Gardner Denver with Record Level Revenues
Gardner Denver, Inc. announced that revenues and net income for the three months ended June 30, 2005 were $250.3 million and $14.7 million, respectively. These results represent a 77% improvement in net income and 55% increase in revenues, compared to the second quarter of the previous year.
Compared to the first quarter of 2005, revenues increased approximately 5% and net income increased approximately 42%. These improved results were primarily a result of the Nash Elmo acquisition, continued expansion in demand for pumps used in oil and natural gas well drilling and stimulation and incremental other income.
CEO's Comments Regarding Results
"The second quarter was an outstanding period for us, reflecting both improved organic growth and the positive impact of our recent acquisitions. Diluted earnings per share (DEPS) of $0.61 represent a record second quarter, and are 22% higher than the results of the first quarter, which was also a record. Organic revenue growth, excluding the Nash Elmo and Bottarini acquisitions and the effect of changes in foreign currency rates, exceeded 12% for the second quarter, compared to the three-month period of the previous year. Compared to the first quarter of 2005, revenues increased almost 5%.
Total segment operating earnings (defined as revenues, less cost of sales, depreciation and amortization, and selling and administrative expenses) as a percentage of revenues (operating margin) increased to 9.4% for the three months ended June 30, 2005, compared to 8.7% for the comparable period of 2004 and 7.6% in the first quarter of 2005," stated Ross Centanni, Chairman, President and CEO.
"We experienced double-digit increases in demand for compressor and vacuum products used in North America, compared to the previous year. Orders for compressor products and related aftermarket parts in North America grew more than 20% compared to the previous year and more than 16% compared to the first quarter of 2005, as a result of a recovering industrial manufacturing environment and demand for compressors used in natural gas gathering. Demand for compressors and blowers used in transportation applications in North America remains strong. Demand for oil and natural gas well drilling pumps and replacement parts increased substantially, due to elevated energy prices and continued increases in North American rig counts. Over the last twelve months, we have booked more orders for drilling pumps than in any comparable period since the 1980's. We were able to convert many of the orders received in the second quarter into shipments, but backlog in both business segments still increased. Therefore, we anticipate that second half shipments will exceed that of the first.
"We continue to actively pursue opportunities to reduce costs in our business. We recently announced the planned closures of a distribution center in the United States and Thomas Industries' (Thomas) corporate office, and will consolidate these activities into our existing operations. These efforts should enable us to lower costs and reduce our investment in inventory and fixed assets. We also restructured some of our sales organizations in Canada and Europe and closed an under-performing packaging operation in Brazil. Expenses associated with these efforts totaled $0.6 million in the second quarter and are expected to be approximately $2 million in the second half of 2005. These efforts, and the previously announced disposition of non-core Syltone operations, are expected to increase income before income taxes by approximately $5 million annually and should be realized beginning in 2006.
We anticipate that there are additional opportunities to generate synergistic benefits via facility and product rationalization, sales channel leverage and material cost reductions through further integration of Nash Elmo, Bottarini and Thomas into the Gardner Denver business platform. We recently completed the first installation of SAP at a Nash Elmo operation and have begun to further refine our integration plans for Thomas since completing the acquisition on July 1. The Thomas operations that existed prior to its acquisition of Rietschle are now managed as the Thomas Products Division by Jim Kregel, who has been appointed the Vice President and General Manager of this new division. Mr. Kregel formerly served as Vice President, Worldwide Compressors and Pumps at Thomas. The Rietschle operations of Thomas are being integrated into our existing Blower Division."
Looking forward, Mr. Centanni stated, "The rate of improvement in demand for drilling pumps and our compressor and vacuum products in North America has exceeded our previous expectations. The consensus opinion is that the current environment for our petroleum products is expected to extend for the longest period in over twenty years. Based on the current economic environment, as well as our existing backlog and recent order trends, we expect DEPS to be approximately $0.46 to $0.56 for the third quarter of 2005 and $2.20 to $2.40 for the year (an increase from our previous expectation of $2.00 to $2.16 DEPS, including the acquisition of Thomas and the impact of the related financings). The guidance for the year includes net income of approximately $10 million to $11 million from the acquisition of Nash Elmo. The Thomas acquisition and related financings are expected to dilute DEPS for the third quarter and full year. The net effect of the transactions is expected to reduce DEPS approximately $0.16 to $0.22 for the third quarter and $0.31 to $0.41 for the year. This reflects a more favorable outlook on the Thomas results offset by incremental dilution on the increased earnings expectations of our base business. We currently expect this acquisition to be accretive to DEPS in 2006."
Second Quarter Results
Revenues increased $89.0 million (55%) to $250.3 million for the three months ended June 30, 2005, compared to the same period of 2004. This increase was primarily due to the acquisitions of Nash Elmo and Bottarini, which contributed $66.9 million. Increased shipments of drilling and well stimulation pumps, compressors and blowers, price increases and favourable changes in currency exchange rates also contributed to the improved revenues.
For the three months ended June 30, 2005, revenues for the Compressor and Vacuum Products segment increased $74.9 million (59%) to $200.9 million, compared to the same period of 2004, primarily due to the acquisitions of Nash Elmo and Bottarini. Higher volumes of compressor and blower shipments in the U.S., Europe and China, price increases and changes in currency exchange rates also contributed to this increase. Fluid Transfer Products segment revenues increased $14.1 million (40%) to $49.4 million for the three months ended June 30, 2005, compared to the same period of 2004. This improvement was primarily due to increased volume of drilling and well stimulation pumps, water jetting systems and related aftermarket parts, price increases and changes in currency exchange rates.
Backlog for the compressor and vacuum businesses that existed prior to the acquisition of Nash Elmo and Bottarini increased over 29% as of June 30, 2005, compared to June 30, 2004. The Nash Elmo and Bottarini acquisitions, completed in September 2004 and June 2005, respectively, contributed another $95.7 million to the increase in backlog compared to the previous year. Orders for compressor and vacuum products for the three-month period ended June 30, 2005 increased by $13.4 million for the businesses that existed prior to the acquisitions, representing growth of 10% compared to the previous year. Orders for fluid transfer products increased more than $22.7 million (55%) in the three-month period of 2005, compared to the previous year, driving a corresponding 159% increase in backlog for this segment, as a result of increased demand in most major product lines.
Gross margin (defined as revenues less cost of sales) for the three months ended June 30, 2005 increased $29.8 million (57%) to $82.4 million compared to the same period of 2004, primarily due to the increase in revenues. Gross margin as a percentage of revenues (gross margin percentage) increased to 32.9% in the three-month period of 2005 from 32.6% in the same period of 2004 primarily due to the acquisition of Nash Elmo, which had a higher gross margin percentage than the Company's previously existing businesses, and due to increased volume and price increases in both segments. These positive factors were partially offset by higher material costs due to surcharges on castings and other components stemming from increases in scrap iron and other metal prices.
Acquisitions (Nash Elmo and Bottarini) increased depreciation and amortization by $2.5 million and selling and administrative expenses by $15.7 million for the three months ended June 30, 2005, compared to the same period of 2004. Higher compensation and fringe benefit costs, changes in currency exchange rates and expenses associated with a new compressor packaging facility in China also contributed to the increase in selling and administrative expenses.
The Compressor and Vacuum Products segment generated operating margin of 8.3% in the three-month period ended June 30, 2005, slightly less than the operating margin of the three-month period of the previous year and an increase from 7.0% for the three months ended March 31, 2005. Improved results from Nash Elmo operations contributed to much of the sequential improvement in operating margin.
The Fluid Transfer Products segment generated operating margin of 13.8% for the three-month period ended June 30, 2005, compared to 9.5% in the same period of 2004 and 10.1% in the first quarter of 2005. This improvement was primarily due to the positive impact of increased leverage of the segment's fixed and semi-fixed costs over a higher revenue base, improved productivity and the favorable mix associated with a higher proportion of drilling pump shipments.
Acquisition related financing and higher interest rates resulted in $3.8 million of additional interest expense for the three months ended June 30, 2005, compared to the same period of 2004. The weighted average interest rate for the three-month period ended June 30, 2005 was 6.8%, compared to 5.2% in the comparable prior year period. Accrued interest on a private placement of $125 million aggregate principal amount of 8% Senior Subordinated Notes due 2013, issued in May 2005 to partially finance the Thomas acquisition, was included in this expense. Approximately $0.7 million of interest income earned on the investment of these proceeds, prior to their use to complete the Thomas acquisition, was included in other income, net. Proceeds from litigation related settlements ($1.6 million) received in the second quarter of 2005 also increased other income, net.
Income before income taxes increased $8.4 million (67%) to $20.9 million for the three months ended June 30, 2005, compared to the same period of 2004. This increase was primarily due to the Nash Elmo acquisition, which contributed approximately $5 million, and the increase in other income. Increased volume and pricing in the Fluid Transfer segment and the related positive impact of increased leverage of fixed and semi-fixed costs over a higher revenue base also contributed to the increase. These positive factors were partially offset by higher interest expense.
The Company's effective tax rate for the three and six months ended June 30, 2005 decreased to 30% compared to 34% in the prior year period, principally due to a higher proportion of earnings derived from lower taxed non-U.S. jurisdictions and other tax planning initiatives. The provision for income taxes increased by $2.0 million to $6.3 million for the three-month period of 2005, compared to the prior year period, as a result of the higher pretax income, partially offset by a lower effective tax rate.
Net income for the three months ended June 30, 2005 increased $6.4 million (77%) to $14.7 million ($0.61 DEPS), compared to $8.3 million ($0.41 DEPS) in the same period of 2004. This improvement resulted primarily from the benefit of the Nash Elmo acquisition (approximately $4 million), increased revenues and the related cost leverage, litigation related settlements and the lower effective tax rate. DEPS for the three-month period were reduced by $0.11 as a result of the public offering of 5,658,000 shares of Gardner Denver's common stock and the Senior Subordinated Notes issued to finance the Thomas acquisition. These acquisition related financings were completed in early May 2005.
Six Month Results
Revenues for the first half of 2005 increased $173.4 million (55%) to $489.2 million, compared to the same period of 2004. This increase was due to the acquisition of Nash Elmo ($128.0 million) and increased shipments of drilling and well stimulation pumps, replacement parts, compressors and blowers. Price increases and favorable changes in currency exchange rates also contributed to this improvement.
Net income for the six months ended June 30, 2005 increased $10.2 million (68%) to $25.0 million ($1.11 DEPS), compared to $14.8 million ($0.80 DEPS) in same period of 2004. This increase was primarily attributable to the Nash Elmo acquisition (approximately $6 million), higher revenues and the related cost leverage, the litigation related settlements received in the second quarter and the lower effective tax rate. In 2004, a non-recurring $1.2 million foreign currency transaction gain, related to the appreciation of U.S. dollar borrowings that were converted to British pounds prior to being used to consummate the Syltone acquisition, was included in other income, net. This transaction gain contributed approximately $0.05 to DEPS in 2004. Conversely, DEPS for the six months ended June 30, 2005 included the incremental dilutive effects of the March 2004 stock offering ($0.10) and the May 2005 financing transactions completed in advance of the Thomas acquisition ($0.11).
In the first six months of 2005, the Company invested approximately $11 million in capital expenditures, and expects total capital expenditures for the year to be approximately $35 million to $40 million, including capital investments for the recently acquired operations of Thomas. Capital has been invested in integrating businesses onto a common enterprise resource planning system, introducing new products to market and improving operations. Net cash provided by operating activities was approximately $19 million in the first half of 2005, compared to approximately $5 million in the comparable period of 2004. This increase was primarily due to higher net income and depreciation and amortization levels. Improvements in days sales outstanding and inventory turnover also contributed to the increase.
Gardner Denver, with 2004 revenues of $740 million ($1,306 million on a pro forma basis including the acquisitions of Nash Elmo and Thomas Industries, which were completed in September 2004 and July 2005, respectively), is a leading worldwide manufacturer of reciprocating, rotary and vane compressors, liquid ring pumps and blowers for various industrial and transportation applications, pumps used in the petroleum and industrial markets, and other fluid transfer equipment serving chemical, petroleum, and food industries.
Source: Gardner Denver, Inc.