Gardner Denver, Inc. announced that revenues and net income for the twelve months ended December 31, 2004 were $739.5 million and $37.1 million, respectively, the Company's highest levels since becoming an independent entity in 1994.
Revenues for the three months ended December 31, 2004 were $241.2 million, a 107% increase compared to the fourth quarter of the previous year, primarily as a result of acquisitions completed in 2004. Net income for the three months ended December 31, 2004 was $13.6 million, a 110% increase compared to the same period last year.
CEO's Comments Regarding Results
"I am pleased to report a record level of revenues, net income and operating cash flow for Gardner Denver. We demonstrated strong revenue growth and flow-through profitability throughout the entire year. Operating earnings as a percentage of revenues (operating margins) increased to 9.1% from 8.7% in the third quarter of 2004 and 6.5% in the fourth quarter of 2003. For the year, operating margins increased to 8.3% in 2004 from 7.3% in 2003. In 2004, we completed two significant acquisitions that opened new markets and provided new channels of distribution for our existing products. These acquisitions contributed to our earnings per share growth in 2004, despite the dilution associated with an equity offering completed in March. We also continue to see strong demand for well stimulation pumps and aftermarket parts used in oil and natural gas well drilling and servicing. Additionally, we have begun to see increases in demand for drilling pumps," stated Ross Centanni, Chairman, President and CEO.
"Industrial demand continues to improve slowly in the U.S. and Europe, and we continue to gain market share in Europe, China and South Africa. Consequently, we have benefited through increased orders of compressors and blowers. We are also experiencing increased demand for water jetting pumps used in industrial cleaning and maintenance. The strong demand in the transportation market has continued to drive orders for our positive displacement blowers and we noted a slight increase in orders for larger multistage centrifugal blowers late in the fourth quarter. The combination of increased demand in our end markets and the impact from our profitability improvement programs resulted in operating margin expansion in each quarter of the year."
"We continue to integrate Nash Elmo into existing operations of our business. We believe there are further synergistic benefits through facility and product rationalization, sales channel leverage and material cost reductions. We have completed the key aspects of integrating Syltone into Gardner Denver, including relocating production to existing facilities and beginning production of key components previously outsourced. Additionally, in January 2005, we sold Perolo S.A., a small, non-core manufacturing operation of Syltone located in Blaye, France. We anticipate further opportunities to reduce selling and administrative expenses at the acquired businesses. We believe the full benefit of our integration efforts will be realized as 2005 progresses."
"Despite some supply chain inefficiencies and increasing levels of purchases, we were able to close out 2004 with a very strong cash flow performance as we generated more than $76 million in cash from operating activities, a 65% increase compared to the previous year. Our acquired operations contributed almost $23 million of this $30 million increase, with strong earnings growth in our base businesses driving the balance of the improvement. These strong cash flows enabled us to continue improving our balance sheet. Our debt-to-capital ratio improved from 47.4% after the acquisition of Nash Elmo in September to 43.6% on December 31, 2004.
"Capital was invested in the business to introduce new products, improve our operations, complete our new assembly and packaging facility in China and integrate businesses onto our common enterprise resource planning system. In 2004, we invested almost $20 million in capital expenditures, compared to $12 million in 2003. We anticipate that we will spend approximately $22 million to $24 million on capital projects in 2005."
Looking forward, Mr. Centanni stated, "I expect to see continuing gradual improvement in demand for industrial products in 2005. Drilling day rates and rig capacity utilization have improved. Elevated oil and natural gas prices, if continued, should drive additional demand for energy products. This environment should continue to support revenue and profitability expansion of our businesses and is one of the primary drivers in increasing our 2005 earnings expectations from our initial estimate in October 2004."
"Given the current economic environment, as well as our existing backlog and recent order trends, we now expect diluted earnings per share (DEPS) for 2005 to be approximately $2.15 to $2.40, with a first quarter DEPS approximating $0.40 to $0.48. Included in this updated guidance is $0.38 to $0.42 of DEPS in 2005 from our most recent acquisition, Nash Elmo."
"The major dynamics to the significant improvement in our overall 2005 earnings expectations include a reduction in our estimated 2005 effective income tax rate to 30% from 34% in our previous guidance, stronger anticipated volume and earnings from our businesses that existed prior to our 2004 acquisitions and a higher level of incremental income from both the Syltone and Nash Elmo acquisitions. These positive factors more than offset the anticipated expense in the second half of 2005 related to expensing stock options starting July 1, 2005, as required by new accounting rules, estimated to be $0.03 to $0.05 of DEPS.
Fourth Quarter Results
Revenues for the fourth quarter of 2004 increased $124.6 million (107%) to $241.2 million for the three months ended December 31, 2004, compared to the same period of 2003. The Compressor and Vacuum Products segment increased revenues $95.4 million to $193.2 million for the three months ended December 31, 2004, compared to the same period of 2003. This 97% increase was primarily due to 2004 acquisitions ($89.5 million); increased volume of truck blowers and compressors sold in the U.S., Europe, China and South Africa; favourable changes in currency exchange rates ($3.3 million) and price increases. Fluid Transfer Products segment revenues increased $29.2 million to $48.0 million for the three months ended December 31, 2004, compared to the same period of 2003. This 156% increase was due to an acquisition ($19.2 million) in 2004, increased shipments of drilling and well stimulation pumps, water jetting systems and related aftermarket services and price increases.
The two acquisitions completed in 2004 increased backlog by $117.1 million on December 31, 2004, compared to December 31, 2003. These 2004 acquisitions added $99.4 million and $17.7 million to the Compressor and Vacuum Products and the Fluid Transfer Products segments backlog, respectively. Orders for the three-month period of 2004 increased by $102.3 million due to these 2004 acquisitions, compared to the previous year. Incremental orders from our 2004 acquisitions contributed $90.3 million to the Compressor and Vacuum Products segment for the three months ended December 31, 2004 and $12.0 million to the Fluid Transfer Products segment. For the full year of 2004, these acquisitions added $193.9 million to compressor and vacuum product orders and $55.5 million to orders for fluid transfer products.
Gross margin as a percentage of sales (gross margin percentage) increased to 32.8% in the three-month period ended December 31, 2004, from 29.1% in the same period of 2003. This increase in gross margin percentage was principally attributable to 2004 acquisitions, as their gross margin percentage was higher than the Company's previously existing businesses. Increased volume and the related benefit of increased leverage of fixed and semi-fixed costs over a higher revenue base positively impacted gross margin percentage. Favorable sales mix also contributed to the increased gross margin as the fourth quarter of 2004 included a higher percentage of drilling pumps and aftermarket sales compared to the previous year. These positive factors were partially offset by the rising cost of certain raw materials coupled with some supply chain inefficiencies that affected material availability.
Depreciation and amortization for the three months ended December 31, 2004 increased $2.3 million to $5.8 million, primarily due to 2004 acquisitions. The fourth quarter of 2004 included a education to depreciation and amortization expense of $1.8 million resulting from finalizing the purchase price allocation related to the Syltone acquisition.
Selling and administrative expenses increased $28.5 million in the three-month period of 2004 to $51.4 million, primarily due to acquisitions ($26.1 million) in 2004. Changes in currency exchange rates and higher compensation and fringe benefit costs also contributed to this increase.
Operating margin for the Company was 9.1% in the three months ended December 31, 2004, an increase from 6.5% for the same period of 2003. Operating earnings for the Compressor and Vacuum Products segment were 7.4% of revenues in the three months ended December 31, 2004, an increase from 6.6% in the same period of 2003. This increase was attributable to the acquisitions in 2004, as their operating margins were higher than the segment's previously existing businesses. The favorable impact of these acquisitions was partially offset by increased compensation, material and fringe benefit costs from previously existing businesses. The Fluid Transfer Products segment generated operating margin of 16.1% for the three months ended December 31, 2004, compared to 5.9% in the same period of 2003. This increase was primarily attributable to positive impact of increased leverage of the segment's fixed and semi-fixed costs over a higher revenue base, favorable mix resulting from increased shipments of drilling pumps and replacement parts, price increases and operational improvements.
Interest expense increased $2.8 million to $4.2 million for the three months ended December 31, 2004, compared to the same period of 2003, due to higher average borrowings stemming from acquisitions completed in 2004 and higher average rates. The average interest rate for the three-month period ended December 31, 2004 was 5.0% compared to 3.8% in the comparable prior year period. This increase in interest rates was attributable to the implementation of interest rate swap agreements to fix a portion of the Company's floating rate debt and the increase in leverage due to the Syltone and Nash Elmo acquisitions.
The provision for income taxes was $3.1 million in both three-month periods, as the increase in income before taxes in 2004 was offset by a lower effective tax rate in the fourth quarter. The Company's tax rate for the three months ended December 31, 2004 was 18.3% due to net favorable fourth quarter income tax reductions that lowered the effective rate for the full year to 29% from the previous estimate of 34% and resulted in $0.13 of incremental DEPS in the fourth quarter. Fourth quarter items that reduced the full year rate related to favorable settlements of U.S. and non-U.S. income tax matters and a higher proportion of earnings derived from lower taxed non-U.S. jurisdictions.
These positive items were partially offset by incremental taxes accrued in anticipation of the planned repatriation of certain non-U.S. earnings in 2005 at a reduced tax rate pursuant to the American Jobs Creation Act of 2004.