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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, 1999
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
--- ---
Number of shares outstanding of the issuer's Common Stock, par value
$.01 per share, as of November 5, 1999: 15,011,875 shares.
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PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
<TABLE>
GARDNER DENVER, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(dollars in thousands, except per share amounts)
(Unaudited)
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- --------------------------
1999 1998 1999 1998
------- ------- -------- --------
<S> <C> <C> <C> <C>
Revenues $77,103 $96,605 $232,737 $289,906
Costs and Expenses:
Cost of sales (excluding depreciation
and amortization) 52,672 64,024 157,758 193,553
Depreciation and amortization 3,439 3,458 10,349 9,574
Selling and administrative expenses 12,897 13,407 38,662 40,099
Interest expense 1,465 1,287 4,141 3,852
Other expense 118 188 344 466
------- ------- -------- --------
Income before income taxes 6,512 14,241 21,483 42,362
Provision for income taxes 2,513 5,493 8,292 16,333
------- ------- -------- --------
Net income $ 3,999 $ 8,748 $ 13,191 $ 26,029
======= ======= ======== ========
Basic earnings per share $ 0.27 $ 0.54 $ 0.88 $ 1.62
======= ======= ======== ========
Diluted earnings per share $ 0.26 $ 0.52 $ 0.86 $ 1.56
======= ======= ======== ========
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)
<CAPTION>
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
1999 1998
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<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 21,127 $ 24,474
Receivables, net 69,410 69,617
Inventories, net 60,588 53,115
Deferred income taxes 3,208 2,445
Other 2,979 2,154
-------- --------
Total current assets 157,312 151,805
-------- --------
Property, plant and equipment, net 60,989 59,261
Intangibles, net 120,293 114,254
Deferred income taxes 8,302 12,172
Other assets 4,868 4,638
-------- --------
Total assets $351,764 $342,130
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings and current maturities
of long-term debt $ 5,329 $ 2,452
Accounts payable and accrued liabilities 52,488 60,806
-------- --------
Total current liabilities 57,817 63,258
-------- --------
Long-term debt, less current maturities 94,621 81,058
Postretirement benefits other than pensions 44,225 46,612
Other long-term liabilities 8,765 8,516
-------- --------
Total liabilities 205,428 199,444
-------- --------
Stockholders' equity:
Common stock, $.01 par value; 50,000,000 shares
authorized; 14,942,466 shares issued and
outstanding at September 30, 1999 165 163
Capital in excess of par value 155,806 153,656
Treasury stock at cost, 1,603,587 shares at
September 30, 1999 (23,525) (12,259)
Retained earnings 16,497 3,306
Accumulated other comprehensive loss (2,607) (2,180)
-------- --------
Total stockholders' equity 146,336 142,686
-------- --------
Total liabilities and stockholders' equity $351,764 $342,130
======== ========
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,
-----------------------
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 13,191 $ 26,029
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 10,349 9,574
Stock issued for employee benefit plans 1,435 1,408
Deferred income taxes 3,864 1,038
Changes in assets and liabilities:
Receivables 2,982 (5,260)
Inventories (4,592) 641
Accounts payable and accrued liabilities (11,167) (3,023)
Other assets and liabilities, net (3,173) (2,666)
-------- --------
Net cash provided by operating activities 12,889 27,741
-------- --------
Cash flows from investing activities:
Business acquisitions, net of cash acquired (17,014) (37,578)
Foreign currency hedging transactions 2,424 960
Capital expenditures (8,669) (12,388)
Disposals of plant and equipment 565 477
-------- --------
Net cash used for investing activities (22,694) (48,529)
-------- --------
Cash flows from financing activities:
Principal payments on long-term debt (22,478) (36,877)
Proceeds from long-term borrowings 40,103 67,450
Debt issuance costs --- (67)
Proceeds from stock options 718 438
Purchase of treasury stock (11,266) ---
Other --- (67)
-------- --------
Net cash provided by financing activities 7,077 30,877
-------- --------
Effect of exchange rate changes on cash and
equivalents (619) 354
-------- --------
(Decrease) increase in cash and equivalents (3,347) 10,443
-------- --------
Cash and equivalents, beginning of period 24,474 8,831
-------- --------
Cash and equivalents, end of period $ 21,127 $ 19,274
======== ========
The accompanying notes are an integral part of this statement.
</TABLE>
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NOTES TO CONDENSED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
Basis of Presentation. The accompanying condensed 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.
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, 1998.
The results of operations for the nine months ended September 30, 1999
are not necessarily indicative of the results to be expected for the
full year.
NOTE 2. RECENT ACQUISITIONS.
On April 1, 1999, the Company acquired 100% of the stock of Allen-Stuart
Equipment Co., Inc. ("Allen-Stuart") and on April 5, 1999, the Company
acquired 100% of the stock of Butterworth Jetting Systems, Inc.
("Butterworth"). Allen-Stuart, located in Houston, Texas, designs and
fabricates custom-engineered packages for blower and compressor
equipment in air and gas applications. Allen-Stuart serves a wide
variety of industrial companies, including petrochemical, power
generation, oil and natural gas production and refining. Butterworth,
also located in Houston, Texas, is a manufacturer of water jet pumps and
systems serving the industrial cleaning and maintenance market.
Applications in this market include runway and ship-hull cleaning,
concrete demolition and metal surface preparation. The aggregate
purchase price for these acquisitions was approximately $17.5 million.
The purchase price of each acquisition was allocated to assets and
liabilities based on their respective fair values at the date of
acquisition and resulted in an aggregate cost in excess of net assets
acquired of $10.7 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 Schopfheim, 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 $4.1 million.
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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 January 5, 1998, the Company acquired 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 Company also paid approximately $2.0 million in cash
to acquire patents, previously owned by Geoquip's shareholders, for
products manufactured by Geoquip. The purchase price for the assets was
paid in cash ($1.5 million) and 430,695 shares of Gardner Denver common
stock. 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 $8.3 million.
As a result of the stability of the product technology, markets and
customers associated with these 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 Geoquip, Champion, Wittig,
Allen-Stuart and Butterworth are included in the Company's Consolidated
Statement of Operations from the respective 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 Allen-Stuart and Butterworth have
not been finalized.
NOTE 3. EARNINGS PER SHARE.
The following table details the calculation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Basic EPS:
Net income $ 3,999 $ 8,748 $13,191 $26,029
======= ======= ======= =======
Shares
Weighted average number of common
shares outstanding 14,922 16,184 15,021 16,080
======= ======= ======= =======
Basic earnings per common share $ 0.27 $ 0.54 $ 0.88 $ 1.62
======= ======= ======= =======
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<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Diluted EPS:
Net income $ 3,999 $ 8,748 $13,191 $26,029
======= ======= ======= =======
Shares
Weighted average number of common
shares outstanding 14,922 16,184 15,021 16,080
Assuming conversion of dilutive stock
options issued and outstanding 370 492 364 593
------- ------- ------- -------
Weighted average number of common
shares outstanding, as adjusted 15,292 16,676 15,385 16,673
======= ======= ======= =======
Diluted earnings per common share $ 0.26 $ 0.52 $ 0.86 $ 1.56
======= ======= ======= =======
</TABLE>
NOTE 4. INVENTORIES.
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
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<S> <C> <C>
Raw materials, including parts and
subassemblies $41,160 $42,006
Work-in-process 9,411 8,167
Finished goods 23,618 17,159
Perishable tooling and supplies 2,525 2,525
------- -------
76,714 69,857
Excess of current standard costs
over LIFO costs (6,912) (7,037)
Allowance for obsolete and slow-
moving inventory (9,214) (9,705)
------- -------
Inventories, net $60,588 $53,115
======= =======
</TABLE>
NOTE 5. COMPREHENSIVE INCOME.
For the three months ended September 30, 1999 and 1998, comprehensive
income was $4.5 million and $8.8 million, respectively. For the nine
months ended September 30, 1999 and 1998, comprehensive income was $12.8
million and $26.2 million, respectively. Items impacting the Company's
comprehensive income, but not included in net income, consist of foreign
currency translation adjustments.
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NOTE 6. CASH FLOW INFORMATION.
In the first nine months of 1999 and 1998, the Company paid $5.6 million
and $16.4 million, respectively, to the various taxing authorities for
income taxes. Interest paid for the first nine months of 1999 and 1998,
totaled $4.9 million and $3.2 million respectively.
NOTE 7. SEGMENT INFORMATION.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- -----------------------
1999 1998 1999 1998
------- ------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Compressed Air Products $70,781 $75,321 $213,331 $223,437
Petroleum Products 6,322 21,284 19,406 66,469
------- ------- -------- --------
Total $77,103 $96,605 $232,737 $289,906
======= ======= ======== ========
Operating Earnings:
Compressed Air Products $ 7,402 $11,090 $ 25,663 $ 32,452
Petroleum Products 1,136 5,088 1,736 15,747
------- ------- -------- --------
Total 8,538 16,178 27,399 48,199
Interest expense 1,465 1,287 4,141 3,852
General corporate 561 650 1,775 1,985
------- ------- -------- --------
Income before income taxes $ 6,512 $14,241 $ 21,483 $ 42,362
======= ======= ======== ========
</TABLE>
NOTE 8. SUBSEQUENT EVENT.
On October 25, 1999, the Company acquired 100% of the stock of Air
Relief, Inc. ("Air Relief"). Air Relief, located in Mayfield, Kentucky,
is an independent provider of replacement parts and service for
centrifugal compressors. This acquisition will be accounted for by the
purchase method and accordingly, the results of its operations will be
included in the Company's consolidated financial statements from the
date of the acquisition.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS.
PERFORMANCE IN THE QUARTER ENDED SEPTEMBER 30, 1999 COMPARED WITH
THE QUARTER ENDED SEPTEMBER 30, 1998
Revenues
Revenues decreased $19.5 million (20%) to $77.1 million for the three
months ended September 30, 1999, compared to the same period of 1998.
Excluding incremental revenue from acquisitions which the Company
completed in April 1999, revenues decreased $24.9 million (26%) over the
same period of 1998. See Note 2 to the Financial Statements for further
information on the Company's recent acquisitions.
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<PAGE>
For the three months ended September 30, 1999, revenues for the
Compressed Air Products segment decreased $4.5 million (6%) to $70.8
million compared to the same period of 1998. Excluding incremental
revenue from acquisitions completed in April 1999, which contributed
$5.4 million, compressed air product revenues decreased $9.9 million
(13%). This reduction was primarily related to a declining rate of
growth in industrial production and lower manufacturing capacity
utilization in the United States which began in the fourth quarter of
1997 and resulted in reduced orders for compressor products beginning in
the second half of 1998. Petroleum Products segment revenues decreased
$15.0 million (70%) to $6.3 million for the three months ended September
30, 1999, compared to the same period of 1998. This reduction was
primarily due to lower oil prices in 1998 and early 1999, which resulted
in lower orders and backlog for petroleum products in 1999, including
the third quarter.
Costs and Expenses
Gross margin (defined as sales less cost of sales excluding depreciation
and amortization) for the three months ended September 30, 1999
decreased $8.2 million (25%) to $24.4 million from $32.6 million in the
same period of 1998. Gross margin as a percentage of revenues (gross
margin percentage) decreased to 31.7% in the three-month period of 1999
from 33.7% in the same period of 1998. This decrease in the gross
margin percentage was principally attributable to two factors. First,
acquisitions completed in April 1999 negatively affected the gross
margin percentage as these companies currently generate lower gross
margins than the Company's previously existing operations. Second, the
negative impact of decreased leverage of production overhead costs over
a lower revenue base was only partially offset by cost reduction efforts
and increased operating efficiencies at our new manufacturing facility
in Georgia.
Depreciation and amortization was approximately the same for the three
months of 1999 and the comparable 1998 period. For the three-month
periods, depreciation and amortization expense as a percentage of
revenues increased to 4.5% in 1999 from 3.6% in 1998. This percentage
increase is due to the effect of lower revenues.
Selling and administrative expenses decreased in the three months of
1999 by 4% to $12.9 million from $13.4 million in the same period of
1998. Incremental expenses of $0.9 million related to acquisitions were
more than offset by decreases in manpower levels and discretionary
spending. Excluding the incremental impact of acquisitions, selling and
administrative expenses decreased by 11% from the comparable 1998
period. As a percentage of revenues, selling and administrative
expenses for the three-month periods increased to 16.7% in 1999 from
13.9% in 1998. This percentage increase is primarily due to the
decrease in revenues and the acquisitions referred to above, which have
higher selling and administrative expenses relative to sales than the
Company's previously existing operations.
The Compressed Air 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 10.5% for the three-month period ended
September 30, 1999, a decrease from 14.7% for the comparable three-month
period of 1998. This decline is due to the negative impact of decreased
leverage of the segment's fixed and semi-fixed costs over a lower
revenue base and the effect of newly acquired operations that currently
generate lower operating margins (after amortization of goodwill
associated with the
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acquisitions) than the Company's previously existing operations. The
operating margin was also negatively impacted by an increased allocation
of shared costs as a result of the segment's revenues representing a
greater percentage of the Company's total revenues in 1999 as compared
to 1998. Staffing reductions, reduced discretionary spending and other
cost reduction efforts partially offset these negative factors.
The Petroleum Products segment generated operating margins of 18.0% for
the three-month period ended September 30, 1999, compared to 23.9% for
the same period in 1998. This decline is primarily attributable to the
negative impact of decreased leverage of the segment's fixed and semi-
fixed costs over a lower revenue base, partially offset by manpower
reductions, reduced discretionary spending and other cost reduction
efforts. The operating margins for the three-month period of 1999 were
favorably impacted by an increased proportion of revenues coming from
replacement parts, which generate higher margins. This favorable mix
resulted in a significant improvement in operating margins compared to
the results of the second quarter of 1999.
Interest expense increased $0.2 million in the three-month period of
1999 compared to the same period of 1998 due to higher average
borrowings in 1999. The average interest rate was 5.8% for both three-
month periods ended 1999 and 1998, respectively.
Income before income taxes declined $7.7 million (54%) to $6.5 million
for the three months ended September 30, 1999, compared to the same
period of 1998. This decrease is primarily the result of lower
revenues and reduced gross margins discussed above.
Compared to 1998, the provision for income taxes decreased by $3.0
million to $2.5 million for the three months as a result of the
decreased income before taxes. The Company's effective tax rate was
38.6% for both three-month periods ended 1999 and 1998.
Net income for the three months ended September 30, 1999 decreased $4.7
million (54%) to $4.0 million ($0.26 diluted earnings per share),
compared to $8.7 million ($0.52 diluted earnings per share) for the same
period of 1998. This reduction in net income is attributable to the
same factors that resulted in decreased income before taxes noted above.
PERFORMANCE IN THE NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED WITH
THE NINE MONTHS ENDED SEPTEMBER 30, 1998
Revenues
Revenues decreased $57.2 million (20%) to $232.7 million for the nine
months ended September 30, 1999, compared to the same period of 1998.
Excluding incremental revenue from acquisitions which the Company has
completed since March 1998, revenues decreased $72.1 million (25%) over
the same period of 1998. See Note 2 to the Financial Statements for
further information on the Company's recent acquisitions.
For the nine months ended September 30, 1999, revenues for the
Compressed Air Products segment decreased $10.1 million (5%) to $213.3
million compared to the same period of 1998. Excluding incremental
revenue from acquisitions since March 1998, which contributed $14.9
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million, compressed air product revenues decreased $25.0 million (11%).
This reduction was primarily related to a declining rate of growth in
industrial production and lower manufacturing capacity utilization in
the United States which has occurred since the fourth quarter of 1997,
resulting in reduced orders for compressor products. Petroleum Products
segment revenues decreased $47.1 million (71%) to $19.4 million for the
nine months ended September 30, 1999, compared to the same period of
1998. This reduction was primarily due to lower oil prices in the
second half of 1998 and early 1999, which resulted in lower orders and
backlog for petroleum products in 1999.
Costs and Expenses
Gross margin (defined as sales less cost of sales excluding depreciation
and amortization) for the nine months ended September 30, 1999 decreased
$21.4 million (22%) to $75.0 million from $96.4 million in the same
period of 1998. Gross margin as a percentage of revenues (gross margin
percentage) decreased to 32.2% in the nine-month period of 1999 from
33.2% in the same period of 1998. This reduction in the gross margin
percentage was principally attributable to two factors. First,
acquisitions completed since March 1998 negatively affected the gross
margin percentage as these companies currently generate lower gross
margins than the Company's previously existing operations. Second, the
negative impact of decreased leverage of production overhead costs over
a lower revenue base was only partially offset by cost reduction efforts
and increased operating efficiencies at our new manufacturing facility
in Georgia.
Depreciation and amortization increased 8% to $10.3 million in the first
nine months of 1999, compared with $9.6 million for the same period of
1998. The increase in depreciation and amortization expense was due to
goodwill amortization associated with acquisitions and ongoing capital
expenditures. For the nine-month periods, depreciation and amortization
expense as a percentage of revenues increased to 4.5% in 1999 from 3.3%
in 1998. This percentage increase is due to the factors noted above,
combined with the effect of lower revenues.
Selling and administrative expenses decreased in the nine months of 1999
by 4% to $38.7 million from $40.1 million in the same period of 1998.
Incremental expenses of $3.0 million related to acquisitions were more
than offset by decreases in manpower levels and discretionary spending.
Excluding the impact of acquisitions completed since March 1998, selling
and administrative expenses decreased by approximately 11% from the
comparable 1998 period. As a percentage of revenues, selling and
administrative expenses for the nine-month periods increased to 16.6% in
1999 from 13.8% in 1998. This percentage increase is primarily due to
the decrease in revenues and the acquisitions referred to above, which
have higher selling and administrative expenses relative to sales than
the Company's existing operations.
The Compressed Air 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 12.0% for the nine-month period ended
September 30, 1999, a decrease from 14.5% for the nine-month period of
1998. This decline is due to the negative impact of decreased leverage
of the segment's fixed and semi-fixed costs over a lower revenue base
and the effect of newly acquired operations that currently generate
lower operating margins (after amortization of goodwill associated with
the acquisitions) than the Company's previously existing operations.
The operating margin was also negatively impacted
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<PAGE>
by an increased allocation of shared costs since the segment's revenues
represent a greater percentage of the Company's total revenues in 1999
as compared to 1998. Manpower reductions, reduced discretionary
spending and other cost reduction efforts partially offset these
negative factors.
The Petroleum Products segment generated operating margins of 8.9% for
the nine-month period ended September 30, 1999, compared to 23.7% for
the same period in 1998. This decline is primarily attributable to the
negative impact of decreased leverage of the segment's fixed and semi-
fixed costs over a lower revenue base, partially offset by manpower
reductions, reduced discretionary spending and other cost reduction
efforts.
Interest expense increased $0.3 million for the nine-month period of
1999, compared to the comparable period of 1998, due to higher average
borrowings in 1999, partially offset by lower average interest rates.
The average interest rate for the nine-month period of 1999 was 5.8%,
compared to 6.1% for the same period of 1998.
Income before income taxes declined $20.9 million (49%) to $21.5 million
for the nine months ended September 30, 1999, compared to the same
period of 1998. This decrease is primarily the result of lower
revenues and reduced gross margins discussed above.
Compared to 1998, the provision for income taxes decreased by $8.0
million to $8.3 million for the nine month period, as a result of the
decreased income before taxes. The Company's effective tax rate was
38.6% for the nine month periods in both 1999 and 1998.
Net income for the nine months ended September 30, 1999 decreased $12.8
million (49%) to $13.2 million ($0.86 diluted earnings per share),
compared to $26.0 million ($1.56 diluted earnings per share) for the
same period of 1998. This reduction in net income is attributable to
the same factors that resulted in decreased income before taxes noted
above.
Outlook
Demand for petroleum products is related to market expectations
concerning prices of oil and natural gas. During the first quarter of
1999, orders for the Company's petroleum products reached their lowest
level of the previous twelve months as a result of the substantial
decline in the prices of oil and natural gas in 1998 and early 1999.
Orders for petroleum products were $6.7 million in the third quarter, an
increase of $0.9 million compared to the same period of 1998. For the
first nine months of 1999, petroleum product orders were $16.8 million,
a decrease of $25.7 million compared to the same period of 1998.
Compared to September 30, 1998, backlog for this business segment
declined $8.8 million to $4.0 million on September 30, 1999. Increases
in demand for these products are dependent upon sustained appreciation
in oil and natural gas prices, which the Company cannot predict.
However, the price of oil increased significantly during the first nine
months of 1999 and the Company experienced appreciable improvement in
orders for petroleum parts in the third quarter, which is typically a
precursor to increased demand for pumps. The Company believes that if
oil and natural gas prices remain at current elevated levels and the rig
count continues to increase, there could be a modest increase in
petroleum product orders and revenues in the fourth quarter compared to
the third quarter of 1999, followed by a more significant improvement in
2000.
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<PAGE>
In general, demand for compressed air products follows economic growth
patterns as indicated by the rate of change in GDP, manufacturing
capacity utilization and industrial production. In the third quarter of
1999, orders for compressed air products were $66.7 million, compared to
$68.8 million in the same period of 1998. For the first nine months of
1999, orders for compressed air products were $209.2 million, compared
to $203.3 million in the same period of 1998. Backlog for this segment
was $47.3 million as of September 30, 1999, compared to $45.1 million as
of September 30, 1998. The increase in both orders and backlog for this
segment is due solely to newly acquired companies. The Company
experienced softer orders for compressed air products, beginning in the
second half of 1998 due to slowing growth in industrial production in
the United States, which resulted in reduced revenue for compressed air
products through the third quarter of 1999. Although there have been
some recent improvements in industrial production which may increase
capacity utilization in the near future, the Company expects compressor
revenues in the fourth quarter to remain essentially flat and growth in
this segment to be delayed until 2000.
At present, the Company anticipates cost reduction efforts and the
financial benefits of completing acquisition integration projects to
enhance profitability in 1999. However, the decreased revenues as a
result of depressed demand for petroleum products and softer orders for
compressed air products will result in unfavorable earnings comparisons
in 1999 compared to 1998. Accordingly, based on the anticipated delay
in orders compared to previous expectations, the Company anticipates
that diluted earnings per share will be approximately 45% to 50% lower
in 1999 compared to 1998.
Liquidity and Capital Resources
Operating Working Capital
During the nine months ended September 30, 1999, operating working
capital (defined as receivables plus inventories, less accounts payable
and accrued liabilities) increased $15.6 million, with acquisitions
completed in 1999 representing $15.3 million of this increase.
Excluding acquisitions, the remaining increase in operating working
capital is related to a decrease in accounts payable and accrued
liabilities and an increase in inventory, partially offset by a decrease
in receivables. The decrease in accounts payable and accrued
liabilities and receivables is due to reduced spending and revenues.
The increase in inventory is primarily due to the timing of shipments
and a buildup of some petroleum products inventory in anticipation of a
possible recovery in demand in late 1999 and early 2000.
Cash Flows
During the nine months of 1999, the Company generated cash flows from
operations totaling $12.9 million, a decrease of $14.9 million (54%)
from the comparable period in 1998. This reduction was primarily the
result of the decrease in net income and accounts payable and accrued
liabilities and an increase in inventories, partially offset by lower
receivables as discussed previously. Net borrowings of long-term debt
totaled $17.6 million and $11.3 million of outstanding Company stock was
purchased during the nine months ended September 30, 1999. The cash
flows provided by operating and financing activities and used for
investing activities resulted in a net cash decrease of $3.3 million for
the nine months ended September 30, 1999.
-13-
<PAGE>
<PAGE>
Capital Expenditures and Commitments
Capital projects to increase operating efficiency, production capacity
and product quality resulted in expenditures of $8.7 million in the
first nine months 1999 compared to $12.4 million in 1998. Commitments
for capital expenditures at September 30, 1999 totaled $5.2 million.
Management expects additional capital authorizations to be committed
during the remainder of the year and that capital expenditures for 1999
will approximate $13 million, primarily due to expenditures for
machining capacity and cost reduction projects. 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 alternative minimum tax obligations
which arise from the exercise of incentive stock options. During the
nine months ended September 30, 1999, 780,442 shares were repurchased
under these repurchase programs at a cost of $10.9 million. As of
September 30, 1999, a total of 1,535,542 shares have been repurchased at
a cost of $22.1 million under both repurchase programs.
Liquidity
During 1998, the Company entered into a new revolving line of credit
agreement with an aggregate $125.0 million borrowing capacity (the
"Credit Line") and terminated the previous line of credit. On September
30, 1999, the Credit Line had an outstanding balance of approximately
$56.3 million, leaving $68.7 million available for letters of credit or
future borrowings. The Credit Line requires no principal payments
during the term of the agreement, which expires in January 2003. 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 these arrangements, other
than customary covenants regarding certain earnings, liquidity, and
capital ratios.
Management currently expects that the Company's future cash flows will
be sufficient to fund the scheduled debt service under existing credit
facilities and provide required resources for working capital and
capital investments.
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.
-14-
<PAGE>
<PAGE>
The Company believes the implementations of new and upgraded management
information systems appropriately address 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 end
of 1999. These upgrades relate primarily to the systems utilized by
operations acquired in 1999. The Company anticipates that the costs
incurred solely to address its Year 2000 Issues will be less than $0.5
million.
The Company has communicated 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 has also performed reviews of critical
suppliers and customers to assess their state of readiness as considered
appropriate.
If required modifications related to Year 2000 Issues are not
successfully 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 its suppliers'
or customers' Year 2000 Issues. Nonetheless, the Company has developed
contingency plans, particularly as related 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
converted from their sovereign currencies to a common currency, the
euro. At that time, fixed conversion rates between the legacy
currencies and euro were set.
The Company has evaluated the potential effect upon its business of the
euro conversion, and developed plans to address any such effect,
including changes to information systems necessary to accommodate
various aspects of the new currency and potentially increased
competitive pressures from greater price transparency. Given the status
of the implementation of new and upgraded information systems at
appropriate locations and the relative size of its current European
operations, the Company does not anticipate that its consolidated
financial position, results of operations or liquidity will be
materially adversely affected as a result of the euro conversion.
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<PAGE>
<PAGE>
NEW ACCOUNTING STANDARDS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). In June 1999, the
FASB issued SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB Statement
No. 133 - an amendment of FASB Statement No. 133" ("SFAS 137"). SFAS
137 delays the effective date of SFAS 133 for one year, to fiscal years
beginning after June 15, 2000 and thus, the Company will adopt SFAS 133
at that time. The Company has reviewed its current derivative
instruments and hedging activities and has determined that the adoption
of SFAS 133 would not have a material impact on its consolidated
financial statements as of September 30, 1999.
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. Such uncertainties and factors could cause actual results of
the Company to differ materially from those matters expressed in or
implied by such forward-looking statements. Such uncertainties and
factors could include among others: the speed with which the Company is
able to integrate its recent acquisitions and realize the related
financial benefits; the level of oil and natural gas prices, drilling
and production, which affect 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 outside the United
States, which affect demand for the Company's compressed air 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 Year 2000
Issues.
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, 1998 and September 30, 1999.
-16-
<PAGE>
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits:
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, 1999.
-17-
<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 15, 1999 By: /s/Ross J. Centanni
---------------------------------
Ross J. Centanni
Chairman, President & CEO
Date: November 15, 1999 By: /s/Philip R. Roth
---------------------------------
Philip R. Roth
Vice President, Finance & CFO
Date: November 15, 1999 By: /s/Daniel C. Rizzo, Jr.
---------------------------------
Daniel C. Rizzo, Jr.
Vice President and Corporate
Controller (Chief Accounting Officer)
-18-
<PAGE>
<PAGE>
GARDNER DENVER, INC.
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
27.0 Financial Data Schedule.
-19-
<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, 1999 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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 21,127
<SECURITIES> 0
<RECEIVABLES> 74,095
<ALLOWANCES> (4,685)
<INVENTORY> 60,588
<CURRENT-ASSETS> 157,312
<PP&E> 170,717
<DEPRECIATION> (109,728)
<TOTAL-ASSETS> 351,764
<CURRENT-LIABILITIES> 57,817
<BONDS> 99,950
<COMMON> 165
0
0
<OTHER-SE> 146,171
<TOTAL-LIABILITY-AND-EQUITY> 351,764
<SALES> 231,346
<TOTAL-REVENUES> 232,737
<CGS> 157,883
<TOTAL-COSTS> 157,758
<OTHER-EXPENSES> (125)
<LOSS-PROVISION> 459
<INTEREST-EXPENSE> 4,141
<INCOME-PRETAX> 21,483
<INCOME-TAX> 8,292
<INCOME-CONTINUING> 13,191
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,191
<EPS-BASIC> 0.88
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