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| GDI > SEC Filings for GDI > Form 10-Q on 6-Nov-2009 | All Recent SEC Filings |
6-Nov-2009
Quarterly Report
The following management's discussion and analysis of financial condition and
results of operations should be read in conjunction with the Company's Annual
Report on Form 10-K for the year ended December 31, 2008, including the
financial statements, accompanying notes and management's discussion and
analysis of financial condition and results of operations, and the interim
condensed consolidated financial statements and accompanying notes included in
this Quarterly Report on Form 10-Q.
Operating Segments
Effective January 1, 2009, the Company reorganized its five former operating
divisions into two major product groups: the Industrial Products Group and the
Engineered Products Group. The Industrial Products Group includes the former
Compressor and Blower Divisions, plus the multistage centrifugal blower
operations formerly managed in the Engineered Products Division. The Engineered
Products Group is comprised of the former Engineered Products (excluding the
multistage centrifugal blower operations), Thomas Products and Fluid Transfer
Divisions. These changes were designed to streamline operations, improve
organizational efficiencies and create greater focus on customer needs. As a
result of these organizational changes, the Company realigned its segment
reporting structure with the newly formed product groups effective with the
reporting period ended March 31, 2009. The Industrial Products Group and
Engineered Products Group constitute the Company's two reportable segments.
In the Industrial Products Group, the Company designs, manufactures, markets
and services the following products and related aftermarket parts for industrial
and commercial applications: rotary screw, reciprocating, and sliding vane air
compressors; and positive displacement, centrifugal and side channel blowers;
primarily serving general industrial and OEM applications. This segment also
designs, manufactures, markets and services complementary ancillary products.
Stationary air compressors are used in manufacturing, process applications and
materials handling, and to power air tools and equipment. Blowers are used
primarily in pneumatic conveying, wastewater aeration, numerous applications in
industrial manufacturing and engineered vacuum systems. The markets served are
primarily in Europe, the U.S. and Asia.
In the Engineered Products Group, the Company designs, manufactures, markets
and services a diverse group of products for industrial and commercial
applications, OEM applications, engineered systems and general industry.
Products include pumps, liquid ring pumps, single-piece piston reciprocating,
diaphragm vacuum 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. Liquid ring pumps are used in many different
applications such as water removal, distilling, reacting, flare gas recovery,
efficiency improvement, lifting and handling, and filtering, principally in the
pulp and paper, industrial manufacturing, petrochemical and power industries.
This segment also designs, manufactures, markets and services other fluid
transfer components and equipment for the chemical, petroleum and food
industries. The markets served are primarily in the U.S., Europe, Canada and
Asia.
The Company has determined its reportable segments in accordance with FASB
ASC 280 and evaluates the performance of its reportable segments based on, among
other measures, operating income (loss), which is defined as income
(loss) before interest expense, other income, net, and income taxes. Reportable
segment operating income (loss) and segment operating margin (defined as segment
operating income (loss) divided by
segment revenues) are indicative of short-term operating performance and ongoing
profitability. Management closely monitors the operating income and operating
margin of each reportable segment to evaluate past performance and actions
required to improve profitability. See Note 17 "Segment Results" in the "Notes
to Condensed Consolidated Financial Statements" included in this Quarterly
Report on Form 10-Q.
Non-GAAP Financial Measures
To supplement the Company's financial information presented in accordance
with GAAP, management, from time to time, uses additional measures to clarify
and enhance understanding of past performance and prospects for the future.
These measures may exclude, for example, the impact of unique and infrequent
items or items outside of management's control (e.g. foreign currency exchange
rates). Such measures are provided in addition to and should not be considered
to be a substitute for, or superior to, the comparable measure under GAAP.
Results of Operations
Performance during the Quarter Ended September 30, 2009 Compared
with the Quarter Ended September 30, 2008
Revenues
Revenues decreased $51.5 million, or 10.7%, to $428.8 million in the three
months ended September 30, 2009, compared to $480.3 million in the comparable
three-month period of 2008. This decrease was attributable to lower volume in
both segments ($143.0 million, or 30%, in total) and unfavorable changes in
foreign currency exchange rates ($11.0 million, or 2%), partially offset by the
acquisitions of CompAir and Best Aire, Inc. ($101.3 million, or 21%) and net
price increases ($1.2 million).
Revenues in the Industrial Products Group increased $10.7 million, or 4%, to
$258.5 million in the third quarter of 2009, compared to $247.8 million in the
third quarter of 2008. This increase reflects the effect of acquisitions
($101.3 million, or 41%) and price increases (1%), largely offset by lower
volume (36%) and unfavorable changes in foreign currency exchange rates (2%).
The volume decline was attributable to the global economic slowdown and was
realized across most product lines and geographic regions.
Revenues in the Engineered Products Group decreased $62.2 million, or 27%, to
$170.3 million in the third quarter of 2009, compared to $232.5 million in the
third quarter of 2008. This decrease reflects lower volume (24%), unfavorable
changes in foreign currency exchange rates (2%) and price reductions, net of
price increases (1%). The decline in volume was realized across most product
lines and geographic regions.
Gross Profit
Gross profit decreased $15.2 million, or 10%, to $135.2 million in the three
months ended September 30, 2009, compared to $150.4 million in the comparable
period of 2008, and as a percentage of revenues was 31.5% in 2009, compared to
31.3% in 2008. Acquisitions provided incremental gross profit of approximately
$27.2 million in the third quarter of 2009. The decrease in gross profit
primarily reflects the volume reductions discussed above coupled with
unfavorable changes in foreign currency exchange rates, partially offset by
price increases. The
improvement in gross profit as a percentage of revenues was due primarily to the
benefits of operational improvements and cost reductions, largely offset by
unfavorable product mix and the loss of volume leverage of fixed and semi-fixed
costs as production levels declined. The unfavorable product mix was related to
the addition of the CompAir product lines, which currently have a lower gross
margin percentage than the Company average, and declining petroleum product
volume, which provide a gross margin percentage above the Company average.
Selling and Administrative Expenses
Selling and administrative expenses increased $9.6 million to $89.9 million
in the third quarter of 2009, compared to $80.3 million in the third quarter of
2008. This increase reflects the effect of acquisitions ($21.7 million),
partially offset by the benefits of cost reductions, including lower
compensation and benefit expenses and the effect of acquisition integration and
other restructuring initiatives ($9.3 million), and the favorable effect of
changes in foreign currency exchange rates ($2.8 million). As a percentage of
revenues, selling and administrative expenses increased to 21.0% in the third
quarter of 2009 compared to 16.7% in the third quarter of 2008 primarily as a
result of the reduced leverage resulting from lower revenues.
Other Operating Expense, Net
Other operating expense, net, was $10.8 million in the third quarter of 2009
compared to $14.6 million in the third quarter of 2008. Other operating expense,
net, in the third quarter of 2009 included restructuring charges of
$12.6 million and foreign currency gains of $1.6 million. Other operating
expense, net, in the third quarter of 2008 included (i) losses totaling
$8.8 million on mark-to-market adjustments for cash transactions and foreign
currency forward contracts entered into in order to limit the impact of changes
in the USD to GBP exchange rate on the amount of USD-denominated borrowing
capacity that remained available on the Company's revolving credit facility
following the completion of the CompAir acquisition, (ii) other foreign currency
losses of $1.6 million, (iii) restructuring charges of $2.4 million and (iv) the
write-off of deferred costs totaling $2.3 million associated with unconsummated
acquisitions.
Impairment Charges
An impairment charge of $2.5 million was recorded in the third quarter of
2009 in connection with the evaluation of goodwill and other indefinite-lived
intangible assets in the Industrial Products Group as further described below
under the discussion of results of operations for the nine-month period ended
September 30, 2009.
Operating Income
Operating income of $31.9 million in the third quarter of 2009 compares to
$55.5 million in the third quarter of 2008. These results reflect the gross
profit, selling and administrative expense, other operating expense, net, and
impairment charge factors discussed above. Operating income in the third quarter
of 2009 reflects the impairment charge of $2.5 million and charges totaling
$13.3 million associated with profit improvement initiatives (consisting
primarily of employee termination costs) and other non-recurring items.
Operating income in the third quarter of 2008 reflects charges totaling
$14.7 million for profit improvement initiatives, mark-to-market currency
adjustments and other non-recurring items.
The Industrial Products Group generated segment operating income and segment
operating margin of $7.3 million and 2.8%, respectively, in the third quarter of
2009, compared to $18.2 million and 7.3%, respectively, in the third quarter of
2008 (see Note 17 "Segment Results" in the "Notes to Condensed Consolidated
Financial Statements" included in this Quarterly Report on Form 10-Q for a
reconciliation of segment operating income (loss) to consolidated income
(loss) before income taxes). This decline in year-over-year performance was due
primarily to lower revenue volume and unfavorable product mix, partially offset
by the benefits of operational improvements and cost reductions. Results in the
third quarter of 2009 were negatively impacted by charges totaling $10.1 million
in connection with impairment charges, profit improvement initiatives and other
non-recurring items. Results in the third quarter of 2008 were negatively
impacted by charges totaling $11.9 million in connection with profit improvement
initiatives, other non-recurring items and the mark-to-market currency
adjustments discussed above.
The Engineered Products Group generated segment operating income and segment
operating margin of $24.6 million and 14.4%, respectively, in the third quarter
of 2009, compared to $37.3 million and 16.0%, respectively, in the same period
of 2008 (see Note 17 "Segment Results" in the "Notes to Condensed Consolidated
Financial Statements" included in this Quarterly Report on Form 10-Q for a
reconciliation of segment operating income (loss) to consolidated income
(loss) before income taxes). This decline in year-over-year performance was due
primarily to lower revenue and the resulting loss of volume leverage of fixed
and semi-fixed costs as production levels declined and the unfavorable product
mix discussed above, partially offset by the benefits of operational
improvements and cost reductions. Results in the third quarters of 2009 and 2008
were negatively impacted by charges totaling $5.7 million and $2.8 million,
respectively, in connection with profit improvement initiatives and other
non-recurring items.
Interest Expense
Interest expense of $7.1 million in the third quarter of 2009 increased
$3.3 million from $3.8 million in the third quarter of 2008, due primarily to
higher average borrowings in the third quarter of 2009 compared to the prior
year period as a result of the CompAir acquisition. The weighted average
interest rate, including the amortization of debt issuance costs, was 6.2% in
the third quarter of 2009 compared to 6.1% in the third quarter of 2008.
Provision for Income Taxes
The provision for income taxes and effective tax rate were $7.1 million and
26.7%, respectively, in the third quarter of 2009, compared to $17.2 million and
33.2%, respectively, in third quarter of 2008. The year-over-year reduction in
the effective rate primarily reflects incremental taxes of approximately
$2.7 million associated with cash repatriation that were recorded in the third
quarter of 2008.
Net Income (Loss)
Consolidated net income of $19.4 million and diluted earnings per share of
$0.37 in the third quarter of 2009 compares with net income and diluted earnings
per share of $34.6 million and $0.65, respectively, in the third quarter of
2008. The decline in net income and diluted earnings per share was the net
result of the factors
affecting operating income, interest expense and the provision for income taxes
discussed above. In the third quarter of 2009, charges associated with profit
improvement initiatives and other non-recurring items ($10.1 million, after tax)
and impairment charges ($2.5 million, after tax) reduced net income and diluted
earnings per share by approximately $12.6 million and $0.24, respectively. In
the third quarter of 2008, mark-to-market currency adjustments ($5.9 million,
after tax), charges associated with profit improvement initiatives and other
non-recurring items ($3.9 million, after tax) and incremental income taxes
associated with cash repatriation ($2.7 million) reduced net income and diluted
earnings per share by approximately $12.5 million and $0.23, respectively.
Performance during the Nine Months Ended September 30, 2009 Compared
with the Nine Months Ended September 30, 2008
Revenues
Revenues decreased $166.7 million, or 11.2%, to $1,327.4 million in the
nine-month period ended September 30, 2009, compared to $1,494.1 million in the
nine-month period of 2008. This decrease was attributable to lower volume in
both segments ($407.0 million, or 27%, in total) coupled with unfavorable
changes in foreign currency exchange rates ($71.2 million, or 5%), partially
offset by the acquisitions of CompAir and Best Aire, Inc. ($288.6 million, or
19%) and net price increases ($22.9 million, or 2%).
Revenues in the Industrial Products Group decreased $0.5 million to
$762.7 million in the nine-month period of 2009, compared to $763.2 million in
the nine-month period of 2008. This decrease reflects lower volume (35%) and
unfavorable changes in foreign currency exchange rates (5%), partially offset by
the effect of acquisitions ($288.6 million, or 38%) and price increases (2%).
The volume decline was attributable to the global economic slowdown and was
realized across most product lines and geographic regions.
Revenues in the Engineered Products Group decreased $166.2 million, or 23%,
to $564.7 million in the nine-month period of 2009, compared to $730.9 million
in the nine-month period of 2008. This decrease reflects lower volume (20%) and
unfavorable changes in foreign currency exchange rates (4%), partially offset by
price increases, net of price reductions (1%). The decline in volume was
realized across most product lines and geographic regions.
Gross Profit
Gross profit decreased $73.3 million, or 15%, to $406.3 million in the
nine-month period ended September 30, 2009, compared to $479.6 million in the
nine-month period of 2008, and as a percentage of revenues was 30.6% in 2009,
compared to 32.1% in 2008. Prior year acquisitions provided incremental gross
profit of approximately $72.0 million in the nine-month period of 2009. The
decrease in gross profit primarily reflects the volume reductions discussed
above and unfavorable changes in foreign currency exchange rates, partially
offset by price increases. The decline in gross profit as a percentage of
revenues was due primarily to unfavorable product mix and the loss of volume
leverage of fixed and semi-fixed costs as production levels declined, partially
offset by the benefits of operational improvements and cost reductions. The
unfavorable product mix was related to the addition of the CompAir product
lines, which currently have a lower gross margin percentage than the Company
average, and less petroleum products volume, which provide a gross margin
percentage above the Company average.
Selling and Administrative Expenses
Selling and administrative expenses increased $14.4 million to $271.7 million
in the nine-month period of 2009, compared to $257.3 million in the nine-month
period of 2008. This increase reflects approximately $66.1 million of
incremental expense attributable to acquisitions, mostly offset by the benefits
of cost reductions, including lower compensation and benefit expenses and the
effect of acquisition integration and other restructuring initiatives
($34.9 million), and the favorable effect of changes in foreign currency
exchange rates ($16.8 million). As a percentage of revenues, selling and
administrative expenses increased to 20.5% in the nine-month period of 2009
compared to 17.2% in the nine-month period 2008 due to the reduced leverage
resulting from lower revenues and the acquisition of CompAir, which had higher
selling and administrative expenses as a percentage of revenues than the rest of
the Company during the relevant period.
Other Operating Expense, Net
Other operating expense, net, was $40.7 million in the nine-month period of
2009 compared to $17.3 million in the nine-month period of 2008. Other operating
expense, net, in the nine-month period of 2009 consisted primarily of
restructuring charges of $40.2 million. Other operating expense, net, in the
nine-month period of 2008 included (i) losses totaling $8.8 million on
mark-to-market adjustments for cash transactions and foreign currency forward
contracts entered into in order to limit the impact of changes in the USD to GBP
exchange rate on the amount of USD-denominated borrowing capacity that remained
available on the Company's revolving credit facility following the completion of
the CompAir acquisition, (ii) restructuring charges of $2.4 million, (iii) the
write-off of deferred costs totaling $2.3 million associated with unconsummated
acquisitions and (iv) other employee and certain retirement costs of
$4.5 million.
Impairment Charges
In the nine-month period ended September 30, 2009, the Company recorded
impairment charges of $253.6 million to reduce the carrying amount of goodwill
in the Industrial Products Group and $10.0 million primarily to reduce the
carrying value of a trade name in the Industrial Products Group. See Note 5
"Goodwill and Other Intangible Assets" in the "Notes to Condensed Consolidated
Financial Statements" included in this Quarterly Report on Form 10-Q for further
discussion of these impairment charges.
Operating Income (Loss)
The operating loss of $169.7 million in the nine-month period of 2009
compares to operating income of $205.0 million in the nine-month period of 2008.
These results reflect the gross profit, selling and administrative expense,
other operating expense, net, and impairment charges discussed above. The
operating loss in the nine-month period of 2009 reflects the net goodwill and
trade name impairment charges totaling $263.6 million and charges totaling
$41.3 million associated with profit improvement initiatives and other
non-recurring items. Operating income in the nine-month period of 2008 reflects
charges totaling $18.6 million for profit improvement initiatives,
mark-to-market currency adjustments and other non-recurring items.
The Industrial Products Group generated a segment operating loss of
$261.8 million and segment operating margin of negative 34.3% in the nine-month
period of 2009 compared to segment operating income of $72.5 million and segment
operating margin of 9.5% in the nine-month period of 2008 (see Note 17 "Segment
Results" in the "Notes to Condensed Consolidated Financial Statements" included
in this Quarterly Report on Form 10-Q for a reconciliation of segment operating
income (loss) to consolidated income (loss) before income taxes). The decline in
year-over-year performance was due primarily to the net impairment charges and
lower gross profit as a result of the revenue decline and unfavorable product
mix discussed above. Results in the nine-month period of 2009 were negatively
impacted by charges totaling $25.7 million in connection with profit improvement
initiatives and other non-recurring items. Results in the nine-month period of
2008 were negatively impacted by charges totaling $13.9 million in connection
with profit improvement initiatives, other non-recurring items and the
mark-to-market currency adjustments discussed above. These reductions to
operating income were partially offset by the benefits of operational
improvements and cost reductions.
The Engineered Products Group generated segment operating income of
$92.0 million and segment operating margin of 16.3% in the nine-month period of
2009, compared to $132.5 million and 18.1%, respectively, in the same period of
2008 (see Note 17 "Segment Results" in the "Notes to Condensed Consolidated
Financial Statements" included in this Quarterly Report on Form 10-Q for a
reconciliation of segment operating income (loss) to consolidated income
(loss) before income taxes). The decline in segment operating income and segment
operating margin was due primarily to lower revenue and the resulting loss of
volume leverage of fixed and semi-fixed costs as production levels declined and
the unfavorable product mix discussed above, partially offset by the benefits of
operational improvements and cost reductions. Results in the nine-month periods
of 2009 and 2008 were negatively impacted by charges totaling $15.6 million and
$4.7 million, respectively, in connection with profit improvement initiatives
and other non-recurring items.
Interest Expense
Interest expense of $21.4 million in the nine-month period of 2009 increased
$6.9 million from $14.5 million in the comparable period of 2008. This increase
was attributable to higher average borrowings in 2009 as a result of the CompAir
acquisition, partially offset by a lower weighted average interest rate as a
result of declines in the floating-rate indices of the Company's borrowings. The
weighted average interest rate, including the amortization of debt issuance
costs, declined to 5.8% in the nine-month period of 2009 compared to 7.0% in the
nine-month period of 2008, due primarily to a decline in the USD LIBOR (on
which, in part, the interest rate on borrowings under the Company's 2008 Credit
Agreement are based).
Provision for Income Taxes
The provision for income taxes was $14.4 million for the nine-month period
ended September 30, 2009, compared to $56.3 million for the nine-month period
ended September 30, 2008. The provision in the nine-month period of 2009
includes an $8.6 million valuation allowance against deferred tax assets related
to net operating losses recorded in connection with the acquisition of CompAir
based on revised financial projections. The provision in the nine-month period
of 2009 also reflects a benefit for the reversal of deferred tax liabilities
totaling $11.6 million associated with a portion of the net goodwill and all of
the trade name impairment charges recorded in the nine-month period of 2009.
Deferred tax liabilities were recorded when the trade name was established and
offsetting deferred tax liabilities and deferred tax assets were established for
the portion of goodwill which was amortizable for tax purposes. A portion of the
goodwill for which the impairment charge was taken was not amortizable for tax
purposes and, accordingly, deferred tax liabilities were not recorded when that
goodwill was established and a corresponding tax benefit did not arise upon
impairment of that portion of goodwill. Finally, the provision in the nine-month
period of 2009 includes a $3.6 million credit for the reversal of an income tax
reserve and the related interest associated with the completion of a foreign tax
examination. The provision in the nine-month period of 2008 includes incremental
taxes of approximately $2.7 million associated with cash repatriation.
Net Income (Loss)
The consolidated net loss of $202.4 million and diluted loss per share of
$3.90 in the nine-month period of 2009 compares with net income and diluted
earnings per share of $135.1 million and $2.52, respectively, recorded in the
nine-month period of 2008. In the nine-month period of 2009, impairment charges
and associated reversal of deferred tax liabilities ($252.0 million, after tax),
write-off of deferred tax assets ($8.6 million), charges associated with profit
improvement initiatives and other non-recurring items ($29.6 million, after
tax), partially offset by the reversal of the income tax reserve and related
interest ($3.6 million), resulted in a net reduction in net income and diluted
earnings per share of approximately $286.6 million and $5.52, respectively. In
the nine-month period of 2008, charges associated with profit improvement
initiatives and other non-recurring items ($6.7 million, after tax),
mark-to-market currency adjustments ($5.9 million, after tax), and incremental
income taxes associated with cash repatriation ($2.7 million) reduced net income
and diluted earnings per share by approximately $15.3 million and $0.28,
respectively.
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