THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT IS NOT COMPLETE AND MAY BE
CHANGED. THIS PROSPECTUS SUPPLEMENT IS NOT AN OFFER TO SELL THESE SECURITIES AND
IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE
OFFER OR SALE IS NOT PERMITTED.
Filed Pursuant to Rule 424(b)(2)
Registration Nos. 333-122422
333-109086
SUBJECT TO COMPLETION, DATED APRIL 15, 2005
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED FEBRUARY 9, 2005)
5,000,000 SHARES
GARDNER LOGO
COMMON STOCK
We are offering 5,000,000 shares of common stock.
Our common stock is listed on the New York Stock Exchange under the symbol
"GDI." On April 13, 2005, the last reported sale price of our common stock was
$40.12 per share.
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. YOU SHOULD CAREFULLY CONSIDER THE
RISK FACTORS BEGINNING ON PAGE S-13 OF THIS PROSPECTUS SUPPLEMENT BEFORE
PURCHASING OUR COMMON STOCK.
--------------------------------------------------------------------------------------
PER SHARE TOTAL
Public Offering Price $ $
Underwriting Discount $ $
Proceeds, Before Expenses, to Us $ $
--------------------------------------------------------------------------------------
The underwriters may also purchase up to an additional 750,000 shares from
us at the public offering price, less the underwriting discount, within 30 days
from the date of this prospectus supplement to cover any over-allotments.
Delivery of the shares will be made on or about May , 2005.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS IS TRUTHFUL OR COMPLETE.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
BEAR, STEARNS & CO. INC.
JPMORGAN
KEYBANC CAPITAL MARKETS
The date of this prospectus supplement is , 2005.
[INSIDE COVER ART]
ABOUT THIS PROSPECTUS SUPPLEMENT
THIS DOCUMENT IS IN TWO PARTS. THE FIRST PART IS THIS PROSPECTUS
SUPPLEMENT, WHICH DESCRIBES THE TERMS OF THIS OFFERING AND ALSO ADDS TO AND
UPDATES INFORMATION CONTAINED IN THE ACCOMPANYING PROSPECTUS AND THE DOCUMENTS
INCORPORATED BY REFERENCE. THE SECOND PART IS THE ACCOMPANYING PROSPECTUS, WHICH
PROVIDES FURTHER INFORMATION, SOME OF WHICH MAY NOT APPLY SPECIFICALLY TO THIS
OFFERING. GENERALLY, WHEN WE REFER TO THIS "PROSPECTUS," WE ARE REFERRING TO
BOTH DOCUMENTS. REFERENCES TO THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS ALSO
INCLUDE THE INFORMATION CONTAINED IN DOCUMENTS INCORPORATED BY REFERENCE. TO THE
EXTENT THAT INFORMATION APPEARING IN A LATER DOCUMENT IS INCONSISTENT WITH PRIOR
INFORMATION, THE LATER STATEMENT WILL CONTROL. IF THIS PROSPECTUS SUPPLEMENT IS
INCONSISTENT WITH THE PROSPECTUS, YOU SHOULD RELY ON THIS PROSPECTUS SUPPLEMENT.
YOU SHOULD RELY ONLY ON THE INFORMATION PROVIDED OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS. WE HAVE
NOT AUTHORIZED ANYONE ELSE TO PROVIDE YOU WITH DIFFERENT INFORMATION. THE
INFORMATION CONTAINED IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING
PROSPECTUS IS ACCURATE ONLY AS OF THEIR RESPECTIVE DATES, REGARDLESS OF TIME OF
DELIVERY OF THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS OR OF ANY
SALE OF OUR COMMON STOCK. WE ARE NOT MAKING AN OFFER OF THESE SECURITIES IN ANY
STATE WHERE THE OFFER IS NOT PERMITTED.
Unless this prospectus supplement indicates otherwise or the context
otherwise requires, references to "we," "our," "us," the "Company," or "Gardner
Denver" are to Gardner Denver, Inc., its subsidiaries and their predecessors.
References to "Thomas Industries" are to Thomas Industries Inc., its
subsidiaries and their predecessors.
FORWARD-LOOKING STATEMENTS
This prospectus supplement and the accompanying prospectus and documents we
incorporate by reference into this prospectus supplement and accompanying
prospectus contain statements that do not directly or exclusively relate to
historical facts. Such statements are forward-looking statements made in
reliance upon the safe harbor of the Private Securities Litigation Reform Act of
1995. 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 our operations and business
environment, all of which are difficult to predict and many of which are beyond
our control. These uncertainties and factors could cause actual results to
differ materially from those matters expressed in or implied by such
forward-looking statements.
The following uncertainties and factors, among others (including those set
forth under "Risk Factors"), could affect future performance and cause actual
results to differ materially from those expressed in or implied by
forward-looking statements:
-- our ability to complete the Thomas Industries acquisition and to
identify, negotiate and complete future acquisitions;
-- the speed with which we are able to integrate acquisitions and
realize the related financial benefits;
-- our ability to maintain and to enter into key purchasing, supply
and outsourcing relationships;
-- changes in our purchased material cost, including surcharges;
-- our ability to effectively manage the transition of iron casting
supply to alternate sources and the skill, commitment and
availability of such alternate sources;
-- the successful implementation of other strategic initiatives,
including, without limitation, restructuring plans, inventory
reduction programs and other cost reduction efforts;
-- the domestic and/or worldwide level of oil and natural gas prices
and oil and gas drilling and production, which affect demand for
our petroleum products;
S-i
-- changes in domestic and/or worldwide industrial production and
industrial capacity utilization rates, which affect demand for our
compressor and vacuum products;
-- pricing of our products;
-- the degree to which we are able to penetrate niche and
international markets;
-- changes in currency exchange rates (primarily among the U.S.
dollar, the euro and the British pound);
-- changes in interest rates;
-- our ability to attract and retain quality management personnel;
-- market performance of our pension plan assets and changes in
discount rates used for actuarial assumptions in our pension and
other postretirement obligation and expense calculations;
-- our continued ability to effectively manage and defend litigation
matters pending, or asserted in the future, against us;
-- the development and acceptance of our new product offerings;
-- the continued successful implementation and utilization of our
electronic services; and
-- changes in laws and regulations, including accounting standards,
tax requirements and interpretations or guidance related to the
American Jobs Creation Act of 2004.
We do not undertake, and hereby disclaim, any duty to update these
forward-looking statements, even though our situation and circumstances may
change in the future.
NON-GAAP FINANCIAL MEASURES
To supplement our financial information presented in accordance with
generally accepted accounting principles, or "GAAP," we use additional measures
to clarify and enhance understanding of past performance and prospects for the
future. These measures may exclude, for example, the impact of unique items
(acquisitions, one-time gains and losses) or items outside of our control
(foreign currency exchange rates).
Gross margin (defined as revenues less cost of sales), gross margin
percentage (defined as gross margin divided by revenues), operating earnings
(defined as revenue less cost of sales, depreciation and amortization, and
selling and administrative expenses) and operating margin (defined as operating
earnings divided by revenues) are indicative of short-term operational
performance and ongoing profitability. We closely monitor operating earnings and
operating margin of each business segment to evaluate past performance and
actions required to improve profitability.
EBITDA, as presented in this prospectus supplement, is a supplemental
measure of our performance. It is not a measurement of our financial performance
under GAAP and should not be considered as an alternative to net income or any
other performance measure derived in accordance with GAAP or as an alternative
to net cash provided by operating activities as a measure of our liquidity.
EBITDA represents net income before provision for income taxes, interest
expense and depreciation and amortization. We believe EBITDA provides investors
with helpful information with respect to our operating performance and cash
flows. We include it to provide additional information with respect to our
ability to meet our future debt service, capital expenditures and working
capital requirements and because certain covenants in our borrowing arrangements
are tied to measures that will be similarly calculated.
In addition, in evaluating this non-GAAP measure, you should be aware that
in the future we will incur expenses such as those excluded in calculating it.
S-ii
EBITDA has limitations as an analytical tool, and you should not consider
it in isolation, or as a substitute for analysis of our results as reported
under GAAP. Some of these limitations are:
-- it does not reflect our cash expenditures, or future requirements
for capital expenditures or contractual commitments;
-- it does not reflect changes in, or cash requirements for, our
working capital needs;
-- it does not reflect the significant interest expense, or the cash
requirements necessary to service interest or principal payments,
on our debt;
-- it does not reflect any cash income taxes that we may be required
to pay;
-- although depreciation and amortization are non-cash charges, the
assets being depreciated and amortized will often have to be
replaced in the future, and EBITDA does not reflect any cash
requirements for such replacements;
-- it is not adjusted for all non-cash income or expense items that
are reflected in our statements of cash flows;
-- it does not reflect limitations on, or costs related to,
transferring earnings from our subsidiaries to us; and
-- other companies in our industry may calculate EBITDA differently
than we do, limiting its usefulness as a comparative measure.
Because of these limitations, our EBITDA measures should not be considered
as a measure of discretionary cash available to us to invest in the growth of
our business or as a measure of cash that will be available to us to meet our
obligations. You should compensate for these limitations by relying primarily on
our GAAP results and using these measures supplementally. See our financial
statements and the related notes included elsewhere in this prospectus
supplement.
MARKET AND INDUSTRY DATA
Some of the market and industry data and other statistical information used
throughout this prospectus supplement are based on independent industry
publications, government publications, reports by market research firms or other
published independent sources. Some data are also based on our good faith
estimates, which are derived from our review of internal surveys, as well as the
independent sources referred to above. Although we believe these sources to be
reliable, we have not independently verified the information and cannot
guarantee its accuracy or completeness.
S-iii
PROSPECTUS SUPPLEMENT SUMMARY
This summary may not contain all of the information that is important to
you. You should read the entire prospectus supplement and the accompanying
prospectus and the documents incorporated and deemed to be incorporated by
reference therein, including the consolidated financial statements and related
notes and other financial data, before making an investment decision. This
summary includes a discussion of our pending acquisition of Thomas Industries
Inc. under " - The Thomas Industries Acquisition and Related Financing
Transactions" but, unless specifically noted, does not otherwise reflect the
effect of the Thomas Industries acquisition. The Thomas Industries acquisition
is subject to numerous conditions and may not be consummated. See "Risk
Factors - Risks Related to the Thomas Industries Acquisition." This summary
includes references to EBITDA, a non-GAAP financial measure, for which we
provide a reconciliation to net income in " - Summary Historical and Pro Forma
Consolidated Financial Information."
OUR COMPANY
We are a leading designer, manufacturer and marketer of highly engineered
air compressors, liquid ring pumps, blowers and certain fluid transfer products.
Our products primarily are used to move fluids, gases or solids through the
application of pressure, vacuum or other mechanical influences, often in highly
demanding applications or environments. Our compressors, liquid ring pumps and
blowers are used in a broad range of industrial applications and our fluid
transfer products are used primarily for oil and natural gas well drilling,
servicing, production and transfer as well as for industrial cleaning and
maintenance.
We report our results of operations through two segments, Compressor and
Vacuum Products (compressors, liquid ring pumps and blowers) and Fluid Transfer
Products, which represented approximately 80% and 20% of our 2004 revenues,
respectively. Our history dates back to 1859 when Robert Gardner redesigned the
fly-ball governor to provide speed control for steam engines. For the fiscal
year ended December 31, 2004, we had revenues of $739.5 million, EBITDA of $84.3
million and net income of $37.1 million. In 2004, we completed the acquisition
of Syltone plc ("Syltone") for $112.5 million and of nash_elmo Holdings, LLC
("Nash Elmo") for $224.6 million. For the fiscal year ended December 31, 2004,
pro forma for acquisitions completed in 2004, we had revenue of $895.9 million,
EBITDA of $102.7 million and net income of $40.4 million.
We sell our products and services globally to customers in diverse
industries around the world. The following charts show the percentage of
revenues generated in 2004 by industries served and by geographic regions, pro
forma for acquisitions completed in 2004.
LOGO LOGO
The majority of our products are marketed through our global network of
over 1,000 independent distributors and representatives, many of whom sell our
products exclusively. We offer our distributors access to one of the broadest
product lines in our served markets. In addition, we provide our distributors
with sales and product literature, technical assistance and training programs,
advertising and sales promotions, order-entry and tracking systems and an annual
restocking program. Our distributors maintain an inventory of complete units and
parts and provide aftermarket service to end-users. We service original
equipment
S-1
manufacturers ("OEMs") and engineering firms through our direct sales force as
these customers typically require higher levels of technical assistance, more
coordinated shipment scheduling and more complex product service than customers
of our less specialized products.
We have an extensive installed base of equipment for which we supply
replacement parts and repair services. Our aftermarket parts and service
businesses provide us with a recurring source of revenues with attractive
margins. Our aftermarket businesses also allow us to be in frequent contact with
customers, enabling us to provide enhanced customer service and product
information, which often generates additional sales of new products. We estimate
that aftermarket parts and services represented approximately 30% of our
revenues in 2004.
OUR BUSINESS SEGMENTS
We report our results of operations through two segments: Compressor and
Vacuum Products and Fluid Transfer Products.
COMPRESSOR AND VACUUM PRODUCTS. Our Compressor and Vacuum Products segment
designs, manufactures, markets and services the following products and related
aftermarket parts for industrial and commercial applications: rotary screw,
reciprocating, sliding vane and centrifugal compressors; positive displacement,
centrifugal and side channel blowers; liquid ring pumps; and engineered systems.
Compressors are used in applications that require high-pressure air, while
blowers and liquid ring pumps are used when higher-volume, low-pressure air or
vacuums are needed in an application. Compressors are used primarily in
manufacturing, process industry and material handling applications. Blowers are
used primarily in pneumatic conveying, wastewater aeration and engineered vacuum
systems, and liquid ring pumps are used primarily in process industry
applications. In general, our standard products are sold through distributors or
directly to OEMs, while our more specialized products and those designed for
specific applications are sold through independent representatives or directly
to end-users.
FLUID TRANSFER PRODUCTS. Our Fluid Transfer Products segment designs,
manufactures, markets and services a wide array of reciprocating pumps as well
as water jetting systems, loading arms and related aftermarket parts. Our
reciprocating pumps are used in oil and natural gas well drilling, servicing and
production and our water jetting systems are used for industrial cleaning and
maintenance. Our loading arms and related transfer components are used to load
and unload ships, tank trucks and rail cars. Most of our pump products are sold
directly to end-users or to packagers. Packagers are customers that combine our
equipment with ancillary products before they are sold to end-users.
OUR COMPETITIVE STRENGTHS
MARKET LEADERSHIP POSITIONS. We believe we are the second largest
manufacturer of compressed air products in the United States and the third
largest in the world, as measured by revenues. We believe we are one of the
world's two largest manufacturers of pumps used for oil and natural gas well
servicing and drilling. We believe that our acquisition of Nash Elmo in 2004
made us the largest worldwide manufacturer of liquid ring pumps and that our
acquisition of Syltone in 2004 made us the second largest worldwide manufacturer
of loading arms. We have achieved our leadership positions through our
commitment to product innovation and quality, our well-developed distribution
channels and our strategic acquisitions. We believe that, as a market segment
leader, we have greater access to distributors and are more likely to be
specified as a supplier when our target customers develop new requirements.
BRAND NAME RECOGNITION. Our products are marketed under a variety of
well-known brand names in our industries served, including: Gardner Denver(R)
compressors, blowers and pumps, Champion(R) compressors, Belliss & Morcom(R)
compressors, Elmo Technology(TM) blowers, Sutorbilt(R) blowers, DuroFlow(R)
blowers, Drum(R) blowers, Nash(R) liquid ring pumps, Partek(R) water jetting
pumps and Emco Wheaton(R) loading arms. Each of these brands enjoys a strong
reputation in its market segment, built over many years. We believe that the
strength of these brand names helps reduce the importance of price as a
competitive factor and provides a measure of built-in demand when we introduce
new products.
S-2
STRONG DISTRIBUTION NETWORK AND OEM ALLIANCES. We offer our customers one
of the industry's broadest selections of high quality products and services. As
a result, we have been able to establish strong customer relationships with
several key OEMs and exclusive supply arrangements with many of our
distributors. These relationships strengthen our market position, facilitate our
sales efforts and provide a valuable conduit for feedback when developing new
products.
LARGE INSTALLED EQUIPMENT BASE. We have maintained strong positions in our
market segments over a number of years, which has allowed us to establish a
large base of installed equipment. For most of the products in our installed
base, a significant portion of total life cycle cost consists of replacement
parts and maintenance. Therefore, our installed base provides us with a
recurring source of aftermarket revenues, typically with attractive margins.
Additionally, we believe that when our customers replace existing equipment they
prefer to do so with equipment of the same type or brand to avoid incremental
costs related to training, operations and maintenance. As a result, we believe
that our large installed base also provides a source of new product revenues.
BROAD AND DIVERSE PRODUCT AND CUSTOMER BASE. We have a product-driven
strategy that is based on our core competencies of manufacturing compressed air
and pump equipment. As a result, we have developed products and services for an
extensive array of applications that we market globally to a diverse group of
industries and customers. In 2004, no customer represented more than 3% of our
total revenues. We believe that our diversity of products and customers reduces
our dependence on any particular geographic or served industry segment.
Additionally, we believe that our presence in many different industries
generates broader brand awareness and facilitates the development and
introduction of new products.
STRONG CASH FLOW FROM OPERATIONS. Since becoming an independent company, we
have increased our annual cash flow from operations from $17.5 million in 1994
to $76.8 million in 2004. We have achieved this through internal growth in
revenues and earnings, through acquisitions and by aggressively managing working
capital and controlling expenses on an ongoing basis throughout our
organization. Our strong cash flow from operations provides us with the
financial flexibility to pursue acquisitions and internal investments.
ABILITY TO EFFECTIVELY INTEGRATE ACQUISITIONS. We believe that our
acquisition and integration expertise is a critical element for the successful
implementation of our strategic growth and profitability initiatives. Between
our spin-off from Cooper Industries, Inc. in 1994 and 2003, we acquired and
successfully integrated 15 businesses. In 2004, we made two additional
acquisitions, Syltone and Nash Elmo, and have made meaningful progress toward
integrating these businesses. For example, since we acquired Syltone, we have
eliminated redundant administrative costs, relocated certain of Syltone's
manufacturing operations into our existing facilities, rationalized both Gardner
Denver's and Syltone's distribution networks to broaden and strengthen our
distribution capabilities and sold certain of Syltone's non-core,
underperforming businesses. With respect to Nash Elmo, we have eliminated
certain of Nash Elmo's administrative expenses, initiated the integration of
Nash Elmo's management information systems and are reviewing opportunities with
respect to the rationalization of Nash Elmo's manufacturing operations.
EXPERIENCED MANAGEMENT TEAM. Our senior management team has significant
experience, averaging more than 12 years with us and more than 20 years in
manufacturing. In addition, this team has substantial experience in identifying,
structuring and integrating acquisitions, supply chain management programs and
lean manufacturing techniques, all of which are important to our long-term
growth.
STRONG CORPORATE GOVERNANCE. We believe that our corporate culture is based
on strong corporate governance and a commitment to stockholder accountability.
Seven of the eight members of our Board of Directors are non-employee directors
and our senior executives are expected to maintain meaningful holdings of our
common stock. We believe our culture and operating performance have been and
will continue to be enhanced by our strong corporate governance.
OUR BUSINESS STRATEGY
Over the last several years, we have employed a six point business strategy
that we believe has positioned us for future profitable growth. During this
period, we have implemented numerous cost reduction
S-3
and sales initiatives, acquired Syltone and Nash Elmo and announced the pending
acquisition of Thomas Industries. We believe that all of these actions have been
consistent with our strategy as highlighted below.
REDUCE COSTS. We continually seek to increase our efficiency and improve
margins in existing and acquired lines of business through the implementation of
cost reduction initiatives. The areas we are focusing on include:
-- Lean manufacturing techniques. We have implemented lean manufacturing
programs such as cellular manufacturing and lot size reduction at many
of our facilities. These programs have translated directly into
lower-cost manufacturing, shorter lead times, better quality, and
reduced inventory investment and have freed more than 300,000 square
feet of manufacturing and office space. Our lean manufacturing
techniques have also facilitated better communications and problem
resolution among production personnel and reduced the likelihood of
errors. As we have implemented lean techniques, we have developed an
internal "lean council" to promote the adoption of our best
manufacturing practices throughout our organization. We also have gone
beyond internal implementation by partnering with suppliers to achieve
additional efficiencies in the supply chain.
-- Purchasing and sourcing. Throughout our organization, we have formed
purchasing teams tasked with identifying the most cost-effective way
to source and manufacture our products. Our purchasing teams seek to
reduce basic material costs by identifying the best-value suppliers,
implementing global sourcing strategies and working with our
manufacturing and engineering personnel to identify less expensive
manufacturing input alternatives. Our purchasing teams also review
non-critical product components to determine whether it is more
cost-effective to manufacture or outsource such products.
-- Capital investments. We evaluate capital expenditures based on the
potential for the investment to generate adequate returns by
increasing our operating efficiency and flexibility, expanding
production capacity and increasing product quality. Our strategy is to
invest throughout our economic cycle. Between 2001 and 2003, when we
faced a challenging operating environment, we cumulatively invested
$37.1 million of capital in our business. Our capital expenditures
were targeted toward investments such as flexible machining centers
that reduced labor and setup expenses and improved product lead time.
As our business began to recover in 2004, we believe that these
investments contributed to the significant operating leverage we
achieved and will continue to benefit us in the future.
PURSUE INTERNATIONAL MARKETS. In 2004, we generated 56% of our revenues in
international markets (59% pro forma for acquisitions completed during 2004).
Between 1994 and 2004, our revenues from international sales grew at a compound
annual growth rate of 27%. The growth of our international revenues and our
improved market positions in Europe, Asia and South America are a result of
successful acquisitions and the expansion of our distribution channels. We sell
through distributors and representatives in more than 20 countries and have
manufacturing facilities in Germany, the United Kingdom, China, Finland, Brazil
and Canada. Also, in 2004, we opened an assembly facility in China that packages
our compressors and blowers to serve growing demand in Asian markets. We believe
international markets will continue to offer attractive growth opportunities.
ACCELERATE NEW PRODUCT DEVELOPMENT. As a leader in our industry, we
consistently develop new products and enhance existing products to meet the
evolving demands of our customers, as well as to enter into new markets and
reduce costs. We have implemented formal processes that coordinate research,
development and engineering activity with feedback from distributors, end-users
and suppliers. We believe that these processes can accelerate the product
development cycle by up to 50%, thereby reducing our costs and shortening the
time it takes us to introduce new products to the market. For example, we
recently developed a new line of global single-stage lubricated compressors
using variable speed drives. This product line was developed concurrently in
Finland and the U.S., which resulted in a number of advantages, including a more
rapid development cycle, more efficient use of engineering resources and global
purchasing opportunities that we expect will lower our production costs. We
believe that our ability to rapidly design and develop new products in response
to the needs of our customers will enhance the future growth of our business.
S-4
MANUFACTURE PROPRIETARY PRODUCTS. We seek to differentiate our products
from those of our competitors by developing proprietary products that offer
superior performance at the lowest total life cycle cost. We also reengineer
products and develop new controls and other product functionalities to improve
their key performance characteristics. We believe that commodity-like products,
such as consumer-grade air compressors, are more susceptible to pricing pressure
and are more likely to dilute brand equity. Conversely, we believe that our
proprietary products enhance our brand names, provide value to customers and
build customer loyalty, allowing us to increase market share and achieve premium
pricing.
EMBRACE NEW TECHNOLOGIES. We continue to embrace new technologies
throughout our business, including within our engineering, manufacturing, sales
and distribution functions. For example, we are utilizing our computer systems
and Internet technology to allow our business partners immediate and continuous
access to sales and technical literature, order processing and tracking, and
service and warranty information. We are also linking these ordering systems
directly to our manufacturing facilities to reduce order processing paperwork,
lead times and the amount of working capital employed. From an engineering
perspective, we employ a number of advanced technologies, including
computational fluid dynamics, finite element analysis and solid modeling
software. Overall, we view our investment in technology as an important means to
increase our efficiency and better serve our customers.
PURSUE STRATEGIC ACQUISITIONS. We believe that our industry is relatively
fragmented and opportunities remain to acquire companies that complement or
expand our product offerings, distribution capabilities and geographic presence.
Our management team has substantial experience making and integrating
acquisitions, having completed 17 acquisitions since Gardner Denver became an
independent company in 1994. While we will opportunistically pursue larger
transactions such as the pending acquisition of Thomas Industries, we will
continue to pursue smaller transactions that incrementally expand our business.
As acquired companies are integrated, we will seek to rationalize administrative
expenses, manufacturing capacity, product lines and distribution channels to
maximize our returns.
OUR INDUSTRY
Our Compressor and Vacuum Products segment competes in a worldwide market
that we estimate to be in excess of $5 billion per year in sales. The largest
market served within our Fluid Transfer Products segment consists of the
worldwide market for industrial/process pumps that we estimate to be in excess
of $22 billion per year in sales. Our reciprocating pumps compete for
approximately $2 billion of this market. Products in all of our served markets
are sold to a diverse group of customers across a wide range of industries.
Competition in our markets is generally robust and is based on product
quality, performance, price and availability. The relative importance of each of
these factors varies depending on the specific type of product. Given the
potential for equipment failures to cause expensive operational disruption, our
customers generally view quality and reliability as critical factors in their
equipment purchasing decision. The required frequency of maintenance is highly
variable based on the type of equipment and application.
Although there are a few large manufacturers of compressor and vacuum
products, the marketplace for these products remains fragmented due to the wide
variety of product technologies, applications and selling channels. The
marketplace for industrial/process pumps, although dominated by a few
multinational manufacturers with a broad product offering, is also fragmented,
as the ten largest pump manufacturers account for only approximately 40% of
annual industry sales. Because we are currently focused on pumps used in oil and
natural gas drilling, servicing and production, we do not typically compete
directly with the major full-line manufacturers. Competition in the market
segment for oil and natural gas pumps is much more concentrated than for pumps
generally. The marketplaces for water jetting systems and loading arms tend to
be niche-oriented and somewhat concentrated with the largest three or four
competitors controlling the majority of the market.
THE THOMAS INDUSTRIES ACQUISITION AND RELATED FINANCING TRANSACTIONS
On March 9, 2005, we announced that we had signed a definitive agreement to
acquire Thomas Industries Inc. (NYSE: ticker "TII") for a purchase price of
$40.00 per share, or approximately
S-5
$734.2 million, and the assumption of $9.5 million in long-term capitalized
lease obligations. As of December 31, 2004, Thomas Industries had $267.1 million
in cash, cash equivalents and short-term investments. Therefore, the net
transaction value, including assumed debt and net of cash, is approximately
$476.6 million. Thomas Industries generated revenues of $410.1 million and
EBITDA of $226.7 million ($48.0 million excluding income related to Genlyte
Thomas Group LLC or "GTG") for the year ended December 31, 2004. These EBITDA
figures include $5.2 million of non-recurring charges related to plant shutdown,
legal and environmental costs. See "Selected Consolidated Financial Information
of Thomas Industries" for a reconciliation of EBITDA to net income.
Thomas Industries, headquartered in Louisville, Kentucky, is a worldwide
leader in the design, manufacture, and marketing of precision engineered pumps
and compressors. Thomas Industries markets its products under a number of
well-known brand names, including Rietschle Thomas(R) pumps and compressors,
Welch(R) laboratory equipment and Oberdorfer(TM) bronze and high alloy liquid
pumps. Thomas Industries serves a diversified, global customer base of OEMs,
end-users and engineered system customers with a relationship strategy focused
on product innovation, application engineering and value added designs.
Thomas Industries' products are sold into a broad range of attractive end
markets, including medical, general industrial, printing, environmental,
packaging and laboratory. Thomas Industries has wholly-owned operations in 21
countries, on five continents. Its primary manufacturing facilities are located
in Sheboygan, Wisconsin; Monroe, Louisiana; Skokie, Illinois; Syracuse, New
York; and Schopfheim, Fahrnau, Puchheim and Memmingen, Germany. In 2004, Thomas
Industries completed the construction of a manufacturing facility in Wuxi,
China, that is expected to become operational in mid-2005. Thomas Industries has
other locations around the world to support sales, marketing, service and
distribution. In 2004, more than 60% of Thomas Industries' sales were derived
outside the United States.
If completed, the acquisition of Thomas Industries will significantly
expand our product portfolio, distribution channels and end markets served.
Although the basic technology of Thomas Industries' products is similar to that
of our products, Thomas Industries' business is primarily complementary to ours:
-- Thomas Industries' products are generally used in smaller, fractional
horsepower applications, while our products are typically used in
larger applications requiring more power;
-- the majority of Thomas Industries' products are sold directly to OEMs
while the majority of our products are sold through distributors and
manufacturers' representatives; and
-- more than 30% of Thomas Industries' OEM sales are to attractive end
markets such as medical, environmental and laboratory, in which we
have a limited presence.
While our business and Thomas Industries' business are complementary, we
believe that significant opportunities for synergies exist between our
businesses should we complete the acquisition, including:
-- reduction of corporate overhead;
-- reduction of selling and administrative expense within business units;
-- leveraging purchases of common raw materials and components;
-- implementation of lean manufacturing initiatives;
-- cross-selling of complementary product lines; and
-- rationalization of manufacturing capacity.
Our ability to realize these synergies is subject to uncertainties. See "Risk
Factors -- Risks Related to the Thomas Industries Acquisition."
The following charts reflect our consolidated revenue mix by industries
served and geographic regions for 2004 on a combined basis as if Syltone, Nash
Elmo and Thomas Industries had been acquired at the beginning of 2004.
S-6
LOGO LOGO
(1) Thomas Industries' information based on OEM sales, which represent
approximately 76% of Thomas Industries' total sales.
---------------------
Our plan to finance the acquisition of Thomas Industries, and to refinance
approximately $35.6 million of our debt, is outlined in the sources and uses
table below:
SOURCES USES
--------------------------------------------- ---------------------------------------------
(dollars in millions)
Available cash at Gardner Denver..... $ 20.0 Merger consideration................. $734.2
Available cash at Thomas Repay existing Gardner Denver
Industries(1)...................... 219.2 debt(2).............................. 35.6
New term loan........................ 230.0 Fees and expenses.................... 25.0
------
New senior subordinated notes........ 125.0
This offering(3)..................... 200.6
------
Total................................ $794.8 Total................................ $794.8
====== ======
Note: Assumes our existing $375 million credit facility is successfully
amended and restated and will not need to be refinanced.
(1) Represents the estimated immediately available amount of Thomas
Industries' total cash and short-term investments.
(2) Includes repayment of $8.7 million of our revolver debt and repayment
of $26.9 million of our other long-term debt.
(3) Does not assume exercise of over-allotment option. If over-allotment
option is exercised an additional $28.7 million of our revolver debt
would be repaid.
Concurrent with this offering, we are offering $125.0 million aggregate
principal amount of Senior Subordinated Notes due 2013 in a private placement.
The notes will not be registered under the Securities Act and may not be offered
or sold in the United States absent registration or an exemption from the
registration requirements. The notes will be unconditionally guaranteed, jointly
and severally, by certain of our current and future domestic subsidiaries. The
gross proceeds from the notes offering will be placed into escrow, together with
an amount in cash, cash equivalents or treasury securities, so that the escrowed
funds will be sufficient to pay the special mandatory redemption price described
below for the notes, when and if due. The notes are subject to a special
redemption on or before January 2, 2006, at a redemption price equal to their
price of issuance, plus accrued interest and accretion of any discount to the
date of redemption, in the event that the Thomas Industries acquisition is not
consummated by December 31, 2005. The proceeds from the notes offering will be
released from escrow upon consummation of the Thomas Industries acquisition.
As of December 31, 2004, our existing credit facility consisted of a $225.0
million revolving credit facility and a $148.1 million term loan. We expect to
enter into an amendment and restatement of this facility which will become
effective upon the consummation of the Thomas Industries acquisition. The
amended and restated facility is expected to provide an additional $230.0
million term loan, the proceeds of which will be used as described above. The
effectiveness of the amendment and restatement is subject to the consummation
S-7
of the Thomas Industries acquisition, receipt of sufficient proceeds from this
offering and our concurrent notes offering and other customary closing
conditions.
The acquisition of Thomas Industries is not contingent upon completion of
this offering, the concurrent notes offering or the amendment and restatement of
our credit facility. We have received a financing commitment letter jointly
issued by affiliates of Bear, Stearns & Co. Inc. and J.P. Morgan Securities Inc.
to ensure availability of funding, subject to customary conditions. A number of
material conditions must still be satisfied before we can effect the acquisition
of Thomas Industries and, as discussed in "Risk Factors," the satisfaction of
many of these conditions is outside of our control. While we plan to finance the
acquisition as outlined in the sources and uses table above, we may alter our
plans depending on market conditions or other factors. Pending the closing of
the acquisition of Thomas Industries, net proceeds from this offering will be
used to repay a portion of our existing indebtedness. See "Use of Proceeds" and
"Unaudited Pro Forma Consolidated Financial Statements."
---------------------
Our principal executive offices are located at 1800 Gardner Expressway,
Quincy, Illinois 62305, and our telephone number is (217) 222-5400. Our website
address is www.gardnerdenver.com. Information contained on our website does not
constitute part of this prospectus supplement.
S-8
THE OFFERING
Issuer........................ Gardner Denver, Inc.
Common stock offered.......... 5,000,000 shares of common stock, par value
$0.01 per share.
Common stock outstanding after
this offering................. 25,106,468 shares.
Use of proceeds............... We estimate that the net proceeds of this
offering will be $191.1 million ($219.8 million
if the underwriters exercise their
over-allotment option in full). We expect to
use the net proceeds from the sale of our
common stock in this offering to finance a
portion of our acquisition of Thomas
Industries. See "Use of Proceeds."
Risk factors.................. You should carefully consider all of the
information set forth in this prospectus
supplement and the accompanying prospectus and,
in particular, should evaluate the specific
factors set forth under "Risk Factors" in
deciding whether to invest in shares of the
common stock.
Dividend policy............... We have not paid cash dividends in 2003 or 2004
and we do not expect to pay cash dividends in
2005.
New York Stock Exchange
symbol........................ GDI
Over-allotment option......... We have granted the underwriters a 30-day
option to purchase from us, from time to time,
up to an additional 750,000 shares of our
common stock to cover any over-allotments.
The number of shares of our common stock to be outstanding after this
offering is based on our shares outstanding as of March 31, 2005, as adjusted
for the 5,000,000 shares offered by this prospectus supplement. It excludes:
-- Up to 750,000 shares issuable by us if the underwriters exercise
their over-allotment option in full;
-- 2,351,962 shares reserved for issuance under our existing stock
incentive plans, including 1,578,649 shares issuable upon exercise
of options outstanding as of March 31, 2005 at a weighted average
exercise price of $23.11 per share;
-- 445,055 shares reserved for issuance under our employee stock
purchase plan; and
-- 241,218 shares reserved for issuance under our retirement savings
plan.
Except as otherwise noted in this prospectus supplement, we have assumed
that the underwriters will not exercise their over-allotment option.
S-9
SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The summary historical consolidated financial information shown below is as
of and for each of the years ended December 31, 2002, 2003 and 2004. The
information for the three years ended December 31, 2002, 2003 and 2004 is
derived from our consolidated financial statements for such years, which are
included herein beginning on page F-1.
The table below also sets forth unaudited pro forma financial information
after giving effect to the Nash Elmo acquisition, this offering, the Thomas
Industries acquisition and the related financing transactions. The unaudited pro
forma consolidated statement of operations data for the year ended December 31,
2004 is presented as if these transactions had taken place on January 1, 2004.
The unaudited pro forma consolidated balance sheet data is presented as if this
offering, the Thomas Industries acquisition and the related financing
transactions had been completed on December 31, 2004. The Thomas Industries
acquisition is subject to a number of closing conditions and may not be
consummated. See "Risk Factors - Risks Related to the Thomas Industries
Acquisition."
Effective with the close of business on July 31, 2004, Thomas Industries
sold its 32% interest in GTG to Genlyte Group Incorporated, or "Genlyte," for
approximately $400.9 million. However, as required by Article 11 of Regulation
S-X, the unaudited pro forma financial information set forth below includes
equity income from GTG as well as a gain from the sale of Thomas Industries'
interest in GTG. In total, the unaudited pro forma financial information
includes approximately $177.0 million of pretax income, $95.1 million of net
income and $3.90 of diluted earnings per share from the effects of GTG. See
footnote (1) below for information excluding the effects of GTG.
You should read this information in conjunction with the information under
"Unaudited Pro Forma Consolidated Financial Statements" and related notes
thereto, "Selected Consolidated Financial Information of Gardner Denver" and the
respective consolidated financial statements and accompanying notes of Gardner
Denver and Thomas Industries included elsewhere in this prospectus supplement.
The Gardner Denver consolidated financial statements for the years ended
December 31, 2002, 2003 and 2004 have been audited by KPMG LLP, an independent
registered public accounting firm.
S-10
YEAR ENDED DECEMBER 31,
-------------------------------- PRO FORMA(1)
2002 2003 2004 UNAUDITED 2004
-------- -------- ---------- --------------
(in thousands, except per share data)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues.................................... $418,158 $439,530 $ 739,539 $1,305,970
Costs and expenses
Cost of sales............................ 289,631 307,753 498,435 848,269
Depreciation and amortization............ 14,139 14,566 21,901 50,415
Selling and administrative expenses...... 79,400 85,326 157,453 309,679
Interest expense......................... 6,365 4,748 10,102 38,482
Other income, net........................ (204) (3,221) (638) (2,312)
-------- -------- ---------- ----------
Total costs and expenses.................... 389,331 409,172 687,253 1,244,533
-------- -------- ---------- ----------
Equity income from GTG...................... -- -- -- 18,608
Gain on sale of GTG......................... -- -- -- 160,410
-------- -------- ---------- ----------
Income before income taxes.................. 28,827 30,358 52,286 240,455
Provision for income taxes.................. 9,225 9,715 15,163 102,529
-------- -------- ---------- ----------
Net income.................................. $ 19,602 $ 20,643 $ 37,123 $ 137,926
======== ======== ========== ==========
Basic earnings per share.................... $ 1.24 $ 1.29 $ 1.96 $ 5.76
======== ======== ========== ==========
Diluted earnings per share.................. $ 1.22 $ 1.27 $ 1.92 $ 5.66
======== ======== ========== ==========
Basic shares outstanding.................... 15,854 16,061 18,955 23,955
Diluted shares outstanding.................. 16,042 16,312 19,377 24,377
BALANCE SHEET DATA (AS OF END OF PERIOD):
Total assets................................ $478,730 $589,733 $1,028,609 $1,678,512
Long-term debt, less current maturities..... 112,663 165,756 280,256 625,733
Total debt.................................. 120,163 182,631 313,205 642,180
Total liabilities........................... 255,807 323,828 623,133 1,081,963
Stockholders' equity........................ 222,923 265,905 405,476 596,549
OTHER FINANCIAL DATA:
Gross margin (2)............................ $128,527 $131,777 $ 241,104 $ 457,701
EBITDA (3).................................. 49,331 49,672 84,289 329,352
Capital expenditures (4).................... 13,641 11,950 19,550 37,971
Net cash provided by operating activities... 52,481 46,283 76,752 --
Orders (5).................................. 402,019 425,620 786,990 --
(1) As noted above, effective with the close of business on July 31, 2004,
Thomas Industries sold its 32% interest in GTG to Genlyte for approximately
$400,900. The information set forth below adjusts the information presented
under the title "Pro Forma Unaudited 2004" to exclude the effects of GTG,
assuming Thomas Industries had sold its interest in GTG at the beginning of
the period presented and
S-11
used a portion of the net proceeds from the sale to repay all of Thomas
Industries' existing debt, other than its capitalized lease obligations.
YEAR ENDED DECEMBER 31, 2004
-------------------------------------------------
PRO FORMA
PRO FORMA UNAUDITED 2004, AS
UNAUDITED 2004 ADJUSTMENTS ADJUSTED FOR GTG
-------------- ----------- ------------------
Revenues................................... $1,305,970 $ -- $1,305,970
---------- --------- ----------
Total costs and expenses................... 1,244,533 (2,064) 1,242,469
Equity income from GTG..................... 18,608 (18,608) --
Gain on sale of GTG........................ 160,410 (160,410) --
---------- --------- ----------
Income before income taxes................. 240,455 (176,954) 63,501
Provision for income taxes................. 102,529 (81,891) 20,638
---------- --------- ----------
Net income................................. $ 137,926 $ (95,063) $ 42,863
========== ========= ==========
Diluted earnings per share (a)............. $ 5.66 $ (3.90) $ 1.76
========== ========= ==========
(a) Based on 24,377 diluted weighted average number of shares
outstanding.
(2) Gross margin consists of revenues minus cost of sales (excluding
depreciation and amortization).
(3) EBITDA consists of net income before provision for income taxes, interest
expense and depreciation and amortization. EBITDA is not a measurement of
financial performance or liquidity determined in accordance with accounting
principles generally accepted in the United States and should not be
considered as an alternative to net income, net cash provided by operating
activities or other consolidated income or cash flow statement data prepared
in accordance with generally accepted accounting principles. We present
EBITDA because we believe it is frequently used by analysts, investors and
other interested parties in the financial evaluation of companies in our
industry, and we believe it provides useful information to investors. This
definition of EBITDA, however, may differ from the definition used by other
companies. A reconciliation of net income to EBITDA is provided as follows:
YEAR ENDED DECEMBER 31,
--------------------------- PRO FORMA
2002 2003 2004 UNAUDITED 2004
------- ------- ------- ------------------
(in thousands)
Net income.............................. $19,602 $20,643 $37,123 $ 137,926
Provision for income taxes.............. 9,225 9,715 15,163 102,529
Interest expense........................ 6,365 4,748 10,102 38,482
Depreciation and amortization........... 14,139 14,566 21,901 50,415
------- ------- ------- ---------
EBITDA.................................. $49,331 $49,672 $84,289 329,352
======= ======= =======
Adjustment to reflect sale of GTG................................ (178,665)
---------
EBITDA excluding effects of GTG.................................. $ 150,687
=========
(4) Pro forma capital expenditures represent the sum of our actual capital
expenditures for the year ended December 31, 2004, Nash Elmo for the eight
month period ended August 31, 2004 and Thomas Industries for the year ended
December 31, 2004.
(5) Orders consist of bookings we believe to be firm for which a customer
purchase order has been received or communicated. Since orders can be
rescheduled or canceled at any time, orders do not necessarily reflect
future sales levels.
S-12
RISK FACTORS
Before you invest in our shares, you should consider carefully the risk
factors described below together with all of the other information included in
this prospectus supplement, the accompanying prospectus and the documents we
have incorporated by reference into this document. If any of the following risks
actually occur, our business, financial condition or results of operations could
be materially adversely affected and you may lose all or part of your
investment.
RISKS RELATED TO THE THOMAS INDUSTRIES ACQUISITION
OUR ABILITY TO CONSUMMATE THE THOMAS INDUSTRIES ACQUISITION IS SUBJECT TO THE
SATISFACTION OF A NUMBER OF CONDITIONS, AND IT IS POSSIBLE THAT WE WILL BE
UNABLE TO CONSUMMATE THE THOMAS INDUSTRIES ACQUISITION.
The Thomas Industries acquisition is subject to the satisfaction or waiver
of a number of closing conditions, including, among other things, the receipt of
governmental and third-party consents, the absence of any material adverse
change with respect to Thomas Industries and the absence of breaches of the
representations, warranties and covenants of Thomas Industries set forth in the
agreement and plan of merger, which we refer to as the "Merger Agreement." We
cannot assure you that all of the closing conditions to the Thomas Industries
acquisition will be satisfied or waived and that we will consummate the Thomas
Industries acquisition. In the event the Thomas Industries acquisition is not
consummated, we will be unable to realize the anticipated benefits of the
acquisition and we may be required to incur certain cash and non-cash charges,
including, under certain circumstances, a $5.0 million payment to Thomas
Industries.
THE THOMAS INDUSTRIES ACQUISITION IS SUBJECT TO THE RECEIPT OF CONSENTS AND
APPROVALS FROM VARIOUS GOVERNMENT ENTITIES, WHICH MAY JEOPARDIZE OR DELAY
COMPLETION OF THE THOMAS INDUSTRIES ACQUISITION OR REDUCE THE ANTICIPATED
BENEFITS OF THE THOMAS INDUSTRIES ACQUISITION.
Completion of the Thomas Industries acquisition is conditioned upon filings
with, and the receipt of required consents, orders, approvals or clearances from
the Federal Trade Commission or the Antitrust Division of the U.S. Department of
Justice and regulatory bodies in Germany and Norway. These consents, orders,
approvals and clearances may impose conditions on or require divestitures
relating to the divisions, operations or assets of Thomas Industries or us. Such
conditions or divestitures may jeopardize or delay completion of the Thomas
Industries acquisition or may reduce the anticipated benefits of the Thomas
Industries acquisition. The Merger Agreement provides that we and Thomas
Industries will use our best efforts to obtain the consents of the Federal Trade
Commission or the U.S. Department of Justice and the various foreign regulatory
bodies that are reviewing the Thomas Industries acquisition, but that we are not
required to agree to effect any divestitures in order to obtain such consents.
WE MAY NOT BE ABLE TO EFFECTIVELY INTEGRATE THE BUSINESSES OF THOMAS INDUSTRIES.
Our future success will depend in part on our ability to effectively
integrate the businesses of Thomas Industries into our operations. We will face
significant challenges in consolidating functions and integrating procedures,
personnel, product lines and operations in a timely and efficient manner. The
integration process will be complex and time consuming, may be disruptive to the
businesses and may cause an interruption of, or a loss of momentum in, the
businesses as a result of a number of obstacles such as:
-- the loss of key employees or customers;
-- the failure to maintain the quality of customer service that each
business has historically provided;
-- the need to coordinate geographically diverse organizations; and
-- the resulting diversion of management's attention from our day-to-day
business and the need to hire additional management personnel to
address integration obstacles.
If we are not successful in this integration, if it takes longer than
anticipated, or if our integrated product and service offerings fail to achieve
market acceptance, our business could be adversely affected.
S-13
WE MAY NOT BE ABLE TO REALIZE ANTICIPATED COST SAVINGS, SYNERGIES OR REVENUE
ENHANCEMENTS FROM THE THOMAS INDUSTRIES ACQUISITION AND WE MAY INCUR SIGNIFICANT
CASH INTEGRATION COSTS TO ACHIEVE THESE COST SAVINGS.
Even if we are able to integrate our operations with those of Thomas
Industries successfully, we cannot assure you that we will realize the cost
savings, synergies or revenue enhancements that we anticipate from such
integration or that we will realize such benefits within the time frame that we
currently expect. Our ability to realize anticipated cost savings, synergies or
revenue enhancements may be affected by a number of factors, including the
following:
-- Our ability to effectively eliminate redundant administrative
overhead and overlapping sales personnel and rationalize
manufacturing capacity is difficult to predict. Accordingly, the
actual amount and timing of the resulting cost savings are inherently
difficult to predict.
-- We may incur significant cash integration costs in achieving these
cost savings, and any cost savings and other synergies from the
Thomas Industries acquisition may be offset by such integration
costs.
-- The cost savings and other synergies may be offset by increases in
other expenses, by operating losses or by problems unrelated to the
Thomas Industries acquisition.
-- Labor cost savings depend on the avoidance of labor disruptions in
connection with the integration of the businesses.
OUR SUBSTANTIAL INDEBTEDNESS COULD ADVERSELY AFFECT OUR FINANCIAL HEALTH.
We have substantial indebtedness now and our indebtedness will increase if
we consummate the Thomas Industries acquisition. As of December 31, 2004, pro
forma for this offering, the Thomas Industries acquisition and the related
financing transactions, we would have had approximately $642.2 million of
indebtedness. Our high level of debt could have a significant adverse future
effect on our business. For example:
-- we may have limited ability to borrow additional amounts for working
capital, capital expenditures, acquisitions, debt service
requirements, execution of our growth strategy or other purposes;
-- a substantial portion of our cash flow may be used to pay principal
and interest on our debt, which will reduce the funds available for
working capital, capital expenditures, acquisitions and other
purposes;
-- we may be more vulnerable to adverse changes in general economic,
industry and competitive conditions;
-- our high debt level and the various covenants contained in our
amended and restated senior credit facility, the indenture governing
the new notes and the documents governing our other existing
indebtedness may place us at a relative competitive disadvantage as
compared to some of our competitors; and
-- borrowings under our amended and restated credit facility bear
interest at floating rates, which could result in higher interest
expense in the event of an increase in interest rates.
The terms of our existing credit facility, our amended and restated credit
facility and the indenture governing the new notes will not prohibit us or our
subsidiaries from incurring additional indebtedness. If we or our subsidiaries
are in compliance with the financial covenants set forth in these agreements, we
and our subsidiaries may be able to incur substantial additional indebtedness.
If we or any of our subsidiaries incur additional indebtedness, the related
risks that we and they now face may intensify.
RISKS RELATED TO OUR BUSINESS
WE HAVE EXPOSURE TO ECONOMIC DOWNTURNS AND OPERATE IN CYCLICAL MARKETS.
As a supplier of capital equipment to a variety of industries, we are
adversely affected by general economic downturns. Demand for our compressor and
vacuum products is dependent upon capital spending
S-14
by manufacturing and process industries. Many of our customers, particularly
industrial customers, will delay capital projects, including non-critical
maintenance and upgrades, during economic downturns. Demand for certain of our
fluid transfer products is primarily tied to the number of working and available
drilling rigs and oil and natural gas prices. The energy market, in particular,
is cyclical in nature as the worldwide demand for oil and natural gas
fluctuates. When worldwide demand for these commodities is depressed, the demand
for our products used in drilling and recovery applications is reduced.
Accordingly, our operating results for any particular period are not
necessarily indicative of the operating results for any future period. The
markets for our products have historically experienced downturns in demand.
Future downturns could have a material adverse effect on our operating results.
WE FACE INTENSE COMPETITION IN THE MARKETS WE SERVE, WHICH COULD MATERIALLY AND
ADVERSELY AFFECT OUR OPERATING RESULTS.
We actively compete with companies producing the same or similar products.
Depending on the particular product, we experience competition based on a number
of factors, including quality, performance, price and availability. We compete
against many companies, including divisions of larger companies, that have
greater financial resources than us. As a result, these competitors may be
better able to withstand a change in conditions within the markets in which we
compete and throughout the economy as a whole. In addition, new competitors
could enter our markets. In particular, it is possible that our European- and
Asian-based competitors could seek to establish a greater presence in the United
States market. If we cannot compete successfully, our sales and operating
results could be materially and adversely affected.
LARGE OR RAPID INCREASES IN THE COSTS OF RAW MATERIALS OR SUBSTANTIAL DECREASES
IN THEIR AVAILABILITY AND OUR DEPENDENCE ON PARTICULAR SUPPLIERS OF RAW
MATERIALS COULD MATERIALLY AND ADVERSELY AFFECT OUR OPERATING RESULTS.
The primary raw materials we use are cast iron and steel. While we are
seeking to enter into long-term contracts with our suppliers, most of our
suppliers are not currently parties to long-term contracts with us.
Consequently, we are vulnerable to fluctuations in prices of such raw materials.
Factors such as supply and demand, freight costs and transportation
availability, inventory levels of brokers and dealers, the level of imports and
general economic conditions may affect the price of cast iron and steel. We
utilize single sources of supply for certain iron castings and other selected
components. From time to time in recent years, we have experienced a disruption
to our supply deliveries and we may experience further supply disruptions. Any
such disruption could have a material adverse effect on our ability to meet our
commitments to customers and, therefore, our operating results.
WE MAY NOT BE ABLE TO CONTINUE TO MAKE THE ACQUISITIONS NECESSARY FOR US TO
REALIZE OUR GROWTH STRATEGY OR INTEGRATE ACQUISITIONS SUCCESSFULLY.
One of our growth strategies is to increase our sales and expand our
markets through acquisitions. We have completed 17 acquisitions since becoming
an independent company in 1994 and entered into a definitive agreement to
acquire Thomas Industries on March 8, 2005. We expect to continue making
acquisitions if appropriate opportunities arise. We may not be able to identify
and successfully negotiate suitable acquisitions, obtain financing for future
acquisitions on satisfactory terms or otherwise complete future acquisitions.
Furthermore, our acquired companies may encounter unforeseen operating
difficulties and may require significant financial and managerial resources
which would otherwise be available for the ongoing development or expansion of
our existing operations. Largely as a consequence of our acquisitions, a
substantial portion of our assets consists of goodwill. If we are unable to
successfully integrate and operate our acquired business, we may determine that
our goodwill assets are impaired and be required to reduce the stated value of
such assets. If we are unable to successfully identify acquisition candidates,
complete acquisitions and integrate the acquired businesses with our existing
businesses (including their internal control procedures), our business,
operating results and financial condition may be materially and adversely
affected.
S-15
ECONOMIC, POLITICAL AND OTHER RISKS ASSOCIATED WITH INTERNATIONAL SALES AND
OPERATIONS COULD ADVERSELY AFFECT OUR BUSINESS.
For the fiscal year ended December 31, 2004, approximately 56% (59% pro
forma for acquisitions completed during 2004) of our revenues were from
customers in countries outside of the United States. We have manufacturing
facilities in Germany, the United Kingdom, China, Finland, Brazil and Canada. We
anticipate that we may continue to expand our international operations to the
extent that suitable opportunities become available.
Our international operations and United States export sales could be
adversely affected as a result of:
-- nationalization of private enterprises;
-- political or economic instability in certain countries;
-- differences in foreign laws, including increased difficulties in
protecting intellectual property and uncertainty in enforcement of
contract rights;
-- changes in the legal and regulatory policies of foreign
jurisdictions;
-- credit risks;
-- currency fluctuations;
-- exchange controls;
-- changes in tariff restrictions;
-- royalty and tax increases;
-- export and import restrictions and restrictive regulations of foreign
governments;
-- potential problems obtaining supply of raw materials;
-- shipping products during times of crisis or war; and
-- other factors inherent in foreign operations.
WE ARE A DEFENDANT IN CERTAIN ASBESTOS AND SILICOSIS PERSONAL INJURY LAWSUITS
WHICH COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION.
We have been named as a defendant in an increasing number of asbestos and
silicosis personal injury lawsuits. The plaintiffs in these suits allege
exposure to asbestos or silica from multiple sources, and typically we are one
of approximately 25 or more named defendants. In our experience to date, the
substantial majority of the plaintiffs have not been physically impaired with a
disease by alleged exposure to products for which we have responsibility.
We believe that the pending lawsuits will not, in the aggregate, have a
material adverse effect on our consolidated financial position, results of
operations or liquidity. However, future developments, including, without
limitation, potential insolvencies of insurance companies, could cause a
different outcome. Accordingly, there can be no assurance that the resolution of
pending or future lawsuits, whether by judgment, settlement, or dismissal, will
not have a material adverse effect on our consolidated financial position,
results of operations or liquidity.
THE NATURE OF OUR PRODUCTS CREATES THE POSSIBILITY OF SIGNIFICANT PRODUCT
LIABILITY AND WARRANTY CLAIMS WHICH COULD HARM OUR BUSINESS.
Customers use some of our products in potentially hazardous drilling,
completion and production applications that can cause injury or loss of life and
damage to property, equipment or the environment. In addition, our products are
integral to the production process for some end-users and any failure of our
products could result in a suspension of their operations.
S-16
Although we maintain strict quality controls and procedures, we cannot be
certain that our products will be completely free from defect. We maintain
amounts and types of insurance coverage that we believe are adequate and
consistent with normal industry practice. However, we cannot guarantee that
insurance will be adequate to cover all liabilities we may incur. We also may
not be able to maintain insurance in the future at levels we believe are
necessary and at rates we consider reasonable. We may be named as a defendant in
product liability or other lawsuits asserting potentially large claims if an
accident occurs at a location where our equipment and services have been used.
ENVIRONMENTAL COMPLIANCE COSTS AND LIABILITIES COULD ADVERSELY AFFECT OUR
FINANCIAL CONDITION.
Our operations and properties are subject to increasingly stringent
domestic and foreign laws and regulations relating to environmental protection,
including laws and regulations governing air emissions, water discharges, waste
management and workplace safety. Under such laws and regulations, we can be
subject to substantial fines and sanctions for violations and be required to
install costly pollution control equipment or effect operational changes to
limit pollution emissions and/or decrease the likelihood of accidental hazardous
substance releases. We must conform our operations and properties to these
domestic and foreign laws and regulations.
We use and generate hazardous substances and wastes in our manufacturing
operations. In addition, many of our current and former properties are or have
been used for industrial purposes. We have been identified as a potentially
responsible party with respect to several sites designated for cleanup under
federal "Superfund" or similar state laws. We have an accrued liability on our
balance sheet reflecting costs which are probable and estimable for our
projected financial obligations relating to these matters. If we have
underestimated our remaining financial obligations, we may face greater exposure
that could have an adverse effect on our financial condition, results of
operations or liquidity. Stringent fines and penalties may be imposed for
non-compliance with regulatory requirements relating to environmental matters,
and many environmental laws impose joint and several liability for remediation
for cleanup of certain waste sites and for related natural resource damages.
We have experienced, and expect to continue to experience, operating costs
to comply with environmental laws and regulations. In addition, new laws and
regulations, stricter enforcement of existing laws and regulations, the
discovery of previously unknown contamination, or the imposition of new clean-up
requirements could require us to incur costs or become the basis for new or
increased liabilities that could have a material adverse effect on our business,
financial condition, results of operations or liquidity.
OUR SUCCESS DEPENDS ON OUR EXECUTIVE OFFICERS AND OTHER KEY PERSONNEL.
Our future success depends to a significant degree on the skills,
experience and efforts of our executive officers and other key personnel. The
loss of the services of any of our executive officers, particularly our
Chairman, President and Chief Executive Officer, Ross J. Centanni, could have an
adverse impact on us. None of our executive officers has an employment agreement
with us. However, we have a common stock ownership requirement and provide
certain benefits for our executive officers, including change in control
agreements, which provide incentives for them to make a long-term commitment to
us. Our future success will also depend on our ability to attract and retain
qualified personnel and a failure to attract and retain new qualified personnel
could have an adverse effect on our operations.
OUR BUSINESS COULD SUFFER IF WE EXPERIENCE EMPLOYEE WORK STOPPAGES OR OTHER
LABOR DIFFICULTIES.
We have approximately 3,800 full-time employees. More than half of our
employees, including most of our employees outside of the United States, are
represented by labor unions. Although we do not anticipate future work stoppages
by our union employees, there can be no assurance that work stoppages will not
occur.
Although we believe that our relations with our employees are good and we
have not experienced any recent strikes or work stoppages, we cannot assure you
that we will be successful in negotiating new collective bargaining agreements,
that such negotiations will not result in significant increases in the cost of
labor or that a breakdown in such negotiations will not result in the disruption
of our operations. If any of the
S-17
preceding were to occur, it could impair our ability to manufacture our products
and result in increased costs and/or decreased operating results.
THE RESTRICTIVE COVENANTS IN OUR EXISTING CREDIT FACILITY, OUR AMENDED AND
RESTATED CREDIT FACILITY AND THE INDENTURE GOVERNING THE NEW NOTES AND ANY OF
OUR FUTURE INDEBTEDNESS COULD ADVERSELY RESTRICT OUR FINANCIAL AND OPERATING
FLEXIBILITY AND SUBJECT US TO OTHER RISKS.
Our existing credit facility, our amended and restated credit facility and
the indenture governing the new notes contain affirmative and negative covenants
that limit our and our subsidiaries' ability to take certain actions. These
agreements require or will require us to maintain specified financial ratios and
satisfy other financial conditions. These agreements also restrict or will
restrict, among other things, our and our subsidiaries' ability to:
-- incur additional debt;
-- pay dividends or make other distributions or repurchase our capital
stock or subordinated debt;
-- make certain investments;
-- create liens;
-- enter into certain types of transactions with affiliates;
-- restrict dividend or other payments by our restricted subsidiaries to
us;
-- use assets as security in other transactions; and
-- sell certain assets or merge with or into other companies.
These restrictions may limit our ability to operate our businesses and may
prohibit or limit our ability to enhance our operations or take advantage of
potential business opportunities as they arise. The breach of any of these
covenants by us or the failure by us to meet any of these conditions could
result in a default under any or all of such indebtedness. Our ability to
continue to comply with such agreements may be affected by events beyond our
control, including prevailing economic, financial and industry conditions. In
addition, upon the occurrence of an event of default under our debt agreements,
all of such amounts outstanding, together with accrued interest, could become
immediately due and payable.
THIRD PARTIES MAY INFRINGE UPON OUR INTELLECTUAL PROPERTY AND WE MAY EXPEND
SIGNIFICANT RESOURCES ENFORCING OUR RIGHTS OR SUFFER COMPETITIVE INJURY.
Our success depends in part on our proprietary technology. We rely on a
combination of patents, copyrights, trademarks, trade secrets, confidentiality
provisions and licensing arrangements to establish and protect our proprietary
rights. We may be required to spend significant resources to monitor and police
our intellectual property rights. If we fail to successfully enforce our
intellectual property rights, our competitive position could suffer, which could
harm our operating results.
OUR PENSION AND OTHER POSTRETIREMENT BENEFIT OBLIGATIONS AND EXPENSE (OR INCOME)
ARE DEPENDENT UPON ASSUMPTIONS USED IN CALCULATING SUCH AMOUNTS AND ACTUAL
RESULTS OF INVESTMENT ACTIVITY.
Pension and other postretirement benefit obligations and expense (or
income) are dependent on assumptions used in calculating such amounts and actual
results of investment activity. These assumptions include discount rate, rate of
compensation increases, expected return on plan assets and expected healthcare
trend rates. While we believe that the assumptions are appropriate, differences
in actual experience or future changes in assumptions may affect our
obligations, future expense and funding requirements.
A SIGNIFICANT PORTION OF OUR ASSETS CONSISTS OF GOODWILL AND OTHER INTANGIBLE
ASSETS, THE VALUE OF WHICH MAY BE REDUCED IF WE DETERMINE THAT THOSE ASSETS ARE
IMPAIRED.
As of December 31, 2004, goodwill and other intangible assets represented
approximately $484.3 million, or 47% of our total assets. Upon completion of the
Thomas Industries acquisition, we estimate that we will increase our goodwill
and other intangible assets by $322.5 million. Goodwill is generated in an
S-18
acquisition when the cost of such acquisition exceeds the fair value of the net
tangible and identifiable intangible assets we acquire. Goodwill is no longer
amortized under generally accepted accounting principles as a result of SFAS No.
142. Instead, goodwill and certain other identifiable intangible assets are
subject to impairment analyses at least annually. We could be required to
recognize reductions in our net income caused by the impairment of goodwill and
other intangibles, that, if significant, could materially and adversely affect
our results of operations.
RISKS RELATED TO THE OFFERING
OUR STOCK PRICE HAS BEEN, AND MAY CONTINUE TO BE, VOLATILE, WHICH COULD RESULT
IN SUBSTANTIAL LOSSES FOR INVESTORS PURCHASING SHARES IN THIS OFFERING.
The trading price of our common stock has fluctuated, ranging between
$24.55 and $43.13 per share over the 52 weeks preceding the date of this
prospectus supplement. The overall market and the price of our common stock may
continue to be volatile. The trading price of our common stock may be
significantly affected by various factors, including:
-- general economic and market conditions;
-- variations in our quarter-to-quarter operating results;
-- changes in investors' and analysts' perceptions of the business risks
and conditions of our business;
-- the expiration of the lock-up period referred to under "Underwriting"
(90 days after the offering); and
-- the limited public float of our common stock.
In addition, there can be no assurance that the issuance of shares in this
offering and in potential future offerings will not have an adverse effect on
the trading price of our common stock.
VARIOUS RESTRICTIONS IN OUR GOVERNING DOCUMENTS AND DELAWARE LAW COULD HINDER A
TAKEOVER THAT IS NOT SUPPORTED BY OUR BOARD OF DIRECTORS.
Certain provisions in our corporate documents and Delaware law could delay
or prevent a change in control. Our Certificate of Incorporation and By-Laws
contain provisions that may make it difficult to acquire control of us,
including provisions: regulating the ability of our stockholders to bring
matters for action at annual meetings; prohibiting the stockholders from acting
by written consent; authorizing the Board of Directors to issue and set the
terms of preferred stock; and creating a Board of Directors comprised of three
classes of directors with staggered terms. We also have a rights plan in place
that would cause extreme dilution to any person or group which attempts to
acquire a significant interest in us without advance approval of the Board of
Directors. In addition, Section 203 of the Delaware General Corporation law
imposes restrictions on mergers and other business combinations between us and
any holder of 15% or more of our common stock.
S-19
USE OF PROCEEDS
The net proceeds to us from this offering are estimated to be approximately
$191.1 million after deducting the underwriting discount and commissions and
offering expenses payable by us. If the underwriters' option to purchase 750,000
additional shares in this offering is exercised in full, we estimate our net
proceeds will be approximately $219.8 million. We expect to use the net proceeds
from this offering, along with the proceeds from the concurrent notes offering,
borrowings under our amended and restated credit facility and available cash, to
finance our acquisition of Thomas Industries, repay approximately $8.7 million
of our revolver debt and approximately $26.9 million of our other long term debt
and pay related fees and expenses. See the sources and uses table in "Unaudited
Pro Forma Consolidated Financial Statements - Thomas Industries Acquisition
Financing." The debt to be repaid has a weighted average interest rate of 5.25%
and a weighted average maturity of November 2006.
Pending the application of the net proceeds, we expect to repay all amounts
outstanding under our revolving credit facility and to invest in short term,
interest-bearing securities. If the Thomas Industries acquisition is not
consummated, we expect to use the net proceeds from this offering to repay all
amounts outstanding under our revolving credit facility and a portion of our
term loan.
PRICE RANGE OF COMMON STOCK
Our common stock is traded on the New York Stock Exchange under the trading
symbol "GDI". The following table sets forth, for the periods indicated, the
high and low sales prices per share of our common stock as reported on the New
York Stock Exchange.
HIGH LOW
------- -------
FISCAL YEAR ENDED DECEMBER 31, 2003
First Quarter.......................................... $ 20.44 $ 16.35
Second Quarter......................................... $ 20.80 $ 18.10
Third Quarter.......................................... $ 25.10 $ 20.05
Fourth Quarter......................................... $ 24.99 $ 19.95
FISCAL YEAR ENDED DECEMBER 31, 2004
First Quarter.......................................... $ 30.30 $ 23.75
Second Quarter......................................... $ 28.96 $ 24.55
Third Quarter.......................................... $ 28.53 $ 25.36
Fourth Quarter......................................... $ 37.95 $ 27.15
FISCAL YEAR ENDED DECEMBER 31, 2005
First Quarter.......................................... $ 43.13 $ 33.97
Second Quarter (through April 13, 2005)................ $ 41.95 $ 38.13
On April 13, 2005, the last reported sale price of our common stock on the
New York Stock Exchange was $40.12. As of April 13, 2005 there were
approximately 7,757 stockholders of record of our common stock.
DIVIDEND POLICY
We have not paid a dividend on our common stock since our spin-off from
Cooper Industries, Inc. in 1994. We plan to retain all net earnings for debt
service and capital accumulation and reinvestment. We do not plan to pay
dividends on our common stock for the foreseeable future. Our Board of Directors
has sole discretion over the declaration and payment of future dividends. Any
future dividends will depend upon our profitability, financial condition, cash
requirements, future prospects, general business conditions, legal and
contractual restrictions on the payment of dividends and other factors our Board
of Directors believes are relevant. Our debt instruments contain restrictions on
the payment of cash dividends.
S-20
CAPITALIZATION
The following table sets forth our cash and cash equivalents, short-term
debt, long-term debt and stockholders' equity as of December 31, 2004: (1) on an
actual basis, (2) as adjusted to give effect to this offering and the
application of the estimated net proceeds from this offering to repay
indebtedness and (3) on a pro forma basis to give effect to this offering, the
Thomas Industries acquisition and the related financing transactions. You should
read this information in conjunction with the information under "Selected
Consolidated Financial Information of Gardner Denver," "Unaudited Pro Forma
Consolidated Financial Statements," "Management's Discussion and Analysis of
Financial Conditions and Results of Operations" and our consolidated financial
statements and related notes beginning on page F-1.
DECEMBER 31, 2004
--------------------------------------
AS ADJUSTED PRO FORMA
ACTUAL UNAUDITED(1) UNAUDITED(2)
-------- ------------ ------------
(in thousands except share data)
Cash and equivalents...................................... $ 64,601 $ 64,601 $ 92,500
======== ======== ==========
Short-term borrowings..................................... $ 12,627 $ 12,627 $ 1,729
======== ======== ==========
Current maturities of long-term debt...................... $ 20,322 $ 20,322 $ 14,718
======== ======== ==========
Long-term debt:
Credit line, due 2009................................... 113,635 -- 104,961
Term loan, due 2009..................................... 138,750 61,312 138,750
Term loan, due 2010..................................... -- -- 230,000
Senior Subordinated Notes, due 2013..................... -- -- 125,000
Other long-term debt.................................... 27,871 27,871 27,022
-------- -------- ----------
Total long-term debt.................................... $280,256 $ 89,183 $ 625,733
======== ======== ==========
Stockholders' equity:
Common stock (shares authorized: 50,000,000, par value
$0.01; shares issued: 19,947,570 actual; 24,947,570
as adjusted and pro forma)........................... 217 267 267
Capital in excess of par value.......................... 262,091 453,114 453,114
Retained earnings....................................... 139,430 139,430 139,430
Accumulated other comprehensive income.................. 30,185 30,185 30,185
Treasury stock at cost.................................. (26,447) (26,447) (26,447)
-------- -------- ----------
Total stockholders' equity........................... 405,476 596,549 596,549
-------- -------- ----------
Total capitalization............................... $718,681 $718,681 $1,238,729
======== ======== ==========
(1) Our intention is to use the net proceeds from this offering to finance a
portion of the acquisition of Thomas Industries. However, if we are unable
to consummate the acquisition of Thomas Industries, we will use the net
proceeds from this offering to repay all amounts outstanding under our
revolving credit facility and a portion of our term loan as presented above
under the title "As Adjusted Unaudited."
(2) Information presented under the title "Pro Forma Unaudited" assumes that the
acquisition of Thomas Industries is consummated. However, the Thomas
Industries acquisition is subject to a number of closing conditions and may
not be consummated. See "Risk Factors - Risks Related to the Thomas
Industries Acquisition."
S-21
The number of shares of our common stock to be outstanding after this
offering is based on our shares outstanding as of March 31, 2005, as adjusted
for the 5,000,000 shares offered by this prospectus supplement. It excludes:
-- Up to 750,000 shares issuable by us if the underwriters exercise
their over-allotment option in full;
-- 2,351,962 shares reserved for issuance under our existing stock
incentive plans, including 1,578,649 shares issuable upon exercise of
options outstanding as of March 31, 2005 at a weighted average
exercise price of $23.11 per share;
-- 445,055 shares reserved for issuance under our employee stock
purchase plan; and
-- 241,218 shares reserved for issuance under our retirement savings
plan.
S-22
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
GENERAL DESCRIPTION
The following unaudited pro forma consolidated financial statements are
based on our audited historical consolidated financial statements and the
audited historical consolidated financial statements of Thomas Industries, each
included in this prospectus supplement, adjusted to give effect to the Nash Elmo
acquisition, this offering, the Thomas Industries acquisition and the related
financing transactions. The unaudited pro forma consolidated statement of
operations for the year ended December 31, 2004 gives effect to the Nash Elmo
acquisition, this offering, the Thomas Industries acquisition and the related
financing transactions as if each had occurred on January 1, 2004. The unaudited
pro forma consolidated balance sheet as of December 31, 2004 gives effect to
this offering, the Thomas Industries acquisition and the related financing
transactions as if each had occurred on December 31, 2004.
THOMAS INDUSTRIES ACQUISITION FINANCING
We intend to use the proceeds from this offering, a concurrent notes
offering, borrowings under our amended and restated credit facility and
available cash to fund our acquisition of Thomas Industries, to repay a portion
of our outstanding indebtedness and to pay related fees and expenses. Our plan
to finance the acquisition of Thomas Industries, and to refinance approximately
$35.6 million of our debt, is outlined in the sources and uses table below:
SOURCES USES
------- ----
(dollars in millions)
Available cash at Gardner Denver..... $ 20.0 Merger consideration................. $734.2
Available cash at Thomas 219.2 Repay existing Gardner Denver 35.6
Industries(1)...................... debt(2)..............................
New term loan........................ 230.0 Fees and expenses.................... 25.0
------
New senior subordinated notes........ 125.0
This offering(3)..................... 200.6
-------
Total................................ $ 794.8 Total................................ $794.8
======= ======
Note: Assumes our existing $375 million credit facility is successfully
amended and restated and will not need to be refinanced.
(1) Represents the estimated immediately available amount of Thomas
Industries' total cash and short-term investments.
(2) Includes repayment of $8.7 million of our revolver debt and repayment
of $26.9 million of our other long-term debt.
(3) Does not assume exercise of over-allotment option. If over-allotment
option is exercised an additional $28.7 million of our revolver debt
would be repaid.
Concurrent with this offering, we are offering $125.0 million aggregate
principal amount of Senior Subordinated Notes due 2013 in a private placement.
The notes will not be registered under the Securities Act and may not be offered
or sold in the United States absent registration or an exemption from the
registration requirements. The notes will be unconditionally guaranteed, jointly
and severally, by certain of our current and future domestic subsidiaries. The
gross proceeds from the notes offering will be placed into escrow, together with
an amount in cash, cash equivalents or treasury securities, so that the escrowed
funds will be sufficient to pay the special mandatory redemption price described
below for the notes, when and if due. The notes are subject to a special
redemption on or before January 2, 2006, at a redemption price equal to their
price of issuance, plus accrued interest and accretion of any discount to the
date of redemption, in the event that the Thomas Industries acquisition is not
consummated by December 31, 2005. The proceeds from the notes offering will be
released from escrow upon consummation of the Thomas Industries acquisition.
As of December 31, 2004, our existing credit facility consisted of a $225.0
million revolving credit facility and a $148.1 million term loan. We expect to
enter into an amendment and restatement of this facility which will become
effective upon the consummation of the Thomas Industries acquisition. The
amended and restated facility is expected to provide an additional $230.0
million term loan, the proceeds of which will be
S-23
used as described above. The effectiveness of the amendment and restatement is
subject to the consummation of the Thomas Industries acquisition, receipt of
sufficient proceeds from this offering and our concurrent notes offering and
other customary closing conditions.
The acquisition of Thomas Industries is not contingent upon completion of
this offering, the concurrent notes offering or the amendment and restatement of
our credit facility. We have received a financing commitment letter jointly
issued by affiliates of Bear, Stearns & Co. Inc. and J.P. Morgan Securities Inc.
to ensure availability of funding, subject to customary conditions. A number of
material conditions must still be satisfied before we can effect the acquisition
of Thomas Industries and, as discussed in "Risk Factors," the satisfaction of
many of these conditions is outside of our control. While we plan to finance the
acquisition as outlined in the sources and uses table above, we may alter our
plans depending on market conditions or other factors. Pending the closing of
the acquisition of Thomas Industries, net proceeds from this offering will be
used to repay a portion of our existing indebtedness. See "Use of Proceeds."
THOMAS INDUSTRIES HISTORICAL FINANCIAL STATEMENTS
The historical consolidated financial statements of Thomas Industries
included in the unaudited pro forma consolidated financial statements are based
on Thomas Industries' audited consolidated financial statements as of, and for
the twelve-month period ended, December 31, 2004.
The Genlyte Group Incorporated, or "Genlyte," and Thomas Industries formed
Genlyte Thomas Group LLC, or "GTG," on August 31, 1998. Effective with Thomas
Industries' investment in GTG, their interest in GTG was accounted for using the
equity method of accounting. Effective with the close of business on July 31,
2004, Thomas Industries sold its 32% interest in GTG to Genlyte for
approximately $400.9 million. The historical consolidated statement of
operations of Thomas Industries for the year ended December 31, 2004 includes
equity income from GTG for the seven months ended July 31, 2004 of $18.6 million
and a pretax gain of $160.4 million from the sale of its interest in GTG.
PRO FORMA ADJUSTMENTS
The unaudited pro forma consolidated financial statements reflect pro forma
adjustments that are described in the accompanying notes and are based on
available information and certain assumptions we believe are reasonable but are
subject to change. In our opinion, all adjustments that are necessary to fairly
present the pro forma information have been made pursuant to Article 11 of
Regulation S-X. The unaudited pro forma consolidated financial statements do not
purport to represent what our results of operations or financial position would
actually have been if this offering, the Thomas Industries acquisition and the
related financing transactions had occurred on such dates or to project our
results of operations or financial position for any future date or period.
The unaudited pro forma consolidated financial statements reflect our
preliminary estimates of the allocation of the purchase price for the Thomas
Industries acquisition and are subject to change. The unaudited pro forma
consolidated financial statements do not reflect any operating efficiencies and
cost savings that we may achieve with respect to the combined entities nor any
expense associated with achieving these benefits.
As required by Article 11 of Regulation S-X, the Unaudited Pro Forma
Consolidated Statement of Operations includes equity income from GTG, as well as
a gain from the sale of Thomas Industries' interest in GTG. In total, the
Unaudited Pro Forma Consolidated Statement of Operations includes approximately
$177.0 million of pretax income, $95.1 million of net income and $3.90 of
diluted earnings per share from the effects of GTG. Thus, the pro forma results
are not indicative of future results of operations of Thomas Industries or the
combined businesses of Gardner Denver, Nash Elmo and Thomas Industries. Absent
the effects of GTG, we would have had $1.76 of pro forma diluted earnings per
share. For information that excludes the effects of GTG, see Note (F) in the
Unaudited Pro Forma Consolidated Statement of Operations.
OTHER RELATED INFORMATION IN THIS PROSPECTUS SUPPLEMENT
You should read the following unaudited pro forma consolidated financial
statements in conjunction with our historical audited consolidated financial
statements and the related notes, Thomas Industries' historical
S-24
audited consolidated financial statements and the related notes, "Use of
Proceeds" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this prospectus supplement.
S-25
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2004
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NASH ELMO PRO FORMA
HISTORICAL FOR GARDNER DENVER
EIGHT MONTHS NASH ELMO PRO FORMA AND NASH ELMO
GARDNER DENVER ENDED PRO FORMA GARDNER DENVER ADJUSTMENTS FOR ADJUSTED FOR
HISTORICAL AUGUST 31, 2004 ADJUSTMENTS AND NASH ELMO THE OFFERING THE OFFERING
-------------- --------------- ----------- -------------- --------------- --------------
Revenues..................... $739,539 $156,317 $ -- $895,856 $ -- $895,856
Costs and expenses
Cost of sales.............. 498,435(A) 97,066 -- 595,501 -- 595,501
Depreciation and
amortization............. 21,901 4,817 2,000(B) 28,718 -- 28,718
Selling and administrative
expenses................. 157,453 40,952 -- 198,405 -- 198,405
Interest expense........... 10,102 3,160 2,918(C) 16,180 (7,957)(E) 8,223
Other income, net.......... (638) (63) -- (701) -- (701)
-------- -------- ------- -------- ------- --------
Total costs and expenses..... 687,253 145,932 4,918 838,103 (7,957) 830,146
Equity income from GTG....... -- -- -- -- -- --
Gain on sale of GTG.......... -- -- -- -- -- --
-------- -------- ------- -------- ------- --------
Income before income taxes... 52,286 10,385 (4,918) 57,753 7,957 65,710
Provision for income taxes... 15,163 3,028 (865)(D) 17,326 2,387(D) 19,713
-------- -------- ------- -------- ------- --------
Net income............... $ 37,123 $ 7,357 $(4,053) $ 40,427 $ 5,570 $ 45,997
======== ======== ======= ======== ======= ========
Basic earnings per share..... $ 1.96 $ 2.13 $ 1.92
======== ======== ========
Diluted earnings per share... $ 1.92 $ 2.09 $ 1.89
======== ======== ========
Basic weighted average number
of shares outstanding...... 18,955 18,955 5,000 23,955
======== ======== ======= ========
Diluted weighted average
number of shares
outstanding................ 19,377 19,377 5,000 24,377
======== ======== ======= ========
PRO FORMA
GARDNER
THOMAS DENVER,
INDUSTRIES ACQ. NASH ELMO,
AND RELATED THOMAS
THOMAS FINANCING INDUSTRIES
INDUSTRIES PRO FORMA AND RELATED
HISTORICAL(F) ADJUSTMENTS FINANCING(F)
------------- --------------- -------------
Revenues..................... $410,114 $ -- $1,305,970
Costs and expenses
Cost of sales.............. 252,768 -- 848,269
Depreciation and
amortization............. 16,340 5,357(G) 50,415
Selling and administrative
expenses................. 111,274 -- 309,679
Interest expense........... 2,691 27,568(H) 38,482
Other income, net.......... (1,611) -- (2,312)
-------- -------- ----------
Total costs and expenses..... 381,462 32,925 1,244,533
Equity income from GTG....... 18,608 -- 18,608
Gain on sale of GTG.......... 160,410 -- 160,410
-------- -------- ----------
Income before income taxes... 207,670 (32,925) 240,455
Provision for income taxes... 93,516 (10,700)(I) 102,529
-------- -------- ----------
Net income............... $114,154 $(22,225) $ 137,926
======== ======== ==========
Basic earnings per share..... $ 5.76
==========
Diluted earnings per share... $ 5.66
==========
Basic weighted average number
of shares outstanding...... 23,955
==========
Diluted weighted average
number of shares
outstanding................ 24,377
==========
NOTE: THE ABOVE UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
INCLUDES EQUITY INCOME FROM THOMAS INDUSTRIES' 32% INVESTMENT IN GTG.
GENLYTE AND THOMAS INDUSTRIES FORMED GTG ON AUGUST 30, 1998. EFFECTIVE
WITH THOMAS INDUSTRIES' INVESTMENT IN GTG, ITS INTEREST IN GTG WAS
ACCOUNTED FOR USING THE EQUITY METHOD OF ACCOUNTING. EFFECTIVE WITH THE
CLOSE OF BUSINESS ON JULY 31, 2004, THOMAS INDUSTRIES SOLD ITS 32%
INTEREST IN GTG TO GENLYTE FOR APPROXIMATELY $400,900. AS REQUIRED BY
ARTICLE 11 OF REGULATION S-X, THE UNAUDITED PRO FORMA CONSOLIDATED
STATEMENT OF OPERATIONS INCLUDES EQUITY INCOME FROM GTG, AS WELL AS A
GAIN FROM THE SALE OF THOMAS INDUSTRIES' INTEREST IN GTG. IN TOTAL, THE
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS INCLUDES
$176,954 OF PRETAX INCOME, $95,063 OF NET INCOME AND $3.90 OF DILUTED
EARNINGS PER SHARE FROM THE EFFECTS OF GTG. FOR INFORMATION THAT
EXCLUDES THE EFFECTS OF GTG, SEE NOTE (F) BELOW.
See accompanying notes to unaudited pro forma consolidated financial statements
S-26
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2004
(IN THOUSANDS)
THOMAS PRO FORMA
INDUSTRIES GARDNER DENVER,
ACQ. AND NASH ELMO,
RELATED THOMAS
ADJUSTMENTS THOMAS FINANCING INDUSTRIES AND
GARDNER DENVER FOR THE GARDNER DENVER INDUSTRIES PRO FORMA RELATED
HISTORICAL OFFERING AS ADJUSTED HISTORICAL ADJUSTMENTS FINANCING
-------------- ----------- -------------- ---------- ------------- ---------------
ASSETS
Current assets
Cash and equivalents....... $ 64,601 $ -- $ 64,601 $133,472 $(105,573)(K) $ 92,500
Short-term investments..... -- -- -- 133,627 (133,627)(K) --
Receivables, net........... 163,927 -- 163,927 58,305 (1,000)(K) 221,232
Inventories, net........... 138,386 -- 138,386 75,207 3,192(K),(L) 219,742
4,957(K)
(2,000)(K)
Deferred income taxes...... 9,465 -- 9,465 5,101 (1,957)(K) 12,609
Other current assets....... 9,143 -- 9,143 7,514 -- 16,657
---------- --------- -------------- -------- --------- ----------
Total current assets..... 385,522 -- 385,522 413,226 (236,008) 562,740
---------- --------- -------------- -------- --------- ----------
Property, plant and
equipment, net............. 148,819 -- 148,819 114,868 25,791(K),(M) 289,478
Goodwill..................... 374,159 -- 374,159 68,639 145,843(K) 588,641
Other intangibles, net....... 110,173 -- 110,173 22,659 108,000(K) 218,173
(22,659)(K)
Other assets................. 9,936 -- 9,936 2,544 7,000(N) 19,480
---------- --------- -------------- -------- --------- ----------
Total assets........... $1,028,609 $ -- $ 1,028,609 $621,936 $ 27,967 $1,678,512
========== ========= ============== ======== ========= ==========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities
Short-term borrowings and
current maturities of
long-term debt........... $ 32,949 $ -- $ 32,949 $ 1,797 $ (18,299) $ 16,447
Accounts payable and
accrued liabilities...... 206,069 -- 206,069 53,961 -- 260,030
Dividends payable.......... -- -- -- 1,689 -- 1,689
---------- --------- -------------- -------- --------- ----------
Total current
liabilities............ 239,018 -- 239,018 57,447 (18,299) 278,166
---------- --------- -------------- -------- --------- ----------
Long-term debt, less current
maturities................. 280,256 (191,073)(J) 89,183 7,751 528,799(K) 625,733
Postretirement benefits other
than pensions.............. 30,503 -- 30,503 -- -- 30,503
Deferred income taxes........ 21,324 -- 21,324 8,978 40,900(K) 71,202
Other liabilities............ 52,032 -- 52,032 20,827 3,500(K) 76,359
---------- --------- -------------- -------- --------- ----------
Total liabilities........ 623,133 (191,073) 432,060 95,003 554,900 1,081,963
---------- --------- -------------- -------- --------- ----------
Total stockholders'
equity................. 405,476 191,073(J) 596,549 526,933 (526,933)(O) 596,549
---------- --------- -------------- -------- --------- ----------
Total liabilities and
stockholders'
equity............... $1,028,609 $ -- $ 1,028,609 $621,936 $ 27,967 $1,678,512
========== ========= ============== ======== ========= ==========
See accompanying notes to unaudited pro forma consolidated financial statements
S-27
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(A) Includes a $3,735 non-recurring unfavorable impact related to recording
the acquired inventory of Syltone and Nash Elmo at fair value.
(B) Reflects the change in Nash Elmo's depreciation and amortization expense
due to the depreciation of the step-up in its property, plant and
equipment to estimated fair value over estimated average useful lives
ranging from 3 to 25 years, and the amortization of the separately
identifiable intangible assets with finite lives at estimated fair values
over estimated useful lives ranging from 5 to 20 years. This adjustment
is based on our estimated allocation of the purchase price for the Nash
Elmo acquisition. We will base the final allocation on appraisals that
have not yet been completed.
(C) Reflects the following interest expense on the incremental borrowings
necessary to finance the Nash Elmo acquisition:
Interest on the incremental credit line borrowing ($117,480
at 3.75%)................................................. $ 2,937
Interest on the incremental term loan borrowing ($108,750 at
3.75%).................................................... 2,719
Incremental interest on our previously existing borrowings
due to an increase in rates on borrowings and commitments
resulting from the increased leverage from the Nash Elmo
acquisition............................................... 213
Net impact on amortization of debt issue costs related to
the financing for the Nash Elmo acquisition............... (117)
Elimination of historical interest expense on Nash Elmo's
debt repaid in conjunction with the Nash Elmo
acquisition............................................... (2,834)
-------
Total interest expense adjustment...................... $ 2,918
=======
For purposes of determining the adjustment for the credit line and the
term loan borrowings, the applicable LIBOR rate plus the applicable
margin per our credit agreement was used.
(D) Reflects the income tax effects of the pro forma adjustments to provide
for the combined effective income tax rate for Gardner Denver and Nash
Elmo of 30.0%.
(E) Reflects the reduction in interest expense assuming net proceeds from the
stock offering of $191,073 were used to pay down debt:
Interest on paid down credit line borrowing ($113,635 at
3.85%).................................................... $(4,375)
Interest on paid down term loan borrowing ($77,438 at
3.85%).................................................... (2,981)
Interest on remaining borrowings due to decreased leverage
from stock offering....................................... (843)
Net impact on amortization of debt issue costs related to
debt retired.............................................. 242
-------
$(7,957)
=======
For purposes of determining the adjustment to interest expense for the
credit line and term loan borrowings, the applicable LIBOR rate plus the
applicable margin per our credit agreement was used.
(F) As noted above, effective with the close of business on July 31, 2004,
Thomas Industries sold its 32% interest in GTG to Genlyte for
approximately $400,900. The information set forth below adjusts the
information presented under the title "Pro Forma Gardner Denver, Nash
Elmo, Thomas Industries and Related Financing" to exclude the effects of
GTG, assuming Thomas Industries had sold its interest in GTG at the
beginning of the period presented and used a portion of the net proceeds
from the sale to repay all of Thomas Industries' existing debt, other
than its capitalized lease obligations.
S-28
YEAR ENDED DECEMBER 31, 2004
------------------------------------------
PRO FORMA
PRO FORMA GARDNER
GARDNER DENVER,
DENVER, NASH ELMO,
NASH ELMO, THOMAS
THOMAS INDUSTRIES
INDUSTRIES AND RELATED
AND RELATED FINANCING,
FINANCING ADJUSTMENTS AS ADJUSTED
------------ ----------- ------------
(in thousands, except per share amounts)
Revenues............................................... $1,305,970 -- $1,305,970
Costs and expenses
Cost of sales........................................ 848,269 -- 848,269
Depreciation and amortization........................ 50,415 -- 50,415
Selling and administrative expenses.................. 309,679 (353)(1) 309,326
Interest expense..................................... 38,482 (1,711)(2) 36,771
Other income, net.................................... (2,312) -- (2,312)
---------- --------- ----------
Total costs and expenses............................... 1,244,533 (2,064) 1,242,469
Equity income from GTG................................. 18,608 (18,608)(3) --
Gain on sale of GTG.................................... 160,410 (160,410)(4) --
---------- --------- ----------
Income before income taxes............................. 240,455 (176,954) 63,501
Provision for income taxes............................. 102,529 (81,891)(5) 20,638
---------- --------- ----------
Net income........................................... $ 137,926 $ (95,063) $ 42,863
========== ========= ==========
Basic earnings per share............................... $ 5.76 $ 1.79
========== ==========
Diluted earnings per share............................. $ 5.66 $ 1.76
========== ==========
Basic weighted average number of shares outstanding.... 23,955 23,955
========== ==========
Diluted weighted average number of shares
outstanding.......................................... 24,377 24,377
========== ==========
(1) The adjustment reflects the reduced bank fees and deferred loan
amortization due to applying a portion of the proceeds from the
sale of Thomas Industries' interest in GTG to pay down previously
existing bank debt, except capitalized lease obligations, as of the
beginning of the period.
(2) The adjustment reflects the reduced interest expense due to
applying a portion of the proceeds from the sale of Thomas
Industries' interest in GTG to pay down debt as of the beginning of
the period.
(3) The adjustment reflects the elimination of Thomas Industries'
equity income from GTG due to the sale of GTG as of the beginning
of the period.
(4) The adjustment reflects the elimination of the pretax gain on sale
of Thomas Industries' interest in GTG as of the beginning of the
period.
(5) The adjustment reflects the income tax effects of adjustments (1),
(2), (3) and (4) based on an overall effective tax rate to 32.5%
without the impact of the gain on Thomas Industries' sale of its
interest in GTG or its equity income prior to the sale.
Financial information for Thomas Industries includes $5,245 of
non-recurring charges related to plant shutdown, legal and environmental
costs.
(G) Reflects the change in Thomas Industries' depreciation and amortization
expense due to the depreciation of the step-up in property, plant and
equipment to the estimated fair value over estimated average useful lives
ranging from 3 to 25 years, and the amortization of the separately
identifiable intangible assets with finite lives at estimated fair values
over estimated useful lives ranging from 5 to 20 years. This adjustment is
based on our estimated allocation of the purchase price for the Thomas
Industries acquisition. We will base the final allocation on appraisals
that have not yet been completed.
S-29
(H) Reflects the following interest expense on the estimated incremental
borrowings necessary to finance the Thomas Industries acquisition (as
discussed above under "- Thomas Industries Acquisition and Related
Financing").
Reversal of interest savings noted in footnote (E) above to
reflect the paydown of such debt.......................... $ 7,957
Interest on the new senior subordinated notes and term loan
borrowings ($355,000 at 5.10%)............................ 18,095
Incremental interest on our previously existing borrowings
due to an increase in rates on borrowings and commitments
resulting from the increased leverage from the Thomas
Industries acquisition.................................... 939
Elimination of historical interest expense on other
borrowings to be repaid ($35,573 at 5.25%)................ (1,868)
Net impact on amortization of debt issue costs related to
the financing for the Thomas Industries acquisition....... 1,171
Prepayment penalty on other borrowings to be repaid......... 1,274
-------
Total interest expense adjustment......................... $27,568
=======
The prepayment penalty on other borrowings to be repaid of $1,274 was
based upon interest rates in effect as of January 1, 2004. Based upon
interest rates in effect at the time of this offering and principal
currently outstanding, the actual prepayment penalty is expected to be
approximately $324.
(I) Reflects the income tax effects of the pro forma adjustments to provide
for the combined effective income tax rate for Gardner Denver, Nash Elmo
and Thomas Industries (excluding the effect of GTG) of 32.5%.
(J) Reflects the issuance of 5,000,000 shares of common stock, par value $0.01
per share at $40.12 per share less direct costs associated with the
offering of $9,527. These net proceeds will be used to pay down the
existing credit line ($113,635) and a portion of the existing term loan
($77,438).
(K) Reflects the following estimated sources and uses of cash, purchase price
allocation and net fair value adjustments to Thomas' assets and liabilities
including goodwill:
Sources and uses of cash:
Consideration to be paid at closing for the shares of Thomas
Industries................................................ $ 734,200
Cash to be paid for estimated direct acquisition costs,
including financial advisory, legal, accounting, auditing
and other costs........................................... 8,500
---------
Aggregate purchase price.................................... $ 742,700
=========
Available cash at Gardner Denver............................ 20,000
Available cash and short-term investments at Thomas
Industries................................................ 219,200
---------
Total existing cash used for the acquisition................ $ 239,200
=========
Borrowings available under existing credit line............. 113,635
Borrowings available under existing term loan............... 77,438
Borrowings available under new term loan.................... 230,000
Borrowings available under new senior subordinated notes.... 125,000
Existing Gardner Denver debt to be repaid................... (35,573)
---------
Total new borrowings........................................ 510,500
Less estimated debt issuance costs related to new
borrowings................................................ (7,000)(N)
---------
Net borrowings directly related to the acquisition purchase
price..................................................... $ 503,500
=========
S-30
Estimated purchase price allocation:
Aggregate purchase price.................................... $ 742,700
Book value of Thomas Industries' net assets................. (526,933)
Capitalized estimated manufacturing profit in inventory
acquired.................................................. (3,192)(L)
Elimination of LIFO reserve................................. (4,957)
Step-up in property, plant and equipment to fair value...... (25,791)(M)
Elimination of Thomas Industries' historical intangible
assets (other than goodwill).............................. 22,659
Separately identifiable intangible assets (other than
goodwill)................................................. (108,000)
Adjustment of pension liabilities (equal to excess of the
projected benefit obligation over the fair value of plan
assets less Thomas Industries' existing liability......... 3,500
Additional deferred tax liabilities, net (on fair value
changes to assets and liabilities)........................ 42,857
Other asset and liability fair value adjustments, net....... 3,000
---------
Net adjustment to goodwill.................................. $ 145,843
=========
This reflects our preliminary estimates of the purchase price allocation
for the Thomas Industries acquisition, which may change upon completion of
appraisals. Further, we may identify other assets and liabilities to which
a portion of the purchase price will be allocated. The purchase price
allocation also does not include an accrual for any anticipated
restructuring activities in connection with the Thomas Industries
acquisition. We have not yet performed a detailed analysis to identify and
measure additional adjustments that may be necessary to conform Thomas
Industries' accounting policies with our accounting policies.
The adjusted pro forma balance of Thomas Industries' other separately
identifiable intangible assets is estimated to be comprised of the
following:
Other intangible assets:
Customer lists and relationships, to be amortized over 20
years.................................................. $ 50,000
Trademarks and trade names, indefinite lives.............. 45,000
Technology (primarily patents and software), to be
amortized
over 5-10 years........................................ 9,500
Other, to be amortized over 5 years....................... 3,500
--------
$108,000
========
In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets,"
the pro forma statement of operations does not include amortization of
goodwill and other intangible assets with indefinite useful lives to be
acquired in the Thomas Industries acquisition.
(L) Reflects the estimated purchase accounting adjustment for capitalization
of estimated manufacturing profit in inventory to be acquired with Thomas
Industries. The pro forma statement of operations does not reflect the
one time adjustment on cost of sales during the period this inventory is
sold.
(M) Reflects the estimated purchase accounting adjustment to Thomas Industries'
property, plant and equipment to step-up the basis to estimated fair value.
This adjustment is based on the estimated allocation of the purchase price
for the Thomas Industries acquisition. The final allocation of the purchase
price will be based on appraisals that have not yet been completed.
(N) Reflects the estimated additional debt issuance costs related to the new
borrowings which will be capitalized and amortized through maturity.
(O) Reflects the elimination of Thomas Industries' historical consolidated
equity.
S-31
SELECTED CONSOLIDATED FINANCIAL INFORMATION OF GARDNER DENVER
The selected historical consolidated financial information presented below
is for, and as of the end of, each of the years in the five-year period ended
December 31, 2004. Our consolidated financial statements for the years ended
December 31, 2002, 2003 and 2004 have been audited by KPMG LLP, an independent
registered public accounting firm. Our consolidated financial statements for the
years ended December 31, 2000 and 2001 have been audited by Arthur Andersen LLP,
independent auditors. The consolidated financial statements as of December 31,
2003 and 2004, and for each of the years in the three-year period ended December
31, 2004, and the reports thereon, are included in this prospectus supplement.
The selected consolidated financial information should be read in
conjunction with the consolidated financial statements for the years ended
December 31, 2004, 2003 and 2002, the related notes, and the independent
registered public accounting firm's reports.
YEAR ENDED DECEMBER 31,
------------------------------------------------------
2000 2001 2002 2003 2004
-------- -------- -------- -------- ----------
(in thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
Revenues............................. $379,358 $419,770 $418,158 $439,530 $ 739,539
Costs and expenses
Cost of sales..................... 268,290 294,249 289,631 307,753 498,435
Depreciation and amortization
(1)............................. 15,881 17,567 14,139 14,566 21,901
Selling and administrative
expenses........................ 59,784 69,678 79,400 85,326 157,453
Interest expense.................. 7,669 6,796 6,365 4,748 10,102
Other income, net................. (2,160) (3,203) (204) (3,221) (638)
-------- -------- -------- -------- ----------
Total costs and expenses............. 349,464 385,087 389,331 409,172 687,253
-------- -------- -------- -------- ----------
Income before income taxes........... 29,894 34,683 28,827 30,358 52,286
Provision for income taxes........... 11,210 12,659 9,225 9,715 15,163
-------- -------- -------- -------- ----------
Net income........................... $ 18,684 $ 22,024 $ 19,602 $ 20,643 $ 37,123
======== ======== ======== ======== ==========
Basic earnings per share............. $ 1.22 $ 1.42 $ 1.24 $ 1.29 $ 1.96
======== ======== ======== ======== ==========
Diluted earnings per share........... $ 1.21 $ 1.40 $ 1.22 $ 1.27 $ 1.92
======== ======== ======== ======== ==========
Basic shares outstanding............. 15,300 15,553 15,854 16,061 18,955
Diluted shares outstanding........... 15,489 15,783 16,042 16,312 19,377
BALANCE SHEET DATA (AS OF END OF
PERIOD):
Total assets......................... $403,881 $488,688 $478,730 $589,733 $1,028,609
Long-term debt, less current
maturities........................ 115,808 160,230 112,663 165,756 280,256
Total debt........................... 121,589 167,605 120,163 182,631 313,205
Total liabilities.................... 232,733 289,960 255,807 323,828 623,133
Stockholders' equity................. 171,148 198,728 222,923 265,905 405,476
OTHER FINANCIAL DATA:
Gross margin (2)..................... $111,068 $125,521 $128,527 $131,777 $ 241,104
EBITDA (3)........................... 53,444 59,046 49,331 49,672 84,289
Capital expenditures................. 13,549 11,524 13,641 11,950 19,550
Net cash provided by operating
activities........................ 30,636 44,153 52,481 46,283 76,752
Orders (4)........................... 379,985 413,438 402,019 425,620 786,990
(1) As a result of adopting Statement of Financial Accounting Standards No. 142
"Goodwill and Other Intangibles Assets," periodic goodwill amortization
ceased effective January 1, 2002.
(2) Gross margin consists of revenues minus cost of sales (excluding
depreciation and amortization).
(3) EBITDA consists of net income before provision for income taxes, interest
expense and depreciation and amortization. EBITDA is not a measurement of
financial performance or liquidity determined in accordance with accounting
principles generally accepted in the United States and should not be
considered as an alternative to net income, net cash provided by operating
activities or other consolidated income or cash flow statement data prepared
in accordance with generally accepted accounting principles.
S-32
We present EBITDA because we believe it is frequently used by analysts,
investors and other interested parties in the financial evaluation of
companies in our industry, and we believe it provides useful information to
investors. This definition of EBITDA, however, may differ from the
definition used by other companies. A reconciliation of net income to EBITDA
is provided as follows:
YEAR ENDED DECEMBER 31,
-----------------------------------------------
2000 2001 2002 2003 2004
------- ------- ------- ------- -------
(in thousands)
Net income................... $18,684 $22,024 $19,602 $20,643 $37,123
Provision for income taxes... 11,210 12,659 9,225 9,715 15,163
Interest expense............. 7,669 6,796 6,365 4,748 10,102
Depreciation and
amortization............... 15,881 17,567 14,139 14,566 21,901
------- ------- ------- ------- -------
EBITDA....................... $53,444 $59,046 $49,331 $49,672 $84,289
======= ======= ======= ======= =======
(4) Orders consists of bookings we believe to be firm for which a customer
purchase order has been received or communicated. Since orders can be
rescheduled or canceled at any time, orders do not necessarily reflect
future sales levels.
S-33
SELECTED CONSOLIDATED FINANCIAL INFORMATION OF THOMAS INDUSTRIES
The selected historical consolidated financial information presented below
is for, and as of the end of, each of the years in the five-year period ended
December 31, 2004. Thomas Industries' consolidated financial statements for the
years ended December 31, 2002, 2003 and 2004 have been audited by Ernst & Young
LLP, an independent registered public accounting firm. Its consolidated
financial statements for the years ended December 31, 2000 and 2001 have been
audited by Arthur Andersen, LLP, independent auditors. The consolidated
financial statements as of December 31, 2003 and 2004, and for each of the years
in the three-year period ended December 31, 2004, and the reports thereon, are
included in this prospectus supplement.
The selected consolidated financial information should be read in
conjunction with the consolidated financial statements for the years ended
December 31, 2004, 2003 and 2002, the related notes, and the independent
registered public accounting firm's report.
YEAR ENDED DECEMBER 31,
----------------------------------------------------
2000 2001 2002 2003 2004
-------- -------- -------- -------- --------
(in thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
Net sales............................. $188,824 $184,382 $240,602 $376,774 $410,114
Costs of products sold................ 120,835 118,625 154,904 246,832 262,654
-------- -------- -------- -------- --------
Gross profit.......................... 67,989 65,757 85,698 129,942 147,460
Selling, general and administrative
expenses........................... 44,070 43,411 59,989 101,943 117,728
Equity income from GTG................ 24,575 24,835 28,804 32,138 18,608
Gain on sale of GTG................... -- -- -- -- 160,410
-------- -------- -------- -------- --------
Operating income...................... 48,494 47,181 54,513 60,137 208,750
Interest expense...................... 3,995 3,630 3,370 4,237 2,691
Interest income and other............. 3,799 1,489 456 312 2,335
Other income (expense)................ -- -- (434) (533) (724)
-------- -------- -------- -------- --------
Income before income taxes and
minority interest.................. 48,298 45,040 51,165 55,679 207,670
Income taxes.......................... 18,213 16,870 18,452 18,340 93,516
-------- -------- -------- -------- --------
Income before minority interest....... 30,085 28,170 32,713 37,339 114,154
Minority interest, net of tax......... -- -- 21 25 --
-------- -------- -------- -------- --------
Net income............................ $ 30,085 $ 28,170 $ 32,692 $ 37,314 $114,154
======== ======== ======== ======== ========
Net income per share - Basic.......... $ 1.95 $ 1.86 $ 2.06 $ 2.17 $ 6.53
Net income - Diluted.................. $ 1.91 $ 1.80 $ 2.00 $ 2.12 $ 6.44
Dividends declared per share.......... $ 0.30 $ 0.34 $ 0.34 $ 0.37 $ 0.38
BALANCE SHEET DATA (AS OF END OF
PERIOD):
Total assets.......................... $306,112 $306,714 $491,016 $573,134 $621,936
Long-term debt, less current
maturities......................... 40,727 24,938 104,047 102,673 7,751
Total debt............................ 48,513 32,726 114,869 115,646 9,548
Total liabilities..................... 88,710 69,001 176,615 189,779 95,003
Stockholders' equity.................. 217,402 237,713 314,367 383,355 526,933
OTHER FINANCIAL DATA:
EBITDA(1)............................. $ 59,756 $ 56,583 $ 65,003 $ 75,123 $226,701
Capital expenditures.................. 10,188 8,548 8,358 20,108 16,403
(1) EBITDA consists of net income before minority interest, provision for income
taxes, interest expense and depreciation and amortization. EBITDA is not a
measurement of financial performance or liquidity determined in accordance
with accounting principles generally accepted in the United States and
should not be considered as an alternative to net income, net cash provided
by operating activities or other
S-34
consolidated income or cash flow statement data prepared in accordance with
generally accepted accounting principles. We present EBITDA because we
believe it is frequently used by analysts, investors and other interested
parties in the financial evaluation of companies in our industry, and we
believe it provides useful information to investors. This definition of
EBITDA, however, may differ from the definition used by other companies. A
reconciliation of net income to EBITDA is provided as follows:
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
2000 2001 2002 2003 2004
-------- -------- -------- -------- ---------
(in thousands)
Net income..................... $ 30,085 $ 28,170 $ 32,692 $ 37,314 $ 114,154
Minority interest, net of
tax.......................... -- -- 21 25 --
Provision for income taxes..... 18,213 16,870 18,452 18,340 93,516
Interest expense............... 3,995 3,630 3,370 4,237 2,691
Depreciation and
amortization................. 7,463 7,913 10,468 15,207 16,340
-------- -------- -------- -------- ---------
EBITDA......................... $ 59,756 $ 56,583 $ 65,003 $ 75,123 $ 226,701
-------- -------- -------- -------- ---------
Equity income from GTG......... (24,575) (24,835) (28,804) (32,138) (18,608)
Gain on sale of GTG............ -- -- -- -- (160,410)
Bank fees and deferred loan
amortization................. -- -- -- -- 353(a)
-------- -------- -------- -------- ---------
EBITDA excluding effects of
GTG.......................... $ 35,181 $ 31,748 $ 36,199 $ 42,985 $ 48,036(b)
======== ======== ======== ======== =========
(a) Resulting from Thomas Industries' repayment of debt.
(b) Includes $5,245 of non-recurring charges related to plant shutdown,
legal and environmental costs.
S-35
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our
Consolidated Financial Statements and notes thereto.
OVERVIEW
The Company believes it is one of the leading designers, manufacturers and
marketers of engineered stationary air compressors, liquid ring pumps and
blowers for various industrial and transportation applications and of pumps used
in the petroleum and industrial markets and other fluid transfer equipment
serving chemical, petroleum and food industries.
Since its spin-off from Cooper Industries, Inc. in 1994, the Company has
completed 17 acquisitions, growing its revenues from approximately $176 million
to $740 million in 2004. Of the 17 acquisitions, the two largest were completed
in 2004 with the purchase of nash_elmo Holdings, LLC ("Nash Elmo") and Syltone
plc ("Syltone").
On September 1, 2004, the Company acquired Nash Elmo, a leading global
manufacturer of industrial vacuum pumps. Nash Elmo is primarily split between
two businesses, liquid ring pumps and side channel blowers. Both businesses'
products are complementary to the Compressor and Vacuum Products segment's
existing product portfolio. Nash Elmo, previously headquartered in Trumbull, CT,
has primary manufacturing facilities located in Bad Neustadt and Nuremberg,
Germany; Zibo, China; and Campinas, Brazil. For the year ended December 31,
2003, Nash Elmo's revenues and earnings before income taxes were $212.4 million
and $7.8 million, respectively. Nash Elmo's largest markets are in Europe, Asia,
North America and South America. Approximately 70% of Nash Elmo's revenues are
generated from liquid ring pump products (including related engineered systems
and aftermarket services), while the remaining 30% are derived from side channel
blower products (including aftermarket services).
On January 2, 2004, the Company acquired the outstanding shares of Syltone,
previously a publicly traded company listed on the London Stock Exchange.
Syltone, previously headquartered in Bradford, United Kingdom ("U.K."), is one
of the world's largest manufacturers of equipment used for loading and unloading
liquid and dry bulk products on commercial transportation vehicles. This
equipment includes compressors, blowers and other ancillary products that are
complementary to the Company's existing product lines. Syltone is also one of
the world's largest manufacturers of fluid transfer equipment (including loading
arms, swivel joints, couplers and valves) used to load and unload ships, tank
trucks and rail cars. For the twelve months ended September 30, 2003, Syltone
generated revenues and operating profit (in accordance with accounting
principles generally accepted in the U.K.) of L84.4 million and L6.3 million,
respectively (approximately $151.1 million and $11.3 million, respectively as
calculated using the December 31, 2003 exchange rate of $1.79/L). Syltone's
largest markets are Europe and North America, which represent approximately 67%
and 20% of its revenues, respectively. Approximately 70% of Syltone's revenues
are generated through transportation-related activities while the remaining 30%
are derived from fluid transfer-related activities.
Subsequent to the acquisition of Nash Elmo and Syltone, the Company
continues to be organized based upon the products and services it offers and has
four operating divisions: Compressor, Blower, Liquid Ring Pump and Fluid
Transfer. These divisions comprise two reportable segments, Compressor and
Vacuum Products (formerly Compressed Air Products) and Fluid Transfer Products.
The Compressor, Blower (which now includes the Syltone transportation-related
activities and Nash Elmo's side channel blower business) and Liquid Ring Pump
(consisting of Nash Elmo's liquid ring pump business) Divisions are aggregated
into one reportable segment (Compressor and Vacuum Products) since the long-term
financial performance of these businesses are affected by similar economic
conditions, coupled with the similar nature of their products, manufacturing
processes and other business characteristics. During the third quarter of 2004,
the Company's former Pump and Fluid Transfer (which consisted of the Syltone
fluid transfer-related activities) Divisions were combined into one division,
Fluid Transfer. These two divisions were previously aggregated into one
reportable segment (Fluid Transfer Products) primarily due to the same factors
as noted above, and thus, there has been no change to the Fluid Transfer
Products segment.
S-36
In the Compressor and Vacuum Products segment, the Company designs,
manufactures, markets and services the following products and related
aftermarket parts for industrial and commercial applications: rotary screw,
reciprocating, sliding vane and centrifugal compressors; positive displacement,
centrifugal and side channel blowers; and liquid ring pumps and engineered
systems. Stationary air compressors are used in manufacturing, process
applications and materials handling, and to power air tools and equipment.
Blowers are used primarily in pneumatic conveying, wastewater aeration, numerous
applications in industrial manufacturing and engineered vacuum systems. Liquid
ring pumps are used in many different vacuum applications and engineered
systems, such as water removal, distilling, reacting, efficiency improvement,
lifting and handling, and filtering, principally in the pulp and paper,
industrial manufacturing, chemical and power industries. Revenues of the
Compressor and Vacuum Products segment constituted 80% of total revenues in
2004.
In the Fluid Transfer Products segment, the Company designs, manufactures,
markets and services a diverse group of pumps, water jetting systems and related
aftermarket parts used in oil and natural gas production, well servicing and
drilling and industrial cleaning and maintenance. This segment also designs,
manufactures, markets and services other fluid transfer components and equipment
for the chemical, petroleum and food industries. Revenues of the Fluid Transfer
Products segment constituted 20% of total revenues in 2004.
The Company sells its products through independent distributors and sales
representatives, and directly to original equipment manufacturers, engineering
firms, packagers and end-users.
The following table sets forth percentage relationships to revenues of
certain income statement items for the years presented.
YEAR ENDED DECEMBER 31,
-----------------------
2004 2003 2002
----- ----- -----
Revenues.................................................... 100.0% 100.0% 100.0%
----- ----- -----
Costs and expenses
Cost of sales............................................. 67.4 70.0 69.3
Depreciation and amortization............................. 2.9 3.3 3.3
Selling and administrative expenses....................... 21.3 19.4 19.0
Interest expense.......................................... 1.4 1.1 1.5
Other income, net......................................... (0.1) (0.7) --
----- ----- -----
Total costs and expenses.................................... 92.9 93.1 93.1
----- ----- -----
Income before income taxes.................................. 7.1 6.9 6.9
Provision for income taxes.................................. 2.1 2.2 2.2
----- ----- -----
Net income.................................................. 5.0% 4.7% 4.7%
===== ===== =====
RECENT DEVELOPMENTS
On March 8, 2005, the Company signed a definitive agreement to acquire
Thomas Industries Inc. ("Thomas Industries"), a New York Stock Exchange listed
company trading under the ticker symbol "TII." Thomas Industries is a worldwide
leader in the design, manufacture and marketing of precision engineered pumps,
compressors and blowers. The agreed-upon purchase price is $40.00 per share for
all outstanding shares and share equivalents (approximately $734.2 million) and
the assumption of $9.5 million of long-term capitalized lease obligations. As of
December 31, 2004, Thomas Industries had $267.1 million in cash, cash
equivalents and short-term investments. The net transaction value, including
assumed debt and net of cash, is approximately $476.6 million. See "Our
Business - The Thomas Industries Acquisition."
The acquisition is expected to close in 2005 and is subject to the approval
of Thomas Industries' stockholders and other customary closing conditions,
including the receipt of applicable regulatory approvals.
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YEAR ENDED DECEMBER 31, 2004, COMPARED WITH
YEAR ENDED DECEMBER 31, 2003
REVENUES
Revenues increased $300.0 million (68%) to $739.5 million in 2004, compared
to $439.5 million in 2003. This increase was primarily due to acquisitions in
2004, which contributed $247.3 million in revenues. Increased shipments of well
stimulation pumps, pump parts, compressors and blowers, combined with changes in
currency exchange rates and price increases, also contributed to this increase.
Revenues outside the United States, as a percentage of total revenues, increased
to 56% in 2004, compared to 42% in 2003, primarily due to acquisitions and
volume increases in Europe, China and South Africa.
Revenues for the Compressor and Vacuum Products segment increased $220.4
million (60%) to $589.4 million in 2004, compared to $369.0 million in 2003.
This increase is primarily due to acquisitions in 2004 (52%), increased volume
of compressor and blower shipments in the U.S., Europe, China and South Africa
(3%), changes in currency exchange rates (3%) and price increases (2%).
Fluid Transfer Products segment revenues increased $79.7 million to $150.2
million in 2004, compared to $70.5 million in 2003. This 113% increase is
primarily due to the acquisition of Syltone (78%), increased shipments of well
stimulation pumps, water jetting systems and related aftermarket (34%) and price
increases (4%). These positive factors were partially offset by a decreased
volume of drilling pump shipments (3%).
COSTS AND EXPENSES
Gross margin increased $109.3 million (83%) to $241.1 million in 2004,
compared to $131.8 million in 2003. Gross margin percentage increased to 32.6%
in 2004, compared to 30.0% in 2003. This increase in gross margin percentage was
principally attributable to the increased volume in both segments and the
related positive impact of increased leverage of fixed and semi-fixed costs over
a higher revenue base. Acquisitions completed in 2004 also positively impacted
gross margin percentage, as their gross margin percentage (35.1%) was higher
than the Company's previously existing businesses despite a non-recurring
negative impact of approximately $3.7 million stemming from recording their
inventory at fair value on the respective acquisition dates. Finally, favorable
sales mix also contributed to the increased gross margin as 2004 included a
higher percentage of aftermarket sales compared to the prior year. These
positive factors were partially offset by higher material costs due to
surcharges on castings and other components stemming from increases in scrap
iron and other metal prices. Higher warranty costs and some supply chain
inefficiencies that affected material availability also negatively impacted
gross margin.
Depreciation and amortization increased $7.3 million to $21.9 million in
2004, compared to $14.6 million in 2003, primarily due to the Syltone and Nash
Elmo acquisitions.
Selling and administrative expenses increased $72.1 million (85%) to $157.5
million in 2004, compared to $85.3 million in 2003, primarily due to
acquisitions in 2004 ($61.9 million). Higher compensation and fringe benefit
costs, professional fees and changes in currency exchange rates also contributed
to this increase. As a percentage of revenues, selling and administrative
expenses increased to 21.3% for 2004 from 19.4% in the prior year, primarily due
to the 2004 acquisitions.
Other income, net decreased $2.6 million in 2004 to $0.6 million, compared
to $3.2 million in 2003. This change was primarily due to higher foreign
currency transaction gains recorded in 2003. Prior year results included a $3.2
million gain in the fourth quarter related to the appreciation of U.S. dollar
borrowings, which were converted to British pounds prior to being used to
consummate the Syltone acquisition. An additional $1.2 million gain was recorded
related to these borrowings in the first quarter of 2004. Prior year results
also included a $0.4 million pretax gain on the sale of an idle manufacturing
facility in Syracuse, New York.
The Compressor and Vacuum Products segment generated operating earnings as
a percentage of revenues of 7.9% in 2004, compared to 7.5% in 2003. This
increase was primarily attributable to the positive impact of increased leverage
of the segment's fixed and semi-fixed costs over a higher revenue base,
favorable sales
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mix and restructuring programs initiated in the fourth quarter of 2003. These
positive factors were partially offset by higher material, compensation and
fringe benefit and warranty costs. Operating earnings as a percentage of
revenues from Compressor and Vacuum Products segment businesses that existed
prior to the Nash Elmo and Syltone acquisitions were 7.9% for 2004.
The Fluid Transfer Products segment generated operating earnings as a
percentage of revenues of 10.0% in 2004, compared to 5.8% in 2003. This
improvement was primarily attributable to the positive impact of increased
leverage of the segment's fixed and semi-fixed costs over a higher revenue base,
operational improvements and price increases. These positive factors were
partially offset by the impact of the Syltone business included in this segment
which had lower operating earnings as a percentage of revenues than the
segment's previously existing businesses. Operating earnings as a percentage of
revenues from Fluid Transfer Products segment businesses that existed prior to
the Syltone acquisition were 13.6% in 2004.
Interest expense increased $5.4 million (113%) to $10.1 million in 2004,
compared to $4.7 million in 2003, due to higher average borrowings stemming from
the Syltone and Nash Elmo acquisitions and higher average interest rates. The
average interest rate was 5.0% in 2004, compared to 3.9% in 2003. See Note 7 to
the Consolidated Financial Statements for further information on the Company's
borrowing arrangements.
Income before income taxes increased $21.9 million (72%) to $52.3 million
in 2004, compared to $30.4 million in 2003. Acquisitions in 2004 contributed
$10.6 million to this increase. The balance of the increase is primarily due to
the increased volume in both segments and the related positive impact of
increased leverage of fixed and semi-fixed costs over a higher revenue base.
These positive factors were partially offset by higher material, compensation
and fringe benefit and warranty costs.
The provision for income taxes increased by $5.4 million to $15.2 million
in 2004, compared to $9.7 million in 2003, as a result of the incremental income
before taxes partially offset by a lower overall effective tax rate. The
Company's effective tax rate was lowered to 29.0% in 2004 compared to 32.0% in
2003. The lower rate is principally due to favorable tax audit settlements in
Finland and the U.S. of $1.4 million and $0.2 million, respectively. A higher
proportion of earnings derived from lower taxed non-U.S. jurisdictions also
contributed to the lower effective tax rate. These positive factors were
partially offset by incremental taxes accrued in the amount of $0.9 million for
the planned repatriation of certain non-U.S. earnings in 2005 at a reduced
income tax rate pursuant to the American Jobs Creation Act of 2004.
Net income increased $16.5 million (80%) to $37.1 million ($1.92 diluted
earnings per share) in 2004, compared to $20.6 million ($1.27 diluted earnings
per share) in 2003. The increase in net income is primarily attributable to the
same factors that resulted in increased income before taxes and the lower
effective tax rate as noted above. Changes in currency exchange rates also
contributed favorably by increasing net income by approximately $0.8 million.
Net income included $0.1 million ($0.01 diluted earnings per share) and $0.2
million ($0.02 diluted earnings per share) in after-tax LIFO income in 2004 and
2003, respectively. The estimated incremental impact on diluted earnings per
share from acquisitions was $0.33 in 2004, which was partially offset by a $0.23
dilutive impact from a stock offering completed in the first quarter of 2004.
YEAR ENDED DECEMBER 31, 2003, COMPARED WITH
YEAR ENDED DECEMBER 31, 2002
REVENUES
Revenues increased $21.3 million to $439.5 million in 2003, compared to
$418.2 million in 2002, primarily due to changes in currency exchange rates.
Revenues outside the United States, as a percentage of total revenues, increased
to 42% in 2003, compared to 37% in 2002. This increase is due to changes in
currency exchange rates (primarily the euro and British pound) and volume
increases in Asia and Canada.
Revenues for the Compressor and Vacuum Products segment increased $19.0
million (5%) to $369.0 million in 2003, compared to $350.0 million in 2002.
Revenues in this segment increased approximately $17.3 million due to changes in
currency exchange rates. Increased prices contributed approximately $2.6 million
but were partially offset by lower centrifugal blower volume.
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Revenues in the Fluid Transfer Products segment increased $2.4 million (4%)
to $70.5 million in 2003, compared to $68.1 million in 2002. Volume increases
contributed approximately 3 percentage points of the change, primarily due to
increased shipments of well stimulation pumps and petroleum pump parts which was
partially offset by lower drilling pump shipments. Increased prices contributed
the remaining 1 percentage point increase. In 2002, Fluid Transfer Products
segment revenues were supported by drilling pump backlog carried over from 2001
orders.
COSTS AND EXPENSES
During the fourth quarter of 2003, the Company announced and initiated
restructuring plans to eliminate redundant manufacturing capacity, streamline
operations and reduce costs. These activities represent further integration of
previously completed acquisitions, which the Company expects will better
leverage existing manufacturing facilities. As a result of the restructuring,
the Company expects to realize a net reduction in headcount of approximately 80
personnel (approximately 4% of its workforce as of September 30, 2003) by the
end of 2005. The substantial majority of this headcount reduction was realized
during the fourth quarter of 2003. As part of the restructuring program, the
Company refocused the marketing strategies of its German blower business to
place more emphasis on the truck blower market rather than industrial
applications for its products. In addition, the Company exited the marketing and
manufacturing of certain highly engineered compressor packages in the U.K. and
U.S. The Company also announced its plan to implement new manufacturing
processes and systems improvements to reduce inventory and its intent to
establish a compressor packaging and assembly operation in China. The aggregate
financial impact of these profitability improvement programs (restructuring
plans, inventory reduction plan and establishment of China operations) resulted
in a reduction in diluted earnings per share of approximately $0.12 in the
fourth quarter of 2003.
Atchison Casting Corporation, the Company's largest supplier of iron
castings in 2002, downsized and subsequently closed its LaGrange, Missouri
foundry in the second half of 2002. As a result, the Company implemented its
previously developed contingency plan to secure alternate supply sources. There
was a negative impact on the Company's financial performance (estimated at
$0.04-$0.05 and $0.01-$0.03 diluted earnings per share in 2003 and 2002,
respectively) as additional costs were incurred to expedite delivery of castings
from new suppliers and accelerate depreciation expense of pattern modification
charges from alternate casting suppliers who are no longer servicing the
Company.
Gross margin increased $3.3 million (3%) in 2003 to $131.8 million,
compared to $128.5 million in 2002. Gross margin percentage of revenues
decreased to 30.0% in 2003 from 30.7% in 2002. This decrease in the gross margin
percentage was principally attributable to charges to cost of sales of $2.1
million incurred in conjunction with implementing the profitability improvement
programs discussed above. This factor contributed 0.5 percentage points of the
0.7 percentage point decrease in gross margin as a percentage of revenues.
Unfavorable sales mix (including a lower proportion of drilling pump and
centrifugal blower sales which generate higher gross margins, and a higher
proportion of compressor package sales, which generate lower gross margins), and
incremental costs associated with the disruption in the Company's casting supply
chain also contributed to this decrease. These negative factors were partially
offset by cost reduction efforts, including continued acquisition integration.
Selling and administrative expenses increased by 7% to $85.3 million in
2003 from $79.4 million in 2002, primarily due to changes in currency exchange
rates. Selling and administrative expenses increased 4% due to changes in
currency exchange rates and 1% due to expenses associated with the profitability
improvement programs. The remaining increase of 2% was primarily attributable to
higher compensation and postretirement expenses, which were partially offset by
lower medical costs and other cost reduction efforts, including continued
acquisition integration. As a percentage of revenues, selling and administrative
expenses were 19.4% in 2003, compared to 19.0% in 2002. The increase in this
ratio was primarily attributable to the factors discussed above, partially
offset by the impact of higher revenues.
Operating earnings for the Compressor and Vacuum Products segment decreased
$2.0 million (7%) to $27.8 million, compared to $29.8 million in 2002. This
decrease was primarily attributable to $2.7 million of charges incurred in the
fourth quarter of 2003 for the profitability improvement programs. Higher
S-40
compensation, postretirement and warranty expenses combined with costs
associated with the disruption within the Company's casting supply chain also
contributed to this decrease. These negative factors were partially offset by
changes in currency exchange rates, lower medical costs and cost reductions
efforts, including continued acquisition integration. As a percentage of
revenues, operating earnings decreased to 7.5% in 2003, compared to 8.5% in
2002, as a result of the factors noted above. The expenses incurred in the
fourth quarter of 2003 related to implementing the profitability improvement
programs contributed 0.8 percentage points of this 1.0 percentage point decrease
in operating earnings as a percentage of revenues.
Operating earnings for the Fluid Transfer Products segment decreased $1.1
million to $4.1 million in 2003, a 21% decrease from $5.2 million in 2002. This
decrease was primarily attributable to a less favorable sales mix due to a lower
proportion of revenues from drilling pumps, which generate higher margins than
other pump products. Higher compensation and postretirement expenses also
contributed to this decrease. As a percentage of revenues, operating earnings
for this segment decreased to 5.8% in 2003, compared to 7.6% in 2002, as a
result of the factors noted above.
Interest expense decreased $1.6 million (25%) to $4.7 million for 2003,
compared to $6.4 million in 2002, due to lower average borrowings and interest
rates. The average interest rate for 2003 was 3.9% compared to 4.4% in 2002.
Other income, net increased $3.0 million to $3.2 million in 2003 compared
to $0.2 million in 2002, due to an unrealized currency transaction gain of $3.2
million recorded in the fourth quarter of 2003. This gain related to the
appreciation of U.S. dollar borrowings, which were converted to British pounds
in November 2003 prior to being used to consummate the Syltone acquisition in
January 2004.
Income before income taxes increased $1.5 million (5%) to $30.4 million in
2003 from $28.8 million in 2002. This increase was primarily the result of the
unrealized currency transaction gain, lower interest expense and changes in
currency exchange rates discussed above. These positive factors were partially
offset by the lower operating earnings in each segment.
The provision for income taxes increased by $0.5 million (5%) to $9.7
million in 2003, compared to $9.2 million in 2002, as a result of the higher
income before taxes. The Company's effective tax rate was 32% in both years.
Net income increased $1.0 million (5%) to $20.6 million ($1.27 diluted
earnings per share) in 2003, compared to $19.6 million ($1.22 diluted earnings
per share) in 2002. Net income included $0.2 million ($0.02 diluted earnings per
share) and $0.3 million ($0.02 diluted earnings per share) in after-tax LIFO
income in 2003 and 2002, respectively. The increase in net income was primarily
attributable to the same factors that resulted in increased income before taxes
discussed above. Changes in currency exchange rates also contributed favorably
by increasing net income by approximately $0.8 million in 2003.
OUTLOOK
In 2004, orders for compressor and vacuum products were $611.3 million,
compared to $352.7 million in 2003. Order backlog for the Compressor and Vacuum
Products segment was $169.9 million as of December 31, 2004, compared to $48.7
million as of December 31, 2003. The favorable impact from 2004 acquisitions for
this segment was approximately $193.9 million and $99.4 million for orders and
backlog, respectively, for the year ended and as of December 31, 2004. Excluding
this impact, the increase in orders and backlog compared to the prior year was
primarily due to improvement in industrial demand in the U.S. and Europe
combined with incremental market share gains in Europe, China and South Africa
and favorable changes in currency exchange rates. The Company also experienced
an increase in demand for positive displacement blowers and locomotive
compressors due to an improved transportation market in the U.S. These positive
factors were partially offset by the Company's exit from the marketing and
manufacture of certain highly engineered compressor packages in the U.K. and
U.S. in fourth quarter of 2003.
Because air is often used as a fourth utility in the manufacturing process,
demand for compressor and vacuum products is generally correlated to
manufacturing capacity utilization rates and the rate of change of industrial
equipment production. Over longer time periods, demand also follows the economic
growth patterns
S-41
indicated by the rates of change in the Gross Domestic Product. These indicators
have been relatively weak in both 2004 and 2003 but did improve gradually during
2004. As a result, orders for compressor and vacuum products are anticipated to
improve modestly in 2005 as the U.S. and European industrial economies continue
to recover.
Demand for fluid transfer products, which are primarily petroleum related,
has historically corresponded to market conditions and expectations for oil and
natural gas prices. Orders for fluid transfer products were $175.7 million in
2004, an increase of $102.8 million (141%) compared to $72.9 million in 2003.
Order backlog for the Fluid Transfer Products segment was $52.3 million at
December 31, 2004, compared to $9.7 million as of December 31, 2003,
representing a 442% increase. The increase in orders and backlog for this
segment due to 2004 acquisitions is $55.5 million and $17.7 million,
respectively. Increased demand for well stimulation pumps, drilling pumps and
petroleum pump parts also contributed to the increase as a result of elevated
prices for oil and natural gas. Future increases in demand for these products
will likely be dependent upon rig counts and oil and natural gas prices, which
the Company cannot predict.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING WORKING CAPITAL
During 2004, operating working capital (defined as receivables plus
inventories, less accounts payable and accrued liabilities) increased $34.6
million to $96.2 million compared to $61.6 million in the prior year primarily
due to the 2004 acquisitions. Inventory turnover decreased to 4.6 at December
31, 2004, compared to 4.9 at December 31, 2003. Days sales outstanding improved
to 61 days at December 31, 2004, compared to 63 days at December 31, 2003, due
to increased use of progress billings and improved collections.
CASH FLOWS
During 2004, the Company generated cash flows from operations totaling
$76.8 million, an increase of $30.5 million (66%) compared to 2003. This
increase was primarily the result of acquisitions ($22.8 million) and higher net
income from previously existing businesses. Net of cash acquired, $295.3 million
was used to fund the Nash Elmo and Syltone acquisitions (including direct
acquisition costs) in 2004. This use of cash was primarily funded by net
borrowings of $84.7 million, the common stock offering in March 2004 that
generated $79.6 million and excess cash reserves. The effect of exchange rate
changes on cash and cash equivalents was $3.8 million in 2004 compared to $10.7
million in 2003. This decrease is primarily due to a significant strengthening
of the British pound against the U.S. dollar during 2003 combined with the fact
that the Company had significant British pound denominated cash and cash
equivalents on hand during the fourth quarter of 2003 to fund the Syltone
acquisition in January 2004. The cash flows provided by operating and financing
activities and used in investing activities, combined with the effect of
exchange rate changes, resulted in a net cash decrease of $68.2 million during
2004.
CAPITAL EXPENDITURES AND COMMITMENTS
Capital projects designed to increase operating efficiency and flexibility,
expand production capacity and increase product quality resulted in expenditures
of $19.6 million in 2004, compared to $12.0 million in 2003. This increase was
primarily due to 2004 acquisitions, the completion of a new assembly and
packaging facility in China and the integration of certain businesses onto the
Company's common enterprise resource planning system. Commitments for capital
expenditures at December 31, 2004 are approximately $10 million. Capital
expenditures related to environmental projects have not been significant in the
past and are not expected to be significant in the foreseeable future.
In October 1998, Gardner Denver's Board of Directors authorized the
repurchase of up to 1,600,000 shares of the Company's common stock to be used
for general corporate purposes. Approximately 200,000 shares remain available
for repurchase under this program. The Company has also established a Stock
Repurchase Program for its executive officers to provide a means for them to
sell Gardner Denver common stock and obtain sufficient funds to meet income tax
obligations which arise from the exercise or vesting of incentive stock options,
restricted stock or performance shares. The Gardner Denver Board has authorized
up to 400,000 shares for repurchase under this program, and of this amount,
approximately 200,000 shares
S-42
remain available for repurchase. During 2004, no shares were repurchased under
these repurchase programs. As of December 31, 2004, a total of 1,572,542 shares
have been repurchased at a cost of $22.8 million under both repurchase programs.
In 2004, the Company also acquired 17,799 shares of its common stock, valued at
$0.5 million, which were tendered for the exercise of stock options.
LIQUIDITY
On March 6, 2002, the Company amended and restated its then existing
Revolving Line of Credit Agreement (the "Credit Agreement"), increasing the
aggregate borrowing capacity to $150.0 million and extending the maturity date
to March 6, 2005. On September 1, 2004, the Company amended and restated the
Credit Agreement once again, increasing the borrowing capacity to $375.0
million. This latter amended and restated Credit Agreement provided the Company
with access to senior secured credit facilities including a $150.0 million
five-year Term Loan and a $225.0 million five-year Revolving Line of Credit (the
"Credit Line"). Proceeds from the Credit Agreement were used to fund the Nash
Elmo acquisition and retire debt outstanding under its previously existing
Credit Line and Term Loan.
The Credit Line matures on September 1, 2009. On December 31, 2004, the
Credit Line had an outstanding principal balance of $113.6 million, leaving
$111.4 million available for letters of credit or future use, subject to the
terms of the Credit Line.
The $150.0 million Term Loan has a final maturity of September 1, 2009. The
Term Loan requires principal payments totaling $7.5 million, $15.0 million,
$22.5 million, $37.5 million and $67.5 million in years one through five,
respectively. Other terms and conditions of the Term Loan are similar to those
of the Credit Line.
The Company's borrowing arrangements permit certain investments and
dividend payments and are generally unsecured with the exception of the Credit
Agreement, which requires the pledge of the stock of certain wholly-owned
subsidiaries, and a security interest in the Company's manufacturing facility in
Bad Neustadt, Germany. There are no material restrictions on the Company as a
result of its credit arrangements, other than customary covenants regarding
certain earnings, liquidity and capital ratios.
On September 24, 2003, the Company filed with the Securities and Exchange
Commission ("SEC") a shelf registration statement regarding $150 million of its
securities. In March 2004, the Company sold 3.45 million shares of common stock
lowering the amount of securities available on the shelf to $65.5 million. On
January 31, 2005, the Company filed a second shelf registration statement
regarding $184.5 million of its securities, bringing the total securities
currently available to $250.0 million. The registration statement has since been
declared effective by the SEC and allows the Company to complete one or more
offerings of its common stock, preferred stock, debt securities or warrants. The
Company intends to use the net proceeds from any offerings for acquisitions,
capital expenditures, repayment of borrowings, working capital and other general
corporate purposes. This offering is being made pursuant to these registration
statements.
On March 8, 2005, the Company executed an agreement and plan of merger
("Merger Agreement") through which it expects to effectively acquire all the
outstanding shares of Thomas Industries. The Company's acquisition of Thomas
Industries through the Merger Agreement is not contingent on the Company's
ability to finance the transaction.
Simultaneously with the execution of the Merger Agreement, the Company
executed a Commitment Letter with Bear, Stearns & Co. Inc. and JP Morgan Chase
Bank, NA and affiliated parties (together, the "Commitment Parties"). This
Commitment Letter obligates the Commitment Parties, subject to limited
conditions, to provide senior secured credit facilities to the Company in the
aggregate amount of $930.0 million if the Company's acquisition of Thomas
Industries is consummated. These credit facilities could be used by the Company
to finance the acquisition of Thomas Industries, pay related fees and expenses,
refinance the existing indebtedness of the Company, and finance the Company's
continuing operations after the acquisition of Thomas Industries.
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Although these credit facilities are available to the Company through the
Commitment Letter, the Company currently plans to finance the Thomas Industries
acquisition through the amendment and expansion of its existing Credit
Agreement, this offering, $125.0 million of new notes and available cash. The
size and timing of these financings are subject to prevailing market conditions.
See "Use of Proceeds."
Management currently expects the Company's cash flows in 2005 to be
sufficient to fund its scheduled debt service and provide required resources for
working capital and capital investments.
CONTRACTUAL OBLIGATIONS
At December 31, 2004 certain of the Company's contractual obligations,
including estimated payments due by period, are as follows (dollars in
thousands):
PAYMENTS DUE BY PERIOD
---------------------------------------------
CONTRACTUAL OBLIGATIONS LESS THAN MORE THAN
TOTAL 1 YEAR 1-3 YEARS 3-5 YEARS 5 YEARS
-------- --------- --------- --------- ---------
Debt............................. $313,571 $ 32,949 $54,090 $210,496 $16,036
Operating leases................. 38,233 9,608 12,661 6,305 9,659
Purchase obligations............. 73,339 73,231 108 -- --
-------- -------- ------- -------- -------
Total............................ $425,143 $115,788 $66,859 $216,801 $25,695
======== ======== ======= ======== =======
Purchase obligations consist primarily of inventory purchases made in the
normal course of business to meet operational requirements. The above table
excludes $103.9 million of other non-current liabilities recorded in the balance
sheet, which primarily consist of pension and other postretirement liabilities
and deferred income taxes, because the timing of payments related to such
liabilities is uncertain. The table also excludes interest payments on existing
debt arrangements. For further information regarding the Company's debt
arrangements and related interest rates, see Note 7 to the Consolidated
Financial Statements.
MARKET RISK
The Company is exposed to market risk related to changes in interest rates,
as well as European and other foreign currency exchange rates, and selectively
uses derivative financial instruments, including forwards and swaps, to manage
these risks. The Company does not hold derivatives for trading purposes. The
value of market-risk sensitive derivatives and other financial instruments is
subject to change as a result of movements in market rates and prices.
Sensitivity analysis is one technique used to evaluate these impacts. Based on a
hypothetical ten percent change in interest rates or ten percent weakening in
the U.S. dollar across relevant foreign currencies, principally the euro,
British pound and Chinese Yuan (if permitted to float independently of the U.S.
dollar), the potential losses in future earnings, fair value and cash flows are
not material to the Company.
CONTINGENCIES
The Company is a party to various legal proceedings, lawsuits and
administrative actions, which are of an ordinary or routine nature. In addition,
due to the bankruptcies of several asbestos manufacturers and other primary
defendants, the Company has been named as a defendant in an increasing number of
asbestos personal injury lawsuits. The Company has also been named as a
defendant in an increasing number of silicosis personal injury lawsuits. The
plaintiffs in these suits allege exposure to asbestos or silica from multiple
sources and typically the Company is one of approximately 25 or more named
defendants. In the Company's experience, the vast majority of the plaintiffs are
not impaired with a disease for which the Company bears any responsibility.
Predecessors to the Company manufactured, distributed and sold products
allegedly at issue in the pending asbestos and silicosis litigation lawsuits
(the "Products"). The Company has potential responsibility for certain of these
Products, namely: (a) air compressors which used asbestos containing components
manufactured and supplied by third parties; and (b) portable air compressors
used in sandblasting operations
S-44
as a component of sandblasting equipment manufactured and sold by others. The
sandblasting equipment is alleged to have caused the silicosis disease
plaintiffs claim in these cases.
Neither the Company nor its predecessors ever mined, manufactured, mixed,
produced or distributed asbestos fiber. The asbestos-containing components used
in the Products were completely encapsulated in a protective non-asbestos binder
and enclosed within the subject Products. Furthermore, the Company has never
manufactured or distributed portable air compressors.
The Company has entered into a series of cost sharing agreements with
multiple insurance companies to secure coverage for asbestos and silicosis
lawsuits. The Company also believes some of the potential liabilities regarding
these lawsuits are covered by indemnity agreements with other parties. The
Company's uninsured settlement payments for past asbestos and silicosis lawsuits
have been immaterial.
The Company believes that the pending and future asbestos and silicosis
lawsuits will not, in the aggregate, have a material adverse effect on its
consolidated financial position, results of operations or liquidity, based on:
the Company's anticipated insurance and indemnification rights to address the
risks of such matters; the limited potential asbestos exposure from the
components described above; the Company's experience that the vast majority of
plaintiffs are not impaired with a disease attributable to alleged exposure to
asbestos or silica from or relating to the Products; various potential defenses
available to the Company with respect to such matters; and the Company's prior
disposition of comparable matters. However, due to inherent uncertainties of
litigation and because future developments could cause a different outcome,
there can be no assurance that the resolution of pending or future lawsuits,
whether by judgment, settlement or dismissal, will not have a material adverse
effect on its consolidated financial position, results of operations or
liquidity.
The Company has also been identified as a potentially responsible party
with respect to several sites designated for environmental cleanup under various
state and federal laws. The Company does not own any of these sites. The Company
does not believe that the future potential costs related to these sites will
have a material adverse effect on its consolidated financial position, results
of operations or liquidity.
NEW ACCOUNTING STANDARDS
In May 2004, the FASB issued Staff Position No. FAS 106-2, "Accounting and
Disclosure Requirements Related to the Medicare Prescription Drug, Improvement
and Modernization Act of 2003," ("FAS 106-2"). FAS 106-2 supersedes Staff
Position No. FAS 106-1, "Accounting and Disclosure Requirements Related to the
Medicare Prescription Drug, Improvement and Modernization Act of 2003," and
provides guidance on the accounting, disclosure, effective date and transition
related to the Prescription Drug Act. FAS 106-2 was effective for the third
quarter of 2004. According to an actuarial assessment, the Company currently
provides prescription drug benefits, which are actuarially equivalent to the
Medicare prescription drug benefit, to certain retired and other employees and
will therefore qualify for the subsidy. As a result, the Company accounted for
the federal subsidy attributable to past services as an actuarial gain, which
reduced the accumulated post-retirement benefit obligation. This actuarial gain
is then amortized in future periods in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions." The federal subsidy attributable to employee
service rendered in current and future periods will reduce future net periodic
postretirement benefit cost as those employees provide service. The Company has
adopted FAS 106-2, resulting in a favorable impact to diluted earnings per share
of $0.01 in 2004. The favorable impact to diluted earnings per share in 2005 is
expected to be $0.02.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs - an
amendment to ARB No. 43, Chapter 4." This statement amends previous guidance and
requires expensing for abnormal amounts of idle facility expense, freight,
handling costs, and wasted material (spoilage). In addition, the statement
requires that allocation of fixed production overheads to inventory be based on
the normal capacity of production facilities. SFAS No. 151 is effective for
inventory costs incurred during annual periods beginning after June 15, 2005.
The Company is currently evaluating the impact of SFAS No. 151 on its future
consolidated financial statements.
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In December 2004, the FASB issued a revision to SFAS No. 123, "Accounting
for Stock-Based Compensation," SFAS No. 123-R, "Share-Based Payment." SFAS No.
123-R focuses primarily on transactions in which an entity exchanges its equity
instruments for employee services and generally establishes standards for the
accounting for transactions in which an entity obtains goods or services in
share-based payment transactions. The Company will adopt SFAS No. 123-R in the
first quarter of 2006.
In December 2004, the FASB issued Staff Position No. FAS 109-1,
"Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax
Deduction on Qualified Production Activities Provided by the American Jobs
Creation Act of 2004," ("FAS 109-1"), and Staff Position No. FAS 109-2,
"Accounting and Disclosure Guidance for the Foreign Earnings Repatriation
Provision within the American Jobs Creation Act of 2004," ("FAS 109-2"). FAS
109-1 requires that companies who qualify for the recent tax law's deduction for
domestic production activities to account for it as a special deduction under
Statement No. 109 and reduce their tax expense in the period or periods the
amounts are deductible on the tax return. FAS 109-2 allows companies additional
time to evaluate whether foreign earnings will be repatriated under the
repatriation provisions of the new tax law and requires specific disclosures for
companies needing additional time to complete the evaluation. Both staff
positions are effective immediately. During 2004, the Company determined that
approximately $16.6 million of existing foreign earnings should meet the
requirements of the American Jobs Creation Act of 2004 (the "AJCA"). The Company
intends to repatriate these earnings during calendar 2005, as soon as the
qualifying requirements are met. Since these earnings are no longer consider
indefinitely reinvested, the Company accrued $0.9 million of income tax expense
in 2004. In addition, the Company is evaluating the potential to repatriate
other foreign earnings pursuant to the AJCA. Whether the Company repatriates
these foreign earnings is dependent upon the Company's ability to meet the
requirements of the AJCA with respect to these earnings. Until that
determination is made, the Company will make no change in its current intention
to indefinitely reinvest accumulated earnings of its foreign subsidiaries except
with respect to the $16.6 million noted above. The range of additional amounts
that the Company is considering for repatriation under the AJCA is between zero
and $40 million. The potential range of income tax is between zero and $2.1
million.
CRITICAL ACCOUNTING POLICIES
Management has evaluated the accounting policies used in the preparation of
the Company's financial statements and related notes and believes those policies
to be reasonable and appropriate. Certain of these accounting policies require
the application of significant judgment by management in selecting the
appropriate assumptions for calculating financial estimates. By their nature,
these judgments are subject to an inherent degree of uncertainty. These
judgments are based on historical experience, trends in the industry,
information provided by customers and information available from other outside
sources, as appropriate. The most significant areas involving management
judgments and estimates are described below. Management believes that the
amounts recorded in the Company's financial statements related to these areas
are based on their best judgments and estimates, although actual results could
differ materially under different assumptions or conditions.
INVENTORIES
Inventories, which consist of materials, labor and manufacturing overhead,
are carried at the lower of cost or market value. As of December 31, 2004, $97.5
million (70%) of the Company's inventory is accounted for on a first-in,
first-out (FIFO) basis with the remaining $40.9 million (30%) accounted for on a
last-in, first-out (LIFO) basis. Management regularly reviews inventory for
obsolescence to determine whether a write-down is necessary. Various factors are
considered in making this determination, including recent sales history and
predicted trends, industry market conditions and general economic conditions.
GOODWILL AND OTHER INTANGIBLES
The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 141 "Business Combinations." Among other things, this standard
requires that intangible assets acquired in a business combination be recognized
(at fair value) apart from goodwill if they meet one of two criteria - the
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contractual-legal criterion or the separability criterion. The Company has also
adopted SFAS No. 142 "Goodwill and Other Intangible Assets." Under the
provisions of this standard, intangible assets deemed to have indefinite lives
and goodwill are not subject to amortization. All other intangible assets are
amortized over their estimated useful lives. Goodwill and other intangible
assets not subject to amortization are tested for impairment annually, or more
frequently if events or changes in circumstances indicate that the asset might
be impaired. This testing requires comparison of carrying values to fair values,
and when appropriate, the carrying value of impaired assets is reduced to fair
value. During the second quarter of 2004, the Company completed its annual
impairment test and determined that no impairment existed. While management
believes that its estimates of fair value are reasonable, different assumptions
regarding such factors as product volumes, selling price changes, labor and
material cost changes, productivity, interest rates and foreign exchange rates
could affect such valuations.
PENSION AND OTHER POSTRETIREMENT BENEFITS
Pension and other postretirement benefit obligations and expense (or
income) are dependent on assumptions used in calculating such amounts. These
assumptions include discount rate, rate of compensation increases, expected
rates of return on plan assets and expected healthcare trend rates. In
accordance with GAAP, actual results that differ from the assumptions are
accumulated and amortized over future periods. While management believes that
the assumptions are appropriate, differences in actual experience or changes in
assumptions may affect the Company's pension and other postretirement benefit
obligations and future expense (or income). In addition, due to the significant
declines in the financial markets in recent years, the fair value of the plan
assets of certain of the Company's funded defined benefit pension plans was less
than their accumulated benefit obligation at December 31, 2004. As a result, the
Company has recorded a cumulative reduction to stockholders' equity (accumulated
other comprehensive income) in the amount of $5.6 million (after tax) as of
December 31, 2004. This non-cash reduction in stockholders' equity did not
impact the Company's compliance with its existing debt covenants and could be
reversed in future periods if a combination of factors, including interest rate
increases, improved investment results and contributions, cause the pension
plans to return to or exceed fully funded status. However, depending upon the
performance of the equity and bond markets in 2005 and beyond, the Company could
also be required to record additional charges to stockholders' equity in the
future.
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OUR INDUSTRY
Our Compressor and Vacuum Products segment competes in a worldwide market
for Compressor and Vacuum products and services which we estimate to be in
excess of $5 billion per year in sales. Our Pump Product segment competes in a
worldwide market for pump products which we estimate to be in excess of $22
billion per year in sales. Our reciprocating pumps compete for approximately $2
billion of that market. Products in all of our served markets are sold to a
diverse group of customers across a wide range of industries.
Almost all manufacturing plants and industrial facilities, as well as many
service industries, utilize air compressors and/or blowers. Our largest
customers for compressor products are durable and non-durable goods
manufacturers; process industries (petroleum, primary metals, pharmaceutical,
food and paper); manufacturers of carpet cleaning equipment, pneumatic conveying
equipment, and dry and liquid bulk transports; wastewater treatment facilities;
and automotive service centers and niche applications such as PET bottle
blowing, breathing air equipment and compressed natural gas. Typical
applications for our pumps include oil transfer, salt water disposal, ammine
pumping for gas processing, repressurizing, enhanced oil recovery, hydraulic
power and other liquid transfer applications.
Compressed air and pump products are best characterized as mature, with
evolutionary technological advances. Technological advances in compressed air
products include development of oil-free air compressors, increased product
efficiency, reduction of noise levels and advanced control systems to upgrade
the flexibility and precision of regulating pressure and capacity. Emerging
compressed air market niches result from new technologies in plastics extrusion,
oil and natural gas well drilling, field gas gathering, mobile and stationary
vacuum applications, utility and fiber optic installation and environmental
impact minimization, as well as other factors. Technological advances in pump
products include development of larger horsepower and lighter weight pumps.
Given the wide variety of end-users who use compressed air and pump
products, strong distribution channels are critical. Products are sold through
independent distributors, sales representatives, company stores, and directly to
OEMs, engineering firms and end-users. Competitors within our industry use
various combinations of distribution channels to reach customers.
Competition in our markets is generally robust and is based on product
quality, performance, price and availability. The relative importance of each of
these factors varies depending on the specific type of product. Given the
potential for equipment failures to cause expensive operational disruption, our
customers generally view quality and reliability as critical factors in their
equipment purchasing decision. The required frequency of maintenance is highly
variable based on the type of equipment and application.
Although there are a few large manufacturers of compressed air products,
the marketplace for these products remains fragmented due to the wide variety of
product technologies, applications and selling channels. Our principal
competitors in sales of compressed air products include Ingersoll-Rand, Sullair
(owned by United Technologies Corporation), Atlas Copco, Quincy Compressor
(owned by En Pro Industries), CompAir and Roots. The marketplace for pumps,
although dominated by a few multinational manufacturers with a broad product
offering, is also fragmented, as the ten largest pump manufacturers account for
only approximately 40% of annual sales. Because we are currently focused on
pumps used in oil and natural gas production, well servicing and well drilling,
we do not typically compete directly with the major full-line manufacturers.
Competition in the market segment for oil and natural gas pumps is much more
concentrated than for pumps generally. Our principal competitors in sales of
petroleum pump products include National-Oilwell and SPM Flow Control, Inc. The
marketplaces for water jetting systems and loading arms tend to be
niche-oriented and somewhat concentrated with the largest three or four
competitors controlling the majority of the market. Our principal competitors in
sales of water jetting systems include NLB Corp., WOMA Apparatebau GmbH and
Hammelmann Maschinenfabrik GmbH. Our principal competitors in sales of loading
arms are OPW Engineered Systems (owned by Dover Corporation) and Kanon in
distribution applications; and FMC Technology and Schwelm Verladetechnik GmbH in
both marine and distribution technologies.
S-48
OUR BUSINESS
Other than under " - The Thomas Industries Acquisition," the following
discussion of our business does not reflect our planned acquisition of Thomas
Industries.
Gardner Denver designs, manufactures and markets compressor and vacuum
products and fluid transfer products. We believe we are one of the leading
manufacturers of highly engineered stationary air compressors, blowers and
liquid ring pumps for industrial applications in the United States. Stationary
air compressors are used in manufacturing, process applications and materials
handling, and to power air tools and equipment. Blowers are used primarily in
pneumatic conveying, wastewater aeration and engineered vacuum systems. Liquid
ring pumps are used primarily in process industry applications. We also believe
that we are one of the leading manufacturers of reciprocating pumps used in oil
and natural gas well drilling, servicing and production, water jetting systems
and loading arms.
For the year ended December 31, 2004, we had revenues of $739.5 million, of
which approximately 80% were derived from sales of compressor and vacuum
products while approximately 20% were from sales of fluid transfer products.
Approximately 44% of our total revenues for the year ended December 31, 2004
were derived from sales in the United States and approximately 56% were from
sales to customers in various countries outside the United States. Of the total
non-U.S. sales, 58% were to Europe, 23% to Asia, 9% to Canada, 8% to Latin
America and 2% to other regions.
Pro forma for the year ended December 31, 2004, assuming that the Syltone
and Nash Elmo acquisitions were completed on January 1, 2004, we had revenues of
$895.9 million, of which approximately 83% were derived from sales of compressor
and vacuum products while approximately 17% were from sales of fluid transfer
products. Approximately 41% of our total pro forma revenues for the year ended
December 31, 2004 were derived from sales in the United States and approximately
59% were from sales to customers in various countries outside the United States.
Of the total pro forma non-U.S. sales, 59% were to Europe, 22% to Asia, 7% to
Canada, 7% to Latin America and 5% to other regions.
COMPRESSOR AND VACUUM PRODUCTS SEGMENT
In the Compressor and Vacuum Products segment, we design, manufacture,
market and service the following products and related aftermarket parts for
industrial and commercial applications: rotary screw, reciprocating, sliding
vane and centrifugal air compressors; positive displacement, centrifugal and
side channel blowers; and liquid ring pumps and engineered systems. We also
design, manufacture, market and service complementary ancillary products (access
platforms, axles and gear boxes, power take-offs and valves) as a result of the
Syltone acquisition. Our sales of compressor and vacuum products for the year
ended December 31, 2004 were $589.4 million, of which approximately 42% were to
customers in the United States.
Compressors are used to increase the pressure of gas, including air, by
mechanically decreasing its volume. Our reciprocating compressors range from 0.5
to 1,500 horsepower and are sold under the Gardner Denver, Champion and Belliss
& Morcom trademarks, among others. Our rotary screw compressors range from 5 to
680 horsepower and are sold under the Gardner Denver trademark, among others.
Blowers and liquid ring pumps are used to produce a high volume of air at
low pressure and to produce vacuum. Our positive displacement blowers range from
0 to 36 pounds per square inch gauge, or "PSIG," pressure and 0-28 inches of
mercury, or "Hg," vacuum and 0 to 43,000 cubic feet per minute, or "CFM," and
are sold under the trademarks Sutorbilt, DuroFlow and Drum, among others. Our
multistage centrifugal blowers are sold under the Gardner Denver trademark,
among others, and range from 0.5 to 25 PSIG pressure and 0-18" Hg vacuum and 100
to 50,000 CFM. Our side channel blowers range from 0 to 15 PSIG pressure and 0
to 1,800 CFM and are sold under the trademark Elmo Technology. Our rotary
sliding vane compressors and vacuum pumps range from 0 to 150 PSIG and 0 to
3,000 CFM and are sold under the Gardner Denver trademark, among others. Our
engineered vacuum systems are used in industrial cleaning and maintenance and
are sold under the Gardner Denver trademark, among others. Our liquid ring pumps
and engineered systems range from 0 to 150 PSIG and 1,000 to 3,000 CFM and are
sold under the Nash trademark, among others.
S-49
Almost all manufacturing plants and industrial facilities, as well as many
service industries, utilize air compressors or blowers. The largest customers
for our compressor products are durable and non-durable goods manufacturers;
process industries (petroleum, primary metals, pharmaceutical, food and paper);
original equipment manufacturers; manufacturers of carpet cleaning equipment,
pneumatic conveying equipment, and dry and liquid bulk transports; wastewater
treatment facilities; and automotive service centers and niche applications such
as PET bottle blowing, breathing air equipment and compressed natural gas.
Manufacturers of machinery and related equipment use stationary compressors for
automated systems, controls, materials handling and special machinery
requirements. The petroleum, primary metals, pharmaceutical, food and paper
industries require compressed air and vacuums for process, instrumentation and
control, packaging and pneumatic conveying. Blowers are instrumental to local
utilities for aeration in treating industrial and municipal waste. Blowers are
also used in service industries, for example, residential carpet cleaning to
vacuum moisture from carpets during the shampooing and cleaning process. Blowers
and rotary vane compressors are used on trucks to vacuum leaves and debris from
street sewers and to unload liquid and dry bulk and powder materials such as
cement, grain and plastic pellets. Additionally, blowers are used in packaging
technologies, medical applications, printing and paper processing and numerous
chemical process applications. Liquid ring pumps are used in many different
vacuum applications and engineered systems, such as water removal, distilling,
reacting, efficiency improvement, lifting and handling, and filtering,
principally in the pulp and paper, industrial manufacturing, chemical and power
industries.
As a result of the Syltone acquisition, we have 14 vehicle fitting
facilities in 11 countries worldwide. These fitting facilities offer customized
vehicle installations of systems, which include compressors, generators,
hydraulics, pumps and oil and fuel systems. Typical uses for such systems
include road demolition equipment, tire removal, electrical tools and lighting,
hydraulic hand tools and high-pressure water jetting pumps. The fitting facility
in the U.K. also manufactures access platforms which are hydraulically powered
and are typically used for overhead service applications. The diverse range of
customers for these products include local government authorities, utility
companies (electricity, water, gas, telecommunications) and tire and road
service providers.
The Compressor and Vacuum Products segment operates production facilities
around the world, including nine plants (including two remanufacturing
facilities) in the U.S., five in the U.K., three in Germany, two in China, and
one each in Finland, Brazil and Canada. The most significant facilities include
owned properties in Sedalia, Missouri; Gloucester, U.K.; Princeton, Illinois;
and Bad Neustadt and Schopfheim, Germany and leased properties in Peachtree
City, Georgia; Tampere, Finland; and Nuremburg, Germany.
FLUID TRANSFER PRODUCTS SEGMENT
We design, manufacture, market and service a diverse group of pumps, water
jetting systems and related aftermarket parts used in oil and natural gas well
drilling, servicing and production and in industrial cleaning and maintenance.
This segment also designs, manufactures, markets and services other fluid
transfer components and equipment for the chemical, petroleum and food
industries. Sales of our fluid transfer products for the year ended December 31,
2004 were $150.2 million, of which approximately 52% were to customers in the
United States.
Positive displacement reciprocating pumps are marketed under the Gardner
Denver trademark, among others. Typical applications of Gardner Denver pumps in
oil and natural gas production include oil transfer, water flooding, salt water
disposal, pipeline testing, ammine pumping for gas processing, re-pressurizing,
enhanced oil recovery, hydraulic power and other liquid transfer applications.
Our production pumps range from 16 to 600 horsepower and consist of horizontal
and vertical designed pumps. We market one of the most complete product lines of
well servicing pumps. Well servicing operations include general workover
service, completions (bringing wells into production after drilling), and
plugging and abandonment of wells. Our well servicing products consist of
high-pressure plunger pumps ranging from 165 to 400 horsepower. We also
manufacture intermittent duty triplex and quintuplex plunger pumps ranging from
250 to 3,000 horsepower for well cementing and stimulation, including reservoir
fracturing or acidizing. Duplex pumps, ranging from 16 to 135 horsepower, are
produced for shallow drilling, which includes water well drilling, seismic
drilling and mineral exploration. Continuous duty triplex mud pumps for oil and
natural gas drilling rigs
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range from 275 to 2,000 horsepower. A small portion of Gardner Denver pumps are
sold for use in industrial applications.
Our water jetting pumps and systems are used in industrial cleaning and
maintenance and are sold under the Partek trademark, among others. Applications
in this market segment include runway and ship hull cleaning, concrete
demolition and metal surface preparation.
Our other fluid transfer components and equipment include loading arms,
swivel joints, couplers and valves used to load and unload ships, tank trucks
and rail cars. These products are sold primarily under the Emco Wheaton
trademark, among others.
The Fluid Transfer Products segment operates seven production facilities
(including one remanufacturing facility) in the U.S and one each in Germany and
Canada. The most significant facilities include owned properties in Quincy,
Illinois; Tulsa, Oklahoma and Kirchhain, Germany and two leased properties in
Houston, Texas and one in Oakville, Ontario.
CUSTOMERS AND CUSTOMER SERVICE
We sell our products through independent distributors and sales
representatives and directly to OEMs, engineering firms and end-users. We have
been able to establish strong customer relationships with numerous key OEMs and
exclusive supply arrangements with many of our distributors. We use a direct
sales force to service OEM and engineering firm accounts because these customers
typically require higher levels of technical assistance, more coordinated
shipment scheduling and more complex product service than customers of our less
specialized products. As a majority of our products are marketed through
independent distribution, we are committed to developing and supporting our
distribution network of over 1,000 distributors and representatives. We have
distribution centers in Memphis, Tennessee and St. Peters, Missouri that stock
parts, accessories and small compressor and vacuum products in order to provide
adequate and timely availability. We also lease sales office and warehouse space
in various U.S. locations and foreign countries. We provide our distributors
with sales and product literature, technical assistance and training programs,
advertising and sales promotions, order-entry and tracking systems and an annual
restocking program. Furthermore, we participate in major trade shows and have a
telemarketing department to generate sales leads and support the distributors'
sales staffs.
Our distributors maintain an inventory of complete units and parts and
provide aftermarket service to end-users. There are several hundred field
service representatives for our products in the distributor network. Our service
personnel and product engineers provide the distributors' service
representatives with technical assistance and field training, particularly with
respect to installation and repair of equipment. We also provide aftermarket
support through our remanufacturing facilities in Indianapolis, Indiana; Fort
Worth, Texas; and Mayfield, Kentucky and our 14 vehicle fitting facilities. The
Indianapolis operation remanufactures and repairs air ends for rotary screw
compressors, blowers and reciprocating compressors. The Fort Worth facility
repairs and remanufactures well servicing pumps, while the Mayfield operation
provides aftermarket parts and repairs for centrifugal compressors. The vehicle
fitting facilities provide preventative maintenance programs, repairs,
refurbishment, upgrades and spare parts for access platforms and vehicle
systems.
RESEARCH AND DEVELOPMENT
Compressor and vacuum and fluid transfer products are best characterized as
mature, with evolutionary technological advances. Technological trends in
compressor and vacuum products include development of oil-free air compressors,
increased product efficiency, reduction of noise levels and advanced control
systems to upgrade the flexibility and precision of regulating pressure and
capacity. Emerging compressor and vacuum market niches result from new
technologies in plastics extrusion, oil and natural gas well drilling, field gas
gathering, mobile and stationary vacuum applications, utility and fiber optic
installation and environmental impact minimization, as well as other factors.
Trends in fluid transfer products include development of larger horsepower and
lighter weight pumps and loading arms to convey natural gas.
S-51
We actively engage in a continuing research and development program. Our
research and development centers are dedicated to various activities, including
new product development, product performance improvement and new product
applications.
Our products are designed to satisfy the safety and performance standards
set by various industry groups and testing laboratories. Care is exercised
throughout the manufacturing and final testing process to ensure that products
conform to industry, government and customer specifications.
Expenditures for research and development were $6.2 million in 2004, $2.8
million in 2003 and $2.4 million in 2002.
MANUFACTURING
In general, our manufacturing processes involve machining castings and
forgings which are assembled into finished components. These components are sold
as finished products or packaged with purchased components into complete
systems. We operate 32 manufacturing facilities that utilize a broad variety of
processes. At our manufacturing locations, we maintain advanced manufacturing,
quality assurance and testing equipment geared to the specific products that we
manufacture, and use extensive process automation in our manufacturing
operations. Most of our manufacturing facilities utilize computer-aided
numerical control tools and manufacturing techniques that concentrate the
equipment necessary to produce similar products in one area of the plant, which
we refer to as cell manufacturing. One operator using cell manufacturing can
monitor and operate several machines, as well as assemble and test products made
by such machines, thereby improving operating efficiency and product quality
while reducing the amount of work-in-process and finished product inventories.
We have representatives on the American Petroleum Institute's working
committee and we have relationships with standard enforcement organizations such
as Underwriters Laboratories, Det Norske Veritas and the Canadian Standard
Association. We maintain ISO 9001-2000 certification on the quality systems at a
majority of our manufacturing and design locations.
RAW MATERIALS
The primary raw materials we use are cast iron and steel. Such materials
are generally available from a number of suppliers. We do not currently have
long-term contracts with our suppliers of raw materials, but we believe that our
sources of raw materials are reliable and adequate for our needs. We utilize
single sources of supply for certain iron castings and other selected
components. A disruption in deliveries from a given supplier could therefore
have an adverse effect on our ability to meet our commitments to customers.
Nevertheless, we believe that we have appropriately balanced this risk against
the cost of sustaining a greater number of suppliers. Moreover, we have sought,
and will continue to seek, cost reductions in our purchases of materials and
supplies by consolidating purchases, pursuing alternate sources of supply and
using online bidding competitions among potential suppliers.
BACKLOG
Our backlog was approximately $222.2 million at December 31, 2004 as
compared to approximately $58.4 million at December 31, 2003. Backlog consists
of orders believed to be firm for which a customer purchase order has been
received or communicated. Since orders may be rescheduled or canceled, backlog
does not necessarily reflect future sales levels. For further discussion of
backlog levels, see the information included under "Outlook" contained in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
PATENTS, TRADEMARKS AND OTHER INTELLECTUAL PROPERTY
We believe that the success of our business depends more on the technical
competence, creativity and marketing abilities of our employees than on any
individual patent, trademark or copyright. Nevertheless, as part of our ongoing
research, development and manufacturing activities, we have a policy of seeking
to protect our proprietary products, product enhancements and processes with
appropriate intellectual property protections.
S-52
In the aggregate, patents and trademarks are of considerable importance to
the manufacturing and marketing of many of our products. However, we do not
consider any single patent or trademark, or group of patents or trademarks, to
be material to our business as a whole, except for the Gardner Denver trademark.
Other important trademarks we use include Champion, Belliss & Morcom, Elmo
Technology, Sutorbilt, DuroFlow, Drum, Nash, Partek and Emco Wheaton. We have
registered our trademarks in the countries where it is deemed necessary.
We also rely upon trade secret protection for our confidential and
proprietary information. We routinely enter into confidentiality agreements with
our employees. There can be no assurance, however, that others will not
independently obtain similar information and techniques or otherwise gain access
to our trade secrets or that we can effectively protect our trade secrets.
EMPLOYEES
As of January 2005, we had approximately 3,800 full-time employees. More
than half of our employees, including most employees outside of the United
States, are represented by labor unions. We believe that our current relations
with employees are satisfactory.
ENVIRONMENTAL MATTERS
We are subject to numerous federal, state, local and foreign laws and
regulations relating to the storage, handling, emission, disposal and discharge
of materials into the environment. We believe that our existing environmental
control procedures are adequate and we have no current plans for substantial
capital expenditures in this area. We have an environmental policy that confirms
our commitment to a clean environment and to compliance with environmental laws.
We have an active environmental management program aimed at compliance with
existing environmental regulations and developing methods to eliminate or
significantly reduce the generation of pollutants in the manufacturing
processes.
We have been identified as a potentially responsible party, or "PRP," with
respect to several sites designated for cleanup under federal "Superfund" or
similar state laws, which impose liability for cleanup of certain waste sites
and for related natural resource damages. Persons potentially liable for such
costs and damages generally include the site owner or operator and persons that
disposed or arranged for the disposal of hazardous substances found at those
sites. Although these laws impose joint and several liability, in application,
the PRPs typically allocate the investigation and cleanup costs based upon the
volume of waste contributed by each PRP. Based on currently available
information, Gardner Denver was only a small contributor to a substantial
majority of these waste sites, and we have, or are attempting to negotiate, de
minimis settlements for their cleanup. The cleanup of the remaining sites is
substantially complete and our future obligations entail a share of the sites'
ongoing operating and maintenance expense.
We have an accrued liability on our balance sheet to the extent costs are
known or can be estimated for our remaining financial obligations for these
matters. Based upon consideration of currently available information, we do not
anticipate any materially adverse effect on our results of operations, financial
condition, liquidity or competitive position as a result of compliance with
federal, state, local or foreign environmental laws or regulations, or cleanup
costs relating to the sites discussed above.
THE THOMAS INDUSTRIES ACQUISITION
On March 9, 2005, we announced that we had signed a definitive agreement to
acquire Thomas Industries Inc. Thomas Industries is a worldwide leader in the
design, manufacture and marketing of precision engineered pumps, compressors and
blowers. The agreed-upon purchase price is $40.00 per share for all outstanding
shares and share equivalents (approximately $734.2 million) and the assumption
of $9.5 million of long-term capitalized lease obligations. As of December 31,
2004, Thomas Industries had $267.1 million in cash, cash equivalents and
short-term investments. The net transaction value, including assumed debt and
net of cash, is approximately $476.6 million.
Thomas Industries is a leading supplier of pumps, compressors and blowers
to the OEM market in such applications as medical equipment, gasoline vapor and
refrigerant recovery, automotive and transportation applications, printing,
packaging, tape drives and laboratory equipment. Thomas Industries designs,
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manufacturers, markets, sells and services these products through worldwide
operations with regional headquarters as follows: North American
Group - Sheboygan, Wisconsin; European Group - Puchheim, Germany; and Asia
Pacific Group - Hong Kong, China.
Thomas Industries has wholly-owned operations in 21 countries on five
continents. Its primary manufacturing facilities are located in Sheboygan,
Wisconsin; Monroe, Louisiana; Skokie, Illinois; Syracuse, New York; Schopfheim,
Fahrnau, Puchheim and Memmingen, Germany; and Wuxi, China. The manufacturing
operations in the United States produce rotary vane, linear, piston and
diaphragm pumps and compressors, and various liquid pumps. These products are
directly sold worldwide to OEMs, as well as through fluid power and industrial
distributors. The German operations manufacture a complementary line of rotary
vane, linear, diaphragm, gear, side channel, radial, claw, screw and rotary lobe
pumps, compressors and blowers, as well as various liquid pumps, air-centers and
centralized systems. These products are also distributed worldwide. The
manufacturing facility in China was constructed during late 2004 and will begin
production in mid 2005.
Thomas Industries' largest markets are Europe and the United States, which
represent approximately 52% and 38% of its revenues, respectively. Of the total
European sales, approximately 61% are within Germany and 39% are within other
European countries. Approximately 10% of Thomas Industries' revenues are
generated in Asia Pacific. At December 31, 2004, Thomas Industries employed
approximately 2,200 people.
For the year ended December 31, 2004, Thomas Industries' revenues and
operating income were $410.1 million and $208.8 million, respectively. Operating
income for this period included $18.6 million from Thomas Industries' 32%
interest in GTG and a $160.4 million nonrecurring gain on the sale of this joint
venture in July 2004. Operating income included $5.2 million of non-recurring
charges related to plant shutdown, legal and environmental costs.
The acquisition of Thomas Industries is expected to close in 2005 and is
subject to the approval of Thomas Industries' stockholders and other customary
closing conditions, including the receipt of applicable regulatory approvals.
See "Risk Factors - Risks Related to the Thomas Industries Acquisition."
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Set forth below is information regarding our executive officers and
directors as of April 13, 2005.
NAME AGE OFFICE
---- --- ------
Ross J. Centanni.......... 59 Chairman, President and Chief Executive Officer
Michael S. Carney......... 47 Vice President and General Manager, Blower Division
Helen W. Cornell.......... 46 Vice President, Finance and Chief Financial Officer
Tracy D. Pagliara......... 42 Vice President, Administration, General Counsel and
Secretary
J. Dennis Shull........... 56 Vice President and General Manager, Compressor
Division
Richard C. Steber......... 54 Vice President and General Manager, Liquid Ring
Pump Division
Donald G. Barger, Jr...... 62 Director
Frank J. Hansen........... 63 Director
Raymond R. Hipp........... 62 Director
Thomas M. McKenna......... 67 Director
David Petratis............ 47 Director
Diane K. Schumacher....... 51 Director
Richard L. Thompson....... 65 Director
ROSS J. CENTANNI, age 59, has been President and Chief Executive Officer
and a director of Gardner Denver since its incorporation in November 1993. He
has been Chairman of Gardner Denver's Board of Directors since November 1998.
Prior to Gardner Denver's spin-off from Cooper Industries, Inc., or "Cooper," in
April 1994, he was Vice President and General Manager of Gardner Denver's
predecessor, the Gardner-Denver Industrial Machinery Division, where he also
served as Director of Marketing from August 1985 to June 1990. He has a B.S.
degree in industrial technology and an M.B.A. degree from Louisiana State
University. Mr. Centanni is a director of Esterline Technologies, a publicly
held manufacturer of components for avionics, propulsion and guidance systems,
and Denman Services, Inc., a privately held supplier of medical products. He is
also a member of the Petroleum Equipment Suppliers Association Board of
Directors and a member of the Executive Committee of the International
Compressed Air and Allied Machinery Committee.
MICHAEL S. CARNEY, age 47, joined the Company as Vice President and General
Manager, Gardner Denver Blower Division in November 2001. Prior to joining
Gardner Denver, Mr. Carney worked for Woods Equipment Company from 1995 to May
2001. The last position he held with Woods was Vice President, Construction
Business. From 1979 to 1995, Mr. Carney worked for General Electric Company in
various management positions. Mr. Carney has a B.S.M.E. degree from the
University of Notre Dame, an M.S.E.E. degree from the University of Cincinnati,
and an M.S.I.A. degree from Purdue University.
HELEN W. CORNELL, age 46, was appointed Vice President, Finance and Chief
Financial Officer in August 2004. She served as Vice President and General
Manager, Fluid Transfer Division and Operations Support of Gardner Denver from
March 2004 until her promotion. She served as Vice President, Strategic Planning
and Operations Support from August 2001 until March 2004 and as Vice President,
Compressor Operations for the Compressor and Pump Division from April 2000 until
August 2001. From November 1993 until accepting her operations role, Ms. Cornell
held positions of increasing responsibility as the Corporate Secretary and
Treasurer of the Company, serving in the role of Vice President, Corporate
Secretary and Treasurer from April 1996 until April 2000. She holds a B.S.
degree in accounting from the University of Kentucky and an M.B.A. from
Vanderbilt University. She is a Certified Public Accountant and a Certified
Management Accountant.
TRACY D. PAGLIARA, age 42, was appointed Vice President, Administration,
General Counsel and Secretary of Gardner Denver in March 2004. He previously
served as Vice President, General Counsel and
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Secretary from August 2000 until his promotion. Prior to joining Gardner Denver,
Mr. Pagliara held positions of increasing responsibility in the legal
departments of Verizon Communications/GTE Corporation from August 1996 to August
2000 and Kellwood Company from May 1993 to August 1996, ultimately serving in
the role of Assistant General Counsel for each company. Mr. Pagliara, a
Certified Public Accountant, has a B.S. degree in accounting and a J.D. degree
from the University of Illinois.
J. DENNIS SHULL, age 56, has been the Vice President and General Manager,
Gardner Denver Compressor Division since January 2002. He previously served the
Company as Vice President and General Manager, Gardner Denver Compressor and
Pump Division since its organization in August 1997. Prior to August 1997, he
served as Vice President, Sales and Marketing since the Company's incorporation
in November 1993. From August 1990 until November 1993, Mr. Shull was the
Director of Marketing for the Gardner Denver Industrial Machinery Division. Mr.
Shull has a B.S. degree in business from Northeast Missouri State University and
an M.A. in business from Webster University.
RICHARD C. STEBER, age 54, has been the Vice President and General Manager,
Gardner Denver Liquid Ring Pump Division since January 2005. He previously
served the Company as Vice President and General Manager of the Gardner Denver
Fluid Transfer Division (formerly the Gardner Denver Pump Division) from January
2002 until his promotion. Prior to joining Gardner Denver, he was employed by
Goulds Pumps, a division of ITT Industries, for twenty-five years, most recently
as the President and General Manager for Europe, Middle East, and Africa. He
previously held positions of Vice President for both the sales and marketing
organizations at Goulds Pumps, with domestic and international responsibility.
Mr. Steber has a B.S. degree in engineering from the State University of New
York College of Environmental Science and Forestry at Syracuse University.
DONALD G. BARGER, JR., age 62, has been a director of Gardner Denver since
its spin-off from Cooper in April 1994. Mr. Barger is the Senior Vice President
and Chief Financial Officer of Yellow Roadway Corporation, a publicly held
company specializing in the transportation of goods and materials. He joined the
predecessor company, Yellow Corporation, or "Yellow," in December 2000 in the
same capacity. Prior to joining Yellow, he served as Vice President and Chief
Financial Officer of Hillenbrand Industries Inc., or "Hillenbrand," a publicly
held company serving healthcare and funeral services, from March 1998 until
December 2000. Mr. Barger was also Vice President, Chief Financial Officer of
Worthington Industries, Inc., a publicly held manufacturer of metal and plastic
products and processed steel products, from September 1993 until joining
Hillenbrand. Mr. Barger has a B.S. degree from the United States Naval Academy
and an M.B.A. from the University of Pennsylvania, Wharton School of Business.
Mr. Barger is a director of the Quanex Corporation.
FRANK J. HANSEN, age 63, has been a director of Gardner Denver since June
1997. Mr. Hansen was the President and Chief Executive Officer of IDEX
Corporation, a publicly held manufacturer of proprietary fluid handling and
industrial products, from April 1999 until his retirement in April 2000. He was
President and Chief Operating Officer from January 1998 to April 1999 and Senior
Vice President and Chief Operating Officer from July 1994 until January 1998.
Mr. Hansen has a B.S. degree in business administration from Portland State
University.
RAYMOND R. HIPP, age 62, has been a director of Gardner Denver since
November 1998. Since July 2002, Mr. Hipp has served as a strategic alternative
and merger and acquisition consultant. Mr. Hipp served as Chairman, President
and CEO and a Director of Alternative Resources Corporation, a provider of
information technology staffing and component outsourcing, a position he held
from July 1998 until his retirement in June 2002. From August 1996 until May
1998, Mr. Hipp was the Chief Executive Officer of ITI Marketing Services, a
provider of telemarketing services. Mr. Hipp has a B.S. degree from Southeast
Missouri State University.
THOMAS M. MCKENNA, age 67, has been a director of Gardner Denver since its
spin-off from Cooper in April 1994. Mr. McKenna served as the President of
United Sugars Corporation, a marketing cooperative which is one of the nation's
largest sugar marketers to both the industrial and retail markets, from December
1998 until his retirement in December 2002. He was President and Chief Executive
Officer of Moorman Manufacturing Company, a privately held manufacturer of
agricultural supplies, from August 1993 until
S-56
January 1998. Mr. McKenna has a B.A. degree from St. Mary's College and an
M.B.A. from Loyola University.
DAVID D. PETRATIS, age 47, has been a director of Gardner Denver since July
2004. Mr. Petratis has been the President and Chief Executive Officer of the
North American Operating Division of Schneider Electric, located in Palatine,
Illinois, since January 2004. Schneider Electric is headquartered in Paris,
France and provides a market-leading brand of electrical distribution and
industrial control products, systems and services. Mr. Petratis previously
served as the President and Chief Operating Officer of the North American
Division of Schneider Electric from December 2002 until his promotion. He was
President of MGE Americas, a privately held manufacturer of power supplies, from
1996 through 2002. Mr. Petratis earned a B.A. degree in Industrial Management
from the University of Northern Iowa and an M.B.A. from Pepperdine University.
He has held positions on the Board of Directors of the University of California,
Irvine Graduate School of Management, the California State (Fullerton) Quality
Advisory Board and Project Independence, a community agency in Costa Mesa,
California for the developmentally disabled. Mr. Petratis also serves on the
Board of Governors of National Electrical Manufacturers Association (NEMA).
DIANE K. SCHUMACHER, age 51, has been a director of Gardner Denver since
August 2000. Ms. Schumacher has served as Senior Vice President, General Counsel
and Secretary of Cooper from 1995 to 2003 and presently serves as Senior Vice
President, General Counsel and Chief Compliance Officer. Ms. Schumacher holds a
B.A. degree in economics from Southern Illinois University and a J.D. degree
from DePaul University College of Law. She also completed the Harvard Advanced
Management Program and serves as a director of the American Arbitration
Association and is a member of the Executive Committee.
RICHARD L. THOMPSON, age 65, has been a director of Gardner Denver since
November 1998. Mr. Thompson served as a Group President and Executive Office
Member of Caterpillar Inc., or "Caterpillar," a publicly held manufacturer of
construction machinery and equipment, from 1995 until his retirement in June
2004. He earned a B.S. in electrical engineering and an M.B.A. from Stanford
University and completed the Caterpillar Advanced Management Program. Mr.
Thompson serves as Vice Chairman of the Board of Directors of Lennox
International, Inc., a publicly held manufacturer of HVAC and refrigeration
equipment, and as a director of NiSource Inc., a publicly held electric and gas
utility.
DESCRIPTION OF CAPITAL STOCK
Information about our capital stock appears under "Description of Our
Capital Stock" in the accompanying prospectus.
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UNDERWRITING
Subject to the terms and conditions of an Underwriting Agreement, dated
April , 2005, the underwriters named below, acting through their
representatives, Bear, Stearns & Co. Inc., J.P. Morgan Securities Inc. and
KeyBanc Capital Markets, a division of McDonald Investments, Inc. have severally
agreed with us, subject to the terms and conditions of the Underwriting
Agreement, to purchase from us the number of shares of common stock set forth
below opposite their respective names.
UNDERWRITERS NUMBER OF SHARES
------------ ----------------
Bear, Stearns & Co. Inc.....................................
J. P. Morgan Securities Inc.................................
KeyBanc Capital Markets, a division of McDonald Investments,
Inc.
---------
Total............................................. 5,000,000
=========
The Underwriting Agreement provides that the obligations of the several
underwriters to purchase and accept delivery of the shares of our common stock
offered by this prospectus supplement are subject to approval by their counsel
of legal matters and to other conditions set forth in the Underwriting
Agreement. The underwriters are obligated to purchase and accept delivery of all
the shares of common stock offered hereby, other than those shares covered by
the over-allotment option described below, if any are purchased.
The representatives of the underwriters have advised us that the
underwriters propose to initially offer shares of our common stock to the public
at the public offering price set forth on the cover page of this prospectus
supplement and to certain dealers at that price less a concession not in excess
of $ per share, of which $ may be reallowed to other dealers. After
this offering, the public offering price, concession and other terms of the
offering may be changed by the representatives. No such change shall change the
amount of proceeds to be received by us as set forth on the cover page of this
prospectus supplement. The shares of our common stock are offered by the
underwriters as stated herein, subject to receipt and acceptance by them and
subject to their right to reject any order in whole or in part.
We have granted to the underwriters an option, exercisable within 30 days
after the date of the prospectus supplement, to purchase from time to time up to
an aggregate of 750,000 shares of common stock to cover over-allotments, if any,
at the public offering price less underwriting discounts and commissions. If the
underwriters exercise their over-allotment option to purchase any of the 750,000
additional shares, each underwriter, subject to certain conditions, will become
obligated to purchase its pro-rata portion of these additional shares based on
the underwriter's percentage underwriting commitment in the offering as
indicated in the preceding table. If purchased, these additional shares will be
sold by the underwriters on the same terms as those on which the shares offered
hereby are being sold. We will be obligated, pursuant to the over-allotment
option, to sell shares to the underwriters to the extent the over-allotment
option is exercised. The underwriters may exercise the over-allotment option
only to cover over-allotments made in connection with the sale of the shares of
common stock offered in this offering.
The following table shows the public offering price, underwriting discounts
and commissions and proceeds, before expenses, to us. Such amounts are shown
assuming both no exercise and full exercise of the underwriters' over-allotment
option to purchase additional shares.
TOTAL
-------------------------------
WITHOUT
OVER-
PER SHARE ALLOTMENT WITH OVER-ALLOTMENT
--------- --------- -------------------
Public offering price................................. $ $ $
Underwriting discount.................................
Proceeds to Gardner Denver............................
We estimate expenses payable by us in connection with this offering, other
than the underwriting discounts and commissions referred to above, will be
approximately $500,000.
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We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act, or to contribute to payments
that the underwriters may be required to make in respect of those liabilities.
Each of our executive officers and directors will agree, subject to
specified exceptions, not to:
-- offer to sell, contract to sell, or otherwise sell, dispose of, loan,
pledge or grant any rights with respect to any shares or any options
or warrants to purchase any shares, or any securities convertible
into or exchangeable for shares owned as of the date of this
prospectus supplement or thereafter acquired directly by those
holders or with respect to which they have the power of disposition,
or
-- enter into any swap or other arrangement that transfers all or a
portion of the economic consequences associated with the ownership of
any shares (regardless of whether any of these transactions are to be
settled by the delivery of shares, or such other securities, in cash
or otherwise)
for a period of 90 days after the date of this prospectus supplement without the
prior written consent of Bear, Stearns & Co. Inc. This restriction terminates
after the close of trading of the common stock on the 90th day after the date of
this prospectus supplement. However, Bear, Stearns & Co. Inc. may, in its sole
discretion and at any time or from time to time before the termination of the
90-day period, without notice, release all or any portion of the securities
subject to lock-up agreements. There are no existing agreements between the
representative and any of our stockholders who will execute a lock-up agreement,
providing consent to the sale of shares prior to the expiration of the lock-up
period.
In addition, we have agreed that, subject to certain exceptions, during the
lock-up period we will not, without the prior written consent of Bear, Stearns &
Co. Inc., consent to the disposition of any shares held by stockholders subject
to lock-up agreements prior to the expiration of the lock-up period, or issue,
sell, contract to sell, or otherwise dispose of, any shares, any options or
warrants to purchase any shares or any securities convertible into, exercisable
for or exchangeable for common stock other than our sale of shares in this
offering, the issuance of our shares upon the exercise of outstanding options or
warrants, and the issuance of options or shares under existing incentive and
benefit plans.
Other than in the United States, no action has been taken by us or the
underwriters that would permit a public offering of the shares of common stock
offered by this prospectus supplement in any jurisdiction when action for that
purpose is required. The shares of common stock offered by this prospectus
supplement may not be offered or sold, directly or indirectly, nor may this
prospectus supplement or any other offering material or advertisements in
connection with the offer and sale of any such shares be distributed or
published in any jurisdiction, except under circumstances that will result in
compliance with the applicable rules and regulations of that jurisdiction.
Persons into whose possession this prospectus supplement comes are advised to
inform themselves about and to observe any restrictions relating to the offering
and the distribution of this prospectus supplement. This prospectus supplement
does not constitute an offer to sell or a solicitation of an offer to buy any
shares of common stock offered by this prospectus supplement in any jurisdiction
in which such an offer or a solicitation is unlawful.
OUR SHARES ARE TRADED ON THE NEW YORK STOCK EXCHANGE UNDER THE SYMBOL
"GDI."
A prospectus supplement in electronic format may be made available on the
Internet sites or through other online services maintained by one or more of the
underwriters of this offering, or by their affiliates. In those cases,
prospective investors may view offering terms online and, depending upon the
particular underwriter, prospective investors may be allowed to place orders
online. The underwriters may agree with us to allocate a specific number of
shares for sale to online brokerage account holders. Any such allocation for
online distributions will be made by the underwriters on the same basis as other
allocations. Other than the prospectus supplement in electronic format, the
information on any underwriter's web site and any information contained in any
other web site maintained by an underwriter is not part of the prospectus
supplement or the registration statement of which this prospectus supplement
forms a part, has not been approved and/or endorsed by us or any underwriter in
its capacity as underwriter and should not be relied upon by investors.
S-59
The representatives of the underwriters have advised us that, pursuant to
Regulation M under the Securities Exchange Act, some participants in the
offering may engage in transactions, including stabilizing bids, syndicate
covering transactions or the imposition of penalty bids, that may have the
effect of stabilizing or maintaining the market price of the shares of common
stock at a level above that which might otherwise prevail in the open market. A
"stabilizing bid" is a bid for or the purchase of shares of common stock on
behalf of the underwriters for the purpose of fixing or maintaining the price of
the shares of common stock. A "syndicate covering transaction" is the bid for or
purchase of shares of common stock on behalf of the underwriters to reduce a
short position incurred by the underwriters in connection with the offering. A
"penalty bid" is an arrangement permitting the representatives to reclaim the
selling concession otherwise accruing to an underwriter or syndicate member in
connection with this offering if the shares of common stock originally sold by
such underwriter or syndicate member are purchased by the representatives in a
syndicate covering transaction and have therefore not been effectively placed by
such underwriter or syndicate member. The representatives of the underwriters
have advised us that such transactions may be effected on the New York Stock
Exchange or otherwise and, if commenced, may be discontinued at any time.
The underwriters may, from time to time, engage in transactions with, and
perform services for, us in the ordinary course of their business. Pending
consummation of the Thomas Industries acquisition, we intend to use a portion of
the proceeds of this offering to repay outstanding amounts under our existing
senior credit facility. Affiliates of Bear, Stearns & Co. Inc., J.P. Morgan
Securities Inc. and KeyBanc Capital Markets are lenders under our existing
senior credit facility and, as a result, would receive a portion of the proceeds
of this offering pending consummation of the acquisition. In addition, JPMorgan
Chase Bank, N.A., an affiliate of J.P. Morgan Securities Inc., is the agent
under, and J.P. Morgan Securities Inc. is the lead arranger under, our existing
senior credit facility. Bear, Stearns & Co. Inc. and J.P. Morgan Securities Inc.
are expected to be the lead arrangers under our amended and restated credit
facility. In addition, Bear Stearns Corporate Lending Inc., an affiliate of
Bear, Stearns & Co. Inc., and JPMorgan Chase Bank, N.A., an affiliate of J.P.
Morgan Securities Inc., are expected to be lenders under and the syndication
agent and administration agent, respectively, under our amended and restated
credit facility. KeyBank National Association, an affiliate of KeyBanc Capital
Markets, is expected to be a lender under our amended and restated credit
facility.
S-60
LEGAL MATTERS
Certain legal matters in connection with the shares of common stock will be
passed upon for us by Bryan Cave LLP, St. Louis, Missouri. Certain legal matters
will be passed upon for the underwriters by Cahill Gordon & Reindel LLP, New
York, New York.
EXPERTS
The consolidated financial statements of Gardner Denver, Inc. and
subsidiaries as of December 31, 2004 and 2003, and for each of the years in the
three-year period ended December 31, 2004, and management's assessment of the
effectiveness of internal control over financial reporting as of December 31,
2004, have been included in this prospectus supplement in reliance upon the
reports of KPMG LLP, an independent registered public accounting firm, and upon
the authority of said firm as experts in accounting and auditing.
The audit report on management's assessment of the effectiveness of
internal control over financial reporting and the effectiveness of internal
control over financial reporting as of December 31, 2004, contains an
explanatory paragraph that states that Gardner Denver, Inc. acquired Nash Elmo
on September 1, 2004, and management excluded from its assessment of the
effectiveness of the Gardner Denver, Inc.'s internal control over financial
reporting as of December 31, 2004, Nash Elmo's internal control over financial
reporting. Total assets related to Nash Elmo as of December 31, 2004 of $331
million and revenues for the four-month period subsequent to the acquisition
(September 1 - December 31, 2004) of $84 million were included in the
consolidated financial statements of Gardner Denver, Inc. and subsidiaries as of
and for the year ended December 31, 2004. The audit of internal control over
financial reporting of Gardner Denver, Inc. also excluded an evaluation of the
internal control over financial reporting of Nash Elmo.
The consolidated financial statements of Thomas Industries Inc. at December
31, 2004 and 2003, and for each of the years in the three-year period ended
December 31, 2004, in this prospectus supplement and registration statement have
been audited by Ernst & Young LLP, independent registered public accounting
firm, as set forth in their report thereon appearing elsewhere herein, and are
included in reliance upon such report given on the authority of such firm as
experts in accounting and auditing.
S-61
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
GARDNER DENVER, INC.
Report on Management's Assessment of Internal Control Over
Financial Reporting.................................... F-2
Report of Independent Registered Public Accounting Firm... F-3
Consolidated Statements of Operations for the Years ended
December 31, 2004, 2003 and 2002....................... F-6
Consolidated Balance Sheets as of December 31, 2004 and
2003................................................... F-7
Consolidated Statements of Stockholders' Equity for the
Years ended December 31, 2004, 2003 and 2002........... F-8
Consolidated Statements of Cash Flows for the Years ended
December 31, 2004, 2003 and 2002....................... F-9
Notes to Consolidated Financial Statements................ F-10
THOMAS INDUSTRIES INC.
Report of Independent Registered Public Accounting Firm... F-35
Consolidated Statements of Income for the Years ended
December 31, 2004, 2003 and 2002....................... F-36
Consolidated Balance Sheets as of December 31, 2004 and
2003................................................... F-37
Consolidated Statements of Shareholders' Equity for the
Years ended December 31, 2004, 2003 and 2002........... F-38
Consolidated Statements of Cash Flow for the Years ended
December 31, 2004, 2003 and 2002....................... F-40
Notes to Consolidated Financial Statements................ F-41
F-1
REPORT ON MANAGEMENT'S ASSESSMENT OF INTERNAL CONTROL OVER FINANCIAL REPORTING
Gardner Denver management is responsible for establishing and maintaining
adequate internal control over financial reporting, as such term is defined in
Exchange Act Rules 13a-15(f). Any system of internal control, no matter how well
designed, has inherent limitations, including the possibility that a control can
be circumvented or overridden and misstatements due to error or fraud may occur
and not be detected. Also, because of changes in conditions, internal control
effectiveness may vary over time. Accordingly, even an effective system of
internal control over financial reporting will provide only reasonable assurance
with respect to financial statement preparation.
Under the supervision and with the participation of management, including
the chief executive officer and chief financial officer, the Company conducted
an evaluation of the effectiveness of its internal control over financial
reporting based on the framework in "Internal Control -- Integrated Framework"
issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Based on its evaluation under the framework in "Internal Control -- Integrated
Framework," management concluded that internal control over financial reporting
was effective as of December 31, 2004, subject to the scope limitation with
respect to Nash Elmo as discussed in the paragraph below.
Gardner Denver acquired Nash Elmo on September 1, 2004. As permitted by SEC
guidance, management excluded from its assessment of the effectiveness of
Gardner Denver's internal control over financial reporting as of December 31,
2004, Nash Elmo's internal control over financial reporting. Total assets
related to Nash Elmo as of December 31, 2004 were $331 million and revenues for
the four-month period subsequent to the acquisition (September 1 -- December 31,
2004) were $84 million.
Management's assessment of the effectiveness of our internal control over
financial reporting as of December 31, 2004 has been audited by KPMG LLP, an
independent registered public accounting firm, as stated in their report which
is included herein.
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of
Gardner Denver, Inc.:
We have audited the accompanying consolidated balance sheets of Gardner
Denver, Inc. and subsidiaries (the Company) as of December 31, 2004 and 2003,
and the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the years in the three-year period ended December 31,
2004. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Gardner
Denver, Inc. and subsidiaries as of December 31, 2004 and 2003, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2004, in conformity with U.S. generally accepted
accounting principles.
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the effectiveness of Gardner
Denver, Inc.'s internal control over financial reporting as of December 31,
2004, based on criteria established in Internal Control -- Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO), and our report dated March 11, 2005 expressed an unqualified opinion on
management's assessment of, and the effective operation of, internal control
over financial reporting.
/s/ KPMG LLP
St. Louis, Missouri
March 11, 2005
F-3
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of
Gardner Denver, Inc.:
We have audited management's assessment, included in the accompanying
Report on Management's Assessment of Internal Control Over Financial Reporting,
that Gardner Denver, Inc. (the Company) maintained effective internal control
over financial reporting as of December 31, 2004, based on criteria established
in Internal Control -- Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). Gardner Denver,
Inc.'s management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on
management's assessment and an opinion on the effectiveness of the Company's
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management's assessment, testing
and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinion.
A company's internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
In our opinion, management's assessment that Gardner Denver, Inc.
maintained effective internal control over financial reporting as of December
31, 2004, is fairly stated, in all material respects, based on criteria
established in Internal Control -- Integrated Framework issued by COSO. Also, in
our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2004, based on
criteria established in Internal Control -- Integrated Framework issued by COSO.
The Company acquired Nash Elmo on September 1, 2004, and management
excluded from its assessment of the effectiveness of Gardner Denver, Inc.'s
internal control over financial reporting as of December 31, 2004, Nash Elmo's
internal control over financial reporting. Total assets related to Nash Elmo at
December 31, 2004 of $331 million and revenues for the four-month period
subsequent to the acquisition (September 1 -- December 31, 2004) of $84 million
were included in the consolidated financial statements of Gardner Denver, Inc.
and subsidiaries as of and for the year ended December 31, 2004. Our audit of
internal control over financial reporting of Gardner Denver, Inc. also excluded
an evaluation of the internal control over financial reporting of Nash Elmo.
F-4
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated balance
sheets of Gardner Denver, Inc. and subsidiaries as of December 31, 2004 and
2003, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 2004, and our report dated March 11, 2005 expressed an unqualified
opinion on those consolidated financial statements.
/s/ KPMG LLP
St. Louis, Missouri
March 11, 2005
F-5
GARDNER DENVER, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
2004 2003 2002
-------- ------- -------
REVENUES.................................................... $739,539 439,530 418,158
COSTS AND EXPENSES
Cost of sales............................................. 498,435 307,753 289,631
Depreciation and amortization............................. 21,901 14,566 14,139
Selling and administrative expenses....................... 157,453 85,326 79,400
Interest expense.......................................... 10,102 4,748 6,365
Other income, net......................................... (638) (3,221) (204)
-------- ------- -------
TOTAL COSTS AND EXPENSES.................................... 687,253 409,172 389,331
======== ======= =======
INCOME BEFORE INCOME TAXES.................................. 52,286 30,358 28,827
PROVISION FOR INCOME TAXES.................................. 15,163 9,715 9,225
-------- ------- -------
NET INCOME.................................................. $ 37,123 20,643 19,602
======== ======= =======
BASIC EARNINGS PER SHARE.................................... $ 1.96 1.29 1.24
======== ======= =======
DILUTED EARNINGS PER SHARE.................................. $ 1.92 1.27 1.22
======== ======= =======
The accompanying notes are an integral part of these statements.
F-6
GARDNER DENVER, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
2004 2003
---------- -------
ASSETS
Current assets
Cash and equivalents...................................... $ 64,601 132,803
Receivables, (net of allowances of $7,543 in 2004 and
$4,534 in 2003)........................................ 163,927 81,345
Inventories, net.......................................... 138,386 64,327
Deferred income taxes..................................... 9,465 3,652
Other current assets...................................... 9,143 5,682
---------- -------
Total current assets................................... 385,522 287,809
---------- -------
Property, plant and equipment, net.......................... 148,819 75,428
Goodwill.................................................... 374,159 205,488
Other intangibles, net...................................... 110,173 10,341
Deferred income taxes....................................... -- 5,374
Other assets................................................ 9,936 5,293
---------- -------
Total assets........................................... $1,028,609 589,733
========== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short-term borrowings and current maturities of long-term
debt................................................... $ 32,949 16,875
Accounts payable and accrued liabilities.................. 206,069 84,081
---------- -------
Total current liabilities.............................. 239,018 100,956
---------- -------
Long-term debt, less current maturities..................... 280,256 165,756
Postretirement benefits other than pensions................. 30,503 32,110
Deferred income taxes....................................... 21,324 --
Other liabilities........................................... 52,032 25,006
---------- -------
Total liabilities...................................... $ 623,133 323,828
---------- -------
Stockholders' equity:
Common stock, $0.01 par value; 50,000,000 shares
authorized; 19,947,570 and 16,117,026 shares
outstanding in 2004 and 2003, respectively............. 217 178
Capital in excess of par value............................ 262,091 174,474
Retained earnings......................................... 139,430 102,307
Accumulated other comprehensive income.................... 30,185 14,893
Treasury stock at cost, 1,739,661 and 1,721,862 shares in
2004 and 2003, respectively............................ (26,447) (25,947)
---------- -------
Total stockholders' equity............................. 405,476 265,905
---------- -------
Total liabilities and stockholders' equity............. $1,028,609 589,733
========== =======
The accompanying notes are an integral part of these statements.
F-7
GARDNER DENVER, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31
(DOLLARS IN THOUSANDS)
CAPITAL ACCUMULATED
IN EXCESS OTHER TOTAL
COMMON OF PAR TREASURY RETAINED COMPREHENSIVE STOCKHOLDERS' COMPREHENSIVE
STOCK VALUE STOCK EARNINGS INCOME (LOSS) EQUITY INCOME
------ --------- -------- -------- ------------- ------------- -------------
Balance January 1, 2002.......... $174 166,262 (25,602) 62,062 (4,168) 198,728
==== ======= ======= ======= ====== =======
Stock issued for benefit plans
and options.................... 3 4,785 4,788
Treasury stock................... (217) (217)
Net income....................... 19,602 19,602 19,602
Foreign currency translation
adjustments.................... 8,482 8,482 8,482
Minimum pension liability
adjustments, net of tax of
$4,976......................... (8,460) (8,460) (8,460)
------
19,624
---- ------- ------- ------- ------ ------- ======
Balance December 31, 2002........ $177 171,047 (25,819) 81,664 (4,146) 222,923
==== ======= ======= ======= ====== =======
Stock issued for benefit plans
and options.................... 1 3,427 3,428
Treasury stock................... (128) (128)
Net income....................... 20,643 20,643 20,643
Foreign currency translation
adjustments.................... 15,734 15,734 15,734
Minimum pension liability
adjustments, net of tax of
$(1,678)....................... 3,305 3,305 3,305
------
39,682
---- ------- ------- ------- ------ ------- ======
Balance December 31, 2003........ $178 174,474 (25,947) 102,307 14,893 265,905
==== ======= ======= ======= ====== =======
Stock offering................... 35 79,522 79,557
Stock issued for benefit plans
and options.................... 4 8,095 8,099
Treasury stock................... (500) (500)
Net income....................... 37,123 37,123 37,123
Foreign currency translation
adjustments.................... 15,712 15,712 15,712
Minimum pension liability
adjustments, net of tax of
$140........................... (420) (420) (420)
------
52,415
---- ------- ------- ------- ------ ------- ======
Balance December 31, 2004........ $217 262,091 (26,447) 139,430 30,185 405,476
==== ======= ======= ======= ====== =======
The accompanying notes are an integral part of these statements.
F-8
GARDNER DENVER, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31
(DOLLARS IN THOUSANDS)
2004 2003 2002
--------- ------- --------
Cash flows from operating activities:
Net income................................................ $ 37,123 20,643 19,602
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................ 21,901 14,566 14,139
Unrealized foreign currency transaction gain, net.... (980) (3,212) --
Net gain on asset dispositions....................... (40) (370) (20)
LIFO liquidation income.............................. (132) (367) (394)
Stock issued for employee benefit plans.............. 3,239 2,434 2,342
Deferred income taxes................................ 537 5,724 2,455
Changes in assets and liabilities:
Receivables....................................... (6,011) (3,568) 13,321
Inventories....................................... (1,745) 7,270 11,254
Accounts payable and accrued liabilities.......... 20,526 4,095 (9,313)
Other assets and liabilities, net................. 2,334 (932) (905)
--------- ------- --------
Net cash provided by operating activities....... 76,752 46,283 52,481
--------- ------- --------
Cash flows from investing activities:
Business acquisitions, net of cash acquired............ (295,313) (2,402) --
Capital expenditures................................... (19,550) (11,950) (13,641)
Disposals of property, plant and equipment............. 557 1,959 200
Foreign currency hedging transactions.................. (1,258) -- (5)
Other.................................................. -- (516) --
--------- ------- --------
Net cash used in investing activities........... (315,564) (12,909) (13,446)
--------- ------- --------
Cash flows from financing activities:
Principal payments on short-term borrowings............ (3,648) -- --
Proceeds from short-term borrowings.................... 327 -- --
Principal payments on long-term debt................... (274,470) (59,532) (109,442)
Proceeds from long-term debt........................... 362,533 122,000 62,000
Proceeds from issuance of common stock................. 79,557 -- --
Proceeds from stock options............................ 4,860 993 2,446
Purchase of treasury stock............................. (500) (128) (217)
Debt issuance costs.................................... (1,847) (302) (754)
--------- ------- --------
Net cash provided by (used in) financing
activities................................... 166,812 63,031 (45,967)
--------- ------- --------
Effect of exchange rate changes on cash and equivalents..... 3,798 10,731 2,619
--------- ------- --------
(Decrease) increase in cash and equivalents................. (68,202) 107,136 (4,313)
Cash and equivalents, beginning of year..................... 132,803 25,667 29,980
--------- ------- --------
Cash and equivalents, end of year........................... $ 64,601 132,803 25,667
========= ======= ========
The accompanying notes are an integral part of these statements.
F-9
GARDNER DENVER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS OR AMOUNTS DESCRIBED IN MILLIONS)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements reflect the operations
of Gardner Denver, Inc. ("Gardner Denver" or the "Company") and its
subsidiaries. Certain prior year amounts have been reclassified to conform with
current year presentation.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All significant intercompany
transactions and accounts have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States ("GAAP") requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities, the 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 these estimates.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of the Company's foreign operations are translated
at the exchange rate in effect at the balance sheet date, while revenues and
expenses are translated at average rates prevailing during the year. Translation
adjustments are reported in accumulated other comprehensive income, a separate
component of stockholders' equity.
REVENUE RECOGNITION
The Company recognizes product revenue when the products are shipped and
title passes to the customer and collection is reasonably assured. Service
revenue is recognized when services are performed and earned and collection is
reasonably assured.
CASH EQUIVALENTS
Cash equivalents are highly liquid investments (valued at cost, which
approximates fair value) acquired with an original maturity of three months or
less. As of December 31, 2003, L62.4 million ($111.4 million) in cash was
deposited on account to acquire the shares of Syltone (See Note 2). These funds
were restricted for such use until the acquisition was consummated. As of
December 31, 2004, cash of $5.3 million was pledged to financial institutions as
collateral to support the issuance of standby letters of credit and similar
instruments on behalf of the Company and its subsidiaries.
INVENTORIES
Inventories, which consist of materials, labor and manufacturing overhead,
are carried at the lower of cost or market value. As of December 31, 2004, $97.5
million (70%) of the Company's inventory is accounted for on a first-in,
first-out (FIFO) basis, with the remaining $40.9 million (30%) accounted for on
a last-in, first-out (LIFO) basis.
F-10
GARDNER DENVER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are carried at cost. Depreciation is provided
using the straight-line method over the estimated useful lives of the assets:
buildings -- 10 to 45 years; machinery and equipment -- 10 to 12 years; office
furniture and equipment -- 3 to 10 years; and tooling, dies, patterns, etc. -- 3
to 7 years.
GOODWILL AND OTHER INTANGIBLES
The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 141 "Business Combinations." Among other things, this standard
requires that intangible assets acquired in a business combination be recognized
(at fair value) apart from goodwill if they meet one of two criteria -- the
contractual-legal criterion or the separability criterion. The Company has also
adopted SFAS No. 142 "Goodwill and Other Intangible Assets." Under the
provisions of this standard, intangible assets deemed to have indefinite lives
and goodwill are not subject to amortization. All other intangible assets are
amortized over their estimated useful lives. Goodwill and other intangible
assets not subject to amortization are tested for impairment annually, or more
frequently if events or changes in circumstances indicate that the asset might
be impaired. This testing requires comparison of carrying values to fair values,
and when appropriate, the carrying value of impaired assets is reduced to fair
value.
The Company uses the straight-line method to amortize intangible assets
(subject to amortization) over their estimated useful lives, generally 5 to 20
years. During the second quarter of 2004, the Company completed its annual
impairment test and determined that no impairment existed.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED
Recoverability of assets to be held and used is measured by a comparison of
the carrying amount of an asset to future net undiscounted cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be disposed
are reported at the lower of the carrying amount or fair value, less costs to
dispose.
PRODUCT WARRANTY
The Company's product warranty liability is calculated based primarily upon
historical warranty claims experience. Management also factors into the product
warranty accrual any specific warranty issues identified during the period which
are expected to impact future periods and may not be consistent with historical
claims experience. Product warranty accruals are reviewed regularly by
management and adjusted from time to time when actual warranty claims experience
differs from that estimated.
PENSION AND OTHER POSTRETIREMENT BENEFITS
Pension and other postretirement benefit obligations and expense (or
income) are dependent on assumptions used in calculating such amounts. These
assumptions include the discount rate, rate of compensation increases, expected
return on plan assets and expected healthcare trend rates. In accordance with
GAAP, actual results that differ from the assumptions are accumulated and
amortized over future periods.
INCOME TAXES
The Company has determined tax expense and other deferred tax information
based on the liability method. Deferred income taxes are provided to reflect
temporary differences between financial and tax reporting.
F-11
GARDNER DENVER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
RESEARCH AND DEVELOPMENT
Costs for research and development are expensed as incurred and were
$6,186, $2,808 and $2,398 for the years ended December 31, 2004, 2003 and 2002,
respectively.
FINANCIAL INSTRUMENTS
All derivative instruments are reported on the balance sheet at fair value.
For each derivative instrument designated as a cash flow hedge, the gain or loss
on the derivative is deferred in accumulated other comprehensive income until
recognized in earnings with the underlying hedged item. For each derivative
instrument designated as a fair value hedge, the gain or loss on the derivative
instrument and the offsetting gain or loss on the hedged item are recognized
immediately in earnings. Currency fluctuations on non-U.S. dollar borrowings
that have been designated as hedges on the Company's investment in a foreign
subsidiary are included in other comprehensive income.
STOCK-BASED COMPENSATION
As allowed under SFAS No. 123, "Accounting for Stock-Based Compensation,"
the Company measures its compensation cost of equity instruments issued under
employee compensation plans using the intrinsic value method in accordance with
Accounting Principles Board Opinion No. 25 ("APB No. 25"), "Accounting for Stock
Issued to Employees," and related interpretations. In December 2002, the FASB
issued SFAS No. 148, "Accounting for Stock-Based Compensation Transition and
Disclosure, an Amendment to SFAS No. 123," to require prominent disclosures in
both annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. Under APB No. 25, no compensation cost was recognized for the Company's
stock option plans. Had compensation cost for the Company's stock option plans
been determined based on the fair value at the grant date for awards outstanding
during 2004, 2003 and 2002 consistent with the provisions of this Statement, the
Company's net income and earnings per share would have been as shown in the
table below:
2004 2003 2002
------- ------ ------
Net income, as reported................................... $37,123 20,643 19,602
Less: Total stock-based employee compensation expense
determined under fair value method, net of related
tax effects......................................... (1,359) (1,252) (1,274)
------- ------ ------
Pro forma net income...................................... $35,764 19,391 18,328
======= ====== ======
Earnings per share:
Basic earnings per share, as reported..................... $ 1.96 1.29 1.24
Basic earnings per share, pro forma....................... $ 1.89 1.21 1.16
Diluted earnings per share, as reported................... $ 1.92 1.27 1.22
Diluted earnings per share, pro forma..................... $ 1.85 1.19 1.14
Compensation costs charged against income (net of tax) for restricted stock
issued under the Company's Incentive Plan totaled $0.2 million in 2003. There
were no restricted stock awards in 2004 or in 2002.
COMPREHENSIVE INCOME
Items impacting the Company's comprehensive income, but not included in net
income, consist of translation adjustments, including realized and unrealized
gains and losses (net of income taxes) on the foreign currency hedge of the
Company's investment in a foreign subsidiary, fair market value adjustments of
interest rate swaps and additional minimum pension liability (net of income
taxes). See Note 8 for further discussion of additional minimum pension
liability adjustments.
F-12
GARDNER DENVER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NEW ACCOUNTING STANDARDS
In May 2004, the FASB issued Staff Position No. FAS 106-2, "Accounting and
Disclosure Requirements Related to the Medicare Prescription Drug, Improvement
and Modernization Act of 2003," ("FAS 106-2"). FAS 106-2 supersedes Staff
Position No. FAS 106-1, "Accounting and Disclosure Requirements Related to the
Medicare Prescription Drug, Improvement and Modernization Act of 2003," and
provides guidance on the accounting, disclosure, effective date and transition
related to the Prescription Drug Act. FAS 106-2 was effective for the third
quarter of 2004. According to an actuarial assessment, the Company currently
provides prescription drug benefits, which are actuarially equivalent to the
Medicare prescription drug benefit, to certain retired and other employees and
will therefore qualify for the subsidy. As a result, the Company accounted for
the federal subsidy attributable to past services as an actuarial gain, which
reduced the accumulated post-retirement benefit obligation. This actuarial gain
is then amortized in future periods in accordance with SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions." The federal subsidy
attributable to employee service rendered in current and future periods will
reduce future net periodic postretirement benefit cost as those employees
provide service. The Company has adopted FAS 106-2 resulting in a favorable
impact to diluted earnings per share of $0.01 in 2004. The favorable impact to
diluted earnings per share in 2005 is expected to be $0.02.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs -- an
amendment to ARB No. 43, Chapter 4." This statement amends previous guidance and
requires expensing for abnormal amounts of idle facility expense, freight,
handling costs, and wasted material (spoilage). In addition, the statement
requires that allocation of fixed production overheads to inventory be based on
the normal capacity of production facilities. SFAS No. 151 is effective for
inventory costs incurred during annual periods beginning after June 15, 2005.
The Company is currently evaluating the impact of SFAS No. 151 on its future
consolidated financial statements.
In December 2004, the FASB issued a revision to SFAS No. 123, "Accounting
for Stock-Based Compensation," SFAS No. 123-R, "Share-Based Payment." SFAS No.
123-R focuses primarily on transactions in which an entity exchanges its equity
instruments for employee services and generally establishes standards for the
accounting for transactions in which an entity obtains goods or services in
share-based payment transactions. The Company will adopt SFAS No. 123-R in the
third quarter of fiscal 2005 and currently expects an unfavorable impact on
diluted earnings per share of approximately $0.03 to $0.05, in the second half
of 2005.
In December 2004, the FASB issued Staff Position No. FAS 109-1,
"Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax
Deduction on Qualified Production Activities Provided by the American Jobs
Creation Act of 2004," ("FAS 109-1"), and Staff Position No. FAS 109-2,
"Accounting and Disclosure Guidance for the Foreign Earnings Repatriation
Provision within the American Jobs Creation Act of 2004," ("FAS 109-2"). FAS
109-1 requires that companies who qualify for the recent tax law's deduction for
domestic production activities to account for it as a special deduction under
Statement No. 109 and reduce their tax expense in the period or periods the
amounts are deductible on the tax return. FAS 109-2 allows companies additional
time to evaluate whether foreign earnings will be repatriated under the
repatriation provisions of the new tax law and requires specific disclosures for
companies needing additional time to complete the evaluation. Both staff
positions are effective immediately and the required income tax disclosures have
been included in Note 10.
NOTE 2: ACQUISITIONS
On September 1, 2004, the Company acquired nash_elmo Holdings, LLC ("Nash
Elmo"). Nash Elmo is a leading global manufacturer of industrial vacuum pumps
and is primarily split between two businesses, liquid ring pumps and side
channel blowers. Both businesses' products are complementary to the Compressor
and Vacuum Products segment's existing product portfolio. The purchase price of
$224.6 million, including
F-13
GARDNER DENVER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
assumed bank debt (net of cash acquired) and direct acquisition costs, was paid
in cash and the assumption of certain of Nash Elmo's debt ($10.4 million). There
are no additional contingent payments or commitments related to this
acquisition.
This acquisition has been accounted for by the purchase method and,
accordingly, its results are included in the Company's consolidated financial
statements from the date of acquisition. The purchase price (including direct
acquisition costs) has been allocated primarily to receivables ($35,629);
inventory ($47,749); property, plant and equipment ($34,461); intangible assets
($170,893); other assets ($6,880); accounts payable and accrued liabilities
($48,985); net deferred income tax liabilities ($18,515) and other long-term
liabilities ($3,547), based on their estimated fair values on the date of
acquisition. This allocation reflects the Company's preliminary estimates of the
purchase price allocation and is subject to change upon completion of appraisals
in 2005. Further, other assets and liabilities may be identified to which a
portion of the purchase price could be allocated.
The following table summarizes the preliminary fair values of the
intangible assets acquired in the Nash Elmo acquisition:
Amortized intangible assets:
Customer lists and relationships.......................... $ 44,000
Other..................................................... 7,245
Unamortized intangible assets:
Goodwill.................................................. 91,648
Tradenames................................................ 28,000
--------
Total intangible assets..................................... $170,893
========
The preliminary weighted average amortization period for customer lists and
relationships and other amortized intangible assets is 20 years and 5 years,
respectively. The total amount of goodwill that is expected to be deductible for
tax purposes is approximately $10 to $15 million. The assignment of goodwill has
been allocated to the Compressor and Vacuum Products segment.
On January 2, 2004, the Company acquired the outstanding shares of Syltone
plc ("Syltone"), previously a publicly traded company listed on the London Stock
Exchange. Syltone, previously headquartered in Bradford, United Kingdom
("U.K."), is one of the world's largest manufacturers of equipment used for
loading and unloading liquid and dry bulk products on commercial transportation
vehicles. This equipment includes compressors, blowers and other ancillary
products that are complementary to the Company's product lines. Syltone is also
one of the world's largest manufacturers of fluid transfer equipment (including
loading arms, swivel joints, couplers and valves) used to load and unload ships,
tank trucks and rail cars. The purchase price of L63.0 million (or approximately
$112.5 million), including assumed bank debt (net of cash acquired) and direct
acquisition costs, was paid in the form of cash (L46.3 million), new loan notes
(L5.2 million) and the assumption of Syltone's existing bank debt, net of cash
acquired (L11.5 million). There are no additional contingent payments or
commitments related to this acquisition.
This acquisition has been accounted for by the purchase method, and
accordingly, its results are included in the Company's consolidated financial
statements from the date of acquisition. The purchase price has been allocated
primarily to receivables ($30,382); inventory ($20,554); property, plant and
equipment ($33,488); intangible assets ($90,160); accounts payable and accrued
liabilities ($40,581); net deferred income tax liabilities ($1,796) and other
long-term liabilities ($19,658), based on their estimated fair values on the
date of acquisition.
F-14
GARDNER DENVER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes the fair values of the intangible assets
acquired in the Syltone acquisition:
Amortized intangible assets:
Customer lists and relationships.......................... $ 8,000
Other..................................................... 4,867
Unamortized intangible assets:
Goodwill.................................................. 68,803
Tradenames................................................ 8,490
-------
Total intangible assets..................................... $90,160
=======
The weighted average amortization period for customer lists and
relationships and other amortized intangible assets is 20 years and 5 years,
respectively. The total amount of goodwill that is expected to be deductible for
tax purposes is not anticipated to be significant, given the stock nature of the
acquisition. The assignment of goodwill has been allocated to the Compressor and
Vacuum Products segment ($57,194) and the Fluid Transfer Products segment
($11,609). See Note 14 for additional segment information.
The following table summarizes the unaudited supplemental pro forma
information as if the Nash Elmo and Syltone acquisitions had been completed on
January 1, 2003 (this unaudited information is subject to change upon
finalization of the purchase price allocation of Nash Elmo):
2004 2003
-------- -------
(UNAUDITED)
Revenues.................................................... $895,856 790,696
Net Income.................................................. 43,043 20,356
Diluted earnings per share.................................. $ 2.22 1.25
The 2003 pro forma net income reflects the negative impact of a one-time
adjustment on cost of sales of approximately $3.6 million stemming from
recording Syltone's and Nash Elmo's inventory at fair value.
In August 2003, the Company paid $2.4 million to acquire certain assets and
assume certain liabilities of a small machine shop operation in Odessa, Texas.
This operation services and repairs well stimulation and drilling pumps serving
the Permian Basin and thus, its financial results were included in the Fluid
Transfer Products segment from the date of acquisition. There are no additional
contingent payments or commitments related to this acquisition. The amounts
assigned to goodwill and other intangible assets were inconsequential.
All acquisitions have been accounted for by the purchase method and,
accordingly, their results are included in the Company's consolidated financial
statements from the respective dates of acquisition. Under the purchase method,
the purchase price is allocated based on the fair value of assets received and
liabilities assumed as of the acquisition date.
F-15
GARDNER DENVER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3: INVENTORIES
2004 2003
-------- ------
Raw materials, including parts and subassemblies............ $ 62,477 34,992
Work-in-process............................................. 23,405 8,506
Finished goods.............................................. 57,321 25,362
-------- ------
143,203 68,860
Excess of FIFO costs over LIFO costs........................ (4,817) (4,533)
-------- ------
Inventories, net.......................................... $138,386 64,327
======== ======
During 2004, 2003 and 2002, reductions in inventory quantities (net of
acquisitions) resulted in liquidations of LIFO inventory layers carried at lower
costs prevailing in prior years. The effect was to increase net income in 2004,
2003 and 2002 by $94, $249 and $268, respectively. It is the Company's policy to
record the earnings effect of LIFO inventory liquidations in the quarter which a
decrease for the entire year becomes certain. In each of the years 2002 through
2004, the LIFO liquidation income was recorded in the fourth quarter. The
Company believes that FIFO costs in the aggregate approximates replacement or
current cost and thus the excess of replacement or current cost over LIFO value
was $4.8 million and $4.5 million as of December 31, 2004 and 2003,
respectively.
NOTE 4: PROPERTY, PLANT AND EQUIPMENT
2004 2003
--------- --------
Land and land improvements.................................. $ 15,304 8,710
Buildings................................................... 75,482 41,727
Machinery and equipment..................................... 141,130 114,594
Tooling, dies, patterns, etc. .............................. 23,516 13,884
Office furniture and equipment.............................. 22,715 14,574
Other....................................................... 10,242 6,780
Construction in progress.................................... 4,664 2,612
--------- --------
293,053 202,881
Accumulated depreciation.................................... (144,234) (127,453)
--------- --------
Property, plant and equipment, net........................ $ 148,819 75,428
========= ========
NOTE 5: GOODWILL AND OTHER INTANGIBLE ASSETS
As discussed in Note 1, the Company has adopted SFAS No. 142. This
statement required, among other things, the discontinuation of goodwill
amortization, assignment of goodwill to reporting units, and completion of a
transitional goodwill impairment test. Substantially all goodwill was assigned
to the reporting unit that acquired the business. Under the impairment test, if
a reporting unit's carrying amount exceeds its estimated fair value, a goodwill
impairment is recognized to the extent that the reporting unit's carrying amount
of goodwill exceeds the implied fair value of the goodwill. The fair value of
each reporting unit was estimated using discounted cash flows and market
multiples. During the second quarter of 2004, the Company completed its annual
impairment test and determined that no impairment existed.
F-16
GARDNER DENVER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The changes in the carrying amount of goodwill attributable to each
business segment for the years ended December 31, 2004 and 2003 are as follows:
COMPRESSOR & FLUID TRANSFER
VACUUM PRODUCTS PRODUCTS TOTAL
--------------- -------------- -------
Balance as of January 1, 2003.................. $176,230 25,531 201,761
======== ====== =======
Acquisitions................................... -- 103 103
Foreign currency translation................... 3,624 -- 3,624
-------- ------ -------
Balance as of December 31, 2003................ 179,854 25,634 205,488
======== ====== =======
Acquisitions................................... 148,842 11,609 160,451
Foreign currency translation................... 7,379 841 8,220
-------- ------ -------
Balance as of December 31, 2004................ $336,075 38,084 374,159
======== ====== =======
Other intangible assets at December 31, 2004 and 2003 consisted of the
following:
DECEMBER 31, 2004 DECEMBER 31, 2003
----------------------- -----------------------
GROSS GROSS
CARRYING ACCUMULATED CARRYING ACCUMULATED
AMOUNT AMORTIZATION AMOUNT AMORTIZATION
-------- ------------ -------- ------------
Amortized intangible assets:
Customer lists and relationships....... $ 53,855 $ (2,153) 1,295 (927)
Acquired technology.................... 19,218 (9,732) 13,312 (8,002)
Other.................................. 11,352 (2,508) 2,943 (1,337)
Unamortized intangible assets:
Trademarks............................. 40,141 -- 3,057 --
-------- -------- ------ -------
Total other intangible assets....... $124,566 $(14,393) 20,607 (10,266)
======== ======== ====== =======
Amortization of intangible assets was $4.4 million and $1.4 million in 2004
and 2003, respectively. Amortization of intangible assets is anticipated to be
approximately $7.0 million per year for 2005 through 2009 based upon intangible
assets with finite useful lives included in the balance sheet as of December 31,
2004.
NOTE 6: ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
2004 2003
-------- ------
Accounts payable-trade...................................... $ 81,977 39,691
Salaries, wages and related fringe benefits................. 39,251 14,661
Taxes....................................................... 12,860 3,422
Advance payments on sales contracts......................... 11,600 1,000
Product warranty............................................ 10,671 6,635
Product liability, workers' compensation and insurance...... 8,030 5,046
Other....................................................... 41,680 13,626
-------- ------
Total accounts payable and accrued liabilities............ $206,069 84,081
======== ======
F-17
GARDNER DENVER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of the changes in the accrued product warranty liability
for the years ended December 31, 2004, 2003 and 2002 is as follows:
2004 2003 2002
------- ------ ------
Balance as of January 1.................................... $ 6,635 7,060 7,578
Product warranty accruals.................................. 7.476 5,420 5,281
Settlements................................................ (7,611) (6,171) (6,126)
Other (primarily acquisitions and foreign currency
translation)............................................. 4,171 326 327
------- ------ ------
Balance as of December 31.................................. $10,671 6,635 7,060
======= ====== ======
NOTE 7: DEBT
2004 2003
-------- -------
SHORT-TERM DEBT:
Revolving Loans, due 2005(1).............................. $ 10,898 --
Other..................................................... 1,729 --
-------- -------
Total short-term debt....................................... $ 12,627 --
======== =======
LONG-TERM DEBT:
Credit Line, due 2009(2).................................. $113,635 114,000
Term Loan, due 2009(3).................................... 148,125 45,625
Secured Mortgages at 4.6%, due 2022(4).................... 10,362 --
Unsecured Senior Note at 7.3%, due 2006................... 10,000 15,000
Variable Rate Industrial Revenue Bonds, due 2018(5)....... 8,000 8,000
Term Loans, due 2007(6)................................... 6,001 --
Other..................................................... 4,455 6
-------- -------
Total long-term debt including current maturities........... 300,578 182,631
Current maturities of long-term debt........................ 20,322 16,875
-------- -------
Long-term debt, less current maturities..................... $280,256 165,756
======== =======
---------------
(1) This amount consists of three loan agreements with similar terms assumed in
the 2004 acquisition of Syltone. The loans are Euro denominated and had an
outstanding balance of E8,046 at December 31, 2004. At December 31, 2004 the
rate on this debt was 2.9% and averaged 3.0% for the year ended December 31,
2004.
(2) The loans under this facility may be denominated in U.S. dollars or several
foreign currencies. At December 31, 2004, the outstanding balance consisted
of U.S. dollar borrowings of $73,000 and Euro borrowings of E30,000. The
interest rates under the facility are based on prime, federal funds and/or
LIBOR for the applicable currency and were 4.2% and 4.0% as of December 31,
2004 for the U.S. dollar and Euro loans, respectively. The rates averaged
3.6% and 4.0% for the year ended December 31, 2004 for the U.S. dollar and
Euro loans, respectively.
(3) The interest rate varies with prime, federal funds and/or LIBOR. As of
December 31, 2004, this rate was 4.1% and averaged 3.5% for the year ended
December 31, 2004.
(4) This amount consists of two commercial bank loans assumed in the 2004
acquisition of Nash Elmo with an outstanding balance of E7,650 at December
31, 2004. The loans are secured by the Company's facility in Bad Neustadt,
Germany and are net of unamortized discount of E270.
F-18
GARDNER DENVER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(5) The interest rate varies with market rates for tax-exempt industrial revenue
bonds. As of December 31, 2004, this rate was 2.1% and averaged 1.3% for the
year ended December 31, 2004.
(6) This amount consists of two loan agreements with similar terms assumed in
the 2004 acquisition of Syltone. The loans are denominated in British pounds
and had an outstanding balance of L3,133 at December 31, 2004. At December
31, 2004 the rate on this debt was 3.1% and averaged 3.1% for the year ended
December 31, 2004.
On January 20, 1998, the Company entered into a Revolving Line of Credit
Agreement (the "Credit Agreement") with an aggregate $125,000 borrowing capacity
and terminated a previous agreement. On March 6, 2002, the Company amended and
restated its Credit Agreement, increasing the aggregate borrowing capacity to
$150,000 and extending the maturity date to March 6, 2005. On September 1, 2004,
the Company amended and restated the Credit Agreement once again, increasing the
borrowing capacity to $375,000. This latter amended and restated Credit
Agreement provided the Company with access to senior secured credit facilities
including a $150,000 five-year Term Loan and a $225,000 five-year Revolving Line
of Credit (the "Credit Line"). Proceeds from the Credit Agreement were used to
fund the Nash Elmo acquisition and retire debt outstanding under its previously
existing Credit Line and Term Loan.
The Credit Line has a borrowing capacity of $225,000 and the total debt
balance is due upon final maturity on September 1, 2009. On December 31, 2004,
the Credit Line had an outstanding principal balance of $113,635, leaving
$111,365 available for letters of credit or future use, subject to the terms of
the Credit Line.
The $150,000 Term Loan has a final maturity of September 1, 2009. The Term
Loan requires principal payments totaling $7,500, $15,000, $22,500, $37,500 and
$67,500 in years one through five, respectively. Other terms and conditions of
the Term Loan are similar to those of the Credit Line.
In September 1996, the Company obtained fixed rate financing by entering
into an unsecured senior note agreement for $35,000. This note has a ten-year
final, seven-year average maturity, with principal payments that began in 2000.
On April 23, 1998, the Fayette County Development Authority issued $9,500
in industrial revenue bonds, on behalf of the Company, to finance the cost of
constructing and equipping a new manufacturing facility in Peachtree City,
Georgia. On July 2, 2001, the Company prepaid $1,500 of principal from unused
funds. The remaining principal for these industrial revenue bonds is to be
repaid in full on March 1, 2018. These industrial revenue bonds are secured by
an $8,100 letter of credit.
The Company's borrowing arrangements permit certain investments and
dividend payments and are generally unsecured with the exception of the Credit
Agreement, which requires the pledge of the stock of certain wholly-owned
subsidiaries, and a security interest in the Company's manufacturing facility in
Bad Neustadt, Germany. There are no material restrictions on the Company as a
result of its credit arrangements, other than customary covenants regarding
certain earnings, liquidity and capital ratios.
Debt maturities for the five years subsequent to December 31, 2004 and
thereafter, are $32,949, $26,022, $28,068, $45,618, $164,878 and $16,036,
respectively.
Cash paid for interest in 2004, 2003 and 2002 was $7,817, $4,498 and
$6,263, respectively.
The rentals for all operating leases were $7,814, $3,818, and $3,357 in
2004, 2003 and 2002, respectively. Future minimum rental payments for operating
leases for the five years subsequent to December 31, 2004 and thereafter are
$9,608, $7,252, $5,409, $4,305, $2,000 and $9,659, respectively.
F-19
GARDNER DENVER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8: PENSION AND OTHER POSTRETIREMENT BENEFITS
The Company sponsors retirement plans covering substantially all worldwide
employees. Benefits are provided to employees under defined benefit pay-related
and service-related plans, which are generally noncontributory in the U.S. and
Germany and are generally contributory in the U.K. Annual Company contributions
to U.S. retirement plans equal or exceed the minimum funding requirements of the
Employee Retirement Income Security Act of 1974. The retirement plans covering
the employees of the Company's operation in Schopfheim, Germany are unfunded and
the full amount of the pension benefit obligation is included as an accrued
benefit liability on the Consolidated Balance Sheets.
With regard to the 2001 Belliss & Morcom acquisition, the majority of the
employees are based in the U.K. and are provided retirement benefits under a
contributory defined benefit pay and service-related plan. Under the Company's
purchase agreement, these employees were allowed to continue to participate in
the seller's benefit plan for a period of up to one year from the acquisition
date. Within this one-year timeframe, the Company established a similar
retirement plan arrangement allowing employees the option of transferring their
accumulated benefit. The purchase agreement also required the transfer from the
seller's plan of plan assets in excess of the transferred accumulated benefit
obligation. As of December 31, 2002, the Company had not received this transfer
and thus an estimate of this receivable was included in the reconciliation of
fair value of plan assets table presented below. During 2003, the Company
settled this receivable resulting in adjustments to the benefit obligation and
fair value of plan assets for non-U.S. pension plans. These adjustments are
included on the "acquisitions" line in the reconciliation table below.
Participation in this plan was frozen as of January 1, 2004. Employees hired
after that date participate in a contributory defined contribution plan.
With regard to the 2004 Syltone acquisition, the majority of the employees
are based in the U.K. and Germany. In the U.K., the majority of these employees
are provided benefits under a contributory defined benefit pay and
service-related plan. Participation in this plan was frozen as of July 1, 2003.
Employees hired after that date participate in a contributory defined
contribution plan. In Germany, with regard to employees of the Syltone
acquisition, employees are provided benefits under either a non-contributory
defined benefit pay and service-related plan or under a contributory defined
contribution plan.
With regard to the Nash Elmo 2004 acquisition, the majority of the
employees are based in the U.S. and Germany. In the U.S., employees are provided
benefits under both a non-contributory defined contribution plan and under
another defined contribution plan with no Company contributions. In Germany,
certain employees are covered by a non-contributory defined benefit pay and
service related plan. Employees hired after October 2000, are covered by a
non-contributory defined contribution plan.
Due to the significant declines in the financial markets, the fair value of
the plan assets of certain of the Company's funded defined benefit pension plans
was less than their accumulated benefit obligation at December 31, 2002. As a
result, the Company recorded a non-cash charge to stockholders' equity
(accumulated other comprehensive loss) in the amount of $8.5 million (net of
income taxes of $5.0 million) in the fourth quarter of 2002. During 2003, the
financial markets and the assets of the Company's funded benefit pension plans
experienced significant gains. As a result, the Company recorded a credit to
accumulated other comprehensive income of $3.3 million (net of income taxes of
$1.7 million) to reduce its additional minimum pension liability. During 2004,
the Company's recorded an additional non-cash charge to accumulated other
comprehensive income of $0.4 million (net of income taxes of $0.1 million) to
increase the additional minimum pension liability.
The Company also sponsors defined contribution plans. Benefits are
determined and funded annually based on terms of the plans or as stipulated in a
collective bargaining agreement. Certain of the Company's full-time salaried and
nonunion hourly employees in the U.S. are eligible to participate in Company-
sponsored defined contribution savings plans, which are qualified plans under
the requirements of
F-20
GARDNER DENVER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Section 401(k) of the Internal Revenue Code. The Company's matching
contributions to the savings plans are in the form of the Company's common
stock.
The full-time salaried and hourly employees of the Company's operations in
Finland have pension benefits, which are guaranteed by the Finnish government.
Although the plans are similar to defined benefit plans, the guarantee feature
of the government causes the substance of the plans to be defined contribution.
Therefore, the discounted future liability of these plans is not included in the
liability for defined benefit plans, but the expense for the Company's
contribution is included in the pension benefit cost for defined contribution
plans.
Certain salaried employees in the U.S. who retired prior to 1989, as well
as certain other employees who were near retirement and elected to receive
certain benefits and certain Nash Elmo employees, have retiree medical,
prescription and life insurance benefits. In most cases, the Nash Elmo retirees
pay the entire cost of their coverage. No other active salaried employees have
postretirement medical benefits. The hourly employees have separate plans with
varying benefit formulas. In all cases, however, no currently active hourly
employee, except for certain employees who are near retirement, will receive
healthcare benefits after retirement. All of the Company's postretirement
medical plans are unfunded.
F-21
GARDNER DENVER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following tables provide a reconciliation of the changes in both the
pension and other postretirement plans benefit obligations and fair value of
assets over the two-year period ended December 31, 2004, and a statement of the
funded status as of December 31, 2004 and 2003:
PENSION BENEFITS
--------------------------------------- OTHER POSTRETIREMENT
U.S. PLANS NON-U.S. PLANS BENEFITS
------------------ ------------------ --------------------
2004 2003 2004 2003 2004 2003
-------- ------- -------- ------- --------- --------
RECONCILIATION OF BENEFIT OBLIGATION
Obligation as of January 1............. $ 58,531 55,633 $ 33,388 26,541 $ 27,664 28,391
Service cost........................... 2,119 1,988 4,187 1,528 16 12
Interest cost.......................... 3,356 3,430 6,413 1,416 1,649 1,685
Actuarial loss (gain).................. 1,129 2,156 1,248 3,617 (1,804) 139
Employee contributions................. -- -- 1,065 415 -- --
Benefit payments....................... (4,466) (4,676) (2,464) (920) (2,617) (2,563)
Acquisitions........................... -- -- 98,652 (2,667) 585 --
Effect of foreign currency exchange
rate changes......................... -- -- 7,994 3,458 -- --
-------- ------- -------- ------- -------- -------
Obligation as of December 31......... $ 60,669 58,531 $150,483 33,388 $ 25,493 27,664
======== ======= ======== ======= ======== =======
RECONCILIATION OF FAIR VALUE OF PLAN
ASSETS
Fair value of plan assets as of January
1.................................... $ 44,305 40,539 $ 23,059 18,358
Actual return on plan assets........... 4,733 7,304 8,270 3,891
Acquisitions........................... -- -- 76,015 (996)
Employer contributions................. 3,201 1,138 3,394 102
Employee contributions................. -- -- 1,065 415
Benefit payments....................... (4,466) (4,676) (3,403) (920)
Effect of foreign currency exchange
rate changes......................... -- -- 5,994 2,209
-------- ------- -------- -------
Fair value of plan assets as of
December 31....................... $ 47,773 44,305 $114,394 23,059
======== ======= ======== =======
FUNDED STATUS
Funded status as of December 31........ $(12,896) (14,226) $(36,089) (10,329) $(25,493) (27,664)
Unrecognized transition liability...... 4 9 -- -- 742 --
Unrecognized prior-service cost........ (451) (537) -- -- (730) (744)
Unrecognized loss (gain)............... 8,911 9,069 7,343 6,249 (7,723) (6,082)
-------- ------- -------- ------- -------- -------
Accrued benefit liability............ $ (4,432) (5,685) $(28,746) (4,080) $(33,204) (34,490)
======== ======= ======== ======= ======== =======
F-22
GARDNER DENVER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The total pension and other postretirement accrued benefit liability is
included in the balance sheets in the following captions:
2004 2003
-------- -------
Deferred income taxes....................................... $ 3,438 3,298
Accounts payable and accrued liabilities.................... (2,966) (2,380)
Postretirement benefits other than pensions................. (30,503) (32,110)
Other liabilities........................................... (41,926) (18,218)
Accumulated other comprehensive income...................... 5,575 5,155
-------- -------
Total pension and other postretirement accrued benefit
liability.............................................. $(66,382) (44,255)
======== =======
The aggregate accumulated benefit obligation and fair value of plan assets
for pension plans with accumulated benefit obligations in excess of plan assets
at December 31, 2004 and 2003 are as follows:
DECEMBER 31,
-----------------------------------
U.S. PLANS NON-U.S. PLANS
---------------- ----------------
2004 2003 2004 2003
------- ------ -------- -----
Accumulated benefit obligation................... $60,562 58,412 $119,094 4,360
Fair value of plan assets........................ $47,773 44,305 $104,629 --
The following table provides the components of net periodic benefit expense
(income) for the plans for the years ended December 31, 2004, 2003 and 2002:
PENSION BENEFITS
-----------------------------------------------------
U.S. PLANS NON-U.S. PLANS OTHER POSTRETIREMENT BENEFITS
------------------------- ------------------------- -----------------------------
2004 2003 2002 2004 2003 2002 2004 2003 2002
------- ------ ------ ------- ------ ------ -------- ------- --------
Service cost.................. $ 2,119 1,988 2,200 $ 4,187 1,529 1,288 $ 16 12 17
Interest cost................. 3,356 3,430 3,658 6,413 1,416 1,302 1,649 1,685 1,939
Expected return on plan
assets...................... (3,701) (3,269) (4,180) (6,853) (1,474) (1,717) -- -- --
Amortization of transition
liability................... 5 5 8 -- -- -- 25 -- --
Amortization of prior-service
cost........................ (86) (86) (86) -- -- -- (156) (606) (1,206)
Amortization of net loss
(gain)...................... 255 439 2 211 211 2 (559) (958) (829)
------- ------ ------ ------- ------ ------ ------ ----- ------
Net periodic benefit expense
(income).................. 1,948 2,507 1,602 3,958 1,682 875 $ 975 133 (79)
------- ------ ------ ------- ------ ------ ====== ===== ======
Defined contribution plans.... 3,021 2,548 2,576 1,677 1,378 1,281
------- ------ ------ ------- ------ ------
Total retirement expense.... $ 4,969 5,055 4,178 $ 5,635 3,060 2,156
======= ====== ====== ======= ====== ======
F-23
GARDNER DENVER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following weighted average assumptions were used to determine the
benefit obligations and net periodic benefit expense (income) for pension and
other postretirement plans:
PENSION AND OTHER POSTRETIREMENT BENEFITS
---------------------------------------------
U.S. PLANS NON-U.S. PLANS
--------------------- ---------------------
2004 2003 2002 2004 2003 2002
----- ----- ----- ----- ----- -----
Discount rate(1)............................... 6.0% 6.3 6.8 5.4% 5.5 5.6
Rate of increase in compensation levels(2)..... 5.0% 5.0 5.0 3.4% 3.5 3.3
Expected long-term rate of return on
assets(2).................................... 9.0% 9.0 9.0 7.6% 8.3 8.0
---------------
(1) Net periodic benefit expense (income) is determined by the previous year's
discount rate
(2) Applies only to pension plans
F-24
GARDNER DENVER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
For measurement purposes, the annual rate of increase in the per capita
cost of covered healthcare benefits assumed for 2004 was 8.4% for all
participants. The rates were assumed to decrease gradually each year to a rate
of 5.0% for 2010 and remain at that level thereafter.
Assumed healthcare cost trend rates have a significant effect on the
amounts reported for the postretirement medical plans. A one-percentage point
change in assumed healthcare cost trend rates would have the following effects:
ONE-PERCENTAGE POINT
--------------------
INCREASE DECREASE
-------- --------
Effect on total of service and interest cost components of
net periodic other postretirement benefit cost -- increase
(decrease)................................................ 9.1% (8.0)%
Effect on the postretirement benefit obligation -- increase
(decrease)................................................ 8.5% (7.5)%
The primary objectives for the investment of pension plan assets is to
secure participant retirement benefits and to minimize reliance on contributions
as a source of benefit security. Plan assets are invested consistent with the
provisions of prudence and diversification rules of ERISA and with a long-term
investment horizon. The expected return on plan assets assumption is determined
by reviewing the investment return of the plans since inception and evaluating
those returns in relation to expectations of various investment organizations to
determine whether long-term future returns are expected to differ significantly
from the past. The Company's pension plan asset allocations at December 31, 2004
and 2003, and target weighted-average allocations are as follows:
U.S. PLANS NON-U.S. PLANS
--------------------- ---------------------
CURRENT CURRENT
2004 2003 TARGET 2004 2003 TARGET
---- ---- ------- ---- ---- -------
Asset category:
Equity securities.......................... 70% 69% 70% 65% 81% 73%
Debt securities............................ 28% 29% 30% 26% 9% 25%
Other...................................... 2% 2% -- 9% 10% 2%
--- --- --- --- --- ---
Total...................................... 100% 100% 100% 100% 100% 100%
=== === === === === ===
The Company estimates that future benefit payments for the U.S. pension
plans will be as follows: $4,360 in 2005, $5,154 in 2006, $4,483 in 2007, $4,778
in 2008, $4,848 in 2009 and $26,594 in total over the five years 2010 through
2014. Using foreign exchange rates as of December 31, 2004, the Company
estimates that future benefit payments for the non-U.S. pension plans will be as
follows: $2,845 in 2005, $3,103 in 2006, $3,530 in 2007, $3,578 in 2008, $3,984
in 2009 and $27,215 in total over the five years 2010 through 2014. In 2005, the
Company expects to contribute $2,436 to U.S. pension plans and $5,050 to
non-U.S. pension plans.
NOTE 9: STOCKHOLDERS' EQUITY AND EARNINGS PER SHARE
At December 31, 2004 and 2003, 50,000,000 shares of $0.01 par value common
stock and 10,000,000 shares of $0.01 par value preferred stock were authorized.
Shares of common stock outstanding at December 31, 2004 and 2003 were 19,947,570
and 16,117,026, respectively. No shares of preferred stock were issued or
outstanding at December 31, 2004 or 2003. The shares of preferred stock, which
may be issued without further stockholder approval (except as may be required by
applicable law or stock exchange rules), may be issued in one or more series,
with the number of shares of each series and the rights, preferences and
limitations of each series to be determined by the Board of Directors. The
Company has a Stockholder's Rights Plan, under which each share of Gardner
Denver's outstanding common stock has an associated preferred share purchase
right. The rights are exercisable only under certain circumstances and
F-25
GARDNER DENVER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
allow holders of such rights to purchase common stock of Gardner Denver or an
acquiring company at a discounted price, which generally would be 50% of the
respective stock's current fair market value.
The following table details the calculation of basic and diluted earnings
per share for the year ended December 31, 2004, 2003 and 2002:
2004 2003 2002
---------------------------- ---------------------------- ----------------------------
AMT. AMT. AMT.
NET WTD. AVG. PER NET WTD. AVG. PER NET WTD. AVG. PER
INCOME SHARES SHARE INCOME SHARES SHARE INCOME SHARES SHARE
------- ---------- ----- ------- ---------- ----- ------- ---------- -----
BASIC EARNINGS PER SHARE:
Income available to common
stockholders.............. $37,123 18,954,841 $1.96 $20,643 16,060,979 $1.29 $19,602 15,854,239 $1.24
DILUTED EARNINGS PER SHARE:
Effect of dilutive
securities:
Stock options granted and
outstanding............. 422,639 251,189 187,356
------- ---------- ----- ------- ---------- ----- ------- ---------- -----
Income available to common
stockholders and assumed
conversions............. $37,123 19,377,480 $1.92 $20,643 16,312,168 $1.27 $19,602 16,041,595 $1.22
======= ========== ===== ======= ========== ===== ======= ========== =====
NOTE 10: INCOME TAXES
Income before income taxes consist of the following:
2004 2003 2002
------- ------ ------
U.S....................................................... $26,934 23,913 22,216
Non-U.S. ................................................. 25,352 6,445 6,611
------- ------ ------
Income before income taxes................................ $52,286 30,358 28,827
======= ====== ======
The following table details the components of the provision for income
taxes. A portion of these income taxes will be payable within one year and are
therefore classified as current, while the remaining balance is deferred:
2004 2003 2002
------- ----- -----
Current:
U.S. federal.............................................. $ 8,458 2,977 4,944
U.S. state and local...................................... 692 340 542
Non-U.S. ................................................. 6,584 611 1,229
Deferred:
U.S. federal.............................................. (513) 4,753 2,253
U.S. state and local...................................... (44) 543 257
Non-U.S. ................................................. (14) 491 --
------- ----- -----
Provision for income taxes.................................. $15,163 9,715 9,225
======= ===== =====
F-26
GARDNER DENVER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The U.S. federal corporate statutory rate is reconciled to the Company's
effective income tax rate as follows:
2004 2003 2002
---- ---- ----
U.S. federal corporate statutory rate....................... 35.0% 35.0% 35.0%
State and local taxes, less federal tax benefit............. 1.2 2.6 2.5
Foreign income taxes........................................ (4.4) -- --
Export benefit.............................................. (2.5) (3.0) (2.8)
Other, net.................................................. (0.3) (2.6) (2.7)
---- ---- ----
Effective income tax rate................................... 29.0% 32.0% 32.0%
==== ==== ====
The principal items that gave rise to deferred income tax assets and
liabilities follow:
2004 2003
-------- -------
Deferred tax assets:
Reserves and accruals..................................... $ 31,971 14,506
Postretirement benefits other than pensions............... 12,491 13,446
Tax loss carryforwards.................................... 7,123 --
Foreign tax credit carryforwards.......................... 852 --
Other..................................................... 4,729 3,014
-------- -------
Total deferred tax assets................................... $ 57,166 30,966
-------- -------
Valuation allowance......................................... $ (4,705) --
-------- -------
Deferred tax liabilities:
LIFO inventory............................................ $ (3,766) (3,493)
Property, plant and equipment............................. (10,395) (7,763)
Intangibles............................................... (42,248) (7,698)
Other..................................................... (7,911) (2,986)
-------- -------
Total deferred tax liabilities.............................. $(64,320) (21,940)
-------- -------
Net deferred income tax (liability) asset................... $(11,859) 9,026
======== =======
As of December 31, 2004, Gardner Denver has net operating loss
carryforwards from various jurisdictions of $24.7 million that result in a
deferred tax asset of $7.1 million. It is more likely than not that a portion of
these tax loss carryforwards will not produce future benefits and a valuation
allowance of $4.7 million has been established with respect to these losses. The
expected expiration dates of the tax loss carryforwards are as follows; < 5
years, $5.6 million, 5 to 10 years, $0, 10 to 20 years, $4.6 million and $14.5
million have no expiration date. The reversal of the valuation allowance will
reduce goodwill. In addition, the Company has a U.S. foreign tax credit
carryforward of $0.9 million that expires in 5 to 10 years.
U.S. deferred income taxes are not provided on certain undistributed
earnings of non-U.S. subsidiaries (approximately $54 million at December 31,
2004) because the Company intends to reinvest such earnings indefinitely or
distribute them only when available foreign tax credits could significantly
reduce the amount of U.S. taxes due on such distributions.
During the year, the Company recorded an income tax benefit related to
favorable audit settlements in Finland and the U.S. of $1.4 million and $0.2
million, respectively.
F-27
GARDNER DENVER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On October 22, 2004, the American Jobs Creation Act (the "AJCA") was signed
into law. The AJCA includes a deduction of 85% of certain foreign earnings that
are repatriated, as defined in the AJCA. The Company may elect to apply this
provision to qualifying earnings repatriations made either after the date of
enactment in calendar year 2004 or throughout calendar year 2005. During
calendar 2004, the Company did not repatriate any qualified earnings pursuant to
the AJCA. However, the Company determined that approximately $16.6 million of
existing foreign earnings will meet the requirements of the AJCA. The Company
has determined that it will repatriate these earnings during calendar 2005, as
soon as the AJCA's qualifying requirements are met. Since these earnings are no
longer considered indefinitely reinvested, the Company accrued $0.9 million of
income tax expense in 2004. In addition, the Company is evaluating the potential
to repatriate other foreign earnings pursuant to the AJCA. Whether the Company
repatriates their foreign earnings is dependent upon the Company's ability to
meet the requirements of the AJCA with respect to these earnings. Until that
determination is made, the Company will make no change in its current intention
to indefinitely reinvest accumulated earnings of its foreign subsidiaries except
with respect to the $16.6 million noted above. The range of additional amounts
that the Company is considering for repatriation under the AJCA is between zero
and $40 million. The related potential range of income tax is between zero and
$2.1 million.
Cash paid for income taxes in 2004, 2003 and 2002 was $8,031, $5,220 and
$6,512, respectively.
NOTE 11: STOCK-BASED COMPENSATION PLANS
Under the Company's Long-Term Incentive Plan (the "Incentive Plan"),
designated employees are eligible to receive awards in the form of stock
options, stock appreciation rights, restricted stock grants or performance
shares, as determined by the Management Development and Compensation Committee
of the Board of Directors. An aggregate of 4,250,000 shares of common stock has
been authorized for issuance under the Incentive Plan. Through December 31,
2004, the Company has granted options on 3,622,909 shares. Under the Incentive
Plan, the option exercise price equals the fair market value of the common stock
on the date of grant. Under the terms of existing awards, one-third of employee
options granted become vested and exercisable on each of the first three
anniversaries of the date of grant. The options granted to employees in 2002 and
2003 expire ten years after the date of grant. The options granted to employees
in 2004 expire seven years after the date of grant.
Pursuant to the Incentive Plan, each nonemployee director was granted an
option to purchase 4,500 shares of common stock on the day after the 2004, 2003
and 2002 annual meeting of stockholders. These options were granted at the fair
market value of the common stock on the date of grant, become exercisable on the
first anniversary of the date of grant (or upon retirement, death or cessation
of service due to disability, if earlier) and expire five years after the date
of grant.
The Company also has an employee stock purchase plan (the "Stock Purchase
Plan"), a qualified plan under the requirements of Section 423 of the Internal
Revenue Code, and has reserved 1,150,000 shares for issuance under this plan.
The Stock Purchase Plan requires participants to have the purchase price of
their options withheld from their pay over a one-year period. In November 2000,
the Stock Purchase Plan was amended to permit eligible employees to purchase
shares at the lesser of 85% of the fair market price of the common stock on
either the offering date or the exercise date. The exercise date for the 2000
offering was January 2, 2002, at which time employees elected to purchase 68,323
shares at an offering price of $15.36 per share, 85% of the fair market price on
the offering date.
In November 2001, the Stock Purchase Plan was offered to eligible employees
under the same provisions as the 2000 offering. The exercise date for the 2001
offering was January 2, 2003, at which time employees elected to purchase 46,460
shares at an offering price of $17.08 per share, 85% of the fair market price on
the exercise date.
F-28
GARDNER DENVER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In November 2002, the Stock Purchase Plan was offered to eligible employees
under the same provisions as the 2001 offering. The exercise date for the 2002
offering was January 2, 2004, at which time employees elected to purchase 94,965
shares at an offering price of $12.72 per share, 85% of the fair market price on
the offering date.
In November 2003, the Stock Purchase Plan was offered to eligible employees
under the same provisions as the 2002 offering. The exercise date for the 2003
offering is January 3, 2005, at which time employees elected to purchase 69,548
shares at an offering price of $18.19 per share, 85% of the fair market price on
the offering date.
No additional options were offered to employees under the Stock Purchase
Plan in 2004.
A summary of the status of the Company's Incentive Plan at December 31,
2004, 2003 and 2002, and changes during the years then ended, is presented in
the table and narrative below (underlying shares in thousands):
2004 2003 2002
---------------- ---------------- ----------------
AVERAGE AVERAGE AVERAGE
PRICE SHARES PRICE SHARES PRICE SHARES
------- ------ ------- ------ ------- ------
Options outstanding, beginning of
year.............................. $17.54 1,367 $17.56 1,144 $17.26 1,106
Options granted..................... $28.46 263 $17.89 264 $20.35 221
Options exercised................... $29.61 (217) $15.25 (13) $16.37 (85)
Options canceled.................... $20.94 (10) $23.20 (28) $21.45 (98)
------ ----- ------ ----- ------ -----
Options outstanding, end of year.... $19.67 1,403 $17.54 1,367 $17.56 1,144
====== ===== ====== ===== ====== =====
Options exercisable, end of year.... $17.55 934 $17.07 940 $16.54 776
====== ===== ====== ===== ====== =====
The following table summarizes information about fixed-price stock options
outstanding at December 31, 2004 (underlying shares in thousands):
OUTSTANDING EXERCISABLE
------------------------------ ----------------
AVERAGE
REMAINING
CONTRACTUAL AVERAGE AVERAGE
RANGE OF EXERCISE PRICES SHARES LIFE PRICE SHARES PRICE
------------------------ ------ ----------- ------- ------ -------
$ 5.00 to $10.00............................ 161 1.4 $ 8.71 161 $ 8.71
$10.01 to $15.00............................. 137 4.4 $12.83 137 $12.83
$15.01 to $20.00............................. 665 6.5 $18.50 456 $18.64
$20.01 to $30.00............................. 440 4.9 $27.57 180 $26.30
----- --- ------ --- ------
Total........................................ 1,403 5.2 $19.67 934 $17.55
===== === ====== === ======
The fair value of each option granted under the Incentive Plan and the
Stock Purchase Plan is estimated on the date of grant using the Black-Scholes
option pricing model. The following weighted average assumptions were used for
grants in 2004, 2003 and 2002, respectively: risk-free interest rates of 3.1%,
2.4% and 3.0%; expected volatility of 34%, 35% and 35%; and expected lives of
4.5, 3.8 and 3.3 years. The valuations assume no dividends are paid. The
weighted average fair values of options granted in 2004, 2003 and 2002 were
$9.45, $5.77 and $5.84, respectively.
F-29
GARDNER DENVER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 12: OFF-BALANCE SHEET RISK, CONCENTRATIONS OF CREDIT RISK AND FAIR VALUE
OF FINANCIAL INSTRUMENTS
OFF-BALANCE SHEET RISK AND CONCENTRATIONS OF CREDIT RISK
There were no off-balance sheet derivative financial instruments as of
December 31, 2004 or 2003.
Concentrations of credit risk with respect to trade receivables are limited
due to the wide variety of customers and industries to which the Company's
products are sold, as well as their dispersion across many different geographic
areas. As a result, the Company does not consider itself to have any significant
concentrations of credit risk as of December 31, 2004.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash and
equivalents, trade receivables, trade payables and debt instruments. The book
values of these instruments are not materially different from their respective
fair values.
The Company selectively uses derivative financial instruments to manage
interest costs and currency exchange risks. The Company does not hold
derivatives for trading purposes. No credit loss is anticipated, as the
counterparties to these agreements are major financial institutions with high
credit ratings.
To effectively manage interest costs, the Company utilizes interest rate
swaps as cash flow hedges of variable rate debt. Also as part of its hedging
strategy, the Company utilizes purchased option and forward exchange contracts
as cash flow hedges to minimize the impact of currency fluctuations on
transactions, cash flows and firm commitments. These contracts for the sale or
purchase of European and other currencies generally mature within one year.
Notional transaction amounts and fair values for the Company's outstanding
derivatives, by risk category and instrument type, as of December 31, 2004 and
2003, are summarized as follows. Fair values of the derivatives do not consider
the offsetting underlying hedged item.
2004 2003
---------------- ----------------
NOTIONAL FAIR NOTIONAL FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ----- -------- -----
Foreign currency forwards........................... $ 6,129 (479) -- --
Interest rate swaps................................. $125,317 304 -- --
NOTE 13: CONTINGENCIES
The Company is a party to various legal proceedings, lawsuits and
administrative actions, which are of an ordinary or routine nature. In addition,
due to the bankruptcies of several asbestos manufacturers and other primary
defendants, the Company has been named as a defendant in an increasing number of
asbestos personal injury lawsuits. The Company has also been named as a
defendant in an increasing number of silicosis personal injury lawsuits. The
plaintiffs in these suits allege exposure to asbestos or silica from multiple
sources and typically the Company is one of approximately 25 or more named
defendants. In the Company's experience, the vast majority of the plaintiffs are
not impaired with a disease for which the Company bears any responsibility.
Predecessors to the Company manufactured, distributed and sold products
allegedly at issue in the pending asbestos and silicosis litigation lawsuits
(the "Products"). The Company has potential responsibility for certain of these
Products, namely: (a) air compressors which used asbestos containing components
manufactured and supplied by third parties; and (b) portable air compressors
used in sandblasting operations
F-30
GARDNER DENVER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
as a component of sandblasting equipment manufactured and sold by others. The
sandblasting equipment is alleged to have caused the silicosis disease
plaintiffs claim in these cases.
Neither the Company nor its predecessors ever mined, manufactured, mixed,
produced or distributed asbestos fiber. The asbestos-containing components used
in the Products were completely encapsulated in a protective non-asbestos binder
and enclosed within the subject Products. Furthermore, the Company has never
manufactured or distributed portable air compressors.
The Company has entered into a series of cost sharing agreements with
multiple insurance companies to secure coverage for asbestos and silicosis
lawsuits. The Company also believes some of the potential liabilities regarding
these lawsuits are covered by indemnity agreements with other parties. The
Company's uninsured settlement payments for past asbestos and silicosis lawsuits
have been immaterial.
The Company believes that the pending and future asbestos and silicosis
lawsuits will not, in the aggregate, have a material adverse effect on its
consolidated financial position, results of operations or liquidity, based on:
the Company's anticipated insurance and indemnification rights to address the
risks of such matters; the limited potential asbestos exposure from the
components described above; the Company's experience that the vast majority of
plaintiffs are not impaired with a disease attributable to alleged exposure to
asbestos or silica from or relating to the Products; various potential defenses
available to the Company with respect to such matters; and the Company's prior
disposition of comparable matters. However, due to inherent uncertainties of
litigation and because future developments could cause a different outcome,
there can be no assurance that the resolution of pending or future lawsuits,
whether by judgment, settlement or dismissal, will not have a material adverse
effect on its consolidated financial position, results of operations or
liquidity.
The Company has also been identified as a potentially responsible party
with respect to several sites designated for environmental cleanup under various
state and federal laws. The Company does not own any of these sites. The Company
does not believe that the future potential costs related to these sites will
have a material adverse effect on its consolidated financial position, results
of operations or liquidity.
NOTE 14: SEGMENT INFORMATION
Subsequent to the acquisition of Nash Elmo and Syltone, the Company
continues to be organized based upon the products and services it offers and has
four operating divisions: Compressor, Blower, Liquid Ring Pump and Fluid
Transfer. These divisions comprise two reportable segments, Compressor and
Vacuum Products (formerly Compressed Air Products) and Fluid Transfer Products.
The Compressor, Blower (which now includes the Syltone transportation-related
activities and Nash Elmo's side channel blower business) and Liquid Ring Pump
(consisting of Nash Elmo's liquid ring pump business) Divisions are aggregated
into one reportable segment (Compressor and Vacuum Products) since the long-term
financial performance of these businesses are affected by similar economic
conditions, coupled with the similar nature of their products, manufacturing
processes and other business characteristics. During the third quarter of 2004,
the Company's former Pump and Fluid Transfer (which consisted of the Syltone
fluid transfer-related activities) Divisions were combined into one division,
Fluid Transfer. These two divisions were previously aggregated into one
reportable segment (Fluid Transfer Products) primarily due to the same factors
as noted above, and thus, there has been no change to the Fluid Transfer
Products segment.
In the Compressor and Vacuum Products segment, the Company designs,
manufactures, markets and services the following products and related
aftermarket parts for industrial and commercial applications: rotary screw,
reciprocating, sliding vane and centrifugal air compressors; positive
displacement, centrifugal and side channel blowers; and liquid ring pumps and
engineered systems. The markets served are primarily in the United States,
Europe and Asia.
F-31
GARDNER DENVER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Fluid Transfer Products segment designs, manufactures, markets and
services a diverse group of pumps, water jetting systems and related aftermarket
products used in oil and natural gas production, well servicing and drilling and
industrial cleaning and maintenance. This segment also designs, manufactures,
markets and services other fluid transfer components and equipment for the
chemical, petroleum and food industries. The markets served are primarily the
United States, Europe, Canada and Asia.
The accounting policies of the segments are the same as those described in
Note 1. The Company evaluates the performance of its segments based on income
before interest expense, other income, net and income taxes. Certain assets
attributable to corporate activity are not allocated to the segments. General
corporate assets (unallocated assets) consist of cash and equivalents and
deferred tax assets. Intersegment sales and transfers are not significant.
Summarized information about the Company's operations by business segment
and by geographic area follows:
REVENUES OPERATING EARNINGS IDENTIFIABLE ASSETS
---------------------------- -------------------------- ------------------------------
2004 2003 2002 2004 2003 2002 2004 2003 2002
-------- ------- ------- -------- ------ ------ ---------- ------- -------
Compressor and Vacuum
Products............. $589,382 369,023 350,036 $ 46,681 27,792 29,795 $ 848,470 375,376 368,761
Fluid Transfer
Products............. 150,157 70,507 68,122 15,069 4,093 5,193 106,073 72,528 68,240
-------- ------- ------- -------- ------ ------ ---------- ------- -------
Total.................. $739,539 439,530 418,158 61,750 31,885 34,988 954,543 447,904 437,001
======== ======= =======
Interest expense....... (10,102) (4,748) (6,365)
Other income, net...... 638 3,221 204
-------- ------ ------
Income before income
taxes................ $ 52,286 30,358 28,827
======== ====== ======
General corporate
(unallocated)........ 74,066 141,829 41,729
---------- ------- -------
Total assets........... $1,028,609 589,733 478,730
========== ======= =======
LIFO LIQUIDATION DEPRECIATION AND AMORTIZATION
INCOME EXPENSE CAPITAL EXPENDITURES
------------------ ------------------------------- -------------------------
2004 2003 2002 2004 2003 2002 2004 2003 2002
---- ---- ---- --------- -------- -------- ------- ------ ------
Compressor and Vacuum
Products................... $132 316 161 $17,902 11,739 11,517 $16,367 8,864 9,856
Fluid Transfer Products...... -- 50 233 3,999 2,827 2,622 3,183 3,086 3,785
---- --- --- ------- ------ ------ ------- ------ ------
Total........................ $132 366 394 $21,901 14,566 14,139 $19,550 11,950 13,641
==== === === ======= ====== ====== ======= ====== ======
REVENUES PROPERTY, PLANT AND EQUIPMENT
---------------------------- -----------------------------
2004 2003 2002 2004 2003 2002
-------- ------- ------- --------- ------- -------
United States....................... $327,551 253,592 264,536 $ 71,026 58,581 61,372
Europe.............................. 237,775 97,198 85,735 70,055 16,686 14,672
Asia................................ 93,150 39,963 25,999 5,834 -- --
Canada.............................. 37,564 26,972 18,597 263 90 70
Latin America....................... 32,227 17,401 17,773 1,532 71 48
Other............................... 11,272 4,404 5,518 109 -- --
-------- ------- ------- -------- ------ ------
Total............................... $739,539 439,530 418,158 $148,819 75,428 76,162
======== ======= ======= ======== ====== ======
F-32
GARDNER DENVER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 15: QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
------------------ ----------------- ----------------- -----------------
2004 2003 2004 2003 2004 2003 2004 2003
-------- ------- ------- ------- ------- ------- ------- -------
Revenues............... $154,428 101,491 161,297 109,388 182,616 112,061 241,198 116,590
Gross margin(1)........ $ 49,917 30,717 52,647 33,237 59,320 33,863 79,220 33,960
Net
income(2),(3),(4).... $ 6,557 3,520 8,276 5,346 8,654 5,277 13,636 6,500
Basic earnings per
share................ $ 0.40 0.22 0.42 0.33 0.44 0.33 0.69 0.40
Diluted earnings per
share................ $ 0.39 0.22 0.41 0.33 0.43 0.32 0.67 0.40
Common stock prices:
High................... $ 30.30 20.44 28.96 20.80 28.53 25.10 37.95 24.99
Low.................... $ 23.75 16.35 24.55 18.10 25.36 20.05 27.15 19.95
---------------
(1) Gross margin equals revenues less cost of sales
(2) The quarter ended December 31, 2003 includes $2,184 from an unrealized
foreign currency transaction gain and $1,946 in charges related to
profitability improvement programs.
(3) The quarter ended March 31, 2004 includes $846 from an unrealized foreign
currency transaction gain.
(4) The quarter ended December 31, 2004 includes the favorable impact of $939
stemming from an adjustment to deprecation and amortization expense due to
finalizing the purchase price allocation for the Syltone acquisition. In
addition, the effective income tax rate for the quarter ended December 31,
2004 was 18.3% due to net favorable income tax reductions that lowered the
effective rate for the full year to 29.0%, compared to 32.0% for the prior
year quarter and full year.
Gardner Denver, Inc. common stock (symbol GDI) has traded on the New York
Stock Exchange since August 14, 1997, under the ticker symbol GDI. Prior to this
date, the Company's common stock traded on the Nasdaq National Market tier of
the Nasdaq Stock Market under the symbol GDMI.
NOTE 16: SUBSEQUENT EVENT (UNAUDITED)
On March 8, 2005, the Company signed a definitive agreement to acquire
Thomas Industries Inc. ("Thomas"), a New York Stock Exchange listed company
trading under the ticker symbol "TII." Thomas is a worldwide leader in the
design, manufacture and marketing of precision engineered pumps, compressors and
blowers. The agreed-upon purchase price is $40.00 per share for all outstanding
shares and share equivalents (approximately $734 million) and the assumption of
$9.5 million of long-term capitalized lease obligations. As of December 31,
2004, Thomas had $267 million in cash, cash equivalents and short-term
investments. The net transaction value, including assumed debt and net of cash,
is approximately $476 million.
Thomas is a leading supplier of pumps, compressors and blowers to the
original equipment manufacturer (OEM) market in such applications as medical
equipment, gasoline vapor and refrigerant recovery, automotive and
transportation applications, printing, packaging, tape drives and laboratory
equipment. Thomas designs, manufacturers, markets, sells and services these
products through worldwide operations with regional headquarters as follows:
North American Group -- Sheboygan, Wisconsin; European Group -- Puchheim,
Germany; and Asia Pacific Group -- Hong Kong, China.
Thomas has wholly-owned operations in 21 countries on five continents. Its
primary manufacturing facilities are located in Sheboygan, Wisconsin, Monroe,
Louisiana, Skokie, Illinois and Syracuse, New York; Schopfheim, Fahrnau,
Puchheim and Memmingen, Germany; and Wuxi, China. The manufacturing operations
in the United States produce rotary vane, linear, piston and diaphragm pumps and
compressors, and various liquid pump technologies. These products are directly
sold worldwide to OEM's, as well as through fluid
F-33
GARDNER DENVER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
power and industrial distributors. The German operations manufacture a
complementary line of rotary vane, linear, diaphragm, gear, side channel,
radial, claw, screw and rotary lobe pumps, compressors and blowers, as well as
various liquid pump technologies, air-centers and centralized systems. These
products are also distributed worldwide. The manufacturing facility in China was
constructed during late 2004 and will begin production in mid 2005.
Thomas' largest markets are Europe and the United States, which represent
approximately 52% and 38% of its revenues, respectively. Of the total sales to
Europe, approximately 61% are to Germany and 39% to other European countries.
Approximately 10% of Thomas' revenues are generated in Asia Pacific. At December
31, 2004, Thomas employed approximately 2,200 people.
For the year ended December 31, 2004, Thomas' revenues and operating income
were $410 million and $209 million, respectively. Operating income for this
period included $19 million from Thomas' 32% interest in the Genlyte Thomas
Group LLC (GTG), a joint venture formed with The Genlyte Group Incorporated
(Genlyte) in 1998, and a $160 million nonrecurring gain on the sale of this
joint venture in July 2004. For the twelve-month period of 2004, operating
income from Thomas' Pumps and Compressors segment, net of corporate expenses,
was $30 million.
Gardner Denver has received a debt commitment to fully finance the
acquisition of Thomas. However, Gardner Denver intends to finance the
acquisition through an amended and expanded senior secured bank facility and a
public offering of approximately $200 million of its common stock. In addition,
the Company may choose to access the debt capital markets. The acquisition is
not conditioned upon completion of any of these financings and the size and
timing of the equity and any debt financings are subject to prevailing market
conditions.
The acquisition is expected to close in 2005 and is subject to the approval
of Thomas' stockholders and other customary closing conditions, including the
receipt of applicable regulatory approvals.
F-34
THOMAS INDUSTRIES INC.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Shareholders of Thomas Industries Inc:
We have audited the accompanying consolidated balance sheets of Thomas
Industries Inc. (a Delaware corporation) as of December 31, 2004 and 2003, and
the related consolidated statements of income, shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 2004. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Thomas
Industries Inc. at December 31, 2004 and 2003, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2004, in conformity with U.S. generally accepted accounting
principles.
/s/ Ernst & Young LLP
Louisville, Kentucky
March 10, 2005
F-35
THOMAS INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31
---------------------------------
2004 2003 2002
--------- --------- ---------
(IN THOUSANDS, EXCEPT SHARE DATA)
Net sales................................................... $410,114 $376,774 $240,602
Cost of products sold....................................... 262,654 246,832 154,904
-------- -------- --------
Gross profit................................................ 147,460 129,942 85,698
Selling, general and administrative expenses................ 117,728 101,943 59,989
Equity income from GTG...................................... 18,608 32,138 28,804
Gain on sale of GTG......................................... 160,410 -- --
-------- -------- --------
Operating income............................................ 208,750 60,137 54,513
Interest expense............................................ 2,691 4,237 3,370
Interest income............................................. 2,335 312 456
Other income (expense)...................................... (724) (533) (434)
-------- -------- --------
Income before income taxes and minority interest............ 207,670 55,679 51,165
Income taxes................................................ 93,516 18,340 18,452
-------- -------- --------
Income before minority interest............................. 114,154 37,339 32,713
Minority interest, net of tax............................... -- 25 21
-------- -------- --------
Net income.................................................. $114,154 $ 37,314 $ 32,692
======== ======== ========
Net income per share
-- Basic................................................. $ 6.53 $ 2.17 $ 2.06
-- Diluted............................................... $ 6.44 $ 2.12 $ 2.00
Dividends declared per share................................ $ 0.38 $ 0.37 $ 0.34
See accompanying notes.
F-36
THOMAS INDUSTRIES INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
-------------------
2004 2003
-------- --------
(IN THOUSANDS)
ASSETS
Current assets
Cash and cash equivalents................................. $133,472 $ 23,933
Short-term investments.................................... 133,627 --
Accounts receivable, net.................................. 58,305 52,819
Inventories............................................... 75,207 65,895
Deferred income taxes..................................... 5,101 6,688
Other current assets...................................... 7,514 6,287
-------- --------
Total current assets........................................ 413,226 155,622
Property, plant and equipment, net.......................... 114,868 108,350
Investment in GTG........................................... -- 214,405
Goodwill.................................................... 68,639 70,164
Other intangible assets, net................................ 22,659 21,788
Other assets................................................ 2,544 2,805
-------- --------
Total assets................................................ $621,936 $573,134
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Notes payable............................................. $ -- $ 3,088
Accounts payable.......................................... 17,999 14,312
Accrued expenses and other current liabilities............ 34,204 30,519
Dividends payable......................................... 1,689 1,642
Income taxes payable...................................... 1,758 595
Current portion of long-term debt......................... 1,797 9,885
-------- --------
Total current liabilities................................... 57,447 60,041
Deferred income taxes....................................... 8,978 6,177
Long-term debt, less current portion........................ 7,751 102,673
Long-term pension liability................................. 12,170 11,279
Other long-term liabilities................................. 8,657 9,609
-------- --------
Total liabilities........................................... 95,003 189,779
Shareholders' equity:
Preferred stock, $1 par value, shares authorized:
3,000,000, none issued................................. -- --
Common stock, $1 par value, shares authorized: 60,000,000,
shares issued: 2004-18,648,723; 2003-18,108,664........ 18,649 18,109
Capital surplus........................................... 149,586 137,041
Deferred compensation..................................... 1,558 1,211
Treasury stock held for deferred compensation............. (1,558) (1,211)
Retained earnings......................................... 323,799 216,296
Accumulated other comprehensive income.................... 46,958 23,968
Less cost of 822,339 treasury shares...................... (12,059) (12,059)
-------- --------
Total shareholders' equity.................................. 526,933 383,355
-------- --------
Total liabilities and shareholders' equity.................. $621,936 $573,134
======== ========
See accompanying notes.
F-37
THOMAS INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31
------------------------------
2004 2003 2002
-------- -------- --------
(IN THOUSANDS)
Common stock:
Beginning of year......................................... $ 18,109 $ 17,948 $ 17,856
Stock options exercised................................... 528 147 89
Shares issued to deferred share trust..................... 11 14 3
Other..................................................... 1 -- --
-------- -------- --------
End of year................................................. 18,649 18,109 17,948
-------- -------- --------
Capital surplus:
Beginning of year......................................... 137,041 133,964 114,342
Treasury shares issued in connection with acquisition..... -- -- 18,356
Stock options exercised................................... 8,384 1,703 657
Tax benefit from options exercised and other.............. 3,818 1,039 517
Shares issued to deferred share trust..................... 343 335 92
-------- -------- --------
End of year................................................. 149,586 137,041 133,964
-------- -------- --------
Deferred compensation:
Beginning of year......................................... 1,211 846 739
Deferred compensation..................................... 347 365 107
-------- -------- --------
End of year................................................. 1,558 1,211 846
-------- -------- --------
Treasury stock held for deferred compensation:
Beginning of year......................................... (1,211) (846) (739)
Increase in treasury stock held for deferred
compensation........................................... (347) (365) (107)
-------- -------- --------
End of year................................................. (1,558) (1,211) (846)
-------- -------- --------
Retained earnings:
Beginning of year......................................... 216,296 185,351 158,161
Net income................................................ 114,154 37,314 32,692
Cash dividends declared................................... (6,651) (6,369) (5,502)
-------- -------- --------
End of year................................................. 323,799 216,296 185,351
-------- -------- --------
Accumulated other comprehensive income (loss):
Beginning of year......................................... 23,968 (10,837) (14,189)
Other comprehensive income (loss)(1)...................... 22,990 34,805 3,352
-------- -------- --------
End of year................................................. 46,958 23,968 (10,837)
-------- -------- --------
Treasury stock:
Beginning of year......................................... (12,059) (12,059) (38,457)
Treasury shares issued in connection with acquisition..... -- -- 26,398
-------- -------- --------
End of year................................................. (12,059) (12,059) (12,059)
-------- -------- --------
Total shareholders' equity.................................. $526,933 $383,355 $314,367
======== ======== ========
F-38
THOMAS INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY -- (CONTINUED)
---------------
(1) A reconciliation of net income to total comprehensive income follows.
YEARS ENDED DECEMBER 31
----------------------------
2004 2003 2002
-------- ------- -------
(IN THOUSANDS)
Net income............................................. $114,154 $37,314 $32,692
Other comprehensive income (loss):
Minimum pension liability (increase)................. 7,942 (225) (6,783)
Related tax expense............................... (3,012) 196 2,476
Derivative adjustment................................ 454 178 --
Related tax expense (credit)...................... (173) (67) --
Foreign currency translation......................... 17,779 34,723 7,659
-------- ------- -------
Total change in other comprehensive income (loss)...... 22,990 34,805 3,352
-------- ------- -------
Total comprehensive income............................. $137,144 $72,119 $36,044
======== ======= =======
Accumulated other comprehensive income (loss) was comprised of foreign
currency translation gains (losses) of $47,922,000, $30,143,000 and
($4,580,000), and minimum pension liabilities, net of tax, of ($1,356,000),
($6,286,000) and ($6,257,000), at December 31, 2004, 2003, and 2002,
respectively. The change in the minimum pension liabilities was primarily due to
the GTG sale transaction. Additionally, accumulated other comprehensive income
(loss) included gains of $392,000 and $111,000, net of tax, from derivative
adjustments, at December 31, 2004 and 2003.
See accompanying notes.
F-39
THOMAS INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
YEARS ENDED DECEMBER 31
-------------------------------
2004 2003 2002
--------- -------- --------
(IN THOUSANDS)
OPERATING ACTIVITIES
Net income.................................................. $ 114,154 $ 37,314 $ 32,692
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Depreciation and intangible amortization.................. 16,340 15,207 10,468
Deferred income taxes..................................... 1,376 1,326 621
Equity income from GTG.................................... (18,608) (32,138) (28,804)
Gain on sale of GTG....................................... (160,410) -- --
Distributions from GTG.................................... 4,350 13,299 13,785
Other items............................................... 966 462 1,291
Changes in operating assets and liabilities net of effect
of acquisitions:
Accounts receivable.................................... (3,312) 2,927 (2,344)
Inventories............................................ (4,905) (3,970) 555
Accounts payable....................................... 2,827 (2,512) (1,379)
Income taxes payable................................... 4,086 758 (1,663)
Accrued expenses and other current liabilities......... (2,007) 6,598 1,523
Other.................................................. (6,768) (6,918) 828
--------- -------- --------
Net cash (used in) provided by operating activities......... (51,911) 32,353 27,573
INVESTING ACTIVITIES
Purchases of property, plant and equipment.................. (16,403) (20,108) (8,358)
Proceeds from sale of property, plant and equipment......... 268 327 828
Proceeds from sale of GTG................................... 400,902 -- --
Purchases of short-term investments......................... (431,322) -- --
Proceeds from sale of short-term investments................ 297,695 -- --
Adjustments (payments) for purchase of companies, net of
cash acquired............................................. 6,154 (3,418) (84,898)
--------- -------- --------
Net cash provided by (used in) investing activities......... 257,294 (23,199) (92,428)
FINANCING ACTIVITIES
Proceeds from (payments on) short-term debt, net............ (2,904) 1,334 (642)
Payments on long-term debt.................................. (122,356) (19,672) (22,173)
Proceeds from long-term debt................................ 18,638 16,247 80,000
Dividends paid.............................................. (6,604) (6,182) (5,342)
Proceeds from stock options exercised....................... 8,912 1,850 745
--------- -------- --------
Net cash (used in) provided by financing activities......... (104,314) (6,423) 52,588
Effect of exchange rate changes on cash..................... 8,470 2,323 1,646
--------- -------- --------
Net increase (decrease) in cash and cash equivalents........ 109,539 5,054 (10,621)
Cash and cash equivalents at beginning of year.............. 23,933 18,879 29,500
--------- -------- --------
Cash and cash equivalents at end of year.................... $ 133,472 $ 23,933 $ 18,879
========= ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Non-cash items:
Issuance of treasury shares in connection with
acquisition.......................................... $ -- $ -- $ 44,754
Capital lease arrangements............................. $ -- $ -- $ 1,292
See accompanying notes.
F-40
THOMAS INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
1. DESCRIPTION OF BUSINESS
Thomas Industries Inc. and subsidiaries (the Company or Thomas) and
affiliates operates in the Pump and Compressor Segment which designs,
manufactures and sells pumps and compressors for use in global original
equipment manufacturing (OEM) applications as well as construction equipment,
systems and laboratory equipment. The Company also provides aftermarket service
and spare parts to support OEM and end-user customers around the world.
Manufacturing facilities and sales and distribution operations are located in
North America and Europe, with additional sales and distribution operations
located in Asia, Australia and South America. A new manufacturing facility in
Asia will begin operations in 2005. Through July 31, 2004, the Company also
operated in the Lighting Segment through its 32% interest in Genlyte Thomas
Group LLC (GTG). GTG, which was formed August 30, 1998, designs, manufactures,
markets and sells lighting products principally in North America for commercial,
industrial and residential applications.
2. ACCOUNTING POLICIES
BASIS OF PRESENTATION
Effective August 30, 1998, the Company and The Genlyte Group Incorporated
(Genlyte) formed GTG, combining Thomas' and Genlyte's lighting businesses.
Effective with the close of business on July 31, 2004, the Company sold its
interest in GTG. Genlyte had a 68% interest in GTG, and Thomas held a 32%
interest, which was accounted for using the equity method of accounting.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company.
Affiliates not required to be consolidated are accounted for using the equity
method, under which the Company's share of earnings of these affiliates is
included in income as earned. Intercompany accounts and transactions are
eliminated.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements. Actual results could differ from these estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of liquid investments with initial
maturities of three months or less.
SHORT-TERM INVESTMENTS
Short-term investments are classified as available-for-sale securities and
include tax advantaged debt securities with original maturities ranging from
four to 38 years. These debt securities are callable at par value (cost) based
on seven to 35 days notification to the bondholders. The Company has the option
to either sell or put these securities every seven to 35 days and these
securities will normally be held for less than one year. The securities are
carried on the balance sheet at fair market value, which is equivalent to cost.
Current period adjustments to the carrying value of available-for-sale
securities would be included in accumulated other comprehensive income within
stockholder's equity. Because of the nature of all these investments, cost does
not differ from fair market value, so there are no such adjustments to the
carrying value.
F-41
THOMAS INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FINANCIAL INSTRUMENTS
Financial instruments consist principally of cash and cash equivalents,
short-term investments, trade receivables and payables. The carrying amounts for
these instruments approximate fair value due to their short maturities. The
Company also uses forward currency exchange contracts which are recorded at fair
value on the balance sheet. See further discussion of these forward currency
exchange contracts under "Currency Risk Management" included in footnote 2.
CONCENTRATION OF CREDIT RISK
Assets that potentially subject the Company to concentration of credit risk
are cash and cash equivalents, short-term investments, and accounts receivable.
Cash and cash equivalents consist of liquid investments in investment grade,
short-term instruments which limits the amount of credit exposure. Investment
policies have been implemented which limit short-term investments to investment
grade securities with multiple financial institutions which limits credit
exposure. The Company sells products and services to customers in diversified
industries and geographic regions and provides credit to most of these
customers. The Company continuously evaluates the creditworthiness of its
customers and generally does not require collateral. No single customer accounts
for more than 10% of annual sales. Based on the Company's wide variety of
customers and markets, concentration of credit risk in accounts receivable is
not considered significant.
INVENTORIES
Inventories are valued at the lower of cost or market. Inventories valued
using the last-in, first-out (LIFO) method represented approximately 21% and 23%
of consolidated inventories at December 31, 2004 and 2003, respectively.
Inventories not on LIFO are valued using the first-in, first-out (FIFO) method.
Inventories at December 31 consist of the following:
2004 2003
------- -------
(IN THOUSANDS)
Finished goods.............................................. $36,331 $29,004
Raw materials............................................... 31,674 28,250
Work in process............................................. 7,202 8,641
------- -------
Total inventories........................................... $75,207 $65,895
======= =======
On a current cost basis, inventories would have been $4,957,000 and
$4,639,000 higher than reported at December 31, 2004 and 2003, respectively.
PROPERTY, PLANT AND EQUIPMENT
The cost of property, plant and equipment is depreciated principally by the
straight-line method over their estimated useful lives ranging from 3 to 31.5
years. Expenditures for maintenance, repairs and renewals of minor items are
expensed as incurred. Major renewals and improvements are capitalized. Property,
plant and equipment at December 31 consisted of the following:
F-42
THOMAS INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2004 2003
-------- --------
(IN THOUSANDS)
Land........................................................ $ 10,299 $ 8,171
Buildings................................................... 52,348 48,143
Leasehold improvements...................................... 6,985 6,291
Machinery and equipment..................................... 133,361 122,518
-------- --------
202,993 185,123
Accumulated depreciation and amortization................... (88,125) (76,773)
-------- --------
Total property, plant and equipment, net.................... $114,868 $108,350
======== ========
Depreciation expense relating to property, plant and equipment, which
includes capital lease items, was approximately $15,410,000, $14,361,000 and
$9,772,000 during 2004, 2003 and 2002, respectively.
Capital leases for land, building, machinery and equipment, autos and
software included above were $14,418,000 and $13,337,000 at December 31, 2004
and 2003, respectively. Accumulated depreciation on capital leases was
$3,355,000 and $2,039,000 at December 31, 2004 and 2003, respectively.
GOODWILL AND OTHER INTANGIBLE ASSETS
Beginning in 2002 with the adoption of Statement of Financial Accounting
Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets," goodwill and
indefinite lived intangible assets are no longer amortized, but instead are
tested for impairment by applying a fair-value based test at least annually, and
more frequently if circumstances indicate a possible impairment.
The statement requires a two-step process for impairment testing. The first
step, used to identify potential impairment only, compares the fair value of the
reporting unit, which is a level below the reportable segments disclosed in Note
13 -- "Industry Segment Information", with its net carrying amount on the
financial statements. Fair value of the reporting unit is estimated based on the
present value of estimated future cash flows of the reporting unit. If the fair
value of the reporting unit exceeds its carrying amount, goodwill is not
considered impaired; thus the second step of the process is not necessary. If
the carrying amount of a reporting unit exceeds its fair value, the second step
of the goodwill impairment test shall be performed to measure the amount of
impairment loss, if any. If the carrying value of goodwill on the financial
statements exceeds the implied fair value of goodwill, the difference must be
recognized as an impairment loss. Implied fair value of goodwill shall be
determined in the same manner as the amount of goodwill recognized in a business
combination is determined.
If the carrying amount of an intangible asset with an indefinite life
exceeds its fair value, an impairment loss is recognized in an amount equal to
the excess. Separate intangible assets that are not deemed to have an indefinite
life continue to be amortized over their useful lives.
The Company tested the goodwill of all its reporting units for impairment
during the fourth quarter of 2004. This assessment did not indicate any
impairment.
F-43
THOMAS INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The changes in net carrying amount of goodwill for the years ended December
31, 2004 and 2003 were as follows (in thousands):
2004 2003
------- -------
Balance at beginning of year................................ $70,164 $55,669
Adjustments to Rietschle acquisition........................ (6,154) 5,593
Minority interest acquisitions.............................. -- 1,778
Aldax acquisition........................................... (86) 2,175
Translation adjustments and other........................... 4,715 4,949
------- -------
Balance at end of year...................................... $68,639 $70,164
======= =======
The goodwill included in the balance sheets is related to the Pump and
Compressor Segment.
Certain intangible assets have definite lives and are being amortized.
Amortizable intangible assets at December 31 consist of the following (in
thousands):
2004 2003
------------------------------ ------------------------------
ACCUMULATED ACCUMULATED
LIFE COST AMORTIZATION LIFE COST AMORTIZATION
----- ------- ------------ ----- ------- ------------
Licenses.................. 18-19 $ 487 $ 218 18-19 $ 503 $ 207
Patents................... 5-20 6,320 1,295 5-20 5,917 771
Other..................... 1-10 4,267 1,470 1-10 3,619 890
------- ------ ------- ------
Total..................... $11,074 $2,983 $10,039 $1,868
======= ====== ======= ======
The total intangible amortization expense for the years ended December 31,
2004, 2003 and 2002 was $930,000, $846,000 and $696,000, respectively.
The estimated amortization expense for the next five years consists of the
following (in thousands):
2005........................................................ $1,002
2006........................................................ 1,002
2007........................................................ 991
2008........................................................ 938
2009........................................................ 829
The Company has various trademarks totaling $13,876,000 and $12,831,000 at
December 31, 2004 and 2003, respectively, that are not amortized. Also included
in other intangible assets is an intangible asset associated with the minimum
pension liability of $692,000 and $786,000 as of December 31, 2004 and 2003,
respectively.
LONG-LIVED ASSETS
The Company periodically evaluates the recoverability of the carrying
amount of long-lived assets (including property, plant and equipment, and
intangible assets with determinable lives) whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be fully
recoverable. We evaluate events or changes in circumstances based on a number of
factors including operating results, business plans and forecasts, general and
industry trends and economic projections and anticipated cash flows. An
impairment is assessed when the undiscounted expected future cash flows derived
from an asset are less than its carrying amount. Impairment losses are measured
as the amount by which the carrying value of an asset exceeds its fair value and
are recognized in earnings. We also continually evaluate the estimated useful
lives of all long-lived assets and when warranted revise such estimates based on
current events. There were
F-44
THOMAS INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
no significant impairment charges recorded in 2004 and 2003, but during the
fourth quarter of 2002, the Company recorded a $594,000 change in the Pump and
Compressor Segment's cost of sales to write-down certain assets to market value.
EXIT COSTS FOR WUPPERTAL, GERMANY FACILITY
In February 2004, the Company announced the closing of its Wuppertal,
Germany manufacturing facility in an effort to further consolidate its European
manufacturing operations and strengthen its market position by concentrating its
product, logistics, and engineering capacity. The exit activities were completed
by December 31, 2004, with the exception of some minor severance which could be
paid in 2005. The following table describes the 2004 activity and the exit
liability as of December 31, 2004 (in thousands):
BEGINNING BALANCE ENDING BALANCE
AT JAN. 1, 2004 ACCRUALS EXPENDITURES AT DEC. 31, 2004
----------------- -------- ------------ -------------------
Exit Costs:
Severance........................ -- $1,642 $(1,622) $20
Contract termination............. -- 8 (8) --
---- ------ ------- ---
Total exit costs................. -- $1,650 $(1,630) $20
==== ====== ======= ===
In addition to the $1,650,000 exit charge noted above, the Company has
recorded $1,186,000 of additional charges in the twelve months ended December
31, 2004 which include costs to coordinate the facility shutdown ($488,000),
fixed asset disposal and other charges to write down assets to net realizable
value ($455,000) and training & other costs related to the transfer of
production from the Wuppertal facility ($243,000). The carrying value of assets
held for sale related to the Wuppertal facility is not significant.
Approximately $2.7 million of the costs associated with this exit activity
were recorded in selling, general and administrative expenses of the Pump and
Compressor Segment, while $.1 million of expense related to loss on asset
disposal was recorded in Other Income (Expense).
No additional exit cost charges or other shutdown related expenses are
expected related to the Wuppertal facility.
FOREIGN CURRENCY TRANSLATION
The local currency is the functional currency for the Company's foreign
subsidiaries. Operating results are translated into U.S. dollars using monthly
average exchange rates, while balance sheet accounts are translated using
year-end exchange rates. The resulting translation adjustments are included as a
component of accumulated other comprehensive income (loss) in shareholders'
equity.
COLLECTIVE BARGAINING AGREEMENTS
As of December 31, 2004, the Company had approximately 14.3% of its
workforce represented by labor unions. Union contracts have varying expiration
dates beginning with June 30, 2005 and ending with March 7, 2008. Management
does not expect the expiration and renegotiation of these agreements to have a
significant impact on 2004 or 2005 results of operations.
F-45
THOMAS INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
REVENUE RECOGNITION
Revenue from product sales is recognized upon title transfer, which occurs
upon shipment, based on our customary terms of sale, which are FOB shipping
point. We do have exceptions to this general policy which are described as
follows:
1) Revenues from service and repair activities have been equal to or
below 6% of our total sales in 2004, 2003 and 2002. Most of these service
and repair revenues do not involve a shipment of product, but instead,
relate to the performance of a service or repair. Billings for these
activities are not made until the service activity has occurred. There are
other instances where we offer customers an annual service contract, which
we invoice in twelve monthly billings.
2) There are instances where we have consignment inventory
arrangements and in these instances, revenue is not recorded upon shipment
to the original customer. Revenue is only recorded when the original
customer ships the inventory to their customer or uses it for other
purposes. These consignment inventory arrangements are insignificant in
amount in all periods presented.
3) There are instances where our terms of sale are FOB destination. We
record accounting entries at the end of reporting periods, to make sure
these revenues are deferred to the subsequent period. These instances are
insignificant in amount in all periods presented.
Credit is extended based on local business customs and practices, and
collateral is not required. We estimate and record provisions for warranties in
the period the related products are sold. The warranty liabilities are
established based upon management's assessment of the various product warranty
periods, historical data and trends of warranty claims paid, and any current
information regarding specific warranty issues. While the Company engages in
extensive product quality programs and processes, should actual product failure
rates differ from estimates, revisions to the estimated warranty liability would
be required.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs, which include costs of product improvements
and design, are expensed as incurred ($22,131,000 in 2004, $19,736,000 in 2003,
and $11,789,000 in 2002).
SHIPPING AND HANDLING COSTS
All shipping and handling amounts billed to a customer in a sale
transaction are classified as revenue. In addition to shipping and handling
costs included in cost of products sold, the Company also has shipping and
handling costs included in selling, general and administrative expenses totaling
$5,817,000, $4,765,000 and $1,736,000 for 2004, 2003 and 2002, respectively.
PRODUCT WARRANTY COSTS
The Company generally offers warranties for most of its products for
periods from one to five years. The specific terms and conditions of these
warranties vary depending on the product sold and country in which the Company
does business. The Company estimates the costs that may be incurred under its
warranty and records a liability in the amount of such costs at the time product
revenue is recognized. Factors that affect the Company's warranty liability
include the number of units sold, historical and anticipated rates of warranty
claims, and cost per claim. The Company periodically assesses the adequacy of
its recorded warranty liability and adjusts the amount as necessary.
F-46
THOMAS INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Changes in the Company's warranty liability for December 31 are as follows
(in thousands):
2004 2003
------- -------
Balance at beginning of year................................ $ 5,382 $ 2,674
Warranties issued during the year........................... 2,908 4,045
Settlements made during the year............................ (3,357) (2,856)
Warranty liability assumed in acquisition of business....... -- 956
Foreign currency translation adjustment..................... 405 563
------- -------
Balance at end of year...................................... $ 5,338 $ 5,382
======= =======
ADVERTISING COSTS
Advertising costs consist of expenses related to promoting the Company's
products, including trade shows, web development, advertising and collateral
material and are charged to expense when incurred. Advertising expense was
$3,234,000, $3,306,000, and $2,142,000 in 2004, 2003 and 2002, respectively.
STOCK BASED COMPENSATION
Stock options are granted under various stock compensation programs to
employees and independent directors (see Note 9, "Shareholders' Equity"). In
December 2003, the Company adopted the fair value recognition provisions of
accounting for stock-based compensation under Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation," (SFAS 123) which
requires the Company to expense the fair value of employee stock options
prospectively for all employee awards granted, modified, or settled after
January 1, 2003. Awards under the Company's plan vest over a period of five
years. Therefore, the cost related to stock-based employee compensation included
in the determination of net income for 2003 is less than that which would have
been recognized if the fair value based method had been applied to all awards
since the original effective date of Statement 123. For employee stock options
granted prior to 2003, the Company continues to use the intrinsic value based
method of accounting prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25). For purposes of pro forma
disclosures, the estimated fair value of the options granted prior to 2003 is
amortized to expense over the options' vesting period.
Included in stock option activity, but accounted for in accordance with
SFAS No. 123, are options granted to GTG employees, for which the Company has
recorded compensation expense. This compensation expense, shown net of tax, is
also included in the pro forma information on the following table.
F-47
THOMAS INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table illustrates the effect on net income and earnings per
share if the fair value based method had been applied to all outstanding and
unvested awards in each period.
2004 2003 2002
---------- --------- ---------
(IN THOUSANDS, EXCEPT SHARE DATA)
Net income (as reported)............................... $114,154 $37,314 $32,692
Add: Stock-based compensation expense for GTG employees
included in reported net income, net of related tax
effects.............................................. 603 249 190
Add: Stock-based employee compensation expense included
in reported net income, net of related tax effects... 11 101 --
Deduct: Total stock-based employee compensation
determined under fair value based method for all
awards, net of related tax effects................... (1,059) (931) (966)
-------- ------- -------
Net income (pro forma)................................. $113,709 $36,733 $31,916
======== ======= =======
Net income per share (Basic) -- As reported............ $ 6.53 $ 2.17 $ 2.06
Pro forma............................................ 6.50 2.14 2.01
Net income per share (Diluted) -- As reported.......... 6.44 2.12 2.00
Pro forma............................................ 6.41 2.09 1.95
NEW ACCOUNTING PRONOUNCEMENTS
In November 2004, the FASB issued Statement of Financial Accounting
Standards No. 151 (FASB 151), Inventory Costs. The Company is required to adopt
the provisions of FASB 151, on a prospective basis, as of January 1, 2006. FASB
151 clarifies the accounting for abnormal amounts of idle facility expense,
freight, handling costs, and wasted material. FASB 151 requires that those
items -- if abnormal -- be recognized as expenses in the period incurred. In
addition, FASB 151 requires the allocation of fixed production overheads to the
costs of conversions based upon the normal capacity of the production
facilities. The Company has not yet determined what effect FASB 151 will have on
its earnings and financial position.
In December 2004, FASB issued Statement of Financial Accounting Standards
No. 123 (revised 2004) (FASB 123R), Share-Based Payment. FASB 123R will require
the Company to expense share-based payments, including employee stock options,
based on their fair value. The Company is required to adopt the provisions of
FASB 123R effective as of the beginning of its third quarter in 2005, however,
earlier adoption in 2005 is allowed. FASB 123R provides alternative methods of
adoption which include prospective application and a modified retroactive
application. The Company adopted the fair-value method of accounting for
share-based payments effective January 1, 2003 using the prospective method
described in FASB Statement No. 148, Accounting for Stock-Based
Compensation -- Transition and Disclosure. Currently, the Company uses the
Black-Scholes-Merton formula to estimate the value of stock options granted to
employees and expects to continue to use this acceptable option valuation model
upon the required adoption of Statement 123R on July 1, 2005. Because Statement
123R must be applied not only to new awards, but to previously granted awards
that are not fully vested on the effective date, and because the Company adopted
Statement 123 using the prospective transition method (which applied only to
awards granted, modified or settled after the adoption date), compensation cost
for some previously granted awards that were not recognized under Statement 123
will be recognized under Statement 123R. However, had we adopted Statement 123R
in prior periods, the impact of that standard would have approximated the impact
of Statement 123 as described in the disclosure of pro forma net income and
earnings per share noted above. Statement 123R also requires the benefits of tax
deductions in excess of recognized compensation cost to be reported as a
financing cash flow, rather than as an operating cash flow as required under
current literature. This requirement will reduce net operating cash flows and
increase net financing cash flows in periods after
F-48
THOMAS INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
adoption. While the Company cannot estimate what those amounts will be in the
future (because they depend on, among other things, when those employees
exercise stock options), the amount of operating cash flows recognized in prior
periods for such excess tax deductions were $2,805,000, $464,000, and $221,000
in 2004, 2003 and 2002, respectively. The 2004 amount was significantly higher
than 2003 and 2002 due primarily to the increased options exercised by GTG
employees. The vesting of options to GTG employees was accelerated and the
options became 100% vested as of December 31, 2004. As part of the GTG sale
agreement, the GTG employees had until December 31, 2004 to exercise or forfeit
their options.
In December 2004, the FASB issued FASB Staff Position (FSP) 109-1,
"Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax
Deduction on Qualified Production Activities Provided by the American Jobs
Creation Act of 2004" and FSP 109-2, "Accounting for Disclosure Guidance for the
Foreign Earnings Repatriation Provision within the American Jobs Creation Act of
2004." FSP 109-1 provides a tax deduction on qualified production activities,
while FSP 109-2 introduces a special one-time dividends-received deduction on
the repatriation of certain foreign earnings to a U.S. taxpayer, provided
certain criteria are met. The Company has adopted both of these staff positions
in 2004 (See Note 7).
CURRENCY RISK MANAGEMENT
All derivative instruments are recorded at fair value on the balance sheet
and all changes in fair value are recorded to earnings or to shareholders'
equity through other comprehensive income in accordance with SFAS No. 133, as
amended, "Accounting for Derivatives and Hedging Activity" (SFAS 133).
The Company uses forward currency exchange contracts to manage its
exposures to the variability of cash flows primarily related to the purchase of
inventory manufactured in Europe but inventoried and sold in non
Euro-denominated countries. These contracts are designated as cash flow hedges.
The Company does not use derivative instruments for trading or speculative
purposes.
All of the Company's derivative contracts are adjusted to current market
values each period and qualify for hedge accounting under SFAS 133. The periodic
gains and losses of the contracts designated as cash flow hedges are deferred in
other comprehensive income until the underlying transactions are recognized.
Upon recognition, such gains and losses are recorded in operations as an
adjustment to the carrying amounts of the underlying transactions in the period
in which these transactions are recognized. The carrying values of derivative
contracts are included in other current assets.
The Company's policy requires that contracts used as hedges must be
effective at reducing the risk associated with the exposure being hedged and
must be designated as a hedge at the inception of the contract. Hedging
effectiveness is assessed periodically. Any contract that is either not
designated as a hedge, or is so designated but is ineffective, is marked to
market and recognized in earnings immediately. If a cash flow hedge ceases to
qualify for hedge accounting or is terminated, the contract would continue to be
carried on the balance sheet at fair value until settled and future adjustments
to the contract's fair value would be recognized in earnings immediately. If a
forecasted transaction were no longer probable to occur, amounts previously
deferred in other comprehensive income would be recognized immediately in
earnings. Additional disclosure related to the Company's hedging contracts is
provided in Note 14.
OTHER
Accounts receivable at December 31, 2004 and 2003 was net of an allowance
for doubtful accounts of $2,303,000 and $2,270,000, respectively.
Certain prior year amounts have been reclassified to conform to the current
year presentation.
F-49
THOMAS INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. ACQUISITIONS
On November 20, 2003, the Company purchased the remaining 25% minority
interests in the Company's New Zealand subsidiary for $244,000. All of the
purchase price was allocated to goodwill. The Company now owns 100% of the New
Zealand subsidiary.
On July 31, 2003, the Company purchased all of the outstanding equity
interests of Aldax AB, of Stockholm, Sweden for $2.6 million, of which $1.7
million was paid in cash at the acquisition date, while $944,000 was recorded as
a long-term liability to be paid on July 31, 2005 in accordance with the
purchase agreement. Approximately $2.0 million of the purchase price was
allocated to goodwill.
On April 11, 2003, the Company purchased the remaining 20% minority
interests in the Company's Italian subsidiary for $1.5 million. All of the
purchase price was allocated to goodwill. The Company now owns 100% of the
Italian subsidiary.
On August 29, 2002, the Company purchased substantially all the assets and
liabilities of Werner Rietschle Holding GmbH ("Rietschle"), a privately held
company based in Schopfheim, Germany. Rietschle is a world leader in vacuum and
pressure technology, which includes dry-running and oil-lubricated pumps,
blowers, compressors, and pressure/vacuum pumps utilizing rotary vane, screw,
roots and claw technologies. With the Rietschle product line, the Company wants
to pursue further opportunities through growth in markets such as printing,
packaging, woodworking and many other applications that fit Rietschle
technologies. The purchase price consisted of $83.3 million in cash and
1,800,000 treasury shares of the Company's common stock, for which fair value
was calculated by using a six-day average stock price, determined three days
before and after the acquisition date. The Company negotiated a $120.0 million
revolving credit facility with a group of banks to finance the cash portion of
the purchase price. Rietschle's operating results are included in the Company's
results since the date of acquisition.
On June 3, 2004, the Company received approximately $6.2 million in cash,
which represents an adjustment to the Company's purchase price of Rietschle. The
purchase agreement specified the negotiation process to be followed for various
items in dispute, so that an adjustment to the purchase price could occur at a
subsequent time. In June 2004, negotiations on certain disputed items were
completed and this adjustment reduced goodwill by $6.2 million. Other
adjustments could occur in the future related to representations and warranties
per the purchase agreement.
In estimating the fair values of the assets acquired and liabilities
assumed in the Rietschle transaction, management considered a number of factors,
including collectibility of accounts receivable, net realizable value and
replacement cost of inventory, and the values of liabilities. In addition, an
independent appraiser was used to assist in determining the value of property,
plant and equipment and other intangible assets; however, management is
ultimately responsible for the values recorded.
Supplemental pro forma information below is presented as though the
business combination had been completed as of the beginning of the period being
reported on. The pro forma financial information does not necessarily reflect
the results of operations that would have occurred if the Company and Rietschle
constituted a single entity during such period.
YEAR ENDED
DECEMBER 31 2002
----------------
(IN THOUSANDS,
UNAUDITED)
Net sales................................................... $333,371
Net income.................................................. 35,581
Earnings per share-diluted.................................. 2.03
F-50
THOMAS INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The adjusted aggregate purchase price for Rietschle consists of (in
thousands):
Initial cash paid by the Company............................ $ 83,288
Fair value of Thomas common stock........................... 44,754
Transaction costs........................................... 5,931
Purchase price adjustment received in cash.................. (6,154)
--------
Total adjusted aggregate purchase price..................... $127,819
========
The following summarizes the estimated fair values of the assets acquired
and liabilities assumed at the date of acquisition (in thousands):
Cash........................................................ $ 3,487
Accounts receivable......................................... 24,913
Inventories................................................. 30,477
Other current assets........................................ 7,105
Property, plant and equipment............................... 44,404
Other intangibles........................................... 16,849
Other assets................................................ 2,999
Current liabilities......................................... (29,221)
Long-term debt.............................................. (17,116)
Other long-term liabilities................................. (6,569)
--------
77,328
Goodwill.................................................... 50,491
--------
Aggregate purchase price.................................... $127,819
========
The goodwill associated with the Rietschle acquisition is all allocated to
the Pump and Compressor Segment.
4. SALE OF INTEREST IN GTG
Effective with the close of business on July 31, 2004, the Company sold its
32% joint venture interest in the Genlyte Thomas Group LLC (GTG), which the
Company accounted for using the equity method of accounting, to The Genlyte
Group Incorporated (Nasdaq: GLYT) for approximately $400.9 million in cash.
Approximately $102.7 million of the proceeds were used to pay down long-term
debt on August 2, 2004. Approximately $80.5 million of the proceeds were used to
pay a portion of the income taxes (due on the gain) and transaction costs during
the third and fourth quarters.
The Company's adjusted book basis in GTG as of July 31, 2004 was as follows
(in millions):
Investment in GTG at July 31, 2004.......................... $230.5
Thomas' adjustment for accelerated option expense treated as
a transaction cost........................................ (.2)
Other comprehensive loss items:
Minimum pension liability................................... 5.5
Foreign currency translation................................ .5
------
Adjusted GTG book basis at July 31, 2004.................... $236.3
======
F-51
THOMAS INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The gain on the sale of GTG, which the Company recorded in 2004, was
calculated as follows (in millions):
Total sale price............................................ $ 400.9
Transaction costs........................................... (4.2)
-------
Net Proceeds................................................ 396.7
Adjusted book basis at July 31, 2004........................ (236.3)
-------
Pre-tax book gain........................................... 160.4
Income taxes................................................ (76.3)
-------
Net after-tax gain.......................................... $ 84.1
=======
Earnings per share -- diluted............................... $ 4.74
This gain calculation is an estimate subject to final determination of
taxes of the transaction when tax returns are filed in 2005. The effective
income tax rate recorded on the gain of 47.6% is primarily due to the basis
differences for financial reporting and tax purposes in the partnership interest
in GTG.
5. NET INCOME PER SHARE
The computation of the numerator and denominator in computing basic and
diluted net income per share follows:
2004 2003 2002
-------- ------- -------
(IN THOUSANDS)
Numerator:
Net income........................................... $114,154 $37,314 $32,692
======== ======= =======
Denominator:
Weighted average shares outstanding.................. 17,483 17,200 15,879
Effect of dilutive securities:
Director and employee stock options.................. 237 331 459
Employee performance shares.......................... 13 39 37
-------- ------- -------
Dilutive potential common shares....................... 250 370 496
-------- ------- -------
Denominator for diluted earnings per share -- adjusted
weighted average shares and assumed conversions...... 17,733 17,570 16,375
======== ======= =======
The deferred compensation obligation discussed in Note 9, "Shareholders'
Equity," is funded with shares of the Company's common stock, which are included
in the calculation of basic and diluted earnings per share.
6. EQUITY INVESTMENT
Through July 31, 2004, Genlyte Thomas Group LLC (GTG) was an affiliated
company accounted for on the equity method. As described in Notes 1 and 2,
Thomas and Genlyte formed GTG in August 1998.
Summarized financial information reported by the affiliate and a summary of
the amounts recorded in Thomas' consolidated financial statements follow. GTG is
organized as a limited liability corporation (LLC) that has elected to be taxed
as a partnership for U.S. income tax purposes. Therefore, Thomas and Genlyte are
responsible for income taxes applicable to their share of GTG's taxable income.
The net income reflected below for GTG does not include any provision for U.S.
income taxes, which will be incurred by
F-52
THOMAS INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Thomas and Genlyte; however, amounts have been provided for foreign income taxes
and certain U.S. franchise taxes.
AS OF
JULY 31, DECEMBER 31,
2004 2003
----------- ---------------
(IN THOUSANDS)
GTG BALANCE SHEETS
Cash and short-term investments............................. $116,284 $130,442
Accounts receivable......................................... 200,367 160,111
Inventories................................................. 151,498 143,898
Other current assets........................................ 9,543 9,821
-------- --------
Total current assets........................................ 477,692 444,272
Property, plant and equipment............................... 112,270 111,624
Goodwill.................................................... 156,623 150,532
Other intangible assets..................................... 11,360 21,315
Other assets................................................ 5,236 5,028
-------- --------
Total assets................................................ $763,181 $732,771
======== ========
Current maturities of long-term debt........................ $ 250 $ 284
Accounts payable............................................ 98,321 98,035
Payable to Genlyte Inc. .................................... 279 16,534
Accrued expenses and other.................................. 73,564 70,956
-------- --------
Total current liabilities................................... 172,414 185,809
Long-term debt, less current portion........................ 11,072 11,190
Accrued pension............................................. 21,739 27,567
Other liabilities........................................... 11,776 12,246
Shareholders' equity........................................ 546,180 495,959
-------- --------
Total liabilities and shareholders' equity.................. $763,181 $732,771
======== ========
F-53
THOMAS INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEVEN
MONTHS
ENDED YEAR ENDED
JULY 31, DECEMBER 31,
2004 2003
----------- ------------
(IN THOUSANDS)
GTG INCOME STATEMENTS
Net sales................................................... $672,358 $1,033,899
Cost of products sold....................................... 431,939 671,322
-------- ----------
Gross profit................................................ 240,419 362,577
SG&A expense................................................ 176,143 260,381
Gain on settlement of patent litigation..................... -- (8,000)
Amortization................................................ 541 1,079
-------- ----------
Operating profit............................................ 63,735 109,117
Interest expense, net....................................... 56 238
Minority interest........................................... (66) 185
-------- ----------
Income before taxes......................................... 63,745 108,694
Income taxes(1)............................................. 5,145 7,416
-------- ----------
Net income.................................................. $ 58,600 $ 101,278
======== ==========
Amounts recorded by Thomas:
Investment................................................ -- $ 214,405
Equity income............................................. $ 18,608(2) 32,138(3)
Distributions received.................................... 4,350 13,299
Changes in the Company's investment in GTG for the years ended December 31,
2004 and 2003 were as follows (in thousands):
2004 2003
--------- --------
Balance at the beginning of period.......................... $ 214,405 $188,810
GTG gross equity earnings................................... 18,752 32,409
GTG cash distributions...................................... (4,350) (13,299)
GTG currency translation adjustment......................... (1,082) 6,457
GTG minimum pension adjustment & other...................... 2,751 28
--------- --------
Balance before sale transaction(4).......................... 230,476 214,405
To record sale of GTG....................................... (230,476) --
--------- --------
Balance at end of period.................................... $ -- $214,405
========= ========
---------------
(1) GTG is organized as a limited liability corporation (LLC) that has elected
to be taxed as a partnership for U.S. income tax purposes. GTG is subject to
foreign income taxes and certain U.S. franchise taxes.
(2) Consists of $18,752 of equity income from GTG for the period January 1
through July 31, less $144 of expense for Thomas Industries stock options
issued to GTG employees.
(3) Consists of $32,409 of equity income from GTG less $271 of expense for
Thomas Industries stock options issued to GTG employees.
(4) See computation of Company's adjusted book basis in GTG as of July 31, 2004,
included in "Note 4 -- Sale of Interest in GTG" in the Notes to Consolidated
Financial Statements.
F-54
THOMAS INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company in the normal course of business has transactions with GTG.
These transactions consist primarily of reimbursement for other shared corporate
expenses.
Payables due to GTG as of December 31, 2004 and 2003 were $1,075,000 and
$175,000, respectively.
For the years ended December 31, 2004, 2003 and 2002, the Company recorded
$4,000, $4,000, and $230,000, respectively, related to the reimbursement of
shared corporate expenses. For the seven months ended July 31, 2004, the Company
recorded $2,000 related to these items.
7. INCOME TAXES
A summary of the provision for income taxes follows:
2004 2003 2002
------- ------- -------
(IN THOUSANDS)
Current:
Federal............................................... $71,756 $12,205 $10,988
State................................................. 15,981 1,883 1,681
Foreign............................................... 4,403 2,926 5,162
------- ------- -------
92,140 17,014 17,831
Deferred:
Federal and state (benefit)........................... (2,687) 236 1,780
Foreign (benefit)..................................... 4,063 1,090 (1,159)
------- ------- -------
1,376 1,326 621
------- ------- -------
Total provision for income taxes........................ $93,516 $18,340 $18,452
======= ======= =======
The U.S. and foreign components of income before income taxes follow:
2004 2003 2002
-------- ------- -------
(IN THOUSANDS)
United States.......................................... $188,070 $42,160 $42,709
Foreign................................................ 19,600 13,519 8,456
-------- ------- -------
Income before income taxes............................. $207,670 $55,679 $51,165
======== ======= =======
A reconciliation of the normal statutory federal income tax rate to the
Company's effective income tax rate follows:
2004 2003 2002
---- ---- ----
U.S. statutory rate......................................... 35.0% 35.0% 35.0%
State income taxes, net of federal tax benefits............. 4.9 2.2 2.4
Gain on sale of investment in GTG joint venture............. 5.2 -- --
Effect of foreign tax rates................................. 0.1 (1.3) .5
GTG foreign equity earnings recorded net of tax............. (0.5) (2.9) (2.9)
Change in valuation allowance............................... (0.1) -- 1.6
Other....................................................... 0.4 (.1) (.5)
---- ---- ----
Effective income tax rate................................... 45.0% 32.9% 36.1%
==== ==== ====
F-55
THOMAS INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income taxes are provided for significant income and expense items
recognized in different years for tax and financial reporting purposes.
Temporary differences which gave rise to significant deferred tax assets and
liabilities follow:
2004 2003
------- -------
(IN THOUSANDS)
Deferred tax assets:
Employee benefit obligations.............................. $ 2,266 $ 4,885
Net operating loss carryforwards.......................... 3,238 819
Allowance for doubtful accounts receivable................ 318 269
Inventory reserves........................................ 703 617
Compensation accruals..................................... 1,448 1,367
Miscellaneous foreign..................................... 5,399 4,479
Accrued liabilities and other............................. 1,633 1,565
------- -------
15,005 14,001
Less valuation allowance.................................... (2,814) (1,320)
------- -------
Net deferred tax asset...................................... 12,191 12,681
Deferred tax liabilities:
Accelerated depreciation.................................. 4,851 4,689
Investment in GTG......................................... -- 2,530
German Goodwill........................................... 4,222 --
Miscellaneous foreign..................................... 5,185 3,513
Other..................................................... 1,810 1,438
------- -------
16,068 12,170
------- -------
Net deferred tax asset/(liability).......................... $(3,877) $ 511
======= =======
2004 2003
------- ------
(IN THOUSANDS)
Classification:
Net current assets........................................ $ 5,101 $6,688
Net long-term liabilities................................. 8,978 6,177
------- ------
Net deferred tax asset/(liability).......................... $(3,877) $ 511
======= ======
Deferred tax assets and liabilities are classified according to the related
asset and liability classification on the consolidated balance sheets.
Management believes it is more likely than not the Company will realize the
benefits of its deferred tax assets, net of the valuation allowance of
$2,814,000. $1,224,000 of this valuation allowance is provided for income tax
loss carryforward benefits for certain foreign jurisdictions (NOL's). The
foreign tax NOL's (in the amount of $12,417,000) can be carried forward from
five to seven years and some portion indefinitely. Management believes that,
based on a number of factors, the available evidence creates sufficient
uncertainty regarding the realizability of a portion of these NOL's. The
remaining valuation allowance of $1,590,000 is provided for various foreign
deferred tax assets. Management believes that, based on a number of factors, the
available evidence creates sufficient uncertainty regarding the realizability of
these foreign assets.
F-56
THOMAS INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income taxes have not been provided on $58,000,000 of foreign
undistributed earnings as of December 31, 2004. It is management's intent that
such undistributed earnings be permanently reinvested in the foreign countries.
It is not practicable to determine the amount of unrecognized deferred tax
liability for temporary differences related to investments in foreign
subsidiaries that are essentially permanent in duration.
On October 22, 2004, the President signed the American Jobs Creation Act of
2004 (the Act). The Act provides a deduction for income from qualified domestic
production activities, which will be phased in from 2005 through 2010. In
return, the Act also provides for a two-year phase out of the existing
Extra-Territorial Income (ETI) exclusion for foreign sales that was viewed to be
inconsistent with international trade protocols by the European Union. The
Company expects the net effect of the phase-out of the ETI and the phase-in of
this new deduction will not result in a significant change to the effective tax
rate for fiscal year 2005 and future years based on current earning levels.
Another provision of the Act creates a temporary incentive for U.S.
corporations to repatriate accumulated income earned abroad by providing an 85%
dividends-received deduction for certain dividends from controller foreign
corporations. The deduction is subject to a number of limitations and, as of
today, uncertainty remains as to how to interpret numerous provisions in the
Act. As such, we are not yet in a position to decide on whether, and to what
extent, we might repatriate foreign earnings that have not been remitted to the
U.S.
The Company made federal, state and foreign income tax payments of
$88,847,000 in 2004, $17,084,000 in 2003 and $21,035,000 in 2002.
8. LONG-TERM DEBT AND CAPITAL LEASES
Long-term debt at December 31 consisted of the following:
2004 2003
------ --------
(IN THOUSANDS)
Revolving credit notes...................................... $ -- $ 85,000
Senior notes................................................ -- 15,430
Capital leases.............................................. 9,548 10,878
Industrial revenue bonds.................................... -- 1,250
------ --------
9,548 112,558
Less: current maturities.................................... 1,797 9,885
------ --------
Total long-term debt........................................ $7,751 $102,673
====== ========
The revolving credit notes were paid down in full on August 2, 2004, with
proceeds from the sale of GTG.
The senior notes had a 9.36% fixed interest rate and were paid down in full
on August 2, 2004, with the proceeds from the sale of GTG.
The capital leases have terms ranging from 2.5 to 18.5 years, and are
payable primarily in monthly installments with interest at rates ranging from
4.8% to 11.3%.
The Industrial Revenue Bonds had a variable interest rate and were paid
down in July 2004.
The fair value of the Company's long-term debt, including the current
portion, at December 31, 2003 was $113,790,000.
F-57
THOMAS INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Maturities of capital lease obligations are as follows (in thousands):
2005........................................................ $1,797
2006........................................................ 234
2007........................................................ 261
2008........................................................ 259
2009........................................................ 247
Thereafter.................................................. 6,750
------
$9,548
======
The Company has no loan agreements which include restrictions on working
capital, operating leases, tangible net worth and the payment of cash dividends
and stock distributions.
Cash paid for interest was $3,458,000 in 2004, $4,739,000 in 2003, and
$3,447,000 in 2002.
9. SHAREHOLDERS' EQUITY
STOCK REPURCHASE PROGRAM
Thomas' Board of Directors in 1999 authorized the purchase of up to
2,373,000 shares of Thomas common stock in the open market. Through December 31,
2004, Thomas had repurchased 879,189 shares at a cost of $17,334,000. No
purchases were made during 2004 and 2003.
STOCK INCENTIVE PLANS
At the April 20, 1995 Annual Meeting, the Company's shareholders approved
the Company's 1995 Incentive Stock Plan. An aggregate of 900,000 shares of
common stock, plus all shares remaining under the Company's 1987 Incentive Stock
Plan, were reserved for issuance under this Plan. At the April 15, 1999 Annual
Meeting, the Company's shareholders approved a 750,000 share increase in the
number of shares reserved for issuance under the 1995 Incentive Stock Plan. At
the April 22, 2004 Annual Meeting, the Company's shareholders approved the
Company's Amended and Restated 1995 Incentive Stock Plan which increased the
number of shares of common stock reserved for issuance by 550,000 shares and
added non-employee directors as participants under the Plan. Under this Plan,
options may be granted to employees and non-employee directors at not less than
market value at date of grant. All options granted have ten-year terms, and vest
and become fully exercisable at the end of five years of continued employment.
Under the terms of the Company's sale agreement with Genlyte, all stock options
granted to GTG employees became fully vested as of July 31, 2004 and expired as
of December 31, 2004.
At the April 21, 1994 Annual Meeting, the Company's shareholders approved
the Non-Employee Director Stock Option Plan. This Plan expired on April 21,
2004, except with respect to outstanding options which may be exercised through
2013. Under this Plan, each continuing non-employee director in office on the
date of each annual meeting was awarded options to purchase 3,000 shares of
common stock at not less than market value at date of grant. All options granted
have 10-year terms, and vest and become fully exercisable as of the date
granted. At December 31, 2004, there were seven non-employee directors in
office, and 225,000 options had been awarded under this Plan. A total of 131,017
shares reserved for this Plan, but not needed to satisfy awards outstanding
under the Non-employee Director Stock Option Plan, were made available under the
Company's Amended and Restated 1995 Incentive Stock Plan.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure" (SFAS 148), as an amendment to SFAS
123, "Accounting for Stock-Based Compensation." Prior to the year ended December
31, 2003, the Company followed SFAS 123 but elected to
F-58
THOMAS INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
continue to measure compensation cost using the intrinsic value based method of
accounting prescribed by APB 25, "Accounting for Stock Issued to Employees" and
related interpretations.
Effective December 2003, the Company elected to adopt the fair value method
of accounting for stock-based compensation under SFAS 123 which requires the
Company to expense the fair value of employee stock options granted, modified or
settled after January 1, 2003. The three transition methods provided by SFAS 148
are the prospective method, the modified prospective method and the retroactive
restatement method. The Company has elected to apply the prospective method
whereby recognition provisions of SFAS 123 apply to all employee awards granted,
modified or settled after January 1, 2003. The Company has recorded expense
related to the stock options of $17,000 and $163,000 in 2004 and 2003,
respectively.
For awards granted prior to 2003, the Company continues to follow SFAS No.
123 and uses the intrinsic value based method of accounting prescribed by APB
25. Under APB 25, because the exercise price of the Company's stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized for options granted to employees and
non-employee directors.
Pro forma information regarding net income and earnings per share is
required by SFAS 123, which also requires that the information be determined as
if the Company has accounted for its stock options granted subsequent to
December 31, 1994 under the fair value method of SFAS 123 (see Note 2,
"Accounting Policies -- Stock Based Compensation"). The fair value for these
options was estimated at the date of grant using a Black-Scholes option pricing
model with the following weighted-average assumptions:
2004 2003 2002
----- ----- -----
Risk-free interest rate..................................... 3.93% 3.14% 3.0%
Expected life, in years..................................... 6.5 6.5 6.5
Expected volatility......................................... 0.293 0.340 0.321
Expected dividend yield..................................... 1.0% 1.4% 1.4%
A summary of stock option activity for all plans follows:
2004 2003 2002
-------------------- -------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE PRICE
OPTIONS PRICE OPTIONS PRICE OPTIONS AVERAGE
--------- -------- --------- -------- --------- --------
Beginning of year...... 1,526,271 $18.08 1,616,359 $19.34 1,527,414 $17.86
Granted................ 77,915 38.99 88,000 24.91 212,800 26.31
Exercised.............. (599,446) 19.04 (166,438) 14.60 (105,957) 11.71
Forfeited or expired... (10,800) 22.12 (11,650) 21.59 (17,898) 21.16
--------- ------ --------- ------ --------- ------
End of year............ 993,940 $22.27 1,526,271 $20.16 1,616,359 $19.34
========= ====== ========= ====== ========= ======
Exercisable at end of
year................. 739,480 $19.69 1,024,882 $18.08 985,028 $16.22
The weighted average fair value of options granted was $7.47 in 2004, $6.61
in 2003 and $6.67 in 2002. Options outstanding at December 31, 2004 had option
prices ranging from $10.67 to $38.99 and expire at various dates between April
20, 2005 and December 6, 2014 (with a weighted-average remaining contractual
life of 5.2 years). There are 808,891 shares reserved for future grant.
Included in the summary of stock option activity above, are options granted
to GTG employees, which in accordance with SFAS 123, the Company has recorded
compensation expense based on using a Black-Scholes option pricing model. This
expense was $144,000 for the seven months ended July 31, 2004, $271,000 and
$201,000 for the twelve months ended December 31, 2003 and 2002, respectively,
and is netted with the Company's equity income from GTG (see Note 6, "Equity
Investment"). Under the terms of the Company's sale agreement with Genlyte, all
outstanding stock options previously granted to GTG employees
F-59
THOMAS INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
became fully vested as of July 31, 2004 and expired as of December 31, 2004. The
Company recognized $759,000 of expense in 2004 related to these options. This
amount was recorded against the gain on the sale of GTG.
The following table summarizes the status of stock options outstanding as
of December 31, 2004:
STOCK OPTIONS
STOCK OPTIONS OUTSTANDING EXERCISABLE
------------------------------ ------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
REMAINING EXERCISE EXERCISE
RANGE OF EXERCISE PRICES SHARES LIFE PRICE SHARES PRICE
------------------------ ------- --------- -------- ------- --------
$10.67 to $14.58.................... 179,063 1.5 $14.20 179,063 $14.20
$16.44 to $25.00.................... 469,249 4.5 20.10 440,141 20.02
$25.87 to $38.99.................... 345,628 8.1 29.40 120,276 26.64
------- --- ------ ------- ------
993,940 5.2 $22.27 739,480 $19.69
======= === ====== ======= ======
The Company also issued cash only stock appreciation rights (SAR's) in 2004
and 2003. All SAR's granted have ten year terms. SAR's granted to employees vest
and become fully exercisable at the end of four years of continued employment.
Under the terms of the Company's sale agreement with Genlyte, SAR's granted to
GTG employees became fully vested as of July 31, 2004 and expired as of December
31, 2004. SAR's granted to non-employee directors vest and become fully
exercisable as of the date granted. The Company has recorded expense of $244,000
and $1,000 in 2004 and 2003, respectively, related to SAR's for Thomas employees
and non-employee directors. For SAR's previously granted to GTG employees in
2004, the Company recognized $177,000 of expense, which was recorded against the
gain on the sale of GTG.
A summary of SAR's activity follows:
2004 2003
------------------ -----------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
SAR'S PRICE SAR'S PRICE
------- -------- ------ --------
Beginning of year............................... 99,230 $34.35 -- --
Granted......................................... 88,000 32.89 99,230 $34.35
Exercised....................................... (61,020) 32.28 -- --
Forfeited or expired............................ (7,480) 32.79 -- --
------- ------ ------ ------
End of year..................................... 118,730 $34.43 99,230 $34.35
======= ====== ====== ======
Exercisable at end of year...................... 21,000 $34.82 -- --
In addition to the options and SAR's listed above, 20,000 performance share
awards were granted in both December 2004 and December 2003, and 14,000
performance share awards were granted in December 2002. Performance share awards
may be earned based on the total shareholder return of the Company during the
three-year periods commencing January 1 following the grant date. A total of
11,526 shares were earned in 2004 from performance share awards granted in
December 2001, 10,550 shares were earned in 2003 from awards granted in December
2000, and 11,639 shares were earned in 2002 from awards granted in December
1999. The Company has recorded compensation expense related to performance
shares of $199,000, $482,000 and $323,000 for 2004, 2003 and 2002, respectively.
DEFERRED SHARE TRUST
Employees who earn performance share awards as discussed above may elect to
defer receipt of such shares until termination of employment. Non-Employee
Directors are permitted to receive part or all of their
F-60
THOMAS INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
director fees in the form of common stock of the Company and to defer receipt of
such shares until retirement or other termination of service. In April 2000, the
Company established a deferred share trust (the "Trust") to maintain the shares
deferred for these obligations. The Trust qualifies as a rabbi trust for income
tax purposes as the assets of the Trust are subject to the claims of general
creditors of the Company. Dividends payable on the shares held by the Trust are
reinvested in additional shares of common stock of the Company on behalf of the
participants. Since there is no provision for diversification of the Trust's
assets and settlement can only be made with a fixed number of shares of the
Company's common stock, the deferred compensation obligation is classified as a
component of shareholders' equity and the common stock held by the Trust is
classified as treasury stock. Subsequent changes in the fair value of the common
stock are not reflected in earnings or shareholders' equity of the Company.
SHAREHOLDER RIGHTS PLAN
On December 10, 1997, the Board of Directors of the Company adopted a
shareholder rights plan (the Rights Plan) pursuant to which preferred stock
purchase rights (the Rights) were declared and distributed to the holders of the
Company's common stock. These Rights are due to expire on January 5, 2008. The
Rights Plan generally provides that the Rights separate from the common stock
and become exercisable if a person or group of persons working together acquires
at least 20% of the common stock (a 20% Acquisition) or announces a tender offer
which would result in ownership by that person or group of at least 20% of the
common stock (a 20% Tender Offer). Upon a 20% Acquisition, the holders of Rights
may purchase the common stock at half-price. If, following the separation of the
Rights from the common stock, the Company is acquired in a merger or sale of
assets, holders of Rights may purchase the acquiring company's stock at
half-price.
Notwithstanding the foregoing discussion, under the Rights Plan, the Board
of Directors has flexibility in certain events. In order to provide maximum
flexibility, the Board of Directors may delay the date upon which the Rights
become exercisable in the event of a 20% Tender Offer. In addition, the Board of
Directors has the option to exchange one share of common stock for each
outstanding Right at any time after a 20% Acquisition, but before the acquirer
has purchased 50% of the outstanding common stock. The Rights may also be
redeemed at two cents per Right at any time prior to a 20% Acquisition or a 20%
Tender Offer.
10. EMPLOYEE BENEFIT PLANS
The Company has noncontributory defined benefit pension plans and
contributory defined contribution plans covering its hourly union employees in
the U.S. The defined benefit plans in the U.S. primarily provide flat benefits
of stated amounts for each year of service. The Company's policy is to fund
pension costs deductible for income tax purposes for these plans.
The Company also has noncontributory defined benefit pension plans covering
certain employees of its foreign locations. These plans provide benefits to
employees based on rate of pay and years of service. The foreign defined benefit
plans are not funded.
F-61
THOMAS INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company also sponsors defined contribution pension plans covering
substantially all U.S. employees whose compensation is not determined by
collective bargaining. Annual contributions are determined by the Board of
Directors.
OTHER
PENSION BENEFITS POSTRETIREMENT
----------------------------------- BENEFITS
FOREIGN PLANS U.S. PLANS (U.S. PLANS)
----------------- --------------- ---------------
2004 2003 2004 2003 2004 2003
------- ------- ------ ------ ------ ------
(IN THOUSANDS) (IN THOUSANDS)
CHANGE IN BENEFIT OBLIGATIONS
Benefit obligations at beginning
of year....................... $10,550 $ 8,056 $8,749 $7,967 $1,523 $1,307
Foreign exchange impact......... 859 1,667 -- -- -- --
Service cost.................... 255 288 325 285 96 67
Interest cost................... 643 592 526 513 106 85
Plan amendments................. -- 355 -- 163 (44) --
Benefits paid................... (373) (314) (351) (764) (40) (39)
Actuarial (gain) loss........... (120) (94) (8) 585 329 103
------- ------- ------ ------ ------ ------
Benefit obligations at end of
year.......................... $11,814 $10,550 $9,241 $8,749 $1,970 $1,523
======= ======= ====== ====== ====== ======
CHANGE IN PLAN ASSETS
Value of plan assets at
beginning of year............. $ -- $ -- $8,189 $7,226 $ -- $ --
Actual return on plan assets -- -- 592 1,157 -- --
Employer contributions.......... 373 314 670 570 40 39
Benefits paid................... (373) (314) (351) (764) (40) (39)
------- ------- ------ ------ ------ ------
Value of plan assets at end of
year.......................... $ -- $ -- $9,100 $8,189 $ -- $ --
======= ======= ====== ====== ====== ======
PENSION BENEFITS
------------------------------------- OTHER POSTRETIREMENT
FOREIGN PLANS U.S. PLANS BENEFITS (U.S. PLANS)
------------------- --------------- ---------------------
2004 2003 2004 2003 2004 2003
-------- -------- ------ ------ --------- ---------
(IN THOUSANDS) (IN THOUSANDS)
FUNDED STATUS OF THE PLANS
Assets less projected
obligations................ $(11,814) $(10,550) $ (141) $ (560) $(1,970) $(1,523)
Unrecognized actuarial
loss....................... 297 404 1,790 1,861 947 560
Unrecognized transition
obligations................ -- -- 2 4 110 168
Unrecognized prior service
cost....................... -- -- 690 782 -- --
-------- -------- ------ ------ ------- -------
Net asset (liability)
recognized at end of
year....................... $(11,517) $(10,146) $2,341 $2,087 $ (913) $ (795)
======== ======== ====== ====== ======= =======
F-62
THOMAS INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OTHER
PENSION BENEFITS POSTRETIREMENT
------------------------------------- BENEFITS
FOREIGN PLANS U.S. PLANS (U.S. PLANS)
------------------- --------------- ---------------
2004 2003 2004 2003 2004 2003
-------- -------- ------ ------ ------ ------
(IN THOUSANDS) (IN THOUSANDS)
BALANCE SHEET ASSETS
(LIABILITIES)
Prepaid benefit costs........... $ -- $ -- $ 114 $ 107 $ -- $ --
Accrued benefit liabilities..... (12,012) (10,707) (158) (572) (913) (795)
Intangible assets............... -- -- 692 786 -- --
Accumulated other comprehensive
income........................ 495 561 1,693 1,766 -- --
-------- -------- ------ ------ ----- -----
Net asset (liability) recognized
at end of year................ $(11,517) $(10,146) $2,341 $2,087 $(913) $(795)
======== ======== ====== ====== ===== =====
Increase in minimum liability
included in other
comprehensive income.......... $ (67) $ 387 $ (73) $ (262) $ -- $ --
======== ======== ====== ====== ===== =====
The Company uses a December 31 measurement date for all U.S. and foreign
plans.
The accumulated benefit obligation for all defined benefit pension plans
was $20,685,000 and $18,942,000 at December 31, 2004 and 2003, respectively.
PENSION BENEFITS
-----------------------------------
FOREIGN PLANS U.S. PLANS
----------------- ---------------
2004 2003 2004 2003
------- ------- ------ ------
(IN THOUSANDS)
INFORMATION FOR PENSION PLANS WITH AN ACCUMULATED
BENEFIT OBLIGATION IN EXCESS OF PLAN ASSETS:
Projected benefit obligation..................... $11,814 $10,550 $8,786 $8,315
Accumulated benefit obligation................... 11,444 10,194 8,786 8,315
Fair value of plan assets........................ -- -- 8,628 7,743
OTHER
PENSION BENEFITS POSTRETIREMENT
------------------------------------------ BENEFITS
FOREIGN PLANS U.S. PLANS (U.S. PLANS)
--------------------------- ------------ ---------------
2004 2003 2004 2003 2004 2003
------------- ----------- ---- ---- ------ ------
(IN THOUSANDS) (IN THOUSANDS)
Discount rate used to determine benefit
obligations at December 31............ 6.00% 6.00% 6.00% 6.25% 6.00% 6.25%
Weighted-average assumptions used to
determine net periodic benefit cost
for years ended December 31:
Discount rate...................... 6.00% 6.00%-7.00% 6.25% 6.75% 6.25% 6.75%
Expected return on plan assets..... -- -- 8.00% 8.00% -- --
Initial health care cost trend
rate............................. -- -- -- -- 11.00% 12.00%
Ultimate health care cost trend
rate............................. -- -- -- -- 5.50% 5.50%
Year ultimate rate is achieved..... 2013 2012
To develop the expected long-term rate of return on assets assumption, the
Company considered historical returns and future expectations. Over the 10-year
period ending December 31, 2003, the compound annual returns on the portfolio
have averaged 10.34%. Considering this information and the potential for
F-63
THOMAS INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
lower future returns due to a generally lower interest rate environment, the
Company selected an 8.00% long-term rate of return on asset assumptions.
The effect of a one-percentage-point change in assumed health care cost
trend rates consisted of the following:
ONE-PERCENTAGE ONE-PERCENTAGE
POINT INCREASE POINT DECREASE
-------------- --------------
(IN THOUSANDS)
Increase (decrease) in total postretirement service and
interest cost components............................... $ 30 $ (25)
Increase (decrease) to postretirement benefit
obligation............................................. $254 $(217)
The following table details the components of pension and other
postretirement benefit costs.
PENSION BENEFITS
------------------------------------------ OTHER POSTRETIREMENT
FOREIGN PLANS U.S. PLANS BENEFITS (U.S. PLANS)
------------------ --------------------- ---------------------
2004 2003 2002 2004 2003 2002 2004 2003 2002
---- ---- ---- ----- ----- ----- ----- ----- -----
(IN THOUSANDS) (IN THOUSANDS)
Service cost............... $255 $288 $137 $ 325 $ 285 $ 289 $ 96 $ 67 $ 52
Interest cost.............. 643 593 243 526 513 490 106 86 75
Expected return on plan
assets................... -- -- -- (623) (542) (610) -- -- --
Other amortization and
deferral................. -- -- -- 188 204 91 54 31 24
---- ---- ---- ----- ----- ----- ---- ---- ----
$898 $881 $380 $ 416 $ 460 $ 260 $256 $184 $151
==== ==== ==== ===== ===== ===== ==== ==== ====
The Company's pension plan weighted-average asset allocations at December
31, 2004, and 2003, by asset category are as follows:
% OF PLAN
ASSETS AT
DECEMBER 31
-----------
ASSET CATEGORY 2004 2003
-------------- ---- ----
Equity securities........................................... 65% 57%
Debt securities............................................. 34% 34%
Short-term investments...................................... 1% 9%
--- ---
100% 100%
=== ===
Equity securities include 14,430 shares of Company common stock with a
market value of $576,000 (6 percent of total plan assets) at December 31, 2004
and $500,000 (6 percent of total plan assets) at December 31, 2003.
Short-term investments include contributions to plans of $570,000 in
December 2003 that had not yet been invested by the investment manager.
The Company's investment objective for plan assets includes exceeding the
return generated by an unmanaged index composed of the S&P 500 Stock Index and
the Lehman Brothers Government/Corporate Bond Index in proportion to the target
portfolio, while achieving a rate of return greater than the actuarially assumed
interest rate. The targeted asset mix was 60 percent equities and 40 percent
fixed income as of December 31, 2004 and 55 percent equities and 45 percent
fixed income as of December 31, 2003. The targeted allocation provides
reasonable assurance that the investment objectives can be achieved based on
historical performance.
F-64
THOMAS INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company expects to contribute $670,000 to its pension plans and
$100,000 to its postretirement benefit plans in 2005.
The following benefit payments, which reflect expected future service, as
appropriate, are expected to be paid:
PENSION BENEFITS OTHER
----------------------------- POSTRETIREMENT
FOREIGN PLANS U.S. PLANS BENEFITS (U.S. PLANS)
------------- ------------- ------------------------
(IN THOUSANDS) (IN THOUSANDS)
2005......................................... $ 373 $ 486 $100
2006......................................... 386 479 99
2007......................................... 394 535 102
2008......................................... 443 468 117
2009......................................... 493 464 103
2010-2014.................................... $3,804 $2,822 $808
Thomas sponsors various defined contribution plans to assist eligible
employees in providing for retirement or other future needs. Company
contributions to these plans amounted to $2,920,000 in 2004, $2,591,000 in 2003
and $1,364,000 in 2002.
On December 8, 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the "Act"), which introduces a Medicare prescription
drug benefit, as well as a federal subsidy to sponsors of retiree health care
benefit plans that provide a benefit that is at least actuarially equivalent to
the Medicare benefit, was enacted. On May 19, 2004, the FASB issued Financial
Staff Position No. 106-2, "Accounting and Disclosure Requirements Related to the
Medicare Prescription Drug, Improvement and Modernization Act of 2003", ("FSP
106-2") to discuss certain accounting and disclosure issues raised by the Act.
FSP 106-2 addresses accounting for the federal subsidy for the sponsors of
single employer defined benefit postretirement healthcare plans and disclosure
requirements for plans for which the employer has not yet been able to determine
actuarial equivalency. Except for certain nonpublic entities, FSP 106-2 is
effective for the first interim or annual period beginning after June 15, 2004
(the quarter ending September 30, 2004 for the Company). We have not yet
concluded whether the prescription drug benefits provided under our
postretirement plan are actuarially equivalent to the Medicare benefit as
necessary to qualify for the subsidy. The reported net periodic benefit costs of
our postretirement plan in the accompanying Financial Statements and included in
Note 10 to the Financial Statements do not reflect the effects of the Act.
Adoption of FSP 106-2 could require revisions to previously reported
information. While we may be eligible for benefits under the Act based on the
prescription drug benefits provided in our postretirement plan, we do not
believe such benefits will have a material impact on our Financial Statements.
11. LEASES, COMMITMENTS AND CONTINGENCIES
Rental expense for building, machinery and equipment was $7,374,000 in
2004, $6,810,000 in 2003, and $3,875,000 in 2002. Future minimum rentals under
non-cancelable operating leases are as follows: 2005 -- $5,630,000;
2006 -- $4,481,000; 2007 -- $3,818,000; 2008 -- $3,416,000; 2009 -- $2,429,000;
and thereafter -- $1,647,000.
The Company had letters of credit outstanding in the amount of $3,080,000
at December 31, 2004.
On August 13, 2002, a petition was filed in the District Court of Jefferson
County, Texas, adding Thomas Industries Inc. as a third party defendant in a
lawsuit captioned Hydro Action, Inc. v. Jesse James, individually and d/b/a
James Backhoe Service of Dietrich, Illinois, Inc. and Original Septic Solutions,
Inc. (the "Third Party Plaintiffs") (the "Original Lawsuit"). The Original
Lawsuit alleged that the Company violated the Texas Deceptive Trade Practices
Act and breached warranties of merchantability and fitness for a
F-65
THOMAS INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
particular purpose with respect to pumps sold by the Company and used in septic
tanks manufactured or sold by the plaintiffs. The Original Lawsuit was stayed as
a result of the bankruptcy filing by Hydro Action, Inc. On October 8, 2003, a
lawsuit was filed against the Company, Gig Drewery, Yasunaga Corporation and
Aqua-Partners, Ltd. in the District Court of Jefferson County, Texas, making the
same allegations set forth in the Original Lawsuit and requesting class-action
certification. No class has been certified. The Third Party Plaintiffs are
plaintiffs in this action. This complaint has been amended to include
approximately 28 plaintiffs. The complaint currently seeks $3 million per
plaintiff and punitive and exemplary damages. The total sales by the Company
related to these products were approximately $900,000. On September 29, 2004,
the case was remanded to state court in Jefferson County and the stay is no
longer in place. Although this litigation is in the preliminary stages, the
Company believes it has meritorious defenses to the claims and intends to
vigorously defend this matter. Litigation is subject to many uncertainties and
the Company cannot guarantee the outcome of these proceedings. However, based
upon information currently available, the Company does not believe that the
outcome of this proceeding will have a material adverse effect on the
consolidated financial position, results of operations or cash flows of the
Company.
In the normal course of business, the Company is a party to other legal
proceedings and claims. When costs can be reasonably estimated, appropriate
liabilities for such matters are recorded. While management currently believes
the amount of ultimate liability, if any, with respect to these actions will not
materially affect the consolidated financial position, results of operations, or
liquidity of the Company, the ultimate outcome of any litigation is uncertain.
Were an unfavorable outcome to occur, the impact could be material to the
Company.
The Company, like other similar manufacturers, is subject to environmental
rules and regulations regarding the use, disposal and cleanup of substances
regulated under environmental protection laws. It is the Company's policy to
comply with these rules and regulations, and the Company believes that its
practices and procedures are designed to meet this compliance.
The Company is subject to various federal, state and local environmental
laws and regulations that require remediation efforts at several locations
including both current and former operating facilities. One of the most
significant sites is a former manufacturing facility located in Beaver Dam,
Kentucky. Since 1992, the Company has been working under an Agreed Order with
the Kentucky Natural Resources and Environmental Protection Cabinet to remediate
this site. The Company has completed all closure activities and has received
approval for implementation of a post-closure plan.
In 2004, a letter was received from the Wisconsin Department of Natural
Resources (WDNR) indicating that the Company was solely responsible for
remediation of a former manufacturing facility located in Fort Atkinson,
Wisconsin, which was sold by the Company in 1985. In response to WDNR's demand,
the Company engaged a consultant to perform an initial hydrogeologic site
investigation. This initial site investigation found elevated levels of volatile
organic compounds including tetrachlorothene and its daughter products. The site
investigation will be expanded to determine the extent of the contamination and
to develop a remediation work plan. The Company provided a reserve of $900,000
in the third quarter and an additional $200,000 in the fourth quarter of 2004
for anticipated future costs associated with remediation of this site.
The Company's policy is to provide for environmental reserves on a
discounted basis, when appropriate. Environmental reserves are subject to
numerous inherent uncertainties that affect the ability to estimate future costs
of required remediation efforts. Such uncertainties involve the nature and
extent of contamination, the extent of required cleanup efforts under existing
environmental regulations, widely varying costs of alternate cleanup methods,
changes in environmental regulations, the potential effect of continuing
improvements in remediation technology and the financial strength of other
potentially responsible parties at multiparty sites. Reserves are reviewed for
adequacy on a quarterly basis and adjusted, if necessary, as environmental
assessment and remediation efforts proceed.
F-66
THOMAS INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Changes in the Company's environmental reserve at December 31, 2004 and
2003 is as follows (in thousands):
FOR THE TWELVE
MONTHS ENDED
DECEMBER 31,
---------------
2004 2003
------ ------
Balance at beginning of period.............................. $1,321 $1,350
Environmental accruals...................................... 1,100 315
Expenditures................................................ (239) (344)
------ ------
Balance at end of period.................................... $2,182 $1,321
====== ======
Related to the $2,182,000 reserve at December 31, 2004, approximately
$1,276,000 of this amount was determined on a discounted basis using a 4.9%
discount rate. The $1,276,000 discounted amount is $1,977,000 on an undiscounted
basis. No recoveries are expected or assumed. Expected payments of the
$1,977,000 are as follows:
2005........................................................ $ 163,000
2006........................................................ 154,000
2007........................................................ 162,000
2008........................................................ 137,000
2009........................................................ 78,000
Thereafter.................................................. 1,283,000
----------
Total..................................................... $1,977,000
==========
12. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
A summary of accrued expenses and other current liabilities follows:
2004 2003
------- -------
(IN THOUSANDS)
Accrued wages, taxes and withholdings....................... $14,314 $10,875
Accrued insurance........................................... 1,680 1,878
Accrued interest............................................ 3 769
Accrued warranty expense.................................... 5,338 5,382
Other current liabilities................................... 12,869 11,615
------- -------
Total accrued expenses and other current liabilities........ $34,204 $30,519
======= =======
13. INDUSTRY SEGMENT INFORMATION
Operating segments are defined as components of an enterprise engaging in
business activities about which separate financial information is available that
is evaluated regularly by the chief decision maker or group in deciding how to
allocate resources and assessing performance.
The Company has historically been organized into two business segments, the
Pump and Compressor Segment and Lighting Segment through its 32% interest in
GTG. The segments have been managed separately based on the fundamental
differences in their respective operations. The Pump and Compressor Segment
designs, manufacturers, and sells pumps and compressors for use in global
original equipment manufacturing applications as well as construction equipment,
systems and laboratory equipment. The
F-67
THOMAS INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Lighting Segment designs, manufactures, markets and sells lighting products
principally in North America for commercial, industrial and residential
applications. See Note 4 which describes in further detail the sale of the
Company's interest in GTG.
Industry segment information follows:
2004 2003 2002
--------- -------- --------
(IN THOUSANDS)
SALES AND OPERATING REVENUES
Pump and Compressor(1)...............................
Total net sales including inter-area sales........ $462,151 $420,473 $266,285
Inter-area sales(2)............................... (52,037) (43,699) (25,683)
-------- -------- --------
Net sales to unaffiliated customers............... $410,114 $376,774 $240,602
======== ======== ========
OPERATING INCOME (LOSS)
Pump and Compressor(1)............................... $ 40,936 $ 36,742 $ 31,675
Lighting (GTG)(3).................................... 18,608 32,138 28,804
Gain on Sale of GTG(3)............................... 160,410 -- --
Corporate............................................ (11,204) (8,743) (5,966)
-------- -------- --------
$208,750 $ 60,137 $ 54,513
======== ======== ========
ASSETS
Pump and Compressor(1)............................... $382,102 $344,384 $287,167
Lighting (GTG)(3).................................... -- 214,405 188,810
Corporate............................................ 239,834 14,345 15,039
-------- -------- --------
$621,936 $573,134 $491,016
======== ======== ========
INVESTMENT IN EQUITY AFFILIATES
Lighting (GTG)(3).................................... -- $214,405 $188,810
======== ======== ========
EXPENSES NOT AFFECTING CASH
Depreciation and amortization
Pump and Compressor(1)............................... $ 16,200 $ 15,072 $ 10,312
Corporate............................................ 140 135 156
-------- -------- --------
$ 16,340 $ 15,207 $ 10,468
======== ======== ========
ADDITIONS TO PROPERTY, PLANT AND EQUIPMENT
Pump and Compressor(1)............................... $ 16,303 $ 19,805 $ 8,208
Corporate............................................ 100 303 150
-------- -------- --------
$ 16,403 $ 20,108 $ 8,358
======== ======== ========
---------------
(1) Includes Rietschle after the August 29, 2002 acquisition date.
(2) Inter-area sales represent intercompany sales between geographic regions
(North America, Europe and Asia Pacific).
(3) The Company sold its joint venture interest in Lighting (GTG) on July 31,
2004.
F-68
THOMAS INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Intra-area sales, which represent intercompany sales between locations
within a geographic region, have been eliminated from the above tabulation.
Operating income by segment is gross profit less operating expenses, excluding
interest, general corporate expenses, other income and income taxes.
Information by geographic area follows:
2004 2003 2002
-------- -------- --------
(IN THOUSANDS)
REVENUES(1)(2)
Total net sales including inter-area sales
United States...................................... $171,063 $165,899 $144,481
Germany............................................ 209,720 180,568 85,227
Other Europe....................................... 84,381 75,194 28,588
Asia Pacific....................................... 40,034 34,512 18,568
-------- -------- --------
$505,198 $456,173 $276,864
======== ======== ========
Inter-area sales(3)
United States...................................... $(14,829) $(12,712) $(13,139)
Germany............................................ (78,660) (62,243) (21,969)
Other Europe....................................... (1,451) (4,262) (1,135)
Asia Pacific....................................... (144) (182) (19)
-------- -------- --------
$(95,084) $(79,399) $(36,262)
======== ======== ========
Net sales to unaffiliated customers
United States...................................... $156,234 $153,187 $131,342
Germany............................................ 131,060 118,325 63,258
Other Europe....................................... 82,930 70,932 27,453
Asia Pacific....................................... 39,890 34,330 18,549
-------- -------- --------
$410,114 $376,774 $240,602
======== ======== ========
PROPERTY, PLANT AND EQUIPMENT
United States...................................... 29,219 $ 31,673 $ 32,069
Germany............................................ 65,329 64,859 48,061
Other Europe....................................... 17,564 10,864 10,840
Asia Pacific....................................... 2,756 954 621
-------- -------- --------
$114,868 $108,350 $ 91,591
======== ======== ========
---------------
(1) Revenues are attributed to geographic areas based on the location of the
selling entity.
(2) Includes Rietschle after the August 29, 2002 acquisition date.
(3) Inter-area sales represent intercompany sales between countries/geographic
areas (United States, Germany, other Europe, and Asia Pacific).
Intra-area sales, which represent intercompany sales between locations
within a country/geographic area, have been eliminated from the above
tabulation.
F-69
THOMAS INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Net exposed assets, which represents assets less liabilities for geographic
operations outside of North America that are exposed to foreign currency risk,
at December 31, 2004 are $239,065,000 and $19,416,000 for Europe and Asia
Pacific, respectively.
14. CURRENCY RISK MANAGEMENT
The Company conducts business in several major international currencies
(primarily the European Euro, British Pound, Japanese Yen, Swiss Franc, and
Australian Dollar) and is subject to risks associated with changing foreign
exchange rates. The Company's objective is to reduce earnings and cash flow
volatility associated with foreign exchange rate changes to allow management to
focus its attention on its core business issues and challenges. Accordingly, the
Company enters into contracts that change in value as foreign exchange rates
change to protect the value of anticipated foreign currency revenues and
expenses. The gains and losses on these contracts offset changes in the value of
the underlying transactions as they occur. The Euro is the only currency hedged.
At December 31, 2004, the Company held forward contracts expiring through
December 2005 to hedge probable, but not firmly committed, intercompany
inventory purchases. These hedging contracts are classified as cash flow hedges
and accordingly, are adjusted to current market values through other
comprehensive income until the underlying transactions are recognized. Upon
recognition, such gains and losses are recorded in operations as an adjustment
to the carrying amounts of the underlying transactions in the period in which
these transactions are recognized.
At December 31, 2004, the foreign currency forward contracts had a notional
amount of Euro 6,000,000 and a fair value of approximately $657,700. The fair
value of the foreign currency forward contracts, which represents an asset, is
included in other current assets. The amount of the pre-tax net gain deferred
through other comprehensive income as of December 31, 2004 was approximately
$631,900. There was $25,800 of gain recognized in fiscal 2004. There was no gain
or loss recognized during 2003.
15. RELATED PARTY TRANSACTIONS
The Company had an accounts receivable of approximately $500,000 as of
December 31, 2004 and $900,000 as of December 31, 2003, from Werner Rietschle
Holding GmbH, a shareholder and the entity which sold the Company assets in the
Rietschle transaction. This amount primarily related to taxes paid by the
Company on behalf of Werner Rietschle Holding GmbH. Dieter Rietschle, who is the
Company's general manager of its TIWR Holding GmbH & Co. KG subsidiary and a
former director, has a 49% ownership and 51% voting control of Werner Rietschle
Holding GmbH. The $500,000 amount as of December 31, 2004 was subsequently
collected in 2005.
16. SUMMARY OF QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Unaudited quarterly results of operations follow:
NET SALES GROSS PROFIT NET INCOME
------------------- ------------------- ------------------
2004 2003 2004 2003 2004 2003
-------- -------- -------- -------- -------- -------
(IN THOUSANDS, EXCEPT SHARE DATA)
1st Qtr. .............. $109,518 $ 92,346 $ 38,383 $ 33,115 $ 10,650 $ 8,806
2nd Qtr. .............. 102,656 95,810 37,563 33,760 9,805 9,432
3rd Qtr. .............. 97,697 88,985 35,433 29,513 90,268(1) 10,583
4th Qtr. .............. 100,243 99,633 36,081 33,554 3,431 8,493
-------- -------- -------- -------- -------- -------
$410,114 $376,774 $147,460 $129,942 $114,154 $37,314
======== ======== ======== ======== ======== =======
F-70
THOMAS INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
BASIC NET DILUTED NET
INCOME PER INCOME PER
SHARE SHARE
------------- -------------
2004 2003 2004 2003
----- ----- ----- -----
1st Qtr. .............................................. $0.61 $0.51 $0.60 $0.50
2nd Qtr. .............................................. 0.56 0.55 0.55 0.54
3rd Qtr. .............................................. 5.16(1) 0.61 5.07(1) 0.60
4th Qtr. .............................................. 0.19 0.49 0.19 0.48
----- ----- ----- -----
$6.53 $2.17 $6.44 $2.12
===== ===== ===== =====
---------------
(1) Includes a gain of $84,135,000 (pre-tax gain of $160,410,000) from the sale
of the Company's joint venture interest in GTG. Net income per share related
to this gain was $4.81 (basic) and $4.74 (diluted).
17. SUBSEQUENT EVENT
On January 10, 2005 the Company acquired certain assets of the side channel
blower business of Ruey Chaang Electric Co, Ltd. of Taipei, Taiwan for
approximately $12 million. A partial payment of $8.4 million in cash was paid in
January 2005, with the balance payable in the third quarter of 2005.
F-71
LOGO
$250,000,000
GARDNER DENVER, INC.
DEBT SECURITIES
PREFERRED STOCK
COMMON STOCK
WARRANTS
----------------------------------------
This prospectus describes securities which we may offer and sell at various
times. A more detailed description of the securities is contained in this
prospectus under "Description of Debt Securities," "Description of our Capital
Stock," and "Description of Warrants and Warrant Units."
-- The securities may be our senior and senior subordinated debt
securities, shares of our preferred or common stock or warrants or
warrant units.
-- The securities to be issued under this prospectus may be offered as
separate series or issuances at an aggregate initial public
offering price not to exceed $250,000,000 (or the equivalent amount
in other currencies).
We will determine the terms of each series of securities (including, as
applicable, the specific designation, aggregate principal amount, interest
rates, dividend rates, maturity, redemption provisions, ranking and other terms)
at the time of sale, and we will describe those terms in a prospectus supplement
which we will deliver together with this prospectus at the time of the sale.
Our common stock is listed on the New York Stock Exchange and trades under
the ticker symbol "GDI." Each prospectus supplement offering any other
securities will state whether those securities are listed or will be listed on
any national securities exchange.
We may offer the securities in amounts, at prices and on terms determined
at the time of the offering. We may sell securities directly to you or through
underwriters, dealers or agents. More information about the way we will
distribute the securities is under the heading "Plan of Distribution."
Information about the underwriters, dealers or agents who will participate in
any particular sale of securities will be in the prospectus supplement relating
to that series of securities.
INVESTING IN THE SECURITIES INVOLVES RISKS. BEFORE PURCHASING THE
SECURITIES, SEE THE INFORMATION UNDER "RISK FACTORS" IN THE PROSPECTUS
SUPPLEMENT PROVIDED IN CONNECTION WITH THE OFFER AND SALE OF ANY SECURITIES.
----------------------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES, OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
----------------------------------------
THE DATE OF THIS PROSPECTUS IS FEBRUARY 9, 2005.
We have not authorized anyone to give any information or to make any
representations concerning the offering of the securities except that which is
in this prospectus or in the prospectus supplement which is delivered with this
prospectus, or which is referred to under "Where You Can Find More Information."
If anyone gives or makes any other information or representation, you should not
rely on it. This prospectus is not an offer to sell or a solicitation of an
offer to buy any securities other than the securities which are referred to in
the prospectus supplement. This prospectus is not an offer to sell or a
solicitation of an offer to buy securities in any circumstances in which the
offer or solicitation is unlawful. You should not interpret the delivery of this
prospectus, or any sale of securities, as an indication that there has been no
change in our affairs since the date of this prospectus. You should also be
aware that information in this prospectus may change after this date.
TABLE OF CONTENTS
Where You Can
Find More
Information... i
Forward-Looking
Statements... ii
Information
About Gardner
Denver....... 1
Use of
Proceeds..... 2
Ratio of
Earnings to
Fixed
Charges...... 2
Description of
Debt
Securities... 3
Description of
our Capital
Stock........ 10
Description of
Warrants and
Warrant
Units........ 15
Plan of
Distribution... 15
Legal
Opinion...... 16
Experts........ 16
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the Securities and Exchange Commission ("SEC"). You may read
and copy any of these documents at the SEC's public reference rooms in
Washington, D.C., New York, New York and Chicago, Illinois. Please call the SEC
at 1-800-SEC-0330 for further information on the public reference rooms. Our SEC
filings are also available to the public at the SEC's Internet website at
http://www.sec.gov. The SEC allows us to incorporate by reference the
information we file with them, which means that we can disclose important
information to you by referring you to those documents.
This prospectus is part of a registration statement we filed with the SEC.
The information incorporated by reference is considered to be part of this
prospectus, and later information that we file with the SEC will automatically
update and supersede this information. We incorporate by reference the documents
listed below and any future filings made with the SEC (File No. 001-13215) under
Sections 13(a), 13(c), 14, or 15(d) of the Securities Exchange Act of 1934
(other than those made pursuant to Item 9 or Item 12 of Form 8-K or other
information "furnished" to the SEC) after January 31, 2005, the date we first
filed the registration statement to which this prospectus relates, until we sell
all of the securities:
-- Our Annual Report on Form 10-K for the year ended December 31,
2003.
-- Our Quarterly Reports on Form 10-Q for the quarters ended March 31,
June 30 and September 30, 2004.
-- Our Current Reports on Form 8-K dated January 13, March 11, March
24, September 2, October 28 and November 17, 2004 and January 21,
2005.
-- The description of our preferred stock purchase rights contained in
our registration statement on Form 8-A/A1 dated August 25, 1997 and
in our Current Report on Form 8-K dated January 21, 2005.
-- The description of our common stock contained in our registration
statement on Form 8-A dated July 25, 1997.
You may receive a copy of any of these filings, at no cost, by writing or
calling the Investor Relations Department, Gardner Denver, Inc., 1800 Gardner
Expressway, Quincy, Illinois 62301, telephone 217-222-5400. You can also find
information about the Company at our Internet website at
http://www.gardnerdenver.com.
We have filed with the SEC a registration statement to register the
securities under the Securities Act of 1933. This prospectus omits certain
information contained in the registration statement, as permitted by SEC rules.
You may obtain copies of the registration statement, including exhibits, as
noted in the first paragraph above.
i
FORWARD-LOOKING STATEMENTS
Certain statements that we include in a prospectus supplement, as well as
certain information incorporated by reference which is referred to under the
heading "Where You Can Find More Information," constitute "forward-looking
statements" as defined in the Private Securities Litigation Reform Act of 1995
and are made in reliance upon the safe harbor of the Private Securities
Litigation Reform Act of 1995. 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 and are subject to
uncertainties. Our Quarterly Report for the quarter ended September 30, 2004,
which is incorporated herein by reference, describes certain factors that could
cause actual results to differ materially from those expressed or implied by
forward-looking statements.
ii
INFORMATION ABOUT GARDNER DENVER
We believe we are one of the leading designers, manufacturers and marketers
of engineered stationary air compressors, liquid ring pumps and blowers for
various industrial and transportation applications and of pumps used in the
petroleum and industrial markets and other fluid transfer equipment serving
chemical, petroleum and food industries. In 2003, we had revenues of
approximately $440 million, of which approximately 84% were derived from sales
of compressed air products while approximately 16% were from sales of pump
products.
Approximately 58% of our total revenues in 2003 were derived from sales in
the United States and approximately 42% were from sales to customers in various
countries outside the United States. Of the total non-U.S. sales, approximately
52% were to Europe, 22% to Asia, 15% to Canada, 9% to Latin America and 2% to
other regions. Since 1996, we have completed 17 acquisitions, growing our
revenues from approximately $176 million, at the time of our spin-off from
Cooper Industries, Inc., to $440 million in 2003. Of the 17 acquisitions, the
two largest were completed in 2004 with the acquisition of Syltone plc
("Syltone") and nash-elmo Holdings, LLC ("Nash Elmo") in January and September
of 2004, respectively. Revenues in 2003, on an unaudited pro-forma basis, as if
the acquisitions of both Syltone and Nash Elmo had each occurred on January 1,
2003, would have been $783 million.
Syltone is one of the world's largest manufacturers of equipment used for
loading and unloading liquid and dry bulk products on commercial transportation
vehicles. This equipment includes compressors, blowers and other ancillary
products that are complementary to our product line. Syltone is also one of the
world's largest manufacturers of fluid transfer equipment (including loading
arms, swivel joints, couplers and valves) used to load and unload ships, tank
trucks and rail cars.
Nash Elmo is a leading global manufacturer of industrial vacuum pumps and
side channel blowers serving the worldwide industrial vacuum equipment market.
Prior to the acquisition, Nash Elmo was primarily split between two businesses,
liquid ring pumps and side channel blowers. Both businesses' products are
complementary to the Compressor and Vacuum Products segment's existing product
portfolio.
Subsequent to the acquisition of Nash Elmo and Syltone, the Company
continues to be organized based upon the products and services it offers and has
four operating divisions: Compressor, Blower, Liquid Ring Pump and Fluid
Transfer. These divisions comprise two reportable segments, Compressor and
Vacuum Products (formerly Compressed Air Products) and Fluid Transfer Products.
The Compressor, Blower (which now includes the Syltone transportation-related
activities and Nash Elmo's side channel blower business) and Liquid Ring Pump
(consisting of Nash Elmo's liquid ring pump business) Divisions are aggregated
into one reportable segment (Compressor and Vacuum Products). During the third
quarter of 2004, the Company's former Pump and Fluid Transfer (which consisted
of the Syltone fluid transfer-related activities) Divisions were combined into
one division, Fluid Transfer. These two divisions were previously aggregated
into one reportable segment (Fluid Transfer Products) primarily due to the same
factors as noted above, and thus, there has been no change to the Fluid Transfer
Products segment.
Through our Compressor and Vacuum Products segment, we design, manufacture,
market and service rotary screw, reciprocating, sliding vane and centrifugal
compressors, positive displacement, centrifugal and side channel blowers, liquid
ring pumps and engineered systems utilizing these products. Stationary air
compressors are used in manufacturing, process applications and materials
handling, and to power air tools and equipment. Blowers are used primarily in
pneumatic conveying, wastewater aeration, numerous applications in industrial
manufacturing and engineered vacuum systems. Liquid ring pumps are used in many
different vacuum applications and engineered systems, such as water removal,
distilling, reacting, efficiency improvement, lifting and handling, and
filtering, principally in the pulp and paper, industrial manufacturing, chemical
and power industries.
Through our Fluid Transfer Products segment we design, manufacture, market
and service a diverse group of pumps, water jetting systems and related
aftermarket parts used in oil and natural gas production, well servicing and
drilling and industrial cleaning and maintenance and other fluid transfer
equipment serving chemical, petroleum, and food industries.
1
With the acquisition of Syltone and Nash Elmo in 2004, we now have 30
manufacturing facilities throughout the world that use advanced manufacturing,
quality assurance and testing equipment geared to specific products being
manufactured. Most of the facilities use computer aided numerical control tools
and manufacturing techniques that concentrate the equipment necessary to produce
similar products in one area of the plant (cell manufacturing).
We sell our products through independent distributors and sales
representatives and directly to original equipment manufacturers (OEMs),
engineering firms and end users. A direct sales force is used to service OEM and
engineering firm accounts because these typically require more technical
assistance, shipment scheduling and product service.
Our executive offices are located at 1800 Gardner Expressway, Quincy,
Illinois 62301 and our telephone number is 217-222-5400.
You can obtain additional information about us in the reports and other
documents incorporated by reference in this prospectus. See "Where You Can Find
More Information."
USE OF PROCEEDS
Except as we may indicate otherwise in the prospectus supplement which
accompanies this prospectus, we intend to use the proceeds of the securities for
acquisitions, capital expenditures, repayment of borrowings, working capital and
other general corporate purposes. Before we use the proceeds for these purposes,
we may invest them in short-term investments. If we decide to use the proceeds
from a particular offering of securities for a specific purpose, we will
describe that purpose in the related prospectus supplement.
RATIO OF EARNINGS TO FIXED CHARGES
The following table shows the ratio of our earnings to fixed charges for
the periods indicated. We have computed these ratios by dividing earnings
available for fixed charges (income before income taxes plus fixed charges) by
fixed charges (interest expense plus that portion of rental expenses deemed to
represent interest).
FOR THE NINE
MONTHS ENDED
SEPTEMBER 30, FOR THE YEAR ENDED MONTHS ENDED
-------------- --------------------------------------------
2004 2003 2003 2002 2001 2000 1999
-------------- --------------------------------------------
Ratio of earnings to fixed charges... 5.7 5.8 6.0 4.9 5.5 4.5 5.3
2
DESCRIPTION OF DEBT SECURITIES
This section describes some of the general terms of the debt securities.
The prospectus supplement describes the particular terms of any debt securities
we are offering. The prospectus supplement also indicates the extent, if any, to
which these general provisions may not apply to the debt securities being
offered. The debt securities will be either senior debt securities or senior
subordinated debt securities. If you would like more information on these
provisions, you may review the Indentures which appear as exhibits to the
registration statement we have filed with the SEC. See "Where You Can Find More
Information."
We will issue the senior debt securities and the senior subordinated debt
under two separate indentures between us and The Bank of New York Trust Company,
NA, formerly known as BNY Midwest Trust Company, as trustee. We are summarizing
certain important provisions of the debt securities and these indentures. This
is not a complete description of the important terms. You should refer to the
specific terms of each indenture for a complete statement of the terms of the
indentures and the debt securities issuable thereunder. When we use capitalized
terms which we do not define here, those terms have the meanings given in the
indentures. Unless otherwise indicated, when we use references to Sections, we
mean Sections in both of the indentures.
GENERAL
The indentures do not limit the amount of debt securities that we may issue
under the indentures, nor do they limit other debt that we may issue. The debt
securities will be our unsecured general obligations. The senior debt securities
will rank pari passu with all of our other unsecured and unsubordinated
obligations. The senior subordinated debt securities will be unsecured and will
be subordinate and junior in priority of payment to some of our other
indebtedness to the extent described in the related prospectus supplement. None
of our subsidiaries will have any obligation to guarantee or otherwise pay
amounts due under the securities. We may issue senior debt securities and senior
subordinated debt securities at various times in different series, each of which
may have different terms. If we so indicate in the prospectus supplement for any
series, we may treat a subsequent offering of debt securities as a part of the
same series as that series.
The prospectus supplement relating to the particular series of debt
securities we are offering includes the following information concerning those
debt securities:
-- The title of the debt securities.
-- The total principal amount of the series of debt securities, and
whether we may treat a subsequent offering of debt securities as a
part of the same series as that series.
-- Whether the debt securities are senior debt securities or senior
subordinated debt securities and the terms of subordination, if
applicable.
-- The date on which the principal and interest will be paid, any
rights we may have to extend the maturity of the debt securities and
any rights the holders may have to require payment of the debt
securities at any time.
-- The interest rate on the debt securities. We may specify a fixed
rate or a variable rate, or a rate to be determined under procedures
we will describe in the prospectus supplement, and the interest rate
may be subject to adjustment.
-- The date or dates from which interest will accrete or accrue, the
dates on which we will pay interest on the debt securities and the
regular record dates for determining the holders who are entitled to
receive the interest payments.
-- Where payments on the debt securities will be made, if it is other
than the office mentioned under "Payments on Debt Securities;
Transfers" below.
-- If applicable, the prices at which we may redeem all or a part of
the debt securities and the time periods during which we may make
the redemptions at our option or at your option. The redemptions may
be made under a sinking fund or otherwise.
3
-- Any obligation we may have to redeem, purchase or repay any of the
debt securities under a sinking fund or otherwise or at the option
of the holder, and the prices, time periods and other terms which
would apply.
-- The terms, if any, on which the debt securities may be convertible
into or exchangeable for common stock or other of our securities.
Such conversion may be mandatory, at the option of the holder, or at
our option, and the number any type of our securities to be received
by the holders on such conversion may be subject to adjustment.
-- Any additional or different events of default or covenants that will
apply to the debt securities.
-- The amounts we would be required to pay if the maturity of the debt
securities is accelerated, if it is less than the principal amount.
-- If we will make payments on the debt securities in any currency
other than U.S. dollars, the currencies in which we will make the
payments.
-- If applicable, the terms under which we or a holder may elect that
payments on the debt securities be made in a currency other than
U.S. dollars.
-- If amounts payable on the debt securities may be determined by a
currency or other index, information on how the payments will be
determined.
-- The amount of discount or premium with which such debt securities
will be issued.
-- Any other special terms that may apply to the debt securities.
PAYMENTS ON DEBT SECURITIES; TRANSFERS
We will make payments on the debt securities to the persons in whose names
the securities are registered at the close of business on the record date for
the interest payments. As explained under "Book-Entry Debt Securities" below,
the Depository Trust Company or its nominee will be the initial registered
holder unless the prospectus supplement provides otherwise.
Unless we indicate otherwise in the prospectus supplement, we will make
payments on the debt securities at the trustee's office, which is now located at
2 North LaSalle Street, Suite 1020, Chicago, Illinois. Transfers of debt
securities can be made at the same offices.
FORM AND DENOMINATIONS
Unless we otherwise indicate in the prospectus supplement:
-- We will issue the debt securities of each series only in registered
form without coupons in denominations of $1,000 and any integral
multiple thereof.
-- We will not charge any fee to register any transfer or exchange of
the debt securities, except for taxes or other governmental charges,
if any.
CERTAIN RESTRICTIONS
Creation of Secured Indebtedness
Under the senior indenture, we and our Restricted Subsidiaries (defined
below) may not create, assume, guarantee or permit to exist any indebtedness for
borrowed money which is secured by a pledge of, or a mortgage or lien on, any
Principal Plants (defined below) or on any of our Restricted Subsidiaries'
capital stock, unless we also provide equal and ratable security for the senior
debt securities. A "Restricted Subsidiary" is a subsidiary which owns or
operates a Principal Plant, unless it is incorporated or has its principal place
of business outside the United States, and any other subsidiary which we elect
to treat as a Restricted Subsidiary. A "Principal Plant" is any of our
production facilities, but does not include a facility which our board of
directors determines shall not be treated as a Principal Plant, as long as all
such plants which are determined not to be Principal Plants, taken together, are
not of material importance to our and our subsidiaries total business. Our board
of directors may change any such designation of a facility as a Principal Plant
or as excluded from the category of Principal Plant at varying times, subject to
the limit described in the preceding sentence.
4
The restriction described in the preceding paragraph does not apply to:
-- purchase money liens, including liens for indebtedness incurred in
connection with the acquisition or construction of a Principal Plant
(so long as we incur the indebtedness within 180 days after the
acquisition or completion of construction of such Principal Plant),
-- liens existing on property when we acquire it,
-- liens on property of a Restricted Subsidiary when it becomes a
Restricted Subsidiary,
-- liens to secure the cost of development or construction of property,
or improvements of property, and which are released or satisfied
within 180 days after completion of the development or construction,
-- liens in connection with the acquisition or construction of
Principal Plants or additions thereto financed by tax-exempt
securities,
-- liens securing indebtedness to us or a wholly-owned Restricted
Subsidiary by a Restricted Subsidiary,
-- liens existing at the date of the senior indenture,
-- liens on property of a corporation existing at the time such
corporation is merged with or consolidated with us or a Restricted
Subsidiary, or at the time we or a Restricted Subsidiary acquires
all or substantially all of the properties of such corporation,
-- liens in favor of the United States government or any U.S. state
government incurred in connection with financing the acquisition or
construction of properties pursuant to a statute or a contract with
any such governmental body, or
-- extensions, renewals or replacements of the liens referred to above.
There is an additional exception described below under "Basket Amount."
Sale-Leaseback Financings
Under the senior indenture, neither we nor any Restricted Subsidiary may
enter into any sale and leaseback transaction involving a Principal Plant,
except a sale by us to a Restricted Subsidiary or a sale by a Restricted
Subsidiary to us or another Restricted Subsidiary or a lease not exceeding three
years, by the end of which we intend to discontinue use of the property, unless:
-- the net proceeds of the sale are at least equal to the fair market
value of the property, and
-- within 180 days of the transfer we repay Funded Debt (defined below)
and/or make expenditures for the expansion, construction or
acquisition of a Principal Plant at least equal to the net proceeds
of the sale.
There is an additional exception described below under "Basket Amount."
Basket Amount
In addition to the exceptions described above under "Creation of Secured
Indebtedness" and "Sale-Leaseback Financings," the senior indenture allows
additional secured indebtedness and additional sale-leaseback financings as long
as the total of the additional indebtedness and the fair market value of the
property transferred in the additional sale-leaseback financings when added to
the permitted Funded Debt described below, does not exceed 10% of our
consolidated total assets.
Limitation on Funded Debt of Restricted Subsidiaries
Under the senior indenture, we may not permit any Restricted Subsidiary to
create, assume or incur any Funded Debt other than:
-- Funded Debt secured by a mortgage, pledge or lien which is permitted
under the provisions described above under "Creation of Secured
Indebtedness,"
-- Funded Debt owed to us or any wholly-owned Restricted Subsidiary,
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-- Funded Debt of a corporation existing at the time it becomes a
Restricted Subsidiary,
-- Funded Debt created in connection with, or with a view to,
compliance with the requirements of any program, law, statute or
regulation of any federal, state or local governmental authority and
applicable to the Restricted Subsidiary and providing financial or
tax benefits to the Restricted Subsidiary which are not available
directly to us, or not available on as favorable terms,
-- guarantees existing at the date of the senior indenture, and
-- other Funded Debt which, when added to outstanding secured debt and
sale-leaseback financings permitted under the provision described
under "Basket Amount" above, does not exceed 10% of our consolidated
total assets.
"Funded Debt" means indebtedness for money borrowed and indebtedness
represented by notes, debentures and other similar evidences of indebtedness,
including purchase money indebtedness, having a maturity of more than twelve
months from the date of determination or having a maturity of less than twelve
months but by its terms being renewable or extendible beyond twelve months at
our option, subject only to conditions which we are then capable of fulfilling,
and guarantees of similar indebtedness of others, except that Funded Debt does
not include:
-- Any indebtedness of a person held in treasury by that person; or
-- Any indebtedness with respect to which sufficient money has been
deposited or set aside in trust to pay the indebtedness; or
-- Certain contingent obligations in respect of indebtedness of other
persons, such as keep-well, maintenance of working capital or
earnings or similar agreements.
Merger
We may not consolidate with or merge into any other corporation or transfer
or lease our properties and assets substantially as an entirety unless certain
conditions are met, including the assumption of the securities by any successor
corporation.
MODIFICATION OR AMENDMENT OF THE INDENTURE
We may modify and amend either indenture if the holders of a majority in
principal amount of the applicable outstanding debt securities give their
consent, except that no supplemental indenture may reduce the principal amount
of or interest or premium payable on any debt security, change the maturity date
or dates of principal, the interest payment dates or other terms of payment, or
reduce the percentage of holders necessary to approve a modification or
amendment of the indenture, without the consent of each holder of such
outstanding debt securities affected by the supplemental indenture.
We and the Trustee may amend an indenture without the holders' consent for
certain specified purposes, including any change which is not otherwise
inconsistent with the indenture and which does not materially adversely affect
the holders' interests.
DEFEASANCE
The indentures include provisions allowing defeasance of the debt
securities of any series. In order to defease debt securities, we would deposit
with the trustee or another trustee money or securities which are direct
obligations of or guaranteed by the United States of America sufficient to make
all payments on those debt securities. If we make a defeasance deposit with
respect to your debt securities, we may elect either:
-- to be discharged from all our obligations on your debt securities,
except for our obligations to register transfers and exchanges, to
replace temporary or mutilated, destroyed, lost or stolen debt
securities, to maintain an office or agency in respect of the debt
securities and to hold monies for payment in trust; or
-- to be released from the restrictions described above relating to
liens, sale-leaseback transactions, Funded Debt of Restricted
Subsidiaries and certain other restrictions and obligations
contained in the
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indentures (specifically not including, however, our obligation to
pay the principal of or interest on any debt securities).
To establish the trust, we must deliver to the Trustee an opinion of our
counsel that the holders of the debt securities will not recognize gain or loss
for Federal income tax purposes as a result of the defeasance and will be
subject to Federal income tax on the same amount, in the same manner and at the
same times as would have been the case if the defeasance had not occurred.
EVENTS OF DEFAULT, NOTICE AND WAIVER
An event of default in respect of any series of debt securities means:
-- default for 30 days in any payment of interest;
-- default in payment of principal or premium when due;
-- default in payment of any sinking fund amount in accordance with the
terms of such debt security;
-- default in performance of or breach of any covenant in the indenture
which applies to the series which continues for 60 days after notice
to us by the Trustee or by the holders of 25% in principal amount of
the outstanding debt securities of the affected series;
-- default in our payment of indebtedness which we have incurred or
guaranteed exceeding $30 million or acceleration of the maturity
such indebtedness exceeding $30 million;
-- certain events of bankruptcy, insolvency and reorganization; and
-- any other events which are designated as Events of Default in
respect of that series.
If an event of default occurs and is continuing (other than with respect to
certain events of bankruptcy, insolvency or similar Event of Default) in respect
of one or more series of debt securities, either the Trustee or the holders of
25% in principal amount of the outstanding debt securities of those series may
declare the principal of and accrued interest, if any, on all securities of
those series to be due and payable. If a bankruptcy, insolvency or similar Event
of Default occurs with respect to us, all outstanding debt securities will be
due and payable without notice or any other action on the part of the trustee or
any holder.
Within 60 days after a default in respect of any series of debt securities,
the Trustee must give to the holders of the debt securities of that series
notice of all uncured and unwaived defaults by us known to it. However, except
in the case of default in payment, the Trustee may withhold the notice if it in
good faith determines that it is in the interest of the holders. The term
"default" means, for this purpose, the occurrence of any event that, upon notice
or lapse of time, would be an Event of Default.
Before the Trustee is required to exercise rights under the indentures at
the request of holders, it is entitled to be indemnified by the holders, subject
to its duty, during an Event of Default, to act with the required standard of
care.
Subject to the Trustee's duty during a default to act with the required
standard of care, the Trustee has the right to be indemnified by the holders of
debt securities issued under the indentures before proceeding to exercise any
right or power under the indenture at the request of the holders. The holders of
a majority in principal amount of the outstanding securities of any series
(voting as a single class) may direct the time, method and place of conducting
any proceeding for any remedy available to the Trustee or exercising any trust
or power conferred upon the Trustee in respect of the securities of that series.
The holders of a majority in principal amount of the outstanding securities
of all series affected by a default (voting as a single class) may, on behalf of
the holders of all that securities, waive the default except a default in
payment of the principal of or premium, if any, or interest on any security. The
holders of a majority in principal amount of outstanding securities of all
series entitled to the benefits thereof (voting as a single class) may waive
compliance with certain covenants under the indenture. We will furnish to the
Trustee, annually, a statement as to the fulfillment by us of our obligations
under the indentures.
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REGARDING THE TRUSTEE
The Bank of New York Trust Company, NA, formerly known as BNY Midwest Trust
Company, is the Trustee under both of the indentures. Its affiliate, The Bank of
New York, is a party to our credit agreement under which it has committed to
lend us up to $20 million, and it may provide other banking services to us.
GOVERNING LAW
The indentures and the debt securities will be governed by and construed in
accordance with the internal laws of the State of New York.
BOOK-ENTRY DEBT SECURITIES
The prospectus supplement will indicate whether we are issuing the related
debt securities as book-entry securities. Book-entry securities of a series will
be issued in the form of one or more global notes that will be deposited with
the Depository Trust Company, New York, New York, and will evidence all of the
debt securities of that series. This means that we will not issue certificates
to each holder. We will issue one or more global securities to DTC, which will
keep a computerized record of its participants (for example, your broker) whose
clients have purchased the debt securities. The participant will then keep a
record of its clients who own the debt securities. Unless it is exchanged in
whole or in part for a security evidenced by individual certificates, a global
security may not be transferred, except that DTC, its nominees and their
successors may transfer a global security as a whole to one another. Beneficial
interests in global securities will be shown on, and transfers of beneficial
interests in global notes will be made only through, records maintained by DTC
and its participants. Each person owning a beneficial interest in a global
security must rely on the procedures of DTC and, if the person is not a
participant, on the procedures of the participant through which the person owns
its interest to exercise any rights of a holder of debt securities under the
applicable Indenture.
We will make payments on each series of book-entry debt securities to DTC
or its nominee, as the sole registered owner and holder of the global security.
Neither we nor the Trustee nor any of their agents will be responsible or liable
for any aspect of DTC's records relating to or payments made on account of
beneficial ownership interests in a global security or for maintaining,
supervising or reviewing any of DTC's records relating to the beneficial
ownership interests.
DTC has informed us that, when it receives any payment on a global
security, it will immediately, on its book-entry registration and transfer
system, credit the accounts of participants with payments in amounts
proportionate to their beneficial interests in the global security as shown on
DTC's records. Payments by participants to you, as an owner of a beneficial
interest in the global security, will be governed by standing instructions and
customary practices (as is now the case with securities held for customer
accounts registered in "street name") and will be the sole responsibility of the
participants.
A global security representing a series will be exchanged for certificated
debt securities of that series if (a) DTC notifies us that it is unwilling or
unable to continue as Depositary or if DTC ceases to be a clearing agency
registered under the Securities Exchange Act of 1934 and we don't appoint a
successor within 90 days or (b) we decide that the global security shall be
exchangeable. If that occurs, we will issue debt securities of that series in
certificated form in exchange for the global security. An owner of a beneficial
interest in the global security then will be entitled to physical delivery of a
certificate for debt securities of the series equal in principal amount to that
beneficial interest and to have those debt securities registered in its name. We
would issue the certificates for the debt securities in denominations of $1,000
or any larger amount that is an integral multiple thereof, and we would issue
them in registered form only, without coupons.
DTC has advised us that it is a limited-purpose trust company organized
under the New York Banking Law, a "banking organization" within the meaning of
the New York Banking Law, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code, and a
"clearing agency" registered under the Securities Exchange Act of 1934 Act. DTC
was created to hold the securities of its participants and to facilitate the
clearance and settlement of securities transactions among its participants
through electronic book-entry changes in accounts of the participants, thereby
eliminating the need for physical movement of securities certificates. DTC's
participants include securities brokers and
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dealers, banks, trust companies, clearing corporations, and certain other
organizations, some of whom (and/or their representatives) own DTC. Access to
DTC's book-entry system is also available to others, such as banks, brokers,
dealers and trust companies that clear through or maintain a custodial
relationship with a participant, either directly or indirectly. The rules
applicable to DTC and its participants are on file with the SEC. No fees or
costs of DTC will be charged to you.
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DESCRIPTION OF OUR CAPITAL STOCK
Our certificate of incorporation authorizes the issuance of up to
50,000,000 shares of common stock, par value $.01 per share, and 10,000,000
shares of preferred stock, par value $.0l per share, of which we have designated
500,000 shares as Series A Junior Participating Preferred Stock in connection
with our shareholder rights plan discussed below. See "Amended and Restated
Rights Agreement -- Series A Junior Participating Preferred Stock." As of
January 21, 2005, there were 19,954,832 shares of common stock outstanding, and
no shares of preferred stock were outstanding.
The following summary is not complete and is qualified by reference to the
applicable provisions of Delaware law and our certificate of incorporation,
by-laws and the amended and restated rights agreement dated as of January 17,
2005, between Gardner Denver, Inc. and National City Bank, as rights agent. This
is not a complete description of the important terms of Delaware law, our
certificate of incorporation, by-laws or the rights agreement. If you would like
more information on the provisions of our certificate of incorporation, by-laws
or the rights agreement, you may review our certificate of incorporation, our
by-laws and our rights agreement, each of which is incorporated by reference as
an exhibit to the registration statement we have filed with the SEC. See "Where
You Can Find More Information."
COMMON STOCK
The holders of our common stock are entitled to one vote for each share
they own on all matters voted on by our stockholders. The common stock does not
have cumulative voting rights. Subject to any preferential or other rights of
any outstanding series of preferred stock that may be designated by our board of
directors, the holders of common stock will be entitled to such dividends as may
be declared by our Board, and upon liquidation will be entitled to receive their
pro rata portion of our assets available for distribution to the holders of
common stock. All of the outstanding shares of common stock are fully paid and
nonassessable. Holders of common stock have no preemptive rights to purchase or
subscribe for any stock or other securities and there are no conversion rights
or redemption or sinking fund provisions with respect to our common stock. The
transfer agent and registrar for our common stock is National City Bank.
PREFERRED STOCK
Our board of directors has the authority to issue the preferred stock in
one or more series and to fix certain of the rights, preferences, privileges and
restrictions applicable to such series, including the annual dividend rate, the
time of payment for dividends, whether such dividends shall be cumulative or
non-cumulative, and the date or dates from which any cumulative dividends will
begin to accrue, redemption terms (including sinking fund provisions),
redemption price or prices, liquidation preferences, the extent of the voting
powers, if any, and conversion rights. In connection with the adoption of a
shareholder rights plan, we have designated 500,000 shares of preferred stock as
Series A Junior Participating Preferred Stock. See "Amended and Restated Rights
Agreement -- Series A Junior Participating Preferred Stock." The prospectus
supplement will describe the specific terms of any preferred stock we are
offering.
CERTAIN PROVISIONS OF DELAWARE LAW, OUR CERTIFICATE OF INCORPORATION AND BY-LAWS
General.
Delaware law, our certificate of incorporation and our by-laws contain
provisions that could make it more difficult for someone to acquire control of
us by means of a tender offer, open market purchases, a proxy contest or
otherwise.
Classified Board of Directors; Removal of Directors.
Our by-laws provide that we shall have at least three and not more than
nine directors, with the exact numbers of directors to be determined from time
to time by a majority of our entire board of directors. We now have eight
directors. The directors are divided into three classes, as nearly equal in
number as is possible, serving staggered three-year terms. With a classified
board of directors, at least two annual meetings of stockholders, instead of
one, is generally required to effect a change in a majority of the Board's
members. As a result, the classification of the Board may discourage proxy
contests for the election of directors,
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unsolicited tender offers or purchases of a substantial block of the common
stock because it could prevent an acquiror from obtaining control of the board
of directors in a relatively short period of time. In addition, pursuant to
Delaware law and our certificate of incorporation, a director or the entire
board of directors may be removed only for cause and only by the affirmative
vote of holders of at least a majority of the outstanding shares of common stock
entitled to vote. As a result, a classified board of directors delays
stockholders who disagree with the policies of the board of directors from
replacing directors, unless they can demonstrate that the directors should be
removed for cause and obtain the requisite vote.
Filling Vacancies on the Board.
Our by-laws provide that, subject to the rights of holders of any shares of
preferred stock, vacancies on the board of directors may be filled only by a
majority of the board of directors then in office, even if less than a quorum,
or by the sole remaining director. Accordingly, the Board could temporarily
prevent any stockholder from obtaining majority representation on the board of
directors by enlarging the board of directors and filling the new directorships
with its own nominees.
No Stockholder Action by Written Consent; Special Meetings.
Stockholder action can be taken only at an annual or special meeting of
stockholders. Stockholder action by written consent in lieu of a meeting is
prohibited. The special meetings of stockholders may be called only by the
President or Secretary upon the request of a majority of the entire board of
directors or upon the request, in writing, of stockholders owning a majority of
the issued capital stock entitled to vote at such meeting. Business conducted at
any special meeting is limited to the purposes specified in the written notice
of the meeting. The provision prohibiting stockholder action by written consent
may delay consideration of a stockholder proposal until the next annual meeting
(unless a special meeting is called). These provisions prevent the holders of a
majority of the voting power of the outstanding shares of stock entitled to vote
generally in the election of directors from using the written consent procedure
to take stockholder action and from taking action by consent without giving all
the stockholders entitled to vote on a proposed action the opportunity to
participate.
Advance Notice Provisions for Stockholder Nominations and Stockholder
Proposals.
Our by-laws establish an advance notice procedure with regard to the
nomination, other than by or at the direction of the board of directors, of
candidates for directors and with regard to business to be brought before an
annual or special meeting of stockholders. The nomination procedure provides
that, subject to any rights of holders of preferred stock, only persons who are
nominated by or at the direction of the board of directors or by a stockholder
who has given timely written notice to the Secretary prior to the meeting at
which directors are to be elected will be eligible for election as directors.
The business procedure provides that at an annual or special meeting only such
business may be conducted as has been specified in the notice of meeting,
brought before the meeting by or at the direction of the board of directors or
by a stockholder who has given timely written notice to our Secretary of such
stockholder's intention to bring such business before the meeting. If the
officer presiding at a meeting determines that a person was not nominated in
accordance with the nomination procedure, the nomination shall be disregarded.
If the presiding officer determines that business was not brought before the
meeting in accordance with the business procedure, the business will not be
transacted. Although the by-laws do not give the Board any power to approve or
disapprove stockholder nominations for the election of directors or proposals
for action, they may have the effect of precluding a contest for the election of
directors or the consideration of stockholder proposals if the proper procedures
are not followed, and of discouraging or deterring a third party from conducting
a solicitation of proxies to elect its own slate of directors or to approve its
proposal without regard to whether consideration of such nominees or proposals
might be harmful or beneficial to us and our stockholders.
Delaware Anti-Takeover Law.
We are subject to Section 203 of the Delaware General Corporation Law
regulating corporate takeovers. Section 203, subject to certain exceptions,
prohibits a Delaware corporation from engaging in any "business
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combination" with any "interested stockholder" for a period of three years
following the date that such stockholder became an interested stockholder
unless:
-- prior to such date, the board of directors of the corporation
approved either the business combination or the transaction that
resulted in the stockholder becoming an interested stockholder;
-- upon consummation of the transaction that resulted in the
stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the
corporation outstanding at the time the transaction commenced,
excluding those shares owned by persons who are directors and also
officers, and employee stock plans in which employee participants do
not have the right to determine confidentially whether shares held
subject to the plan will be tendered in a tender or exchange offer;
or
-- on or subsequent to such date, the business combination is approved
by the board of directors and authorized at an annual or special
meeting of stockholders, and not by written consent, by the
affirmative vote of at least two-thirds of the outstanding voting
stock that is not owned by the interested stockholder.
In general, Section 203 defines "business combination" to include mergers
or consolidations between a Delaware corporation and an interested stockholder,
transactions with an interested stockholder involving the assets or stock of the
corporation or its majority-owned subsidiaries and transactions which increase
an interested stockholder's percentage ownership of stock. In general, Section
203 defines an "interested stockholder" as any entity or person beneficially
owning 15% or more of the outstanding voting stock of the corporation and any
entity or person affiliated with or controlling or controlled by such entity or
person.
Amendment of Certain Certificate of Incorporation and By-Law Provisions.
Under Delaware law, stockholders have the right to adopt, amend or repeal
the by-laws of a corporation. In addition, if the certificate of incorporation
so provides, the by-laws may be amended by the board of directors. Our
certificate of incorporation provides that our by-laws may be amended by the
affirmative vote of the majority of the board of directors.
The by-laws provide that the stockholders may amend the by-laws by an
affirmative vote of the majority entitled to vote, provided, however, the
affirmative vote of the holders of at least 80% of our outstanding shares
entitled to vote is required to amend provisions relating to special meetings,
number, election and term of the board of directors, and amending the by-laws.
Provisions set forth in our certificate of incorporation relating to the removal
of directors and the prohibition of stockholder action without a meeting may be
amended only by the affirmative vote of the holders of at least 80% of our
outstanding shares.
AMENDED AND RESTATED RIGHTS AGREEMENT
Under our stockholder rights plan, we authorized the issuance of one
preferred stock purchase right for each outstanding share of common stock. The
amended and restated rights agreement between the Company and National City
Bank, as rights agent, contains the terms of the stockholder rights plan. The
summary description of the rights agreement and the Series A Junior Preferred
Stock set forth below does not purport to be complete and is qualified in its
entirety by reference to the rights agreement and the certificate of designation
for the Series A Junior Preferred Stock, which are incorporated by reference
into this registration statement.
Exercisability of Rights.
Under the rights agreement, each share of our common stock carries with it
an associated right. When exercisable, each right entitles the registered holder
to purchase from us one one-hundredth of a share of Series A Junior
Participating Preferred Stock, par value $.0l, at a purchase price of $145 per
one-one hundredth of a share, subject to certain adjustments. For a description
of the terms of the Series A Junior Participating Preferred Stock. See
"-- Series A Junior Participating Preferred Stock."
The rights will not become exercisable until the earlier of: (i) 10
business days following a public announcement that a person or group of
affiliated or associated persons (an "Acquiring Person") has acquired, or
obtained the right to acquire beneficial ownership of 15% or more of the
outstanding shares of common stock (the "Stock Acquisition Date"), or (ii) 10
business days (or such later date as the board of
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directors shall determine) following the commencement of a tender or exchange
offer that would result in a person or group beneficially owning 15% or more of
such outstanding shares of common stock (the "Tender Offer Date") (the earlier
of the dates described in (i) and (ii) is referred to as a "Distribution Date").
The rights will expire at the close of business on January 31, 2015, unless
earlier redeemed by us as described below.
Until a right is exercised, the holder of the right will have no rights as
a stockholder, including the right to vote or to receive dividends.
"Flip In" Feature.
In the event (i) we are the surviving corporation in a merger or other
business combination with an Acquiring Person (or any associate or affiliate
thereof) and our common stock remains outstanding and unchanged, (ii) any person
becomes the beneficial owner of 15% or more of the then outstanding shares of
our common stock (except pursuant to (A) certain consolidations or mergers
involving us or sales or transfers of the combined assets or earning power of us
and our subsidiaries or (B) an offer for all of the outstanding shares of common
stock at a price and upon terms and conditions determined by a majority of the
board of directors to be in our and our stockholders best interest), or (iii)
there occurs a reclassification of securities, a recapitalization or any of
certain business combinations or other transactions (other than certain
consolidations and mergers involving us and sales or transfers of the combined
assets or earning power of us and our subsidiaries) involving us or any of our
subsidiaries which has the effect of increasing by more than 1% the
proportionate share of any class of our outstanding equity securities or any of
our subsidiaries beneficially owned by an Acquiring Person (or any associate or
affiliate there), each holder of a right (other than an Acquiring Person,
certain related parties and transferees) will thereafter have the right to
receive, upon exercise, common stock (or, in certain circumstances, cash,
property or other securities) having a value equal to two times the exercise
price of the right. Following the occurrence of any of the events set forth in
this paragraph, all rights that are, or (under certain circumstances specified
in the rights agreement) were, beneficially owned by any Acquiring Person will
be null and void.
"Flip Over" Feature
If at any time following the Stock Acquisition Date:
-- We are acquired in a merger or business combination transaction in
which we are not the surviving corporation;
-- We are the surviving corporation in a consolidation or merger
pursuant to which all or part of the outstanding shares of common
stock are changed into or exchanged for stock or other securities of
any other person or cash or any other property; or
-- more than 50% of the combined assets or earning power of our and our
subsidiaries is sold or transferred (in each case other than certain
consolidations with, mergers with and into, or sales of assets or
earning power by or to our subsidiaries as specified in the rights
agreement),
each holder of a right shall thereafter have the right to receive, upon exercise
thereof, common stock of the acquiring company having a value equal to two times
the exercise price of the right.
In order to prevent dilution, the purchase price payable, the number and
kind of shares covered by each right and the number of rights outstanding are
subject to adjustment from time to time in accordance with the terms of the
rights agreement.
Redemption of Rights
Generally, at any time until 10 business days following the Stock
Acquisition Date, we may redeem the rights in whole, but not in part, at a price
of $.0l per right (payable in cash, shares of common stock or other
consideration deemed appropriate by the board of directors). Immediately upon
the action of the board of directors ordering redemption of the rights, the
rights will terminate and the only right of the holders of rights will be to
receive the $.0l redemption price.
Series A Junior Participating Preferred Stock
Each share of Series A Junior Participating Preferred Stock purchased upon
exercise of the rights will be entitled to a minimum preferential quarterly
dividend payment equal to the greater of (i) $2.50 per share, and
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(ii) 100 times the dividend, if any, declared per share of common stock. In the
event of liquidation, the holders of the Series A Junior Participating Preferred
Stock will be entitled to a minimum preferential liquidation payment equal to
100 times the par value per share plus an amount equal to accrued and unpaid
dividends and distributions to the date of such payment. Each share of Series A
Junior Participating Preferred Stock will have 100 votes and, except as
otherwise provided in the certificate of incorporation or applicable law, will
vote together with the common stock. In the event of any merger, consolidation
or other transaction in which shares of common stock are exchanged, each share
of Series A Junior Participating Preferred Stock will be entitled to receive 100
times the amount per share of common stock received in such merger,
consolidation or other transaction. These rights are protected by customary
anti-dilution provisions. The shares of Series A Junior Participating Preferred
Stock will, if issued, be junior to any other series of preferred stock
authorized and issued by us, unless the terms of the series provide otherwise.
Because of the nature of the Series A Junior Participating Preferred Stock's
dividend, liquidation and voting rights, the value of one one-hundredth of a
share of Series A Junior Participating Preferred Stock purchasable upon the
exercise of each right should approximate the value of one share of common
stock.
INDEMNIFICATION AGREEMENTS AND INSURANCE
We maintain insurance on behalf of any person who is or was our director,
officer, employee or agent, or is or was our director or officer serving at our
request as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise
against certain claims asserted against him or her and liabilities incurred by
him or her in any such capacity, or arising out of his or her status as such,
whether or not we would have the power or the obligation to indemnify him
against such liability under the provisions of our certificate of incorporation
and by-laws.
We have entered into indemnification agreements with each of our executive
officers and directors. The indemnification agreements require us to indemnify
the officers and directors to the fullest extent permitted by law and to advance
to the executive officers and directors all related expenses, subject to
reimbursement if it is subsequently determined that indemnification is not
permitted. We must also indemnify and advance all expenses incurred by executive
officers and directors seeking to enforce their rights under the indemnification
agreements, and cover executive officers and directors under our directors' and
officers' liability insurance. Although the form of indemnification agreement
offers substantially the same scope of coverage afforded by provisions in our
certificate of incorporation and by-laws, it provides greater assurance to
directors and officers that indemnification will be available, because, as a
contract, it cannot be modified unilaterally in the future by the board of
directors or by the stockholders to eliminate the rights it provides. Such
unilateral action is possible with respect to the relevant provisions of the
by-laws, at least as to prospective elimination of such rights.
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DESCRIPTION OF WARRANTS AND WARRANT UNITS
We may issue warrants, including warrants to purchase debt securities,
common stock or preferred stock or any combination of the foregoing. Warrants
may be issued independently or as part of a unit with any other securities and
may be attached to or separate from the underlying securities. The warrants will
be issued under warrant agreements to be entered into between us and a bank or
trust company, as warrant agent, as detailed in the prospectus supplement
relating to warrants being offered.
A prospectus supplement relating to any warrants being offered will include
specific terms relating to the offering, including a description of any other
securities sold together with the warrants. Such terms will include:
-- the title of the warrants;
-- the aggregate number of the warrants;
-- the price or prices at which the warrants will be issued;
-- the currencies in which the price or prices of the warrants may be
payable;
-- the designation, amount, and terms of the debt securities, common
stock or preferred stock purchasable upon exercise of the warrants
and procedures by which those numbers may be adjusted;
-- the designation and terms of the other offered securities, if any,
with which the warrants are issued and the number of the warrants
issued with each security;
-- if applicable, the date on and after which the warrants and the
offered securities purchasable upon exercise of the warrants will be
separately transferable;
-- the price or prices at which the offered securities purchasable upon
exercise of the warrants may be purchased;
-- the date on which the right to exercise the warrants shall commence
and the date on which the right shall expire;
-- the minimum or maximum amount of the warrants that may be exercised
at any one time;
-- any terms relating to the modification of the warrants, including
adjustments in the exercise price;
-- information with respect to book-entry procedures, if any;
-- a discussion of any material federal income tax considerations; and
-- any other material terms of the warrants, including terms,
procedures, and limitations relating to the transferability,
exchange, exercise or redemption of the warrants.
The applicable prospectus supplement will describe the specific terms of
any warrant units.
The descriptions of the warrant agreements in this prospectus and in any
prospectus supplement are summaries of the applicable provisions of the
applicable agreements. These descriptions do not restate those agreements in
their entirety and do not contain all of the information that you may find
useful. We urge you to read the applicable agreements because they, and not the
summaries, define your rights as holders of the warrants or any warrant units.
For more information, please review the form of the relevant agreements, which
will be filed with the SEC promptly after the offering of the warrants or
warrant units and will be available as described in the heading "Where You Can
Find More Information" above.
PLAN OF DISTRIBUTION
We may sell the securities to or through one or more underwriters or
dealers, and also may sell the securities directly to other purchasers or
through agents. These firms may also act as our agents in the sale of the
securities. Only underwriters named in the prospectus supplement will be
considered as underwriters of the securities offered by the prospectus
supplement.
We may distribute the securities at different times in one or more
transactions. We may sell the securities at fixed prices, which may change, at
market prices prevailing at the time of sale, at prices related to the
prevailing market prices or at negotiated prices.
15
In connection with the sale of the securities, underwriters may receive
compensation from us or from purchasers of the securities in the form of
discounts, concessions or commissions. Underwriters, dealers and agents that
participate in the distribution of the securities may be deemed to be
underwriters. Discounts or commissions they receive and any profit on their
resale of the securities may be considered underwriting discounts and
commissions under the Securities Act of 1933. We will identify any underwriter
or agent, and we will describe any compensation, in the prospectus supplement.
We may agree to indemnify underwriters, dealers and agents who participate
in the distribution of the securities against certain liabilities, including
liabilities under the Securities Act of 1933.
We may authorize dealers or other persons who act as our agents to solicit
offers by certain institutions to purchase the securities from us under
contracts which provide for payment and delivery on a future date. We may enter
into these contracts with commercial and savings banks, insurance companies,
pension funds, investment companies, educational and charitable institutions and
others. If we enter into these agreements concerning any series of securities,
we will indicate that in the prospectus supplement.
In connection with an offering of the securities, underwriters may engage
in transactions that stabilize, maintain or otherwise affect the price of the
securities. Specifically, underwriters may over-allot in connection with the
offering, creating a syndicate short position in the securities for their own
account. In addition, underwriters may bid for, and purchase, securities in the
open market to cover short positions or to stabilize the price of the
securities. Finally, underwriters may reclaim selling concessions allowed for
distributing the securities in the offering if the underwriters repurchase
previously distributed securities in transactions to cover short positions, in
stabilization transactions or otherwise. Any of these activities may stabilize
or maintain the market price of the securities above independent market levels.
Underwriters are not required to engage in any of these activities and may end
any of these activities at any time.
Each series of securities (other than our common stock) offered will be a
new issue of securities and will have no established trading market. The
securities (other than our common stock) may or may not be listed on a national
securities exchange. No assurance can be given as to the liquidity of or the
existence of trading markets for any securities offered (other than with respect
to our common stock).
LEGAL OPINION
Bryan Cave LLP, St. Louis, Missouri, as our counsel, will opine upon the
legality of the securities.
EXPERTS
The consolidated financial statements and schedule of Gardner Denver, Inc.
as of December 31, 2003 and 2002 and for the years ended December 31, 2003 and
2002, have been incorporated by reference herein in reliance upon the reports of
KPMG LLP, independent registered public accounting firm, incorporated by
reference herein, and upon the authority of said firm as experts in accounting
and auditing. The audit report for Gardner Denver, Inc. covering the December
31, 2003 consolidated financial statements refers to the adoption of Statement
of Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets," in the year ending December 31, 2002.
The consolidated financial statements of Syltone plc and subsidiaries as of
31 March 2003 and 2002, and for the years ended 31 March 2003 and 2002, have
been incorporated by reference herein in reliance upon the report of KPMG Audit
Plc, independent auditors, incorporated by reference herein, and upon the
authority of said firm as experts in accounting and auditing.
The consolidated financial statements of nash_elmo Holdings LLC and
subsidiaries as of December 31, 2003 and for the year then ended, have been
incorporated by reference herein in reliance upon the report of KPMG LLP,
independent auditors, incorporated by reference herein, and upon the authority
of said firm as experts in accounting and auditing.
Arthur Andersen LLP, our former independent auditors, have audited the
consolidated financial statements and schedule of Gardner Denver, Inc. as of
December 31, 2001, and for the year ended December 31, 2001, as set forth in
their report. We have incorporated by reference our consolidated financial
statements and schedule in this prospectus and elsewhere in the registration
statement from our Annual
16
Report on Form 10-K for the fiscal year ended December 31, 2003 in reliance on
Arthur Andersen LLP's report.
On August 31, 2002, Arthur Andersen ceased practicing before the SEC. We
have been unable to obtain, after reasonable efforts, the written consent of
Arthur Andersen LLP to our naming it as an expert and as having audited such
consolidated financial statements, and including its audit report in this
prospectus. The cessation of Arthur Andersen's practice and the absence of such
written consent from Arthur Andersen may limit your ability to recover damages
from Arthur Andersen LLP under Section 11 of the Securities Act for any untrue
statements of a material fact contained in the financial statements audited by
Arthur Andersen LLP or any omissions to state a material fact required to be
stated therein or necessary to make the statements therein not misleading.
On June 26, 2002, our board of directors, based on a recommendation of the
Audit and Finance Committee, dismissed Arthur Andersen LLP as our independent
public accountants and approved the selection of KPMG LLP to serve as our
independent public accountants for the year ending December 31, 2002.
Arthur Andersen LLP's reports on our financial statements for the past two
years did not contain an adverse opinion or disclaimer of opinion, nor were they
qualified or modified as to uncertainty, audit scope or accounting principles.
In connection with the audits for the fiscal year ended December 31, 2001 and
through June 26, 2002, there were no disagreements with Arthur Andersen LLP on
any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreements, if not resolved
to the satisfaction of Arthur Andersen LLP, would have caused Arthur Andersen
LLP to make reference thereto in its report on our financial statements for such
years. Also, during those years, there have been no "reportable events," as such
term is used in Item 304(a)(1)(v) of Regulation S-K.
17
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No dealer, salesperson or other person is authorized to give any
information or to represent anything not contained in this prospectus supplement
and accompanying prospectus. You must not rely on any unauthorized information
or representations. This prospectus supplement and accompanying prospectus is an
offer to sell only the shares offered hereby, but only under circumstances and
in jurisdictions where it is lawful to do so. The information contained in this
prospectus supplement and accompanying prospectus is current only as of its
date.
TABLE OF CONTENTS
PAGE
------
PROSPECTUS SUPPLEMENT
About this Prospectus Supplement.......... S-i
Forward-Looking Statements................ S-i
Non-GAAP Financial Measures............... S-ii
Market and Industry Data.................. S-iii
Prospectus Supplement Summary............. S-1
Risk Factors.............................. S-13
Use of Proceeds........................... S-20
Price Range of Common Stock............... S-20
Dividend Policy........................... S-20
Capitalization............................ S-21
Unaudited Pro Forma Consolidated Financial
Statements.............................. S-23
Selected Consolidated Financial
Information of Gardner Denver........... S-32
Selected Consolidated Financial
Information of Thomas Industries........ S-34
Management's Discussion and Analysis of
Financial Condition and Results of
Operations S-36
Our Industry.............................. S-48
Our Business.............................. S-49
Management................................ S-55
Description of Capital Stock.............. S-57
Underwriting.............................. S-58
Legal Matters............................. S-61
Experts................................... S-61
Index to Consolidated Financial
Statements.............................. F-1
PROSPECTUS
Where You Can Find More Information....... i
Forward-Looking Statements................ ii
Information About Gardner Denver.......... 1
Use of Proceeds........................... 2
Ratio of Earnings to Fixed Charges........ 2
Description of Debt Securities............ 3
Description of Our Capital Stock.......... 10
Description of Warrants and Warrant
Units................................... 15
Plan of Distribution...................... 15
Legal Opinion............................. 16
Experts................................... 16
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5,000,000 SHARES
(GARDNER LOGO)
COMMON STOCK
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PROSPECTUS SUPPLEMENT
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, 2005
BEAR, STEARNS & CO. INC.
JPMORGAN
KEYBANC CAPITAL MARKETS
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