The Daily Magic Formula Stock for 09/21/2008 is Gardner Denver Inc. According to the Magic Formula Investing Web Site, the ebit yield is 13% and the EBIT ROIC is 25-50 %.
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Gardner Denver, Inc. (â€śGardner Denverâ€ť or the â€śCompanyâ€ť) designs, manufactures and markets compressor and vacuum products and fluid transfer products. The Company believes it is one of the worldâ€™s leading manufacturers of highly engineered stationary air compressors and blowers for industrial applications. 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 supplies pumps and compressors for original equipment manufacturer (â€śOEMâ€ť) applications such as medical equipment, vapor recovery, printing, packaging and laboratory equipment. In addition, the Company designs, manufactures, markets, and services a diverse group of pumps, water jetting systems and related aftermarket parts used in oil and natural gas well drilling, servicing and production and in industrial cleaning and maintenance. The Company also manufactures loading arms, swivel joints, couplers and valves used to load and unload ships, tank trucks and rail cars. The Company believes that it is one of the worldâ€™s leading manufacturers of reciprocating pumps used in oil and natural gas well drilling, servicing and production and in and loading arms for the transfer of petrochemical products.
For the year ended December 31, 2007, the Companyâ€™s revenues were approximately $1.9 billion, of which 77% were derived from sales of compressor and vacuum products while 23% were from sales of fluid transfer products. Approximately 41% of the Companyâ€™s total revenues for the year ended December 31, 2007 were derived from sales in the U.S. and approximately 59% were from sales to customers in various countries outside the United States. Of the total non-U.S. sales, 59% were to Europe, 22% to Asia, 5% to Canada, 9% to Latin America and 5% to other regions. See Note 16 â€śSegment Informationâ€ť in the â€śNotes to Consolidated Financial Statements.â€ť
Significant Accomplishments in 2007
The Company has consistently followed a strategic vision with a goal to grow revenues faster than the industry average, and to grow net income faster than revenues. To accomplish this goal, the Company has acquired products and operations that serve global markets, and has focused on integrating these acquisitions to remove excess cost and generate cash. The Company has pursued organic growth through new product development and investing in new technologies and our employees, with a goal of improving our internal efficiencies. Specifically, in 2007 the Company:
â€˘ Increased revenues 12% as a result of organic growth (7%) and the favorable effect of changes in foreign currency exchange rates (5%). The organic growth included volume increases in each of the reportable segments and significant price increases for fluid transfer products.
â€˘ Improved net income 54% as a result of revenue growth, cost reductions achieved primarily through acquisition integration initiatives and a lower effective income tax rate. The lower effective tax rate resulted primarily from non-recurring, non-cash reductions to net deferred tax liabilities related to corporate income tax rate changes in Germany, the United Kingdom and China, which were enacted in 2007 and will become effective in 2008, and foreign tax credits.
â€˘ Generated more than $181 million in net cash from operating activities in 2007, compared to $167 million in 2006.
â€˘ Used cash provided by operating activities to repay more than $125 million of debt.
â€˘ Relocated production of certain liquid ring pumps from Germany to China and laboratory vacuum products from Skokie, Illinois to Monroe, Louisiana and Sheboygan, Wisconsin to reduce costs.
â€˘ Relocated production of certain blower products from Schopfheim, Germany to Bradford, United Kingdom to better use existing capacity. The manufacturing processes remaining in Schopfheim were realigned to improve labor efficiency, increase production volume and reduce inventory.
â€˘ Developed new products and redesigned existing products to enhance features and benefits for customers. The new product introductions included a compressed natural gas loading arm for the marine market and expanding the line of variable speed rotary screw compressors available on a global basis. The Company also completed a redesign of its reciprocating locomotive compressor and introduced a rotary screw locomotive compressor to enable the penetration of key accounts.
Management believes that long-term growth in profitability and creation of stockholder value requires focused diversification of the Companyâ€™s end markets served, geographic footprint and customer base, and manufacturing excellence. Recognizing that the Company is subject to certain economic cycles, the intent of its strategies is to mitigate the impact of any particular cycle. The pursuit of manufacturing excellence will ensure that the Company is effectively using previous investments in assets to fund future growth initiatives.
Since becoming an independent company in 1994, the Company has actively pursued diversification and has formulated key strategies and action plans to achieve this vision. The Companyâ€™s strategic initiatives can provide a consistent source for growth in the future, as they have in the past. Therefore, the Company intends to continue to:
â€˘ Pursue international markets. Non-U.S. revenues, as a percentage of total revenues, have grown to 59% in 2007 from 21% in 1994, the Companyâ€™s first year as an independent company. By growing internationally, the Company reduces the impact of an economic down cycle in any one particular country and participates in faster growing regions of the world, such as Asia Pacific.
â€˘ Acquire complementary products, in particular those that provide access to faster growing end market segments, such as medical and environmental applications, or serve to otherwise diversify revenues while providing synergies to generate an appropriate return on the Companyâ€™s investment.
â€˘ Embrace new technologies to improve the efficiencies of our operations, whether in production, design, communications or management.
â€˘ Develop new products to bring value to the customer.
â€˘ Reduce costs and eliminate waste to improve asset management and return on invested capital.
â€˘ Focus on manufacturing proprietary products and outsourcing items that are not central to our engineering value proposition.
â€˘ Develop our people, since the organizationâ€™s vision and execution of its strategic plan is completely dependent on the capabilities of its staff.
Management believes the continued execution of the Companyâ€™s strategies will mitigate the variability of its financial results in the short term, while providing above-average opportunities for growth and return on investment.
The Companyâ€™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. (â€śCooperâ€ť) 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 â€śDivisionâ€ť). 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 Â® 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 stockholders of Cooper.
Gardner Denver has completed 20 acquisitions since becoming an independent company in 1994. The following table summarizes transactions completed since January 2004.
In January 2004, the Company acquired Syltone plc (â€śSyltoneâ€ť), previously a publicly traded company listed on the London Stock Exchange. Syltone was one of the worldâ€™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 Companyâ€™s product lines. Syltone was also one of the worldâ€™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. This acquisition strengthened the Companyâ€™s position, particularly in Europe, as the leading global provider of bulk handling solutions for the commercial transportation industry. The acquisition also expanded the Companyâ€™s product lines to include loading arms.
In September 2004, the Company acquired nash_elmo Holdings, LLC (â€śNash Elmoâ€ť). Nash Elmo was a global manufacturer of industrial vacuum pumps and is primarily split between two businesses, liquid ring pumps and side channel blowers. Both businessesâ€™ products were complementary to the Companyâ€™s Compressor and Vacuum Products segmentâ€™s product portfolio.
In June 2005, the Company acquired Bottarini S.p.A. (â€śBottariniâ€ť), a packager of industrial air compressors located near Milan, Italy. Bottariniâ€™s products were complementary to the Compressor and Vacuum Products segmentâ€™s product portfolio.
In July 2005, the Company acquired Thomas Industries Inc. (â€śThomasâ€ť), previously a New York Stock Exchange listed company traded under the ticker symbol â€śTII.â€ť Thomas was a leading supplier of pumps, compressors and blowers for OEM applications such as medical equipment, vapor recovery, automotive and transportation applications, printing, packaging and laboratory equipment. Thomas designs, manufactures, markets, sells and services these products through worldwide operations. This acquisition was primarily complementary to the Companyâ€™s Compressor and Vacuum Products segmentâ€™s product portfolio.
In January 2006, the Company completed the acquisition of the Todo Group (â€śTodoâ€ť). Todo, with assembly operations in Sweden and the United Kingdom, had one of the most extensive offerings of dry-break couplers in the industry. TODO-MATIC self-sealing couplings are used by many of the worldâ€™s largest oil, chemical and gas companies to safely and efficiently transfer their products. The Todo acquisition extended the Companyâ€™s product line of Emco Wheaton couplers, added as part of the Syltone acquisition in 2004, and strengthened the distribution of each companyâ€™s products throughout the world. This acquisition was complementary to the Companyâ€™s Fluid Transfer Products segmentâ€™s product portfolio.
Markets and Products
A description of the particular products manufactured and sold by Gardner Denver in its two reportable segments as of December 31, 2007 is set forth below. For financial information over the past three years on the Companyâ€™s performance by reportable segment and the Companyâ€™s international sales, refer to Note 16 â€śSegment Informationâ€ť in the â€śNotes to Consolidated Financial Statements.â€ť
Compressor and Vacuum Products Segment
In the Compressor and Vacuum Products segment, the Company designs, manufactures, markets and services the following products and related aftermarket parts for industrial and commercial applications: rotary screw, reciprocating, and sliding vane air compressors; positive displacement, centrifugal and side channel blowers; liquid ring pumps; and single-piece piston reciprocating, diaphragm, and linear compressor and vacuum pumps, primarily serving OEM applications, engineered systems and general industry. The Company also designs, manufactures, markets and services complementary ancillary products. The Companyâ€™s sales of compressor and vacuum products for the year ended December 31, 2007 were approximately $1.4 billion.
Compressors are used to increase the pressure of gas, including air, by mechanically decreasing its volume. The Companyâ€™s reciprocating compressors range from sub-fractional to 1,500 horsepower and are sold under the Gardner Denver, Champion, Thomas, Bottarini and Belliss & Morcom trademarks. The Companyâ€™s rotary screw compressors range from 5 to 680 horsepower and are sold under the Gardner Denver, Bottarini, Electra-Screw, Electra-Saver, Enduro, RotorChamp, Tamrotor and Tempest trademarks.
Blowers and liquid ring pumps are used to produce a high volume of air at low pressure and to produce vacuum. The Companyâ€™s positive displacement blowers range from 0 to 36 pounds per square inch gauge (PSIG) pressure and 0 to 29.9 inches of mercury (Hg) vacuum and capacity range of 0 to 43,000 cubic feet per minute (CFM) and are sold under the trademarks Sutorbilt, DuroFlow, CycloBlower, Drum, Wittig, Elmo Rietschle and TurboTron. The Companyâ€™s multistage centrifugal blowers are sold under the trademarks Gardner Denver, Lamson and Hoffman and range from 0.5 to 25 PSIG pressure and 0 to 18 inches Hg vacuum and capacity range of 100 to 50,000 CFM. The Companyâ€™s side channel blowers range from 0 to 15 PSIG pressure and 26 inches of mercury vacuum and capacity range of 0 to 1,800 CFM and are sold under the Elmo Rietschle trademark. The Companyâ€™s sliding vane compressors and vacuum pumps range from 0 to 150 PSIG and 29.9 inches of mercury vacuum and capacity range of 0 to 3,000 CFM and are sold under the Gardner Denver, Elmo Rietschle, Thomas, Welch, Drum and Wittig trademarks. The Companyâ€™s engineered vacuum systems are used in industrial cleaning, hospitals, dental offices, general industrial applications and the chemical industry and are sold under the Gardner Denver, Invincible, Thomas, Elmo Rietschle and Cat Vac trademarks. The Companyâ€™s liquid ring pumps and engineered systems range from 0 to 150 PSIG and 27.8 inches of mercury vacuum and capacity range of 1,000 to 3,000 CFM and are sold under the Nash and Elmo Rietschle trademarks.
Almost all manufacturing plants and industrial facilities, as well as many service industries, use compressor and vacuum products. The largest customers for the Companyâ€™s compressor and vacuum products are durable and non-durable goods manufacturers; process industries (petroleum, primary metals, pharmaceutical, food and paper); OEMs; manufacturers of printing equipment, pneumatic conveying equipment, and dry and liquid bulk transports; wastewater treatment facilities; and automotive service centers and niche applications such as PET bottle blowing, breathing air equipment and compressed natural gas. Manufacturers of machinery and related equipment use stationary compressors for automated systems, controls, materials handling and special machinery requirements. The petroleum, primary metals, pharmaceutical, food and paper industries require compressed air and vacuum for processing, instrumentation, 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 sliding vane compressors are used on trucks to vacuum leaves and debris from street sewers and to unload liquid and dry bulk and powder materials such as cement, grain and plastic pellets. Additionally, blowers are used in packaging technologies, medical applications, printing and paper processing and numerous chemical processing applications. Liquid ring pumps are used in many different vacuum applications and engineered systems, such as water removal, distilling, reacting, efficiency improvement, lifting and handling, and filtering, principally in the pulp and paper, industrial manufacturing, petrochemical and power industries.
As a result of the Thomas acquisition, the Company has a stronger presence in environmental markets such as sewage aeration and vapor recovery. Other strengths of Thomas are in medical, printing, packaging and automotive markets, primarily through custom compressor and pump designs for OEMs. Other Thomas products include Welch laboratory equipment.
The Compressor and Vacuum Products segment operates production facilities around the world including twelve plants in the U.S., six in Germany, three in the United Kingdom, three in China, and one each in Italy, Finland and Brazil. The most significant facilities include owned properties in Quincy, Illinois; Sedalia, Missouri; Peachtree City, Georgia; Sheboygan, Wisconsin; Princeton, Illinois; Bradford and Gloucester, United Kingdom; Zibo and Wuxi, China; Campinas, Brazil; Bad Neustadt, Memmingen, and Schopfheim, Germany; and leased properties in Trumbull, Connecticut; Tampere, Finland; Puchheim and Nuremburg, Germany; and Qing Pu, China.
The Company has nine vehicle fitting facilities in seven countries worldwide. These fitting facilities offer customized vehicle installations of systems, which include compressors, generators, hydraulics, pumps and oil and fuel systems. Typical uses for such systems include road demolition equipment; tire removal, electrical tools and lighting; hydraulic hand tools and high-pressure water jetting pumps. In addition, the Company has eight service and remanufacturing centers in the U.S. and Germany that can perform installation, repair, and maintenance work on certain of the Companyâ€™s products and similar equipment.
Fluid Transfer 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. This segment also designs, manufactures, markets and services other fluid transfer components and equipment for the chemical, petroleum and food industries. Sales of the Companyâ€™s fluid transfer products for the year ended December 31, 2007 were $429 million.
Positive displacement reciprocating pumps are marketed under the Gardner Denver 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 Companyâ€™s production pumps range from 16 to 300 horsepower and consist of horizontal 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 Companyâ€™s well servicing products consist of high-pressure plunger pumps ranging from 165 to 400 horsepower. Gardner Denver also manufactures intermittent duty triplex and quintuplex plunger pumps ranging from 250 to 3,000 horsepower for well cementing and stimulation, including reservoir fracturing or acidizing. Duplex pumps, ranging from 16 to 135 horsepower, are produced for shallow drilling, which includes water well drilling, seismic drilling and mineral exploration. Triplex mud pumps for oil and natural gas drilling rigs range from 275 to 2,000 horsepower. The Oberdorfer line of fractional horsepower specialty bronze and high alloy pumps for the general industrial and marine markets was acquired as part of the Thomas acquisition. A small portion of Gardner Denver pumps are sold for use in industrial applications.
Gardner Denver water jetting pumps and systems are used in a variety of industries including petrochemical, refining, power generation, aerospace, construction and automotive, among others. The products are sold under the Partek, Liqua-Blaster and American Water Blaster trademarks, and are employed in applications such as industrial cleaning, coatings removal, concrete demolition, and surface preparation.
Gardner Denverâ€™s other fluid transfer components and equipment include loading arms, swivel joints, storage tank equipment and dry- break couplers used to load and unload ships, tank trucks and rail cars. These products are sold primarily under the Emco Wheaton, TODO and Perolo trademarks.
The Fluid Transfer Products segment operates seven production facilities (including two remanufacturing facilities) in the U.S. and one each in the United Kingdom, Germany, Sweden and Canada. The most significant facilities include owned properties in Tulsa, Oklahoma; Quincy, Illinois; Syracuse, New York; Margate, United Kingdom; Kirchhain, Germany; Toreboda, Sweden and two leased properties in Houston, Texas and one in Oakville, Ontario.
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 numerous key OEMs and exclusive supply arrangements with many of its distributors. The Company uses a direct sales force to serve 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 the Companyâ€™s less specialized products. As a significant portion 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 distribution centers that stock parts, accessories and small compressor and vacuum products in order to provide adequate and timely availability. The Company also leases sales office and warehouse space in various locations. Gardner Denver 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 distributorsâ€™ sales personnel. The Company does not have any customers that individually provide more than 4% of its consolidated revenue, and the loss of any individual customer would not materially affect its consolidated revenues. Fluctuations in revenue are primarily driven by specific industry and market changes.
Gardner Denverâ€™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 Companyâ€™s service personnel and product engineers provide the distributorsâ€™ service representatives with technical assistance and field training, particularly with respect to installation and repair of equipment. The Company also provides aftermarket support through its service and remanufacturing facilities in the U.S. and Germany. The service and vehicle fitting facilities provide preventative maintenance programs, repairs, refurbishment, upgrades and spare parts for many of the Companyâ€™s products.
The primary OEM accounts for Thomas products are handled directly from the manufacturing locations. Smaller accounts and replacement business are handled through a network of distributors. Outside of the United States and Germany, the Companyâ€™s subsidiaries are responsible for sales and service of Thomas products in the countries or regions they serve.
Ross J. Centanni, age 62, was appointed to the position of Executive Chairman of the Board in January 2008. He has served as Chairman of the Board since November 1998 and has been a member of the Board of Directors from the Companyâ€™s incorporation in November 1993. In addition, Mr. Centanni served as President and Chief Executive Officer of the Company since its incorporation in 1993 through January 2008. Prior to Gardner Denverâ€™s spin-off from Cooper in April 1994, he was Vice President and General Manager of Gardner Denverâ€™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 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.
Barry L. Pennypacker , age 47, was appointed President and Chief Executive Officer in January 2008 and as a director in February 2008. He joined Gardner Denver from Westinghouse Air Brake Technologies Corporation (â€śWabtecâ€ť), a provider of technology-based equipment and services for the rail industry worldwide, where he held a series of Vice President positions with increasing responsibility from 1999 to 2008, most recently as Vice President, Group Executive. Prior to that, he was Director, Worldwide Operations for the Stanley Fastening Systems, an operating unit of Stanley Works, from 1997 to 1999. Mr. Pennypacker also served in a number of senior management positions of increasing responsibility with Danaher Corporation from 1992 to 1997. He holds a Bachelor of Science Degree in Operations Management from Penn State University and an M.B.A. in Operations Research from St. Josephâ€™s University.
Helen W. Cornell, age 49, was appointed Executive Vice President, Finance and Chief Financial Officer in November 2007. She previously served as Vice President, Finance and Chief Financial Officer from August 2004 until November 2007; Vice President and General Manager, Fluid Transfer Division of Gardner Denver from March 2004 until August 2004; Vice President, Strategic Planning and Operations Support from August 2001 until March 2004; and Vice President, Compressor Operations for the Compressor and Pump Division from April 2000 until August 2001. From November 1993 until accepting her operations role, Ms. Cornell held positions of increasing responsibility as the Corporate Secretary and Treasurer of the Company, serving in the role of Vice President, Corporate Secretary and Treasurer from April 1996 until April 2000. She holds a B.S. degree in accounting from the University of Kentucky and an M.B.A. from Vanderbilt University. She is a Certified Public Accountant and a Certified Management Accountant.
Tracy D. Pagliara, age 45, was appointed Executive Vice President, Administration, General Counsel and Secretary of Gardner Denver in November 2007. He previously served as Vice President, Administration, General Counsel and Secretary of Gardner Denver from March 2004 until November 2007 and as Vice President, General Counsel and Secretary of Gardner Denver from August 2000 until March 2004. Prior to joining Gardner Denver, Mr. Pagliara held positions of increasing responsibility in the legal departments of Verizon Communications/GTE Corporation from August 1996 to August 2000 and Kellwood Company from May 1993 to August 1996, ultimately serving in the role of Assistant General Counsel for each company. Mr. Pagliara, a Certified Public Accountant, has a B.S. degree in accounting and a J.D. degree from the University of Illinois.
J. Dennis Shull, age 59, has been the Executive Vice President and General Manager, Gardner Denver Compressor Division since January 2007. From January 2002 until January 2007, Mr. Shull served as Vice President and General Manager, Gardner Denver Compressor Division. He previously served the Company as Vice President and General Manager, Gardner Denver Compressor and Pump Division from its organization in August 1997 to January 2002. Prior to August 1997, he served as Vice President, Sales and Marketing since the Companyâ€™s incorporation in November 1993. From August 1990 until November 1993, Mr. Shull was the Director of Marketing for the 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 57, has been the Vice President and General Manager, Gardner Denver Engineered Products Division since November 2006. He previously served the Company as Vice President and General Manager of the Liquid Ring Pump Division from January 2005 to November 2006 and Vice President and General Manager of the Gardner Denver Fluid Transfer Division (formerly the Gardner Denver Pump Division) from January 2002 until his promotion. Prior to joining Gardner Denver, he was employed by Goulds Pumps, a division of ITT Industries, for twenty-five years, most recently as the President and General Manager for Europe, Middle East and Africa. He previously held positions as 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.
T. Duane Morgan, age 58, joined the Company as Vice President and General Manager of the Gardner Denver Fluid Transfer Division in December 2005. Prior to joining Gardner Denver, Mr. Morgan served as President of Process Valves for the Valves & Measurement group (the â€śGroupâ€ť) of Cameron International Corporation (â€śCameronâ€ť). From 2003 to 2005, he served as Vice President and General Manager, Aftermarket Services, for the Group and from 1998 to 2002, he was President of Orbit Valve, a division of the Group. From 1985 to 1998, he served in various capacities in plant and sales management for Cameron, which before 1995 was part of Cooper. Before joining Cooper, he held various positions in finance, marketing and sales with Joy Manufacturing Company and B.F. Goodrich Company. Mr. Morgan holds a B.S. degree in mathematics from McNeese State University and an M.B.A. from Louisiana State University.
James J. Kregel, age 57, was named Vice President and General Manager of the Gardner Denver Thomas Products Division in July 2005, when Gardner Denver announced the completion of the acquisition of Thomas. Mr. Kregel served as Vice President of Worldwide Pumps and Compressors for Thomas at the time of the acquisition. Prior to this, he held the position of Vice President and General Manager of the North American Group for Thomas. Mr. Kregel joined Thomas in 1988 as Director of Marketing. Previous to his employment with Thomas, he was Director of Sales for Tecumseh Products, Inc. Mr. Kregel earned a B.S. degree from the University of Wisconsin and an M.B.A. from Keller Graduate School.
Winfried Kaiser, age 52, was named Vice President and General Manager of the Gardner Denver Blower Division in November 2006. In 2005, he was appointed Managing Director of the Emco Wheaton Loading Systems SBU of the Gardner Denver Fluid Transfer Division. Mr. Kaiser served as Managing Director of Emco Wheaton GmbH prior to Garner Denverâ€™s acquisition of Syltone until his promotion in 2005. He was also a member of the Syltone Executive Board prior to the acquisition. Previous to his employment with the Syltone, he served as Managing Director of WAGWasseraufbereitung GmbH and as Managing Director of Rehman Process Engineering GmbH. Mr. Kaiser holds a Masters degree in Engineering from the Technical University of Darmstadt, Germany.
Bob D. Elkins, age 59, was appointed Vice President, Chief Information Officer, in November 2007. He joined Gardner Denver in January 2004, as Director of Information Technology. In January 2005, he was promoted to Vice President, Information Technology and served in that role until his appointment in 2007. Mr. Elkins has over 20 years experience in Information Technology leadership positions. Prior to joining Gardner Denver, he served as Senior Project Manager for SBI and Company from September 2003 to December 2003. He served as Vice President, Industry Solutions for Novoforum from July 2000 to September 2002. He served as Director of Information Technology for Halliburton Energy Services from May 1994 to July 2000 and from January 1981 to May 1994 he served as an Associate Partner at Accenture (formerly Andersen Consulting). Mr. Elkins has a B.S. degree in Economics and an M.B.A. in Business Computer Science from Texas A&M University.
MANAGEMENT DISCUSSION FROM LATEST 10K
Managementâ€™s Discussion and Analysis
The following discussion should be read in conjunction with the consolidated financial statements and notes thereto.
Amounts presented in this Managementâ€™s Discussion and Analysis reflect a change in the presentation of certain expenses within the Companyâ€™s consolidated statements of operations. Depreciation expense recorded in connection with the manufacture of the Companyâ€™s products sold during each reporting period is now included in the caption â€śCost of sales.â€ť Depreciation expense not associated with the manufacture of the Companyâ€™s products and amortization expense are now included in the caption â€śSelling and administrative expenses.â€ť Depreciation and amortization expense were previously combined and reported in the caption â€śDepreciation and amortization.â€ť In addition, certain operating income and expense items previously included in the caption â€śOther income, netâ€ť have been reclassified to â€śSelling and administrative expenses.â€ť These items are not material, individually or in the aggregate, to â€śSelling and administrative expenses.â€ť Non-operating income and expense items, consisting primarily of investment income, continue to be reported in the caption â€śOther income, net.â€ť The reclassification of operating income and expense items to â€śSelling and administrative expensesâ€ť resulted in a corresponding change in reportable segment operating income (see Note 16 â€śSegment Informationâ€ť in the â€śNotes to Consolidated Financial Statementsâ€ť). In connection with these reclassifications, the Company added the captions â€śGross profitâ€ť and â€śOperating incomeâ€ť to its consolidated statement of operations. The Company believes that this change in presentation provides a more meaningful measure of its cost of sales and selling and administrative expenses and that gross profit and operating income are useful, widely accepted measures of profitability and operating performance. These reclassifications had no effect on reported consolidated income before income taxes, net income or per share amounts.
Overview and Description of Business
The Company designs, manufactures and markets compressor and vacuum products and fluid transfer products. The Company believes it is one of the worldâ€™s leading manufacturers of highly engineered stationary air compressors and blowers for industrial applications. 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 supplies pumps and compressors for OEM applications such as medical equipment, vapor recovery, printing, packaging and laboratory equipment. In addition, the Company designs, manufactures, markets, and services a diverse group of pumps, water jetting systems and related aftermarket parts used in oil and natural gas well drilling, servicing and production and in industrial cleaning and maintenance. The Company also manufactures loading arms, swivel joints, couplers and valves used to load and unload ships, tank trucks and rail cars. The Company believes that it is one of the worldâ€™s leading manufacturers of reciprocating pumps used in oil and natural gas well drilling, servicing and production and in loading arms for the transfer of petrochemical products.
Since becoming an independent company in 1994, Gardner Denver has completed 20 acquisitions, growing its revenues from approximately $176 million in 1994 to approximately $1.9 billion in 2007. Of the 20 acquisitions, the three largest, namely Thomas, Nash Elmo and Syltone, were completed since January 1, 2004.
In January 2004, the Company acquired Syltone, previously a publicly traded company listed on the London Stock Exchange. Syltone, previously headquartered in Bradford, United Kingdom, was one of the worldâ€™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 Companyâ€™s product lines. Syltone was also one of the worldâ€™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. This acquisition strengthened the Companyâ€™s position, particularly in Europe, as the leading global provider of bulk handling solutions for the commercial transportation industry. The acquisition also expanded the Companyâ€™s product lines to include loading arms.
In September 2004, the Company acquired Nash Elmo. Nash Elmo, previously headquartered in Trumbull, Connecticut, was a global manufacturer of industrial vacuum pumps and is primarily split between two businesses, liquid ring pumps and side channel blowers. Both businessesâ€™ products were complementary to the Companyâ€™s Compressor and Vacuum Products segmentâ€™s product portfolio. Nash Elmoâ€™s largest markets are in Europe, Asia and North America.
In July 2005, the Company acquired Thomas, previously a New York Stock Exchange listed company traded under the ticker symbol â€śTII.â€ť Thomas, previously headquartered in Louisville, Kentucky, was a leading supplier of pumps, compressors and blowers for OEM applications such as medical equipment, vapor recovery, automotive and transportation applications, printing, packaging and laboratory equipment. Thomas designs, manufactures, markets, sells and services these products through worldwide operations. This acquisition was primarily complementary to the Companyâ€™s Compressor and Vacuum Products segmentâ€™s product portfolio.
Gardner Denver has five operating divisions: Compressor, Blower, Engineered Products, Thomas Products and Fluid Transfer. These divisions comprise two reportable segments: Compressor and Vacuum Products and Fluid Transfer Products. The Compressor, Blower, Engineered Products and Thomas Products Divisions are aggregated into one reportable segment (Compressor and Vacuum 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 Compressor and Vacuum Products segment, the Company designs, manufactures, markets and services the following products and related aftermarket parts for industrial and commercial applications: rotary screw, reciprocating, and sliding vane air compressors; positive displacement, centrifugal and side channel blowers; liquid ring pumps; and single-piece piston reciprocating, diaphragm, and linear compressor and vacuum pumps, primarily serving OEM applications, engineered systems and general industry. Stationary air compressors are used in manufacturing, process applications and materials handling, and to power air tools and equipment. Blowers are used primarily in pneumatic conveying, wastewater aeration, numerous applications in industrial manufacturing and engineered vacuum systems. Liquid ring pumps are used in many different vacuum applications and engineered systems, such as water removal, distilling, reacting, efficiency improvement, lifting and handling, and filtering, principally in the pulp and paper, industrial manufacturing, petrochemical and power industries. Diaphragm, linear and single-piece piston reciprocating compressors and vacuum pumps are used in a variety of OEM applications. The Company also designs, manufactures, markets and services complementary ancillary products. Revenues of the Compressor and Vacuum Products segment constituted 77% of total revenues in 2007.
In the Fluid Transfer Products segment, the Company designs, manufactures, markets and services a diverse group of pumps, water jetting systems and related aftermarket parts used in oil and natural gas well drilling, servicing and production and in industrial cleaning and maintenance. This segment also designs, manufactures, markets and services loading arms, couplers and other fluid transfer components and equipment for the chemical, petroleum and food industries. Revenues of the Fluid Transfer Products segment constituted 23% of total revenues in 2007.
The Company sells its products through independent distributors and sales representatives, and directly to OEMs, engineering firms, packagers and end users.
ear Ended December 31, 2007, Compared with Year Ended December 31, 2006
Revenues increased $199.7 million, or 12%, to $1,868.8 million in 2007, compared to $1,669.2 million in 2006. This increase was attributable to favorable changes in foreign currency exchange rates ($79.0 million, or 5%), price increases ($52.7 million, or 3%) and volume growth ($68.0 million, or 4%) for both the Compressor and Vacuum Products and Fluid Transfer Products segments. International revenues were 59% of total revenues in 2007 compared to 58% in 2006.
Revenues in the Compressor and Vacuum Products segment increased $129.8 million, or 10%, to $1,440.3 million, compared to $1,310.5 million in 2006. This increase reflects favorable changes in foreign currency exchange rates (5%), volume growth (3%) and price increases (2%). The volume growth was led by strength in European and Asian markets, including OEM applications and low pressure and vacuum products.
Revenues in the Fluid Transfer Products segment increased $69.9 million, or 19%, to $428.5 million, compared to $358.7 million in 2006. This increase reflects price increases (8%), volume growth (8%) and favorable changes in foreign currency exchange rates (3%). The volume growth was attributable to increased shipments of fuel systems, well servicing pumps and loading arms, partially offset by reduced shipments of drilling pumps.
Gross profit increased $70.6 million, or 13%, to $619.9 million in 2007 compared to $549.3 million in 2006, and as a percentage of revenues was 33.2% in 2007 compared to 32.9% in 2006. The increase in gross profit primarily reflects price increases, volume growth and foreign currency translation. Gross profit as a percentage of revenues was favorably impacted by price increases, a higher percentage of petroleum pump shipments, which have higher gross profit percentages than the Companyâ€™s average, cost reductions, operational improvements, leveraging of fixed and semi-fixed costs over additional revenue and the realization of benefits from completed acquisition integration activities, largely offset by lower productivity related to acquisition integration efforts during the first half of 2007. Additionally, gross profit in 2006 was negatively affected by a non-recurring charge to depreciation expense of approximately $5.5 million associated with the finalization of the fair market value of the Thomas property, plant and equipment.
Selling and Administrative Expenses
Selling and administrative expenses increased $13.4 million, or 4%, to $328.4 million in 2007, compared to $315.0 million in 2006. This increase reflects the unfavorable effect of changes in foreign currency exchange rates of approximately $15.8 million and other inflationary factors such as salary increases, partially offset by cost reductions realized through the completion of integration initiatives. Additionally, selling and administrative expenses in 2006 reflected an approximately $3.2 million non-recurring reduction to amortization expense associated with the finalization of the fair market value of the Thomas amortizable intangible assets. As a percentage of revenues, selling and administrative expenses improved to 17.6% in 2007 from 18.9% in 2006 due to increased leverage of these expenses over additional volume and the cost reductions described above.
Consolidated operating income increased $57.2 million, or 24%, to $291.5 million in 2007 compared to $234.3 million in 2006, and as a percentage of revenues increased to 15.6% in 2007 from 14.0% in 2006. These improvements reflect the revenue, gross profit and selling and administrative expense factors discussed above.
The Compressor and Vacuum Products segment generated operating income of $169.7 million and operating margin of 11.8% in 2007, compared to $140.1 million and 10.7%, respectively, in 2006 (see Note 16 â€śSegment Informationâ€ť in the â€śNotes to Consolidated Financial Statementsâ€ť for a reconciliation of segment operating income to consolidated income before income taxes). This improvement was primarily due to higher revenue, increased leverage of the segmentâ€™s fixed and semi-fixed costs over additional revenue, cost reductions realized through the completion of acquisition integration initiatives, price increases, the net favorable effect of changes in foreign currency exchange rates and reduced net depreciation and amortization expense associated with the finalization of the fair values of the Thomas property, plant and equipment and amortizable intangible assets as discussed above. The above factors were partially offset by increased material costs and compensation-related expenses.
The Fluid Transfer Products segment generated operating income of $121.9 million and operating margin of 28.4% in 2007, compared to $94.3 million and 26.3%, respectively, in 2006 (see Note 16 â€śSegment Informationâ€ť in the â€śNotes to Consolidated Financial Statementsâ€ť for a reconciliation of segment operating income to consolidated income before income taxes). This improvement was primarily due to higher revenue, increased leverage of the segmentâ€™s fixed and semi-fixed costs over additional revenue, benefits from capital investments, price increases, favorable sales mix and the net favorable effect of changes in foreign currency exchange rates. The above factors were partially offset by increased material costs and compensation-related expenses.
Interest expense of $26.2 million in 2007 declined $11.2 million from $37.4 million in 2006 due primarily to lower average borrowings between the two years, partially offset by a higher weighted average interest rate. Net principal payments on debt totaled $125.2 million in 2007 (see â€śConsolidated Statements of Cash Flowsâ€ť and Note 8 â€śDebtâ€ť in the â€śNotes to Consolidated Financial Statementsâ€ť). The weighted average interest rate, including the amortization of debt issuance costs, increased to 7.3% during 2007, compared to 6.9% during 2006, due primarily to the greater relative weight of the fixed interest rate on the Companyâ€™s 8% Senior Subordinated Notes and increases in the floating-rate indices of the Companyâ€™s non-U.S. dollar borrowings.
Other Income, Net
Other income, net, consisting primarily of investment income, decreased $0.5 million to $3.1 million in 2007 compared to $3.6 million in 2006, due primarily to lower average levels of cash and equivalents in 2007.
Provision For Income Taxes
The provision for income taxes and effective income tax rate decreased to $63.3 million and 23.6%, respectively, in 2007 from $67.7 million and 33.7%, respectively, in 2006. This improvement reflects non-recurring, non-cash reductions in net deferred tax liabilities of approximately $10.0 million recorded in connection with corporate income tax rate reductions in Germany, the United Kingdom and China which were enacted in 2007 and will become effective in 2008, foreign tax credits of approximately $8.0 million resulting from the Companyâ€™s cash repatriation efforts, and tax reserve reductions of approximately $1.5 million resulting from the favorable resolution of certain previously open tax matters. Excluding these items, the Companyâ€™s effective income tax rate would have been approximately 30.8% in 2007.
Consolidated net income of $205.1 million increased $72.2 million, or 54%, in 2007 from $132.9 million in 2006. Diluted earnings per share increased 53% to $3.80 in 2007 from $2.49 in 2006. These improvements reflect the operating income, interest expense and income tax items discussed above. The increase in diluted average shares outstanding in 2007 compared to 2006, which was primarily due to shares issued in connection with the Companyâ€™s stock compensation programs, resulted in an approximately $0.04 reduction in diluted earnings per share.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
Results of Operations
Performance in the Quarter Ended March 31, 2008 Compared
with the Quarter Ended March 31, 2007
Revenues increased $54.3 million, or 12%, to $495.7 million in the three months ended March 31, 2008, compared to $441.4 million in the first three months of 2007. This increase was attributable to favorable changes in foreign currency exchange rates ($27.0 million, or 6%), price increases ($16.1 million, or 4%) and volume growth in the Compressor and Vacuum Products segment, offset by lower volume in the Fluid Transfer Products segment (net combined increase between the two segments of $11.2 million, or 2%).
Revenues in the Compressor and Vacuum Products segment increased $46.2 million, or 14%, to $385.1 million in 2008, compared to $338.9 million in 2007. This increase reflects favorable changes in foreign currency exchange rates (7%), volume growth (4%) and price increases (3%). The volume growth was attributable to nearly all of this segmentâ€™s product lines and geographic regions.
Revenues in the Fluid Transfer Products segment increased $8.0 million, or 8%, to $110.6 million in 2008, compared to $102.6 million in 2007. This increase reflects price increases (7%) and favorable changes in foreign currency exchange rates (5%), partially offset by lower volume (4%). Lower drilling pump volume was partially offset by the shipment of the second of two large contracts for liquid natural gas and compressed natural gas loading arms and increased shipments of well servicing pumps and fuel systems.
Gross profit increased $12.4 million, or 8%, to $161.3 million in the first three months of 2008 compared to $148.9 million in the first three months of 2007, and as a percentage of revenues was 32.5% in 2008 compared to 33.7% in 2007. The increase in gross profit primarily reflects the increases in revenue discussed above and the favorable effect of changes in foreign currency exchange rates. The decline in gross profit as a percentage of revenues primarily reflects the lower volume of drilling pump shipments, which have a higher gross profit percentage than the Companyâ€™s average.
Selling and Administrative Expenses
Selling and administrative expenses increased $4.4 million, or 5%, to $85.4 million in the first quarter of 2008, compared to $81.0 million in the first quarter of 2007. This increase primarily reflects the unfavorable impact of changes in foreign currency exchanges rates of approximately $4.8 million. Inflationary increases were more than offset by cost reductions realized through integration initiatives and lower stock-based compensation expense. As a percentage of revenues, selling and administrative expenses improved to 17.2% in the first quarter of 2008 from 18.4% in the comparable period of 2007 primarily due to increased leverage of theses expenses over additional volume and the favorable effect of the net cost reductions discussed above.
Consolidated operating income increased $8.0 million, or 12%, to $75.9 million in the first three months of 2008 compared to $67.9 million in the first three months of 2007, and as a percentage of revenues was 15.3% in 2008 compared to 15.4% in 2007. These results reflect the revenue, gross profit and selling and administrative expense factors discussed above.
The Compressor and Vacuum Products segment generated operating income of $45.5 million and operating margin of 11.8% in the first quarter of 2008, compared to $38.7 million and 11.4%, respectively, in the first quarter of 2007 (see Note 16 â€śSegment Resultsâ€ť in the â€śNotes to Consolidated Financial Statementsâ€ť for a reconciliation of segment operating income to consolidated income before income taxes). This improvement primarily reflects revenue growth as discussed above, the favorable effect of increased leverage of the segmentâ€™s fixed and semi-fixed costs over increased revenue, cost reductions and the benefits of acquisition integration activities, partially offset by costs incurred to streamline operations in Europe and Australia.
The Fluid Transfer Products segment generated operating income of $30.5 million and operating margin of 27.6% in the first quarter of 2008, compared to $29.2 million and 28.5%, respectively, in the first quarter of 2007 (see Note 16 â€śSegment Resultsâ€ť in the â€śNotes to Consolidated Financial Statementsâ€ť for a reconciliation of segment operating income to consolidated income before income taxes). The lower volume of drilling pump shipments, which have a higher operating margin than this segmentâ€™s average, was largely offset by increased shipments of loading arms and well servicing pumps and the favorable effect of increased leverage of the segmentâ€™s fixed and semi-fixed costs over increased revenue.
Interest expense of $5.6 million in the first quarter of 2008 declined $1.1 million from $6.7 million in the comparable period of 2007 primarily due to lower average borrowings in 2008, partially offset by a higher weighted average interest rate. Net principal payments on debt totaled $0.2 million in the first quarter of 2008 (see â€śConsolidated Statements of Cash Flowsâ€ť and Note 7 â€śDebtâ€ť in the â€śNotes to Consolidated Financial Statementsâ€ť). The weighted average interest rate, including the amortization of debt issuance costs, increased to 7.7% in the first quarter of 2008, compared to 6.7% in the first quarter of 2007, due primarily to the greater relative weight of the fixed interest rate on the Companyâ€™s 8% Senior Subordinated Notes and increases in the floating-rate indices of the Companyâ€™s euro-denominated borrowings.
Provision for Income Taxes
The provision for income taxes and effective tax rate were $19.7 million and 28.0%, respectively, for the three-month period ending March 31, 2008 compared to $19.1 million and 30.8%, respectively, for the three-month period ending March 31, 2007. The lower effective tax rate primarily reflects a higher proportion of earnings in jurisdictions with lower tax rates coupled with a reduction in the corporate income tax rate in Germany, which became effective on January 1, 2008.
Consolidated net income of $50.9 million increased $8.0 million, or 19%, in the first quarter of 2008 from $42.8 million in the first quarter of 2007. Diluted earnings per share increased 19% to $0.95 in the three-month period of 2008 from $0.80 in the same period of 2007. This improvement was the net result of the operating income, interest expense and provision for income tax factors discussed above. The Companyâ€™s repurchase of approximately 1.2 million shares of its common stock during the first quarter (see â€śLiquidity and Capital Resourcesâ€ť) did not have a significant effect on first quarter net income and diluted earnings per share.
In general, the Company believes that demand for compressor and vacuum products tends to correlate to the rate of total industrial capacity utilization and the rate of change of industrial equipment production because air is often used as a fourth utility in the manufacturing process. Over longer time periods, the Company believes that demand also tends to follow economic growth patterns indicated by the rates of change in the gross domestic product (â€śGDPâ€ť) around the world. During the first quarter of 2008, total industrial capacity utilization rates in the U.S., as published by the Federal Reserve Board, remained above 80%. Rates above 80% have historically indicated a good demand environment for industrial equipment such as compressor and vacuum products.
The Company continues to expect global economic growth to slow during the remainder of 2008. Growth in industrial demand in Europe is expected to exceed that of the U.S., and Asia is expected to continue to be the strongest region for growth and exceed the global average. The Company projects orders for compressor and vacuum products will remain strong through the second quarter of 2008 driven by demand in Europe and Asia for original equipment manufacturer (â€śOEMâ€ť) applications and engineered products, as well as standard products in Europe and Asia. As a result of these growth expectations, coupled with strong orders in the first quarter, the Company believes that demand for the industrial portion of its business will continue to grow in 2008, although at a slightly slower rate than realized in 2007, and that shipments in the Compressor and Vacuum Products segment will remain strong through the end of the third quarter of 2008.
Production capacity for well servicing pumps is sold out through the second quarter of 2008, but the Company has less visibility of the demand for petroleum pumps in the second half of the year. However, the Company anticipates good demand for aftermarket parts and services for petroleum pumps through the end of 2008. Despite recent increases in oil and gas prices, the Company currently expects that the rig count will remain steady in North America and that demand for drilling pumps in the U.S. will continue to decline throughout 2008. In spite of the domestic decline, quotations for international rigs and improved product availability are expected to continue to result in some incremental opportunities to ship drilling pumps during the remainder of the year. The Companyâ€™s previous investments in capital to expand its production capacities for aftermarket parts and enable it to expand its market share in this area, are beginning to come on-line.
Order backlog consists of orders believed to be firm for which a customer purchase order has been received or communicated. However, since orders may be rescheduled or canceled, backlog does not necessarily reflect future sales levels.
In the first quarter of 2008, orders for compressor and vacuum products increased 15% to $421.5 million, compared to $367.5 million in the first quarter of 2007. Order backlog for the Compressor and Vacuum Products segment increased 25% to $483.5 million as of March 31, 2008, compared to $385.5 million as of March 31, 2007. The increases in orders and backlog reflected increased global demand for products used in OEM applications and engineered packages, and order growth in Europe and Asia for standard products. The favorable effect of changes in foreign currency exchange rates increased orders and backlog in the first quarter of 2008 by approximately 7% and 10%, respectively, compared to the same period of 2007.
Future demand for petroleum-related fluid transfer products has historically corresponded to market conditions, rig counts and expectations for oil and natural gas prices, which the Company cannot predict. Orders for fluid transfer products increased 39% to $103.4 million in the first quarter of 2008, compared to $74.6 million in the first quarter of 2007. This increase was due primarily to the receipt of a large liquid natural gas loading arm order in the first quarter of 2008 which is currently scheduled for shipment in early 2009, and increased demand for petroleum pumps and aftermarket parts. The favorable effect of changes in foreign currency exchange rates increased orders approximately 7% compared to the first quarter of 2007. Order backlog for the Fluid Transfer Products segment declined 20% to $127.7 million at March 31, 2008, compared to $158.8 million at March 31, 2007. The decrease in backlog was primarily associated with lower demand for petroleum pumps, partially offset by increased backlog for loading arms, including the liquid natural gas loading arm order discussed above, and fuel systems. The favorable effect of changes in foreign currency exchange rates increased backlog by approximately 5% compared to March 31, 2007.
The Company continues to expect Fluid Transfer segment revenues and operating income to decline for the total year 2008 compared to 2007 based on its expectations for a year over year decline in shipments of petroleum pumps. Fluid Transfer Products segment operating margin is expected to decline from the first quarter level during the remainder of 2008, primarily as a result of product mix and reduced leverage of fixed and semi-fixed costs as production levels decrease.
Based on its current economic outlook, the Company currently estimates that total year 2008 income before income taxes will increase approximately 2% compared with 2007, and that net income will decrease approximately 1% to 4% due to a higher effective income tax rate. The year over year increase in the effective income tax rate primarily reflects non-recurring reductions in the 2007 tax provision associated with the German rate reduction and resulting 2007 German deferred tax benefit, net of a lower German rate benefit and expected lower foreign tax credit benefit in 2008.
Barry L. Pennypacker - President and Chief Executive Officer
Good morning everyone, and welcome to Gardner Denver's second quarter 2008 conference call. I am joined this morning by Helen Cornell, Executive Vice President, Finance and CFO of the company. We will have some comments about the quarterly results in a moment along with some more detail about the CompAir acquisition. But, first, I would like to turn it over to Helen to make free statement.
Helen W. Cornell - Executive Vice President, Finance and Chief Financial Officer
Thanks, Barry. First of all, I would like to direct everyone's attention to the Investor Relations page on Gardner Denver's website, www.gardnerdenver.com, where you will find a presentation that we will be following to this morning's call. I also believe that those of you who are listening to this call via the webcast on our homepage can also view the slide as part of the webcast. We'll refer to the slide numbers as we progress this morning.
Speaking of which, let me begin with Safe Harbor disclosure. All of the statements made by Gardner Denver during this call other than historical facts are forward-looking statements. As a general matter, forward-looking statements are those focused upon anticipated events or trends and assumptions, expectations and beliefs relating to matters that are not historical in nature. Forward-looking statements are subject to known and unknown risks, uncertainties, and other factors relating to Garden Denver's operations and business environment, all of which are difficult to predict and many of which are beyond the control of the company. These known and unknown risks, uncertainties, and other factors could cause actual results to differ materially from those expressed in, anticipated by or implied by such forward-looking statements.
Please refer to Gardner Denver's press release issued on July 21, 2008 regarding proposed acquisition of CompAir, as well as the second quarter 2008 earnings press release issued on July 23, 2008 for further information regarding potential risks, uncertainties and other factors that could cause actual results to differ from anticipated results.
These statements reflect the current views and assumptions of management with respect to future events. Gardner Denver does not undertake or plan to update these forward-looking statements, even though the company's situation may change. Therefore, you should not rely on these forward-looking statements as representing the company or its management's views as of any other date subsequent to today.
As a reminder, this call is being broadcast in listen-only mode through a live webcast. This free webcast is available for replay up to 90 days following the call through the Investor Relations page on Gardner Denver website or on Thomson StreetEvents site, www.earnings.com. Barry?
Barry L. Pennypacker - President and Chief Executive Officer
Thanks, Helen. From an agenda perspective, we have two general topics this morning second quarter earnings and the acquisition of CompAir. Both are very important items and we will allow plenty of time for your questions on both subjects.
However, before we get started, I want to take a moment to welcome any employees of CompAir that may be listening to our webcast. Although you aren't part of the organization yet, I want you to know that the employees of Gardner Denver and I are very much looking forward to working with you. We see a great fit between our businesses and are excited that begin the process of bringing our companies together as soon as we complete the regulatory approval process.
We are in the process of transforming our culture to one of continuous improvement driven by lean manufacturing techniques. I observed in my visits to CompAir's operations during the due diligence process these types of activities taking place, and I look forward to the future success as one company.
You will soon learn that we work hard, but enjoy seeing the benefits of our results. A good example of that occurred last month at Quincy, Illinois, the location of our corporate headquarters, the headquarters of our Compressor division, and also our drilling pump and locomotive compressor manufacturing facility. Those of you who have been here know that our site is located on the banks of the Mississippi.
Well, on 9th June, the Mississippi reached 500 year of flood levels, and we are starting [ph] our facility on three sites. Every day for more than one week the call went out our employees to help fill sandbags, and [indiscernible] the call. Our employees batted together to protect the facility. They volunteered on their own time, plus recruited family and friends, and with the great support of the community we were able to keep the mighty Mississippi abate, not only did they achieve the goal, but we were able to keep our manufacturing running at full steam. We did not miss a single shipment due to the flood.
I can't thank our employees or the local community, not for their efforts to battle the flood of 2008, but no one should be surprised by this, as I have said during many occasions that we have a very experienced and dedicated work force, willing to except any challenge that presents itself.
Getting back to the employees of CompAir, we are looking forward to walking you to the Gardner Denver family. What we expect is that you do what's right for our customers, do us what's right for our shareholders and do what's right for our fellow employees, and our combined company will endure any challenges that the market can present. There will be changes in your organization, but I think you will be pleased with what you see.
So now let's talk about CompAir business. Moving on to slide four, as many of you saw on Monday, we announced the pending acquisition of compare, a business that is headquartered in the UK with a significant base of their operations in Europe. To say that I'm excited about this acquisition is a serious understatement. When I arrived at Gardner Denver in January, I met with each of my direct reports. For the operations managers, we discussed their primary acquisition targets, among other things, and CompAir was clearly the number one on the list for all of our compressor operations. The geographic footprint is complementary with ours and the product lines are a very good fit.
As you will see later, the profitability of the business is not what it should, not by a long shot. But improvement had been made and with the experienced dedication of our team, we can get it to where it needs to be and generate significant return for our shareholders. It is important to note that this business currently owned by a combination of private equity firm, management, and a UK publicly traded company, Invensys.
This group is on the business for about six years. In that time they have undertaken a pretty good turnaround. In fact, in 2006, CompAir was awarded the private company turnaround of year 2006 by the Society of Turnaround Professionals, a group representing UK's top corporate troubleshooters. We have been interested in acquiring the business since 2000, but decided back then there were too many integration challenges for us relative to the size of the two companies at that time. Just as a reminder, in 2001, our compressor products revenues were just $300 million.
These owners have taken the right steps to get the business on its way to long-term success, but did not take any strategic steps that will prevent us from further integration of the operations. I will note that their aftermarket market revenues on this page at 31% is a nice recurring revenue stream, but we can improve that too.
Moving on to slide five, give a little bit of the CompaAir business overview. 73% of the revenues comes from the Industrial division, which is the manufacturer of oil flooded rotary screws, oil-free rotary screw compressors, piston compressors, and portable compressors. The CompAir product offering will extend the Gardner Denver offering in all of these technologies, except oil flooded rotary screws where we currently offer full range products.
From an end market segment perspective, the Industrial division has exposure to a broad range of industrial segments, including the construction market through the portable offering that they currently have. In general, this segment of the company will grow at the approximate rate of the European and Asian GDP with a little drag on it due to the construction market of late. The Industrial group adds to the Gardner Denver's geographic footprint in Europe and Asia where their distribution channels are better developed than those of Gardner Denver.
The Hydrovane division manufactures rotary vane compressors under the Hydrovane brand. These are used in certain OEM applications as well as some of more specialized engineering applications. [indiscernible] existing rotary vane business is limited and now we serve a lower pressure applications. So we believe that Hydrovane product line is a great addition.
The third part of the business is Reavell, manufacturer high pressure reciprocating compressors, which are used in the applications ranging from CNG to breathing air. The division operates under both the Reavell brand name as well as the Mako brand name, which is for breathing air applications.
The Reavell product line is very complementing with our own line of high pressure reciprocating compressors such as those used for PET bottle blows.
Moving on to slide six, to look at the geographic footprint, basically three large manufacturing facilities that the business has are all located in Europe, Simmern, Germany, for rotary screw compressors and portables. Hydrovane's primary manufacturing is in Ipswich, in the UK. Reavell's primary facility is in Redditch in the UK.
The Industrial division has a second location in Shanghai, China, which is a business that is 51% owned by CompAir. The other manufacturing facilities is in Shanghai is a relatively new plant of the Reavell division. That business is 60% owned by CompAir. Reavell has a third site at Ocala, Florida, which is for breathing air packaging. Outside of the manufacturing facilities, there are 21 sales offices and 50 branch offices for this business.
Moving on to slide number seven, slide seven shows pro forma combination of CompAir and Gardner Denver's revenues. As a result of CompAir's strong presence in Europe and Asia, the combined footprint further diversifies our revenue base. Compared to Gardner Denver's 2007 revenues by geography, we expect revenues in North and South America to decline from 49% of total revenues to 42%, revenues in Europe to increase from 35% to 38%, and those in Asia to increase from 13% to 16%. Overall, this transaction will double the size of our compressor operations in both Europe and Asia. That's pretty exciting for us.
Move on to slide number eight, let's talk about the strategic implications of the deal. And now I would like to ask that you go to slide nine, and I will turn the presentation over to Helen.
Helen W. Cornell - Executive Vice President, Finance and Chief Financial Officer
Thanks, Barry. CompAir's financials are prepared in accordance with UK GAAP and are recorded on a fiscal year that ends March 31st. So, we have a pretty recent picture and audit of the account. You'll see that the business generated growth of about 7% from fiscal year '07 to fiscal year '08 and the growth was actually a little better than that because they had a business that was sold in late fiscal year '07 that generated about â‚¤6.3 million. So, adjusting for the disposed... that disposal, revenues grew about 10% year-over-year, which includes a little bit of headwind given the deteriorating demand in the construction market served by portables. From a profitability perspective, you can see that they certainly made improvements. As Barry said though, they have a long way to go. Barry?
CompAir has worked very hard to improve the profitability through strategy similar to Gardner Denver. They have used value engineering, low-cost country sourcing to reduce the overall product cost, introduced new products, and rationalized and strengthened their distribution channels to grow sales. In short, although focused on improving their profitability, they have invested in the future operations of the business. Therefore, I feel its their strategies are similar to Gardner Denver's and we will make it easier to align the goals of the CompAir team with those of Gardner Denver. The more important than what they have done in the past, let me address what I see as the combined company's strengths going forward focusing on the future.
Please go to slide 10. As we have discussed already, there are a number of reasons why we are so excited about this transaction, but the keys are the complementary product line, the additions to our geographic profile, and the opportunity to grow margins of the business.
Regarding the geographic profile, it is important to note that the relative positions of the two companies in Europe and Asia are very complementary. In Europe, CompAir is a tier one competitor, a strong distribution and a good revenue base, and will provide us channels to broaden the distribution of all Gardner Denver's more extensive product offerings.
On the other hand, in the U.S., Gardner Denver is a tier one competitor and provides challenge from product distribution that are currently not available to compare. In Asia, as we have relative strengths and weaknesses, and I think the combination of the business will bring out the best of both companies. For example, I am impressed with CompAir's depth of knowledge and experience in low-cost sourcing. I think we can benefit from the existing Gardner Denver operations.
On the other hands, we have a manufacturing base in Asia that could be used to assist their penetration in the region. So, through the products and the geography, this is a very strategic transaction, and about the best fit that we could have. I can only say that it's a 350 yard drive right down to middle of the fairway. I stated earlier that this business wasn't a turnaround situation, the current owners have taken it pretty far, there is a lot of margin growth opportunity left.
In addition, we have many synergies that will help grow the profitability. Our Gardner Denver teams have begun to learn a lot about lean and I intend to further update you on that in a bit. But this same knowledge and benefit of implementing these principles will be available to CompAir's operations.
On slide 11, you can see the acquisition synergies. Our primary synergies in the deal come from the manufacturing synergies, purchasing and rationalization of administrative costs. From our growth perspective, we believe that our combined presence post-transaction in China will be a great driver for the future of the business.
I know that we will get questions from this group looking for us to quantify the synergies that we are expecting. Of all we know the sources and have estimated their impact, we are not going to go through that sort of detail today. However, we believe that we can get the operating profit as a percentage of revenues to or at Gardner Denver's existing margins in the next three to five years. We wouldn't do the deal if we didn't believe we could see our way there.
Just like we have with other transactions, we will provide periodic updates about the progress and the integration, specific target dates, and savings for certain projects and of course, if there is any other material items that develop, we will certainly have a discussion about those.
Now I would like to turn the call over Helen to give an overall view of the transaction itself. Helen?
Helen W. Cornell - Executive Vice President, Finance and Chief Financial Officer
Thanks, Barry. Many of you know Gardner Denver and our philosophy on transaction. We value the cash of a potential acquisition on a standalone basis and the synergies that we expect to realize for the business. The greater the synergies the greater value we can realize and the more we can afford to pay. We are conservative in the realization of these strategies... the synergies and in terms of time to achieve to them and the full benefits. In general, historically, we have underestimated the value of the synergies of the combined businesses and after we own the operations for a while, we often find other synergistic opportunities that weren't apparent when we initially valued the acquisition.
I'm now on slide 13, and just to summarize the total enterprise value of the transaction is 197.5 million pound sterling. The actual price purchase is about a â‚¤183 million that will be received in cash and assuming debt with the shares of the business, plus there are certain other adjustment that were made to get up to the â‚¤197.5 million. The closing date depends on the length of time necessary to receive the regulatory approvals. Our best guess is that it will probably be October before the process is completed. Unfortunately, some of these approvals could take longer given the holiday period in Europe.
And as we stated in our press release, the deal is not contingent upon financing. We are arranging a new syndicated credit facility to replace our existing facility, which would have come due in 2010 anyway, to finance the transaction.
As you would have noticed in the press release, we also suspended our stock buyback during the second quarter giving the material inside information that we had, and began pulling cash in anticipation of the transaction. We currently believe there is about $40 million of excess cash available at the end of Q2, and given the benefits that we are seeing from lean, I would expect that to continue to increase this week at near the acquisition.
Suspending the buyback do give us a little bit of a headwind in our diluted earnings per share numbers in the second quarter, and we will also do so in the reminder of 2008, unfortunately. We work second share repurchases to add about $0.05 to diluted earnings per share in the final three quarters of the year, which was baked in our previous guidance. Our new guidance for the year assumes that no further buybacks occur and is therefore lower buyback, $0.05 per share.
We will give more guidance on our expectations for the 2009 diluted earnings per share impact of CompAir after we close the transaction and have a little more confidence in the timing of the accounting adjustments that are necessary when we make an acquisition.
On slide 14 now, just a few comments on the second quarter before I turn it over to Barry. I think we had a great quarter. We reported $0.93 diluted earnings per share, which included a $0.05 per share one-time retirement expense. This compares to our guidance of $0.88 to $0.92 diluted earnings per share, which did not include that retirement expense.
On a pre-tax basis, the nonrecurring retirement expense amounted to about $3.9 million. Those who know we don't break out corporate expenses separately and out P&L, so those costs are borne by the reportable segment. Therefore, the Fluid Transfer operating income was reduced by about $800,000 as a result of the charge. The Compressor and Vacuum Products segment operating margin was reduced by about $3.1 million. Therefore the unplanned expense reduced Fluid Transfer Products operating margin about 0.8 percentage points and the Compressor and Vacuum Products operating margin by about 0.7 percentage points. And I would expect as many of you would want to spike that out when you are looking at segment operating income as a percentage of revenues for the second quarter.
I received a few comments that the Fluid Transfer operating margins seem low in the quarter. I think that the results were very consistent with the guidance we provided during our first quarter conference call. At that time I was asked if we were expecting Fluid Transfer operating margin to decline from the high 20s in the first quarter, which included a lot of closer profitability on the significant loading ramp shipment we made then to the lower 20s. I said at that time I felt that that was pretty consistent with our expectation. Our results of operating margin for Fluid Transfer of 21.8%, net of the unplanned retirement expense, which reduced the result by 0.8 percentage points, I think, are pretty indicative of margin coming in in the low 20s. So I think our performance is right on track despite the time that we spent finding the flood in the facility that produces our drilling pumps.
Regarding the remainder of the second quarter financial results and the guidance for the remainder of year, I think things are pretty self-explanatory, but I want to turn it first over to Barry to give you some comments on the progress that we are making.
Barry L. Pennypacker - President and Chief Executive Officer
Thanks, Helen. We've already taken a fair bit of time talking about the CompAir transaction, which is important, but I want to say a few words about the second quarter before we turn it over to question. Talk a little bit about lean. We continue to push the organization's learning and the use of lean enterprise techniques. The implementation speed is exceeding my expectations. During the second quarter, we continued progress at the original five sites, in which we started our journey, paving the way to a culture where continuous improvement in inventory, lead time, velocity and yes, operating margins are the norm.
During the last 10 days, we've been performing divisional operation reviews in our European operations. Without fail, every facility has started their journey to lean. I would be remiss if I did not recognize just a few of them. In our Margate facility in the UK, I observed the work of a dedicated group that implements lean principles during their work day. They have made great progress in the plant layout, as well as five S implementation in the plant, including a significant reduction in single [indiscernible] exchanges dies technique. This group is currently working on seeking certification in lean principles that will aid our organization by being able to trade other operations as we continue to grow.
In our Bradford UK plant, I observed a cell that was recently put in place by a dedicated group that yielded a 73% improvement in productivity, as well as 50% inventory reduction, coupled with a 65% reduction in lead time. These results I observed, these are not theoretical. It is important that you note that during the early implementation of lean, there is pressure on operating margin because production declines and costs haven't been reduced proportionally. The first areas, as we have said all along, you will see benefit is in inventory and I am pleased to say that we already saw a bit of improvement in Q2. In the second quarter inventory generated approximately $5 million in cash for the business during the period where revenues are increasing.
I am seeing progress and I am excited that there is more to come in that area yet this year. The margin benefit, as we have been consistently saying, should start to materialize in 2009.
Another area of emphasis within the company is market penetration. Gardner Denver is interested in expanding our presence in the aftermarket, which may require positioning ourselves slightly different in some markets.
Each of our division has our developing detail plans to expand their aftermarket sales and service organization. We are concentrating opportunities to bundle products to key customers, to consolidate previous multiple phases to the customer into one, concentrating on value to the customer and simplifying their ability to interact with us.
We are considering some small acquisitions that will increase our ability to service the aftermarket in both reportable segments and look forward to an opportunity to speak about those as these transactions are completed.
In general, we are more aggressively looking for opportunities to strengthen our sales channels through product innovation, improving our distribution and enhancing our aftermarket programs. I am excited about these opportunities, and anticipate that they will ultimately apply to CompAir as well.
From an economic outlook, our view really hasn't changed from last quarter. U.S. industrial market is stagnant to declining in certain horsepower ranges. Europe is still growing albeit at a slowing rate. Exports are still benefiting production levels in Western Europe. Niche markets such as locomotive and marine compressors remain robust. UK market is following the U.S., demand is softening, Asia remains striven for oil and gas products, as well as other engineered packages that we continue to see levels increase over last year.
Backlog is improving for joint pumps, which give us some upside opportunities in the second half that we do not previously expect. However, as is our practice, we cannot HowvHoHh do a forecast extreme revenue and profit growth in this product line until we have some level of confidence that the orders are forthcoming.
If demand continues to grow at the rate we saw late in the second quarter, the outlook for the fourth quarter could improve. I think some of you may have expected a more significant increase in drilling pump shipments, a question why we don't backlog in the product raise [ph] in increasing shipments. You must keep in mind that drilling pumps are a small component in the investment of a rig. There are two drilling pumps on a rig which equates to $750,000 or less. Component on a $10 million investment, our customer must schedule a lot of different purchase components and labor availability to build the rigs. They are not looking to hold our pumps and stop [ph]. So when they place an order it has specific shipment commitments.
Remember, drilling pumps are a critical part of the capital investment that has longer lead times in some production equipment, similar to the consumables that are used in the oil field. Additionally, we again caution that we think there will be increased rig production in 2008, but not at the level of 2006 and 2007. In 2006, there were more than 200 new rig builds, followed by nearly 350 in 2007. We are currently expecting about 100 new rig builds to be built in 2008. There could be some upside to that number, but I don't think it will double. There continue to be opportunities for pumps sold for rig refurbishments and international applications, and we continue to pursue those opportunities. We continue to position inventory to seize opportunities for quick turn sales, and if forces [ph] are available, we will get the incremental sales. It's just not our practice to build that type of bet in our guidance.
Lastly, I would like to remind that group that Gardner Denver is an inquisitive company. What I saw from our team in the valuation of CompAir was impressive. And the integration planning is just as impressive. I have every confidence that this team will execute our plans in this acquisition to realize the synergies planned. Transactions are a core competency of this organization. Just because we have the CompAir transaction in process does not mean that we are done. The transaction environment is still quite robust and we remain positive on the outlook for good strategic acquisitions. Even after the CompAir transaction, I expect our pro forma EBITDA to be less than two.
Helen W. Cornell - Executive Vice President, Finance and Chief Financial Officer
Debt to pro forma EBITDA.
Barry L. Pennypacker - President and Chief Executive Officer
Debt to pro forma, yes. As I said at the beginning of this call, my operations team has a list of primary candidates for acquisition. CompAir was in the top five. We will continue evaluate these opportunities, but we expect to maintain a conservative approach to financing, but there are still interesting opportunities in the market.
With that, I'll turn it back to the operator and we will yield your questions.