-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CxV6CXrSEvJxQoNF5ol08/0dkwf5Tbk+jxYdxZoWlEVvrWuDFerOzPKzdarl7NFr RUDs75Aqd1jModi6W4L3HQ== 0001068800-04-000191.txt : 20040310 0001068800-04-000191.hdr.sgml : 20040310 20040310160102 ACCESSION NUMBER: 0001068800-04-000191 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 20031231 FILED AS OF DATE: 20040310 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GARDNER DENVER INC CENTRAL INDEX KEY: 0000916459 STANDARD INDUSTRIAL CLASSIFICATION: GENERAL INDUSTRIAL MACHINERY & EQUIPMENT [3560] IRS NUMBER: 760419383 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-13215 FILM NUMBER: 04660311 BUSINESS ADDRESS: STREET 1: 1800 GARDNER EXPRESSWAY STREET 2: P O BOX 528 CITY: QUINCY STATE: IL ZIP: 62301 BUSINESS PHONE: 2172225400 MAIL ADDRESS: STREET 1: 1800 GARDNER EXPRESSWAY STREET 2: P O BOX 528 CITY: QUINCY STATE: IL ZIP: 62301 FORMER COMPANY: FORMER CONFORMED NAME: GARDNER DENVER MACHINERY INC DATE OF NAME CHANGE: 19931221 10-K 1 gard10k.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K [X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934: For the fiscal year ended December 31, 2003 [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934: For the transition period from ___________ to ___________ Commission file number 1-13215 ----------------------- GARDNER DENVER, INC. - ---------------------------------------------------------------------------- (Exact Name of Registrant as Specified in Its Charter) Delaware 76-0419383 - -------------------------------------- -------------------------- (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 1800 Gardner Expressway, Quincy, IL 62301 - -------------------------------------- -------------------------- (Address of Principal Executive Offices) (Zip Code) (217) 222-5400 - ---------------------------------------------------------------------------- (Registrant's Telephone Number, Including Area Code) Securities registered pursuant to Section 12(b) of the Act: Common Stock, $0.01 par value - ---------------------------------------------------------------------------- (Title of Class) Rights to Purchase Preferred Stock - ---------------------------------------------------------------------------- (Title of Class) Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes X No --- --- The aggregate market value of the registrant's voting stock held by non-affiliates as of June 30, 2003 was $328.7 million. The number of shares outstanding of the registrant's Common Stock, as of March 8, 2004 was 16,251,601. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Gardner Denver, Inc. Proxy Statement, dated March 8, 2004 (incorporated into Part III of this Annual Report on Form 10-K). Portions of the 2003 Annual Report to Stockholders (incorporated into Parts I and II of this Annual Report on Form 10-K). ============================================================================ PART I ITEM 1. BUSINESS Other than under "Recent Developments," the following business discussion does not reflect Gardner Denver's acquisition of Syltone plc ("Syltone") in January 2004. Service marks, trademarks and/or tradenames and related designs or logotypes owned by Gardner Denver, Inc. or its subsidiaries are shown in italics. Gardner Denver, Inc. ("Gardner Denver" or the "Company") designs, manufactures and markets compressed air products and pump products. The Company believes it is one of the leading manufacturers of highly engineered stationary air compressors and blowers 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. The Company also believes that it is one of the leading manufacturers of reciprocating pumps used in oil and natural gas well drilling, servicing and production and in water jetting systems. For the year ended December 31, 2003, the Company's revenues were $439.5 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 the Company's total revenues for the year ended December 31, 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, 52% were to Europe, 21% to Asia, 15% to Canada, 9% to Latin America and 3% to other regions. The Company's international operations and United States export sales are exposed to such risks as risk of nationalization of private enterprises, risk of 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 and shipping products during times of crisis or war, as well as other factors inherent in foreign operations. HISTORY The Company's business of manufacturing industrial and petroleum equipment began in 1859 when Robert W. Gardner redesigned the fly-ball governor to provide speed control for steam engines. By 1900, the then Gardner Company had expanded its product line to include steam pumps and vertical high-speed air compressors. In 1927, the Gardner Company merged with Denver Rock Drill, a manufacturer of equipment for oil wells and mining and construction, and became the Gardner-Denver Company. In 1979, the Gardner-Denver Company was acquired by Cooper Industries, Inc. ("Cooper") and operated as 10 unincorporated divisions. Two of these divisions, the Gardner-Denver Air Compressor Division and the Petroleum Equipment Division, were combined in 1985 to form the Gardner-Denver Industrial Machinery Division (the 2 "Division"). The OPI pump product line was purchased in 1985 and added to the Division. In 1987, Cooper acquired the Sutorbilt and DuroFlow blower product lines and the Joy industrial compressor product line, which were also consolidated into the Division. Effective December 31, 1993, the assets and liabilities of the Division were transferred by Cooper to the Company, which had been formed as a wholly-owned subsidiary of Cooper. On April 15, 1994, the Company was spun-off as an independent company to the shareholders of Cooper. Gardner Denver has completed fifteen acquisitions since becoming an independent company. In 1996, Gardner Denver acquired NORAMPTCO, Inc., renamed Gardner Denver Holdings Inc., and its primary operating subsidiary Lamson Corporation ("Lamson"). Lamson designs, manufactures and sells multistage centrifugal blowers and exhausters used in various industrial and wastewater applications. Lamson's products complemented the Company's product offering by enabling it to expand its participation in environmental and industrial segments requiring air and gas management. Also in 1996, the Company acquired TCM Investments, Inc., an oilfield pump manufacturer based in Tulsa, Oklahoma. This acquisition extended the Company's well stimulation pump product line, provided a physical presence in the oilfield market and allowed Gardner Denver to become a major supplier of repair parts and remanufacturing services to some of the Company's customers. In 1997, the Company acquired Oy Tamrotor Ab ("Tamrotor"), located in Tampere, Finland. Tamrotor designs and manufactures lubricated rotary screw compressor air ends and packages. The addition of Tamrotor provided the Company with a manufacturing base in Europe and growth opportunities through complementary product lines and international market penetration. In 1999, the Company liquidated Tamrotor and now conducts business in Finland as Gardner Denver OY. In January 1998, the Company purchased Champion Pneumatic Machinery Company, Inc. ("Champion"). Champion, located in Princeton, Illinois, is a leading manufacturer of low horsepower reciprocating compressors. Champion opened new market opportunities for Gardner Denver products through the Champion distribution network and expanded the range of reciprocating compressors available to existing distributors of Gardner Denver branded products. In January 1998, the Company also acquired Geological Equipment Corporation ("Geoquip"), a leading manufacturer of pumps, ranging from 350 to 2,400 horsepower, in Fort Worth, Texas. The operation also remanufactures pumps and provides repair services. The addition of Geoquip enhanced the Gardner Denver well servicing product line, expanded the Company's presence in remanufacturing and repair services and introduced the Company to the water jetting market. The Company purchased the Wittig Division of Mannesmann Demag AG ("Wittig") in March 1998. Wittig, located in Schopfheim, Germany, is a leading manufacturer of rotary sliding vane compressors and vacuum pumps. Wittig's products primarily serve the truck blower market for liquid and dry bulk conveyance, as well as other industrial applications. The acquisition of Wittig expanded the Company's manufacturing presence in Europe and provided distribution channels for its blower products, which are produced in the United States. 3 In April 1999, the Company acquired Allen-Stuart Equipment Company, Inc. ("Allen-Stuart"), located in Houston, Texas. Allen-Stuart, which also conducts business as the Gardner Denver Engineered Packaging Center, designs, fabricates and services custom-engineered packages for blower and compressor equipment in air and gas applications. This entity also distributes Gardner Denver blowers in Texas. The addition of Allen-Stuart enhanced the Company's ability to supply engineered packages, incorporating the wide range of compressor and blower products manufactured by Gardner Denver. During 2003, the fabrication of customer-engineered packages was transferred to the Company's existing facility in Quincy, Illinois. In April 1999, the Company also purchased Butterworth Jetting Systems, Inc., a manufacturer of water jetting pumps and systems serving the industrial cleaning and maintenance market, located in Houston, Texas. This operation, which was renamed Gardner Denver Water Jetting Systems, Inc., expanded the Company's position in the rapidly growing water jetting market. In October 1999, the Company acquired Air Relief, Inc. ("Air Relief"), located in Mayfield, Kentucky. Air Relief is an independent provider of replacement parts and service for centrifugal compressors. This operation enhanced the Company's ability to penetrate the centrifugal compressor market by adding key engineering, assembly, sales and service capabilities. In January 2000, the Company acquired Invincible Airflow Systems, Co. ("Invincible"). Invincible, located in Baltic, Ohio, manufactured single and fabricated multistage centrifugal blowers and engineered vacuum systems. Invincible extended Gardner Denver's product offering for the industrial cleaning market and introduced the Company's centrifugal blowers to new markets. During 2003, manufacturing of Invincible products was transferred to the Company's existing centrifugal blower facility in Peachtree City, Georgia. The Company acquired Jetting Systems & Accessories, Inc. ("JSA") in April 2000 and CRS Power Flow, Inc. ("CRS") in July 2000. JSA and CRS were located in Houston, Texas, and both manufacture aftermarket products for the water jetting industry. These two acquisitions complemented the Company's product offering for the water jetting market and further leveraged Gardner Denver's commitment to being a full service provider in the water jetting industry. Manufacturing of JSA and CRS products were subsequently transferred to the Company's existing water jetting facility in Houston, Texas in 2000 and 2001, respectively. In September 2001, the Company acquired Hamworthy Belliss & Morcom ("Belliss & Morcom"), headquartered in Gloucester, United Kingdom ("U.K."). Belliss & Morcom manufactures and distributes reciprocating air compressors used for a variety of niche applications, such as polyethylene terephthalate ("PET") bottle blowing, breathing air equipment and compressed natural gas. The acquisition of Belliss & Morcom broadened the Company's range of product offerings, strengthened its distribution and service networks and increased its participation in sales of products with applications that have the potential to grow faster than the overall industrial economy. In September 2001, the Company also acquired Hoffman Air and Filtration Systems ("Hoffman"). Hoffman, previously headquartered in Syracuse, New York, manufactures and distributes multistage centrifugal blowers and vacuum systems, primarily for wastewater treatment and industrial applications. The acquisition of Hoffman expanded Gardner Denver's product offering and distribution capabilities and enhanced its position as a leading international 4 supplier of centrifugal products to the air and gas handling industry. During 2002, manufacturing of Hoffman products was transferred to the Company's existing centrifugal blower facility in Peachtree City, Georgia. In August 2003, the Company acquired a small machine shop operation in Odessa, Texas to service and repair well stimulation and drilling pumps serving the Permian Basin. This business also has a line of pumps and uniquely designed fluid cylinders, which enhances the Company's existing product offering. This acquisition provides opportunities to strengthen relationships with existing customers and expand its share of aftermarket business in this key geographic region. On January 2, 2004, the Company effectively acquired all of the outstanding shares of Syltone plc ("Syltone"), previously a publicly traded company listed on the London Stock Exchange. See "Recent Development" section below for further information on the Syltone acquisition. MARKETS AND PRODUCTS A description of the particular products manufactured and sold by Gardner Denver in its two reportable segments as of December 31, 2003, is set forth below. Other than under "Recent Developments," the following discussion does not reflect our acquisition of Syltone in January 2004. Compressed Air Products Segment In the Compressed Air 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 and centrifugal blowers. The Company's sales of compressed air products for the year ended December 31, 2003 were $369.0 million, of which approximately 57% were to customers in the United States. Compressors are used to increase the pressure of gas, including air, by mechanically decreasing its volume. The Company's reciprocating compressors range from 0.5 to 1,500 horsepower and are sold under the Gardner Denver, Champion, Commandair and Belliss & Morcom trademarks. The Company's rotary screw compressors range from 5 to 680 horsepower and are sold under the Gardner Denver, Electra-Screw, Electra-Saver, Enduro, RotorChamp, Twistair, Tamrotor, and Tempest trademarks. The Company's centrifugal compressors range from 400 to 1,500 horsepower and are sold under the GD Turbo name. Blowers are used to produce a high volume of air at low pressure and to produce vacuum. Positive displacement blowers provide a constant volume of airflow at varying levels of pressure. Centrifugal blowers produce a constant level of pressure and varying volumes of airflow. The Company's positive displacement blowers range from 0 to 36 pounds per square inch gauge (PSIG) pressure and 0-28 inches of mercury (Hg) vacuum and 0 to 43,000 cubic feet per minute (CFM) and are sold under the trademarks Sutorbilt, DuroFlow, CycloBlower and TurboTron. The Company's multistage centrifugal blowers are sold under the trademarks Lamson and Hoffman and range from 0.5 to 25 PSIG pressure and 0-18" Hg vacuum and 100 to 50,000 CFM. 5 The Company's rotary sliding vane compressors and vacuum pumps range from 0 to 150 PSIG and 0 to 3,000 CFM and are sold under the trademark Wittig. The Company's engineered vacuum systems are used in industrial cleaning and maintenance and are sold under the Invincible and Cat Vac trademarks. Almost all domestic 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 ("OEMs"); 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 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 numerous chemical process applications. The Compressed Air Products segment operates production facilities around the world including seven plants (including two remanufacturing facilities) in the U.S., two in the U.K. and one each in Finland, Germany and Canada. The most significant facilities include owned properties in Sedalia, Missouri; Gloucester, U.K.; Princeton, Illinois; and Schopfheim, Germany and leased properties in Peachtree City, Georgia and Tampere, Finland. Pump Products Segment Gardner Denver designs, manufactures, markets and services 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. Sales of the Company's pump products for the year ended December 31, 2003 were $70.5 million, of which approximately 64% were to customers in the United States. Positive displacement reciprocating pumps are marketed under the Gardner Denver, Geoquip, Ajax and OPI trademarks. 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. The Company's production pumps range from 16 to 600 horsepower and consist of horizontal and vertical designed pumps. The Company markets 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. The Company's well servicing products consist of high pressure plunger pumps ranging from 165 to 400 horsepower. Gardner Denver also manufactures intermittent 6 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 range from 275 to 2,000 horsepower. A small portion of Gardner Denver and Ajax pumps are sold for use in industrial applications. Gardner Denver water jetting pumps and systems are used in industrial cleaning and maintenance and are sold under the Partek, Liqua-Blaster and American Water Blaster trademarks. Applications in this market segment include runway and shiphull cleaning, concrete demolition and metal surface preparation. The Pump Products segment operates six production facilities (including one remanufacturing facility) in the U.S. The most significant facilities include owned properties in Quincy, Illinois and Tulsa, Oklahoma and a leased property in Houston, Texas. For financial information over the past three years on the Company's performance by industry segment and the Company's international sales, refer to Note 15 of the Notes to Consolidated Financial Statements included in Gardner Denver's 2003 Annual Report to Stockholders and incorporated herein by reference. CUSTOMERS AND CUSTOMER SERVICE Gardner Denver sells its products through independent distributors and sales representatives and directly to OEMs, engineering firms and end-users. The Company has been able to establish strong customer relationships with several key OEMs and exclusive supply arrangements with many of our distributors. The Company uses 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 its products are marketed through independent distribution, the Company is committed to developing and supporting its distribution network of over 1,000 distributors and representatives. The Company has a distribution center in Memphis, Tennessee that stocks parts, accessories, blowers and small compressor products in order to provide adequate and timely availability. Gardner Denver also provides its 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, the Company participates in major trade shows and has a telemarketing department to generate sales leads and support the distributors' sales staffs. Gardner Denver's distributors maintain an inventory of complete units and parts and provide aftermarket service to end-users. There are several hundred field service representatives for Gardner Denver products in the distributor network. The Company's 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. The Company also provides aftermarket support through our remanufacturing facilities in Indianapolis, Indiana; Fort Worth, Texas; and Mayfield, Kentucky. The Indianapolis operation remanufactures and repairs air ends for rotary screw compressors, blowers and reciprocating compressors. The Fort 7 Worth facility repairs and remanufactures well servicing pumps, while the Mayfield operation provides aftermarket parts and repairs for centrifugal compressors. Outside the United States, Gardner Denver markets its products through a network of sales representatives, as well as distributors and direct sales persons. COMPETITION Competition in the Company's 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, the Company's 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 highly fragmented due to the wide variety of product technologies, applications and selling channels. Gardner Denver's principal competitors in sales of compressed air products include Ingersoll-Rand, Sullair (owned by United Technologies Corporation), Atlas Copco, Quincy Compressor (owned by EnPro Industries), CompAir and Roots. The marketplace for pumps, although dominated by a few multinational manufacturers with a broad product offering, is still highly fragmented, as the ten largest pump manufacturers account for only approximately 40% of annual sales. Because Gardner Denver is currently focused on pumps used in oil and natural gas production, well servicing and well drilling, it does not typically compete directly with the major full-line manufacturers. The Company's principal competitors in sales of petroleum pump products include National-Oilwell and SPM Flow Control, Inc. The Company's principal competitors in sales of water jetting systems include NLB Corp., WOMA Apparatebau GmbH and Hammelmann Maschinenfabrik GmbH. RESEARCH AND DEVELOPMENT Compressed air and pump products are best characterized as mature, with evolutionary technological advances. Technological trends 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. Trends in pump products include development of larger horsepower and lighter weight pumps. The Company actively engages in a continuing research and development program. The Gardner Denver research and development centers are dedicated to various activities, including new product development, product performance improvement and new product applications. 8 Gardner Denver's 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 $2.8 million in 2003, $2.4 million in 2002, and $2.5 million in 2001. MANUFACTURING In general, the Company's 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. Gardner Denver operates eighteen manufacturing facilities that utilize a broad variety of processes. At the Company's manufacturing locations, it maintains advanced manufacturing, quality assurance and testing equipment geared to the specific products that it manufactures, and uses extensive process automation in its manufacturing operations. Most of the Company's 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 (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. Gardner Denver has representatives on the American Petroleum Institute's working committee and has relationships with standard enforcement organizations such as Underwriters Laboratories, Det Norske Veritas and the Canadian Standard Association. The Company maintains ISO 9001-2000 certification on the quality systems at a majority of its manufacturing and design locations. RAW MATERIALS The primary raw materials used by Gardner Denver are cast iron and steel. Such materials are generally available from a number of suppliers. The Company does not currently have long-term contracts with its suppliers of raw materials, but it believes that its sources of raw materials are reliable and adequate for its needs. Gardner Denver utilizes 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 its ability to meet its commitments to customers. Nevertheless, the Company believes that it has appropriately balanced this risk against the cost of sustaining a greater number of suppliers. Moreover, the Company has 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. Atchison Casting Corporation, the Company's largest supplier of iron castings in 2002, downsized and subsequently closed its LaGrange, Missouri foundry ("LaGrange Foundry") in the second half of 2002. As a result, the Company implemented its previously developed contingency plan to secure alternate supply sources. There was a negative impact on the 9 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. The changes related to the LaGrange Foundry closure have been completed and the Company expects to benefit going forward from reduced material costs from alternate suppliers. At the same time, the Company anticipates that it will need to address some residual problems in 2004 as it re-balances its casting supply chain while dealing with suppliers that are experiencing lower volumes, high fixed cost structures and increased competitive pressures. Historically, the Company has not experienced any significant supply problems in its operations other than the LaGrange Foundry closure noted above; however, there can be no assurance that this will be the case in the future. BACKLOG The Company's backlog was approximately $58.4 million at December 31, 2003 as compared to approximately $65.3 million at December 31, 2002. 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. PATENTS, TRADEMARKS AND OTHER INTELLECTUAL PROPERTY The Company believes that the success of its business depends more on the technical competence, creativity and marketing abilities of its employees than on any individual patent, trademark or copyright. Nevertheless, as part of its ongoing research, development and manufacturing activities, Gardner Denver has a policy of seeking to protect our proprietary products, product enhancements and processes with appropriate intellectual property protections. In the aggregate, patents and trademarks are of considerable importance to the manufacturing and marketing of many of Gardner Denver's products. However, the Company does not consider any single patent or trademark, or group of patents or trademarks, to be material to its business as a whole, except for the Gardner Denver trademark. Other important trademarks the Company uses include DuroFlow, Sutorbilt, CycloBlower, Wittig, Lamson, Tamrotor, OPI, Champion, Geoquip, Belliss & Morcom and Hoffman. Joy is a registered trademark of Joy Technologies, Inc. The Company has the right to use the Joy trademark on aftermarket parts until November 2027. Its right to use this trademark on air compressors expired in November 1995. Pursuant to trademark license agreements, Cooper Industries has rights to use the Gardner Denver trademark for certain power tools and the Company has rights to use the Ajax trademark for petroleum pump products. Gardner Denver has registered its 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. 10 EMPLOYEES At December 31, 2003, the Company had approximately 1,900 full-time employees, of which approximately 650, including most of the employees in Finland, Germany and the U.K., were represented by labor unions. The Company believes that its current relations with employees are satisfactory. ENVIRONMENTAL MATTERS The Company is 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. The Company believes that its existing environmental control procedures are adequate and it has no current plans for substantial capital expenditures in this area. Gardner Denver has an environmental policy that confirms its commitment to a clean environment and to compliance with environmental laws. Gardner Denver has 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. The Company has been identified as a potentially responsible party ("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 the substantial majority of these waste sites, and the Company has, or is attempting to negotiate, de minimis settlements for their cleanup. The cleanup of the remaining sites is substantially complete and the Company's future obligations entail a share of the sites' ongoing operating and maintenance expense. Gardner Denver has an accrued liability on its balance sheet to the extent costs are known or can be estimated for its remaining financial obligations for these matters. Based upon consideration of currently available information, the Company does 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. RECENT DEVELOPMENTS On January 2, 2004, the Company effectively acquired all of the outstanding shares of Syltone plc ("Syltone"), previously a publicly traded company listed on the London Stock Exchange. The purchase price of (pound)61.2 million (approximately $109.2 million), including assumed bank debt (net of cash acquired), was paid in the form of cash ((pound)43.1 million), new loan notes ((pound)5.2 million) and the assumption of Syltone's existing bank debt, net of cash ((pound)12.9 million). Syltone is headquartered in Bradford, United Kingdom ("U.K.") and manufactures products in the U.K., Germany, France, Canada, Denmark and the U.S. The company also operates fitting shops 11 around the world, which assemble its manufactured components and other parts on commercial vehicles and provides aftermarket support. Syltone's principal activity is the design, manufacture, sale and service of equipment for the international transportation and fluid transfer industries. They are one of the world's largest manufacturers of equipment for handling dry bulk or liquid product on commercial vehicles and loading arms for rail, truck and marine applications. Syltone generated revenues and operating profit (in accordance with accounting principles generally accepted in the U.K.) of (pound)84.4 million and (pound)6.3 million, respectively (approximately $151.1 million and $11.3 million, respectively as calculated using the December 31, 2003 exchange rate of $1.79/(pound)) for the twelve months ended September 30, 2003. Syltone's largest markets are Europe and North America, which represent approximately 67% and 20% of its revenues, respectively. Of the total sales to Europe, approximately 38% are to the U.K., 18% to France, 11% to Germany and 33% to other European countries. Approximately 70% of Syltone's revenues are generated through transportation-related activities while the remaining 30% are derived from fluid transfer-related activities. Syltone's Transportation-Related Activities Syltone's transportation-related activities include the design and manufacture of equipment for handling dry bulk or liquid product on commercial vehicles, access platforms, axles and gearboxes for commercial and military applications, power take-offs and valves. This part of Syltone's business serves tank truck carriers and highway and utility applications. Syltone designs and installs loading and unloading systems, which often include blowers, compressors, pumps, valves and filters, to serve the tank truck sector. The product being handled by the tank trucks can be in a liquid, dry or gaseous state, thereby dictating the system required. Carriers of petroleum-based products and other fuels, which are potentially dangerous and polluting products, are highly regulated by various governmental authorities around the world. Syltone provides these carriers with bottom loading vapor recovery systems and other ancillary and safety equipment. Highway and utility applications include vans and trucks fitted with access platforms and systems, which include compressors, generators, hydraulics and pumps to drive a wide range of equipment. 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 access platforms 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. Syltone's transportation-related products are sold under the Drum, Emco Wheaton, Perolo, Priestman, Sam System, Webster and AirDrive names. Primary competitors serving the tank truck market include GHH (owned by Ingersoll-Rand), Civacon and Blackmer Mouvex (both owned by Dover Corporation) and Sening. Mellow Flowtrans, Winton Engineering and Versalift are the primary competitors serving highway and utility applications. 12 Syltone's Fluid Transfer-Related Activities Syltone's fluid transfer-related activities include the design and manufacture of arms, swivel joints and related systems for loading and offloading liquids from ships, railcars and road vehicles, as well as dry-break couplers and valves. These loading arms and systems are used in distribution and marine applications. This part of Syltone's business serves a variety of markets including the petroleum, chemical, food, liquefied gas and marine industries and the military. Syltone's fluid transfer products are sold primarily under the Emco Wheaton and Perolo names. Competitors in this sector include OPW Engineered Systems (owned by Dover Corporation) and Kanon in distribution applications; and FMC Technologies and Schwelm Verladetechnik GmbH (SVT) in both marine and distribution applications. Syltone's Customer Service One of Syltone's strengths is its global sales, service and vehicle fitting facility network. Syltone currently has sales offices in fifteen countries, which are reinforced by an expanding network of distributors and agents. Syltone also has fourteen vehicle fitting facilities in eleven countries worldwide. Syltone has a highly skilled workforce. In-house engineering can customize a system installation and offer preventive maintenance, repairs, refurbishment, upgrades and spare parts for all equipment to optimize product lifecycle cost. In addition, many of Syltone's products operate in critical health and safety environments and therefore changes in legislation frequently drive requirements for product enhancements and innovations. The acquisition of Syltone strengthens Gardner Denver's position, particularly in Europe, as the leading global provider of bulk handling solutions for the commercial transportation industry. Syltone's emphasis on systems-oriented handling solutions expands the Company's product offering and manufacturing capabilities and provides incremental growth opportunities. In addition, Syltone's installation and aftermarket capabilities are expected to strengthen the Company's distribution and service networks, as well. Through the acquisition of Syltone, the Company expanded its product lines to include loading arms. The Company views loading arms as an attractive market segment given its stability in developed regions where product demand is driven primarily by replacement activity, and its growth potential in emerging economies that are expanding their transportation infrastructure. Syltone's Production Facilities and Employees Syltone operates production facilities around the world including three plants in the U.K., two in the U.S. and one each in France, Germany, Canada and Denmark. The most significant facilities are located in Bradford and Margate in the U.K.; Kirchhain, Germany; Louisville, Kentucky; and Blaye, France. As of January 31, 2004, Syltone had approximately 900 full-time employees of which approximately 400 were represented by labor unions. The Company believes its current relations with employees are satisfactory. 13 AVAILABLE INFORMATION Our Internet website address is http://www.gardnerdenver.com. We provide copies of the following reports available free of charge through our Internet website, as soon as reasonably practicable after they have been filed with or furnished to the Securities Exchange Commission pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934: our annual report on Form 10-K; quarterly reports on Form 10-Q; current reports on Form 8-K; and amendments to those reports. Information on our website does not constitute part of this annual report on Form 10-K. ITEM 2. PROPERTIES See "Item 1. Business" for information on Gardner Denver's manufacturing, distribution and fitting facilities and sales offices. Generally, the Company's plants are suitable and adequate for the purposes for which they are intended, and overall have sufficient capacity to conduct business in 2004. The Peachtree City, Georgia facility is currently leased from the Fayette County Development Authority in connection with industrial revenue bond financing. The Company has an option to purchase the property at a nominal price when the bonds are repaid in 2018. The Company leases sales office and warehouse space in various U.S. locations and foreign countries. ITEM 3. LEGAL PROCEEDINGS The Company is a party to various legal proceedings and administrative actions. The information regarding these proceedings and actions under "Contingencies" contained on pages 19 and under Note 13 contained on page 40 of Gardner Denver's 2003 Annual Report to Stockholders, is hereby incorporated herein by reference. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During the fourth quarter of the fiscal year covered by this report, no matters were submitted to a vote of the stockholders. 14 EXECUTIVE OFFICERS OF REGISTRANT The executive officers of the Company, their positions with the Company, business history and certain other information, as of March 10, 2004, are set forth below. These officers serve at the pleasure of the Board of Directors.
Name Office Age ---- ------ --- Ross J. Centanni Chairman, President and Chief Executive Officer 58 Michael S. Carney Vice President and General Manager, Blower Division 46 Helen W. Cornell Vice President and General Manager, Fluid Transfer Division and Operations Support 45 Tracy D. Pagliara Vice President, Administration, General Counsel and Secretary 41 Philip R. Roth Vice President, Finance and Chief Financial Officer 52 J. Dennis Shull Vice President and General Manager, Compressor Division 55 Richard C. Steber Vice President and General Manager, Pump Division 53
ROSS J. CENTANNI, age 58, 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. ("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 46, 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 45, was appointed Vice President and General Manager, Fluid Transfer Division and Operations Support of Gardner Denver in March 2004. She previously served as Vice President, Strategic Planning and Operations Support from August 2001 until her promotion. She served as Vice President, Compressor Operations for the Compressor and Pump Division from April 2000 until August 2001. From November 1993 until accepting her 15 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 41, was appointed Vice President, Administration, General Counsel and Secretary of Gardner Denver in March 2004. He previously served as Vice President, General Counsel and Secretary of Gardner Denver 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. PHILIP R. ROTH, age 52, joined the Company as Vice President, Finance and Chief Financial Officer in May 1996. Prior to joining Gardner Denver, Mr. Roth was employed by Emerson Electric Co. for fifteen years, most recently as the Vice President, Finance and Chief Financial Officer of the Wiegand Industrial Division. Mr. Roth, a Certified Public Accountant, received his B.S. degree in business administration from the University of Missouri and an M.B.A. from the Olin School of Business at Washington University. J. DENNIS SHULL, age 55, 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 53, joined the Company as Vice President and General Manager of the Gardner Denver Pump Division in January 2002. 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. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The information under "Stock Information" and "Dividends," contained on page 44 of Gardner Denver's 2003 Annual Report to Stockholders, is hereby incorporated herein by reference. 16 ITEM 6. SELECTED FINANCIAL DATA The information under "Financial History," contained on page 12 of Gardner Denver's 2003 Annual Report to Stockholders, is hereby incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information under "Management's Discussion and Analysis," contained on pages 13 through 21 of Gardner Denver's 2003 Annual Report to Stockholders, is hereby incorporated herein by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information under "Management's Discussion and Analysis - Market Risk," contained on page 19 of Gardner Denver's 2003 Annual Report to Stockholders, is hereby incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information under "Reports of Independent Public Accountants" and "Consolidated Financial Statements and Notes," contained on pages 23 through 43 of Gardner Denver's 2003 Annual Report to Stockholders, is hereby incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE On June 26, 2002, the Board of Directors of Gardner Denver, based on the recommendation of its Audit Committee, dismissed Arthur Andersen LLP ("Andersen") as Gardner Denver's independent public accountants and engaged KPMG LLP ("KPMG") to serve as Gardner Denver's independent public accountants for the fiscal year 2002, effective immediately. Andersen's audit reports on Gardner Denver's consolidated financial statements for each of the fiscal years ended December 31, 2001 and 2000 did not contain an adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope or accounting principles. During the fiscal years ended December 31, 2001 and 2000 and through June 26, 2002, there were no disagreements with Andersen on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure which, if not resolved to Andersen's satisfaction, would have caused them to make reference to the subject matter in connection with their report on Gardner Denver's consolidated financial statements for such years; and there were no reportable events as defined in Item 304(a)(1)(v) of Regulation S-K. 17 Gardner Denver requested Andersen to furnish a letter addressed to the Securities and Exchange Commission stating whether Andersen agreed with the statements made above by Gardner Denver. A copy of that letter addressed to the Securities and Exchange Commission, dated June 28, 2002, was included as Exhibit 16 to Gardner Denver Inc.'s Form 8-K, filed July 1, 2002. During the years ended December 31, 2001 and 2000 and through June 26, 2002, Gardner Denver did not consult KPMG with respect to the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on Gardner Denver's consolidated financial statements, or any other matters or reportable events as set forth in Items 304(a)(2)(i) and (ii) of Regulation S-K. ITEM 9a. CONTROLS AND PROCEDURES As required by Rule 13a-15 of the Exchange Act, the Company has carried out an evaluation of the effectiveness of the design and operation of the Company's disclosure controls and procedures as of December 31, 2003. This evaluation was carried out under the supervision and with the participation of the Company's management, including the Chairman, President and Chief Executive Officer and the Vice President, Finance and Chief Financial Officer. Based upon that evaluation, the Chairman, President and Chief Executive Officer and Vice President, Finance and Chief Financial Officer concluded that the Company's controls and procedures were effective to provide reasonable assurance that information required to be disclosed in the Company's periodic SEC reports is recorded, processed, summarized, and reported as and when required. In addition, they concluded that there were no changes in the Company's internal control over financial reporting that occurred during fourth quarter of fiscal 2003 that have materially affected, or that are reasonably likely to materially affect the Company's internal control over financial reporting. In designing and evaluating the disclosure controls and procedures, the Company's management recognized that any controls and procedures, no matter how well designed, can provide only reasonable assurances of achieving the desired control objectives and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information concerning the Company's directors contained under "Election of Directors," "Nominees for Election," and "Directors Whose Terms of Office Will Continue After the Meeting," and the information contained in the first and third paragraphs under "Corporate Governance," the first, second and third sentences under "Board of Directors Committees - The Audit and Finance Committee," and "Section 16(a) Beneficial Ownership Reporting Compliance" of the Gardner Denver Proxy Statement, dated March 10, 2004, is hereby incorporated herein by reference. Printed copies of the Company's policy regarding Corporate Governance and its Code of Ethics and Business Conduct for directors, executive officers and employees are available to any stockholder who requests it. Information concerning the Company's executive officers is contained in Part I of this Annual Report on Form 10-K. 18 ITEM 11. EXECUTIVE COMPENSATION The information related to executive compensation contained under "Compensation of Directors," "Executive Management Compensation" and "Employee and Executive Benefit Plans" of the Gardner Denver Proxy Statement, dated March 10, 2004, is hereby incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information contained under "Security Ownership of Management and Certain Beneficial Owners" and "Equity Compensation Plan Information" of the Gardner Denver Proxy Statement, dated March 10, 2004, is hereby incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Not applicable. ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES The information required by Item 14 is contained in the Gardner Denver Proxy Statement under "Accounting Fees" and is incorporated herein by reference. PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Documents filed as part of this Annual Report --------------------------------------------- 1. Financial Statements and the related report of independent public accountants are incorporated by reference to the pages shown below in Gardner Denver's 2003 Annual Report to Stockholders. Pursuant to Rule 2-02(e) of Regulation S-X, our 2003 Annual Report includes a copy of a prior year's Report of Independent Public Accountants from the prior independent public accountants, Arthur Andersen LLP ("Andersen"). The report was previously issued by Andersen, for our Annual Report for fiscal year 2001 and incorporated by reference into our annual report on Form 10-K for the year ended December 31, 2001, and has not been reissued by Andersen. The report refers to previous consolidated financial statements that are not included in the 2003 Annual Report or this filing (consisting of the consolidated balance sheet as of December 31, 2000 and the consolidated statements of operations, stockholders' equity and cash flows for the year ended December 31, 1999). After reasonable efforts, and due to the fact that Andersen has ceased operations, we were unable to obtain a reissued report and Andersen did not consent to the inclusion of its previously issued report in our 2003 Annual Report or this filing. Because Andersen did not consent to the inclusion of its report in our 2003 Annual Report or this filing, it may be difficult to seek remedies against Andersen and the ability to seek relief against 19 Andersen may be impaired. See Exhibit 23.2 to this annual report on Form 10-K for further discussion. Page No. -------- Reports of Independent Public Accountants 23 Consolidated Statements of Operations for Each of the Three Years in the Period Ended December 31, 2003 24 Consolidated Balance Sheets as of December 31, 2003 and December 31, 2002 25 Consolidated Statements of Stockholders' Equity for Each of the Three Years in the Period Ended December 31, 2003 26 Consolidated Statements of Cash Flows for Each of the Three Years in the Period Ended December 31, 2003 27 Notes to Consolidated Financial Statements 28-43 The financial statement schedules listed below should be read in conjunction with the financial statements listed above. Financial statement schedules not included in this Annual Report on Form 10-K have been omitted because they are not applicable or the required information is shown in the financial statements or notes hereto. 2. Schedules --------- Report of KPMG S-1 Schedule II - Valuation and Qualifying Accounts S-2 3. Exhibits -------- 2.1 Recommended Cash Offer by UBS Investment Bank on behalf of GD First (UK) plc for Syltone plc filed as exhibit 99.2 to Gardner Denver, Inc.'s Current Report on Form 8-K, dated January 13, 2004, and incorporated herein by reference. 2.2 Form of Acceptance, Authority and Election for Recommended Cash Offer filed as exhibit 99.3 to Gardner Denver, Inc.'s Current Report on Form 8-K, dated January 13, 2004, and incorporated herein by reference. 3.1 Certificate of Incorporation of Gardner Denver, Inc., as amended on May 5, 1998, filed as Exhibit 3.1 to Gardner Denver, Inc.'s Quarterly Report on Form 10-Q, dated August 13, 1998, and incorporated herein by reference. 20 3.2 ByLaws of Gardner Denver, Inc., as amended on July 31, 2001, filed as Exhibit 3.2 to Gardner Denver, Inc.'s Quarterly Report on Form 10-Q, dated August 13, 2001, and incorporated herein by reference. 4.1 Rights Agreement dated as of January 18, 1995, between Gardner Denver Machinery Inc. and First Chicago Trust Company of New York as Rights Agent, filed as Exhibit 4.0 to Gardner Denver Machinery Inc.'s Current Report on Form 8-K, dated January 18, 1995, (File No. 001-13215) and incorporated herein by reference. 4.2 Note Purchase Agreement, dated as of September 26, 1996, filed as Exhibit 4.0 to Gardner Denver Machinery Inc.'s Quarterly Report on Form 10-Q, dated November 14, 1996, and incorporated herein by reference. 4.2.1 Second Amendment dated August 31, 2001, to the Note Purchase Agreement dated as of September 26, 1996 filed as Exhibit 4.2.1 on Form 10-Q, dated November 13, 2001, and incorporated herein by reference. 10.0+ Amended and Restated Credit Agreement dated March 6, 2002, among Bank One, NA (formerly known as The First National Bank of Chicago) and the lenders named therein, filed as Exhibit 10.0 to Gardner Denver, Inc.'s Form 10-K, dated March 28, 2002, and incorporated herein by reference. 10.1* Gardner Denver, Inc. Long-Term Incentive Plan, as amended May 6, 2003 filed as Exhibit 10.1 to Gardner Denver, Inc.'s Quarterly Report on Form 10-Q dated August 8, 2003 and incorporated herein by reference. 10.2* Gardner Denver Machinery Inc. Supplemental Excess Defined Benefit Plan filed as Exhibit 10.9 to Gardner Denver Machinery Inc.'s Registration Statement on Form 10, effective on March 31, 1994, and incorporated herein by reference. 10.3* Gardner Denver Machinery Inc. Supplemental Excess Defined Contribution Plan, filed as Exhibit 10.10 to Gardner Denver Machinery Inc.'s Registration Statement on Form 10, effective on March 31, 1994, and incorporated herein by reference. 10.4* Amended and Restated Form of Indemnification Agreements entered into between Gardner Denver, Inc. and its directors, officers or representatives, filed as Exhibit 10.4 to Gardner Denver, Inc.'s Form 10-K, dated March 28, 2002, and incorporated herein by reference. 10.6* Gardner Denver, Inc. Phantom Stock Plan for Outside Directors, as amended May 4, 1998 and March 7, 2000, with an effective date of April 1, 2000, and incorporated herein by reference. 10.7* Gardner Denver, Inc. Executive Stock Repurchase Program, as amended May 6, 2003 filed as Exhibit 10.7 to Gardner Denver, Inc.'s Quarterly Report on Form 10-Q dated May 8, 2003 and incorporated herein by reference. 21 10.8* Gardner Denver, Inc. Incentive Stock Option Agreement, as filed as Exhibit 10.8 to Gardner Denver, Inc.'s Form 10-K dated March 22, 2001, and incorporated herein by reference. 10.9* Gardner Denver, Inc. Nonstatutory Stock Option Agreement, as filed as Exhibit 10.9 to Gardner Denver, Inc.'s Form 10-K dated March 22, 2001, and incorporated herein by reference. 10.10* Form of Gardner Denver, Inc. Nonemployee Director Stock Option Agreement, as amended July 29, 2003 filed as Exhibit 10.10 to Gardner Denver, Inc.'s Quarterly Report on Form 10-Q dated November 12, 2003 and incorporated herein by reference. 10.11* Gardner Denver, Inc. Management Annual Incentive Plan dated January 2, 2001, filed as Exhibit 10.11 to Gardner Denver, Inc.'s Quarterly Report on Form 10-Q, dated May 14, 2001, and incorporated herein by reference. 10.12* Form of Gardner Denver, Inc. Long-Term Cash Bonus Agreement between Gardner Denver, Inc. and executive bonus award participants, filed as Exhibit 10.12 to Gardner Denver, Inc's Form 10-K dated March 28, 2002, and incorporated herein by reference. 10.13* Change in Control Agreement dated August 1, 2002, entered into between Gardner Denver, Inc. and its Chief Executive Officer, filed as Exhibit 10.13 to Gardner Denver, Inc.'s Quarterly Report on 10-Q, dated August 13, 2002, and incorporated herein by reference. 10.14* Form of Change in Control Agreement dated August 1, 2002, entered into between Gardner Denver, Inc. and its executive officers, filed as Exhibit 10.14 to Gardner Denver, Inc.'s Quarterly Report on 10-Q, dated August 13, 2002, and incorporated herein by reference. 10.15* Gardner Denver, Inc. Executive Retirement Planning Program Services, dated May 5, 2003, filed as Exhibit 10.15 to Gardner Denver, Inc.'s Quarterly Report on Form 10-Q dated August 8, 2003 and incorporated herein by reference. 10.16 Amendment and Consent No. 1 to Amended and Restated Credit Agreement, dated November 6, 2003. 12 Calculation of Ratio of Earnings to Fixed Charges. 22 13.0 The following portions of the Gardner Denver, Inc. 2003 Annual Report to Stockholders. Page No. -------- Financial History 12 Management's Discussion and Analysis 13-21 Reports of Independent Public Accountants 23 Consolidated Statements of Operations 24 Consolidated Balance Sheets 25 Consolidated Statements of Stockholders' Equity 26 Consolidated Statements of Cash Flows 27 Notes to Consolidated Financial Statements 28-43 Stock Information 44 Dividends 44 21.0 Subsidiaries of Gardner Denver, Inc. 23.1 Consent of KPMG. 23.2 Information Regarding Consent of Arthur Andersen LLP. 24.0 Powers of Attorney from members of the Gardner Denver Inc. Board of Directors. 31.1 Certification of Principal Executive Officer Pursuant to Rule 13a-15(e) or 15d-15(e) of the Exchange Act, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Principal Financial Officer Pursuant to Rule 13a-15(e) or 15d-15(e) of the Exchange Act, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. + The registrant hereby agrees to furnish supplementally a copy of any omitted schedules to this agreement to the SEC upon request. * Indicates management contract or compensatory plan or arrangement. 23 (b) Reports on Form 8-K. ------------------- The Company filed a Current Report on Form 8-K, dated October 20, 2003, relating to a press release issued on that date announcing the Company's earnings for the third quarter and nine months ended September 30, 2003, certain recent activities, and guidance as to certain future results. The Company filed a Current Report on Form 8-K, dated November 13, 2003, relating to a press release which announced the Company's agreement with the Board of Directors of Syltone plc to recommend an offer to acquire the outstanding share capital of Syltone plc. The Company filed a Current Report on Form 8-K/A, dated November 21, 2003, to correct certain previously announced results of Syltone plc for the six-month period ended September 30, 2003 which were included in its press release and Form 8-K dated November 13, 2004. 24 SIGNATURES Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. GARDNER DENVER, INC. By /s/Ross J. Centanni ---------------------------------- Name: Ross J. Centanni Title: Chairman, President and CEO Date: March 10, 2004 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.
Signature Title Date --------- ----- ---- /s/Ross J. Centanni Chairman, President and CEO March 10, 2004 - ------------------------------- (Principal Executive Officer) (Ross J. Centanni) and Director /s/Philip R. Roth Vice President, Finance and CFO March 10, 2004 - ------------------------------- (Principal Financial Officer) (Philip R. Roth) /s/Daniel C. Rizzo, Jr. Vice President and Corporate March 10, 2004 - ------------------------------- Controller (Chief Accounting (Daniel C. Rizzo, Jr.) Officer) *Donald G. Barger, Jr. Director March 10, 2004 (Donald G. Barger, Jr.) *Frank J. Hansen Director March 10, 2004 (Frank J. Hansen) *Raymond R. Hipp Director March 10, 2004 (Raymond R. Hipp) *Thomas M. McKenna Director March 10, 2004 (Thomas M. McKenna) *Diane K. Schumacher Director March 10, 2004 (Diane K. Schumacher) *Richard L. Thompson Director March 10, 2004 (Richard L. Thompson) *By /s/Tracy D. Pagliara -------------------- (Tracy D. Pagliara, as Attorney-In-Fact for each of the persons indicated)
25 INDEPENDENT AUDITORS' REPORT ---------------------------- The Board of Directors Gardner Denver, Inc.: Under date of January 30, 2004, we reported on the consolidated balance sheet of Gardner Denver, Inc. and subsidiaries (the Company) as of December 31, 2003 and 2002 and the related consolidated statements of operations, stockholders' equity and cash flows for each of the years in the two-year period ended December 31, 2003, which are included in the 2003 annual report on Form 10-K. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related consolidated financial statement schedule included in the 2003 annual report on Form 10-K. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. The consolidated financial statements and the related financial statement schedule of Gardner Denver, Inc. for the year ended December 31, 2001 were audited by other auditors who have ceased operations. In their report dated February 6, 2002, except with respect to the matter discussed in Note 9, as to which the date is March 6, 2002, those auditors stated that the supplementary information for the year ended December 31, 2001, included in the consolidated financial statement schedule was subjected to auditing procedures applied in their audit of the 2001 basic financial statements and, in their opinion, fairly stated in all material respects, the financial data required to be set forth therein in relation to the basic financial statements for the year ended December 31, 2001, taken as a whole. In our opinion, such financial statement schedule for the years ended December 31, 2003 and 2002, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. Our report refers to a change in accounting for goodwill and other intangible assets for the year ended December 31, 2002. /s/ KPMG LLP St. Louis, Missouri January 30, 2004 S-1 26 PREVIOUS INDEPENDENT AUDITORS' REPORT ------------------------------------- Pursuant to Rule 2-02(e) of Regulation S-X, below is a copy of a prior year's Report of Independent Public Accountants from the prior independent public accountants, Arthur Andersen LLP ("Andersen"). This report was previously issued by Andersen, for filing with our annual report on Form 10-K for fiscal year 2001. This report refers to previous consolidated financial statements that are not included in the 2003 annual report on Form 10-K (consisting of the consolidated balance sheet as of December 31, 2000 and the consolidated statements of operations, stockholders' equity and cash flows for the year ended December 31, 1999). After reasonable efforts, and due to the fact that Andersen has ceased operations, we have been unable to obtain a reissued report and Andersen has not consented to the inclusion of its previously issued report in this 2003 annual report on Form 10-K. Because Andersen has not consented to the inclusion of its report in this annual report on Form 10-K, it may be difficult to seek remedies against Andersen and the ability to seek relief against Andersen may be impaired. See Exhibit 23.2 to this annual report on Form 10-K for further discussion. To Gardner Denver, Inc. We have audited in accordance with auditing standards generally accepted in the United States, the consolidated financial statements included in Gardner Denver, Inc.'s. 2001 Annual Report to Stockholders incorporated by reference in this Form 10-K, and have issued our report thereon dated February 6, 2002 (except with respect to the matter discussed in Note 9, as to which the date is March 6, 2002). Our audit was made for the purpose of forming an opinion on those statements taken as a whole. Schedule II included in this Form 10-K is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in our audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP St. Louis, Missouri February 6, 2002 (except with respect to the matter discussed in Note 9, as to which the date is March 6, 2002) 27 GARDNER DENVER, INC. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR THE YEAR ENDED DECEMBER 31, (dollars in thousands)
BALANCE AT CHARGED TO CHARGED TO BALANCE AT BEGINNING OF COSTS AND OTHER END OF DESCRIPTION YEAR EXPENSES ACCOUNTS (1) DEDUCTIONS YEAR ----------- ------------ ---------- ------------ ---------- ---------- 2003 - ---- Allowance for doubtful accounts $5,279 $ 795 $ 170 $(1,710) $4,534 2002 - ---- Allowance for doubtful accounts $5,229 $1,905 $ 303 $(2,158) $5,279 2001 - ---- Allowance for doubtful accounts $5,169 $ 708 $ 454 $(1,102) $5,229 (1) Includes the allowance for doubtful accounts of acquired businesses at the dates of acquisition and the effect of foreign currency translation adjustments for those companies whose functional currency is not the U.S. dollar.
S-2 28 GARDNER DENVER, INC. EXHIBIT INDEX EXHIBIT NO. DESCRIPTION 2.1 Recommended Cash Offer by UBS Investment Bank on behalf of GD First (UK) plc for Syltone plc filed as exhibit 99.2 to Gardner Denver, Inc.'s Current Report on Form 8-K, dated January 13, 2004, and incorporated herein by reference. 2.2 Form of Acceptance, Authority and Election for Recommended Cash Offer filed as exhibit 99.3 to Gardner Denver, Inc.'s Current Report on Form 8-K, dated January 13, 2004, and incorporated herein by reference. 3.1 Certificate of Incorporation of Gardner Denver, Inc., as amended on May 5, 1998, filed as Exhibit 3.1 to Gardner Denver, Inc.'s Quarterly Report on Form 10-Q, dated August 13, 1998, and incorporated herein by reference. 3.2 ByLaws of Gardner Denver, Inc., as amended on July 31 2001, filed as Exhibit 3.2 to Gardner Denver, Inc.'s Quarterly Report on Form 10-Q, dated August 13, 2001, and incorporated herein by reference. 4.1 Rights Agreement dated as of January 18, 1995, between Gardner Denver Machinery Inc. and First Chicago Trust Company of New York as Rights Agent, filed as Exhibit 4.0 to Gardner Denver Machinery Inc.'s Current Report on Form 8-K, dated January 18, 1995, (File No. 001-13215) and incorporated herein by reference. 4.2 Note Purchase Agreement, dated as of September 26, 1996, filed as Exhibit 4.0 to Gardner Denver Machinery Inc.'s Quarterly Report on Form 10-Q, dated November 14, 1996, and incorporated herein by reference. 4.2.1 Second Amendment dated August 31, 2001, to the Note Purchase Agreement dated as of September 26, 1996 filed as Exhibit 4.2.1 on Form 10-Q, dated November 13, 2001, and incorporated herein by reference. 10.0+ Amended and Restated Credit Agreement dated March 6, 2002, among Bank One, NA (formerly known as The First National Bank of Chicago) and the lenders named therein, filed as Exhibit 10.0 to Gardner Denver, Inc.'s Form 10-K, dated March 28, 2002, and incorporated herein by reference. 10.1* Gardner Denver, Inc. Long-Term Incentive Plan, as amended May 6, 2003 filed as Exhibit 10.1 to Gardner Denver, Inc.'s Quarterly Report on Form 10-Q dated August 8, 2003 and incorporated herein by reference. 29 10.2* Gardner Denver Machinery Inc. Supplemental Excess Defined Benefit Plan filed as Exhibit 10.9 to Gardner Denver Machinery Inc.'s Registration Statement on Form 10, effective on March 31, 1994, and incorporated herein by reference. 10.3* Gardner Denver Machinery Inc. Supplemental Excess Defined Contribution Plan, filed as Exhibit 10.10 to Gardner Denver Machinery Inc.'s Registration Statement on Form 10, effective on March 31, 1994, and incorporated herein by reference. 10.4* Amended and Restated Form of Indemnification Agreements between Gardner Denver, Inc. and its directors, officers or representatives, filed as Exhibit 10.4 to Gardner Denver, Inc.'s Form 10-K, dated March 28, 2002, and incorporated herein by reference. 10.6* Gardner Denver, Inc. Phantom Stock Plan for Outside Directors, as amended May 4, 1998 and March 7, 2000, with an effective date of April 1, 2000, and incorporated herein by reference. 10.7* Gardner Denver, Inc. Executive Stock Repurchase Program, as amended May 6, 2003 filed as Exhibit 10.7 to Gardner Denver, Inc.'s Quarterly Report on Form 10-K dated May 8, 2003 and incorporated herein by reference. 10.8* Gardner Denver, Inc. Incentive Stock Option Agreement, filed as Exhibit 10.8 to Gardner Denver, Inc.'s Form 10-K dated March 22, 2001, and incorporated herein by reference. 10.9* Gardner Denver, Inc. Nonstatutory Stock Option Agreement, filed as Exhibit 10.9 to Gardner Denver, Inc.'s Form 10-K dated March 22, 2001, and incorporated herein by reference. 10.10* Form of Gardner Denver, Inc. Nonemployee Director Stock Option Agreement, as amended July 29, 2003 filed as Exhibit 10.10 to Gardner Denver, Inc.'s Quarterly Report on Form 10-Q dated November 12, 2003 and incorporated herein by reference. 10.11* Gardner Denver, Inc. Management Annual Incentive Plan dated January 2, 2001, filed as Exhibit 10.11 to Gardner Denver, Inc.'s Quarterly Report on Form 10-Q, dated May 14, 2001, and incorporated herein by reference. 10.12* Form of Gardner Denver, Inc. Long-Term Cash Bonus Agreement between Gardner Denver, Inc. and executive bonus award participants, filed as Exhibit 10.12 to Gardner Denver, Inc.'s Form 10-K, dated March 28, 2002, and incorporated herein by reference. 10.13* Change in Control Agreement dated August 1, 2002, entered into between Gardner Denver, Inc. and its Chief Executive Officer, filed as Exhibit 10.13 to Gardner Denver, Inc.'s Quarterly Report on 10-Q, dated August 13, 2002, and incorporated herein by reference. 30 10.14* Form of Change in Control Agreement dated August 1, 2002, entered into between Gardner Denver, Inc. and its executive officers, filed as Exhibit 10.14 to Gardner Denver, Inc.'s Quarterly Report on 10-Q, dated August 13, 2002, and incorporated herein by reference. 10.15 Gardner Denver, Inc. Executive Retirement Planning Program Services, dated May 5, 2003, filed as Exhibit 10.15 to Gardner Denver, Inc.'s Quarterly Report on Form 10-Q dated August 8, 2003 and incorporated herein by reference. 10.16 Amendment and Consent No. 1 to Amended and Restated Credit Agreement, dated November 6, 2003. 12 Calculation of Ratio of Earnings to Fixed Charges. 13.0 The following portions of the Gardner Denver, Inc. 2003 Annual Report to Stockholders. Page No. -------- Financial History 12 Management's Discussion and Analysis 13-21 Reports of Independent Public Accountants 23 Consolidated Statements of Operations 24 Consolidated Balance Sheets 25 Consolidated Statements of Stockholders' Equity 26 Consolidated Statements of Cash Flows 27 Notes to Consolidated Financial Statements 28-43 Stock Information 44 Dividends 44 21.0 Subsidiaries of Gardner Denver, Inc. 23.1 Consent of KPMG. 23.2 Information Regarding Consent of Arthur Andersen, LLP. 24.0 Powers of Attorney from members of the Gardner Denver, Inc. Board of Directors. 31.1 Certification of Principal Executive Officer Pursuant to Rule 13a-15(e) or 15d-15(e) of the Exchange Act, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Principal Financial Officer Pursuant to Rule 13a-15(e) or 15d-15(e) of the Exchange Act, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 31 32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. + The registrant hereby agrees to furnish supplementally a copy of any omitted schedules to this Agreement to the SEC upon request. * Indicates management contract or compensatory plan or arrangement. 32 EX-10.16 3 exh10p16.txt EXHIBIT 10.16 AMENDMENT AND CONSENT NO. 1 TO AMENDED AND RESTATED CREDIT AGREEMENT DATED AS OF NOVEMBER 6, 2003 THIS AMENDMENT AND CONSENT NO. 1 TO AMENDED AND RESTATED CREDIT AGREEMENT ("Amendment") is made as of the "Amendment Effective Date" (as defined below) by and among GARDNER DENVER, INC. (the "Borrower"), the financial institutions listed on the signature pages hereof as lenders (the "Lenders"), BANK ONE, NA, individually as a Lender, as LC Issuer, Swing Line Lender and as agent (the "Agent") for the Lenders under that certain Amended and Restated Credit Agreement dated as of March 6, 2002 by and among the Borrower, the Lenders and the Agent (the "Credit Agreement"). Defined terms used herein and not otherwise defined herein shall have the meaning given to them in the Credit Agreement. WITNESSETH WHEREAS, the Borrower, the Lenders and the Agent are parties to the Credit Agreement; WHEREAS, the Borrower intends to consummate the UK Acquisition (as defined herein) and has provided the Agent with historical financial statements of the UK Target (as defined herein), pro forma financial statements for the Borrower after giving effect to the UK Acquisition on a combined and consolidated basis and drafts of the formal offer documents to be posted by the Borrower in connection with the UK Acquisition; WHEREAS, the Borrower has requested that the Lenders consent to the UK Acquisition and amend the Credit Agreement in certain respects; and WHEREAS, the Lenders party hereto and the Agent are willing to consent to the UK Acquisition and amend the Credit Agreement, in each case on the terms and conditions set forth herein; NOW, THEREFORE, in consideration of the premises set forth above, the terms and conditions contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Borrower, the Lenders party hereto and the Agent have agreed to the following. 1. AMENDMENTS TO CREDIT AGREEMENT. Subject to the satisfaction of ------------------------------ the conditions precedent set forth in Section 3 below, the Credit Agreement --------- is hereby amended as follows: 1.1. ARTICLE I OF THE CREDIT AGREEMENT IS HEREBY AMENDED TO AMEND CERTAIN DEFINITIONS APPEARING THEREIN IN THE FOLLOWING MANNER: (a) THE DEFINITION OF APPLICABLE COMMERCIAL FACILITY LC MARGIN IS HEREBY AMENDED BY INSERTING THE FOLLOWING SENTENCE AT THE END THEREOF: Notwithstanding the foregoing, from the date on which the UK Acquisition is consummated to but not including the fifth Business Day following receipt of the Borrower's financial statements delivered pursuant to Section 6.1(i) -------------- or (ii), as applicable for the next fiscal quarter end or ---- fiscal year end to occur after such consummation, the ----- Applicable Commercial Facility LC Margin shall be 0.875%. (b) THE DEFINITION OF APPLICABLE FACILITY FEE IS HEREBY AMENDED BY INSERTING THE FOLLOWING SENTENCE AT THE END THEREOF: Notwithstanding the foregoing, from the date on which the UK Acquisition is consummated to but not including the fifth Business Day following receipt of the Borrower's financial statements delivered pursuant to Section 6.1(i) -------------- or (ii), as applicable for the next fiscal quarter end or ---- fiscal year end to occur after such consummation, the ----- Applicable Facility Fee shall be 0.30%. (c) THE DEFINITION OF APPLICABLE MARGIN IS HEREBY AMENDED BY INSERTING THE FOLLOWING SENTENCE AT THE END THEREOF: Notwithstanding the foregoing, from the date on which the UK Acquisition is consummated to but not including the fifth Business Day following receipt of the Borrower's statements delivered pursuant to Section 6.1(i) or (ii), -------------- ---- as applicable for the next fiscal quarter end or fiscal year end to occur after such consummation, the Applicable ----- Margin shall be 1.45%. (d) THE DEFINITION OF APPLICABLE STAND-BY FACILITY LC MARGIN IS HEREBY AMENDED BY INSERTING THE FOLLOWING SENTENCE AT THE END THEREOF: Notwithstanding the foregoing, from the date on which the UK Acquisition is consummated to but not including the fifth Business Day following receipt of the Borrower's financial statements delivered pursuant to Section 6.1(i) -------------- or (ii), as applicable for the next fiscal quarter end or ---- fiscal year end to occur after such consummation, the ----- Applicable Stand-by Facility LC Margin shall be 1.75%. (e) THE DEFINITIONS OF CONSOLIDATED EBIT AND CONSOLIDATED TOTAL DEBT ARE HEREBY DELETED IN THEIR ENTIRETY AND THE FOLLOWING ARE SUBSTITUTED THEREFOR: "CONSOLIDATED EBIT" means, for any period of four consecutive fiscal quarters of the Borrower, on a consolidated basis for the Borrower and its Subsidiaries in accordance with Agreement Accounting Principles, the sum of the 2 amounts for such period, without duplication, of (i) Consolidated Net Income, plus (ii) Consolidated Interest ---- Expense to the extent deducted in computing Net Income, plus (iii) charges against income for all domestic and ---- foreign, federal, state and local taxes to the extent deducted in computing Net Income, plus (iv) restructuring ---- charges incurred in the Borrower's fourth fiscal quarter of 2003 or first fiscal quarter of 2004 to the extent (a) deducted in computing Net Income, (b) related to costs associated with the profitability improvement plan of the Borrower as disclosed in the Borrower's press release dated October 20, 2003 or as otherwise disclosed to the Lenders and (c) in an aggregate cumulative amount not in excess of $2,700,000. "CONSOLIDATED TOTAL DEBT" means the aggregate of all Indebtedness (other than (i) Hedging Obligations and (ii) only for purposes of determining compliance with Section 6.22, and only until the earlier of (A) the date ------------ upon which the UK Acquisition has been consummated or abandoned and (B) April 30, 2004, the UK Acquisition Advance) on a consolidated basis for the Borrower and its Subsidiaries as of a referenced date." 1.2. ARTICLE I OF THE CREDIT AGREEMENT IS HEREBY FURTHER AMENDED TO INSERT THE FOLLOWING NEW DEFINITIONS THERETO: ""APPLICABLE UK ACQUISITION AVAILABILITY FEE" means, for any day and (notwithstanding anything contained in Section 8.3 to the contrary) subject to adjustment from time to time by the Required Lenders and the Borrower, 0.50% per annum. "BUYING LENDER" is defined in Section 2.27(b) hereof. "COMMITMENT INCREASE NOTICE" is defined in Section 2.27(a) hereof. "EFFECTIVE COMMITMENT AMOUNT" is defined in Section 2.27(a) hereof. "LENDER INCREASE NOTICE" is defined in Section 2.27(a) hereof. "PROPOSED NEW LENDER" is defined in Section 2.27(a) hereof. "SELLING LENDER" is defined in Section 2.27(b) hereof. "UK ACQUISITION" means the acquisition by the Borrower of all or substantially all of the equity interests in the UK Target, including the equity interests of related entities, by means of the UK Tender Offer. "UK ACQUISITION ADVANCE" means an Advance hereunder in an aggregate amount up to the UK Acquisition Commitment Amount to fund the UK Acquisition, which Advance may occur prior to consummation of the UK Acquisition. 3 "UK ACQUISITION COMMITMENT AMOUNT" means, at any time the same is to be determined, the Dollar Amount of (pound)56,000,000 at such time. "UK ACQUISITION COMMITMENT EFFECTIVE DATE" means the date upon which the UK Acquisition Advance is made. "UK ACQUISITION COMMITMENT TERMINATION DATE" means the earliest of (w) the date upon which the UK Tender Offer does not comply with any of the applicable UK Tender Offer Requirements, (x) the date upon which the UK Acquisition has closed and all conditions precedent to the effectiveness thereof have been satisfied or waived by the required parties, (y) June 30, 2004 and (z) the date specified as such on at least three (3) Business Days' notice from the Borrower to the Agent. "UK TARGET" means a company organized under the laws of England and Wales and previously disclosed to the Agent. "UK TENDER OFFER" means an offer, by no later than November 30, 2003, by the Borrower to purchase certain of the capital stock of the UK Target in compliance with the UK Tender Offer Requirements. "UK TENDER OFFER REQUIREMENTS" means: (i) the UK Tender Offer becoming unconditional as to acceptances within 60 days of the date formal offer documents in connection therewith are posted by the Borrower; (ii) the UK Tender Offer becoming unconditional in all respects within 81 days of the date such formal offer documents are posted; (iii) the UK Tender Offer not having lapsed in accordance with its terms and conditions; (iv) the UK Tender having complied with applicable requirements of The City Code on Takeovers and Mergers; and (v) the UK Tender Offer having been consummated by satisfaction of the conditions precedent and any other conditions prescribed in such formal offer documents as originally posted." 1.3. SECTION 2.4(c) OF THE CREDIT AGREEMENT IS AMENDED TO INSERT THE FOLLOWING SENTENCE AT THE END THEREOF: "In addition to the foregoing, if the UK Acquisition has not been consummated by the earlier of (x) the date upon which the UK Tender Offer does not comply with the UK Tender Offer Requirements and (y) June 30, 2004, the Borrower shall immediately prepay Revolving Loans (to be applied to such Loans as the 4 Borrower shall direct at the time of such payment) in an amount equal to the aggregate outstanding principal amount of the UK Acquisition Advance. For purposes of determining the outstanding principal amount of the UK Acquisition Advance under this paragraph, any repayments of Revolving Loans which may have occurred subsequent to the UK Acquisition Commitment Effective Date but on or prior to the UK Acquisition Commitment Termination Date shall be deemed to have been applied to the repayment of all Advances other than the UK Acquisition Advance." 1.4. SECTION 2.7 IS DELETED IN ITS ENTIRETY AND THE FOLLOWING IS SUBSTITUTED THEREFOR: "2.7. Facility Fee; Reductions in Aggregate Revolving Loan ---------------------------------------------------- Commitment. The Borrowers agree to pay to the Agent for ---------- the pro rata account of the Lenders according to their Percentages (except as set forth in Section 8.2), a ----------- facility fee accruing at the rate of the Applicable Facility Fee per annum based on the sum of the Aggregate Revolving Loan Commitment (without regards to usage thereof) plus the then outstanding aggregate principal amount of the Term Loans, from the date hereof to and including the Term Loan Final Maturity Date, payable on each Payment Date hereafter and on the Term Loan Final Maturity Date (it being understood and agreed that the Non-U.S. Subsidiary Borrower shall not be liable to pay any Facility Fees determined to be attributable to the Borrower). The Borrower may permanently reduce the Aggregate Revolving Loan Commitment in whole, or in part, ratably among the Lenders in integral multiples of $5,000,000 upon at least three Business Days' written notice to the Agent, which notice shall specify the amount of any such reduction (the "AGGREGATE REVOLVING LOAN COMMITMENT REDUCTION NOTICE"); provided, that the amount -------- of the Aggregate Revolving Loan Commitment may not be reduced below the Dollar Amount of the Aggregate Outstanding Credit Exposure not attributable to Term Loans. All accrued Facility Fees shall be payable on the effective date of any termination of the Revolving Loan Commitments of the Lenders and the obligation of the Borrowers to pay facility fees with respect to any Revolving Loan Commitments shall terminate on the date of any termination of the Revolving Loan Commitments." 1.5. SECTION 2.21(a) OF THE CREDIT AGREEMENT IS HEREBY --------------- AMENDED BY DELETING IN ITS ENTIRETY THE REFERENCE TO "NOT MORE THAN 180 DAYS AND" APPEARING IN THE FIRST SENTENCE THEREOF. 1.6. A NEW SECTION 2.27 AND A NEW SECTION 2.28 ARE HEREBY ------------ ------------ ADDED TO THE CREDIT AGREEMENT AND SUCH SECTIONS SHALL READ AS FOLLOWS: "2.27. UK Acquisition Availability Fee. In addition to the ------------------------------- other fees payable under this Agreement, the Borrower agrees to pay to the Agent for the pro rata account of the Lenders according to their Percentages (except as set forth in Section 8.2), an availability fee, accruing at ----------- the rate of the Applicable UK Acquisition Availability Fee per annum multiplied by the amount of the UK 5 Acquisition Advance, from the UK Acquisition Commitment Effective Date to and including the UK Acquisition Commitment Termination Date, payable on each Payment Date hereafter and on the UK Acquisition Commitment Termination Date (or, if earlier, the date of termination in whole of the Aggregate Revolving Loan Commitment pursuant to Section 2.7 hereof or the Commitments pursuant to Section ----------- ------- 8.1 hereof). --- 2.28. Increase of Revolving Loan Commitments. (a) At any -------------------------------------- time, the Borrower may request that the Aggregate Revolving Loan Commitment be increased; provided that, without the prior written consent of all of the Lenders, (i) the Aggregate Revolving Loan Commitment shall at no time exceed $175,000,000 minus the aggregate amount of all reductions in the Aggregate Revolving Loan Commitment previously made pursuant to Section 2.27; (ii) the ------------ Borrower shall not make any such request during the six month period following any reduction in the Aggregate Revolving Loan Commitment previously made pursuant to Section 2.27; (iii) the Borrower shall not be entitled to ------------ make any such request more frequently than once in each 12-month period; and (iv) each such request shall be in a minimum amount of at least $10,000,000 and increments of $5,000,000 in excess thereof. Such request shall be made in a written notice given to the Agent and the Lenders by the Borrower not less than twenty (20) Business Days prior to the proposed effective date of such increase, which notice (a "COMMITMENT INCREASE NOTICE") shall specify the amount of the proposed increase in the Aggregate Revolving Loan Commitment and the proposed effective date of such increase. In the event of such a Commitment Increase Notice, each of the Lenders shall be given the opportunity to participate in the requested increase ratably in proportions that their respective Revolving Loan Commitments bear to the Aggregate Revolving Loan Commitment. No Lender shall have any obligation to increase its Revolving Loan Commitment pursuant to a Commitment Increase Notice. On or prior to the date that is fifteen (15) Business Days after receipt of the Commitment Increase Notice, each Lender shall submit to the Agent a notice indicating the maximum amount by which it is willing to increase its Revolving Loan Commitment in connection with such Commitment Increase Notice (any such notice to the Agent being herein a "LENDER INCREASE NOTICE"). Any Lender which does not submit a Lender Increase Notice to the Agent prior to the expiration of such fifteen (15) Business Day period shall be deemed to have denied any increase in its Revolving Loan Commitment. In the event that the increases of Revolving Loan Commitments set forth in the Lender Increase Notices exceed the amount requested by the Borrower in the Commitment Increase Notice, the Agent and the Arranger shall have the right, in consultation with the Borrower, to allocate the amount of increases necessary to meet the Borrower's Commitment Increase Notice. In the event that the Lender Increase Notices are less than the amount requested by the Borrower, the Agent shall so advise the Borrower not later than ten (10) Business Days prior to the proposed effective date, and not later than three (3) Business Days prior to the proposed effective date the Borrower may notify the Agent of any financial institution that shall have agreed to become a "Lender" party hereto (a "PROPOSED NEW 6 LENDER") in connection with the Commitment Increase Notice. Any Proposed New Lender shall be consented to by the Agent (which consent shall not be unreasonably withheld). If the Borrower shall not have arranged any Proposed New Lender(s) to commit to the shortfall from the Lender Increase Notices, then the Borrower shall be deemed to have reduced the amount of its Commitment Increase Notice to the aggregate amount set forth in the Lender Increase Notices. Based upon the Lender Increase Notices, any allocations made in connection therewith and any notice regarding any Proposed New Lender, if applicable, the Agent shall notify the Borrower and the Lenders on or before the Business Day immediately prior to the proposed effective date of the amount of each Lender's and Proposed New Lenders' Revolving Loan Commitment (the "EFFECTIVE COMMITMENT AMOUNT") and the amount of the Aggregate Revolving Loan Commitment, which amount shall be effective on the following Business Day. Any increase in the Aggregate Revolving Loan Commitment shall be subject to the following conditions precedent: (A) the Borrower shall have obtained the consent thereto of each Subsidiary party to the Subsidiary Guaranty (each, a "Guarantor") and its reaffirmation of the Credit Document(s) executed by it, which consent and reaffirmation shall be in writing and in form and substance reasonably satisfactory to the Agent, (B) as of the date of the Commitment Increase Notice and as of the proposed effective date of the increase in the Aggregate Revolving Loan Commitment, all representations and warranties shall be true and correct in all material respects as though made on such date and no event shall have occurred and then be continuing which constitutes a Default or Unmatured Default, (C) the Borrower, the Agent and each Proposed New Lender or Lender that shall have agreed to provide a "Revolving Loan Commitment" in support of such increase in the Aggregate Revolving Loan Commitment shall have executed and delivered a "Commitment and Acceptance" substantially in the form of Exhibit J --------- hereto, (D) counsel for the Borrower and for the Guarantors shall have provided to the Agent supplemental opinions in form and substance reasonably satisfactory to the Agent and (E) the Borrower and the Proposed New Lender shall otherwise have executed and delivered such other instruments and documents as may be required under Article ------- IV or that the Agent shall have reasonably requested in -- connection with such increase. If any fee shall be charged by the Lenders in connection with any such increase, such fee shall be in accordance with then prevailing market conditions, which market conditions shall have been reasonably documented by the Agent to the Borrower. Upon satisfaction of the conditions precedent to any increase in the Aggregate Revolving Loan Commitment, the Agent shall promptly advise the Borrower and each Lender of the effective date of such increase. Upon the effective date of any increase in the Aggregate Revolving Loan Commitment that is supported by a Proposed New Lender, such Proposed New Lender shall be a party to this Agreement as a Lender and shall have the rights and obligations of a Lender hereunder. Nothing contained herein shall constitute, or otherwise be deemed to be, a commitment on the part of any Lender to increase its Revolving Loan Commitment at any time. 7 (b) For purposes of this clause (b), (A) the term "BUYING ---------- LENDER(S)" shall mean (1) each Lender the Effective Commitment Amount of which is greater than its Revolving Loan Commitment prior to the effective date of any increase in the Aggregate Revolving Loan Commitment, and (2) each Proposed New Lender that is allocated an Effective Commitment Amount in connection with any Commitment Increase Notice and (B) the term "SELLING LENDER(S)" shall mean each Lender whose Revolving Loan Commitment is not being increased from that in effect prior to such increase in the Aggregate Revolving Loan Commitment. Effective on the effective date of any increase in the Aggregate Revolving Loan Commitment pursuant to clause (a) above, each Selling Lender hereby sells, grants, assigns and conveys to each Buying Lender, without recourse, warranty, or representation of any kind, except as specifically provided herein, an undivided percentage in such Selling Lender's right, title and interest in and to its Outstanding Credit Exposure in the respective Dollar Amounts and percentages necessary so that, from and after such sale, each such Selling Lender's Outstanding Credit Exposure shall equal such Selling Lender's Percentage (calculated based upon the Effective Commitment Amounts) of the Aggregate Outstanding Credit Exposure. Effective on the effective date of the increase in the Aggregate Revolving Loan Commitment pursuant to clause (a) above, each Buying Lender hereby purchases and accepts such grant, assignment and conveyance from the Selling Lenders. Each Buying Lender hereby agrees that its respective purchase price for the portion of the Outstanding Credit Exposure purchased hereby shall equal the respective Dollar Amount necessary so that, from and after such payments, each Buying Lender's Outstanding Credit Exposure shall equal such Buying Lender's Percentage (calculated based upon the Effective Commitment Amounts) of the Aggregate Outstanding Credit Exposure. Such amount shall be payable on the effective date of the increase in the Aggregate Revolving Loan Commitment by wire transfer of immediately available funds to the Agent. Each Selling Lender hereby represents and warrants to each Buying Lender that such Selling Lender owns the Outstanding Credit Exposure being sold and assigned hereby for its own account and has not sold, transferred or encumbered any or all of its interest in such Loans, except for participations which will be extinguished upon payment to Selling Lender of an amount equal to the portion of the Outstanding Credit Exposure being sold by such Selling Lender. Each Buying Lender hereby acknowledges and agrees that, except for each Selling Lender's representations and warranties contained in the foregoing sentence, each such Buying Lender has entered into its Commitment and Acceptance with respect to such increase on the basis of its own independent investigation and has not relied upon, and will not rely upon, any explicit or implicit written or oral representation, warranty or other statement of the Lenders or the Agent concerning the authorization, execution, legality, validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement or the other Credit Documents. The Borrower hereby agrees to compensate each Selling Lender for all losses, expenses and liabilities incurred by each Lender in connection with the sale and assignment of any Eurocurrency Loan hereunder on the terms and in the manner as set forth in Section 3.4." ----------- 8 1.7. A NEW EXHIBIT J IS HEREBY ADDED TO THE CREDIT --------- AGREEMENT AND SUCH EXHIBIT SHALL READ AS SET FORTH ON ANNEX I HERETO. 2. CONSENT. Effective as of the date hereof and subject to the ------- satisfaction of the conditions precedent set forth in Section 3 below, the --------- Lenders party hereto hereby (i) consent to the UK Acquisition and the assumption by the Borrower of the UK Target's indebtedness and liabilities in the amounts outstanding on the effective date (the "UK Acquisition Effective Date") of the UK Acquisition, (ii) consent to the possible transfer, from the Borrower to one or more Wholly-Owned Subsidiaries, of the UK Target and related assets and entities acquired pursuant to, and within six (6) months of consummating, the UK Acquisition (the "UK Acquisition Transfer") so long as the Borrower and its Subsidiaries comply on a timely basis with Sections 6.15 and 6.24 of the Credit Agreement and (iii) waive ------------- ---- the Borrower's non-compliance with any provisions of Sections 6.15(xi) and ----------------- 6.19 of the Credit Agreement which would otherwise limit or restrict the UK - ---- Acquisition or the UK Acquisition Transfer. This specific consent and waiver is limited to the express circumstances described herein and shall not be construed to constitute (i) a consent to, or waiver of, any other event, circumstance or condition or of any other right or remedy available to the Agent or any Lender pursuant to the Credit Agreement or hereunder or (ii) a consent to any departure by the Borrower or any Subsidiary from any other term or requirement under the Credit Agreement or hereunder. 3. CONDITIONS OF EFFECTIVENESS. This Amendment shall become --------------------------- effective and be deemed effective if, and only if, the Agent shall have received, on or before the UK Acquisition Commitment Effective Date, each of the following: (a) duly executed signature pages to this Amendment from the Borrower and the Required Lenders; provided that the ------------- effectiveness of the amendment to Section 2.7 of the Credit Agreement as set forth in Section 1.4 hereof shall require the consent of each of the Lenders; (b) an amendment fee, for the benefit of each Lender executing and delivering its signature page hereto by such time as is required by the Administrative Agent, in an amount equal to 0.05% on the sum of such Lender's Revolving Loan Commitment and outstanding Term Loans as of the date hereof; (c) a reaffirmation from each of the Borrower's Subsidiaries which are parties to the Subsidiary Guaranty, such reaffirmation being attached hereto and made a part hereof; and (d) such other documents, instruments and agreements as the Agent may reasonably request. 4. REPRESENTATIONS AND WARRANTIES OF THE BORROWER. The Borrower ---------------------------------------------- hereby represents and warrant as follows: 9 (a) This Amendment, and the Credit Agreement as previously executed and as amended hereby, constitute legal, valid and binding obligations of the Borrower and are enforceable against the Borrower in accordance with their terms. (b) Upon the effectiveness of this Amendment, the Borrower hereby reaffirms all covenants, representations and warranties made in the Credit Agreement and other Credit Documents, to the extent the same are not amended hereby, and agrees that all such covenants, representations and warranties shall be deemed to have been remade as of the effective date of this Amendment, provided that such representations and warranties shall be deemed to have been updated to reflect the information which has been provided by the Borrower to the Agent prior to the date of this Amendment pursuant to Section 6.1 of the Credit Agreement. ----------- (c) No Default or Unmatured Default has occurred and is continuing under the Credit Agreement. 5. REFERENCE TO THE EFFECT ON THE CREDIT AGREEMENT. ----------------------------------------------- (a) Upon the effectiveness of this Amendment, on and after the date hereof, each reference in the Credit Agreement to "this Agreement," "hereunder," "hereof," "herein" or words of like import shall mean and be a reference to the Credit Agreement, as amended previously and as amended hereby. (b) Except as previously amended and as specifically amended and waived above, the Credit Agreement and all other documents, instruments and agreements executed and/or delivered in connection therewith shall remain in full force and effect, and are hereby ratified and confirmed. (c) Except to the limited extent set forth in Section 2 --------- above, the execution, delivery and effectiveness of this Amendment shall not operate as a waiver of any right, power or remedy of the Agent or any of the Lenders, nor constitute a waiver of any provision of the Credit Agreement or any other documents, instruments and agreements executed and/or delivered in connection therewith. 6. GOVERNING LAW. This Amendment shall be governed by and construed ------------- in accordance with the internal laws (as opposed to the conflict of law provisions) of the State of Illinois. 7. HEADINGS. Section headings in this Amendment are included herein -------- for convenience of reference only and shall not constitute a part of this Amendment for any other purpose. 8. COUNTERPARTS. This Amendment may be executed by one or more of ------------ the parties to the Amendment on any number of separate counterparts and all of said counterparts taken together shall be deemed to constitute one and the same instrument. A facsimile signature page hereto sent to the Agent or the Agent's counsel shall be effective as a counterpart signature, and each party so executing such a facsimile counterpart shall be deemed to agree to deliver originals to the Agent thereof. 10 [Signature Pages Follow] 11 IN WITNESS WHEREOF, this Amendment and Consent No. 1 has been duly executed as of the day and year first above written. GARDNER DENVER, INC. as Borrower By:_______________________________________ Name: Title: BANK ONE, NA, individually as a Lender, as LC Issuer, Swing Line Lender and as Agent By:_______________________________________ Name: Title: U.S. BANK NATIONAL ASSOCIATION, individually as a Lender and as the Syndication Agent By:_______________________________________ Name: Title: WACHOVIA BANK, NATIONAL ASSOCIATION (formerly known as First Union National Bank), as a Lender By:_______________________________________ Name: Title: Signature Page to Amendment and Consent No. 1 November 2003 Gardner Denver, Inc. NORDEA BANK FINLAND PLC, as a Lender By:_______________________________________ Name: Title: By:_______________________________________ Name: Title: THE BANK OF NEW YORK, as a Lender By:_______________________________________ Name: Title: NATIONAL CITY BANK OF MICHIGAN/ILLINOIS, as a Lender By:_______________________________________ Name: Title: THE BANK OF NOVIA SCOTIA, as a Lender By:_______________________________________ Name: Title: MERCANTILE TRUST AND SAVINGS BANK, as a Lender By:_______________________________________ Name: Title: Signature Page to Amendment and Consent No. 1 November 2003 Gardner Denver, Inc. REAFFIRMATION Each of the undersigned hereby acknowledges receipt of a copy of Amendment and Consent No. 1 to the Amended and Restated Credit Agreement dated as of March 6, 2002, by and among Gardner Denver, Inc., the Lenders and the Agent (the "Credit Agreement"), which Amendment and Consent No. 1 is dated as of November 6, 2003 (the "Amendment"). Capitalized terms used in this Reaffirmation and not defined herein shall have the meanings given to them in the Credit Agreement. Without in any way establishing a course of dealing by the Agent or any Lender, the undersigned reaffirms the terms and conditions of the Amended and Restated Subsidiary Guaranty dated as of March 6, 2002 executed by it and acknowledges and agrees that such Amended and Restated Subsidiary Guaranty and each and every other Credit Document executed by the undersigned in connection with the Credit Agreement remain in full force and effect and are hereby ratified, reaffirmed and confirmed. All references to the Credit Agreement contained in the above-referenced documents shall be references to the Credit Agreement as so amended by the Amendment and as the same may from time to time hereafter be amended, modified or restated. GARDNER DENVER INTERNATIONAL, INC. By: --------------------------------------- Its: --------------------------------------- GARDNER DENVER HOLDINGS INC. By: --------------------------------------- Its: --------------------------------------- LAMSON CORPORATION By: --------------------------------------- Its: --------------------------------------- TCM INVESTMENTS, INC. By: --------------------------------------- Its: --------------------------------------- Signature Page to Amendment and Consent No. 1 November 2003 Gardner Denver, Inc. ALLEN-STUART EQUIPMENT CO., INC. By: --------------------------------------- Its: --------------------------------------- GARDNER DENVER WATER JETTING SYSTEMS, INC. By: --------------------------------------- Its: --------------------------------------- AIR RELIEF, INC. By: --------------------------------------- Its: --------------------------------------- HOFFMAN AIR FILTRATION LICENSO INC. By: --------------------------------------- Its: --------------------------------------- BELLISS & MORCOM (USA) INC. By: --------------------------------------- Its: --------------------------------------- Signature Page to Amendment and Consent No. 1 November 2003 Gardner Denver, Inc. ANNEX I TO AMENDMENT AND CONSENT NO. 1 EXHIBIT J TO CREDIT AGREEMENT FORM OF COMMITMENT AND ACCEPTANCE DATED [_______] Reference is made to the Amended and Restated Credit Agreement dated as of March 6, 2002 (as amended, restated, supplemented or otherwise modified from time to time, the "Credit Agreement") among Gardner Denver, Inc. (the "Borrower"), the Non-U.S. Subsidiary Borrowers from time to time party thereto, the financial institutions party thereto (the "Lenders"), and Bank One, NA, as contractual representative for the Lenders (the "Agent"). Terms defined in the Credit Agreement are used herein with the same meaning. Pursuant to Section 2.27 of the Credit Agreement, the Borrower has requested an increase in the Aggregate Revolving Loan Commitment from $______________ to $_____________. Such increase in the Aggregate Revolving Loan Commitment is to become effective on the date (the "Effective Date") which is the later of (i) _________, ____ and (ii) the date on which the conditions precedent set forth in Section 2.27 in respect of such increase have been satisfied. In connection with such requested increase in the Aggregate Revolving Loan Commitment, the Borrower, the Agent and _________________ (the "Accepting Bank") hereby agree as follows: 1. Effective as of the Effective Date, [the Accepting Bank shall become a party to the Credit Agreement as a Lender and shall have all of the rights and obligations of a Lender thereunder and shall thereupon have a Revolving Loan Commitment under and for purposes of the Credit Agreement in an amount equal to the] [the Revolving Loan Commitment of the Accepting Bank under the Credit Agreement shall be increased from $_________ to the] amount set forth opposite the Accepting Bank's name on the signature page hereof. [2. The Accepting Bank hereby (i) confirms that it has received a copy of the Credit Agreement, together with copies of the financial statements and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Commitment and Acceptance Agreement; (ii) agrees that it will, independently and without reliance upon the Agent or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Credit Agreement; (iii) appoints and authorizes the Agent to take such action as contractual representative on its behalf and to exercise such powers under the Credit Agreement and the other Credit Documents as are delegated to the Agent by the terms thereof, together with such powers as are reasonably incidental thereto; and (iv) agrees that it will perform in accordance with their terms all of the obligations which by the terms of the Credit Agreement are required to be performed by it as a Lender.] 3. The Borrower hereby represents and warrants that as of the date hereof and as of the Effective Date, (a) all representations and warranties shall be true and correct in all material respects as though made on such date and (b) no event shall have occurred and then be continuing which constitutes a Default or an Unmatured Default. 4. THIS COMMITMENT AND ACCEPTANCE AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE INTERNAL LAWS (INCLUDING SECTION 735 ILCS 105/5-1 ET SEQ. BUT OTHERWISE WITHOUT REGARD TO THE CONFLICTS OF LAWS PROVISIONS) OF THE STATE OF ILLINOIS. 5. This Commitment and Acceptance Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which taken together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have caused this Commitment and Acceptance Agreement to be executed by their respective officers thereunto duly authorized, as of the date first above written. GARDNER DENVER, INC. By: --------------------------------------- Its: --------------------------------------- BANK ONE, NA (Main Office, Chicago), as Agent By: --------------------------------------- Its: --------------------------------------- REVOLVING LOAN - -------------- COMMITMENT ACCEPTING BANK - ---------- -------------- $ [BANK] By: --------------------------------------- Its: --------------------------------------- REAFFIRMATIONS OF GUARANTORS Each of the undersigned hereby acknowledges receipt of the foregoing Commitment and Acceptance. Capitalized terms used in this Reaffirmation and not defined herein shall have the meanings given to them in the Credit Agreement referred to in the foregoing Commitment and Acceptance. Without in any way establishing a course of dealing by the Agent or any Lender, the undersigned reaffirms the terms and conditions of the Amended and Restated Subsidiary Guaranty dated as of March 6, 2002 executed by it and acknowledges and agrees that such Amended and Restated Subsidiary Guaranty and each and every other Credit Document executed by the undersigned in connection with the Credit Agreement remain in full force and effect and are hereby ratified, reaffirmed and confirmed. All references to the Credit Agreement contained in the above-referenced documents shall be references to the Credit Agreement as so amended by the Commitment and Acceptance and as the same may from time to time hereafter be amended, modified or restated. The failure of any Subsidiary party to such Amended and Restated Subsidiary Guaranty to sign this Reaffirmation shall not release, discharge or otherwise affect the obligations of any of the other such Subsidiaries hereunder or under such Amended and Restated Subsidiary Guaranty. [GUARANTORS] By: ____________________________ Its: ______________________ EX-12 4 exh12.txt Exhibit 12 RATIO OF EARNINGS TO FIXED CHARGES GARDNER DENVER, INC. Computation of Ratio of Earnings to Fixed Charges (Dollars in thousands)
For the Year Ended ------------------------------------------------------------------ 2003 2002 2001 2000 1999 1998 ------------------------------------------------------------------ Earnings: Income before income taxes $30,358 28,827 34,683 29,894 29,157 59,894 Plus: Fixed Charges 6,019 7,483 7,789 8,486 6,746 5,692 ------- ------ ------ ------ ------ ------ Total $36,377 36,310 42,472 38,380 35,903 65,586 ======= ====== ====== ====== ====== ====== Fixed Charges: Interest expense incl. amortization of debt expense $ 4,748 6,365 6,796 7,669 5,934 4,849 Rentals-portion representative of interest 1,271 1,118 993 817 812 843 ------- ------ ------ ------ ------ ------ Total $ 6,019 7,483 7,789 8,486 6,746 5,692 ======= ====== ====== ====== ====== ====== Ratio of earnings to fixed charges 6.0 4.9 5.5 4.5 5.3 11.5 ======= ====== ====== ====== ====== ======
EX-13 5 exh13.txt Exhibit 13 Financial History (dollars in thousands, except per share amounts)
Year ended December 31, --------------------------------------------------------------------- 2003 2002 2001 2000 1999 - ---------------------------------------------------------------------------------------------------------- INCOME STATEMENT DATA: Revenues $439,530 418,158 419,770 379,358 327,067 Costs and expenses: Cost of sales (excluding depreciation and amortization) 307,753 289,631 294,249 268,290 226,550 Depreciation and amortization 14,566 14,139 17,567 15,881 14,222 Selling and administrative expenses 85,326 79,400 69,678 59,784 53,080 Interest expense 4,748 6,365 6,796 7,669 5,934 Other income, net (3,221) (204) (3,203) (2,160) (1,876) - ---------------------------------------------------------------------------------------------------------- 409,172 389,331 385,087 349,464 297,910 - ---------------------------------------------------------------------------------------------------------- Income before income taxes 30,358 28,827 34,683 29,894 29,157 Provision for income taxes 9,715 9,225 12,659 11,210 11,109 - ---------------------------------------------------------------------------------------------------------- Net income $ 20,643 19,602 22,024 18,684 18,048 ========================================================================================================== Basic earnings per share $1.29 1.24 1.42 1.22 1.20 ========================================================================================================== Diluted earnings per share $1.27 1.22 1.40 1.21 1.18 ========================================================================================================== December 31, --------------------------------------------------------------------- 2003 2002 2001 2000 1999 - ---------------------------------------------------------------------------------------------------------- BALANCE SHEET DATA: Total assets $589,733 478,730 488,688 403,881 379,419 Long-term debt (excluding current maturities) 165,756 112,663 160,230 115,808 114,200 Other long-term obligations 57,116 58,935 45,153 48,682 53,001 Stockholders' equity 265,905 222,923 198,728 171,148 152,609 ========================================================================================================== This Income Statement and Balance Sheet Data should be read in conjunction with Management's Discussion and Analysis and the Consolidated Financial Statements and notes thereto. During September 2001, the Company acquired certain assets and stock of Hoffman Air and Filtration Systems and the Hamworthy, Belliss and Morcom compressor business. See Note 2 to the Consolidated Financial Statements. As a result of adopting SFAS No. 142 "Goodwill and Other Intangible Assets," periodic goodwill amortization ceased effective January 1, 2002. See Notes 1 and 5 to the Consolidated Financial Statements.
12 Management's Discussion and Analysis The following discussion should be read in conjunction with the Consolidated Financial Statements and notes thereto. OVERVIEW The Company is organized based on the products and services it offers. Under this organizational structure, the Company has three operating divisions: Compressor, Blower and Pump. These divisions comprise two reportable segments, Compressed Air Products and Pump Products. The Compressor and Blower Divisions are aggregated into one reportable segment (Compressed Air Products) since the long-term financial performance of these businesses is affected by similar economic conditions, coupled with the similar nature of their products, manufacturing processes and other business characteristics. In the Compressed Air 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, and positive displacement and centrifugal blowers. The primary customers and applications for Gardner Denver's compressed air products are durable and non-durable goods manufacturers; process industries such as petroleum, primary metals, pharmaceuticals, food and paper; original equipment manufacturers; manufacturers of carpet cleaning equipment, pneumatic conveying equipment and dry bulk trailers; wastewater treatment facilities; automotive service centers; and niche applications such as polyethylene terephthalate ("PET") bottle blowing, breathing air equipment and compressed natural gas. Revenues of the Compressed Air Products segment constituted approximately 84% of total revenues in 2003. In the Pump Products segment, the Company designs, manufactures, markets and services reciprocating pumps, water jetting systems and related aftermarket parts used in oil and natural gas drilling, servicing and production, and industrial cleaning and maintenance. Typical applications for pumps include oil transfer, saltwater disposal, ammine pumping for gas processing, enhanced oil recovery, hydraulic power and other liquid transfer applications. Applications for water jetting systems include runway and shiphull cleaning, concrete demolition and metal surface preparation. Revenues of the Pump Products segment constituted approximately 16% of total revenues in 2003. The Company sells its products through independent distributors and sales representatives, and directly to original equipment manufacturers, engineering firms, packagers and end users. In August 2003, the Company acquired a small machine shop operation in Odessa, Texas to service and repair well stimulation and drilling pumps serving the Permian Basin. This business also has a line of pumps and uniquely designed fluid cylinders, which enhances the Company's existing product offering. This acquisition provides opportunities to strengthen relationships with existing customers and expand its share of aftermarket business in this key geographic region. The financial results of this acquisition are included in the Company's Pump Products segment. In September 2001, the Company acquired Hoffman Air and Filtration Systems ("Hoffman") and Hamworthy, Belliss & Morcom ("Belliss & Morcom"). Hoffman, previously headquartered in Syracuse, New York, manufactures and distributes multistage centrifugal blowers and vacuum systems, primarily for wastewater treatment and industrial applications. The acquisition of Hoffman expanded Gardner Denver's product offering and distribution capabilities and enhanced its position as a leading international supplier of centrifugal products to the air and gas handling industry. During 2002, manufacturing of Hoffman products was transferred to the Company's existing centrifugal blower facility in Peachtree City, Georgia. Belliss & Morcom, headquartered in Gloucester, England, manufactures and distributes reciprocating air compressors used for a variety of niche applications, such as PET bottle blowing, breathing air equipment and compressed natural gas. The acquisition of Belliss & Morcom broadened the Company's range of product offerings, strengthened its distribution and service networks and increased its participation in sales of products with applications that have the potential to grow faster than the overall industrial economy. The Hoffman and Belliss & Morcom acquisitions provided growth opportunities through synergistic product lines and domestic and international market penetration and are included in the Company's Compressed Air Products segment. The following table sets forth percentage relationships to revenues of certain income statement items for the years presented.
Year ended December 31, ------------------------------------- 2003 2002 2001 - ------------------------------------------------------------------------------------------------ REVENUES 100.0% 100.0 100.0 Costs and expenses: Cost of sales (excluding depreciation and amortization) 70.0 69.3 70.1 Depreciation and amortization 3.3 3.3 4.2 Selling and administrative expenses 19.4 19.0 16.6 Interest expense 1.1 1.5 1.6 Other income, net (0.7) -- (0.8) - ------------------------------------------------------------------------------------------------ 93.1 93.1 91.7 - ------------------------------------------------------------------------------------------------ Income before income taxes 6.9 6.9 8.3 Provision for income taxes 2.2 2.2 3.0 - ------------------------------------------------------------------------------------------------ NET INCOME 4.7% 4.7 5.3 ================================================================================================
GARDNER DENVER 2003 ANNUAL REPORT 13 Management's Discussion and Analysis RECENT DEVELOPMENTS On January 2, 2004, the Company effectively acquired Syltone plc ("Syltone"), previously a publicly traded company listed on the London Stock Exchange. The purchase price of (pound)61.2 million (approximately $109.2 million) including assumed bank debt (net of cash acquired) was paid in the form of cash ((pound)43.1 million), new loan notes ((pound)5.2 million) and the assumption of Syltone's existing bank debt, net of cash ((pound)12.9 million). The cash portion of the purchase price was funded from the Company's existing revolving credit line and cash reserves. The loan notes are unsecured and bear interest payable every six months, in arrears, at a rate per annum of one-half of one percent below the British pound based London Interbank Offered Rate for six-month deposits. The loan notes are redeemable at par at the option of the loan noteholder, in whole or in part, on any interest payment date falling on or after December 31, 2004. If at any time the aggregate nominal amount of all loan notes outstanding is (pound)0.5 million or less, the Company has the right to redeem all of the outstanding loan notes. Any loan notes outstanding on June 30, 2009 will be redeemed in full, together with interest on that day. Syltone, 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 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. Syltone generated revenues and operating profit (in accordance with accounting principles generally accepted in the U.K.) of (pound)84.4 million and (pound)6.3 million, respectively (approximately $151.1 million and $11.3 million, respectively as calculated using the December 31, 2003 exchange rate of $1.79/(pound)) for the twelve months ended September 30, 2003. Syltone's largest markets are Europe and North America, which represent approximately 67% and 20% of its revenues, respectively. Of the total sales to Europe, approximately 38% are to the U.K., 18% to France, 11% to Germany and 33% to other European countries. Approximately 70% of Syltone's revenues are generated through transportation-related activities while the remaining 30% are derived from fluid transfer-related activities. The acquisition of Syltone strengthens the Company's position, particularly in Europe, as the leading global provider of bulk handling solutions for the commercial transportation industry. Syltone's emphasis on systems-oriented handling solutions expands the Company's product offering and manufacturing capabilities and provides incremental growth opportunities. In addition, Syltone's installation and aftermarket capabilities are expected to strengthen the Company's distribution and service networks. Through the acquisition of Syltone, the Company expanded its product line to include loading arms. The Company views loading arms as an attractive market segment given its stability in developed regions where product demand is driven primarily by replacement activity, and its growth potential in emerging economies that are expanding their transportation infrastructure. - ------------------------------------------------------------------------------ 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 Compressed Air 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 volumes of centrifugal blowers. Revenues in the Pump 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, Pump 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 addi- 14 tion, 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 ("LaGrange 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. The changes related to the LaGrange Foundry closure have been completed and the Company expects to benefit going forward from reduced material costs from alternate suppliers. At the same time, the Company anticipates that it will need to address some residual problems in 2004 as it re-balances its casting supply chain while dealing with suppliers that are experiencing lower volumes, high fixed cost structures and increased competitive pressures. Gross margin (defined as revenues less cost of sales) in 2003 increased $3.3 million (3%) to $131.8 million compared to $128.5 million in 2002. Gross margin as a percentage of revenues (gross margin percentage) 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 in 2003 by 7% to $85.3 million 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. Compressed Air Products' operating earnings (defined as revenues less cost of sales, depreciation and amortization, and selling and administrative expenses) 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 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 Pump 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. See Note 9 to the Consolidated Financial Statements for further information on the Company's borrowing arrangements. 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 a portion of the proceeds from U.S. dollar borrowings, which were converted to British pounds in November 2003 and appreciated in U.S. dollars prior to being used to consummate the Syltone acquisition in January 2004. See Note 16 to the Consolidated Financial Statements for further information on the Syltone acquisition. 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 GARDNER DENVER 2003 ANNUAL REPORT 15 Management's Discussion and Analysis 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 2003, orders for compressed air products were $352.7 million, compared to $347.9 million in 2002. Order backlog for the Compressed Air Products segment was $48.7 million as of December 31, 2003, compared to $58.7 million as of December 31, 2002. The favorable impact of changes in currency exchange rates was approximately $16.6 million and $2.9 million for compressed air products orders and backlog, respectively, for the year ended and as of December 31, 2003. Excluding this impact, the decrease in orders and backlog compared to the prior year is primarily due to softer U.S. and European industrial economies combined with the Company's exit from the marketing and manufacture of certain highly engineered compressor packages in the U.K. and U.S. as discussed above. Because air is often used as a fourth utility in the manufacturing process, demand for compressed air 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 indicated by the rates of change in the Gross Domestic Product. These indicators have been relatively weak in both 2003 and 2002 but improved in the second half of 2003. As a result, orders for compressed air products are anticipated to improve gradually in 2004 as the U.S. industrial economy recovers. Demand for pump products, which are primarily petroleum related, has historically corresponded to market conditions and expectations for oil and natural gas prices. Orders for pump products were $72.9 million in 2003, an increase of $18.8 million (35%) compared to $54.1 million in 2002. Order backlog for the Pump Products segment was $9.7 million at December 31, 2003, compared to $6.6 million as of December 31, 2002, representing a 47% increase. The increase in orders and backlog is primarily due to increased demand for well stimulation pumps and petroleum pump parts. 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. - ------------------------------------------------------------------------------ YEAR ENDED DECEMBER 31, 2002, COMPARED WITH YEAR ENDED DECEMBER 31, 2001 REVENUES Revenues declined slightly to $418.2 million in 2002, compared to $419.8 million in 2001. Excluding incremental revenue from acquisitions completed since August 2001, which added $54.1 million to revenues in 2002, revenues decreased $55.7 million as compared to 2001. Revenues outside the United States, as a percentage of total revenues, increased to 37% in 2002, compared to 30% in 2001. This increase is primarily due to the Belliss & Morcom acquisition, which strengthened the Company's presence in Europe and Asia. Revenues in the Compressed Air Products segment increased $42.0 million (14%) in 2002 to $350.0 million, compared to $308.0 million in 2001. This increase is primarily due to acquisitions ($54.1 million), changes in currency exchange rates ($4.5 million) and price increases ($3.1 million). Excluding these favorable factors, revenues declined $19.7 million (6%) due to softness in the U.S. and European industrial markets, which weakened demand for compressors and blowers. Revenues in the Pump Products segment declined $43.6 million (39%) to $68.1 million in 2002, compared to $111.7 million in 2001. This decline resulted from depressed demand for petroleum pump products, due to reduced rig counts, which began negatively impacting order rates in the second half of 2001. Changes in revenues related to price increases were not significant. COSTS AND EXPENSES Gross margin in 2002 increased $3.0 million (2%) to $128.5 million, from $125.5 million in 2001. Gross margin percentage increased to 30.7% in 2002 from 29.9% in 2001, primarily due to an overall favorable sales mix change (including a lower proportion of Pump Product segment sales, which generate lower gross margins than the Compressed Air Products segment). The incremental impact of acquisitions, lower warranty expense in the Compressed Air Products segment and ongoing cost reduction projects, including acquisition integration efforts, also contributed to this increase. In 2002, gross margin was enhanced $0.4 million as a result of the liquidation of LIFO inventory layers, compared to $0.5 million in 2001. Depreciation and amortization decreased 20% to $14.1 million in 2002, compared to $17.6 million in 2001. This decrease was due 16 to the adoption of the Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 142, effective January 1, 2002, which eliminated goodwill amortization of $4.4 million. This decrease was partially offset by the amortization of intangible assets (other than goodwill) related to the 2001 acquisitions. Selling and administrative expenses increased in 2002 by 14% to $79.4 million from $69.7 million in 2001 due to acquisitions and unfavorable foreign currency exchange rates. Excluding acquisitions ($10.6 million) and currency exchange rate effects ($0.9 million), selling and administrative expenses decreased approximately 3% in 2002, due to cost reduction efforts, including acquisition integration, which were partially offset by higher fringe benefit costs (medical, pension and other postretirement benefits). As a percentage of revenues, selling and administrative expenses were 19.0% in 2002, compared to 16.6% in 2001. The increase in this ratio was attributable to the decline in revenues excluding acquisitions. Acquisitions also contributed to this increase as they currently have higher selling and administrative expenses as a percentage of revenues than the Company's previously existing operations. Compressed Air Products' operating earnings increased $7.6 million (34%) to $29.8 million, compared to $22.2 million in 2001. This increase was primarily attributable to the incremental impact of acquisitions, the cessation of goodwill amortization, reduced warranty expense and ongoing cost reduction efforts. These positive factors were partially offset by the negative impact of decreased leverage of the segment's fixed and semi-fixed costs over a lower revenue base (excluding acquisitions) and higher fringe benefit costs. As a percentage of revenues, operating earnings increased to 8.5% in 2002, compared to 7.2% (8.4% excluding goodwill amortization) in 2001, as a result of the factors noted above. Operating earnings for the Pump Products segment decreased $10.9 million to $5.2 million in 2002, a 68% decrease from $16.1 million in 2001, primarily due to the decrease in revenues. As a percentage of revenues, operating earnings for this segment decreased to 7.6% in 2002, compared to 14.4% (15.1% excluding goodwill amortization) in 2001. This decrease was primarily attributable to the negative impact of decreased leverage of the segment's fixed and semi-fixed costs over a lower revenue base. The cessation of goodwill amortization partially offset this negative factor. Interest expense decreased $0.4 million (6%) to $6.4 million for 2002, compared to $6.8 million in 2001, as lower average interest rates were partially offset by higher average borrowings (due to businesses acquired in 2001). The average interest rate for 2002 was 4.4%, compared to 5.4% for 2001. See Note 9 to the Consolidated Financial Statements for further information on the Company's borrowing arrangements. In 2001, other income, net included approximately $2.1 million from litigation settlement proceeds and $0.5 million from interest income related to finalization of an income tax settlement with the Internal Revenue Service. Excluding the impact of these non-recurring items, the majority of the decline in other income was due to currency transaction losses recorded in 2002, generated from U.S. dollar denominated monetary assets of foreign subsidiaries. INCOME Income before income taxes decreased $5.9 million (17%) to $28.8 million in 2002 from $34.7 million in 2001. This decrease was primarily the result of decreased leverage of fixed costs over a lower revenue base (excluding acquisitions) for both segments and the non-recurring gains included in 2001 other income mentioned above. These factors were partially offset by the cessation of goodwill amortization. The provision for income taxes decreased by $3.5 million to $9.2 million in 2002 compared to $12.7 million in 2001, as a result of lower income before taxes and a lower overall effective tax rate. The Company's effective tax rate was 32.0% in 2002, compared to 36.5% in 2001. This decrease was primarily attributable to the cessation of non-deductible goodwill amortization. A higher proportion of Extraterritorial Income Exclusion (EIE) benefit from U.S. export sales relative to pretax income and a higher proportion of income derived from lower taxed non-U.S. jurisdictions also contributed to this decline. Net income decreased $2.4 million (11%) to $19.6 million ($1.22 diluted earnings per share) in 2002, compared to $22.0 million ($1.40 diluted earnings per share) in 2001. In both 2002 and 2001, net income included $0.3 million in after-tax LIFO income ($0.02 diluted earnings per share). The decrease in net income was primarily attributable to the same factors that resulted in decreased income before taxes noted above. LIQUIDITY AND CAPITAL RESOURCES OPERATING WORKING CAPITAL During 2003, operating working capital (defined as receivables plus inventories, less accounts payable and accrued liabilities) decreased $3.6 million as reductions in inventory and increases in accounts payable and accrued liabilities were partially offset by higher receivables. These changes were a result of the increased activity levels in the fourth quarter of 2003 (revenues and cost of sales increased 12% compared to the fourth quarter of 2002) combined with improved management of inventory and collection of accounts receivable. Inventory turnover improved to 4.9 at December 31, 2003, compared to 4.2 at December 31, 2002. Days sales outstanding improved to 63 days at December 31, 2003, compared to 65 days at December 31, 2002. GARDNER DENVER 2003 ANNUAL REPORT 17 Management's Discussion and Analysis CASH FLOWS During 2003, the Company generated cash flows from operations totaling $46.3 million, a decrease of $6.2 million (12%) compared to 2002. This decrease was primarily the result of a less favorable change in operating working capital, partially offset by higher net income in 2003. During 2003, the Company made principal payments of $59.5 million and borrowed $122.0 million under its credit facilities. Borrowings included $92.0 million during the fourth quarter of 2003, which was used to demonstrate the Company's ability to finance and complete the acquisition of Syltone. See Note 16 to the Consolidated Financial Statements for additional information regarding the Syltone acquisition. The effect of exchange rate changes on cash and cash equivalents was $10.7 million in 2003 compared to $2.6 in 2002. This increase is due to a significant strengthening of the euro and 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 during the fourth quarter of 2003 to fund the Syltone acquisition, as noted above. 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 increase of $107.1 million during 2003. CAPITAL EXPENDITURES AND COMMITMENTS Capital projects designed to increase operating efficiency and flexibility, expand production capacity and increase product quality resulted in expenditures of $12.0 million in 2003, compared to $13.6 million in 2002. This decrease was primarily due to the timing of capital projects. Commitments for capital expenditures at December 31, 2003 totaled $10.4 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 remain available for repurchase. During 2003, no shares were repurchased under these repurchase programs. As of December 31, 2003, a total of 1,572,542 shares have been repurchased at a cost of $22.8 million under both repurchase programs. In 2003, the Company also acquired 5,509 shares of its common stock, valued at $0.1 million, which were tendered for the exercise of stock options. LIQUIDITY On March 6, 2002, the Company amended and restated its Revolving Line of Credit Agreement (the "Credit Line"), increasing the aggregate borrowing capacity to $150 million and extending the maturity date to March 6, 2005. Subject to approval by lenders holding more than 75% of the debt, the Company may request up to two, one-year extensions. The Credit Line requires no principal payments during the term of the agreement and is due upon final maturity. On December 31, 2003, the Credit Line had an outstanding balance of $114.0 million, leaving $36.0 million available for future use or for letters of credit. The amended and restated agreement also provided for an additional $50 million Term Loan. Proceeds from the Term Loan were used to retire debt outstanding under an Interim Credit Agreement. The five-year Term Loan requires principal payments of $2.5 million in years one and two, and $15 million in years three through five. Other terms and conditions of the Term Loan are similar to those of the Credit Line. The Company's borrowing arrangements are generally unsecured and permit certain investments and dividend payments. There are no material restrictions on the Company as a result of its credit 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. 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 offering for acquisitions, capital expenditures, repayment of borrowings, working capital and other general corporate purposes. Management currently expects the Company's cash flows in 2004 to be sufficient to fund its scheduled debt service and provide required resources for working capital and capital investments. CONTRACTUAL OBLIGATIONS At December 31, 2003, certain of the Company's contractual obligations, including estimated payments due by period, are as follows (dollars in thousands):
Payments Due by Period ------------------------------------------------------- Less than More than Total 1 year 1 - 3 years 3 - 5 years 5 years - ---------------------------------------------------------------------------------------------------------- CONTRACTUAL OBLIGATIONS Long-term debt $182,631 $16,875 $154,000 $3,750 $8,006 Operating leases 17,409 3,469 4,932 2,861 6,147 Purchase obligations 35,258 35,210 48 -- -- - ---------------------------------------------------------------------------------------------------------- Total $235,298 $55,554 $158,980 $6,611 $14,153 ==========================================================================================================
18 Purchase obligations consist primarily of inventory purchases made in the normal course of business to meet operational requirements. The above table does not include $57.1 million of other non-current liabilities recorded in the balance sheet, which primarily consists of pension and other postretirement liabilities, because the timing of payments related to such liabilities is uncertain. 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 and British pound, 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. 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 substantial majority of the plaintiffs are not physically impaired with a disease attributable to the alleged exposure. Predecessors to the Company manufactured, distributed and sold the products allegedly at issue in the pending asbestos and silicosis litigation lawsuits. The Company has potential responsibility for certain contingent liabilities with respect to 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 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 at issue 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 substantial majority of plaintiffs are not impaired with a disease attributable to alleged exposure to asbestos or silica; various potential defenses available to the Company with respect to such matters; and the Company's prior disposition of comparable matters. However, due to the 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 December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure - an Amendment of FASB Statement No. 123." SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, the statement amends the disclosure requirements of SFAS 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. The Company has adopted SFAS No. 148 and included the required disclosures in Note 1 to the Consolidated Financial Statements. In December 2002, the Emerging Issues Task Force issued EITF 00-21, "Revenue Arrangements with Multiple Deliverables." This issue addresses certain aspects of the accounting by a vendor for arrangements under which it will perform multiple revenue-generating activities. In some arrangements, the different revenue-generating activities (deliverables) are sufficiently separable, and there exists sufficient evidence of their fair values to separately account for some or all of the deliverables. This issue GARDNER DENVER 2003 ANNUAL REPORT 19 Management's Discussion and Analysis addresses when and, if so, how an arrangement involving multiple deliverables should be divided into separate units of accounting. This issue does not change otherwise applicable revenue recognition criteria. This issue is applicable for revenue arrangements beginning in the third quarter of 2003. The Company has adopted the provisions of EITF 00-21, which did not have a material impact on its financial statements. In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities," an interpretation of Accounting Research Bulletin No. 51, which addresses consolidation by business enterprises of variable interest entities. This interpretation requires existing unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the interest entities do not effectively disperse risks among the parties involved. This interpretation applies to variable interest entities created after January 31, 2003. It applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. The Company has no variable interest entities and has adopted this interpretation which did not have a material impact on its financial statements. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity." SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Company has adopted this statement which did not have a material impact on its financial statements. In December 2003, the FASB issued SFAS No. 132 (revised), "Employers' Disclosures about Pensions and Other Postretirement Benefits." This statement requires additional disclosures about plan assets, benefit obligations, cash flows, benefit costs and other relevant information. In addition to expanded annual disclosures, the statement also requires disclosures of various elements of pension and other postretirement benefit costs on an interim basis. The Company has adopted SFAS No. 132 (revised) and included the required disclosures in Note 7 to the Consolidated Financial Statements. CRITICAL ACCOUNTING POLICIES Management has evaluated the accounting policies used in the preparation of the Company's financial statements and related notes and believes those policies to be reasonable and appropriate. Certain of these accounting policies require the application of significant judgment by management in selecting 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, 2003, $40.4 million (63%) of the Company's inventory is accounted for on a first-in, first-out (FIFO) basis with the remaining $23.9 million (37%) 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 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 2003, 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, interest rates and productivity could affect such valuations. 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. 20 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 health care trend rates. In accordance with accounting principles generally accepted in the United States, 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 during the past few 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, 2003. As a result, the Company has recorded a cumulative reduction to stockholders' equity (accumulated other comprehensive income) in the amount of $5.2 million (after tax) as of December 31, 2003. 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 2004 and beyond, the Company could also be required to record additional charges to stockholders' equity in the future. Due to the market trends of the past few years (i.e., lower interest rates and asset returns and increasing health care costs) and lower amortization gains from prior service costs, pension and other postretirement benefit expense is expected to increase by approximately $1.2 million in 2004 (excluding the incremental expense associated with the Syltone acquisition). CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS All of the statements in this Annual Report to Stockholders, other than historical facts, are forward looking statements made in reliance upon the safe harbor of the Private Securities Litigation Reform Act of 1995, including, without limitation, statements made in the Chairman's Letter, the remainder of the narrative/non-financial portions of the Annual Report and in Management's Discussion and Analysis, particularly under the caption "Outlook." As a general matter, forward-looking statements are those focused upon anticipated events or trends and expectations and beliefs relating to matters that are not historical in nature. Such forward-looking statements are subject to uncertainties and factors relating to the Company's operations and business environment, all of which are difficult to predict and many of which are beyond the control of the Company. These uncertainties and factors could cause actual results to differ materially from those matters expressed in or implied by such forward-looking statements. The following uncertainties and factors, among others, could affect future performance and cause actual results to differ materially from those expressed in or implied by forward-looking statements: (1) the ability to maintain and to enter into key purchasing, supply and outsourcing relationships; (2) the ability to effectively manage the transition of iron casting supply to alternate sources and the skill, commitment and availability of such alternate sources; (3) the ability to identify, negotiate and complete future acquisitions; (4) the speed with which the Company is able to integrate acquisitions and realize the related financial benefits; (5) the successful implementation of other strategic initiatives, including, without limitation, restructuring plans, inventory reduction programs and other cost reduction efforts; (6) the domestic and/or worldwide level of oil and natural gas prices and oil and gas drilling and production, which affect demand for the Company's petroleum products; (7) changes in domestic and/or worldwide industrial production and industrial capacity utilization rates, which affect demand for the Company's compressed air products; (8) pricing of the Company's products; (9) the degree to which the Company is able to penetrate niche and international markets; (10) changes in currency exchange rates (primarily between the U.S. dollar, the euro and the British pound); (11) changes in interest rates; (12) the ability to attract and retain quality management personnel; (13) market performance of pension plan assets and changes in discount rates used for actuarial assumptions in pension and other postretirement obligation and expense calculations; (14) the continued ability to effectively manage and defend litigation matters pending, or asserted in the future, against the Company; (15) the development and acceptance of the Company's new product offerings; and (16) the continued successful implementation and utilization of the Company's electronic services. The Company does not undertake, and hereby disclaims, any duty to update these forward-looking statements, even though its situation and circumstances may change in the future. GARDNER DENVER 2003 ANNUAL REPORT 21 Report of Management The Company's management is responsible for the integrity and accuracy of the financial statements. Management believes that the financial statements have been prepared in conformity with appropriate accounting principles generally accepted in the United States. In preparing the financial statements, management makes informed judgments and estimates, where necessary, to reflect the expected effects of events and transactions that have not been completed. The Company believes that its disclosure controls and procedures were effective to provide reasonable assurance that material information required to be disclosed is recorded, processed, summarized and communicated to management and reported within the required time periods. In meeting its responsibility for the reliability of the financial statements, management relies on a system of internal accounting controls. This system is designed to provide reasonable assurance that assets are safeguarded and transactions are executed in accordance with management's authorization and recorded properly to permit the preparation of financial statements in accordance with accounting principles generally accepted in the United States. The design of this system recognizes that errors or irregularities may occur and that estimates and judgments are required to assess the relative cost and expected benefits of the controls. Management believes that the Company's accounting controls provide reasonable assurance that errors or irregularities that could be material to the financial statements are prevented or would be detected within a timely period. The Audit and Finance Committee of the Board of Directors (the "Committee"), which is comprised solely of Directors who are not employees of the Company, is responsible for overseeing the Company's financial reporting process. The Committee meets with management and internal audit periodically to review their activities and ensure that management and internal audit are properly discharging their responsibilities. The Committee also meets periodically with the independent auditors, who are responsible to the Committee and the Board of Directors, to discuss the quality and acceptability of the Company's financial reporting and internal controls, as well as non-audit- related services. The independent auditors are engaged to express an opinion on the Company's consolidated financial statements. Their opinion is based on procedures which they believe to be sufficient to provide a reasonable basis that the financial statements, in all material respects, are fairly presented in conformity with accounting principles generally accepted in the United States. /s/ Ross J. Centanni Ross J. Centanni Chairman, President and Chief Executive Officer /s/ Philip R. Roth Philip R. Roth Vice President, Finance and Chief Financial Officer 22 Reports of Independent Public Accountants To the Board of Directors and Stockholders of Gardner Denver, Inc. We have audited the accompanying consolidated balance sheets of Gardner Denver, Inc. (a Delaware corporation) and subsidiaries as of December 31, 2003 and 2002, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the years in the two-year period ended December 31, 2003. 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. The accompanying consolidated financial statements of Gardner Denver, Inc. for the year ended December 31, 2001, were audited by other auditors who have ceased operations. Those auditors expressed an unqualified opinion on those financial statements, before the addition of the transitional disclosures detailed in Note 5, in their report dated February 6, 2002. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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, 2003 and 2002, and the results of their operations and their cash flows for each of the years in the two-year period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America. As detailed in Note 5, the December 31, 2001 consolidated financial statements, which were audited by other auditors who have ceased operations, include the addition of the transitional disclosures required by Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, which was adopted by the Company in the year ending December 31, 2002. In our opinion, the disclosures for December 31, 2001 in Note 5 are appropriate. However, we were not engaged to audit, review, or apply any procedures to the December 31, 2001 consolidated financial statements of Gardner Denver, Inc. and subsidiaries other than with respect to such disclosures and, accordingly, we do not express an opinion or any other form of assurance on the December 31, 2001 consolidated financial statements taken as a whole. /s/ KPMG LLP St. Louis, Missouri January 30, 2004 - ------------------------------------------------------------------------------ This is a copy of a report previously issued by Arthur Andersen LLP, which has ceased operations, and has not been reissued by Arthur Andersen LLP. To the Board of Directors and Stockholders of Gardner Denver, Inc. We have audited the accompanying consolidated balance sheets of Gardner Denver, Inc. (a Delaware corporation) and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2001. 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 auditing standards generally accepted in the 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, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. /s/ Arthur Andersen LLP St. Louis, Missouri February 6, 2002 (except with respect to the matter discussed in Note 9, as to which the date is March 6, 2002) GARDNER DENVER 2003 ANNUAL REPORT 23 Consolidated Statements of Operations (dollars in thousands, except per share amounts)
Year ended December 31, --------------------------------------- 2003 2002 2001 - ------------------------------------------------------------------------------------------------------------- Revenues $439,530 418,158 419,770 Costs and expenses: Cost of sales (excluding depreciation and amortization) 307,753 289,631 294,249 Depreciation and amortization 14,566 14,139 17,567 Selling and administrative expenses 85,326 79,400 69,678 Interest expense 4,748 6,365 6,796 Other income, net (3,221) (204) (3,203) - ------------------------------------------------------------------------------------------------------------- 409,172 389,331 385,087 - ------------------------------------------------------------------------------------------------------------- Income before income taxes 30,358 28,827 34,683 Provision for income taxes 9,715 9,225 12,659 - ------------------------------------------------------------------------------------------------------------- Net income $ 20,643 19,602 22,024 ============================================================================================================= Basic earnings per share $ 1.29 1.24 1.42 ============================================================================================================= Diluted earnings per share $ 1.27 1.22 1.40 ============================================================================================================= The accompanying notes are an integral part of these statements.
24 Consolidated Balance Sheets (dollars in thousands, except per share amounts)
December 31, ------------------------ 2003 2002 - ------------------------------------------------------------------------------------------------------------ ASSETS Current assets: Cash and equivalents $132,803 25,667 Receivables (net of allowances of $4,534 in 2003 and $5,279 in 2002) 81,345 74,490 Inventories, net 64,327 67,448 Deferred income taxes 3,652 5,902 Other current assets 5,682 4,268 - ------------------------------------------------------------------------------------------------------------ Total current assets 287,809 177,775 - ------------------------------------------------------------------------------------------------------------ Property, plant and equipment, net 75,428 76,162 Goodwill 205,488 201,761 Other intangibles, net 10,341 9,418 Deferred income taxes 5,374 10,160 Other assets 5,293 3,454 - ------------------------------------------------------------------------------------------------------------ Total assets $589,733 478,730 ============================================================================================================ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current maturities of long-term debt $ 16,875 7,500 Accounts payable and accrued liabilities 84,081 76,709 - ------------------------------------------------------------------------------------------------------------ Total current liabilities 100,956 84,209 - ------------------------------------------------------------------------------------------------------------ Long-term debt, less current maturities 165,756 112,663 Postretirement benefits other than pensions 32,110 34,539 Other liabilities 25,006 24,396 - ------------------------------------------------------------------------------------------------------------ Total liabilities 323,828 255,807 - ------------------------------------------------------------------------------------------------------------ Stockholders' equity: Common stock, $0.01 par value; 50,000,000 shares authorized; 16,117,026 and 15,942,138 shares outstanding in 2003 and 2002, respectively 178 177 Capital in excess of par value 174,474 171,047 Retained earnings 102,307 81,664 Accumulated other comprehensive income (loss) 14,893 (4,146) Treasury stock at cost, 1,721,862 and 1,716,353 shares in 2003 and 2002, respectively (25,947) (25,819) - ------------------------------------------------------------------------------------------------------------ Total stockholders' equity 265,905 222,923 - ------------------------------------------------------------------------------------------------------------ Total liabilities and stockholders' equity $589,733 478,730 ============================================================================================================ The accompanying notes are an integral part of these statements.
GARDNER DENVER 2003 ANNUAL REPORT 25 Consolidated Statements of Stockholders' Equity (dollars in thousands)
Accumulated Capital In Other Total Common Excess of Treasury Retained Comprehensive Stockholders' Comprehensive Stock Par Value Stock Earnings Income (Loss) Equity Income - --------------------------------------------------------------------------------------------------------------------------------- Balance January 1, 2001 $170 160,343 (24,508) 40,038 (4,895) 171,148 ================================================================================================================= Stock issued for benefit plans and options 4 5,919 5,923 Treasury stock (1,094) (1,094) Net income 22,024 22,024 22,024 Foreign currency translation adjustments 727 727 727 - --------------------------------------------------------------------------------------------------------------------------------- 22,751 ======= Balance December 31, 2001 $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 ================================================================================================================= The accompanying notes are an integral part of these statements.
26 Consolidated Statements of Cash Flows (dollars in thousands)
Year ended December 31, --------------------------------------- 2003 2002 2001 - -------------------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $ 20,643 19,602 22,024 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 14,566 14,139 17,567 Unrealized foreign currency transaction gain (3,212) -- -- Net (gain)/loss on asset dispositions (370) (20) 46 LIFO liquidation income (367) (394) (502) Stock issued for employee benefit plans 2,434 2,342 2,471 Deferred income taxes 5,724 2,455 615 Changes in assets and liabilities: Receivables (3,568) 13,321 6,105 Inventories 7,270 11,254 1,200 Accounts payable and accrued liabilities 4,095 (9,313) (4,294) Other assets and liabilities, net (932) (905) (1,079) - -------------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 46,283 52,481 44,153 - -------------------------------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Capital expenditures (11,950) (13,641) (11,524) Disposals of property, plant and equipment 1,959 200 97 Foreign currency hedging transactions -- (5) (31) Business acquisitions, net of cash acquired (2,402) -- (82,907) Other (516) -- -- - -------------------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (12,909) (13,446) (94,365) - -------------------------------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Principal payments on long-term debt (59,532) (109,442) (90,151) Proceeds from long-term debt 122,000 62,000 139,000 Proceeds from stock options 993 2,446 3,452 Purchase of treasury stock (128) (217) (1,094) Other (302) (754) (421) - -------------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities 63,031 (45,967) 50,786 - -------------------------------------------------------------------------------------------------------------------------------- Effect of exchange rate changes on cash and equivalents 10,731 2,619 (833) - -------------------------------------------------------------------------------------------------------------------------------- Increase (decrease) in cash and equivalents 107,136 (4,313) (259) Cash and equivalents, beginning of year 25,667 29,980 30,239 - -------------------------------------------------------------------------------------------------------------------------------- Cash and equivalents, end of year $132,803 25,667 29,980 ================================================================================================================================ The accompanying notes are an integral part of these statements.
GARDNER DENVER 2003 ANNUAL REPORT 27 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 (loss), 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, (pound)62.4 million ($111.4 million) in cash was deposited on account to acquire the shares of Syltone (See Note 16). These funds were restricted for such use until the acquisition was consummated or the Company's offer to purchase such shares expired. INVENTORIES Inventories, which consist of materials, labor and manufacturing overhead, are carried at the lower of cost or market value. As of December 31, 2003, $40.4 million (63%) of the Company's inventory is accounted for on a first-in, first-out (FIFO) basis, with the remaining $23.9 million (37%) accounted for on a last-in, first-out (LIFO) basis. 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 Effective July 1, 2001, the Company adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 142 "Goodwill and Other Intangible Assets" applicable to business combinations completed after June 30, 2001. Effective January 1, 2002, additional provisions of SFAS No. 142, relating to business combinations completed prior to July 1, 2001 became effective and were adopted by the Company. 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, generally 5 to 15 years. 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 2003, 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 OF 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 of 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. 28 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. RESEARCH AND DEVELOPMENT Costs for research and development are expensed as incurred and were $2,808, $2,398 and $2,476 for the years ended December 31, 2003, 2002 and 2001, respectively. FINANCIAL INSTRUMENTS There were no off-balance sheet derivative financial instruments as of December 31, 2003 or 2002. 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 2003, 2002 and 2001 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:
Year ended December 31, ------------------------------ 2003 2002 2001 - ------------------------------------------------------------------------------------------------- Net income, as reported $20,643 19,602 22,024 Less: Total stock-based employee compensation expense determined under fair value method, net of related tax effects (1,252) (1,274) (1,293) - ------------------------------------------------------------------------------------------------- Pro forma net income $19,391 18,328 20,731 ================================================================================================= Basic earnings per share, as reported $ 1.29 1.24 1.42 Basic earnings per share, pro forma $ 1.21 1.16 1.33 Diluted earnings per share, as reported $ 1.27 1.22 1.40 Diluted earnings per share, pro forma $ 1.19 1.14 1.31 =================================================================================================
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 2002 or 2001. 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 and additional minimum pension liability (net of income taxes). See Note 7 for further discussion of additional minimum pension liability adjustments. NEW ACCOUNTING STANDARDS In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure - an Amendment of FASB Statement No. 123." SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, the statement amends the disclosure requirements of SFAS 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. The Company has adopted SFAS No. 148 and included the required disclosures above. In December 2002, the Emerging Issues Task Force issued EITF 00-21, "Revenue Arrangements with Multiple Deliverables." This issue addresses certain aspects of the accounting by a vendor for arrangements under which it will perform multiple revenue-generating activities. In some arrangements, the different revenue-generating activities (deliverables) are sufficiently separable, and there exists sufficient evidence of their fair values to GARDNER DENVER 2003 ANNUAL REPORT 29 Notes to Consolidated Financial Statements (dollars in thousands, except per share amounts or amounts described in millions) separately account for some or all of the deliverables. This issue addresses when and, if so, how an arrangement involving multiple deliverables should be divided into separate units of accounting. This issue does not change otherwise applicable revenue recognition criteria. This issue is applicable for revenue arrangements beginning in the third quarter of 2003. The Company has adopted the provisions of EITF 00-21, which did not have a material impact on its financial statements. In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities," an interpretation of Accounting Research Bulletin No. 51, which addresses consolidation by business enterprises of variable interest entities. This interpretation requires existing unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the interest entities do not effectively disperse risks among the parties involved. This interpretation applies to variable interest entities created after January 31, 2003. It applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. The Company has no variable interest entities and has adopted this statement, which did not have a material impact on its financial statements. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity." SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Company has adopted this statement which did not have a material impact on its financial statements. In December 2003, the FASB issued SFAS No. 132 (revised), "Employers' Disclosures about Pensions and Other Postretirement Benefits." This statement requires additional disclosures about plan assets, benefit obligations, cash flows, benefit costs and other relevant information. In addition to expanded annual disclosures, the statement also requires disclosures of various elements of pension and other postretirement benefit costs on an interim basis. The Company has adopted SFAS No. 132 (revised) and included the required disclosures in Note 7 to the Consolidated Financial Statements. - ------------------------------------------------------------------------------ NOTE 2: ACQUISITIONS 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 Pump 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. During 2001, the Company's Compressed Air Products segment completed two acquisitions. Effective September 10, 2001, the Company acquired certain assets and stock of Hoffman Air and Filtration Systems ("Hoffman"). Hoffman, previously headquartered in Syracuse, New York, manufactures and distributes multistage centrifugal blowers and vacuum systems, primarily for wastewater treatment and industrial applications. Effective September 1, 2001, the Company also acquired certain assets and stock of the Hamworthy Belliss & Morcom compressor business ("Belliss & Morcom"). Belliss & Morcom is headquartered in Gloucester, England and manufactures and distributes lubricated and oil-free reciprocating air compressors for a variety of applications. The aggregate purchase price, net of cash acquired, was approximately $83 million for these acquisitions. There are no additional contingent payments or commitments related to these acquisitions. The purchase price of each acquisition has been allocated primarily to receivables; inventory; property, plant and equipment; intangible assets (other than goodwill); and accounts payable and accrued liabilities, based on their respective fair values at the date of acquisition and resulted in aggregate costs in excess of net assets acquired of approximately $58 million. The following table summarizes supplemental pro forma information as if the Hoffman and Belliss & Morcom acquisitions had been completed on January 1, 2000:
Year ended December 31, 2001 (Unaudited) - ------------------------------------------------------------------------------- Revenues $481,285 Net income 23,618 Diluted earnings per share $ 1.50 ===============================================================================
The unaudited pro forma information has been presented for comparative purposes and does not purport to be indicative of the consolidated results of operations had these transactions been completed as of the assumed date. 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. 30 - ------------------------------------------------------------------------------- NOTE 3: INVENTORIES
December 31, ------------------------- 2003 2002 - ------------------------------------------------------------------------------ Raw materials, including parts and subassemblies $33,850 33,400 Work-in-process 7,850 9,077 Finished goods 24,731 27,630 Perishable tooling and supplies 2,429 2,456 - ------------------------------------------------------------------------------ 68,860 72,563 Excess of FIFO costs over LIFO costs (4,533) (5,115) - ------------------------------------------------------------------------------ Inventories, net $64,327 67,448 ==============================================================================
During 2003, 2002 and 2001, 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 2003, 2002 and 2001 by $249, $268 and $319, respectively. It is the Company's policy to record the earnings effect of LIFO inventory liquidations in the quarter in which a decrease for the entire year becomes certain. In each of the years 2001 through 2003, 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 $4.5 million as of December 31, 2003. - ------------------------------------------------------------------------------ NOTE 4: PROPERTY, PLANT AND EQUIPMENT
December 31, --------------------------- 2003 2002 - ------------------------------------------------------------------------------ Property, plant and equipment: Land and land improvements $ 8,710 8,189 Buildings 41,727 41,779 Machinery and equipment 114,594 107,366 Tooling, dies, patterns, etc. 13,884 12,759 Office furniture and equipment 14,574 13,143 Other 6,780 6,099 Construction in progress 2,612 4,758 - ------------------------------------------------------------------------------ 202,881 194,093 Accumulate depreciation (127,453) (117,931) - ------------------------------------------------------------------------------ Property, plant and equipment, net $ 75,428 76,162 ==============================================================================
- ------------------------------------------------------------------------------ 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. Net income and basic and diluted earnings per share for the year ended December 31, 2001, adjusted to exclude goodwill amortization, are as follows:
Year ended December 31, 2001 - ---------------------------------------------------------------------------------------- Reported net income $22,024 Adjustments: goodwill amortization (net of income taxes) 3,760 - ---------------------------------------------------------------------------------------- Adjusted net income $25,784 ======================================================================================== Basic earnings per share: Reported $ 1.42 Adjusted $ 1.66 Diluted earnings per share: Reported $ 1.40 Adjusted $ 1.63 ========================================================================================
GARDNER DENVER 2003 ANNUAL REPORT 31 Notes to Consolidated Financial Statements (dollars in thousands, except per share amounts or amounts described in millions) The changes in the carrying amount of goodwill attributable to each business segment for the years ended December 31, 2002 and 2003 are as follows:
Compressed Air Pump Products Products - -------------------------------------------------------------------------------------- Balance as of January 1, 2002 $157,614 25,531 Adjustment due to finalization of purchase price allocations for businesses acquired in 2001 16,213 -- Foreign currency translation 2,403 -- - -------------------------------------------------------------------------------------- Balance as of December 31, 2002 176,230 25,531 - -------------------------------------------------------------------------------------- Goodwill acquired during the year -- 103 Foreign currency translation 3,624 -- - -------------------------------------------------------------------------------------- BALANCE AS OF DECEMBER 31, 2003 $179,854 25,634 ======================================================================================
Other intangible assets at December 31, 2003 and 2002 consisted of the following:
DECEMBER 31, 2003 December 31, 2002 ------------------------------------------------------------------- GROSS CARRYING ACCUMULATED Gross Carrying Accumulated AMOUNT AMORTIZATION Amount Amortization - ------------------------------------------------------------------------------------------------------- Amortized intangible assets: Acquired technology $13,312 $ (8,002) 10,936 (6,853) Other 4,238 (2,264) 4,541 (2,163) Unamortized intangible assets: Trademarks 3,057 -- 2,957 -- - ------------------------------------------------------------------------------------------------------- Total other intangible assets $20,607 $(10,266) 18,434 (9,016) =======================================================================================================
The purchase price allocations for Hoffman and Belliss & Morcom were finalized during the quarter ended September 30, 2002, upon completion of valuations of the acquired, separately identifiable intangible assets (other than goodwill). Pursuant to the valuations, the fair value of separately identifiable assets was reduced from the Company's previous fair value estimates with a corresponding increase in the purchase price allocated to goodwill. The impact on amortization expense as a result of the finalization of the purchase price allocations was insignificant. Amortization of intangible assets was $1.4 million in 2003. Amortization of intangible assets is anticipated to be approximately $3.5 million per year for 2004 through 2008. This amount includes an estimate for amortization of intangible assets with finite useful lives acquired in the Syltone acquisition. See Note 16 for further information on the Syltone acquisition. - ------------------------------------------------------------------------------ NOTE 6: ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
December 31, ------------------------ 2003 2002 - ----------------------------------------------------------------------------------------------- Accounts payable - trade $39,691 35,385 Salaries, wages and related fringe benefits 14,661 11,831 Product warranty 6,635 7,060 Product liability, workers' compensation and other insurance 5,046 5,127 Other 18,048 17,306 - ----------------------------------------------------------------------------------------------- Total accounts payable and accrued liabilities $84,081 76,709 ===============================================================================================
32 A reconciliation of the changes in the product warranty liability for the years ended December 31, 2002 and 2003 is as follows: - ------------------------------------------------------------------------- Balance as of December 31, 2001 $ 7,578 Product warranty accruals 5,281 Settlements (6,126) Other (primarily foreign currency translation) 327 - ------------------------------------------------------------------------- Balance as of December 31, 2002 7,060 - ------------------------------------------------------------------------- Product warranty accruals 5,420 Settlements (6,171) Other (primarily foreign currency translation) 326 - ------------------------------------------------------------------------- BALANCE AS OF DECEMBER 31, 2003 $ 6,635 =========================================================================
- ------------------------------------------------------------------------- NOTE 7: PENSION AND OTHER POSTRETIREMENT BENEFITS The Company sponsors retirement plans covering substantially all employees. Benefits are provided to employees under defined benefit pay-related and service-related plans, which are generally noncontributory. Annual Company contributions to domestic retirement plans equal or exceed the minimum funding requirements of the Employee Retirement Income Security Act of 1974. Consistent with the practice in Germany, the retirement plans covering the employees of the Company's Wittig operation in 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 respect to the 2001 Hoffman acquisition, the accumulated benefit obligation and plan assets related to the defined benefit plans, covering substantially all full-time employees, were transferred to the Company pursuant to the purchase agreement. With regard to the 2001 Belliss & Morcom acquisition, the majority of the employees are based in the United Kingdom 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. 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. 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 are eligible to participate in Company-sponsored defined contribution savings plans, which are qualified plans under the requirements of 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. Domestic salaried employees who retired prior to 1989, as well as certain other employees who were near retirement and elected to receive certain benefits, have retiree medical, prescription and life insurance benefits. All other active salaried employees do not have postretirement medical benefits. The hourly employees have GARDNER DENVER 2003 ANNUAL REPORT 33 Notes to Consolidated Financial Statements (dollars in thousands, except per share amounts or amounts described in millions) separate plans with varying benefit formulas. In all cases, however, currently active hourly employees, except for certain employees who are near retirement, will not receive healthcare benefits after retirement. All of the Company's postretirement medical plans are unfunded. In December 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 ("the Act") became law in the U.S. The Act introduces a prescription drug benefit under Medicare 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. In accordance with FASB Staff Position FAS 106-1, "Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003," the Company has elected to defer recognition of the effects of the Act in any measures of its benefit obligations or costs. Specific authoritative guidance on the accounting for the federal subsidy is pending and that guidance, when issued, will be adopted by the Company to the extent applicable. 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, 2003, and a statement of the funded status as of December 31, 2003 and 2002:
Pension Benefits -------------------------------------------- U.S. Plans Non-U.S. Plans Postretirement Benefits -------------------------------------------- ----------------------- 2003 2002 2003 2002 2003 2002 - --------------------------------------------------------------------------------------------------------------------------- RECONCILIATION OF BENEFIT OBLIGATION Obligation at January 1 $ 55,176 54,235 $ 26,997 3,147 $ 28,391 30,371 Service cost 1,977 2,188 1,539 1,301 12 17 Interest cost 3,400 3,629 1,447 1,331 1,685 1,939 Actuarial loss (gain) 2,133 (214) 3,640 3,237 139 (1,154) Employee contributions -- -- 415 372 -- -- Benefit payments (4,668) (4,662) (928) (182) (2,563) (2,272) Acquisitions -- -- (2,667) 15,270 -- (510) Effect of foreign currency exchange rate changes -- -- 3,458 2,521 -- -- - --------------------------------------------------------------------------------------------------------------------------- Obligation at December 31 $ 58,018 55,176 $ 33,901 26,997 $ 27,664 28,391 =========================================================================================================================== RECONCILIATION OF FAIR VALUE OF PLAN ASSETS Fair value of plan assets at January 1 $ 40,539 50,198 $ 18,358 -- Actual return on plan assets 7,304 (5,527) 3,891 (893) Acquisitions -- -- (996) 17,196 Employer contributions 1,130 529 39 92 Employee contributions -- 1 415 372 Benefit payments (4,668) (4,662) (857) (182) Effect of foreign currency exchange rate changes -- -- 2,209 1,773 - --------------------------------------------------------------------------------------------------------------------------- Fair value of plan assets at December 31 $ 44,305 40,539 $ 23,059 18,358 =========================================================================================================================== FUNDED STATUS Funded status at December 31 $(13,713) (14,639) $(10,842) (8,637) $(27,664) (28,391) Unrecognized transition liability 9 13 -- -- -- -- Unrecognized prior-service cost (537) (623) -- -- (744) (1,349) Unrecognized loss (gain) 8,989 11,314 6,329 6,766 (6,082) (7,180) - --------------------------------------------------------------------------------------------------------------------------- Accrued benefit liability $ (5,252) (3,935) $ (4,513) (1,871) $(34,490) (36,920) ===========================================================================================================================
The total pension and other postretirement accrued benefit liability is included in the balance sheets in the following captions:
December 31, --------------------------------- 2003 2002 - ------------------------------------------------------------------------------------------------------------- Deferred income taxes $ 3,298 4,975 Accounts payable and accrued liabilities (2,380) (2,381) Postretirement benefits other than pensions (32,110) (34,539) Other liabilities (18,218) (19,241) Accumulated other comprehensive income 5,155 8,460 - ------------------------------------------------------------------------------------------------------------- Total pension and other postretirement accrued benefit liability $(44,255) (42,726) =============================================================================================================
34 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, 2003 and 2002 are as follows:
December 31, ----------------------------------------------- U.S. Plans Non-U.S. Plans ----------------------------------------------- 2003 2002 2003 2002 - ------------------------------------------------------------------------------------------------- Accumulated benefit obligation $57,890 54,907 $4,874 23,061 Fair value of plan assets 44,305 40,539 -- 18,358 =================================================================================================
The following table provides the components of net periodic benefit expense (income) for the plans for the years ended December 31, 2003, 2002 and 2001:
Pension Benefits -------------------------------------------------------------------- Other U.S. Plans Non-U.S. Plans Postretirement Benefits -------------------------------------------------------------------- ------------------------------- 2003 2002 2001 2003 2002 2001 2003 2002 2001 - ---------------------------------------------------------------------------------------------------------------------------------- Service cost $ 1,977 2,188 1,989 $ 1,539 1,301 83 $ 12 17 23 Interest cost 3,400 3,629 3,520 1,447 1,331 181 1,685 1,939 2,083 Expected return on plan assets (3,269) (4,180) (4,441) (1,474) (1,717) -- -- -- -- Amortization of transition liability 5 5 4 -- 3 6 -- -- -- Amortization of prior- service cost (86) (86) (86) -- -- -- (606) (1,206) (1,307) Amortization of net loss (gain) 421 -- 2 230 3 -- (958) (829) (1,030) - ---------------------------------------------------------------------------------------------------------------------------------- Net periodic benefit expense (income) 2,448 1,556 988 1,742 921 270 $ 133 (79) (231) Defined contribution plans 2,548 2,576 2,816 1,378 1,281 872 =============================== - ------------------------------------------------------------------------------------------------ Total retirement expense $ 4,996 4,132 3,804 $ 3,120 2,202 1,142 ================================================================================================
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 ----------------------------------------------------------------- 2003 2002 2001 2003 2002 2001 - ------------------------------------------------------------------------------------------------------------------------- Discount rate (1) 6.5% 6.8 7.3 5.5% 5.6 6.0 Rate of increase in compensation levels (2) 5.0% 5.0 5.0 3.5% 3.3 2.5 Expected long-term rate of return on assets (2) 9.0% 9.0 9.0 8.3% 8.3 N/A ========================================================================================================================= (1) Net periodic benefit expense (income) is determined by the previous year's discount rate (2) Applies only to pension plans
For measurement purposes, the annual rate of increase in the per capita cost of covered healthcare benefits assumed for 2003 was 7.3% for all participants. The rates were assumed to decrease gradually each year to a rate of 5.5% 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) 7.3% (6.5%) Effect on the postretirement benefit obligation - increase (decrease) 7.8% (6.9%) ============================================================================================================
GARDNER DENVER 2003 ANNUAL REPORT 35 Notes to Consolidated Financial Statements (dollars in thousands, except per share amounts or amounts described in millions) With respect to its U.S. funded pension plans, the Company attempts to achieve a long-term rate of return of 9% by setting an investment policy which targets an asset portfolio split between equity (70%) and debt (30%) securities. Investment policy targets are further broken down by U.S. large cap equity securities (50%), U.S. small to medium cap securities (15%), non-U.S. equity funds (5%), U.S. investment grade debt securities (25%) and U.S. high yield debt securities (5%). The Company's U.S. pension plans' actual weighted-average asset allocations at December 31, 2003 and 2002 by asset category are as follows:
2003% 2002 - ----------------------------------------------------------------------------- Equity securities 69.4% 65.4 Debt securities 28.6% 34.5 Other 2.0% 0.1 - ----------------------------------------------------------------------------- Total 100% 100 ============================================================================
The Company currently expects to contribute approximately $4 million to its U.S. funded pension plans in 2004 based upon current government regulations. Although a number of bills have recently been proposed in the U.S. Congress that could significantly affect pension funding rules, none of the current proposals would increase the Company's expected contributions in 2004. - ----------------------------------------------------------------------------- NOTE 8: 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 3,500,000 shares of common stock has been authorized for issuance under the Incentive Plan. Through December 31, 2003, the Company has granted options on 3,360,309 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 2001, 2002 and 2003 expire ten 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 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 900,000 shares for issuance under this plan. In November 1999, the Stock Purchase Plan was amended to permit eligible employees to purchase shares at the lesser of 90% of the fair market price of the common stock on either the offering date or the exercise date. At that time, the Stock Purchase Plan was also amended to require participants to have the purchase price of their options withheld from their pay over a one-year period. The exercise date for the 1999 offering was January 2, 2001, at which time employees elected to purchase 118,136 shares at an offering price of $10.74 per share, 90% of the fair market price on the offering date. 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. 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. As of December 31, 2003, employees had enrolled to purchase 78,113 shares under the 2003 offering. 36 A summary of the status of the Company's Incentive Plan at December 31, 2003, 2002 and 2001, and changes during the years then ended, is presented in the table and narrative below (underlying shares in thousands):
2003 2002 2001 ------------------------------------------------------------------- WTD. AVG. Wtd. Avg. Wtd. Avg. EXERCISE Exercise Exercise SHARES PRICE Shares Price Shares Price - ------------------------------------------------------------------------------------------------------------- Options outstanding, beginning of year 1,144 $17.56 1,106 $17.26 1,071 $16.60 Granted 264 17.89 221 20.35 204 19.78 Exercised (13) 15.25 (85) 16.37 (145) 15.08 Forfeited (28) 23.20 (98) 21.45 (24) 23.75 - ------------------------------------------------------------------------------------------------------------- Options outstanding, end of year 1,367 $17.54 1,144 $17.56 1,106 $17.26 ============================================================================================================= Options exercisable, end of year 940 $17.07 776 $16.54 690 $16.93 =============================================================================================================
The following table summarizes information about fixed-price stock options outstanding at December 31, 2003 (underlying shares in thousands):
Options Outstanding Options Exercisable -------------------------------------------------------------- Wtd. Avg. Number Remaining Wtd. Avg. Number Wtd. Avg. Outstanding Contractual Exercise Exercisable Exercise Range of Exercise Prices at 12/31/03 Life Price at 12/31/03 Price - --------------------------------------------------------------------------------------------------------------- $ 5.00 - 10.00 201 2.4 years $8.74 201 $ 8.74 10.01 - 15.00 161 5.4 12.79 161 12.79 15.01 - 20.00 802 7.3 18.47 379 18.38 20.01 - 30.00 203 4.3 26.36 199 26.47 ===============================================================================================================
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 2003, 2002 and 2001, respectively: risk-free interest rates of 2.4%, 3.0% and 3.9%; expected volatility of 35%, 35% and 36%; and expected lives of 3.8, 3.3 and 3.5 years. The valuations assume no dividends are paid. The weighted average fair values of options granted in 2003, 2002 and 2001 were $5.77, $5.84 and $6.67, respectively. - ------------------------------------------------------------------------------ NOTE 9: LONG-TERM DEBT AND OTHER BORROWING ARRANGEMENTS
December 31, --------------------------------- 2003 2002 - ------------------------------------------------------------------------------------------------- Credit Line, due 2005 (1) $114,000 44,000 Term Loan, due 2007 (2) 45,625 48,125 Unsecured Senior Note, due 2006 (3) 15,000 20,000 Variable Rate Industrial Revenue Bonds, due 2018 (4) 8,000 8,000 Other 6 38 - ------------------------------------------------------------------------------------------------- Long-term debt including current maturities 182,631 120,163 Current maturities of long-term debt 16,875 7,500 - ------------------------------------------------------------------------------------------------- Long-term debt, less current maturities $165,756 112,663 ================================================================================================= (1) The loans under this facility may be denominated in U.S. dollars or several foreign currencies. At December 31, 2003, the outstanding balance consisted of U.S. dollar borrowings of $114,000. The interest rates under the facility vary and are based on prime, federal funds and/or LIBOR for the applicable currency, and the Company's debt to adjusted income ratio. As of December 31, 2003, the rate for the U.S. dollar loan was 2.6%, and averaged 2.5% for the year ended December 31, 2003. (2) The interest rate varies with prime, federal funds and/or LIBOR. As of December 31, 2003, this rate was 2.2% and averaged 2.3% for the year ended December 31, 2003. (3) The interest rate of 7.3% is fixed until maturity. (4) The interest rate varies with market rates for tax-exempt industrial revenue bonds. As of December 31, 2003, this rate was 1.3% and averaged 1.1% for the year ended December 31, 2003.
GARDNER DENVER 2003 ANNUAL REPORT 37 Notes to Consolidated Financial Statements (dollars in thousands, except per share amounts or amounts described in millions) On January 20, 1998, the Company entered into a Revolving Line of Credit Agreement with an aggregate $125,000 borrowing capacity (the "Credit Line") and terminated a previous agreement. On March 6, 2002, the Company amended and restated the Credit Line, increasing the aggregate borrowing capacity to $150,000 and extending the maturity date to March 6, 2005. Subject to approval by lenders holding more than 75% of the debt, the Company may request up to two, one-year extensions. The total debt balance will be due upon final maturity. On December 31, 2003, the Credit Line had an outstanding balance of $114,000, leaving $36,000 available for future use or to issue as letters of credit. The amended and restated agreement also provided for an additional $50,000 Term Loan. Proceeds from the Term Loan were used to retire debt outstanding under an interim credit agreement. The five-year Term Loan requires principal payments of $2,500 in years one and two, and $15,000 in years three through five. 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. The Credit Line, Term Loan and Unsecured Senior Note are unsecured and permit certain investments and dividend payments. There are no material restrictions on the Company as a result of these agreements, other than customary covenants regarding certain earnings, liquidity and capital ratios. 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 $8.1 million letter of credit. Maturities of long-term debt for the five years subsequent to December 31, 2003 and thereafter, are $16,875, $134,000, $20,000, $3,750, $0 and $8,006, respectively. Cash paid for interest in 2003, 2002 and 2001 was $4,498, $6,263 and $6,900, respectively. The rentals for all operating leases were $3,818, $3,357, and $2,981 in 2003, 2002 and 2001, respectively. Future minimum rental payments for operating leases for the five years subsequent to December 31, 2003 and thereafter are $3,469, $2,766, $2,166, $1,566, $1,295 and $6,147, respectively. - ------------------------------------------------------------------------------ NOTE 10: STOCKHOLDERS' EQUITY AND EARNINGS PER SHARE At December 31, 2003 and 2002, 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, 2003 and 2002 were 16,117,026 and 15,942,138, respectively. No shares of preferred stock were issued or outstanding at December 31, 2003 or 2002. 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 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:
Year ended December 31, -------------------------------------------------------------------------------------------------- 2003 2002 2001 - ---------------------------------------------------------------------------------------------------------------------------------- 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 $20,643 16,060,979 $1.29 $19,602 15,854,239 $1.24 $22,024 15,552,543 $1.42 DILUTED EARNINGS PER SHARE: Effect of dilutive securities: Stock options granted and outstanding -- 251,189 -- 187,356 -- 230,582 - ---------------------------------------------------------------------------------------------------------------------------------- Income available to common stockholders and assumed conversions $20,643 16,312,168 $1.27 $19,602 16,041,595 $1.22 $22,024 15,783,125 $1.40 ==================================================================================================================================
38 - ------------------------------------------------------------------------------ NOTE 11: INCOME TAXES 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.
Year ended December 31, ------------------------------- 2003 2002 2001 - ------------------------------------------------------------------------------------------------- Income taxes: Current: U.S. federal $2,977 4,944 9,708 U.S. state and local 340 542 1,109 Non-U.S. 611 1,229 1,149 - ------------------------------------------------------------------------------------------------- Current 3,928 6,715 11,966 - ------------------------------------------------------------------------------------------------- Deferred: U.S. federal 4,753 2,253 622 U.S. state and local 543 257 71 Non-U.S. 491 -- -- - ------------------------------------------------------------------------------------------------- Deferred 5,787 2,510 693 - ------------------------------------------------------------------------------------------------- Provision for income taxes $9,715 9,225 12,659 =================================================================================================
The following table reconciles the statutory U.S. federal corporate income tax rate to the Company's effective tax rate (as a percentage of the Company's income before income taxes):
Year ended December 31, ----------------------------- 2003 2002 2001 - ----------------------------------------------------------------------------------------------- U.S. federal income tax rate 35.0% 35.0 35.0 Changes in the tax rate resulting from: State and local income taxes 2.6 2.5 3.1 Nondeductible goodwill -- -- 3.5 Export benefit (3.0) (2.8) (2.3) Other, net (2.6) (2.7) (2.8) - ----------------------------------------------------------------------------------------------- Effective income tax rate 32.0% 32.0 36.5 =============================================================================================== December 31, --------------------------------- 2003 2002 - ----------------------------------------------------------------------------------------------- Components of deferred tax balances: Deferred tax assets: Reserves and accruals $ 14,506 15,722 Postretirement benefits other than pensions 13,446 14,394 Other 3,014 1,156 - ----------------------------------------------------------------------------------------------- Total deferred tax assets 30,966 31,272 - ----------------------------------------------------------------------------------------------- Deferred tax liabilities: LIFO inventory (3,493) (3,051) Plant and equipment (7,763) (6,318) Intangibles (7,698) (4,530) Other (2,986) (1,311) - ----------------------------------------------------------------------------------------------- Total deferred tax liabilities (21,940) (15,210) - ----------------------------------------------------------------------------------------------- Net deferred tax assets $ 9,026 16,062 ===============================================================================================
GARDNER DENVER 2003 ANNUAL REPORT 39 Notes to Consolidated Financial Statements (dollars in thousands, except per share amounts or amounts described in millions) For U.S. income tax purposes, the Foreign Sales Corporation (FSC) has been replaced by the Extraterritorial Income Exclusion (EIE) on the Company's U.S. export sales for 2002 and beyond. Consistent with the FSC, the EIE lowers the effective tax rate on income from U.S. export sales. Income before income taxes of non-U.S. operations for 2003, 2002 and 2001 was $6,445, $6,611 and $5,963, respectively. U.S. deferred income taxes are not provided on certain undistributed earnings of non-U.S. subsidiaries (approximately $28 million at December 31, 2003) 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. Cash paid for income taxes in 2003, 2002 and 2001 was $5,220, $6,512 and $13,814, respectively. - ------------------------------------------------------------------------------ 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, 2003 and 2002. 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, 2003. 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. - ------------------------------------------------------------------------------ NOTE 13: CONTINGENCIES The Company is a party to various legal proceedings, lawsuits and administrative actions, which are of an ordinary or routine nature. Due to the bankruptcies of several asbestos manufacturers and other primary defendants, the Company has 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 substantial majority of the plaintiffs are not impaired with a disease attributable to the alleged exposure. Predecessors to the Company manufactured, distributed and sold the products allegedly at issue in the pending asbestos and silicosis litigation lawsuits. The Company has potential responsibility for certain contingent liabilities with respect to 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 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 at issue 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 substantial majority of plaintiffs are not impaired with a disease attributable to alleged exposure to asbestos or silica; 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. 40 - ------------------------------------------------------------------------------ NOTE 14: QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
2003 QUARTER ENDED ------------------------------------------------ MARCH 31, JUNE 30, SEPT. 30, DEC. 31,(3) - --------------------------------------------------------------------------------------------------- Revenues $101,491 109,388 112,061 116,590 Gross margin (1) 30,717 33,237 33,863 33,960 Net income (2) 3,520 5,346 5,277 6,500 Basic earnings per share $ 0.22 0.33 0.33 0.40 Diluted earnings per share $ 0.22 0.33 0.32 0.40 =================================================================================================== 2002 Quarter Ended ------------------------------------------------ March 31, June 30, Sept. 30, Dec. 31,(3) - --------------------------------------------------------------------------------------------------- Revenues $106,609 104,854 102,791 103,904 Gross margin (1) 32,007 33,565 32,530 30,425 Net income 4,578 5,524 4,829 4,671 Basic earnings per share $ 0.29 0.35 0.30 0.29 Diluted earnings per share $ 0.29 0.34 0.30 0.29 =================================================================================================== (1) Gross margin equals revenues less cost of sales. (2) Includes $2,184 from an unrealized currency transaction gain and $1,946 in charges related to profitability improvement programs in the quarter ended December 31. (3) Includes an increase in net income in 2003 and 2002 of $249 and $268, respectively, related to LIFO inventory liquidations.
- ------------------------------------------------------------------------------ NOTE 15: SEGMENT INFORMATION The Company is organized based on the products and services it offers. Under this organizational structure, the Company has three operating divisions: Compressor, Blower and Pump. These divisions comprise two reportable segments, Compressed Air Products and Pump Products. The Compressor and Blower Divisions are aggregated into one reportable segment (Compressed Air 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. In the Compressed Air 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; and positive displacement and centrifugal blowers. The markets served are primarily in the United States, but a growing portion of revenue is from exports and expanding European operations. The Pump 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. 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. Unallocated assets consist of cash and equivalents and deferred tax assets. Intersegment sales and transfers are not significant. GARDNER DENVER 2003 ANNUAL REPORT 41 Notes to Consolidated Financial Statements (dollars in thousands, except per share amounts or amounts described in millions)
Revenues Operating Earnings (1) Identifiable Assets --------------------------------------------------------------------------------------------- Year ended December 31, Year ended December 31, December 31, --------------------------------------------------------------------------------------------- 2003 2002 2001 2003 2002 2001 2003 2002 - ------------------------------------------------------------------------------------------------------------------------------- Compressed Air Products $369,023 350,036 308,028 $27,792 29,795 22,176 $375,376 368,761 Pump Products 70,507 68,122 111,742 4,093 5,193 16,100 72,528 68,240 --------------------------------------------------------------------------------------------- Total $439,530 418,158 419,770 31,885 34,988 38,276 447,904 437,001 ================================ Interest expense (4,748) (6,365) (6,796) Other income, net 3,221 204 3,203 -------------------------------- Income before income taxes $30,358 28,827 34,683 ================================ General corporate 141,829 41,729 --------------------- Total assets $589,733 478,730 =============================================================================================================================== (1) As a result of adopting SFAS No. 142, periodic goodwill amortization ceased effective January 1, 2002 (See Notes 1 and 5). For comparability purposes, operating earnings by segment for the year ended December 31, 2001 excluding goodwill amortization were as follows: Compressed Air Products $25,796 Pump Products 16,860 ------------------------------------------------ Total $42,656 ================================================ Year ended December 31, --------------------------------- 2003 2002 2001 - ------------------------------------------------------------------------------------------------------------- Income from reductions of inventory quantities resulting in liquidations of LIFO inventory layers, included in operating earnings above: Compressed Air Products $ 316 161 459 Pump Products 50 233 43 - ------------------------------------------------------------------------------------------------------------- Total $ 366 394 502 ============================================================================================================= Depreciation and amortization, included in operating earnings above: Compressed Air Products $ 11,739 11,517 14,281 Pump Products 2,827 2,622 3,286 - ------------------------------------------------------------------------------------------------------------- Total $ 14,566 14,139 17,567 ============================================================================================================= Capital expenditures: Compressed Air Products $ 8,864 9,856 8,856 Pump Products 3,086 3,785 2,668 - ------------------------------------------------------------------------------------------------------------- Total $ 11,950 13,641 11,524 ============================================================================================================= Revenues outside the United States were comprised of sales to unaffiliated companies in: Europe $ 97,198 85,735 65,511 Asia 39,963 25,999 14,048 Canada 26,972 18,597 24,315 Latin America 17,401 17,773 18,186 Other 4,404 5,518 5,844 - ------------------------------------------------------------------------------------------------------------- Total $185,938 153,622 127,904 ============================================================================================================= December 31, -------------------- 2003 2002 - ------------------------------------------------------------------------------------------------- Property, plant and equipment by geographic area are as follows: United States $58,581 61,372 Europe 16,686 14,672 Other 161 118 - ------------------------------------------------------------------------------------------------- Total $75,428 76,162 =================================================================================================
42 - ------------------------------------------------------------------------------ NOTE 16: SUBSEQUENT EVENT On January 2, 2004, the Company effectively acquired Syltone plc ("Syltone"), previously a publicly traded company listed on the London Stock Exchange. The purchase price of (pound)61.2 million (approximately $109.2 million) including assumed bank debt (net of cash acquired) was paid in the form of cash ((pound)43.1 million), new loan notes ((pound)5.2 million) and the assumption of Syltone's existing bank debt, net of cash ((pound)12.9 million). The cash portion of the purchase price was funded from the Company's existing revolving credit line and cash reserves. The loan notes are unsecured and bear interest payable every six months, in arrears, at a rate per annum of one-half of one percent below the British pound based London Interbank Offered Rate for six-month deposits. The loan notes are redeemable at par at the option of the loan noteholder, in whole or in part, on any interest payment date falling on or after December 31, 2004. If at any time the aggregate nominal amount of all loan notes outstanding is (pound)0.5 million or less, the Company has the right to redeem all of the outstanding loan notes. Any loan notes outstanding on June 30, 2009 will be redeemed in full, together with interest on that day. Syltone, 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 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. Syltone generated revenues and operating profit (in accordance with accounting principles generally accepted in the U.K.) of (pound)84.4 million and (pound)6.3 million, respectively (approximately $151.1 million and $11.3 million, respectively as calculated using the December 31, 2003 exchange rate of $1.79/(pound)) for the twelve months ended September 30, 2003. Syltone's largest markets are Europe and North America, which represent approximately 67% and 20% of its revenues, respectively. Of the total sales to Europe, approximately 38% are to the U.K., 18% to France, 11% to Germany and 33% to other European countries. Approximately 70% of Syltone's revenues are generated through transportation-related activities while the remaining 30% are derived from fluid transfer-related activities. This acquisition will be accounted for by the purchase method and accordingly, its results will be included in the Company's consolidated financial statements from the date of acquisition. The aggregate purchase price (including direct acquisition costs) has been allocated primarily to receivables ($34,400); inventory ($21,900); property, plant and equipment ($36,000); intangible assets ($80,000); accounts payable and accrued liabilities ($34,900); bank debt, net ($23,000); net deferred income tax liabilities ($3,600) and other long-term liabilities ($21,000), based on their estimated fair values at 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 2004. Further, other assets and liabilities may be identified to which a portion of the purchase price will be allocated. A detailed analysis also has not yet been performed to identify and measure any adjustments that may be necessary to conform Syltone's accounting policies with the Company's accounting policies. The following table summarizes the preliminary fair values of the intangible assets acquired in the Syltone acquisition:
- ------------------------------------------------------------------------------ Amortized intangible assets: Customer lists and relationships $19,500 Other 2,600 Unamortized intangible assets: Goodwill 49,000 Trademarks 8,900 - ------------------------------------------------------------------------------ Total intangible assets $80,000 ==============================================================================
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 not anticipated to be significant given the stock nature of the acquisition. The assignment of goodwill to reporting segments has not been finalized. GARDNER DENVER 2003 ANNUAL REPORT 43 Stockholder Information STOCK INFORMATION Gardner Denver's common stock 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. The quarterly high and low sales prices for the Company's common stock for the two most recent years, as reported by the New York Stock Exchange, are as follows:
2003 QUARTER ENDED ---------------------------------------------------- MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, - ---------------------------------------------------------------------------------- HIGH 20.44 20.80 25.10 24.99 LOW 16.35 18.10 20.05 19.95 - ---------------------------------------------------------------------------------- 2002 Quarter Ended ---------------------------------------------------- March 31, June 30, September 30, December 31, - ---------------------------------------------------------------------------------- High 25.25 28.00 21.00 21.39 Low 19.55 18.34 15.00 14.34 - ----------------------------------------------------------------------------------
As of March 5, 2004, there were approximately 8,040 holders of record of Gardner Denver's common stock. DIVIDENDS Gardner Denver has not paid a cash dividend since its spin-off from Cooper Industries, Inc. in April 1994. The cash flow generated by the Company is currently utilized for debt service and capital accumulation and reinvestment. TRANSFER AGENT AND REGISTRAR National City Bank Corporate Trust Operations P.O. Box 92301 Cleveland, OH 44193-0900 (800) 622-6757 (216) 257-8508 (facsimile) e-mail address: shareholder.inquiries@nationalcity.com STOCK PURCHASE PLAN National City Bank sponsors and administers an Open Enrollment Stock Purchase Plan for the direct purchase and sale of Gardner Denver's common stock. Plan information may be obtained from: National City Bank Reinvestment Services P.O. Box 94946 Cleveland, OH 44101-4946 (800) 622-6757 (216) 257-8367 (facsimile) NEWS RELEASES AND SEC FILINGS Gardner Denver's news releases, including the quarterly earnings releases, and Securities and Exchange Commission filings, are available by visiting the investor relations area of our website at www.gardnerdenver.com. QUARTERLY CONFERENCE CALL WEBCASTS Gardner Denver anticipates issuing earnings press releases on April 28, July 28 and October 27, 2004. Associated conference calls will be held on the following mornings. You may access a webcast of these calls through the investor relations area of our website at www.gardnerdenver.com. Replays of the calls will be available for ninety days. FORM 10-K A copy of the annual report on Form 10-K filed with the Securities and Exchange Commission is available, without charge, upon written request to the Corporate Secretary at the Company's address indicated below. ANNUAL MEETING The 2004 Annual Meeting of Stockholders will be held on May 4 at the Quincy Country Club, 2410 State Street, Quincy, IL, starting at 1:30 p.m. CORPORATE OFFICES Gardner Denver, Inc. 1800 Gardner Expressway Quincy, IL 62305 (217) 222-5400 e-mail address: mktg@gardnerdenver.com website address: www.gardnerdenver.com 44 Board of Directors and Corporate Officers BOARD OF DIRECTORS Ross J. Centanni Chairman, President and Chief Executive Officer Gardner Denver, Inc. Donald G. Barger, Jr. Senior Vice President and Chief Financial Officer Yellow Roadway Corporation Frank J. Hansen President and Chief Executive Officer (retired) IDEX Corporation Raymond R. Hipp Chairman, President and Chief Executive Officer (retired) Alternative Resources Corporation Thomas M. McKenna President (retired) United Sugars Corporation Diane K. Schumacher Senior Vice President, General Counsel and Secretary Cooper Industries, Inc. Richard L. Thompson Group President and Executive Office Member Caterpillar Inc. LEAD NON-EMPLOYEE DIRECTOR Frank J. Hansen BOARD COMMITTEES AUDIT AND FINANCE Donald G. Barger, Jr., Chairperson Frank J. Hansen Raymond R. Hipp MANAGEMENT DEVELOPMENT AND COMPENSATION Richard L. Thompson, Chairperson Thomas M. McKenna Diane K. Schumacher NOMINATING AND CORPORATE GOVERNANCE Diane K. Schumacher, Chairperson Thomas M. McKenna Richard L. Thompson CORPORATE OFFICERS Ross J. Centanni Chairman, President and Chief Executive Officer Michael S. Carney Vice President and General Manager, Blower Division Helen W. Cornell Vice President and General Manager, Fluid Transfer Division and Operations Support Tracy D. Pagliara Vice President, Administration, General Counsel and Secretary Daniel C. Rizzo, Jr. Vice President and Corporate Controller Philip R. Roth Vice President, Finance and Chief Financial Officer Randall E. Schwedes Treasurer J. Dennis Shull Vice President and General Manager, Compressor Division Richard C. Steber Vice President and General Manager, Pump Division Gardner Denver, Aqualine, Belliss & Morcom, Champion, Hoffman, Lamson, MultiPilot, Syltone, Tamrotor, Wittig and their related trademark designs and logotypes are service/trademarks and/or trade names of Gardner Denver, Inc., its subsidiaries or investments. Stora Enso and W.W. Grainger, Inc. and their related trademarks and logotypes used within this Annual Report are the trade names, service/trademarks and/or logotypes of the respective companies. GARDNER DENVER 2003 ANNUAL REPORT EX-21 6 exh21.txt Exhibit 21.0 GARDNER DENVER, INC. SCHEDULE OF SUBSIDIARIES
NAME SUBSIDIARY SUBSIDIARY NAME INCORPORATION USES FOR DOING BUSINESS - --------------- ------------- ----------------------- Air-Relief, Inc. Kentucky Air Relief, Inc. Allen-Stuart Equipment Company, Inc. Texas Gardner Denver Engineered Packaging Center Belliss & Morcom (USA) Inc. Delaware Bellis & Morcom (USA) Inc. Bellis & Morcom Limited United Kingdom Bellis & Morcom Limited Drum International Ltd. United Kingdom Drum International Ltd. Emco Wheaton Corp. Canada Emco Wheaton Corp. Emco Wheaton GmbH Germany Emco Wheaton GmbH Emco Wheaton UK Ltd. United Kingdom Emco Wheaton UK Ltd. Gardner Denver Deutschland GmbH Germany Gardner Denver Deutschland GmbH Gardner Denver Holdings Inc. Delaware Gardner Denver Holdings Inc. Gardner Denver Hoffman, Ltd. United Kingdom Gardner Denver Hoffman, Ltd. Gardner Denver International, Inc. Delaware Gardner Denver International, Inc. Gardner Denver Ireland Limited Ireland Gardner Denver Ireland Limited Gardner Denver Kompressoren GmbH Germany Gardner Denver Kompressoren GmbH Gardner Denver Ltd. United Kingdom Gardner Denver Ltd. Gardner Denver Nova Scotia, ULC Nova Scotia Gardner Denver Nova Scotia, ULC Gardner Denver SA France Gardner Denver SA Gardner Denver Oy Finland Gardner Denver Oy Gardner Denver Water Jetting Systems, Inc. Texas Gardner Denver Water Jetting Systems, Inc. Gardner Denver Wittig GmbH Germany Gardner Denver Wittig GmbH GD First (UK) plc United Kingdom GD First (UK) plc GD Investment Ky Finland GD Investment Ky Hamworthy Belliss & Morcom Brasil Ltda. Brazil Hamworthy Belliss & Morcom Brasil Ltda. Hamworthy Bellis & Morcom Limited United Kingdom Hamworthy Bellis & Morcom Limited Hoffman Air Filtration Licensco Inc. Delaware Hoffman Air Filtration Licensco Inc. Lamson Corporation New York Lamson Corporation Perolo SA France Perolo SA Sam System A/S Denmark Sam System A/S Syltone Australia Pty Ltd. Australia Syltone Australia Pty Ltd. Syltone Belgium NV Belgium Syltone Belgium NV Syltone Deutschland GmbH Germany Syltone Deutschland GmbH Syltone do Brasil Ltda Brazil Syltone do Brasil Ltda Syltone France SA France Syltone France SA Syltone Industria Iberica SA Spain Syltone Industria Iberica SA Syltone Industries plc United Kingdom Syltone Industries plc Syltone Industries GmbH Germany Syltone Industries GmbH Syltone Industries LLC Delaware Syltone Industries LLC Syltone Industries SA France Syltone Industries SA Syltone Italia s.r.l. Italy Syltone Italia s.r.l. Syltone (Malaysia) Sdn Bhd Malaysia Syltone (Malaysia) Sdn Bhd Syltone Marine, Inc. Texas Syltone Marine, Inc. Syltone Nederland BV Netherlands Syltone Nederland BV Syltone plc United Kingdom Syltone plc Syltone Polska Sp.zo.o. Poland Syltone Polska Sp.zo.o. Syltone UK Ltd. United Kingdom Syltone UK Ltd. Webster Drives Ltd. United Kingdom Webster Drives Ltd. Tamrotor Kompressorit Oy Finland Tamrotor Kompressorit Oy TCM Investments, Inc. Oklahoma TCM Investments, Inc.
EX-23.1 7 exh23p1.txt Exhibit 23.1 INDEPENDENT AUDITORS' CONSENT ----------------------------- The Board of Directors Gardner Denver, Inc.: We consent to the incorporation by reference in the registration statements (Nos. 33-91088, 333-24921, 333-84397 and 333-61314) on Form S-8 and the registration statement No. 333-109086 on Form S-3 of Gardner Denver, Inc. of our report dated January 30, 2004, with respect to the consolidated balance sheets of the Company as of December 31, 2003 and 2002, and the related consolidated statements of earnings, stockholders' equity, and cash flows for each of the years in the two-year period ended December 31, 2003, which report appears in the December 31, 2003, annual report on Form 10-K of the Company. Our report refers to a change in accounting for goodwill and other intangible assets for the year ended December 31, 2002. /s/ KPMG LLP St. Louis, Missouri March 9, 2004 EX-23.2 8 exh23p2.txt Exhibit 23.2 INFORMATION REGARDING CONSENT OF ARTHUR ANDERSEN LLP Section 11(a) of the Securities Act of 1933, as amended (the "Securities Act"), provides that if part of a registration statement at the time it becomes effective contains an untrue statement of a material fact, or omits a material fact required to be stated therein or necessary to make the statements therein not misleading, any person acquiring a security pursuant to such registration statement (unless it is proved that at the time of such acquisition such person knew of such untruth or omission) may assert a claim against, among others, an accountant who has consented to be named as having certified any part of the registration statement or as having prepared any report for use in connection with the registration statement. Gardner Denver, Inc. ("Gardner Denver") dismissed Arthur Andersen LLP ("Andersen") as its independent auditors, effective July 26, 2002. For additional information, see Gardner Denver's Report on Form 8-K dated July 28, 2002. After reasonable efforts, and due to the fact that Andersen has ceased operations, Gardner Denver has been unable to obtain Andersen's written consent to the incorporation by reference into Gardner Denver's previously filed Registration Statements (File Numbers 33-91088, 0333-24921, 333-84397 and 333-61314) (collectively the "Registration Statements") of Andersen's audit report with respect to Gardner Denver's consolidated financial statements as of December 31, 2001 and for the two years in the period then ended. Under these circumstances, Rule 437a under the Securities Act permits Gardner Denver to file this Annual Report on Form 10-K, which is incorporated by reference into the Registration Statements, without a written consent from Andersen. As a result, with respect to transactions in Gardner Denver's securities pursuant to the Registration Statements that occur subsequent to the date this Annual Report on Form 10-K is filed with the Securities and Exchange Commission, Andersen will not have any liability under Section 11(a) of the Securities Act for any untrue statements of a material fact contained in the financial statements audited by Andersen or any omissions of a material fact required to be stated therein. Accordingly, it would not be possible to assert a claim against Andersen under Section 11(a) of the Securities Act. EX-24 9 exh24.txt Exhibit 24.0 GARDNER DENVER, INC. ANNUAL REPORT ON FORM 10-K POWER OF ATTORNEY OF DIRECTORS The undersigned, a director of Gardner Denver, Inc., a Delaware corporation (the "Company"), which anticipates filing with the Securities and Exchange Commission (the "Commission") under the provisions of the Securities Exchange Act of 1934 (the "Act") an Annual Report on Form 10-K (the "Annual Report") for the fiscal year ended December 31, 2003 (together with any and all subsequent amendments) does hereby constitute and appoint Ross J. Centanni and Tracy D. Pagliara, and each of them, with full power of substitution and resubstitution, as attorney or attorneys to execute and file on behalf of the undersigned, in his capacity as a director of the Company, the Annual Report and any and all other documents to be filed with the Commission pertaining to the Annual Report with full power and authority to do and perform any and all acts and things whatsoever required or necessary to be done in the premises, as fully as to all intents and purposes as he could do if personally present, hereby ratifying and approving the acts of said attorneys and any of them and any such substitution. Executed at St. Louis , Missouri this 24th day of February 2004. ------------- ------------- ------ /s/Thomas M. McKenna -------------------- Thomas M. McKenna Exhibit 24.0 GARDNER DENVER, INC. ANNUAL REPORT ON FORM 10-K POWER OF ATTORNEY OF DIRECTORS The undersigned, a director of Gardner Denver, Inc., a Delaware corporation (the "Company"), which anticipates filing with the Securities and Exchange Commission (the "Commission") under the provisions of the Securities Exchange Act of 1934 (the "Act") an Annual Report on Form 10-K (the "Annual Report") for the fiscal year ended December 31, 2003 (together with any and all subsequent amendments) does hereby constitute and appoint Ross J. Centanni and Tracy D. Pagliara, and each of them, with full power of substitution and resubstitution, as attorney or attorneys to execute and file on behalf of the undersigned, in his capacity as a director of the Company, the Annual Report and any and all other documents to be filed with the Commission pertaining to the Annual Report with full power and authority to do and perform any and all acts and things whatsoever required or necessary to be done in the premises, as fully as to all intents and purposes as he could do if personally present, hereby ratifying and approving the acts of said attorneys and any of them and any such substitution. Executed at St. Louis , Missouri this 24th day of February 2004. ------------- ------------- ------ /s/Diane K. Schumacher ---------------------- Diane K. Schumacher Exhibit 24.0 GARDNER DENVER, INC. ANNUAL REPORT ON FORM 10-K POWER OF ATTORNEY OF DIRECTORS The undersigned, a director of Gardner Denver, Inc., a Delaware corporation (the "Company"), which anticipates filing with the Securities and Exchange Commission (the "Commission") under the provisions of the Securities Exchange Act of 1934 (the "Act") an Annual Report on Form 10-K (the "Annual Report") for the fiscal year ended December 31, 2003 (together with any and all subsequent amendments) does hereby constitute and appoint Ross J. Centanni and Tracy D. Pagliara, and each of them, with full power of substitution and resubstitution, as attorney or attorneys to execute and file on behalf of the undersigned, in his capacity as a director of the Company, the Annual Report and any and all other documents to be filed with the Commission pertaining to the Annual Report with full power and authority to do and perform any and all acts and things whatsoever required or necessary to be done in the premises, as fully as to all intents and purposes as he could do if personally present, hereby ratifying and approving the acts of said attorneys and any of them and any such substitution. Executed at St. Louis , Missouri this 24th day of February 2004. ------------- ------------- ------ /s/Donald G. Barger, Jr. ------------------------ Donald G. Barger, Jr. Exhibit 24.0 GARDNER DENVER, INC. ANNUAL REPORT ON FORM 10-K POWER OF ATTORNEY OF DIRECTORS The undersigned, a director of Gardner Denver, Inc., a Delaware corporation (the "Company"), which anticipates filing with the Securities and Exchange Commission (the "Commission") under the provisions of the Securities Exchange Act of 1934 (the "Act") an Annual Report on Form 10-K (the "Annual Report") for the fiscal year ended December 31, 2003 (together with any and all subsequent amendments) does hereby constitute and appoint Ross J. Centanni and Tracy D. Pagliara, and each of them, with full power of substitution and resubstitution, as attorney or attorneys to execute and file on behalf of the undersigned, in his capacity as a director of the Company, the Annual Report and any and all other documents to be filed with the Commission pertaining to the Annual Report with full power and authority to do and perform any and all acts and things whatsoever required or necessary to be done in the premises, as fully as to all intents and purposes as he could do if personally present, hereby ratifying and approving the acts of said attorneys and any of them and any such substitution. Executed at St. Louis , Missouri this 24th day of February 2004. ------------- ------------- ------ /s/Frank J. Hansen ------------------ Frank J. Hansen Exhibit 24.0 GARDNER DENVER, INC. ANNUAL REPORT ON FORM 10-K POWER OF ATTORNEY OF DIRECTORS The undersigned, a director of Gardner Denver, Inc., a Delaware corporation (the "Company"), which anticipates filing with the Securities and Exchange Commission (the "Commission") under the provisions of the Securities Exchange Act of 1934 (the "Act") an Annual Report on Form 10-K (the "Annual Report") for the fiscal year ended December 31, 2003 (together with any and all subsequent amendments) does hereby constitute and appoint Ross J. Centanni and Tracy D. Pagliara, and each of them, with full power of substitution and resubstitution, as attorney or attorneys to execute and file on behalf of the undersigned, in his capacity as a director of the Company, the Annual Report and any and all other documents to be filed with the Commission pertaining to the Annual Report with full power and authority to do and perform any and all acts and things whatsoever required or necessary to be done in the premises, as fully as to all intents and purposes as he could do if personally present, hereby ratifying and approving the acts of said attorneys and any of them and any such substitution. Executed at St. Louis , Missouri this 24th day of February 2004. ------------- ------------- ------ /s/Richard L. Thompson ---------------------- Richard L. Thompson Exhibit 24.0 GARDNER DENVER, INC. ANNUAL REPORT ON FORM 10-K POWER OF ATTORNEY OF DIRECTORS The undersigned, a director of Gardner Denver, Inc., a Delaware corporation (the "Company"), which anticipates filing with the Securities and Exchange Commission (the "Commission") under the provisions of the Securities Exchange Act of 1934 (the "Act") an Annual Report on Form 10-K (the "Annual Report") for the fiscal year ended December 31, 2003 (together with any and all subsequent amendments) does hereby constitute and appoint Ross J. Centanni and Tracy D. Pagliara, and each of them, with full power of substitution and resubstitution, as attorney or attorneys to execute and file on behalf of the undersigned, in his capacity as a director of the Company, the Annual Report and any and all other documents to be filed with the Commission pertaining to the Annual Report with full power and authority to do and perform any and all acts and things whatsoever required or necessary to be done in the premises, as fully as to all intents and purposes as he could do if personally present, hereby ratifying and approving the acts of said attorneys and any of them and any such substitution. Executed at St. Louis , Missouri this 24th day of February 2004. ------------- ------------ ------ /s/Raymond R. Hipp ------------------ Raymond R. Hipp EX-31.1 10 exh31p1.txt Exhibit 31.1 PRINCIPAL EXECUTIVE OFFICER CERTIFICATION I, Ross J. Centanni, certify that: 1. I have reviewed this annual report on Form 10-K of Gardner Denver, Inc. ("Gardner Denver"); 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of Gardner Denver as of, and for, the periods presented in this annual report; 4. Gardner Denver's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for Gardner Denver and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to Gardner Denver, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of Gardner Denver's disclosure controls and procedures and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this annual report based on such evaluation; and c) disclosed in this annual report any change in Gardner Denver's internal control over financial reporting that occurred during Gardner Denver's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, Gardner Denver's internal control over financial reporting; and 5. Gardner Denver's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to Gardner Denver's auditors and the audit committee of Gardner Denver's Board of Directors: a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect Gardner Denver's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in Gardner Denver's internal control over financial reporting. By: /s/ Ross J. Centanni -------------------- Ross J. Centanni Chairman, President & CEO March 10, 2004 EX-31.2 11 exh31p2.txt Exhibit 31.2 PRINCIPAL FINANCIAL OFFICER CERTIFICATION I, Philip R. Roth, certify that: 1. I have reviewed this annual report on Form 10-K of Gardner Denver, Inc. ("Gardner Denver"); 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of Gardner Denver as of, and for, the periods presented in this annual report; 4. Gardner Denver's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for Gardner Denver and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to Gardner Denver, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of Gardner Denver's disclosure controls and procedures and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this annual report based on such evaluation; and c) disclosed in this annual report any change in Gardner Denver's internal control over financial reporting that occurred during Gardner Denver's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, Gardner Denver's internal control over financial reporting; and 5. Gardner Denver's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to Gardner Denver's auditors and the audit committee of Gardner Denver's Board of Directors: a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect Gardner Denver's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in Gardner Denver's internal control over financial reporting. By: /s/ Philip R. Roth ------------------ Philip R. Roth Vice President, Finance & CFO March 10, 2004 EX-32.2 12 exh32p1.txt Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Gardner Denver, Inc. on Form 10-K for the period ended December 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Ross J. Centanni, Chairman, President and Chief Executive Officer of Gardner Denver, Inc., certify to the best of my knowledge, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Gardner Denver, Inc. By: /s/ Ross J. Centanni --------------------- Ross J. Centanni Title: Chairman, President & CEO Gardner Denver, Inc. March 10, 2004 EX-32.2 13 exh32p2.txt Exhibit 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Gardner Denver, Inc. on Form 10-K for the period ended December 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Philip R. Roth, Vice President, Finance & Chief Financial Officer of Gardner Denver, Inc., certify to the best of my knowledge, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Gardner Denver, Inc. By: /s/ Philip R. Roth ------------------- Philip R. Roth Title: Vice President, Finance & CFO Gardner Denver, Inc. March 10, 2004 -----END PRIVACY-ENHANCED MESSAGE-----