which is
planned to be completed in the fourth quarter of 1998. Excluding the
incremental effect of acquisitions completed this year, the operating
margin for compressed air products would have increased to 16.7% in the
third quarter of 1998.
Interest expense increased $0.7 million (22%) for the nine month period
of 1998 compared to the same period of 1997, due to incremental debt
incurred for the acquisitions. The average interest rate for the nine
month period of 1998 was 6.1% compared to 7.3% for the same period of
1997, primarily due to lower interest rates on incremental 1998
borrowings. During the third quarter of 1998, interest expense
increased $0.1 million (4%) to $1.3 million compared to the same period
in 1997. See Note 5 to the Financial Statements for further information
on the Company's borrowing arrangements.
Income before income taxes improved $10.4 million (33%) for the nine
months ended September 30, 1998, compared to the same period of 1997.
Approximately $2.5 million of this increase is attributable to the
acquisitions, net of interest expense on debt incurred to complete the
acquisitions and the related amortization of goodwill. The remaining
$7.9 million increase is primarily a result of incremental revenues,
improved gross margin, increased leverage of costs and lower interest
expense (excluding debt related to acquisitions) in 1998 compared to the
previous year. Income before income taxes improved $2.6 million (22%)
for the third quarter of 1998, compared to the same period in 1997.
Approximately $1.0 million of this increase is attributable to the
acquisitions, net of interest expense on debt incurred to complete the
acquisitions and the related amortization of goodwill. The remaining
$1.6 million increase is attributable to incremental revenues, improved
operating performance and lower interest expense (excluding debt related
to acquisitions) as discussed earlier.
Compared to 1997, the provision for income taxes increased by $3.4
million to $16.3 million for the first nine months of 1998 and by $0.8
million to $5.5 million for the third quarter of 1998, as a result of
the increase in income before taxes partially offset by a reduction in
the Company's overall effective tax rate. The Company's effective tax
rate for the three and nine month periods ended September 30, 1998 was
38.6%, compared to 40.3% for the respective periods of 1997. The lower
effective tax rate in 1998 is due to the tax savings from the Foreign
Sales Corporation (the "FSC"), the lower statutory tax rate in Finland
compared to the U.S., and the implementation of other tax strategies,
partly offset by an increase in nondeductible goodwill resulting from
some of the acquisitions.
Net income for the nine months ended September 30, 1998 increased
$6.9 million (36%) to $26.0 million ($1.56 diluted earnings per share),
compared to $19.1 million ($1.21 diluted earnings per share) for the
same period of 1997. Acquisitions provided $1.6 million ($0.10
diluted earnings per share) of the net income increase in the nine month
period of 1998. The remaining $5.3 million ($0.25 diluted earnings per
share) increase is a result of volume growth, price increases for
petroleum products and increased leverage of manufacturing costs and
administrative expenses as volume increased. Net income for the third
quarter of 1998 increased $1.7 million (26%) to $8.7 million ($0.52
diluted earnings per share) from $7.0 million ($0.44 diluted earnings
per share) for the same period in 1997. Net income for the third
quarter of 1998 included approximately $0.6 million ($0.03 diluted
earnings per share) in incremental income
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from acquisitions. Excluding the incremental income from acquisitions,
net income increased $1.1 million (17%) for the quarter, a $0.05 diluted
earnings per share improvement, as a result of the same factors that led
to the increase in net income for the nine month period of 1998.
Outlook
Demand for petroleum products correlates with the prices of oil and
natural gas. During the third quarter of 1998, demand for the Company's
petroleum products reached its lowest level of the previous twelve
months as a result of the decline in the prices of oil and natural gas.
Orders for petroleum products were $5.8 million in the third quarter,
including $1.5 million from acquisitions, a decrease of $14.7 million
compared to the same period of 1997. For the first nine months of 1998,
petroleum product orders were $42.5 million, including $5.4 million from
acquisitions, a decrease of $7.7 million from the comparable 1997
period. Compared to September 30, 1997, backlog for this business
segment declined $1.9 million to $12.8 million on September 30, 1998,
which included $1.8 million from acquisitions. Future increases in
demand for these products is dependent upon further appreciation in oil
and natural gas prices.
In general, demand for compressed air products follows economic growth
patterns as indicated by the rate of change in GDP and industrial
production. In the third quarter of 1998, orders for compressed air
products were $68.8 million. With the exception of centrifugal blowers,
orders for the Company's compressed air products, including $15.3
million from acquisitions, increased $7.3 million in the third quarter
of 1998 as compared to the same period of 1997. Demand for centrifugal
blowers was negatively impacted by the impending relocation of the
manufacturing facility to Peachtree City, Georgia from Syracuse, New
York. For the nine month period ended September 30, 1998, orders for
compressed air products, including $50.2 million from acquisitions,
increased $29.4 million to $203.3 million as compared to the same period
of 1997. Backlog for this business segment was $45.1 million as of
September 30, 1998, including $4.3 million from acquisitions, compared
to $50.8 million as of September 30, 1997.
Despite the slowing in order rates, the Company currently expects 1998
fourth quarter diluted earnings per share, which is expected to include
a annual adjustment for LIFO inventory reductions, to exceed the
earnings per share for both the third quarter of 1998 ($0.52 diluted
earnings per share) and the fourth quarter of 1997 ($0.53 diluted
earnings per share). At present, the Company anticipates cost reduction
efforts and the financial benefits of completing acquisition integration
projects to enhance profitability in 1999, but not sufficiently to
offset decreased profits from a reduction in petroleum product revenues
resulting from depressed demand. Accordingly, based on the Company's
current economic outlook, the Company anticipates that diluted earnings
per share will be approximately 10% less in 1999 than in 1998, exclusive
of any effect of fewer shares outstanding resulting from the repurchase
of its common stock.
LIQUIDITY AND CAPITAL RESOURCES
Operating Working Capital
During the nine months ended September 30, 1998, operating working
capital (defined as receivables plus inventories, less accounts payable
and accrued liabilities) increased $16.6
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<PAGE>
million to $68.8 million, with acquisitions completed in 1998 causing
$10.9 million of this increase. Receivables increased $15.4 million
from the end of 1997, with $13.0 million of the increase attributable to
the 1998 acquisitions, and the remaining increase due to higher revenues
in August and September of 1998 as compared to November and December of
1997. Inventories and accounts payable and accrued liabilities
increased $11.9 million and $10.7 million, respectively, as compared to
December 31, 1997, primarily as a result of the 1998 acquisitions.
Cash Flows
During the nine months of 1998, the Company generated cash flows from
operations totaling $27.7 million, an increase of $0.8 million (3%)
compared to the same period in 1997. This increase was primarily the
result of incremental net income and increased depreciation and
amortization, offset by an increase in operating working capital as
compared to the 1997 period. During the nine month period, the Company
borrowed $18.0 million under a new revolving credit facility and
utilized the funds to repay all outstanding commitments under its
previous credit facility. The Company also borrowed $40.0 million to
finance the purchase of acquisitions, and issued $10.5 million of its
common stock to fund a portion of the purchase price for Geoquip. In
April of 1998, the Fayette County Development Authority issued $9.5
million in Industrial Revenue Bonds on the Company's behalf to finance
the construction of the Peachtree City, Georgia facility, as discussed
below. Cash flows from the above discussed items enabled the Company to
expend $11.9 million on capital expenditures and repay $36.9 million of
long-term debt, resulting in an increase in the cash balance of $10.4
million as of September 30, 1998.
Capital Expenditures and Commitments
Capital projects to increase operating efficiency and flexibility,
expand production capacity and product quality resulted in expenditures
of $11.9 million in the first nine months of 1998. This was $7.3
million higher than the level of capital expenditures in the comparable
period in 1997. Most of the increase was due to expenditures made for
production equipment and construction of the new manufacturing facility
in Peachtree City, Georgia. Commitments for capital expenditures at
September 30, 1998 totaled $10.7 million. Management expects additional
capital authorizations to be committed during the remainder of the year
and that capital expenditures for 1998 will approximate $18 to $21
million, primarily due to the construction of the new facility in
Georgia, expenditures made at newly acquired facilities and for capacity
expansion and cost reductions at other operations.
In 1997, the Company announced that it will close its centrifugal blower
manufacturing plant in Syracuse, New York, and consolidate operations at
its new site in Georgia. The new plant should be operating in the
fourth quarter of 1998, at which time the Syracuse plant will be shut
down. The Company expects to spend approximately $7.0 million in
capital for the facility.
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. The shares will be purchased from
time to time in open market or private transactions.
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<PAGE>
<PAGE>
IMPACT OF YEAR 2000 ISSUES
"Year 2000 Issues" are the result of computer programs being written
using two digits rather than four to define the applicable year. Any of
the Company's computer programs that have date-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000.
This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary
inability to process transactions, send invoices or statements, perform
material requirements planning or engage in similar normal business
activities.
The Company believes the recent implementation of its new or upgraded
management information systems appropriately addresses the Year 2000
Issues for the programs replaced with these systems. These upgrades
include significant enhancements for purposes other than addressing Year
2000 Issues. The Company has completed its assessment of the impact of
Year 2000 Issues on other parts of its business, including embedded
systems not involving information technology. The Company expects to
implement the remaining upgrades necessary to address Year 2000 Issues
by the first quarter of 1999 without a material impact on its operating
results, liquidity or financial condition.
The Company is communicating with its significant suppliers and
customers to determine the extent to which the Company would be
vulnerable to those third parties' failure to remediate their own Year
2000 Issues. The Company is also in the process of performing on-site
reviews of critical suppliers and customers to assess their state of
readiness as considered appropriate.
If needed modifications relative to Year 2000 Issues are not made on a
timely basis by the Company or its significant suppliers or customers,
the Company's operations, liquidity or financial condition could be
materially affected. Although not anticipated, the most reasonably
likely worst case scenario of failure by the Company or its significant
suppliers or customers to resolve the Year 2000 Issues would be a short-
term interruption of manufacturing operations at one or more of the
Company's facilities and a short-term inability on the part of the
Company to deliver product to customers.
As noted above, the Company expects its internal systems to be Year 2000
compliant in a timely manner. However, the success of the Company's
suppliers and customers in remediating their respective Year 2000 Issues
is not within the Company's control. The Company does not currently
expect that its operations will be materially impacted by Year 2000
Issues due to its suppliers or customers. Nonetheless, the Company is
currently developing contingency plans, particularly as it relates to
its significant suppliers, which include the identification and
qualification of alternate supply sources for key materials and
services.
IMPACT OF THE CONVERSION TO THE EURO
On January 1, 1999, eleven of the member countries of the European Union
will convert from their sovereign currencies to a common currency, the
euro. At that time fixed conversion rates between the legacy currencies
and the euro will be set.
The Company is finalizing its evaluation of the potential effect upon
its business of the euro conversion, and its plans to address any such
effect, including changes to information systems to
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<PAGE>
<PAGE>
accommodate various aspects of the new currency and potentially
increased competitive pressures from greater price transparency.
Although the Company has not completed its evaluation, given the status
of the implementation of "euro compliant" information systems at
appropriate locations and the relative size of the Company's current
European operations, the Company does not anticipate that its operating
results or financial condition will be materially adversely affected as
a result of the euro conversion.
CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS
This Management's Discussion and Analysis contains forward-looking
statements within the meaning of the federal securities laws. As a
general matter, forward-looking statements are those focused upon
anticipated events or trends and expectations and beliefs relating to
matters that are not historical in nature. Such forward-looking
statements are subject to uncertainties and factors relating to the
Company's operations and business environment, all of which are
difficult to predict and many of which are beyond the control of the
Company, that could cause actual results of the Company to differ
materially from those matters expressed in or implied by such forward-
looking statements. Such factors could include among others; the speed
with which the Company is able to integrate its recent acquisitions and
realize the financial benefits; the successful relocation of the
Company's centrifugal blower manufacturing facility in the fourth
quarter of 1998; the level of oil and natural gas drilling and
production, which affects demand for the Company's petroleum products;
pricing of Gardner Denver's products; changes in the general level of
industrial production and industrial capacity utilization rates in the
United States and the rate of economic growth in Europe, which affect
demand for the Company's compressor products; the degree to which the
Company is able to penetrate niche markets; the successful
implementation of cost reduction efforts; and the extent to which the
Company is able to operate without disruption due to the Year 2000
Issues.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
- ---------------
ITEM 5. OTHER INFORMATION
The deadline for stockholders to submit proposals pursuant to Rule 14a-8
under the Securities Exchange Act of 1934 for inclusion in the Company's
proxy statement for its 1999 Annual Meeting of Stockholders is November
27, 1998. Any proposals submitted other than pursuant to Rule 14a-8
must be received by the Company no later than March 5, 1999 or such
proposals will be considered untimely, in which case the Company's proxy
for its 1999 Annual Meeting of Stockholders may confer discretionary
voting authority regarding such matters.
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<PAGE>
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits:
11.1 Computation of earnings per share for the three months ended
September 30, 1998 and September 30, 1997.
11.2 Computation of earnings per share for the nine months ended
September 30, 1998 and September 30, 1997.
27.0 Financial Data Schedule.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the quarter ended
September 30, 1998.
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<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
GARDNER DENVER, INC.
Date: November 13, 1998 By: /s/Ross J. Centanni
--------------------------------------
Ross J. Centanni
Chairman, President & CEO
Date: November 13, 1998 By: /s/Philip R. Roth
--------------------------------------
Philip R. Roth
Vice President, Finance & CFO
Date: November 13, 1998 By: /s/Daniel C. Rizzo, Jr.
--------------------------------------
Daniel C. Rizzo, Jr.
Vice President and Corporate
Controller (Chief Accounting Officer)
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<PAGE>
GARDNER DENVER, INC.
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
11.1 Computation of earnings per share for the three months ended
September 30, 1998 and September 30, 1997.
11.2 Computation of earnings per share for the nine months ended
September 30, 1998 and September 30, 1997.
27.0 Financial Data Schedule.
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<PAGE>
<TABLE>
Exhibit 11.1
COMPUTATION OF EARNINGS PER COMMON SHARE
(in thousands, except per share amounts)
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
1998 1997
------- -------
<S> <C> <C>
Basic EPS:
Net income $ 8,748 $ 6,965
======= =======
Shares
Weighted average number of common
shares outstanding 16,184 15,085
======= =======
Basic earnings per common share $ 0.54 $ 0.46
======= =======
Diluted EPS:
Net income $ 8,748 $ 6,965
======= =======
Shares
Weighted average number of common
shares outstanding 16,184 15,085
Assuming conversion of options issued
and outstanding 492 797
------- -------
Weighted average number of common
shares outstanding, as adjusted 16,676 15,882
======= =======
Diluted earnings per common share $ 0.52 $ 0.44
======= =======
<FN>
<F*>This calculation is submitted in accordance with SFAS 128, "Earnings
Per Share," which requires disclosure of the calculation of basic and
diluted earnings per share.
</TABLE>
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<PAGE>
<TABLE>
Exhibit 11.2
COMPUTATION OF EARNINGS PER COMMON SHARE
(in thousands, except per share amounts)
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1998 1997
------- -------
<S> <C> <C>
Basic EPS:
Net income $26,029 $19,102
======= =======
Shares
Weighted average number of common
shares outstanding 16,080 14,985
======= =======
Basic earnings per common share $ 1.62 $ 1.27
======= =======
Diluted EPS:
Net income $26,029 $19,102
======= =======
Shares
Weighted average number of common
shares outstanding 16,080 14,985
Assuming conversion of options issued
and outstanding 593 802
------- -------
Weighted average number of common
shares outstanding, as adjusted 16,673 15,787
======= =======
Diluted earnings per common share $ 1.56 $ 1.21
======= =======
<FN>
<F*>This calculation is submitted in accordance with SFAS 128, "Earnings
Per Share," which requires disclosure of the calculation of basic and
diluted earnings per share.
</TABLE>
-21-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF GARDNER DENVER, INC.
FOR THE YEAR-TO-DATE PERIOD ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 19,274
<SECURITIES> 0
<RECEIVABLES> 82,175
<ALLOWANCES> (4,435)
<INVENTORY> 60,247
<CURRENT-ASSETS> 165,755
<PP&E> 159,456
<DEPRECIATION> (104,610)
<TOTAL-ASSETS> 349,889
<CURRENT-LIABILITIES> 69,509
<BONDS> 83,356
<COMMON> 162
0
0
<OTHER-SE> 141,908
<TOTAL-LIABILITY-AND-EQUITY> 349,889
<SALES> 288,486
<TOTAL-REVENUES> 289,906
<CGS> 193,250
<TOTAL-COSTS> 193,553
<OTHER-EXPENSES> 303
<LOSS-PROVISION> 164
<INTEREST-EXPENSE> 3,937
<INCOME-PRETAX> 42,362
<INCOME-TAX> 16,333
<INCOME-CONTINUING> 26,029
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 26,029
<EPS-PRIMARY> 1.62
<EPS-DILUTED> 1.56
</TABLE>
